Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 175356               December 3, 2013

MANILA MEMORIAL PARK, INC. AND LA FUNERARIA PAZ-SUCAT, INC., Petitioners, 

vs.SECRETARY OF THE DEPARTMENT OF SOCIAL WELFARE AND

DEVELOPMENT and THE SECRETARY OF THE DEPARTMENT OF FINANCE, Respondents.

D E C I S I O N

DEL CASTILLO, J.:

When a party challeges the constitutionality of a law, the burden of proof rests upon him.

Before us is a Petition for Prohibition2 under Rule 65 of the Rules of Court filed by petitioners Manila Memorial Park, Inc. and La Funeraria Paz-Sucat, Inc., domestic corporations engaged in the business of providing funeral and burial services, against public respondents Secretaries of the Department of Social Welfare and Development (DSWD) and the Department of Finance (DOF).

Petitioners assail the constitutionality of Section 4 of Republic Act (RA) No. 7432,3 as amended by RA 9257,4 and the implementing rules and regulations issued by the DSWD and DOF insofar as these allow business establishments to claim the 20% discount given to senior citizens as a tax deduction.

Factual Antecedents

On April 23, 1992, RA 7432 was passed into law, granting senior citizens the following privileges:

SECTION 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the following:

a) the grant of twenty percent (20%) discount from all establishments relative to utilization of transportation services, hotels and similar lodging

establishment[s], restaurants and recreation centers and purchase of medicine anywhere in the country: Provided, That private establishments may claim the cost as tax credit;

b) a minimum of twenty percent (20%) discount on admission fees charged by theaters, cinema houses and concert halls, circuses, carnivals and other similar places of culture, leisure, and amusement;

c) exemption from the payment of individual income taxes: Provided, That their annual taxable income does not exceed the property level as determined by the National Economic and Development Authority (NEDA) for that year;

d) exemption from training fees for socioeconomic programs undertaken by the OSCA as part of its work;

e) free medical and dental services in government establishment[s] anywhere in the country, subject to guidelines to be issued by the Department of Health, the Government Service Insurance System and the Social Security System;

f) to the extent practicable and feasible, the continuance of the same benefits and privileges given by the Government Service Insurance System (GSIS), Social Security System (SSS) and PAG-IBIG, as the case may be, as are enjoyed by those in actual service.

On August 23, 1993, Revenue Regulations (RR) No. 02-94 was issued to implement RA 7432. Sections 2(i) and 4 of RR No. 02-94 provide:

Sec. 2. DEFINITIONS. – For purposes of these regulations: i. Tax Credit – refers to the amount representing the 20% discount granted to a qualified senior citizen by all establishments relative to their utilization of transportation services, hotels and similar lodging establishments, restaurants, drugstores, recreation centers, theaters, cinema houses, concert halls, circuses, carnivals and other similar places of culture, leisure and amusement, which discount shall be deducted by the said establishments from their gross income for income tax purposes and from their gross sales for value-added tax or other percentage tax purposes. x x x x Sec. 4. RECORDING/BOOKKEEPING REQUIREMENTS FOR PRIVATE ESTABLISHMENTS. – Private establishments, i.e., transport services, hotels and similar lodging establishments, restaurants, recreation centers, drugstores, theaters, cinema houses, concert halls, circuses, carnivals and other similar places of culture[,] leisure and amusement, giving 20% discounts to qualified senior citizens are required to keep separate and accurate record[s] of sales made to senior citizens, which shall include the name, identification number, gross sales/receipts, discounts, dates of transactions and invoice number for every transaction. The amount of

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20% discount shall be deducted from the gross income for income tax purposes and from gross sales of the business enterprise concerned for purposes of the VAT and other percentage taxes.

