FIRST DIVISION

[G.R. No. L-7859. December 22, 1955.]

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the

deceased Antonio Jayme Ledesma, Plaintiff-Appellant, v. J. ANTONIO
ARANETA, as the Collector of Internal Revenue, Defendant-Appellee.

Ernesto J. Gonzaga for Appellant.

Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo

E. Torres and Solicitor Felicisimo R. Rosete for Appellee.

SYLLABUS

1. CONSTITUTIONAL LAW; TAXATION; POWER OF STATE TO LEVY TAX IN AND

SUPPORT OF SUGAR INDUSTRY. As the protection and promotion of the sugar
industry is a matter of public concern the Legislature may determine within
reasonable bounds what is necessary for its protection and expedient for its
promotion. Here, the legislative must be allowed full play, subject only to the test of
reasonableness; and it is not contended that the means provided in section 6 of
Commonwealth Act No. 567 bear no relation to the objective pursued or are
oppressive in character. If objective an methods are alike constitutionally valid, no
reason is seen why the state may not levy taxes to raise funds for their prosecution
and attainment. Taxation may be made the implement. Taxation may be made the
implement of the states police power (Great Atl. & Pac. Tea Co. v. Grosjean, 301 U.S.
412, 81 L. Ed. 1193; U.S. v. Butler, 297 U.S. 1, 80 L. Ed. 477; MCulloch v.
Maryland, 4 Wheat, 316, 4 L. Ed. 579).

2. ID.; ID.; POWER OF STATE TO SELECT SUBJECT OF TAXATION. It is inherent

in the power to tax that a state be free to select the subjects of taxation, and it has
been repeatedly held that "inequalities which result from a singling out of one
particular class for taxation or exemption infringe no constitutional limitation
(Carmicheal v. Southern Coal & Coke Co., 301 U.S. 495, 81 L. Ed. 1245, citing
numerous authorities, at 1251).

DECISION

REYES, J. B. L., J.:

This case was initiated in the Court of First Instance of Negros Occidental to test the
legality of the taxes imposed by Commonwealth Act No. 567, otherwise known as the
Sugar Adjustment Act.

Promulgated in 1940, the law in question opens (section 1) with a declaration of

emergency, due to the threat to our industry by the imminent imposition of export
taxes upon sugar as provided in the Tydings-McDuffie Act, and the "eventual loss of
its preferential position in the United States market" ; wherefore, the national policy
was expressed "to obtain a readjustment of the benefits derived from the sugar
industry by the component elements thereof" and "to stabilize the sugar industry so
as to prepare it for the eventuality of the loss of its preferential position in the United
States market and the imposition of the export taxes."cralaw virtua1aw library

In section 2, Commonwealth Act 567 provides for an increase of the existing tax on
the manufacture of sugar, on a graduated basis, on each picul of sugar
manufactures; while section 3 levies on owners or persons in control of lands devoted
to the cultivation of sugar cane and ceded to others for a consideration, on lease or
otherwise

"a tax equivalent to the difference between the money value of the rental or
consideration collected and the amount representing 12 per centum of the assessed
value of such land."cralaw virtua1aw library

According to section 6 of the law

SEC. 6. All collections made under this Act shall accrue to a special fund in the
Philippine Treasury, to be known as the Sugar Adjustment and Stabilization Fund,
and shall be paid out only for any or all of the following purposes or to attain any or
all of the following objectives, as may be provided by law.

First, to place the sugar industry in a position to maintain itself despite the gradual
loss of the preferential position of the Philippine sugar in the United States market,
and ultimately to insure its continued existence notwithstanding the loss of that
market and the consequent necessity of meeting competition in the free markets of
the world;

Second, to readjust the benefits derived from the sugar industry by all of the
component elements thereof the mill, the landowner, the planter of the sugar cane,
and the laborers in the factory and in the field so that all might continue profitably
to engage therein;

Third, to limit the production of sugar to areas more economically suited to the
production thereof; and

Fourth, to afford labor employed in the industry a living wage and to improve their
living and working conditions: Provided, That the President of the Philippines may,
until the adjournment of the next regular session of the National Assembly, make the
necessary disbursements from the fund herein created (1) for the establishment and
operation of sugar experiment station or stations and the undertaking of researchers
(a)to increase the recoveries of the centrifugal sugar factories with the view of
reducing manufacturing costs, (b) to produce and propagate higher yielding varieties
of sugar cane more adaptable to different distinct conditions in the Philippines, (c) to
lower the costs of raising sugar cane, (d) to improve the buying quality of denatured
alcohol from molasses for motor fuel, (e) to determine the possibility of utilizing the
other by-products of the industry, (f) to determine what crop or crops are suitable for
rotation and for the utilization of excess cane lands, and (g) on other problems the
solution of which would help rehabilitated and stabilize the industry, and (2) for the
improvement of living and working conditions in sugar mills and sugar plantations,
authorizing him to organize the necessary agency or agencies to take charge of the
expenditure and allocation of said funds to carry out the purpose hereinbefore
enumerated, and, likewise, authorizing the disbursement from the fund herein
created of the necessary amount of amounts needed for salaries, wages, travelling
expenses, equipment, and other sundry expenses or said agency or agencies."cralaw
virtua1aw library

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate
of Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue
the sum of P14,666.40 paid by the estate as taxes, under section 3 of the Act, for the
crop years 1948-1949 and 1949-1950; alleging that such tax is unconstitutional and
void, being levied for the aid and support of the sugar industry exclusively, which in
plaintiffs opinion is not a public purpose for which a tax may be constitutionally
levied. The action having been dismissed by the Court of First Instance, the plaintiffs
appealed the case directly to this Court (Judiciary Act, section 17).
The basic defect in the plaintiffs position is his assumption that the tax provided for
in Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the
Act, and particularly of section 6 (heretofore quoted in full), will show that the tax is
levied with a regulatory purpose, to provide means for the rehabilitation and
stabilization of the threatened sugar industry. In other words, the act is primarily an
exercise of the police power.

This Court can take judicial notice of the fact that sugar production in one of the
great industries of our nation, sugar occupying a leading position among its export
products; that it gives employment to thousands of laborers in fields and factories;
that it is a great source of the states wealth, is one of the important sources of
foreign exchange needed by our government, and is thus pivotal in the plans of a
regime committed to a policy of currency stability. Its promotion, protection and
advancement, therefore redounds greatly to the general welfare. Hence it was
competent for the legislature to find that the general welfare demanded that the
sugar industry should be stabilized in turn; and in the wide field of its police power,
the law-making body could provide that the distribution of benefits therefrom be
readjusted among its components to enable it to resist the added strain of the
increase in taxes that it had to sustain (Sligh v. Kirkwood, 237 U. S. 52, 59 L. Ed.
835; Johnson v. State ex rel. Marey, 99 Fla. 1311, 128 So 853; Maxcy Inc. v. Mayo,
103 Fla. 552, 139 So. 121).

As stated in Johnson v. State ex rel. Marey, with reference to the citrus industry in
Florida

"The protection of a large industry constituting one of the great sources of the states
wealth and therefore directly or indirectly affecting the welfare of so great a portion of
the population of the State is affected to such an extent by public interests as to be
within the police power of the sovereign." (128 So. 857)

Once it is conceded, as it must, that the protection and promotion of the sugar
industry is a matter of public concern, it follows that the Legislature may determine
within reasonable bounds what is necessary for its protection and expedient for its
promotion. Here, the legislative discretion must be allowed full play, subject only to
the test of reasonableness; and it is not contended that the means provided in section
6 of the law (above quoted) bear no relation to the objective pursued or are oppressive
in character. If objective and methods are alike constitutionally valid, no reason is
seen why the state may not be levy taxes to raise funds for their prosecution and
attainment. Taxation may be made the implement of the states police power (Great
Atl. & Pac. Tea Co. v. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. v. Butler, 297 U.
S. 1, 80 L. Ed. 477; MCulloch v. Maryland, 4 Wheat. 318, 4 L. Ed. 579).

That the tax to be levied should burden the sugar producers themselves can hardly
be a ground of complaint; indeed, it appears rational that the tax be obtained
precisely from those who are to be benefited from the expenditure of the funds
derived from it. At any rate, it is inherent in the power to tax that a state be free to
select the subjects of taxation, and it has been repeatedly held that "inequalities
which result from a singling out of one particular class for taxation, or exemption
infringe no constitutional limitation" (Carmichael v. Southern Coal & Coke Co., 301
U. S. 495, 81 L. Ed. 1245, citing numerous authorities, at p. 1251).

From the point of view we have taken it appears of no moment that the funds raised
under the Sugar Stabilization Act, now in question, should be exclusively spent in aid
of the sugar industry, since it is that very enterprise that is being protected. It may be
that other industries are also in need of similar protection; but the legislature is not
required by the Constitution to adhere to a policy of "all or none." As ruled in
Minnesota ex rel. Pearson v. Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the law
presumably hits the evil where it is most felt, it is not to be overthrown because there
are other instances to which it might have been applied;" and that the legislative
authority, exerted within its proper field, need not embrace all the evils within its
reach" (N. L. R. B. v. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).

Even from the standpoint that the Act is a pure tax measure, it cannot be said that
the devotion of tax money to experimental stations to seek increase of efficiency in
sugar production, utilization of by- products and solution of allied problems, as well
as to the improvement of living and working conditions in sugar mills or plantations,
without any part of such money being channeled directly to private persons,
constitutes expenditure of tax money for private purposes, (compare Everson v.
Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).

The decision appealed from is affirmed, with costs against appellant. So ordered.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-23645 October 29, 1968

BENJAMIN P. GOMEZ, petitioner-appellee,

vs.
ENRICO PALOMAR, in his capacity as Postmaster General, HON. BRIGIDO R.
VALENCIA, in his capacity as Secretary of Public Works and Communications,
and DOMINGO GOPEZ, in his capacity as Acting Postmaster of San Fernando,
Pampanga, respondent-appellants.

Lorenzo P. Navarro and Narvaro Belar S. Navarro for petitioner-appellee.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Frine C.
Zaballero and Solicitor Dominador L. Quiroz for respondents-appellants.

CASTRO, J.:

This appeal puts in issue the constitutionality of Republic Act 1635,1 as amended by
Republic Act 2631,2 which provides as follows:

To help raise funds for the Philippine Tuberculosis Society, the Director of
Posts shall order for the period from August nineteen to September thirty every
year the printing and issue of semi-postal stamps of different denominations
with face value showing the regular postage charge plus the additional amount
of five centavos for the said purpose, and during the said period, no mail
matter shall be accepted in the mails unless it bears such semi-postal
stamps: Provided, That no such additional charge of five centavos shall be
imposed on newspapers. The additional proceeds realized from the sale of the
semi-postal stamps shall constitute a special fund and be deposited with the
National Treasury to be expended by the Philippine Tuberculosis Society in
carrying out its noble work to prevent and eradicate tuberculosis.

The respondent Postmaster General, in implementation of the law, thereafter issued

four (4) administrative orders numbered 3 (June 20, 1958), 7 (August 9, 1958), 9
(August 28, 1958), and 10 (July 15, 1960). All these administrative orders were
issued with the approval of the respondent Secretary of Public Works and
Communications.

The pertinent portions of Adm. Order 3 read as follows:

Such semi-postal stamps could not be made available during the period from
August 19 to September 30, 1957, for lack of time. However, two
denominations of such stamps, one at "5 + 5" centavos and another at "10 + 5"
centavos, will soon be released for use by the public on their mails to be posted
during the same period starting with the year 1958.

xxx xxx xxx

During the period from August 19 to September 30 each year starting in 1958,
no mail matter of whatever class, and whether domestic or foreign, posted at
any Philippine Post Office and addressed for delivery in this country or abroad,
shall be accepted for mailing unless it bears at least one such semi-postal
stamp showing the additional value of five centavos intended for the Philippine
Tuberculosis Society.
 In the case of second-class mails and mails prepaid by means of mail permits
or impressions of postage meters, each piece of such mail shall bear at least
one such semi-postal stamp if posted during the period above stated starting
with the year 1958, in addition to being charged the usual postage prescribed
by existing regulations. In the case of business reply envelopes and cards
mailed during said period, such stamp should be collected from the addressees
at the time of delivery. Mails entitled to franking privilege like those from the
office of the President, members of Congress, and other offices to which such
privilege has been granted, shall each also bear one such semi-postal stamp if
posted during the said period.

Mails posted during the said period starting in 1958, which are found in street
or post-office mail boxes without the required semi-postal stamp, shall be
returned to the sender, if known, with a notation calling for the affixing of such
stamp. If the sender is unknown, the mail matter shall be treated as
nonmailable and forwarded to the Dead Letter Office for proper disposition.

Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:

In the case of the following categories of mail matter and mails entitled to
franking privilege which are not exempted from the payment of the five
centavos intended for the Philippine Tuberculosis Society, such extra charge
may be collected in cash, for which official receipt (General Form No. 13, A)
shall be issued, instead of affixing the semi-postal stamp in the manner
hereinafter indicated:

1. Second-class mail. Aside from the postage at the second-class rate, the
extra charge of five centavos for the Philippine Tuberculosis Society shall be
collected on each separately-addressed piece of second-class mail matter, and
the total sum thus collected shall be entered in the same official receipt to be
issued for the postage at the second-class rate. In making such entry, the total
number of pieces of second-class mail posted shall be stated, thus: "Total
charge for TB Fund on 100 pieces . .. P5.00." The extra charge shall be entered
separate from the postage in both of the official receipt and the Record of
Collections.

2. First-class and third-class mail permits. Mails to be posted without postage

affixed under permits issued by this Bureau shall each be charged the usual
postage, in addition to the five-centavo extra charge intended for said society.
The total extra charge thus received shall be entered in the same official receipt
to be issued for the postage collected, as in subparagraph 1.

3. Metered mail. For each piece of mail matter impressed by postage meter
under metered mail permit issued by this Bureau, the extra charge of five
centavos for said society shall be collected in cash and an official receipt issued
for the total sum thus received, in the manner indicated in subparagraph 1.

4. Business reply cards and envelopes. Upon delivery of business reply cards
and envelopes to holders of business reply permits, the five-centavo charge
intended for said society shall be collected in cash on each reply card or
envelope delivered, in addition to the required postage which may also be paid
in cash. An official receipt shall be issued for the total postage and total extra
charge received, in the manner shown in subparagraph 1.

5. Mails entitled to franking privilege. Government agencies, officials, and

other persons entitled to the franking privilege under existing laws may pay in
cash such extra charge intended for said society, instead of affixing the semi-
postal stamps to their mails, provided that such mails are presented at the
post-office window, where the five-centavo extra charge for said society shall be
 collected on each piece of such mail matter. In such case, an official receipt
shall be issued for the total sum thus collected, in the manner stated in
subparagraph 1.

Mail under permits, metered mails and franked mails not presented at the
post-office window shall be affixed with the necessary semi-postal stamps. If
found in mail boxes without such stamps, they shall be treated in the same
way as herein provided for other mails.

Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government and its
Agencies and Instrumentalities Performing Governmental Functions." Adm. Order 10,
amending Adm. Order 3, as amended, exempts "copies of periodical publications
received for mailing under any class of mail matter, including newspapers and
magazines admitted as second-class mail."

The FACTS. On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter
at the post office in San Fernando, Pampanga. Because this letter, addressed to a
certain Agustin Aquino of 1014 Dagohoy Street, Singalong, Manila did not bear the
special anti-TB stamp required by the statute, it was returned to the petitioner.

In view of this development, the petitioner brough suit for declaratory relief in the
Court of First Instance of Pampanga, to test the constitutionality of the statute, as
well as the implementing administrative orders issued, contending that it violates the
equal protection clause of the Constitution as well as the rule of uniformity and
equality of taxation. The lower court declared the statute and the orders
unconstitutional; hence this appeal by the respondent postal authorities.

For the reasons set out in this opinion, the judgment appealed from must be
reversed.

I.

Before reaching the merits, we deem it necessary to dispose of the respondents'

contention that declaratory relief is unavailing because this suit was filed after the
petitioner had committed a breach of the statute. While conceding that the mailing by
the petitioner of a letter without the additional anti-TB stamp was a violation of
Republic Act 1635, as amended, the trial court nevertheless refused to dismiss the
action on the ground that under section 6 of Rule 64 of the Rules of Court, "If before
the final termination of the case a breach or violation of ... a statute ... should take
place, the action may thereupon be converted into an ordinary action."

The prime specification of an action for declaratory relief is that it must be brought
"before breach or violation" of the statute has been committed. Rule 64, section 1 so
provides. Section 6 of the same rule, which allows the court to treat an action for
declaratory relief as an ordinary action, applies only if the breach or violation occurs
after the filing of the action but before the termination thereof.3

Hence, if, as the trial court itself admitted, there had been a breach of the statute
before the firing of this action, then indeed the remedy of declaratory relief cannot be
availed of, much less can the suit be converted into an ordinary action.

Nor is there merit in the petitioner's argument that the mailing of the letter in
question did not constitute a breach of the statute because the statute appears to be
addressed only to postal authorities. The statute, it is true, in terms provides that "no
mail matter shall be accepted in the mails unless it bears such semi-postal stamps."
It does not follow, however, that only postal authorities can be guilty of violating it by
accepting mails without the payment of the anti-TB stamp. It is obvious that they can
be guilty of violating the statute only if there are people who use the mails without
paying for the additional anti-TB stamp. Just as in bribery the mere offer constitutes
a breach of the law, so in the matter of the anti-TB stamp the mere attempt to use
the mails without the stamp constitutes a violation of the statute. It is not required
that the mail be accepted by postal authorities. That requirement is relevant only for
the purpose of fixing the liability of postal officials.

Nevertheless, we are of the view that the petitioner's choice of remedy is correct
because this suit was filed not only with respect to the letter which he mailed on
September 15, 1963, but also with regard to any other mail that he might send in the
future. Thus, in his complaint, the petitioner prayed that due course be given to
"other mails without the semi-postal stamps which he may deliver for mailing ... if
any, during the period covered by Republic Act 1635, as amended, as well as other
mails hereafter to be sent by or to other mailers which bear the required postage,
without collection of additional charge of five centavos prescribed by the same
Republic Act." As one whose mail was returned, the petitioner is certainly interested
in a ruling on the validity of the statute requiring the use of additional stamps.

II.

We now consider the constitutional objections raised against the statute and the
implementing orders.

1. It is said that the statute is violative of the equal protection clause of the
Constitution. More specifically the claim is made that it constitutes mail users into a
class for the purpose of the tax while leaving untaxed the rest of the population and
that even among postal patrons the statute discriminatorily grants exemption to
newspapers while Administrative Order 9 of the respondent Postmaster General
grants a similar exemption to offices performing governmental functions. .

The five centavo charge levied by Republic Act 1635, as amended, is in the nature of
an excise tax, laid upon the exercise of a privilege, namely, the privilege of using the
mails. As such the objections levelled against it must be viewed in the light of
applicable principles of taxation.

To begin with, it is settled that the legislature has the inherent power to select the
subjects of taxation and to grant exemptions.4 This power has aptly been described
as "of wide range and flexibility."5 Indeed, it is said that in the field of taxation, more
than in other areas, the legislature possesses the greatest freedom in
classification.6 The reason for this is that traditionally, classification has been a
device for fitting tax programs to local needs and usages in order to achieve an
equitable distribution of the tax burden.7

That legislative classifications must be reasonable is of course undenied. But what

the petitioner asserts is that statutory classification of mail users must bear some
reasonable relationship to the end sought to be attained, and that absent such
relationship the selection of mail users is constitutionally impermissible. This is
altogether a different proposition. As explained in Commonwealth v. Life Assurance
Co.:8

While the principle that there must be a reasonable relationship between

classification made by the legislation and its purpose is undoubtedly true in
some contexts, it has no application to a measure whose sole purpose is to
raise revenue ... So long as the classification imposed is based upon some
standard capable of reasonable comprehension, be that standard based upon
ability to produce revenue or some other legitimate distinction, equal protection
of the law has been afforded. See Allied Stores of Ohio, Inc. v. Bowers, supra,
358 U.S. at 527, 79 S. Ct. at 441; Brown Forman Co. v. Commonwealth of
Kentucky, 2d U.S. 56, 573, 80 S. Ct. 578, 580 (1910).
We are not wont to invalidate legislation on equal protection grounds except by the
clearest demonstration that it sanctions invidious discrimination, which is all that
the Constitution forbids. The remedy for unwise legislation must be sought in the
legislature. Now, the classification of mail users is not without any reason. It is based
on ability to pay, let alone the enjoyment of a privilege, and on administrative
convinience. In the allocation of the tax burden, Congress must have concluded that
the contribution to the anti-TB fund can be assured by those whose who can afford
the use of the mails.