In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,5 the Court declared Sections 2(i) and 4 of RR No. 02-94 as erroneous because these contravene RA 7432,6 thus:

RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they grant. In turn, the Implementing Rules and Regulations, issued pursuant thereto, provide the procedures for its availment. To deny such credit, despite the plain mandate of the law and the regulations carrying out that mandate, is indefensible. First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing the 20 percent discount that "shall be deducted by the said establishments from their gross income for income tax purposes and from their gross sales for value-added tax or other percentage tax purposes." In ordinary business language, the tax credit represents the amount of such discount. However, the manner by which the discount shall be credited against taxes has not been clarified by the revenue regulations. By ordinary acceptation, a discount is an "abatement or reduction made from the gross amount or value of anything." To be more precise, it is in business parlance "a deduction or lowering of an amount of money;" or "a reduction from the full amount or value of something, especially a price." In business there are many kinds of discount, the most common of which is that affecting the income statement or financial report upon which the income tax is based.

x x x x

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount deductible from gross income for income tax purposes, or from gross sales for VAT or other percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales discount. This contrived definition is improper, considering that the latter has to be deducted from gross sales in order to compute the gross income in the income statement and cannot be deducted again, even for purposes of computing the income tax. When the law says that the cost of the discount may be claimed as a tax credit, it means that the amount — when claimed — shall be treated as a reduction from any tax liability, plain and simple. The option to avail of the tax credit benefit depends upon the existence of a tax liability, but to limit the benefit to a sales discount — which is not even identical to the discount privilege that is granted by law — does not define it at all and serves no useful purpose. The definition must, therefore, be stricken down.

Laws Not Amended by Regulations

Second, the law cannot be amended by a mere regulation. In fact, a regulation that "operates to create a rule out of harmony with the statute is a mere nullity;" it cannot prevail. It is a cardinal rule that courts "will and should respect the contemporaneous construction placed upon a statute by the executive officers whose duty it is to enforce it x x x." In the scheme of judicial tax administration, the need for certainty and predictability in the implementation of tax laws is crucial. Our tax authorities fill in the details that "Congress may not have the opportunity or competence to provide." The regulations these authorities issue are relied upon by taxpayers, who are certain that these will be followed by the courts. Courts, however, will not uphold these authorities’ interpretations when clearly absurd, erroneous or improper. In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA 7432 provides. Their interpretation has muddled x x x the intent of Congress in granting a mere discount privilege, not a sales discount. The administrative agency issuing these regulations may not enlarge, alter or restrict the provisions of the law it administers; it cannot engraft additional requirements not contemplated by the legislature.

In case of conflict, the law must prevail. A "regulation adopted pursuant to law is law." Conversely, a regulation or any portion thereof not adopted pursuant to law is no law and has neither the force nor the effect of law.7

On February 26, 2004, RA 92578 amended certain provisions of RA 7432, to wit:

SECTION 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the following:

(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in hotels and similar lodging establishments, restaurants and recreation centers, and purchase of medicines in all establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial services for the death of senior citizens;

x x x x

The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted. Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper

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documentation and to the provisions of the National Internal Revenue Code, as amended.

To implement the tax provisions of RA 9257, the Secretary of Finance issued RR No. 4-2006, the pertinent provision of which provides:

SEC. 8. AVAILMENT BY ESTABLISHMENTS OF SALES DISCOUNTS AS DEDUCTION FROM GROSS INCOME. – Establishments enumerated in subparagraph (6) hereunder granting sales discounts to senior citizens on the sale of goods and/or services specified thereunder are entitled to deduct the said discount from gross income subject to the following conditions:

(1) Only that portion of the gross sales EXCLUSIVELY USED, CONSUMED OR ENJOYED BY THE SENIOR CITIZEN shall be eligible for the deductible sales discount.

(2) The gross selling price and the sales discount MUST BE SEPARATELY INDICATED IN THE OFFICIAL RECEIPT OR SALES INVOICE issued by the establishment for the sale of goods or services to the senior citizen.

(3) Only the actual amount of the discount granted or a sales discount not exceeding 20% of the gross selling price can be deducted from the gross income, net of value added tax, if applicable, for income tax purposes, and from gross sales or gross receipts of the business enterprise concerned, for VAT or other percentage tax purposes.

(4) The discount can only be allowed as deduction from gross income for the same taxable year that the discount is granted.

(5) The business establishment giving sales discounts to qualified senior citizens is required to keep separate and accurate record[s] of sales, which shall include the name of the senior citizen, TIN, OSCA ID, gross sales/receipts, sales discount granted, [date] of [transaction] and invoice number for every sale transaction to senior citizen.