The classification is likewise based on considerations of administrative convenience.

For it is now a settled principle of law that "consideration of practical administrative
convenience and cost in the administration of tax laws afford adequate ground for
imposing a tax on a well recognized and defined class."9 In the case of the anti-TB
stamps, undoubtedly, the single most important and influential consideration that
led the legislature to select mail users as subjects of the tax is the relative ease and
convenienceof collecting the tax through the post offices. The small amount of five
centavos does not justify the great expense and inconvenience of collecting through
the regular means of collection. On the other hand, by placing the duty of collection
on postal authorities the tax was made almost self-enforcing, with as little cost and
as little inconvenience as possible.

And then of course it is not accurate to say that the statute constituted mail users
into a class. Mail users were already a class by themselves even before the enactment
of the statue and all that the legislature did was merely to select their class.
Legislation is essentially empiric and Republic Act 1635, as amended, no more than
reflects a distinction that exists in fact. As Mr. Justice Frankfurter said, "to recognize
differences that exist in fact is living law; to disregard [them] and concentrate on
some abstract identities is lifeless logic."10

Granted the power to select the subject of taxation, the State's power to grant
exemption must likewise be conceded as a necessary corollary. Tax exemptions are
too common in the law; they have never been thought of as raising issues under the
equal protection clause.

It is thus erroneous for the trial court to hold that because certain mail users are
exempted from the levy the law and administrative officials have sanctioned an
invidious discrimination offensive to the Constitution. The application of the lower
courts theory would require all mail users to be taxed, a conclusion that is hardly
tenable in the light of differences in status of mail users. The Constitution does not
require this kind of equality.

As the United States Supreme Court has said, the legislature may withhold the
burden of the tax in order to foster what it conceives to be a beneficent
enterprise.11 This is the case of newspapers which, under the amendment introduced
by Republic Act 2631, are exempt from the payment of the additional stamp.

As for the Government and its instrumentalities, their exemption rests on the State's
sovereign immunity from taxation. The State cannot be taxed without its consent and
such consent, being in derogation of its sovereignty, is to be strictly
construed.12 Administrative Order 9 of the respondent Postmaster General, which
lists the various offices and instrumentalities of the Government exempt from the
payment of the anti-TB stamp, is but a restatement of this well-known principle of
constitutional law.

The trial court likewise held the law invalid on the ground that it singles out
tuberculosis to the exclusion of other diseases which, it is said, are equally a menace
to public health. But it is never a requirement of equal protection that all evils of the
same genus be eradicated or none at all.13 As this Court has had occasion to say, "if
the law presumably hits the evil where it is most felt, it is not to be overthrown
because there are other instances to which it might have been applied."14

2. The petitioner further argues that the tax in question is invalid, first, because it is
not levied for a public purpose as no special benefits accrue to mail users as
taxpayers, and second, because it violates the rule of uniformity in taxation.

The eradication of a dreaded disease is a public purpose, but if by public purpose the
petitioner means benefit to a taxpayer as a return for what he pays, then it is
sufficient answer to say that the only benefit to which the taxpayer is constitutionally
entitled is that derived from his enjoyment of the privileges of living in an organized
society, established and safeguarded by the devotion of taxes to public purposes. Any
other view would preclude the levying of taxes except as they are used to compensate
for the burden on those who pay them and would involve the abandonment of the
most fundamental principle of government that it exists primarily to provide for
the common good.15

Nor is the rule of uniformity and equality of taxation infringed by the imposition of a
flat rate rather than a graduated tax. A tax need not be measured by the weight of
the mail or the extent of the service rendered. We have said that considerations of
administrative convenience and cost afford an adequate ground for classification. The
same considerations may induce the legislature to impose a flat tax which in effect is
a charge for the transaction, operating equally on all persons within the class
regardless of the amount involved.16 As Mr. Justice Holmes said in sustaining the
validity of a stamp act which imposed a flat rate of two cents on every $100 face value
of stock transferred:

One of the stocks was worth $30.75 a share of the face value of $100, the other
$172. The inequality of the tax, so far as actual values are concerned, is
manifest. But, here again equality in this sense has to yield to practical
considerations and usage. There must be a fixed and indisputable mode of
ascertaining a stamp tax. In another sense, moreover, there is equality. When
the taxes on two sales are equal, the same number of shares is sold in each
case; that is to say, the same privilege is used to the same extent. Valuation is
not the only thing to be considered. As was pointed out by the court of appeals,
the familiar stamp tax of 2 cents on checks, irrespective of income or earning
capacity, and many others, illustrate the necessity and practice of sometimes
substituting count for weight ...17

According to the trial court, the money raised from the sales of the anti-TB stamps is
spent for the benefit of the Philippine Tuberculosis Society, a private organization,
without appropriation by law. But as the Solicitor General points out, the Society is
not really the beneficiary but only the agency through which the State acts in
carrying out what is essentially a public function. The money is treated as a special
fund and as such need not be appropriated by law.18

3. Finally, the claim is made that the statute is so broadly drawn that to execute it
the respondents had to issue administrative orders far beyond their powers. Indeed,
this is one of the grounds on which the lower court invalidated Republic Act 1631, as
amended, namely, that it constitutes an undue delegation of legislative power.

Administrative Order 3, as amended by Administrative Orders 7 and 10, provides

that for certain classes of mail matters (such as mail permits, metered mails,
business reply cards, etc.), the five-centavo charge may be paid in cash instead of the
purchase of the anti-TB stamp. It further states that mails deposited during the
period August 19 to September 30 of each year in mail boxes without the stamp
should be returned to the sender, if known, otherwise they should be treated as
nonmailable.
It is true that the law does not expressly authorize the collection of five centavos
except through the sale of anti-TB stamps, but such authority may be implied in so
far as it may be necessary to prevent a failure of the undertaking. The authority given
to the Postmaster General to raise funds through the mails must be liberally
construed, consistent with the principle that where the end is required the
appropriate means are given.19

The anti-TB stamp is a distinctive stamp which shows on its face not only the
amount of the additional charge but also that of the regular postage. In the case of
business reply cards, for instance, it is obvious that to require mailers to affix the
anti-TB stamp on their cards would be to make them pay much more because the
cards likewise bear the amount of the regular postage.

It is likewise true that the statute does not provide for the disposition of mails which
do not bear the anti-TB stamp, but a declaration therein that "no mail matter shall be
accepted in the mails unless it bears such semi-postal stamp" is a declaration that
such mail matter is nonmailable within the meaning of section 1952 of the
Administrative Code. Administrative Order 7 of the Postmaster General is but a
restatement of the law for the guidance of postal officials and employees. As for
Administrative Order 9, we have already said that in listing the offices and entities of
the Government exempt from the payment of the stamp, the respondent Postmaster
General merely observed an established principle, namely, that the Government is
exempt from taxation.

ACCORDINGLY, the judgment a quo is reversed, and the complaint is dismissed,

without pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Angeles and Capistrano,
JJ., concur.
Zaldivar, J., is on leave.

Separate Opinions

FERNANDO, J., concurring:

I join fully the rest of my colleagues in the decision upholding Republic Act No. 1635
as amended by Republic Act No. 2631 and the majority opinion expounded with
Justice Castro's usual vigor and lucidity subject to one qualification. With all due
recognition of its inherently persuasive character, it would seem to me that the same
result could be achieved if reliance be had on police power rather than the attribute
of taxation, as the constitutional basis for the challenged legislation.

1. For me, the state in question is an exercise of the regulatory power connected with
the performance of the public service. I refer of course to the government postal
function, one of respectable and ancient lineage. The United States Constitution of
1787 vests in the federal government acting through Congress the power to establish
post offices.1 The first act providing for the organization of government departments
in the Philippines, approved Sept. 6, 1901, provided for the Bureau of Post Offices in
the Department of Commerce and Police.2 Its creation is thus a manifestation of one
of the many services in which the government may engage for public convenience and
public interest. Such being the case, it seems that any legislation that in effect would
require increase cost of postage is well within the discretionary authority of the
government.

It may not be acting in a proprietary capacity but in fixing the fees that it collects for
the use of the mails, the broad discretion that it enjoys is undeniable. In that sense,
the principle announced in Esteban v. Cabanatuan City,3 in an opinion by our Chief
Justice, while not precisely controlling furnishes for me more than ample support for
the validity of the challenged legislation. Thus: "Certain exactions, imposable under
an authority other than police power, are not subject, however, to qualification as to
the amount chargeable, unless the Constitution or the pertinent laws provide
otherwise. For instance, the rates of taxes, whether national or municipal, need not
be reasonable, in the absence of such constitutional or statutory limitation. Similarly,
when a municipal corporation fixes the fees for the use of its properties, such as
public markets, it does not wield the police power, or even the power of taxation.
Neither does it assert governmental authority. It exercises merely a proprietary
function. And, like any private owner, it is in the absence of the aforementioned
limitation, which does not exist in the Charter of Cabanatuan City (Republic Act No.
526) free to charge such sums as it may deem best, regardless of the
reasonableness of the amount fixed, for the prospective lessees are free to enter into
the corresponding contract of lease, if they are agreeable to the terms thereof or,
otherwise, not enter into such contract."

2. It would appear likewise that an expression of one's personal view both as to

the attitude and awareness that must be displayed by inferior tribunals when the
"delicate and awesome" power of passing on the validity of a statute would not be
inappropriate. "The Constitution is the supreme law, and statutes are written and
enforced in submission to its commands."4 It is likewise common place in
constitutional law that a party adversely affected could, again to quote from Cardozo,
"invoke, when constitutional immunities are threatened, the judgment of the courts."5

Since the power of judicial review flows logically from the judicial function of
ascertaining the facts and applying the law and since obviously the Constitution is
the highest law before which statutes must bend, then inferior tribunals can, in the
discharge of their judicial functions, nullify legislative acts. As a matter of fact, in
clear cases, such is not only their power but their duty. In the language of the
present Chief Justice: "In fact, whenever the conflicting claims of the parties to a
litigation cannot properly be settled without inquiring into the validity of an act of
Congress or of either House thereof, the courts have, not only jurisdiction to pass
upon said issue but, also, the duty to do so, which cannot be evaded without violating
the fundamental law and paving the way to its eventual destruction."6

Nonetheless, the admonition of Cooley, specially addressed to inferior tribunals, must

ever be kept in mind. Thus: "It must be evident to any one that the power to declare a
legislative enactment void is one which the judge, conscious of the fallibility of the
human judgment, will shrink from exercising in any case where he can
conscientiously and with due regard to duty and official oath decline the
responsibility."7

There must be a caveat however to the above Cooley pronouncement. Such should
not be the case, to paraphrase Freund, when the challenged legislation imperils
freedom of the mind and of the person, for given such an undesirable situation, "it is
freedom that commands a momentum of respect." Here then, fidelity to the great
ideal of liberty enshrined in the Constitution may require the judiciary to take an
uncompromising and militant stand. As phrased by us in a recent decision, "if the
liberty involved were freedom of the mind or the person, the standard of its validity of
governmental acts is much more rigorous and exacting."8

So much for the appropriate judicial attitude. Now on the question of awareness of
the controlling constitutional doctrines.

There is nothing I can add to the enlightening discussion of the equal protection
aspect as found in the majority opinion. It may not be amiss to recall to mind,
however, the language of Justice Laurel in the leading case of People v. Vera,9 to the
effect that the basic individual right of equal protection "is a restraint on all the three
grand departments of our government and on the subordinate instrumentalities and
subdivisions thereof, and on many constitutional powers, like the police power,
taxation and eminent domain."10 Nonetheless, no jurist was more careful in avoiding
the dire consequences to what the legislative body might have deemed necessary to
promote the ends of public welfare if the equal protection guaranty were made to
constitute an insurmountable obstacle.

A similar sense of realism was invariably displayed by Justice Frankfurter, as is quite

evident from the various citations from his pen found in the majority opinion. For
him, it would be a misreading of the equal protection clause to ignore actual
conditions and settled practices. Not for him the at times academic and sterile
approach to constitutional problems of this sort. Thus: "It would be a narrow
conception of jurisprudence to confine the notion of 'laws' to what is found written on
the statute books, and to disregard the gloss which life has written upon it. Settled
state practice cannot supplant constitutional guaranties, but it can establish what is
state law. The Equal Protection Clause did not write an empty formalism into the
Constitution. Deeply embedded traditional ways of carrying out state policy, such as
those of which petitioner complains, are often tougher and truer law than the dead
words of the written text."11 This too, from the same distinguished jurist: "The
Constitution does not require things which are different in fact or opinion to be
treated in law as though they were the same."12

Now, as to non-delegation. It is to be admitted that the problem of non-delegation of

legislative power at times occasions difficulties. Its strict view has been announced by
Justice Laurel in the aforecited case of People v. Verain this language. Thus: "In
testing whether a statute constitutes an undue delegation of legislative power or not,
it is usual to inquire whether the statute was complete in all its terms and provisions
when it left the hands of the legislature so that nothing was left to the judgment of
any other appointee or delegate of the legislature. .... In United States v. Ang Tang
Ho ..., this court adhered to the foregoing rule; it held an act of the legislature void in
so far as it undertook to authorize the Governor-General, in his discretion, to issue a
proclamation fixing the price of rice and to make the sale of it in violation of the
proclamation a crime."13

Only recently, the present Chief Justice reaffirmed the above view in Pelaez v. Auditor
General,14 specially where the delegation deals not with an administrative function
but one essentially and eminently legislative in character. What could properly be
stigmatized though to quote Justice Cardozo, is delegation of authority that is
"unconfined and vagrant, one not canalized within banks which keep it from
overflowing."15

This is not the situation as it presents itself to us. What was delegated was power not
legislative in character. Justice Laurel himself, in a later case, People v.
Rosenthal,16 admitted that within certain limits, there being a need for coping with
the more intricate problems of society, the principle of "subordinate legislation" has
been accepted, not only in the United States and England, but in practically all
modern governments. This view was reiterated by him in a 1940
decision, Pangasinan Transportation Co., Inc. v. Public Service Commission.17 Thus:
"Accordingly, with the growing complexity of modern life, the multiplication of the
subjects of governmental regulation, and the increased difficulty of administering the
laws, there is a constantly growing tendency toward the delegation of greater powers
by the legislature, and toward the approval of the practice by the courts."

In the light of the above views of eminent jurists, authoritative in character, of both
the equal protection clause and the non-delegation principle, it is apparent how far
the lower court departed from the path of constitutional orthodoxy in nullifying
Republic Act No. 1635 as amended. Fortunately, the matter has been set right with
the reversal of its decision, the opinion of the Court, manifesting its fealty to
constitutional law precepts, which have been reiterated time and time again and for
the soundest of reasons.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-4817 May 26, 1954

SILVESTER M. PUNSALAN, ET AL., plaintiffs-appellants,

vs.
THE MUNICIPAL BOARD OF THE CITY OF MANILA, ET AL., defendants-
appellants.

Calanog and Alafriz for plaintiffs-appellants.

City Fiscal Eugenio Angeles and Assistant Fiscal Eulogio S. Serreno for defendants-
appellants.

REYES, J.:

This suit was commenced in the Court of First Instance of Manila by two lawyers, a
medical practitioner, a public accountant, a dental surgeon and a pharmacist,
purportedly "in their own behalf and in behalf of other professionals practising in the
City of Manila who may desire to join it." Object of the suit is the annulment of
Ordinance No. 3398 of the City of Manila together with the provision of the Manila
charter authorizing it and the refund of taxes collected under the ordinance but paid
under protest.

The ordinance in question, which was approved by the municipal board of the City of
Manila on July 25, 1950, imposes a municipal occupation tax on persons exercising
various professions in the city and penalizes non-payment of the tax "by a fine of not
more than two hundred pesos or by imprisonment of not more than six months, or by
both such fine and imprisonment in the discretion of the court." Among the
professions taxed were those to which plaintiffs belong. The ordinance was enacted
pursuant to paragraph (1) of section 18 of the Revised Charter of the City of Manila
(as amended by Republic Act No. 409), which empowers the Municipal Board of said
city to impose a municipal occupation tax, not to exceed P50 per annum, on persons
engaged in the various professions above referred to.

Having already paid their occupation tax under section 201 of the National Internal
Revenue Code, plaintiffs, upon being required to pay the additional tax prescribed in
the ordinance, paid the same under protest and then brought the present suit for the
purpose already stated. The lower court upheld the validity of the provision of law
authorizing the enactment of the ordinance but declared the ordinance itself illegal
and void on the ground that the penalty there in provided for non-payment of the tax
was not legally authorized. From this decision both parties appealed to this Court,
and the only question they have presented for our determination is whether this
ruling is correct or not, for though the decision is silent on the refund of taxes paid
plaintiffs make no assignment of error on this point.

To begin with defendants' appeal, we find that the lower court was in error in saying
that the imposition of the penalty provided for in the ordinance was without the
authority of law. The last paragraph (kk) of the very section that authorizes the
enactment of this tax ordinance (section 18 of the Manila Charter) in express terms
also empowers the Municipal Board "to fix penalties for the violation of ordinances
which shall not exceed to(sic) two hundred pesos fine or six months" imprisonment, or
both such fine and imprisonment, for a single offense." Hence, the pronouncement
below that the ordinance in question is illegal and void because it imposes a penalty
not authorized by law is clearly without basis.
As to plaintiffs' appeal, the contention in substance is that this ordinance and the law
authorizing it constitute class legislation, are unjust and oppressive, and authorize
what amounts to double taxation.

In raising the hue and cry of "class legislation", the burden of plaintiffs' complaint is
not that the professions to which they respectively belong have been singled out for
the imposition of this municipal occupation tax; and in any event, the Legislature
may, in its discretion, select what occupations shall be taxed, and in the exercise of
that discretion it may tax all, or it may select for taxation certain classes and leave
the others untaxed. (Cooley on Taxation, Vol. 4, 4th ed., pp. 3393-3395.) Plaintiffs'
complaint is that while the law has authorized the City of Manila to impose the said
tax, it has withheld that authority from other chartered cities, not to mention
municipalities. We do not think it is for the courts to judge what particular cities or
municipalities should be empowered to impose occupation taxes in addition to those
imposed by the National Government. That matter is peculiarly within the domain of
the political departments and the courts would do well not to encroach upon it.
Moreover, as the seat of the National Government and with a population and volume
of trade many times that of any other Philippine city or municipality, Manila, no
doubt, offers a more lucrative field for the practice of the professions, so that it is but
fair that the professionals in Manila be made to pay a higher occupation tax than
their brethren in the provinces.

Plaintiffs brand the ordinance unjust and oppressive because they say that it creates
discrimination within a class in that while professionals with offices in Manila have to
pay the tax, outsiders who have no offices in the city but practice their profession
therein are not subject to the tax. Plaintiffs make a distinction that is not found in
the ordinance. The ordinance imposes the tax upon every person "exercising" or
"pursuing" in the City of Manila naturally any one of the occupations named,
but does not say that such person must have his office in Manila. What constitutes
exercise or pursuit of a profession in the city is a matter of judicial determination.
The argument against double taxation may not be invoked where one tax is imposed
by the state and the other is imposed by the city (1 Cooley on Taxation, 4th ed., p.
492), it being widely recognized that there is nothing inherently obnoxious in the
requirement that license fees or taxes be exacted with respect to the same
occupation, calling or activity by both the state and the political subdivisions thereof.
(51 Am. Jur., 341.)

In view of the foregoing, the judgment appealed from is reversed in so far as it

declares Ordinance No. 3398 of the City of Manila illegal and void and affirmed in so
far as it holds the validity of the provision of the Manila charter authorizing it. With
costs against plaintiffs-appellants.

Pablo, Bengzon, Montemayor, Jugo, Bautista Angelo, Labrador, and Concepcion, JJ.,
concur.

Separate Opinions

PARAS, C.J., dissenting:

I am constrained to dissent from the decision of the majority upon the ground that
the Municipal Board of Manila cannot outlaw what Congress of the Philippines has
already authorized. The plaintiffs-appellants two lawyers, a physician, an
accountant, a dentist and a pharmacist had already paid the occupation tax under
section 201 of the National Internal Revenue Code and are thereby duly licensed to
practice their respective professions throughout the Philippines; and yet they had
been required to pay another occupation tax under Ordinance No. 3398 for practising
in the City of Manila. This is a glaring example of contradiction the license granted
by the National Government is in effect withdrawn by the City in case of non-
payment of the tax under the ordinance. I fit be argued that the national occupation
tax is collected to allow the professional residing in Manila to pursue his calling in
other places in the Philippines, it should then be exacted only from professionals
practising simultaneously in and outside of Manila. At any rate, we are confronted
with the following situation: Whereas the professionals elsewhere pay only one
occupation tax, in the City of Manila they have to pay two, although all are on equal
footing insofar as opportunities for earning money out of their pursuits are
concerned. The statement that practice in Manila is more lucrative than in the
provinces, may be true perhaps with reference only to a limited few, but certainly not
to the general mass of practitioners in any field. Again, provincial residents who have
occasional or isolated practice in Manila may have to pay the city tax. This obvious
discrimination or lack of uniformity cannot be brushed aside or justified by any trite
pronouncement that double taxation is legitimate or that legislation may validly affect
certain classes.