(6) Only the following business establishments which granted sales discount to senior citizens on their sale of goods and/or services may claim the said discount granted as deduction from gross income, namely:

x x x x

(i) Funeral parlors and similar establishments – The beneficiary or any person who shall shoulder the funeral and burial expenses of the deceased senior citizen shall claim the discount, such as casket,

embalmment, cremation cost and other related services for the senior citizen upon payment and presentation of [his] death certificate.

The DSWD likewise issued its own Rules and Regulations Implementing RA 9257, to wit:

RULE VI DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS

Article 8. Tax Deduction of Establishments. – The establishment may claim the discounts granted under Rule V, Section 4 – Discounts for Establishments, Section 9, Medical and Dental Services in Private Facilities and Sections 10 and 11 – Air, Sea and Land Transportation as tax deduction based on the net cost of the goods sold or services rendered.

Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted; Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended; Provided, finally, that the implementation of the tax deduction shall be subject to the Revenue Regulations to be issued by the Bureau of Internal Revenue (BIR) and approved by the Department of Finance (DOF).

Feeling aggrieved by the tax deduction scheme, petitioners filed the present recourse, praying that Section 4 of RA 7432, as amended by RA 9257, and the implementing rules and regulations issued by the DSWD and the DOF be declared unconstitutional insofar as these allow business establishments to claim the 20% discount given to senior citizens as a tax deduction; that the DSWD and the DOF be prohibited from enforcing the same; and that the tax credit treatment of the 20% discount under the former Section 4 (a) of RA 7432 be reinstated.

Issues

Petitioners raise the following issues:

A.

WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR CONTROVERSY.

B.

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WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND X X X ITS IMPLEMENTING RULES AND REGULATIONS, INSOFAR AS THEY PROVIDE THAT THE TWENTY PERCENT (20%) DISCOUNT TO SENIOR CITIZENS MAY BE CLAIMED AS A TAX DEDUCTION BY THE PRIVATE ESTABLISHMENTS, ARE INVALID AND UNCONSTITUTIONAL.9

Petitioners’ Arguments

Petitioners emphasize that they are not questioning the 20% discount granted to senior citizens but are only assailing the constitutionality of the tax deduction scheme prescribed under RA 9257 and the implementing rules and regulations issued by the DSWD and the DOF.10

Petitioners posit that the tax deduction scheme contravenes Article III, Section 9 of the Constitution, which provides that: "[p]rivate property shall not be taken for public use without just compensation."11

In support of their position, petitioners cite Central Luzon Drug Corporation,12 where it was ruled that the 20% discount privilege constitutes taking of private property for public use which requires the payment of just compensation,13 and Carlos Superdrug Corporation v. Department of Social Welfare and Development,14 where it was acknowledged that the tax deduction scheme does not meet the definition of just compensation.15

Petitioners likewise seek a reversal of the ruling in Carlos Superdrug Corporation16 that the tax deduction scheme adopted by the government is justified by police power.17

They assert that "[a]lthough both police power and the power of eminent domain have the general welfare for their object, there are still traditional distinctions between the two"18 and that "eminent domain cannot be made less supreme than police power."19

Petitioners further claim that the legislature, in amending RA 7432, relied on an erroneous contemporaneous construction that prior payment of taxes is required for tax credit.20

Petitioners also contend that the tax deduction scheme violates Article XV, Section 421 and Article XIII, Section 1122of the Constitution because it shifts the State’s constitutional mandate or duty of improving the welfare of the elderly to the private sector.23

Under the tax deduction scheme, the private sector shoulders 65% of the discount because only 35%24 of it is actually returned by the government.25

Consequently, the implementation of the tax deduction scheme prescribed under Section 4 of RA 9257 affects the businesses of petitioners.26

Thus, there exists an actual case or controversy of transcendental importance which deserves judicious disposition on the merits by the highest court of the land.27

Respondents’ Arguments

Respondents, on the other hand, question the filing of the instant Petition directly with the Supreme Court as this disregards the hierarchy of courts.28

They likewise assert that there is no justiciable controversy as petitioners failed to prove that the tax deduction treatment is not a "fair and full equivalent of the loss sustained" by them.29

As to the constitutionality of RA 9257 and its implementing rules and regulations, respondents contend that petitioners failed to overturn its presumption of constitutionality.30

More important, respondents maintain that the tax deduction scheme is a legitimate exercise of the State’s police power.31

Our Ruling

The Petition lacks merit.