My position is that a professional who has paid the occupation tax under the
National Internal Revenue Code should be allowed to practice in Manila even without
paying the similar tax imposed by Ordinance No. 3398. The City cannot give what
said professional already has. I would not say that this Ordinance, enacted by the
Municipal Board pursuant to paragraph 1 of section 18 of the Revised Charter of
Manila, as amended by Republic Act No. 409, empowering the Board to impose a
municipal occupation tax not to exceed P50 per annum, is invalid; but that only one
tax, either under the Internal Revenue Code or under Ordinance No. 3398, should be
imposed upon a practitioner in Manila.
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-67649 June 28, 1988
ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.
DECISION
GUTIERREZ, JR., J.:
The petitioner invokes legal and equitable grounds to reverse the questioned decision
of the Intermediate Appellate Court, to set aside the auction sale of his property which
took place on December 5, 1977, and to allow him to recover a 203 square meter lot
which was, sold at public auction to Ho Fernandez and ordered titled in the latters
name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-story house built
upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro
Manila. The lot, with an area of about 328 square meters, is described and covered by
Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay City.
On October 15, 1977, a 125 square meter portion of Francias property was
expropriated by the Republic of the Philippines for the sum of P4,116.00 representing
the estimated amount equivalent to the assessed value of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on
December 5, 1977, his property was sold at public auction by the City Treasurer of
Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real
Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez
was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that time
helping his uncle ship bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P In re:
Petition for Entry of New Certificate of Title filed by Ho Fernandez, seeking the
cancellation of TCT No. 4739 (37795) and the issuance in his name of a new certificate
of title. Upon verification through his lawyer, Francia discovered that a Final Bill of
Sale had been issued in favor of Ho Fernandez by the City Treasurer on December 11,
1978. The auction sale and the final bill of sale were both annotated at the back of TCT
No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later
amended his complaint on January 24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of which
reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the
amended complaint and ordering:
(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in
favor of the defendant Ho Fernandez over the parcel of land including the improvements
thereon, subject to whatever encumbrances appearing at the back of TCT No. 4739
(37795) and ordering the same TCT No. 4739 (37795) cancelled.
(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorneys
fees. (p. 30, Record on Appeal)
The Intermediate Appellate Court affirmed the decision of the lower court in toto.
Hence, this petition for review.
Francia prefaced his arguments with the following assignments of grave errors of law:
I
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR
OF LAW IN NOT HOLDING PETITIONERS OBLIGATION TO PAY P2,400.00 FOR
SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00
WHICH THE GOVERNMENT IS INDEBTED TO THE FORMER.
II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND
SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND
DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE
ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF
P2,400.00.
III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A
SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE
PRICE OF P2,400.00 PAID BY RESPONDENT HO FERNANDEZ WAS GROSSLY
INADEQUATE AS TO SHOCK ONES CONSCIENCE AMOUNTING TO FRAUD AND A
DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW, AND
CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21,
Rollo)
We gave due course to the petition for a more thorough inquiry into the petitioners
allegations that his property was sold at public auction without notice to him and that
the price paid for the property was shockingly inadequate, amounting to fraud and
deprivation without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought the problems
raised in his petition upon himself. While we commiserate with him at the loss of his
property, the law and the facts militate against the grant of his petition. We are
constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of
his land was expropriated on October 15, 1977. Hence, his tax obligation had been set-
off by operation of law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of
persons, who in their own right are reciprocally debtors and creditors of each other,
are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy
the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time
a principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled
that there can be no off-setting of taxes against the claims that the taxpayer may have
against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that
Internal Revenue Taxes can not be the subject of set-off or compensation. We stated
that:
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be
set-off under the statutes of set-off, which are construed uniformly, in the light of
public policy, to exclude the remedy in an action or any indebtedness of the state or
municipality to one who is liable to the state or municipality for taxes. Neither are they
a proper subject of recoupment since they do not arise out of the contract or
transaction sued on. (80 C.J.S., 7374). The general rule based on grounds of public
policy is well-settled that no set-off admissible against demands for taxes levied for
general or local governmental purposes. The reason on which the general rule is based,
is that taxes are not in the nature of contracts between the party and party but grow
out of duty to, and are the positive acts of the government to the making and enforcing
of which, the personal consent of individual taxpayers is not required.
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector
because he has a claim against the governmental body not included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated
that: internal revenue taxes can not be the subject of compensation: Reason:
government and taxpayer are not mutually creditors and debtors of each other under
Article 1278 of the Civil Code and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.
There are other factors which compel us to rule against the petitioner. The tax was due
to the city government while the expropriation was effected by the national government.
Moreover, the amount of P4,116.00 paid by the national government for the 125 square
meter portion of his lot was deposited with the Philippine National Bank long before
the sale at public auction of his remaining property. Notice of the deposit dated
September 28, 1977 was received by the petitioner on September 30, 1977. The
petitioner admitted in his testimony that he knew about the P4,116.00 deposited with
the bank but he did not withdraw it. It would have been an easy matter to withdraw
P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the
sale at public auction.
Petitioner had one year within which to redeem his property although, as well be shown
later, he claimed that he pocketed the notice of the auction sale without reading it.
Petitioner contends that the auction sale in question was made without complying
with the mandatory provisions of the statute governing tax sale. No evidence, oral or
otherwise, was presented that the procedure outlined by law on sales of property for
tax delinquency was followed. Since defendant Ho Fernandez has the affirmative of
this issue, the burden of proof therefore rests upon him to show that plaintiff was duly
and properly notified .(Petition for Review, Rollo p. 18; emphasis supplied)
We agree with the petitioners claim that Ho Fernandez, the purchaser at the auction
sale, has the burden of proof to show that there was compliance with all the prescribed
requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx xxx xxx
[D]ue process of law to be followed in tax proceedings must be established by proof
and the general rule is that the purchaser of a tax title is bound to take upon himself the
burden of showing the regularity of all proceedings leading up to the sale. (emphasis
supplied)
There is no presumption of the regularity of any administrative action which results in
depriving a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil.
437); Denoga v. Insular Government, 19 Phil. 261). This is actually an exception to the
rule that administrative proceedings are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal
prerequisites have been complied with, the petitioner can not, however, deny that he
did receive the notice for the auction sale. The records sustain the lower courts finding
that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not
properly notified of the auction sale. Surprisingly, however, he admitted in his
testimony that he received the letter dated November 21, 1977 (Exhibit I) as shown
by his signature (Exhibit I-A) thereof. He claimed further that he was not present on
December 5, 1977 the date of the auction sale because he went to Iligan City. As long
as there was substantial compliance with the requirements of the notice, the validity
of the auction sale can not be assailed .
We quote the following testimony of the petitioner on cross-examination, to wit:
Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you
that the property in question shall be sold at public auction to the highest bidder on
December 5, 1977 pursuant to Sec. 74 of PD 464. Will you tell the Court whether you
received the original of this letter?
A. I just signed it because I was not able to read the same. It was just sent by mail
carrier.
Q. So you admit that you received the original of Exhibit I and you signed upon receipt
thereof but you did not read the contents of it?
A. Yes, sir, as I was in a hurry.
Q. After you received that original where did you place it?
A. I placed it in the usual place where I place my mails.
Petitioner, therefore, was notified about the auction sale. It was negligence on his part
when he ignored such notice. By his very own admission that he received the notice,
his now coming to court assailing the validity of the auction sale loses its force.
Petitioners third assignment of grave error likewise lacks merit. As a general rule, gross
inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon
v. Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917
Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held
that alleged gross inadequacy of price is not material when the law gives the owner
the right to redeem as when a sale is made at public auction, upon the theory that the
lesser the price, the easier it is for the owner to effect redemption. In Velasquez v.
Coronel (5 SCRA 985), this Court held:
[R]espondent treasurer now claims that the prices for which the lands were sold are
unconscionable considering the wide divergence between their assessed values and the
amounts for which they had been actually sold. However, while in ordinary sales for
reasons of equity a transaction may be invalidated on the ground of inadequacy of
price, or when such inadequacy shocks ones conscience as to justify the courts to
interfere, such does not follow when the law gives to the owner the right to redeem, as
when a sale is made at public auction, upon the theory that the lesser the price the
easier it is for the owner to effect the redemption. And so it was aptly said: When there
is the right to redeem, inadequacy of price should not be material, because the
judgment debtor may reacquire the property or also sell his right to redeem and thus
recover the loss he claims to have suffered by reason of the price obtained at the
auction sale.
The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v.
De Long, et al. (188 Wash. 162, 61 P. 2d, 1290):
If mere inadequacy of price is held to be a valid objection to a sale for taxes, the
collection of taxes in this manner would be greatly embarrassed, if not rendered
altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the correct rule is stated
as follows: where land is sold for taxes, the inadequacy of the price given is not a valid
objection to the sale. This rule arises from necessity, for, if a fair price for the land
were essential to the sale, it would be useless to offer the property. Indeed, it is
notorious that the prices habitually paid by purchasers at tax sales are grossly out of
proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P.
367, 369).
In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et
al. (267 P. 555):
Like most cases of this character there is here a certain element of hardship from which
we would be glad to relieve, but do so would unsettle long-established rules and lead
to uncertainty and difficulty in the collection of taxes which are the life blood of the
state. We are convinced that the present rules are just, and that they bring hardship
only to those who have invited it by their own neglect.
We are inclined to believe the petitioners claim that the value of the lot has greatly
appreciated in value. Precisely because of the widening of Buendia Avenue in Pasay
City, which necessitated the expropriation of adjoining areas, real estate values have
gone up in the area. However, the price quoted by the petitioner for a 203 square meter
lot appears quite exaggerated. At any rate, the foregoing reasons which answer the
petitioners claims lead us to deny the petition.
And finally, even if we are inclined to give relief to the petitioner on equitable grounds,
there are no strong considerations of substantial justice in his favor. Mr. Francia failed
to pay his taxes for 14 years from 1963 up to the date of the auction sale. He claims to
have pocketed the notice of sale without reading it which, if true, is still an act of
inexplicable negligence. He did not withdraw from the expropriation payment deposited
with the Philippine National Bank an amount sufficient to pay for the back taxes. The
petitioner did not pay attention to another notice sent by the City Treasurer on
November 3, 1978, during the period of redemption, regarding his tax delinquency.
There is furthermore no showing of bad faith or collusion in the purchase of the
property by Mr. Fernandez. The petitioner has no standing to invoke equity in his
attempt to regain the property by belatedly asking for the annulment of the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED.
The decision of the respondent court is affirmed.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-18994 June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First
Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late
Walter Scott Price, respondents.

Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.

Benedicto and Martinez for respondents.

LABRADOR, J.:

This is a petition for certiorari and mandamus against the Judge of the Court of First
Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders
of the court and for an order in this Court directing the respondent court below to
execute the judgment in favor of the Government against the estate of Walter Scott
Price for internal revenue taxes.

It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-
14674, January 30, 1960, this Court declared as final and executory the order for the
payment by the estate of the estate and inheritance taxes, charges and penalties,
amounting to P40,058.55, issued by the Court of First Instance of Leyte in, special
proceedings No. 14 entitled "In the matter of the Intestate Estate of the Late Walter
Scott Price." In order to enforce the claims against the estate the fiscal presented a
petition dated June 21, 1961, to the court below for the execution of the judgment.
The petition was, however, denied by the court which held that the execution is not
justifiable as the Government is indebted to the estate under administration in the
amount of P262,200. The orders of the court below dated August 20, 1960 and
September 28, 1960, respectively, are as follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K.

Price, Administratrix of the estate of her late husband Walter Scott Price and
Director Zoilo Castrillo of the Bureau of Lands dated September 19, 1956 and
acknowledged before Notary Public Salvador V. Esguerra, legal adviser in
Malacaang to Executive Secretary De Leon dated December 14, 1956, the note
of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2,
1958, directing the latter to pay to Mrs. Price the sum ofP368,140.00, and an
extract of page 765 of Republic Act No. 2700 appropriating the sum of
P262.200.00 for the payment to the Leyte Cadastral Survey, Inc., represented
by the administratrix Simeona K. Price, as directed in the above note of the
President. Considering these facts, the Court orders that the payment of
inheritance taxes in the sum of P40,058.55 due the Collector of Internal
Revenue as ordered paid by this Court on July 5, 1960 in accordance with the
order of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be
deducted from the amount of P262,200.00 due and payable to the
Administratrix Simeona K. Price, in this estate, the balance to be paid by the
Government to her without further delay. (Order of August 20, 1960)

The Court has nothing further to add to its order dated August 20, 1960 and it
orders that the payment of the claim of the Collector of Internal Revenue be
deferred until the Government shall have paid its accounts to the
 administratrix herein amounting to P262,200.00. It may not be amiss to repeat
that it is only fair for the Government, as a debtor, to its accounts to its
citizens-creditors before it can insist in the prompt payment of the latter's
account to it, specially taking into consideration that the amount due to the
Government draws interests while the credit due to the present state does not
accrue any interest. (Order of September 28, 1960)

The petition to set aside the above orders of the court below and for the execution of
the claim of the Government against the estate must be denied for lack of merit. The
ordinary procedure by which to settle claims of indebtedness against the estate of a
deceased person, as an inheritance tax, is for the claimant to present a claim before
the probate court so that said court may order the administrator to pay the amount
thereof. To such effect is the decision of this Court in Aldamiz vs. Judge of the Court of
First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:

. . . a writ of execution is not the proper procedure allowed by the Rules of

Court for the payment of debts and expenses of administration. The proper
procedure is for the court to order the sale of personal estate or the sale or
mortgage of real property of the deceased and all debts or expenses of
administrator and with the written notice to all the heirs legatees and devisees
residing in the Philippines, according to Rule 89, section 3, and Rule 90,
section 2. And when sale or mortgage of real estate is to be made, the
regulations contained in Rule 90, section 7, should be complied
with.1wph1.t

Execution may issue only where the devisees, legatees or heirs have entered
into possession of their respective portions in the estate prior to settlement and
payment of the debts and expenses of administration and it is later ascertained
that there are such debts and expenses to be paid, in which case "the court
having jurisdiction of the estate may, by order for that purpose, after hearing,
settle the amount of their several liabilities, and order how much and in what
manner each person shall contribute, and may issue execution if circumstances
require" (Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.)
And this is not the instant case.

The legal basis for such a procedure is the fact that in the testate or intestate
proceedings to settle the estate of a deceased person, the properties belonging to the
estate are under the jurisdiction of the court and such jurisdiction continues until
said properties have been distributed among the heirs entitled thereto. During the
pendency of the proceedings all the estate is in custodia legis and the proper
procedure is not to allow the sheriff, in case of the court judgment, to seize the
properties but to ask the court for an order to require the administrator to pay the
amount due from the estate and required to be paid.

Another ground for denying the petition of the provincial fiscal is the fact that the
court having jurisdiction of the estate had found that the claim of the estate against
the Government has been recognized and an amount of P262,200 has already been
appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under the
above circumstances, both the claim of the Government for inheritance taxes and the
claim of the intestate for services rendered have already become overdue and
demandable is well as fully liquidated. Compensation, therefore, takes place by
operation of law, in accordance with the provisions of Articles 1279 and 1290 of the
Civil Code, and both debts are extinguished to the concurrent amount, thus:

ART. 1200. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguished both debts to
the concurrent amount, eventhough the creditors and debtors are not aware of
the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment for
taxes against the estate of the deceased Walter Scott Price. Furthermore, the petition
for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the
remedy.

The petition is, therefore, dismissed, without costs.

[G.R. No. 125704. August 28, 1998]

PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL

REVENUE, COURT OF APPEALS, and THE COURT OF TAX
APPEALS, respondents.

DECISION
ROMERO, J.:

Petitioner Philex Mining Corp. assails the decision of the Court of Appeals
promulgated on April 8, 1996 in CA-G.R. SP No. 36975[1] affirming the Court of Tax
Appeals decision in CTA Case No. 4872 dated March 16, 1995[2] ordering it to pay the
amount of P110,677,668.52 as excise tax liability for the period from the 2nd quarter
of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until
fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977.
The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to
settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and
2nd quarter of 1992 in the total amount of P123,821,982.52 computed as follows:

PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE

TAX DUE

2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91

3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60

4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88

------------------- ----------------- ----------------- ---------------------

47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39

1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25

2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88

43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13

90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52

========== ========== =========== ===========[3]

In a letter dated August 20, 1992,[4] Philex protested the demand for payment of
the tax liabilities stating that it has pending claims for VAT input credit/refund for the
taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus
interest. Therefore, these claims for tax credit/refund should be applied against the
tax liabilities, citing our ruling in Commissioner of Internal Revenue v. Itogon-Suyoc
Mines, Inc.[5]
In reply, the BIR, in a letter dated September 7, 1992,[6] found no merit in Philexs
position. Since these pending claims have not yet been established or determined with
certainty, it follows that no legal compensation can take place. Hence, he BIR reiterated
its demand that Philex settle the amount plus interest within 30 days from the receipt
of the letter.
 In view of the BIRs denial of the offsetting of Philexs claim for VAT input
credit/refund against its exercise tax obligation, Philex raised the issue to the Court of
Tax Appeals on November 6, 1992.[7] In the course of the proceedings, the BIR issued
a Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which, applied to
the total tax liabilities of Philex of P123,821,982.52; effectively lowered the latters tax
obligation of P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the
remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit:

Thus, for legal compensation to take place, both obligations must be liquidated and
demandable. Liquidated debts are those where the exact amount has already been
determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition,
p. 259). In the instant case, the claims of the Petitioner for VAT refund is still pending
litigation, and still has to be determined by this Court (C.T.A. Case No.
4707). A fortiori, the liquidated debt of the Petitioner to the government cannot,
therefore, be set-off against the unliquidated claim which Petitioner conceived to exist
in its favor (see Compaia General de Tabacos vs. French and Unson, No. 14027,
November 8, 1918, 39 Phil. 34).[8]

Moreover, the Court of Tax Appeals ruled that taxes cannot be subject to set-off on
compensation since claim for taxes is not a debt or contract.[9] The dispositive portion
of the CTA decision[10] provides:

In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and
Petitioner is hereby ORDERED to PAY the Respondent the amount
of P110,677,668.52 representing excise tax liability for the period from the
2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from
August 6, 1994 until fully paid pursuant to Section 248 and 249 of the Tax Code, as
amended.

Aggrieved with the decision, Philex appealed the case before the Court of Appeals
docketed as CA-G.R. CV No. 36975.[11] Nonetheless, on April 8, 1996, the Court of
Appeals affirmed the Court of Tax Appeals observation. The pertinent portion of which
reads:[12]

WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the
decision dated March 16, 1995 is AFFIRMED.

Philex filed a motion for reconsideration which was, nevertheless, denied in a

Resolution dated July 11, 1996.[13]
However, a few days after the denial of its motion for reconsideration, Philex was
able to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991
but also for 1992 and 1994, computed as follows:[14]
Period Covered By Tax Credit Certificate Date Of Issue Amount
Claims For Vat Number
refund/credit

1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01

1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61

1989 007732 11 July 1996 P37,322,799.19

1990-1991 007751 16 July 1996 P84,662,787.46

1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95

 In view of the grant of its VAT input credit/refund, Philex now contends that the
same should, ipso jure, off-set its excise tax liabilities[15] since both had already become
due and demandable, as well as fully liquidated;[16] hence, legal compensation can
properly take place.
We see no merit in this contention.
In several instances prior to the instant case, we have already made the
pronouncement that taxes cannot be subject to compensation for the simple reason
that the government and the taxpayer are not creditors and debtors of each
other.[17] There is a material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the Government in its
sovereign capacity.[18] We find no cogent reason to deviate from the aforementioned
distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court,[19] we
categorically held that taxes cannot be subject to set-off or compensation, thus:

We have consistently ruled that there can be no off-setting of taxes against the claims
that the taxpayer may have against the government. A person cannot refuse to pay a
tax on the ground that the government owes him an amount equal to or greater than
the tax being collected. The collection of tax cannot await the results of a lawsuit
against the government.

The ruling in Francia has been applied to the subsequent case of Caltex Philippines,
Inc. v. Commission on Audit,[20] which reiterated that:

x x x a taxpayer may not offset taxes due from the claims that he may have against
the government. Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other and a
claim for taxes is not such a debt, demand, contract or judgment as is allowed to be
set-off.

Further, Philexs reliance on our holding in Commissioner of Internal Revenue v.

Itogon-Suyoc Mines, Inc., wherein we ruled that a pending refund may be set off against
an existing tax liability even though the refund has not yet been approved by the
Commissioner,[21] is no longer without any support in statutory law.
It is important to note that the premise of our ruling in the aforementioned case
was anchored on Section 51(d) of the National Revenue Code of 1939. However, when
the National Internal Revenue Code of 1977 was enacted, the same provision upon
which the Itogon-Suyoc pronouncement was based was omitted.[22] Accordingly, the
doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex.
Despite the foregoing rulings clearly adverse to Philexs position, it asserts that the
imposition of surcharge and interest for the non-payment of the excise taxes within the
time prescribed was unjustified. Philex posits the theory that it had no obligation to
pay the excise liabilities within the prescribed period since, after all, it still has pending
claims for VAT input credit/refund with BIR.[23]
We fail to see the logic of Philexs claim for this is an outright disregard of the basic
principle in tax law that taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance.[24] Evidently, to countenance Philexs
whimsical reason would render ineffective our tax collection system. Too simplistic, it
finds no support in law or in jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the
ground that it has a pending tax claim for refund or credit against the government
which has not yet been granted. It must be noted that a distinguishing feature of a tax
is that it is compulsory rather than a matter of bargain.[25] Hence, a tax does not depend
upon the consent of the taxpayer.[26] If any payer can defer the payment of taxes by
raising the defense that it still has a pending claim for refund or credit, this would
adversely affect the government revenue system. A taxpayer cannot refuse to pay his
taxes when they fall due simply because he has a claim against the government or that
the collection of the tax is contingent on the result of the lawsuit it filed against the
government.[27] Moreover, Philex's theory that would automatically apply its VAT input
credit/refund against its tax liabilities can easily give rise to confusion and abuse,
depriving the government of authority over the manner by which taxpayers credit and
offset their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input claim/refund with
the government is immaterial for the imposition of charges and penalties prescribed
under Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is
mandatory and the BIR is not vested with any authority to waive the collection
thereof.[28] The same cannot be condoned for flimsy reasons,[29] similar to the one
advanced by Philex in justifying its non-payment of its tax liabilities.
Finally, Philex asserts that the BIR violated Section 106(e)[30] of the National
Internal Revenue Code of 1977, which requires the refund of input taxes within 60
days,[31] when it took five years for the latter to grant its tax claim for VAT input
credit/refund.[32]
In this regard, we agree with Philex. While there is no dispute that a claimant
has the burden of proof to establish the factual basis of his or her claim for tax credit
or refund,[33] however, once the claimant has submitted all the required documents, it
is the function of the BIR to assess these documents with purposeful dispatch. After
all, since taxpayers owe honesty to government it is but just that government render
fair service to the taxpayers.[34]
In the instant case, the VAT input taxes were paid between 1989 to 1991 but the
refund of these erroneously paid taxes was only granted in 1996. Obviously, had the
BIR been more diligent and judicious with their duty, it could have granted the refund
earlier. We need not remind the BIR that simple justice requires the speedy refund of
wrongly-held taxes.[35] Fair dealing and nothing less, is expected by the taxpayer from
the BIR in the latter's discharge of its function. As aptly held in Roxas v. Court of Tax
Appeals:[36]

"The power of taxation is sometimes called also the power to destroy. Therefore it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collectot kill
the 'hen that lays the golden egg.' And, in the order to maintain the general public's
trust and confidence in the Government this power must be used justly and not
treacherously."

Despite our concern with the lethargic manner by which the BIR handled Philex's
tax claim, it is a settled rule that in the performance of governmental function, the
State is not bound by the neglect of its agents and officers. Nowhere is this more true
than in the field of taxation.[37] Again, while we understand Philex's predicament, it
must be stressed that the same is not valid reason for the non- payment of its tax
liabilities.
To be sure, this is not state that the taxpayer is devoid of remedy against public
servants or employees especially BIR examiners who, in investigating tax claims are
seen to drag their feet needlessly. First, if the BIR takes time in acting upon the
taxpayer's claims for refund, the latter can seek judicial remedy before the Court of Tax
Appeals in the manner prescribed by law.[38] Second, if the inaction can be
characterized as willful neglect of duty, then recourse under the Civil Code and the Tax
Code can also be availed of.
Article 27 of the Civil Code provides:

"Art. 27. Any person suffering material or moral loss because a public servant or
employee refuses or neglects, without just cause, to perform his official duty may file
an action for damages and other relief against the latter, without prejudice to any
disciplinary action that may be taken."

More importantly, Section 269 (c) of the National Internal Revenue Act of 1997
states:
"xxx xxx xxx

(c) wilfully neglecting to give receipts, as by law required for any sum collected in the
performance of duty or wilfully neglecting to perform, any other duties enjoined by
law."

Simply put, both provisions abhor official inaction, willful neglect and unreasonable
delay in the performance of official duties.[39] In no uncertain terms must we stress
that every public employee or servant must strive to render service to the people with
utmost diligence and efficiency. Insolence and delay have no place in government
service. The BIR, being the government collecting arm, must and should do no less. It
simply cannot be apathetic and laggard in rendering service to the taxpayer if it
wishes to remain true to its mission of hastening the country's development. We take
judicial notice of the taxpayer's generally negative perception towards the BIR; hence,
it is up to the latter to prove its detractors wrong.

In sum, while we can never condone the BIR's apparent callousness in performing
its duties, still, the same cannot justify Philex's non-payment of its tax liabilities. The
adage "no one should take the law into his own hands" should have guided Philex's
action.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED.
The assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.
SO ORDERED.
June 18, 1987

G.R. No. L-75697

VALENTIN TIO doing business under the name and style of OMI
ENTERPRISES, petitioner,
vs.
VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO MANILA
COMMISSION, CITY MAYOR and CITY TREASURER OF MANILA, respondents.

Nelson Y. Ng for petitioner.

The City Legal Officer for respondents City Mayor and City Treasurer.

MELENCIO-HERRERA, J.:

This petition was filed on September 1, 1986 by petitioner on his own behalf and
purportedly on behalf of other videogram operators adversely affected. It assails the
constitutionality of Presidential Decree No. 1987 entitled "An Act Creating the
Videogram Regulatory Board" with broad powers to regulate and supervise the
videogram industry (hereinafter briefly referred to as the BOARD). The Decree was
promulgated on October 5, 1985 and took effect on April 10, 1986, fifteen (15) days
after completion of its publication in the Official Gazette.

On November 5, 1985, a month after the promulgation of the abovementioned decree,

Presidential Decree No. 1994 amended the National Internal Revenue Code
providing, inter alia:

SEC. 134. Video Tapes. There shall be collected on each processed video-
tape cassette, ready for playback, regardless of length, an annual tax of five
pesos; Provided, That locally manufactured or imported blank video tapes shall
be subject to sales tax.

On October 23, 1986, the Greater Manila Theaters Association, Integrated Movie
Producers, Importers and Distributors Association of the Philippines, and Philippine
Motion Pictures Producers Association, hereinafter collectively referred to as the
Intervenors, were permitted by the Court to intervene in the case, over petitioner's
opposition, upon the allegations that intervention was necessary for the complete
protection of their rights and that their "survival and very existence is threatened by
the unregulated proliferation of film piracy." The Intervenors were thereafter allowed
to file their Comment in Intervention.

The rationale behind the enactment of the DECREE, is set out in its preambular
clauses as follows:

1. WHEREAS, the proliferation and unregulated circulation of videograms

including, among others, videotapes, discs, cassettes or any technical
improvement or variation thereof, have greatly prejudiced the operations of
moviehouses and theaters, and have caused a sharp decline in theatrical
attendance by at least forty percent (40%) and a tremendous drop in the
collection of sales, contractor's specific, amusement and other taxes, thereby
resulting in substantial losses estimated at P450 Million annually in
government revenues;

2. WHEREAS, videogram(s) establishments collectively earn around P600

Million per annum from rentals, sales and disposition of videograms, and such
 earnings have not been subjected to tax, thereby depriving the Government of
approximately P180 Million in taxes each year;

3. WHEREAS, the unregulated activities of videogram establishments have also

affected the viability of the movie industry, particularly the more than 1,200
movie houses and theaters throughout the country, and occasioned industry-
wide displacement and unemployment due to the shutdown of numerous
moviehouses and theaters;

4. "WHEREAS, in order to ensure national economic recovery, it is imperative

for the Government to create an environment conducive to growth and
development of all business industries, including the movie industry which has
an accumulated investment of about P3 Billion;

5. WHEREAS, proper taxation of the activities of videogram establishments will

not only alleviate the dire financial condition of the movie industry upon which
more than 75,000 families and 500,000 workers depend for their livelihood,
but also provide an additional source of revenue for the Government, and at
the same time rationalize the heretofore uncontrolled distribution of
videograms;

6. WHEREAS, the rampant and unregulated showing of obscene videogram

features constitutes a clear and present danger to the moral and spiritual well-
being of the youth, and impairs the mandate of the Constitution for the State to
support the rearing of the youth for civic efficiency and the development of
moral character and promote their physical, intellectual, and social well-being;

7. WHEREAS, civic-minded citizens and groups have called for remedial

measures to curb these blatant malpractices which have flaunted our
censorship and copyright laws;

8. WHEREAS, in the face of these grave emergencies corroding the moral

values of the people and betraying the national economic recovery program,
bold emergency measures must be adopted with dispatch; ... (Numbering of
paragraphs supplied).

Petitioner's attack on the constitutionality of the DECREE rests on the following

grounds:

1. Section 10 thereof, which imposes a tax of 30% on the gross receipts payable
to the local government is a RIDER and the same is not germane to the subject
matter thereof;

2. The tax imposed is harsh, confiscatory, oppressive and/or in unlawful

restraint of trade in violation of the due process clause of the Constitution;

3. There is no factual nor legal basis for the exercise by the President of the
vast powers conferred upon him by Amendment No. 6;

4. There is undue delegation of power and authority;

5. The Decree is an ex-post facto law; and

6. There is over regulation of the video industry as if it were a nuisance, which

it is not.

We shall consider the foregoing objections in seriatim.

1. The Constitutional requirement that "every bill shall embrace only one subject
which shall be expressed in the title thereof" 1 is sufficiently complied with if the title
be comprehensive enough to include the general purpose which a statute seeks to
achieve. It is not necessary that the title express each and every end that the statute
wishes to accomplish. The requirement is satisfied if all the parts of the statute are
related, and are germane to the subject matter expressed in the title, or as long as
they are not inconsistent with or foreign to the general subject and title. 2An act
having a single general subject, indicated in the title, may contain any number of
provisions, no matter how diverse they may be, so long as they are not inconsistent
with or foreign to the general subject, and may be considered in furtherance of such
subject by providing for the method and means of carrying out the general
object." 3 The rule also is that the constitutional requirement as to the title of a bill
should not be so narrowly construed as to cripple or impede the power of
legislation. 4 It should be given practical rather than technical construction. 5

Tested by the foregoing criteria, petitioner's contention that the tax provision of the
DECREE is a rider is without merit. That section reads, inter alia:

Section 10. Tax on Sale, Lease or Disposition of Videograms. Notwithstanding

any provision of law to the contrary, the province shall collect a tax of thirty
percent (30%) of the purchase price or rental rate, as the case may be, for every
sale, lease or disposition of a videogram containing a reproduction of any
motion picture or audiovisual program. Fifty percent (50%) of the proceeds of
the tax collected shall accrue to the province, and the other fifty percent (50%)
shall acrrue to the municipality where the tax is collected; PROVIDED, That in
Metropolitan Manila, the tax shall be shared equally by the City/Municipality
and the Metropolitan Manila Commission.

xxx xxx xxx

The foregoing provision is allied and germane to, and is reasonably necessary for the
accomplishment of, the general object of the DECREE, which is the regulation of the
video industry through the Videogram Regulatory Board as expressed in its title. The
tax provision is not inconsistent with, nor foreign to that general subject and title. As
a tool for regulation 6 it is simply one of the regulatory and control mechanisms
scattered throughout the DECREE. The express purpose of the DECREE to include
taxation of the video industry in order to regulate and rationalize the heretofore
uncontrolled distribution of videograms is evident from Preambles 2 and 5, supra.
Those preambles explain the motives of the lawmaker in presenting the measure. The
title of the DECREE, which is the creation of the Videogram Regulatory Board, is
comprehensive enough to include the purposes expressed in its Preamble and
reasonably covers all its provisions. It is unnecessary to express all those objectives
in the title or that the latter be an index to the body of the DECREE. 7

2. Petitioner also submits that the thirty percent (30%) tax imposed is harsh and
oppressive, confiscatory, and in restraint of trade. However, it is beyond serious
question that a tax does not cease to be valid merely because it regulates,
discourages, or even definitely deters the activities taxed. 8 The power to impose taxes
is one so unlimited in force and so searching in extent, that the courts scarcely
venture to declare that it is subject to any restrictions whatever, except such as rest
in the discretion of the authority which exercises it. 9 In imposing a tax, the
legislature acts upon its constituents. This is, in general, a sufficient security against
erroneous and oppressive taxation. 10

The tax imposed by the DECREE is not only a regulatory but also a revenue measure
prompted by the realization that earnings of videogram establishments of around
P600 million per annum have not been subjected to tax, thereby depriving the
Government of an additional source of revenue. It is an end-user tax, imposed on
retailers for every videogram they make available for public viewing. It is similar to
the 30% amusement tax imposed or borne by the movie industry which the theater-
owners pay to the government, but which is passed on to the entire cost of the
admission ticket, thus shifting the tax burden on the buying or the viewing public. It
is a tax that is imposed uniformly on all videogram operators.

The levy of the 30% tax is for a public purpose. It was imposed primarily to answer
the need for regulating the video industry, particularly because of the rampant film
piracy, the flagrant violation of intellectual property rights, and the proliferation of
pornographic video tapes. And while it was also an objective of the DECREE to
protect the movie industry, the tax remains a valid imposition.

The public purpose of a tax may legally exist even if the motive which impelled
the legislature to impose the tax was to favor one industry over another. 11

It is inherent in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that "inequities which result from a
singling out of one particular class for taxation or exemption infringe no
constitutional limitation". 12 Taxation has been made the implement of the
state's police power.13

At bottom, the rate of tax is a matter better addressed to the taxing legislature.

3. Petitioner argues that there was no legal nor factual basis for the promulgation of
the DECREE by the former President under Amendment No. 6 of the 1973
Constitution providing that "whenever in the judgment of the President ... , there
exists a grave emergency or a threat or imminence thereof, or whenever the interim
Batasang Pambansa or the regular National Assembly fails or is unable to act
adequately on any matter for any reason that in his judgment requires immediate
action, he may, in order to meet the exigency, issue the necessary decrees, orders, or
letters of instructions, which shall form part of the law of the land."

In refutation, the Intervenors and the Solicitor General's Office aver that the 8th
"whereas" clause sufficiently summarizes the justification in that grave emergencies
corroding the moral values of the people and betraying the national economic
recovery program necessitated bold emergency measures to be adopted with
dispatch. Whatever the reasons "in the judgment" of the then President, considering
that the issue of the validity of the exercise of legislative power under the said
Amendment still pends resolution in several other cases, we reserve resolution of the
question raised at the proper time.

4. Neither can it be successfully argued that the DECREE contains an undue

delegation of legislative power. The grant in Section 11 of the DECREE of authority to
the BOARD to "solicit the direct assistance of other agencies and units of the
government and deputize, for a fixed and limited period, the heads or personnel of
such agencies and units to perform enforcement functions for the Board" is not a
delegation of the power to legislate but merely a conferment of authority or discretion
as to its execution, enforcement, and implementation. "The true distinction is
between the delegation of power to make the law, which necessarily involves a
discretion as to what it shall be, and conferring authority or discretion as to its
execution to be exercised under and in pursuance of the law. The first cannot be
done; to the latter, no valid objection can be made." 14 Besides, in the very language
of the decree, the authority of the BOARD to solicit such assistance is for a "fixed and
limited period" with the deputized agencies concerned being "subject to the direction
and control of the BOARD." That the grant of such authority might be the source of
graft and corruption would not stigmatize the DECREE as unconstitutional. Should
the eventuality occur, the aggrieved parties will not be without adequate remedy in
law.
5. The DECREE is not violative of the ex post facto principle. An ex post facto law is,
among other categories, one which "alters the legal rules of evidence, and authorizes
conviction upon less or different testimony than the law required at the time of the
commission of the offense." It is petitioner's position that Section 15 of the DECREE
in providing that:

All videogram establishments in the Philippines are hereby given a period of

forty-five (45) days after the effectivity of this Decree within which to register
with and secure a permit from the BOARD to engage in the videogram business
and to register with the BOARD all their inventories of videograms, including
videotapes, discs, cassettes or other technical improvements or variations
thereof, before they could be sold, leased, or otherwise disposed of. Thereafter
any videogram found in the possession of any person engaged in the videogram
business without the required proof of registration by the BOARD, shall be
prima facie evidence of violation of the Decree, whether the possession of such
videogram be for private showing and/or public exhibition.

raises immediately a prima facie evidence of violation of the DECREE when the
required proof of registration of any videogram cannot be presented and thus
partakes of the nature of an ex post facto law.

The argument is untenable. As this Court held in the recent case of Vallarta vs. Court
of Appeals, et al. 15

... it is now well settled that "there is no constitutional objection to the passage
of a law providing that the presumption of innocence may be overcome by a
contrary presumption founded upon the experience of human conduct, and
enacting what evidence shall be sufficient to overcome such presumption of
innocence" (People vs. Mingoa 92 Phil. 856 [1953] at 858-59, citing 1 COOLEY,
A TREATISE ON THE CONSTITUTIONAL LIMITATIONS, 639-641). And the
"legislature may enact that when certain facts have been proved that they shall
be prima facie evidence of the existence of the guilt of the accused and shift the
burden of proof provided there be a rational connection between the facts
proved and the ultimate facts presumed so that the inference of the one from
proof of the others is not unreasonable and arbitrary because of lack of
connection between the two in common experience". 16

Applied to the challenged provision, there is no question that there is a rational

connection between the fact proved, which is non-registration, and the ultimate fact
presumed which is violation of the DECREE, besides the fact that the prima
facie presumption of violation of the DECREE attaches only after a forty-five-day
period counted from its effectivity and is, therefore, neither retrospective in character.

6. We do not share petitioner's fears that the video industry is being over-regulated
and being eased out of existence as if it were a nuisance. Being a relatively new
industry, the need for its regulation was apparent. While the underlying objective of
the DECREE is to protect the moribund movie industry, there is no question that
public welfare is at bottom of its enactment, considering "the unfair competition
posed by rampant film piracy; the erosion of the moral fiber of the viewing public
brought about by the availability of unclassified and unreviewed video tapes
containing pornographic films and films with brutally violent sequences; and losses
in government revenues due to the drop in theatrical attendance, not to mention the
fact that the activities of video establishments are virtually untaxed since mere
payment of Mayor's permit and municipal license fees are required to engage in
business. 17

The enactment of the Decree since April 10, 1986 has not brought about the "demise"
of the video industry. On the contrary, video establishments are seen to have
proliferated in many places notwithstanding the 30% tax imposed.
In the last analysis, what petitioner basically questions is the necessity, wisdom and
expediency of the DECREE. These considerations, however, are primarily and
exclusively a matter of legislative concern.

Only congressional power or competence, not the wisdom of the action taken,
may be the basis for declaring a statute invalid. This is as it ought to be. The
principle of separation of powers has in the main wisely allocated the respective
authority of each department and confined its jurisdiction to such a sphere.
There would then be intrusion not allowable under the Constitution if on a
matter left to the discretion of a coordinate branch, the judiciary would
substitute its own. If there be adherence to the rule of law, as there ought to
be, the last offender should be courts of justice, to which rightly litigants
submit their controversy precisely to maintain unimpaired the supremacy of
legal norms and prescriptions. The attack on the validity of the challenged
provision likewise insofar as there may be objections, even if valid and cogent
on its wisdom cannot be sustained. 18

In fine, petitioner has not overcome the presumption of validity which attaches to a
challenged statute. We find no clear violation of the Constitution which would justify
us in pronouncing Presidential Decree No. 1987 as unconstitutional and void.

WHEREFORE, the instant Petition is hereby dismissed.

No costs.

SO ORDERED.
G.R. No. L-24756 October 31, 1968

CITY OF BAGUIO, plaintiff-appellee,

vs.
FORTUNATO DE LEON, defendant-appellant.