There exists an actual case or controversy.

We shall first resolve the procedural issue. When the constitutionality of a law is put in issue, judicial review may be availed of only if the following requisites concur: "(1) the existence of an actual and appropriate case; (2) the existence of personal and substantial interest on the part of the party raising the [question of constitutionality]; (3) recourse to judicial review is made at the earliest opportunity; and (4) the [question of constitutionality] is the lis mota of the case."32

In this case, petitioners are challenging the constitutionality of the tax deduction scheme provided in RA 9257 and the implementing rules and regulations issued by the DSWD and the DOF. Respondents, however, oppose the Petition on the ground that there is no actual case or controversy. We do not agree with respondents. An actual case or controversy exists when there is "a conflict of legal rights" or "an assertion of opposite legal claims susceptible of judicial resolution."33

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The Petition must therefore show that "the governmental act being challenged has a direct adverse effect on the individual challenging it."34

In this case, the tax deduction scheme challenged by petitioners has a direct adverse effect on them. Thus, it cannot be denied that there exists an actual case or controversy.

The validity of the 20% senior citizen discount and tax deduction scheme under RA 9257, as an exercise of police power of the State, has already been settled in Carlos Superdrug Corporation.

Petitioners posit that the resolution of this case lies in the determination of whether the legally mandated 20% senior citizen discount is an exercise of police power or eminent domain. If it is police power, no just compensation is warranted. But if it is eminent domain, the tax deduction scheme is unconstitutional because it is not a peso for peso reimbursement of the 20% discount given to senior citizens. Thus, it constitutes taking of private property without payment of just compensation. At the outset, we note that this question has been settled in Carlos Superdrug Corporation.35

In that case, we ruled:

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private property. Compelling drugstore owners and establishments to grant the discount will result in a loss of profit and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby drugstores will be justly compensated for the discount. Examining petitioners’ arguments, it is apparent that what petitioners are ultimately questioning is the validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount that they extend to senior citizens. Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse petitioners for the discount privilege accorded to senior citizens. This is because the discount is treated as a deduction, a tax-deductible expense that is subtracted from the gross income and results in a lower taxable income. Stated otherwise, it is an amount that is allowed by law to reduce the income prior to the application of the tax rate to compute the amount of tax which is due. Being a tax deduction, the discount does not reduce taxes owed on a peso for peso basis but merely offers a fractional reduction in taxes owed. Theoretically, the treatment of the discount as a deduction reduces the net income of the private establishments concerned. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments, were it not for R.A. No. 9257. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. This constitutes compensable taking for which petitioners

would ordinarily become entitled to a just compensation. Just compensation is defined as the full and fair equivalent of the property taken from its owner by the expropriator. The measure is not the taker’s gain but the owner’s loss. The word just is used to intensify the meaning of the word compensation, and to convey the idea that the equivalent to be rendered for the property to be taken shall be real, substantial, full and ample. A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet the definition of just compensation. Having said that, this raises the question of whether the State, in promoting the health and welfare of a special group of citizens, can impose upon private establishments the burden of partly subsidizing a government program. The Court believes so. The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to nation-building, and to grant benefits and privileges to them for their improvement and well-being as the State considers them an integral part of our society. The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself. Thus, the Act provides: SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:

SECTION 1. Declaration of Policies and Objectives. — Pursuant to Article XV, Section 4 of the Constitution, it is the duty of the family to take care of its elderly members while the State may design programs of social security for them. In addition to this, Section 10 in the Declaration of Principles and State Policies provides: "The State shall provide social justice in all phases of national development." Further, Article XIII, Section 11, provides: "The State shall adopt an integrated and comprehensive approach to health development which shall endeavor to make essential goods, health and other social services available to all the people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly, disabled, women and children." Consonant with these constitutional principles the following are the declared policies of this Act:

… … …

(f) To recognize the important role of the private sector in the improvement of the welfare of senior citizens and to actively seek their partnership.