The City Attorney for plaintiff-appellee.

Fortunato de Leon for and in his own behalf as defendant-appellant.

FERNANDO, J.:

In this appeal, a lower court decision upholding the validity of an ordinance1 of the
City of Baguio imposing a license fee on any person, firm, entity or corporation doing
business in the City of Baguio is assailed by defendant-appellant Fortunato de Leon.
He was held liable as a real estate dealer with a property therein worth more than
P10,000, but not in excess of P50,000, and therefore obligated to pay under such
ordinance the P50 annual fee. That is the principal question. In addition, there has
been a firm and unyielding insistence by defendant-appellant of the lack of
jurisdiction of the City Court of Baguio, where the suit originated, a complaint having
been filed against him by the City Attorney of Baguio for his failure to pay the
amount of P300 as license fee covering the period from the first quarter of 1958 to the
fourth quarter of 1962, allegedly, inspite of repeated demands. Nor was defendant-
appellant agreeable to such a suit being instituted by the City Treasurer without the
consent of the Mayor, which for him was indispensable. The lower court was of a
different mind.

In its decision of December 19, 1964, it declared the above ordinance as amended,
valid and subsisting, and held defendant-appellant liable for the fees therein
prescribed as a real estate dealer. Hence, this appeal. Assume the validity of such
ordinance, and there would be no question about the liability of defendant-appellant
for the above license fee, it being shown in the partial stipulation of facts, that he was
"engaged in the rental of his property in Baguio" deriving income therefrom during
the period covered by the first quarter of 1958 to the fourth quarter of 1962.

The source of authority for the challenged ordinance is supplied by Republic Act No.
329, amending the city charter of Baguio2 empowering it to fix the license fee and
regulate "businesses, trades and occupations as may be established or practiced in
the City."

Unless it can be shown then that such a grant of authority is not broad enough to
justify the enactment of the ordinance now assailed, the decision appealed from must
be affirmed. The task confronting defendant-appellant, therefore, was far from easy.
Why he failed is understandable, considering that even a cursory reading of the above
amendment readily discloses that the enactment of the ordinance in question finds
support in the power thus conferred.

Nor is the question raised by him as to the validity thereof novel in character.
In Medina v. City of Baguio,3 the effect of the amendatory section insofar as it would
expand the previous power vested by the city charter was clarified in these terms:
"Appellants apparently have in mind section 2553, paragraph (c) of the Revised
Administrative Code, which empowers the City of Baguio merely to impose a license
fee for the purpose of rating the business that may be established in the city. The
power as thus conferred is indeed limited, as it does not include the power to levy a
tax. But on July 15, 1948, Republic Act No. 329 was enacted amending the charter of
said city and adding to its power to license the power to tax and to regulate. And it is
precisely having in view this amendment that Ordinance No. 99 was approved in
order to increase the revenues of the city. In our opinion, the amendment above
adverted to empowers the city council not only to impose a license fee but also to levy
a tax for purposes of revenue, more so when in amending section 2553 (b), the
phrase 'as provided by law' has been removed by section 2 of Republic Act No. 329.
The city council of Baguio, therefore, has now the power to tax, to license and to
regulate provided that the subjects affected be one of those included in the charter.
In this sense, the ordinance under consideration cannot be considered ultra
vires whether its purpose be to levy a tax or impose a license fee. The terminology
used is of no consequence."

It would be an undue and unwarranted emasculation of the above power thus

granted if defendant-appellant were to be sustained in his contention that no such
statutory authority for the enactment of the challenged ordinance could be discerned
from the language used in the amendatory act. That is about all that needs to be said
in upholding the lower court, considering that the City of Baguio was not devoid of
authority in enacting this particular ordinance. As mentioned at the outset, however,
defendant-appellant likewise alleged procedural missteps and asserted that the
challenged ordinance suffered from certain constitutional infirmities. To such points
raised by him, we shall now turn.

1. Defendant-appellant makes much of the alleged lack of jurisdiction of the City

Court of Baguio in the suit for the collection of the real estate dealer's fee from him in
the amount of P300. He contended before the lower court, and it is his contention
now, that while the amount of P300 sought was within the jurisdiction of the City
Court of Baguio where this action originated, since the principal issue was the
legality and constitutionality of the challenged ordinance, it is not such City Court
but the Court of First Instance that has original jurisdiction.

There is here a misapprehension of the Judiciary Act. The City Court has jurisdiction.
Only recently, on September 7, 1968 to be exact, we rejected a contention similar in
character in Nemenzo v. Sabillano.4 The plaintiff in that case filed a claim for the
payment of his salary before the Justice of the Peace Court of Pagadian, Zamboanga
del Sur. The question of jurisdiction was raised; the defendant Mayor asserted that
what was in issue was the enforcement of the decision of the Commission of Civil
Service; the Justice of the Peace Court was thus without jurisdiction to try the case.
The above plea was curtly dismissed by Us, as what was involved was "an ordinary
money claim" and therefore "within the original jurisdiction of the Justice of the
Peace Court where it was filed, considering the amount involved." Such is likewise
the situation here.

Moreover, in City of Manila v. Bugsuk Lumber Co.,5 a suit to collect from a defendant
this license fee corresponding to the years 1951 and 1952 was filed with the
Municipal Court of Manila, in view of the amount involved. The thought that the
municipal court lacked jurisdiction apparently was not even in the minds of the
parties and did not receive any consideration by this Court.

Evidently, the fear is entertained by defendant-appellant that whenever a

constitutional question is raised, it is the Court of First Instance that should have
original jurisdiction on the matter. It does not admit of doubt, however, that what
confers jurisdiction is the amount set forth in the complaint. Here, the sum sought to
be recovered was clearly within the jurisdiction of the City Court of Baguio.

Nor could it be plausibly maintained that the validity of such ordinance being open to
question as a defense against its enforcement from one adversely affected, the matter
should be elevated to the Court of First Instance. For the City Court could rely on the
presumption of the validity of such ordinance,6 and the mere fact, however, that in
the answer to such a complaint a constitutional question was raised did not suffice to
oust the City Court of its jurisdiction. The suit remains one for collection, the lack of
validity being only a defense to such an attempt at recovery. Since the City Court is
possessed of judicial power and it is likewise axiomatic that the judicial power
embraces the ascertainment of facts and the application of the law, the Constitution
as the highest law superseding any statute or ordinance in conflict therewith, it
cannot be said that a City Court is bereft of competence to proceed on the matter. In
the exercise of such delicate power, however, the admonition of Cooley on inferior
tribunals is well worth remembering. Thus: "It must be evident to any one that the
power to declare a legislative enactment void is one which the judge, conscious of the
fallibility of the human judgment, will shrink from exercising in any case where he
can conscientiously and with due regard to duty and official oath decline the
responsibility."7 While it remains undoubted that such a power to pass on the validity
of an ordinance alleged to infringe certain constitutional rights of a litigant exists,
still it should be exercised with due care and circumspection, considering not only
the presumption of validity but also the relatively modest rank of a city court in the
judicial hierarchy.

2. To repeat the challenged ordinance cannot be considered ultra vires as there is

more than ample statutory authority for the enactment thereof. Nonetheless, its
validity on constitutional grounds is challenged because of the allegation that it
imposed double taxation, which is repugnant to the due process clause, and that it
violated the requirement of uniformity. We do not view the matter thus.

As to why double taxation is not violative of due process, Justice Holmes made clear
in this language: "The objection to the taxation as double may be laid down on one
side. ... The 14th Amendment [the due process clause] no more forbids double
taxation than it does doubling the amount of a tax, short of confiscation or
proceedings unconstitutional on other grounds."8With that decision rendered at a
time when American sovereignty in the Philippines was recognized, it possesses more
than just a persuasive effect. To some, it delivered the coup de graceto the bogey of
double taxation as a constitutional bar to the exercise of the taxing power. It would
seem though that in the United States, as with us, its ghost as noted by an eminent
critic, still stalks the juridical state. In a 1947 decision, however,9 we quoted with
approval this excerpt from a leading American decision:10 "Where, as here, Congress
has clearly expressed its intention, the statute must be sustained even though double
taxation results."

At any rate, it has been expressly affirmed by us that such an "argument against
double taxation may not be invoked where one tax is imposed by the state and the
other is imposed by the city ..., it being widely recognized that there is nothing
inherently obnoxious in the requirement that license fees or taxes be exacted with
respect to the same occupation, calling or activity by both the state and the political
subdivisions thereof."11

The above would clearly indicate how lacking in merit is this argument based on
double taxation.

Now, as to the claim that there was a violation of the rule of uniformity established by
the constitution. According to the challenged ordinance, a real estate dealer who
leases property worth P50,000 or above must pay an annual fee of P100. If the
property is worth P10,000 but not over P50,000, then he pays P50 and P24 if the
value is less than P10,000. On its face, therefore, the above ordinance cannot be
assailed as violative of the constitutional requirement of uniformity. In Philippine
Trust Company v. Yatco,12 Justice Laurel, speaking for the Court, stated: "A tax is
considered uniform when it operates with the same force and effect in every place
where the subject may be found."

There was no occasion in that case to consider the possible effect on such a
constitutional requirement where there is a classification. The opportunity came
in Eastern Theatrical Co. v. Alfonso.13 Thus: "Equality and uniformity in taxation
means that all taxable articles or kinds of property of the same class shall be taxed at
the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation; ..." About two years later, Justice Tuason,
speaking for this Court in Manila Race Horses Trainers Assn. v. De la
Fuente14incorporated the above excerpt in his opinion and continued: "Taking
everything into account, the differentiation against which the plaintiffs complain
conforms to the practical dictates of justice and equity and is not discriminatory
within the meaning of the Constitution."

To satisfy this requirement then, all that is needed as held in another case decided
two years later, 15 is that the statute or ordinance in question "applies equally to all
persons, firms and corporations placed in similar situation." This Court is on record
as accepting the view in a leading American case16 that "inequalities which result
from a singling out of one particular class for taxation or exemption infringe no
constitutional limitation."17

It is thus apparent from the above that in much the same way that the plea of double
taxation is unavailing, the allegation that there was a violation of the principle of
uniformity is inherently lacking in persuasiveness. There is no need to pass upon the
other allegations to assail the validity of the above ordinance, it being maintained
that the license fees therein imposed "is excessive, unreasonable and oppressive" and
that there is a failure to observe the mandate of equal protection. A reading of the
ordinance will readily disclose their inherent lack of plausibility.

3. That would dispose of all the errors assigned, except the last two, which would
predicate a grievance on the complaint having been started by the City Treasurer
rather than the City Mayor of Baguio. These alleged errors, as was the case with the
others assigned, lack merit.

In much the same way that an act of a department head of the national government,
performed within the limits of his authority, is presumptively the act of the President
unless reprobated or disapproved,18 similarly the act of the City Treasurer, whose
position is roughly analogous, may be assumed to carry the seal of approval of the
City Mayor unless repudiated or set aside. This should be the case considering that
such city official is called upon to see to it that revenues due the City are collected.
When administrative steps are futile and unavailing, given the stubbornness and
obduracy of a taxpayer, convinced in good faith that no tax was due, judicial remedy
may be resorted to by him. It would be a reflection on the state of the law if such
fidelity to duty would be met by condemnation rather than commendation.

So, much for the analytical approach. The conclusion thus reached has a
reinforcement that comes to it from the functional and pragmatic test. If a city
treasurer has to await the nod from the city mayor before a municipal ordinance is
enforced, then opportunity exists for favoritism and undue discrimination to come
into play. Whatever valid reason may exist as to why one taxpayer is to be accorded a
treatment denied another, the suspicion is unavoidable that such a manifestation of
official favor could have been induced by unnamed but not unknown consideration.
It would not be going too far to assert that even defendant-appellant would find no
satisfaction in such a sad state of affairs. The more desirable legal doctrine therefore,
on the assumption that a choice exists, is one that would do away with such
temptation on the part of both taxpayer and public official alike.

WHEREFORE, the lower court decision of December 19, 1964, is hereby affirmed.
Costs against defendant-appellant
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-41631 December 17, 1976

HON. RAMON D. BAGATSING, as Mayor of the City of Manila; ROMAN G.

GARGANTIEL, as Secretary to the Mayor; THE MARKET ADMINISTRATOR; and
THE MUNICIPAL BOARD OF MANILA, petitioners,
vs.
HON. PEDRO A. RAMIREZ, in his capacity as Presiding Judge of the Court of
First Instance of Manila, Branch XXX and the FEDERATION OF MANILA
MARKET VENDORS, INC., respondents.

Santiago F. Alidio and Restituto R. Villanueva for petitioners.

Antonio H. Abad, Jr. for private respondent.

Federico A. Blay for petitioner for intervention.

MARTIN, J.:

The chief question to be decided in this case is what law shall govern the publication
of a tax ordinance enacted by the Municipal Board of Manila, the Revised City
Charter (R.A. 409, as amended), which requires publication of the ordinance before
its enactment and after its approval, or the Local Tax Code (P.D. No. 231), which only
demands publication after approval.

On June 12, 1974, the Municipal Board of Manila enacted Ordinance No. 7522, "AN
ORDINANCE REGULATING THE OPERATION OF PUBLIC MARKETS AND
PRESCRIBING FEES FOR THE RENTALS OF STALLS AND PROVIDING PENALTIES
FOR VIOLATION THEREOF AND FOR OTHER PURPOSES." The petitioner City
Mayor, Ramon D. Bagatsing, approved the ordinance on June 15, 1974.

On February 17, 1975, respondent Federation of Manila Market Vendors, Inc.

commenced Civil Case 96787 before the Court of First Instance of Manila presided
over by respondent Judge, seeking the declaration of nullity of Ordinance No. 7522
for the reason that (a) the publication requirement under the Revised Charter of the
City of Manila has not been complied with; (b) the Market Committee was not given
any participation in the enactment of the ordinance, as envisioned by Republic Act
6039; (c) Section 3 (e) of the Anti-Graft and Corrupt Practices Act has been violated;
and (d) the ordinance would violate Presidential Decree No. 7 of September 30, 1972
prescribing the collection of fees and charges on livestock and animal products.

Resolving the accompanying prayer for the issuance of a writ of preliminary

injunction, respondent Judge issued an order on March 11, 1975, denying the plea
for failure of the respondent Federation of Manila Market Vendors, Inc. to exhaust
the administrative remedies outlined in the Local Tax Code.

After due hearing on the merits, respondent Judge rendered its decision on August
29, 1975, declaring the nullity of Ordinance No. 7522 of the City of Manila on the
primary ground of non-compliance with the requirement of publication under the
Revised City Charter. Respondent Judge ruled:
 There is, therefore, no question that the ordinance in question was not
published at all in two daily newspapers of general circulation in the City
of Manila before its enactment. Neither was it published in the same
manner after approval, although it was posted in the legislative hall and
in all city public markets and city public libraries. There being no
compliance with the mandatory requirement of publication before and
after approval, the ordinance in question is invalid and, therefore, null
and void.

Petitioners moved for reconsideration of the adverse decision, stressing that (a) only a
post-publication is required by the Local Tax Code; and (b) private respondent failed
to exhaust all administrative remedies before instituting an action in court.

On September 26, 1975, respondent Judge denied the motion.

Forthwith, petitioners brought the matter to Us through the present petition for
review on certiorari.

We find the petition impressed with merits.

1. The nexus of the present controversy is the apparent conflict between the Revised
Charter of the City of Manila and the Local Tax Code on the manner of publishing a
tax ordinance enacted by the Municipal Board of Manila. For, while Section 17 of the
Revised Charter provides:

Each proposed ordinance shall be published in two daily newspapers of

general circulation in the city, and shall not be discussed or enacted by
the Board until after the third day following such publication. * * * Each
approved ordinance * * * shall be published in two daily newspapers of
general circulation in the city, within ten days after its approval; and
shall take effect and be in force on and after the twentieth day following
its publication, if no date is fixed in the ordinance.

Section 43 of the Local Tax Code directs:

Within ten days after their approval, certified true copies of all provincial,
city, municipal and barrio ordinances levying or imposing taxes, fees or
other charges shall be published for three consecutive days in a
newspaper or publication widely circulated within the jurisdiction of the
local government, or posted in the local legislative hall or premises and in
two other conspicuous places within the territorial jurisdiction of the
local government. In either case, copies of all provincial, city, municipal
and barrio ordinances shall be furnished the treasurers of the respective
component and mother units of a local government for dissemination.

In other words, while the Revised Charter of the City of Manila requires
publication before the enactment of the ordinance and after the approval thereof in
two daily newspapers of general circulation in the city, the Local Tax Code only
prescribes for publication after the approval of "ordinances levying or imposing taxes,
fees or other charges" either in a newspaper or publication widely circulated within
the jurisdiction of the local government or by posting the ordinance in the local
legislative hall or premises and in two other conspicuous places within the territorial
jurisdiction of the local government. Petitioners' compliance with the Local Tax Code
rather than with the Revised Charter of the City spawned this litigation.

There is no question that the Revised Charter of the City of Manila is a special
act since it relates only to the City of Manila, whereas the Local Tax Code is a general
law because it applies universally to all local governments. Blackstone defines general
law as a universal rule affecting the entire community and special law as one relating
to particular persons or things of a class. 1 And the rule commonly said is that a
prior special law is not ordinarily repealed by a subsequent general law. The fact that
one is special and the other general creates a presumption that the special is to be
considered as remaining an exception of the general, one as a general law of the land,
the other as the law of a particular case. 2 However, the rule readily yields to a
situation where the special statute refers to a subject in general, which the general
statute treats in particular. The exactly is the circumstance obtaining in the case at
bar. Section 17 of the Revised Charter of the City of Manila speaks of "ordinance" in
general, i.e., irrespective of the nature and scope thereof, whereas, Section 43 of the
Local Tax Code relates to "ordinances levying or imposing taxes, fees or other
charges" in particular. In regard, therefore, to ordinances in general, the Revised
Charter of the City of Manila is doubtless dominant, but, that dominant force loses
its continuity when it approaches the realm of "ordinances levying or imposing taxes,
fees or other charges" in particular. There, the Local Tax Code controls. Here, as
always, a general provision must give way to a particular provision. 3 Special
provision governs. 4 This is especially true where the law containing the particular
provision was enacted later than the one containing the general provision. The City
Charter of Manila was promulgated on June 18, 1949 as against the Local Tax Code
which was decreed on June 1, 1973. The law-making power cannot be said to have
intended the establishment of conflicting and hostile systems upon the same subject,
or to leave in force provisions of a prior law by which the new will of the legislating
power may be thwarted and overthrown. Such a result would render legislation a
useless and Idle ceremony, and subject the law to the reproach of uncertainty and
unintelligibility. 5

The case of City of Manila v. Teotico 6 is opposite. In that case, Teotico sued the City
of Manila for damages arising from the injuries he suffered when he fell inside an
uncovered and unlighted catchbasin or manhole on P. Burgos Avenue. The City of
Manila denied liability on the basis of the City Charter (R.A. 409) exempting the City
of Manila from any liability for damages or injury to persons or property arising from
the failure of the city officers to enforce the provisions of the charter or any other law
or ordinance, or from negligence of the City Mayor, Municipal Board, or other officers
while enforcing or attempting to enforce the provisions of the charter or of any other
law or ordinance. Upon the other hand, Article 2189 of the Civil Code makes cities
liable for damages for the death of, or injury suffered by any persons by reason of the
defective condition of roads, streets, bridges, public buildings, and other public works
under their control or supervision. On review, the Court held the Civil Code
controlling. It is true that, insofar as its territorial application is concerned, the
Revised City Charter is a special law and the subject matter of the two laws, the
Revised City Charter establishes a general rule of liability arising from negligence in
general, regardless of the object thereof, whereas the Civil Code constitutes a
particular prescription for liability due to defective streets in particular. In the same
manner, the Revised Charter of the City prescribes a rule for the publication of
"ordinance" in general, while the Local Tax Code establishes a rule for the publication
of "ordinance levying or imposing taxes fees or other charges in particular.

In fact, there is no rule which prohibits the repeal even by implication of a special or
specific act by a general or broad one. 7 A charter provision may be impliedly
modified or superseded by a later statute, and where a statute is controlling, it must
be read into the charter notwithstanding any particular charter provision. 8 A
subsequent general law similarly applicable to all cities prevails over any conflicting
charter provision, for the reason that a charter must not be inconsistent with the
general laws and public policy of the state. 9 A chartered city is not an independent
sovereignty. The state remains supreme in all matters not purely local. Otherwise
stated, a charter must yield to the constitution and general laws of the state, it is to
have read into it that general law which governs the municipal corporation and which
the corporation cannot set aside but to which it must yield. When a city adopts a
charter, it in effect adopts as part of its charter general law of such character. 10
2. The principle of exhaustion of administrative remedies is strongly asserted by
petitioners as having been violated by private respondent in bringing a direct suit in
court. This is because Section 47 of the Local Tax Code provides that any question or
issue raised against the legality of any tax ordinance, or portion thereof, shall be
referred for opinion to the city fiscal in the case of tax ordinance of a city. The opinion
of the city fiscal is appealable to the Secretary of Justice, whose decision shall be
final and executory unless contested before a competent court within thirty (30) days.
But, the petition below plainly shows that the controversy between the parties is
deeply rooted in a pure question of law: whether it is the Revised Charter of the City
of Manila or the Local Tax Code that should govern the publication of the tax
ordinance. In other words, the dispute is sharply focused on the applicability of the
Revised City Charter or the Local Tax Code on the point at issue, and not on the
legality of the imposition of the tax. Exhaustion of administrative remedies before
resort to judicial bodies is not an absolute rule. It admits of exceptions. Where the
question litigated upon is purely a legal one, the rule does not apply. 11 The principle
may also be disregarded when it does not provide a plain, speedy and adequate
remedy. It may and should be relaxed when its application may cause great and
irreparable damage. 12

3. It is maintained by private respondent that the subject ordinance is not a "tax

ordinance," because the imposition of rentals, permit fees, tolls and other fees is not
strictly a taxing power but a revenue-raising function, so that the procedure for
publication under the Local Tax Code finds no application. The pretense bears its
own marks of fallacy. Precisely, the raising of revenues is the principal object of
taxation. Under Section 5, Article XI of the New Constitution, "Each local government
unit shall have the power to create its own sources of revenue and to levy taxes,
subject to such provisions as may be provided by law." 13 And one of those sources of
revenue is what the Local Tax Code points to in particular: "Local governments may
collect fees or rentals for the occupancy or use of public markets and premises * *
*." 14 They can provide for and regulate market stands, stalls and privileges, and,
also, the sale, lease or occupancy thereof. They can license, or permit the use of,
lease, sell or otherwise dispose of stands, stalls or marketing privileges. 15

It is a feeble attempt to argue that the ordinance violates Presidential Decree No. 7,
dated September 30, 1972, insofar as it affects livestock and animal products,
because the said decree prescribes the collection of other fees and charges thereon
"with the exception of ante-mortem and post-mortem inspection fees, as well as the
delivery, stockyard and slaughter fees as may be authorized by the Secretary of
Agriculture and Natural Resources." 16Clearly, even the exception clause of the decree
itself permits the collection of the proper fees for livestock. And the Local Tax Code
(P.D. 231, July 1, 1973) authorizes in its Section 31: "Local governments may collect
fees for the slaughter of animals and the use of corrals * * * "

4. The non-participation of the Market Committee in the enactment of Ordinance No.

7522 supposedly in accordance with Republic Act No. 6039, an amendment to the
City Charter of Manila, providing that "the market committee shall formulate,
recommend and adopt, subject to the ratification of the municipal board, and approval
of the mayor, policies and rules or regulation repealing or maneding existing
provisions of the market code" does not infect the ordinance with any germ of
invalidity. 17 The function of the committee is purely recommendatory as the
underscored phrase suggests, its recommendation is without binding effect on the
Municipal Board and the City Mayor. Its prior acquiescence of an intended or
proposed city ordinance is not a condition sine qua non before the Municipal Board
could enact such ordinance. The native power of the Municipal Board to legislate
remains undisturbed even in the slightest degree. It can move in its own initiative
and the Market Committee cannot demur. At most, the Market Committee may serve
as a legislative aide of the Municipal Board in the enactment of city ordinances
affecting the city markets or, in plain words, in the gathering of the necessary data,
studies and the collection of consensus for the proposal of ordinances regarding city
markets. Much less could it be said that Republic Act 6039 intended to delegate to
the Market Committee the adoption of regulatory measures for the operation and
administration of the city markets. Potestas delegata non delegare potest.

5. Private respondent bewails that the market stall fees imposed in the disputed
ordinance are diverted to the exclusive private use of the Asiatic Integrated
Corporation since the collection of said fees had been let by the City of Manila to the
said corporation in a "Management and Operating Contract." The assumption is of
course saddled on erroneous premise. The fees collected do not go direct to the
private coffers of the corporation. Ordinance No. 7522 was not made for the
corporation but for the purpose of raising revenues for the city. That is the object it
serves. The entrusting of the collection of the fees does not destroy the public
purpose of the ordinance. So long as the purpose is public, it does not matter
whether the agency through which the money is dispensed is public or private. The
right to tax depends upon the ultimate use, purpose and object for which the fund is
raised. It is not dependent on the nature or character of the person or corporation
whose intermediate agency is to be used in applying it. The people may be taxed for a
public purpose, although it be under the direction of an individual or private
corporation. 18

Nor can the ordinance be stricken down as violative of Section 3(e) of the Anti-Graft
and Corrupt Practices Act because the increased rates of market stall fees as levied
by the ordinance will necessarily inure to the unwarranted benefit and advantage of
the corporation. 19 We are concerned only with the issue whether the ordinance in
question is intra vires. Once determined in the affirmative, the measure may not be
invalidated because of consequences that may arise from its enforcement. 20

ACCORDINGLY, the decision of the court below is hereby reversed and set aside.
Ordinance No. 7522 of the City of Manila, dated June 15, 1975, is hereby held to
have been validly enacted. No. costs.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

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

WENCESLAO PASCUAL, in his official capacity as Provincial Governor of

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

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

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

CONCEPCION, J.:

Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First

Instance of Rizal, dismissing the above entitled case and dissolving the writ of
preliminary injunction therein issued, without costs.

On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal,

instituted this action for declaratory relief, with injunction, upon the ground that
Republic Act No. 920, entitled "An Act Appropriating Funds for Public Works",
approved on June 20, 1953, contained, in section 1-C (a) thereof, an item (43[h]) of
P85,000.00 "for the construction, reconstruction, repair, extension and improvement"
of Pasig feeder road terminals (Gen. Roxas Gen. Araneta Gen. Lucban Gen.
Capinpin Gen. Segundo Gen. Delgado Gen. Malvar Gen. Lim)"; that, at the
time of the passage and approval of said Act, the aforementioned feeder roads were
"nothing but projected and planned subdivision roads, not yet constructed, . . .
within the Antonio Subdivision . . . situated at . . . Pasig, Rizal" (according to the
tracings attached to the petition as Annexes A and B, near Shaw Boulevard, not far
away from the intersection between the latter and Highway 54), which projected
feeder roads "do not connect any government property or any important premises to
the main highway"; that the aforementioned Antonio Subdivision (as well as the lands
on which said feeder roads were to be construed) were private properties of
respondent Jose C. Zulueta, who, at the time of the passage and approval of said Act,
was a member of the Senate of the Philippines; that on May, 1953, respondent
Zulueta, addressed a letter to the Municipal Council of Pasig, Rizal, offering to donate
said projected feeder roads to the municipality of Pasig, Rizal; that, on June 13,
1953, the offer was accepted by the council, subject to the condition "that the donor
would submit a plan of the said roads and agree to change the names of two of
them"; that no deed of donation in favor of the municipality of Pasig was, however,
executed; that on July 10, 1953, respondent Zulueta wrote another letter to said
council, calling attention to the approval of Republic Act. No. 920, and the sum of
P85,000.00 appropriated therein for the construction of the projected feeder roads in
question; that the municipal council of Pasig endorsed said letter of respondent
Zulueta to the District Engineer of Rizal, who, up to the present "has not made any
endorsement thereon" that inasmuch as the projected feeder roads in question were
private property at the time of the passage and approval of Republic Act No. 920, the
appropriation of P85,000.00 therein made, for the construction, reconstruction,
repair, extension and improvement of said projected feeder roads, was illegal and,
therefore, void ab initio"; that said appropriation of P85,000.00 was made by
Congress because its members were made to believe that the projected feeder roads
in question were "public roads and not private streets of a private subdivision"'; that,
"in order to give a semblance of legality, when there is absolutely none, to the
aforementioned appropriation", respondents Zulueta executed on December 12,
1953, while he was a member of the Senate of the Philippines, an alleged deed of
donation copy of which is annexed to the petition of the four (4) parcels of land
constituting said projected feeder roads, in favor of the Government of the Republic of
the Philippines; that said alleged deed of donation was, on the same date, accepted
by the then Executive Secretary; that being subject to an onerous condition, said
donation partook of the nature of a contract; that, such, said donation violated the
provision of our fundamental law prohibiting members of Congress from being
directly or indirectly financially interested in any contract with the Government, and,
hence, is unconstitutional, as well as null and void ab initio, for the construction of
the projected feeder roads in question with public funds would greatly enhance or
increase the value of the aforementioned subdivision of respondent Zulueta, "aside
from relieving him from the burden of constructing his subdivision streets or roads at
his own expense"; that the construction of said projected feeder roads was then being
undertaken by the Bureau of Public Highways; and that, unless restrained by the
court, the respondents would continue to execute, comply with, follow and implement
the aforementioned illegal provision of law, "to the irreparable damage, detriment and
prejudice not only to the petitioner but to the Filipino nation."

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

Respondents moved to dismiss the petition upon the ground that petitioner had "no
legal capacity to sue", and that the petition did "not state a cause of action". In
support to this motion, respondent Zulueta alleged that the Provincial Fiscal of Rizal,
not its provincial governor, should represent the Province of Rizal, pursuant to
section 1683 of the Revised Administrative Code; that said respondent is " not aware
of any law which makes illegal the appropriation of public funds for the
improvements of . . . private property"; and that, the constitutional provision invoked
by petitioner is inapplicable to the donation in question, the same being a pure act of
liberality, not a contract. The other respondents, in turn, maintained that petitioner
could not assail the appropriation in question because "there is no actual bona
fide case . . . in which the validity of Republic Act No. 920 is necessarily involved" and
petitioner "has not shown that he has a personal and substantial interest" in said Act
"and that its enforcement has caused or will cause him a direct injury."

Acting upon said motions to dismiss, the lower court rendered the aforementioned
decision, dated October 29, 1953, holding that, since public interest is involved in
this case, the Provincial Governor of Rizal and the provincial fiscal thereof who
represents him therein, "have the requisite personalities" to question the
constitutionality of the disputed item of Republic Act No. 920; that "the legislature is
without power appropriate public revenues for anything but a public purpose", that
the instructions and improvement of the feeder roads in question, if such roads
where private property, would not be a public purpose; that, being subject to the
following condition:
 The within donation is hereby made upon the condition that the Government of
the Republic of the Philippines will use the parcels of land hereby donated for
street purposes only and for no other purposes whatsoever; it being expressly
understood that should the Government of the Republic of the Philippines
violate the condition hereby imposed upon it, the title to the land hereby
donated shall, upon such violation, ipso facto revert to the DONOR, JOSE C.
ZULUETA. (Emphasis supplied.)

which is onerous, the donation in question is a contract; that said donation or

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

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

Respondents do not deny the accuracy of this conclusion, which is self-

evident. 2However, respondent Zulueta contended, in his motion to dismiss that:

A law passed by Congress and approved by the President can never be illegal
because Congress is the source of all laws . . . Aside from the fact that movant
is not aware of any law which makes illegal the appropriation of public funds
for the improvement of what we, in the meantime, may assume as private
property . . . (Record on Appeal, p. 33.)

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

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

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

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

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

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

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

Generally, under the express or implied provisions of the constitution, public

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

xxx xxx xxx

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

Needless to say, this Court is fully in accord with the foregoing views which, apart
from being patently sound, are a necessary corollary to our democratic system of
government, which, as such, exists primarily for the promotion of the general welfare.
Besides, reflecting as they do, the established jurisprudence in the United States,
after whose constitutional system ours has been patterned, said views and
jurisprudence are, likewise, part and parcel of our own constitutional law.lawphil.net

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

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

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

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

In the determination of the degree of interest essential to give the requisite

standing to attack the constitutionality of a statute, the general rule is that not
only persons individually affected, but also taxpayers, have sufficient interest in
preventing the illegal expenditure of moneys raised by taxation and may
therefore question the constitutionality of statutes requiring expenditure of public
moneys. (11 Am. Jur. 761; emphasis supplied.)

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

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

Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the
expropriation of a land by the Province of Tayabas, two (2) taxpayers thereof were
allowed to intervene for the purpose of contesting the price being paid to the owner
thereof, as unduly exorbitant. It is true that in Custodio vs. President of the Senate
(42 Off. Gaz., 1243), a taxpayer and employee of the Government was not permitted
to question the constitutionality of an appropriation for backpay of members of
Congress. However, in Rodriguez vs. Treasurer of the Philippines and
Barredo vs.Commission on Elections (84 Phil., 368; 45 Off. Gaz., 4411), we
entertained the action of taxpayers impugning the validity of certain appropriations of
public funds, and invalidated the same. Moreover, the reason that impelled this
Court to take such position in said two (2) cases the importance of the issues
therein raised is present in the case at bar. Again, like the petitioners in the
Rodriguez and Barredo cases, petitioner herein is not merely a taxpayer. The Province
of Rizal, which he represents officially as its Provincial Governor, is our most
populated political subdivision, 8and, the taxpayers therein bear a substantial portion
of the burden of taxation, in the Philippines.

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

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

EN BANC

G.R. No. L-65773-74 April 30, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, respondents.

Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent British Airways.

MELENCIO-HERRERA, J.:

Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the

joint Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561,
dated 26 January 1983, which set aside petitioner's assessment of deficiency income
taxes against respondent British Overseas Airways Corporation (BOAC) for the fiscal
years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18
November, 1983 denying reconsideration.

BOAC is a 100% British Government-owned corporation organized and existing

under the laws of the United Kingdom It is engaged in the international airline
business and is a member-signatory of the Interline Air Transport Association (IATA).
As such it operates air transportation service and sells transportation tickets over the
routes of the other airline members. During the periods covered by the disputed
assessments, it is admitted that BOAC had no landing rights for traffic purposes in
the Philippines, and was not granted a Certificate of public convenience and necessity
to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a nine-
month period, partly in 1961 and partly in 1962, when it was granted a temporary
landing permit by the CAB. Consequently, it did not carry passengers and/or cargo to
or from the Philippines, although during the period covered by the assessments, it
maintained a general sales agent in the Philippines Wamer Barnes and Company,
Ltd., and later Qantas Airways which was responsible for selling BOAC tickets
covering passengers and cargoes. 1

G.R. No. 65773 (CTA Case No. 2373, the First Case)

On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity)

assessed BOAC the aggregate amount of P2,498,358.56 for deficiency income taxes
covering the years 1959 to 1963. This was protested by BOAC. Subsequent
investigation resulted in the issuance of a new assessment, dated 16 January 1970
for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new
assessment under protest.

On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79,
which claim was denied by the CIR on 16 February 1972. But before said denial,
BOAC had already filed a petition for review with the Tax Court on 27 January 1972,
assailing the assessment and praying for the refund of the amount paid.

G.R. No. 65774 (CTA Case No. 2561, the Second Case)

On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and
penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of
P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as
compromise penalties for violation of Section 46 (requiring the filing of corporation
returns) penalized under Section 74 of the National Internal Revenue Code (NIRC).

On 25 November 1971, BOAC requested that the assessment be countermanded and

set aside. In a letter, dated 16 February 1972, however, the CIR not only denied the
BOAC request for refund in the First Case but also re-issued in the Second Case the
deficiency income tax assessment for P534,132.08 for the years 1969 to 1970-71
plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's
request for reconsideration was denied by the CIR on 24 August 1973. This prompted
BOAC to file the Second Case before the Tax Court praying that it be absolved of
liability for deficiency income tax for the years 1969 to 1971.

This case was subsequently tried jointly with the First Case.

On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing
the CIR. The Tax Court held that the proceeds of sales of BOAC passage tickets in the
Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways,
during the period in question, do not constitute BOAC income from Philippine
sources "since no service of carriage of passengers or freight was performed by BOAC
within the Philippines" and, therefore, said income is not subject to Philippine income
tax. The CTA position was that income from transportation is income from services so
that the place where services are rendered determines the source. Thus, in the
dispositive portion of its Decision, the Tax Court ordered petitioner to credit BOAC
with the sum of P858,307.79, and to cancel the deficiency income tax assessments
against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.

Hence, this Petition for Review on certiorari of the Decision of the Tax Court.

The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:

1. Whether or not the revenue derived by private respondent British

Overseas Airways Corporation (BOAC) from sales of tickets in the
Philippines for air transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources, and, accordingly,
taxable.

2. Whether or not during the fiscal years in question BOAC s a resident

foreign corporation doing business in the Philippines or has an office or
place of business in the Philippines.

3. In the alternative that private respondent may not be considered a

resident foreign corporation but a non-resident foreign corporation, then
it is liable to Philippine income tax at the rate of thirty-five per cent (35%)
of its gross income received from all sources within the Philippines.

Under Section 20 of the 1977 Tax Code:

(h) the term resident foreign corporation engaged in trade or business

within the Philippines or having an office or place of business therein.

(i) The term "non-resident foreign corporation" applies to a foreign

corporation not engaged in trade or business within the Philippines and
not having any office or place of business therein

It is our considered opinion that BOAC is a resident foreign corporation. There is no

specific criterion as to what constitutes "doing" or "engaging in" or "transacting"
business. Each case must be judged in the light of its peculiar environmental
circumstances. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or
the exercise of some of the functions normally incident to, and in progressive
prosecution of commercial gain or for the purpose and object of the business
organization. 2 "In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a local agent, and not
one of a temporary character. 3

BOAC, during the periods covered by the subject - assessments, maintained a

general sales agent in the Philippines, That general sales agent, from 1959 to 1971,
"was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into
series of trips each trip in the series corresponding to a different airline company;
(3) receiving the fare from the whole trip; and (4) consequently allocating to the
various airline companies on the basis of their participation in the services rendered
through the mode of interline settlement as prescribed by Article VI of the Resolution
No. 850 of the IATA Agreement." 4 Those activities were in exercise of the functions
which are normally incident to, and are in progressive pursuit of, the purpose and
object of its organization as an international air carrier. In fact, the regular sale of
tickets, its main activity, is the very lifeblood of the airline business, the generation of
sales being the paramount objective. There should be no doubt then that BOAC was
"engaged in" business in the Philippines through a local agent during the period
covered by the assessments. Accordingly, it is a resident foreign corporation subject
to tax upon its total net income received in the preceding taxable year from all
sources within the Philippines. 5

Sec. 24. Rates of tax on corporations. ...

(b) Tax on foreign corporations. ...

(2) Resident corporations. A corporation organized, authorized, or

existing under the laws of any foreign country, except a foreign fife
insurance company, engaged in trade or business within the Philippines,
shall be taxable as provided in subsection (a) of this section upon the
total net income received in the preceding taxable year from all sources
within the Philippines. (Emphasis supplied)

Next, we address ourselves to the issue of whether or not the revenue from sales of
tickets by BOAC in the Philippines constitutes income from Philippine sources and,
accordingly, taxable under our income tax laws.

The Tax Code defines "gross income" thus:

"Gross income" includes gains, profits, and income derived from salaries,
wages or compensation for personal service of whatever kind and in
whatever form paid, or from profession, vocations, trades, business,
commerce, sales, or dealings in property, whether real or personal,
growing out of the ownership or use of or interest in such property; also
from interests, rents, dividends, securities, or the transactions of any
business carried on for gain or profile, or gains, profits, and income
derived from any source whatever (Sec. 29[3]; Emphasis supplied)

The definition is broad and comprehensive to include proceeds from sales of

transport documents. "The words 'income from any source whatever' disclose a
legislative policy to include all income not expressly exempted within the class of
taxable income under our laws." Income means "cash received or its equivalent"; it is
the amount of money coming to a person within a specific time ...; it means
something distinct from principal or capital. For, while capital is a fund, income is a
flow. As used in our income tax law, "income" refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for the fiscal years 1968-
69 to 1970-71 amounted to P10,428,368 .00. 7

Did such "flow of wealth" come from "sources within the Philippines",

The source of an income is the property, activity or service that produced the
income. 8 For the source of income to be considered as coming from the Philippines,
it is sufficient that the income is derived from activity within the Philippines. In
BOAC's case, the sale of tickets in the Philippines is the activity that produces the
income. The tickets exchanged hands here and payments for fares were also made
here in Philippine currency. The site of the source of payments is the Philippines. The
flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the
protection accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of supporting the government.