To implement the above policy, the law grants a twenty percent discount to senior citizens for medical and dental services, and diagnostic and laboratory fees; admission fees charged by theaters, concert halls, circuses, carnivals, and other similar places of culture, leisure and amusement; fares for domestic land, air and sea travel; utilization of services in hotels and similar lodging establishments, restaurants and recreation centers; and purchases of medicines for the exclusive use or enjoyment of senior citizens. As a form of reimbursement, the law provides that business establishments extending the twenty percent

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discount to senior citizens may claim the discount as a tax deduction. The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare for its object. Police power is not capable of an exact definition, but has been purposely veiled in general terms to underscore its comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible response to conditions and circumstances, thus assuring the greatest benefits. Accordingly, it has been described as "the most essential, insistent and the least limitable of powers, extending as it does to all the great public needs." It is "[t]he power vested in the legislature by the constitution to make, ordain, and establish all manner of wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not repugnant to the constitution, as they shall judge to be for the good and welfare of the commonwealth, and of the subjects of the same." For this reason, when the conditions so demand as determined by the legislature, property rights must bow to the primacy of police power because property rights, though sheltered by due process, must yield to general welfare. Police power as an attribute to promote the common good would be diluted considerably if on the mere plea of petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated. Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of the provision in question, there is no basis for its nullification in view of the presumption of validity which every law has in its favor. Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is unduly oppressive to their business, because petitioners have not taken time to calculate correctly and come up with a financial report, so that they have not been able to show properly whether or not the tax deduction scheme really works greatly to their disadvantage. In treating the discount as a tax deduction, petitioners insist that they will incur losses because, referring to the DOF Opinion, for every P1.00 senior citizen discount that petitioners would give, P0.68 will be shouldered by them as only P0.32 will be refunded by the government by way of a tax deduction. To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive maintenance drug Norvasc as an example. According to the latter, it acquires Norvasc from the distributors at P37.57 per tablet, and retails it at P39.60 (or at a margin of 5%). If it grants a 20% discount to senior citizens or an amount equivalent to P7.92, then it would have to sell Norvasc at P31.68 which translates to a loss from capital of P5.89 per tablet. Even if the government will allow a tax deduction, only P2.53 per tablet will be refunded and not the full amount of the discount which is P7.92. In short, only 32% of the 20% discount will be reimbursed to the drugstores. Petitioners’ computation is flawed. For purposes of reimbursement, the law states that the cost of the discount shall be deducted from gross income, the amount of income derived from all sources before deducting allowable expenses, which will result in net income. Here, petitioners tried to show a loss on a per transaction basis, which should not be the case. An income statement, showing an accounting of petitioners' sales, expenses, and net profit (or loss) for a given period could have accurately reflected the effect of the

discount on their income. Absent any financial statement, petitioners cannot substantiate their claim that they will be operating at a loss should they give the discount. In addition, the computation was erroneously based on the assumption that their customers consisted wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on income, not on the amount of the discount.

Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices of their medicines given the cutthroat nature of the players in the industry. It is a business decision on the part of petitioners to peg the mark-up at 5%. Selling the medicines below acquisition cost, as alleged by petitioners, is merely a result of this decision. Inasmuch as pricing is a property right, petitioners cannot reproach the law for being oppressive, simply because they cannot afford to raise their prices for fear of losing their customers to competition. The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing component of the business. While the Constitution protects property rights, petitioners must accept the realities of business and the State, in the exercise of police power, can intervene in the operations of a business which may result in an impairment of property rights in the process.

Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the precept for the protection of property, various laws and jurisprudence, particularly on agrarian reform and the regulation of contracts and public utilities, continuously serve as x x x reminder[s] that the right to property can be relinquished upon the command of the State for the promotion of public good. Undeniably, the success of the senior citizens program rests largely on the support imparted by petitioners and the other private establishments concerned. This being the case, the means employed in invoking the active participation of the private sector, in order to achieve the purpose or objective of the law, is reasonably and directly related. Without sufficient proof that Section 4 (a) of R.A. No. 9257 is arbitrary, and that the continued implementation of the same would be unconscionably detrimental to petitioners, the Court will refrain from quashing a legislative act.36 (Bold in the original; underline supplied)

We, thus, found that the 20% discount as well as the tax deduction scheme is a valid exercise of the police power of the State.