A transportation ticket is not a mere piece of paper. When issued by a common

carrier, it constitutes the contract between the ticket-holder and the carrier. It gives
rise to the obligation of the purchaser of the ticket to pay the fare and the
corresponding obligation of the carrier to transport the passenger upon the terms and
conditions set forth thereon. The ordinary ticket issued to members of the traveling
public in general embraces within its terms all the elements to constitute it a valid
contract, binding upon the parties entering into the relationship. 9

True, Section 37(a) of the Tax Code, which enumerates items of gross income from
sources within the Philippines, namely: (1) interest, (21) dividends, (3) service, (4)
rentals and royalties, (5) sale of real property, and (6) sale of personal property, does
not mention income from the sale of tickets for international transportation. However,
that does not render it less an income from sources within the Philippines. Section
37, by its language, does not intend the enumeration to be exclusive. It merely directs
that the types of income listed therein be treated as income from sources within the
Philippines. A cursory reading of the section will show that it does not state that it is
an all-inclusive enumeration, and that no other kind of income may be so considered.
" 10

BOAC, however, would impress upon this Court that income derived from
transportation is income for services, with the result that the place where the services
are rendered determines the source; and since BOAC's service of transportation is
performed outside the Philippines, the income derived is from sources without the
Philippines and, therefore, not taxable under our income tax laws. The Tax Court
upholds that stand in the joint Decision under review.

The absence of flight operations to and from the Philippines is not determinative of
the source of income or the site of income taxation. Admittedly, BOAC was an off-line
international airline at the time pertinent to this case. The test of taxability is the
"source"; and the source of an income is that activity ... which produced the
income. 11 Unquestionably, the passage documentations in these cases were sold in
the Philippines and the revenue therefrom was derived from a activity regularly
pursued within the Philippines. business a And even if the BOAC tickets sold covered
the "transport of passengers and cargo to and from foreign cities", 12 it cannot alter
the fact that income from the sale of tickets was derived from the Philippines. The
word "source" conveys one essential idea, that of origin, and the origin of the income
herein is the Philippines. 13

It should be pointed out, however, that the assessments upheld herein apply only to
the fiscal years covered by the questioned deficiency income tax assessments in these
cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential
Decree No. 69, promulgated on 24 November, 1972, international carriers are now
taxed as follows:
 ... Provided, however, That international carriers shall pay a tax of 2-
per cent on their cross Philippine billings. (Sec. 24[b] [21, Tax Code).

Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory

definition of the term "gross Philippine billings," thus:

... "Gross Philippine billings" includes gross revenue realized from uplifts
anywhere in the world by any international carrier doing business in the
Philippines of passage documents sold therein, whether for passenger,
excess baggage or mail provided the cargo or mail originates from the
Philippines. ...

The foregoing provision ensures that international airlines are taxed on their income
from Philippine sources. The 2- % tax on gross Philippine billings is an income tax.
If it had been intended as an excise or percentage tax it would have been place under
Title V of the Tax Code covering Taxes on Business.

Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit
by this Court of the appeal in JAL vs. Commissioner of Internal Revenue (G.R. No. L-
30041) on February 3, 1969, is res judicata to the present case. The ruling by the Tax
Court in that case was to the effect that the mere sale of tickets, unaccompanied by
the physical act of carriage of transportation, does not render the taxpayer therein
subject to the common carrier's tax. As elucidated by the Tax Court, however, the
common carrier's tax is an excise tax, being a tax on the activity of transporting,
conveying or removing passengers and cargo from one place to another. It purports to
tax the business of transportation. 14 Being an excise tax, the same can be levied by
the State only when the acts, privileges or businesses are done or performed within
the jurisdiction of the Philippines. The subject matter of the case under consideration
is income tax, a direct tax on the income of persons and other entities "of whatever
kind and in whatever form derived from any source." Since the two cases treat of a
different subject matter, the decision in one cannot be res judicata to the other.

WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET
ASIDE. Private respondent, the British Overseas Airways Corporation (BOAC), is
hereby ordered to pay the amount of P534,132.08 as deficiency income tax for the
fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from
April 16, 1972 for a period not to exceed three (3) years in accordance with the Tax
Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied.
Without costs.

SO ORDERED.

Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.

Fernan, J., took no part.

Separate Opinions

TEEHANKEE, C.J., concurring:

I concur with the Court's majority judgment upholding the assessments of deficiency
income taxes against respondent BOAC for the fiscal years 1959-1969 to 1970-1971
and therefore setting aside the appealed joint decision of respondent Court of Tax
Appeals. I just wish to point out that the conflict between the majority opinion
penned by Mr. Justice Feliciano as to the proper characterization of the taxable
income derived by respondent BOAC from the sales in the Philippines of tickets foe
BOAC form the issued by its general sales agent in the Philippines gas become moot
after November 24, 1972. Booth opinions state that by amendment through P.D.
No.69, promulgated on November 24, 1972, of section 24(b) (2) of the Tax Code
providing dor the rate of income tax on foreign corporations, international carriers
such as respondent BOAC, have since then been taxed at a reduced rate of 2-% on
their gross Philippine billings. There is, therefore, no longer ant source of substantial
conflict between the two opinions as to the present 2-% tax on their gross
Philippine billings charged against such international carriers as herein respondent
foreign corporation.

FELICIANO, J., dissenting:

With great respect and reluctance, i record my dissent from the opinion of Mme.
Justice A.A. Melencio-Herrera speaking for the majority . In my opinion, the joint
decision of the Court of Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26
January 1983, is correct and should be affirmed.

The fundamental issue raised in this petition for review is whether the British
Overseas Airways Corporation (BOAC), a foreign airline company which does not
maintain any flight operations to and from the Philippines, is liable for Philippine
income taxation in respect of "sales of air tickets" in the Philippines through a general
sales agent, relating to the carriage of passengers and cargo between two points both
outside the Philippines.

1. The Solicitor General has defined as one of the issue in this case the question of:

2. Whether or not during the fiscal years in question 1 BOAC [was] a

resident foreign corporation doing business in the Philippines or [had] an
office or place of business in the Philippines.

It is important to note at the outset that the answer to the above-quoted issue is not
determinative of the lialibity of the BOAC to Philippine income taxation in respect of
the income here involved. The liability of BOAC to Philippine income taxation in
respect of such income depends, not on BOAC's status as a "resident foreign
corporation" or alternatively, as a "non-resident foreign corporation," but rather on
whether or not such income is derived from "source within the Philippines."

A "resident foreign corporation" or foreign corporation engaged in trade or business in

the Philippines or having an office or place of business in the Philippines is subject to
Philippine income taxation only in respect of income derived from sources within the
Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax Code"), as
amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3
August 1969, read as follows:

(2) Resident corporations. A foreign corporation engaged in trade or

business with in the Philippines (expect foreign life insurance companies)
shall be taxable as provided in subsection (a) of this section.

Section 24 (a) of the Tax Code in turn provides:

Rate of tax on corporations. (a) Tax on domestic corporations. ... and

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

(2) Resident Corporations. A corporation, organized, authorized

or existing under the laws of any foreign counrty, except foreign life
insurance company, engaged in trade or business within the Philippines,
shall be taxable as provided in subsection (a) of this section upon the
total net income received in the preceding taxable year from all sources
within the Philippines. (Emphasis supplied)

Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-
resident foreign corporations. Section 24 (b) (1) as amended by Republic Act No. 3825
approved 22 June 1963, read as follows:

(b) Tax on foreign corporations. (1) Non-resident corporations. There

shall be levied, collected and paid for each taxable year, in lieu of the tax
imposed by the preceding paragraph upon the amount received by every
foreign corporation not engaged in trade or business within the Philippines,
from all sources within the Philippines, as interest, dividends, rents,
salaries, wages, premium, annuities, compensations, remunerations,
emoluments, or other fixed or determinative annual or periodical gains,
profits and income a tax equal to thirty per centum of such amount:
provided, however, that premiums shall not include reinsurance
premiums. 2

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines
and therefore a resident foreign corporation, or not doing business in the Philippines
and therefore a non-resident foreign corporation, it is liable to income tax only to the
extent that it derives income from sources within the Philippines. The circumtances
that a foreign corporation is resident in the Philippines yields no inference that all or
any part of its income is Philippine source income. Similarly, the non-resident status
of a foreign corporation does not imply that it has no Philippine source income.
Conversely, the receipt of Philippine source income creates no presumption that the
recipient foreign corporation is a resident of the Philippines. The critical issue, for
present purposes, is therefore whether of not BOAC is deriving income from sources
within the Philippines.

2. For purposes of income taxation, it is well to bear in mind that the "source of
income" relates not to the physical sourcing of a flow of money or the physical situs of
payment but rather to the "property, activity or service which produced the income."
In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the court dealt with the
issue of the applicable source rule relating to reinsurance premiums paid by a local
insurance company to a foreign reinsurance company in respect of risks located in
the Philippines. The Court said:

The source of an income is the property, activity or services that produced

the income. The reinsurance premiums remitted to appellants by virtue of
the reinsurance contract, accordingly, had for their source the undertaking
to indemnify Commonwealth Insurance Co. against liability. Said
undertaking is the activity that produced the reinsurance premiums, and
the same took place in the Philippines. [T]he reinsurance, the liabilities
insured and the risk originally underwritten by Commonwealth
Insurance Co., upon which the reinsurance premiums and indemnity
were based, were all situated in the Philippines. 4

The Court may be seen to be saying that it is the underlying prestation which is
properly regarded as the activity giving rise to the income that is sought to be taxed.
In the Howden case, that underlying prestation was theindemnification of the local
insurance company. Such indemnification could take place only in the Philippines
where the risks were located and where payment from the foreign reinsurance (in
case the casualty insured against occurs) would be received in Philippine pesos
under the reinsurance premiums paid by the local insurance companies constituted
Philippine source income of the foreign reinsurances.

The concept of "source of income" for purposes of income taxation originated in the
United States income tax system. The phrase "sources within the United States" was
first introduced into the U.S. tax system in 1916, and was subsequently embodied in
the 1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act
466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems
useful to refer to a standard U.S. text on federal income taxation:

The Supreme Court has said, in a definition much quoted but often
debated, that income may be derived from three possible sources
only: (1) capital and/or (2) labor and/or (3) the sale of capital assets.
While the three elements of this attempt at definition need not be
accepted as all-inclusive, they serve as useful guides in any inquiry into
whether a particular item is from "source within the United States" and
suggest an investigation into the nature and location of the activities or
property which produce the income. If the income is from labor
(services) the place where the labor is done should be decisive; if it is done
in this counrty, the income should be from "source within the United
States." If the income is from capital, the place where the capital is
employed should be decisive; if it is employed in this country, the income
should be from "source within the United States". If the income is from
the sale of capital assets, the place where the sale is made should be
likewise decisive. Much confusion will be avoided by regarding the term
"source" in this fundamental light. It is not a place; it is an activity or
property. As such, it has a situs or location; and if that situs or location is
within the United States the resulting income is taxable to nonresident
aliens and foreign corporations. The intention of Congress in the 1916
and subsequent statutes was to discard the 1909 and 1913 basis of
taxing nonresident aliens and foreign corporations and to make the test
of taxability the "source", or situs of the activities or property which
produce the income . . . . Thus, if income is to taxed, the recipient thereof
must be resident within the jurisdiction, or the property or activities out of
which the income issue or is derived must be situated within the
jurisdiction so that the source of the income may be said to have a situs in
this country. The underlying theory is that the consideration for taxation
is protection of life and propertyand that the income rightly to be levied
upon to defray the burdens of the United States Government is that
income which is created by activities and property protected by this
Government or obtained by persons enjoying that protection. 5

3. We turn now to the question what is the source of income rule applicable in the
instant case. There are two possibly relevant source of income rules that must be
confronted; (a) the source rule applicable in respect of contracts of service; and (b) the
source rule applicable in respect of sales of personal property.

Where a contract for the rendition of service is involved, the applicable source rule
may be simply stated as follows: the income is sourced in the place where the service
contracted for is rendered. Section 37 (a) (3) of our Tax Code reads as follows:

Section 37. Income for sources within the Philippines.

(a) Gross income from sources within the Philippines. The following
items of gross income shall be treated as gross income from sources within
the Philippines:
 xxx xxx xxx

(3) Services. Compensation for labor or personal

services performed in the Philippines;... (Emphasis supplied)

Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources
without the Philippines in the following manner:

(c) Gross income from sources without the Philippines. The following
items of gross income shall be treated as income from sources without the
Philippines:

(3) Compensation for labor or personal services performed without the

Philippines; ... (Emphasis supplied)

It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only
in respect of services rendered by individual natural persons; they also apply to
services rendered by or through the medium of a juridical person. 6 Further, a
contract of carriage or of transportation is assimilated in our Tax Code and Revenue
Regulations to a contract for services. Thus, Section 37 (e) of the Tax Code provides
as follows:

(e) Income form sources partly within and partly without the Philippines.
Items of gross income, expenses, losses and deductions, other than those
specified in subsections (a) and (c) of this section shall be allocated or
apportioned to sources within or without the Philippines, under the rules
and regulations prescribed by the Secretary of Finance. ... Gains, profits,
and income from (1) transportation or other services rendered partly within
and partly without the Philippines, or (2) from the sale of personnel
property produced (in whole or in part) by the taxpayer within and sold
without the Philippines, or produced (in whole or in part) by the taxpayer
without and sold within the Philippines, shall be treated as derived partly
from sources within and partly from sources without the Philippines. ...
(Emphasis supplied)

It should be noted that the above underscored portion of Section 37 (e) was derived
from the 1939 U.S. Tax Code which "was based upon a recognition
that transportation was a service and that the source of the income derived therefrom
was to be treated as being the place where the service of transportation was
rendered. 7

Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible,
implication that income derived from transportation or other services rendered
entirely outside the Philippines must be treated as derived entirely from sources
without the Philippines. This implication is reinforced by a consideration of certain
provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations" as
amended, first promulgated by the Department of Finance on 10 February 1940.
Section 155 of Revenue Regulations No. 2 (implementing Section 37 of the Tax Code)
provides in part as follows:

Section 155. Compensation for labor or personnel services. Gross

income from sources within the Philippines includes compensation for
labor or personal services within the Philippines regardless of the
residence of the payer, of the place in which the contract for services was
made, or of the place of payment (Emphasis supplied)

Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code)
deals with a particular species of foreign transportation companies i.e.,
foreign steamship companies deriving income from sources partly within and partly
without the Philippines:

Section 163 Foreign steamship companies. The return of foreign

steamship companies whose vessels touch parts of the Philippines should
include as gross income, the total receipts of all out-going
business whether freight or passengers. With the gross income thus
ascertained, the ratio existing between it and the gross income from all
ports, both within and without the Philippines of all vessels, whether
touching of the Philippines or not, should be determined as the basis
upon which allowable deductions may be computed, . (Emphasis
supplied)

Another type of utility or service enterprise is dealt with in Section 164 of Revenue
Regulations No. 2 (again implementing Section 37 of the Tax Code) with provides as
follows:

Section 164. Telegraph and cable services. A foreign corporation

carrying on the business of transmission of telegraph or cable messages
between points in the Philippines and points outside the Philippines
derives income partly form source within and partly from sources
without the Philippines.

... (Emphasis supplied)

Once more, a very strong inference arises under Sections 163 and 164 of Revenue
Regulations No. 2 that steamship and telegraph and cable services rendered between
points both outside the Philippines give rise to income wholly from sources outside the
Philippines, and therefore not subject to Philippine income taxation.

We turn to the "source of income" rules relating to the sale of personal property, upon
the one hand, and to the purchase and sale of personal property, upon the other
hand.

We consider first sales of personal property. Income from the sale of personal
property by the producer or manufacturer of such personal property will be regarded
as sourced entirely within or entirely without the Philippines or as sourced partly
within and partly without the Philippines, depending upon two factors: (a) the place
where the sale of such personal property occurs; and (b) the place where such
personal property was produced or manufactured. If the personal property involved
was both produced or manufactured and sold outside the Philippines, the income
derived therefrom will be regarded as sourced entirely outside the Philippines,
although the personal property had been produced outside the Philippines, or if the
sale of the property takes place outside the Philippines and the personal was
produced in the Philippines, then, the income derived from the sale will be deemed
partly as income sourced without the Philippines. In other words, the income (and
the related expenses, losses and deductions) will be allocated between sources within
and sources without the Philippines. Thus, Section 37 (e) of the Tax Code, although
already quoted above, may be usefully quoted again:

(e) Income from sources partly within and partly without the Philippines. ...
Gains, profits and income from (1) transportation or other services
rendered partly within and partly without the Philippines; or (2) from the
sale of personal property produced (in whole or in part) by the taxpayer
within and sold without the Philippines, or produced (in whole or in part)
by the taxpayer without and sold within the Philippines, shall be treated
as derived partly from sources within and partly from sources without
the Philippines. ... (Emphasis supplied)
In contrast, income derived from the purchase and sale of personal property i. e.,
trading is, under the Tax Code, regarded as sourced wholly in the place where the
personal property is sold. Section 37 (e) of the Tax Code provides in part as follows:

(e) Income from sources partly within and partly without the Philippines
... Gains, profits and income derived from the purchase of personal
property within and its sale without the Philippines or from the purchase of
personal property without and its sale within the Philippines, shall be
treated as derived entirely from sources within the country in which
sold. (Emphasis supplied)

Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:

Section 159. Sale of personal property. Income derived from the purchase
and sale of personal property shall be treated as derived entirely from the
country in which sold. The word "sold" includes "exchange." The "country"
in which "sold" ordinarily means the place where the property is
marketed. This Section does not apply to income from the sale personal
property produced (in whole or in part) by the taxpayer within and sold
without the Philippines or produced (in whole or in part) by the taxpayer
without and sold within the Philippines. (See Section 162 of these
regulations). (Emphasis supplied)

4. It will be seen that the basic problem is one of characterization of the transactions
entered into by BOAC in the Philippines. Those transactions may be characterized
either as sales of personal property (i. e., "sales of airline tickets") or as entering into a
lease of services or a contract of service or carriage. The applicable "source of income"
rules differ depending upon which characterization is given to the BOAC
transactions.

The appropriate characterization, in my opinion, of the BOAC transactions is that of

entering into contracts of service, i.e., carriage of passengers or cargo between points
located outside the Philippines.

The phrase "sale of airline tickets," while widely used in popular parlance, does not
appear to be correct as a matter of tax law. The airline ticket in and of itself has no
monetary value, even as scrap paper. The value of the ticket lies wholly in the right
acquired by the "purchaser" the passenger to demand a prestation from BOAC,
which prestation consists of the carriage of the "purchaser" or passenger from the
one point to another outside the Philippines. The ticket is really the evidence of the
contract of carriage entered into between BOAC and the passenger. The money paid
by the passenger changes hands in the Philippines. But the passenger does not
receive undertaken to be delivered by BOAC. The "purchase price of the airline ticket"
is quite different from the purchase price of a physical good or commodity such as a
pair of shoes of a refrigerator or an automobile; it is really the compensation paid for
the undertaking of BOAC to transport the passenger or cargo outside the Philippines.

The characterization of the BOAC transactions either as sales of personal property or

as purchases and sales of personal property, appear entirely inappropriate from other
viewpoint. Consider first purchases and sales: is BOAC properly regarded as engaged
in trading in the purchase and sale of personal property? Certainly, BOAC was not
purchasing tickets outside the Philippines and selling them in the Philippines.
Consider next sales: can BOAC be regarded as "selling" personal property produced
or manufactured by it? In a popular or journalistic sense, BOAC might be described
as "selling" "a product" its service. However, for the technical purposes of the law
on income taxation, BOAC is in fact entering into contracts of service or carriage. The
very existance of "source rules" specifically and precisely applicable to the rendition of
services must preclude the application here of "source rules" applying generally to
sales, and purchases and sales, of personal property which can be invoked only by
the grace of popular language. On a slighty more abstract level, BOAC's income is
more appropriately characterized as derived from a "service", rather than from an
"activity" (a broader term than service and including the activity of selling) or from the
here involved is income taxation, and not a sales tax or an excise or privilege tax.

5. The taxation of international carriers is today effected under Section 24 (b) (2) of
the Tax Code, as amended by Presidential Decree No. 69, promulgated on 24
November 1972 and by Presidential Decree No. 1355, promulgated on 21 April 1978,
in the following manner:

(2) Resident corporations. A corporation organized, authorized, or

existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received in the
preceeding taxable year from all sources within the Philippines: Provided,
however, That international carriers shall pay a tax of two and one-half
per cent on their gross Philippine billings. "Gross Philippines of passage
documents sold therein, whether for passenger, excess baggege or mail,
provide the cargo or mail originates from the Philippines. The gross
revenue realized from the said cargo or mail shall include the gross
freight charge up to final destination. Gross revenues from chartered
flights originating from the Philippines shall likewise form part of "gross
Philippine billings" regardless of the place of sale or payment of the
passage documents. For purposes of determining the taxability to
revenues from chartered flights, the term "originating from the
Philippines" shall include flight of passsengers who stay in the
Philippines for more than forty-eight (48) hours prior to embarkation.
(Emphasis supplied)

Under the above-quoted proviso international carriers issuing for compensation

passage documentation in the Philippines for uplifts from any point in the world to
any other point in the world, are not charged any Philippine income tax on their
Philippine billings (i.e., billings in respect of passenger or cargo originating from the
Philippines). Under this new approach, international carriers who service port or
points in the Philippines are treated in exactly the same way as international carriers
not serving any port or point in the Philippines. Thus, the source of income rule
applicable, as above discussed, to transportation or other services rendered partly
within and partly without the Philippines, or wholly without the Philippines, has been
set aside. in place of Philippine income taxation, the Tax Code now imposes this 2
per cent tax computed on the basis of billings in respect of passengers and cargo
originating from the Philippines regardless of where embarkation and debarkation
would be taking place. This 2- per cent tax is effectively a tax on gross receipts or
an excise or privilege tax and not a tax on income. Thereby, the Government has done
away with the difficulties attending the allocation of income and related expenses,
losses and deductions. Because taxes are the very lifeblood of government, the
resulting potential "loss" or "gain" in the amount of taxes collectible by the state is
sometimes, with varying degrees of consciousness, considered in choosing from
among competing possible characterizations under or interpretation of tax statutes. It
is hence perhaps useful to point out that the determination of the appropriate
characterization here that of contracts of air carriage rather than sales of airline
tickets entails no down-the-road loss of income tax revenues to the Government.
In lieu thereof, the Government takes in revenues generated by the 2- per cent tax
on the gross Philippine billings or receipts of international carriers.

I would vote to affirm the decision of the Court of Tax Appeals.

Separate Opinions

TEEHANKEE, C.J., concurring:

I concur with the Court's majority judgment upholding the assessments of deficiency
income taxes against respondent BOAC for the fiscal years 1959-1969 to 1970-1971
and therefore setting aside the appealed joint decision of respondent Court of Tax
Appeals. I just wish to point out that the conflict between the majority opinion
penned by Mr. Justice Feliciano as to the proper characterization of the taxable
income derived by respondent BOAC from the sales in the Philippines of tickets foe
BOAC form the issued by its general sales agent in the Philippines gas become moot
after November 24, 1972. Booth opinions state that by amendment through P.D.
No.69, promulgated on November 24, 1972, of section 24(b) (2) of the Tax Code
providing dor the rate of income tax on foreign corporations, international carriers
such as respondent BOAC, have since then been taxed at a reduced rate of 2-% on
their gross Philippine billings. There is, therefore, no longer ant source of substantial
conflict between the two opinions as to the present 2-% tax on their gross
Philippine billings charged against such international carriers as herein respondent
foreign corporation.

FELICIANO, J., dissenting:

With great respect and reluctance, i record my dissent from the opinion of Mme.
Justice A.A. Melencio-Herrera speaking for the majority . In my opinion, the joint
decision of the Court of Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26
January 1983, is correct and should be affirmed.

The fundamental issue raised in this petition for review is whether the British
Overseas Airways Corporation (BOAC), a foreign airline company which does not
maintain any flight operations to and from the Philippines, is liable for Philippine
income taxation in respect of "sales of air tickets" in the Philippines through a general
sales agent, relating to the carriage of passengers and cargo between two points both
outside the Philippines.

1. The Solicitor General has defined as one of the issue in this case the question of:

2. Whether or not during the fiscal years in question 1 BOAC [was] a

resident foreign corporation doing business in the Philippines or [had] an
office or place of business in the Philippines.

It is important to note at the outset that the answer to the above-quoted issue is not
determinative of the lialibity of the BOAC to Philippine income taxation in respect of
the income here involved. The liability of BOAC to Philippine income taxation in
respect of such income depends, not on BOAC's status as a "resident foreign
corporation" or alternatively, as a "non-resident foreign corporation," but rather on
whether or not such income is derived from "source within the Philippines."

A "resident foreign corporation" or foreign corporation engaged in trade or business in

the Philippines or having an office or place of business in the Philippines is subject to
Philippine income taxation only in respect of income derived from sources within the
Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax Code"), as
amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3
August 1969, read as follows:

(2) Resident corporations. A foreign corporation engaged in trade or

business with in the Philippines (expect foreign life insurance companies)
shall be taxable as provided in subsection (a) of this section.
Section 24 (a) of the Tax Code in turn provides:

Rate of tax on corporations. (a) Tax on domestic corporations. ... and

a like tax shall be livied, collected, and paid annually upon the total net
income received in the preceeding taxable year from all sources within the
Philippines by every corporation organized, authorized, or existing under
the laws of any foreign country: ... . (Emphasis supplied)

Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer
when it amended once more Section 24 (b) (2) of the Tax Code so as to read as
follows:

(2) Resident Corporations. A corporation, organized, authorized

or existing under the laws of any foreign counrty, except foreign life
insurance company, engaged in trade or business within the Philippines,
shall be taxable as provided in subsection (a) of this section upon the
total net income received in the preceding taxable year from all sources
within the Philippines. (Emphasis supplied)

Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-
resident foreign corporations. Section 24 (b) (1) as amended by Republic Act No. 3825
approved 22 June 1963, read as follows:

(b) Tax on foreign corporations. (1) Non-resident corporations. There

shall be levied, collected and paid for each taxable year, in lieu of the tax
imposed by the preceding paragraph upon the amount received by every
foreign corporation not engaged in trade or business within the Philippines,
from all sources within the Philippines, as interest, dividends, rents,
salaries, wages, premium, annuities, compensations, remunerations,
emoluments, or other fixed or determinative annual or periodical gains,
profits and income a tax equal to thirty per centum of such amount:
provided, however, that premiums shall not include reinsurance
premiums. 2

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines
and therefore a resident foreign corporation, or not doing business in the Philippines
and therefore a non-resident foreign corporation, it is liable to income tax only to the
extent that it derives income from sources within the Philippines. The circumtances
that a foreign corporation is resident in the Philippines yields no inference that all or
any part of its income is Philippine source income. Similarly, the non-resident status
of a foreign corporation does not imply that it has no Philippine source income.
Conversely, the receipt of Philippine source income creates no presumption that the
recipient foreign corporation is a resident of the Philippines. The critical issue, for
present purposes, is therefore whether of not BOAC is deriving income from sources
within the Philippines.

2. For purposes of income taxation, it is well to bear in mind that the "source of
income" relates not to the physical sourcing of a flow of money or the physical situs of
payment but rather to the "property, activity or service which produced the income."
In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the court dealt with the
issue of the applicable source rule relating to reinsurance premiums paid by a local
insurance company to a foreign reinsurance company in respect of risks located in
the Philippines. The Court said:

The source of an income is the property, activity or services that produced

the income. The reinsurance premiums remitted to appellants by virtue of
the reinsurance contract, accordingly, had for their source the undertaking
to indemnify Commonwealth Insurance Co. against liability. Said
undertaking is the activity that produced the reinsurance premiums, and
 the same took place in the Philippines. [T]he reinsurance, the liabilities
insured and the risk originally underwritten by Commonwealth
Insurance Co., upon which the reinsurance premiums and indemnity
were based, were all situated in the Philippines. 4

The Court may be seen to be saying that it is the underlying prestation which is
properly regarded as the activity giving rise to the income that is sought to be taxed.
In the Howden case, that underlying prestation was theindemnification of the local
insurance company. Such indemnification could take place only in the Philippines
where the risks were located and where payment from the foreign reinsurance (in
case the casualty insured against occurs) would be received in Philippine pesos
under the reinsurance premiums paid by the local insurance companies constituted
Philippine source income of the foreign reinsurances.

The concept of "source of income" for purposes of income taxation originated in the
United States income tax system. The phrase "sources within the United States" was
first introduced into the U.S. tax system in 1916, and was subsequently embodied in
the 1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act
466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems
useful to refer to a standard U.S. text on federal income taxation:

The Supreme Court has said, in a definition much quoted but often
debated, that income may be derived from three possible sources
only: (1) capital and/or (2) labor and/or (3) the sale of capital assets.
While the three elements of this attempt at definition need not be
accepted as all-inclusive, they serve as useful guides in any inquiry into
whether a particular item is from "source within the United States" and
suggest an investigation into the nature and location of the activities or
property which produce the income. If the income is from labor
(services) the place where the labor is done should be decisive; if it is done
in this counrty, the income should be from "source within the United
States." If the income is from capital, the place where the capital is
employed should be decisive; if it is employed in this country, the income
should be from "source within the United States". If the income is from
the sale of capital assets, the place where the sale is made should be
likewise decisive. Much confusion will be avoided by regarding the term
"source" in this fundamental light. It is not a place; it is an activity or
property. As such, it has a situs or location; and if that situs or location is
within the United States the resulting income is taxable to nonresident
aliens and foreign corporations. The intention of Congress in the 1916
and subsequent statutes was to discard the 1909 and 1913 basis of
taxing nonresident aliens and foreign corporations and to make the test
of taxability the "source", or situs of the activities or property which
produce the income . . . . Thus, if income is to taxed, the recipient thereof
must be resident within the jurisdiction, or the property or activities out of
which the income issue or is derived must be situated within the
jurisdiction so that the source of the income may be said to have a situs in
this country. The underlying theory is that the consideration for taxation
is protection of life and propertyand that the income rightly to be levied
upon to defray the burdens of the United States Government is that
income which is created by activities and property protected by this
Government or obtained by persons enjoying that protection. 5

3. We turn now to the question what is the source of income rule applicable in the
instant case. There are two possibly relevant source of income rules that must be
confronted; (a) the source rule applicable in respect of contracts of service; and (b) the
source rule applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule
may be simply stated as follows: the income is sourced in the place where the service
contracted for is rendered. Section 37 (a) (3) of our Tax Code reads as follows:

Section 37. Income for sources within the Philippines.

(a) Gross income from sources within the Philippines. The following
items of gross income shall be treated as gross income from sources
within the Philippines:

xxx xxx xxx

(3) Services. Compensation for labor or personal

services performed in the Philippines;... (Emphasis supplied)

Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources
without the Philippines in the following manner:

(c) Gross income from sources without the Philippines. The following
items of gross income shall be treated as income from sources without the
Philippines:

(3) Compensation for labor or personal services performed without the

Philippines; ... (Emphasis supplied)

It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only
in respect of services rendered by individual natural persons; they also apply to
services rendered by or through the medium of a juridical person. 6 Further, a
contract of carriage or of transportation is assimilated in our Tax Code and Revenue
Regulations to a contract for services. Thus, Section 37 (e) of the Tax Code provides
as follows:

(e) Income form sources partly within and partly without the Philippines.
Items of gross income, expenses, losses and deductions, other than those
specified in subsections (a) and (c) of this section shall be allocated or
apportioned to sources within or without the Philippines, under the rules
and regulations prescribed by the Secretary of Finance. ... Gains, profits,
and income from (1) transportation or other services rendered partly within
and partly without the Philippines, or (2) from the sale of personnel
property produced (in whole or in part) by the taxpayer within and sold
without the Philippines, or produced (in whole or in part) by the taxpayer
without and sold within the Philippines, shall be treated as derived partly
from sources within and partly from sources without the Philippines. ...
(Emphasis supplied)

It should be noted that the above underscored portion of Section 37 (e) was derived
from the 1939 U.S. Tax Code which "was based upon a recognition
that transportation was a service and that the source of the income derived therefrom
was to be treated as being the place where the service of transportation was
rendered. 7

Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible,
implication that income derived from transportation or other services rendered
entirely outside the Philippines must be treated as derived entirely from sources
without the Philippines. This implication is reinforced by a consideration of certain
provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations" as
amended, first promulgated by the Department of Finance on 10 February 1940.
Section 155 of Revenue Regulations No. 2 (implementing Section 37 of the Tax Code)
provides in part as follows:
 Section 155. Compensation for labor or personnel services. Gross
income from sources within the Philippines includes compensation for
labor or personal services within the Philippines regardless of the
residence of the payer, of the place in which the contract for services was
made, or of the place of payment (Emphasis supplied)

Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code)
deals with a particular species of foreign transportation companies i.e.,
foreign steamship companies deriving income from sources partly within and partly
without the Philippines:

Section 163 Foreign steamship companies. The return of foreign

steamship companies whose vessels touch parts of the Philippines should
include as gross income, the total receipts of all out-going
business whether freight or passengers. With the gross income thus
ascertained, the ratio existing between it and the gross income from all
ports, both within and without the Philippines of all vessels, whether
touching of the Philippines or not, should be determined as the basis
upon which allowable deductions may be computed, . (Emphasis
supplied)

Another type of utility or service enterprise is dealt with in Section 164 of Revenue
Regulations No. 2 (again implementing Section 37 of the Tax Code) with provides as
follows:

Section 164. Telegraph and cable services. A foreign corporation

carrying on the business of transmission of telegraph or cable messages
between points in the Philippines and points outside the Philippines
derives income partly form source within and partly from sources without
the Philippines.

... (Emphasis supplied)

Once more, a very strong inference arises under Sections 163 and 164 of Revenue
Regulations No. 2 that steamship and telegraph and cable services rendered between
points both outside the Philippines give rise to income wholly from sources outside the
Philippines, and therefore not subject to Philippine income taxation.

We turn to the "source of income" rules relating to the sale of personal property, upon
the one hand, and to the purchase and sale of personal property, upon the other
hand.

We consider first sales of personal property. Income from the sale of personal
property by the producer or manufacturer of such personal property will be regarded
as sourced entirely within or entirely without the Philippines or as sourced partly
within and partly without the Philippines, depending upon two factors: (a) the place
where the sale of such personal property occurs; and (b) the place where such
personal property was produced or manufactured. If the personal property involved
was both produced or manufactured and sold outside the Philippines, the income
derived therefrom will be regarded as sourced entirely outside the Philippines,
although the personal property had been produced outside the Philippines, or if the
sale of the property takes place outside the Philippines and the personal was
produced in the Philippines, then, the income derived from the sale will be deemed
partly as income sourced without the Philippines. In other words, the income (and
the related expenses, losses and deductions) will be allocated between sources within
and sources without the Philippines. Thus, Section 37 (e) of the Tax Code, although
already quoted above, may be usefully quoted again:
 (e) Income from sources partly within and partly without the Philippines. ...
Gains, profits and income from (1) transportation or other services
rendered partly within and partly without the Philippines; or (2) from the
sale of personal property produced (in whole or in part) by the taxpayer
within and sold without the Philippines, or produced (in whole or in part)
by the taxpayer without and sold within the Philippines, shall be treated
as derived partly from sources within and partly from sources without
the Philippines. ... (Emphasis supplied)

In contrast, income derived from the purchase and sale of personal property i. e.,
trading is, under the Tax Code, regarded as sourced wholly in the place where the
personal property is sold. Section 37 (e) of the Tax Code provides in part as follows:

(e) Income from sources partly within and partly without the Philippines
... Gains, profits and income derived from the purchase of personal
property within and its sale without the Philippines or from the purchase of
personal property without and its sale within the Philippines, shall be
treated as derived entirely from sources within the country in which sold.
(Emphasis supplied)

Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:

Section 159. Sale of personal property. Income derived from the purchase
and sale of personal property shall be treated as derived entirely from the
country in which sold. The word "sold" includes "exchange." The "country"
in which "sold" ordinarily means the place where the property is
marketed. This Section does not apply to income from the sale personal
property produced (in whole or in part) by the taxpayer within and sold
without the Philippines or produced (in whole or in part) by the taxpayer
without and sold within the Philippines. (See Section 162 of these
regulations). (Emphasis supplied)

4. It will be seen that the basic problem is one of characterization of the transactions
entered into by BOAC in the Philippines. Those transactions may be characterized
either as sales of personal property (i. e., "sales of airline tickets") or as entering into a
lease of services or a contract of service or carriage. The applicable "source of income"
rules differ depending upon which characterization is given to the BOAC
transactions.

The appropriate characterization, in my opinion, of the BOAC transactions is that of

entering into contracts of service, i.e., carriage of passengers or cargo between points
located outside the Philippines.

The phrase "sale of airline tickets," while widely used in popular parlance, does not
appear to be correct as a matter of tax law. The airline ticket in and of itself has no
monetary value, even as scrap paper. The value of the ticket lies wholly in the right
acquired by the "purchaser" the passenger to demand a prestation from BOAC,
which prestation consists of the carriage of the "purchaser" or passenger from the
one point to another outside the Philippines. The ticket is really the evidence of the
contract of carriage entered into between BOAC and the passenger. The money paid
by the passenger changes hands in the Philippines. But the passenger does not
receive undertaken to be delivered by BOAC. The "purchase price of the airline ticket"
is quite different from the purchase price of a physical good or commodity such as a
pair of shoes of a refrigerator or an automobile; it is really the compensation paid for
the undertaking of BOAC to transport the passenger or cargo outside the Philippines.

The characterization of the BOAC transactions either as sales of personal property or

as purchases and sales of personal property, appear entirely inappropriate from other
viewpoint. Consider first purchases and sales: is BOAC properly regarded as engaged
in trading in the purchase and sale of personal property? Certainly, BOAC was not
purchasing tickets outside the Philippines and selling them in the Philippines.
Consider next sales: can BOAC be regarded as "selling" personal property produced
or manufactured by it? In a popular or journalistic sense, BOAC might be described
as "selling" "a product" its service. However, for the technical purposes of the law
on income taxation, BOAC is in fact entering into contracts of service or carriage. The
very existance of "source rules" specifically and precisely applicable to the rendition of
services must preclude the application here of "source rules" applying generally to
sales, and purchases and sales, of personal property which can be invoked only by
the grace of popular language. On a slighty more abstract level, BOAC's income is
more appropriately characterized as derived from a "service", rather than from an
"activity" (a broader term than service and including the activity of selling) or from the
here involved is income taxation, and not a sales tax or an excise or privilege tax.

5. The taxation of international carriers is today effected under Section 24 (b) (2) of
the Tax Code, as amended by Presidential Decree No. 69, promulgated on 24
November 1972 and by Presidential Decree No. 1355, promulgated on 21 April 1978,
in the following manner:

(2) Resident corporations. A corporation organized, authorized, or

existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received in the
preceeding taxable year from all sources within the Philippines: Provided,
however, That international carriers shall pay a tax of two and one-half
per cent on their gross Philippine billings. "Gross Philippines of passage
documents sold therein, whether for passenger, excess baggege or mail,
provide the cargo or mail originates from the Philippines. The gross
revenue realized from the said cargo or mail shall include the gross
freight charge up to final destination. Gross revenues from chartered
flights originating from the Philippines shall likewise form part of "gross
Philippine billings" regardless of the place of sale or payment of the
passage documents. For purposes of determining the taxability to
revenues from chartered flights, the term "originating from the
Philippines" shall include flight of passsengers who stay in the
Philippines for more than forty-eight (48) hours prior to embarkation.
(Emphasis supplied)

Under the above-quoted proviso international carriers issuing for compensation

passage documentation in the Philippines for uplifts from any point in the world to
any other point in the world, are not charged any Philippine income tax on their
Philippine billings (i.e., billings in respect of passenger or cargo originating from the
Philippines). Under this new approach, international carriers who service port or
points in the Philippines are treated in exactly the same way as international carriers
not serving any port or point in the Philippines. Thus, the source of income rule
applicable, as above discussed, to transportation or other services rendered partly
within and partly without the Philippines, or wholly without the Philippines, has been
set aside. in place of Philippine income taxation, the Tax Code now imposes this 2
per cent tax computed on the basis of billings in respect of passengers and cargo
originating from the Philippines regardless of where embarkation and debarkation
would be taking place. This 2- per cent tax is effectively a tax on gross receipts or
an excise or privilege tax and not a tax on income. Thereby, the Government has done
away with the difficulties attending the allocation of income and related expenses,
losses and deductions. Because taxes are the very lifeblood of government, the
resulting potential "loss" or "gain" in the amount of taxes collectible by the state is
sometimes, with varying degrees of consciousness, considered in choosing from
among competing possible characterizations under or interpretation of tax statutes. It
is hence perhaps useful to point out that the determination of the appropriate
characterization here that of contracts of air carriage rather than sales of airline
tickets entails no down-the-road loss of income tax revenues to the Government.
In lieu thereof, the Government takes in revenues generated by the 2- per cent tax
on the gross Philippine billings or receipts of international carriers.

I would vote to affirm the decision of the Court of Tax Appeals.

Narvasa, Gutierrez, Jr., and Cruz, JJ., dissent.