No compelling reason has been proffered to overturn, modify or abandon the ruling in Carlos Superdrug Corporation.

Petitioners argue that we have previously ruled in Central Luzon Drug Corporation37 that the 20% discount is an exercise of the power of eminent domain, thus, requiring the payment of just compensation. They

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urge us to re-examine our ruling in Carlos Superdrug Corporation38 which allegedly reversed the ruling in Central Luzon Drug Corporation.39

They also point out that Carlos Superdrug Corporation40 recognized that the tax deduction scheme under the assailed law does not provide for sufficient just compensation. We agree with petitioners’ observation that there are statements in Central Luzon Drug Corporation41 describing the 20% discount as an exercise of the power of eminent domain, viz.:

[T]he privilege enjoyed by senior citizens does not come directly from the State, but rather from the private establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as their just compensation for private property taken by the State for public use. The concept of public use is no longer confined to the traditional notion of use by the public, but held synonymous with public interest, public benefit, public welfare, and public convenience. The discount privilege to which our senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just compensation. This term refers not only to the issuance of a tax credit certificate indicating the correct amount of the discounts given, but also to the promptness in its release. Equivalent to the payment of property taken by the State, such issuance — when not done within a reasonable time from the grant of the discounts — cannot be considered as just compensation. In effect, respondent is made to suffer the consequences of being immediately deprived of its revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with the reduction in its revenues. Besides, the taxation power can also be used as an implement for the exercise of the power of eminent domain. Tax measures are but "enforced contributions exacted on pain of penal sanctions" and "clearly imposed for a public purpose." In recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. While it is a declared commitment under Section 1 of RA 7432, social justice "cannot be invoked to trample on the rights of property owners who under our Constitution and laws are also entitled to protection. The social justice consecrated in our [C]onstitution [is] not intended to take away rights from a person and give them to another who is not entitled thereto." For this reason, a just compensation for income that is taken away from respondent becomes necessary. It is in the tax credit that our legislators find support to realize social justice, and no administrative body can alter that fact. To put it differently, a private establishment that merely breaks even — without the discounts yet — will surely start to incur losses because of such discounts. The same effect is expected if its mark-up is less than 20 percent, and if all its sales come

from retail purchases by senior citizens. Aside from the observation we have already raised earlier, it will also be grossly unfair to an establishment if the discounts will be treated merely as deductions from either its gross income or its gross sales. Operating at a loss through no fault of its own, it will realize that the tax credit limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will be put in a better position if they avail themselves of tax credits denied those that are losing, because no taxes are due from the latter.42 (Italics in the original; emphasis supplied)

The above was partly incorporated in our ruling in Carlos Superdrug Corporation43 when we stated preliminarily that—

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private property. Compelling drugstore owners and establishments to grant the discount will result in a loss of profit and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby drugstores will be justly compensated for the discount. Examining petitioners’ arguments, it is apparent that what petitioners are ultimately questioning is the validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount that they extend to senior citizens. Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse petitioners for the discount privilege accorded to senior citizens. This is because the discount is treated as a deduction, a tax-deductible expense that is subtracted from the gross income and results in a lower taxable income. Stated otherwise, it is an amount that is allowed by law to reduce the income prior to the application of the tax rate to compute the amount of tax which is due. Being a tax deduction, the discount does not reduce taxes owed on a peso for peso basis but merely offers a fractional reduction in taxes owed. Theoretically, the treatment of the discount as a deduction reduces the net income of the private establishments concerned. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments, were it not for R.A. No. 9257. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. This constitutes compensable taking for which petitioners would ordinarily become entitled to a just compensation. Just compensation is defined as the full and fair equivalent of the property taken from its owner by the expropriator. The measure is not the taker’s gain but the owner’s loss. The word just is used to intensify the meaning of the word compensation, and to convey the idea that the equivalent to be rendered for the property to be taken shall be real, substantial, full and ample. A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet the definition of just compensation. Having said that, this raises the question of whether the State, in promoting the health and welfare of a special group of citizens,

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can impose upon private establishments the burden of partly subsidizing a government program. The Court believes so.44

This, notwithstanding, we went on to rule in Carlos Superdrug Corporation45 that the 20% discount and tax deduction scheme is a valid exercise of the police power of the State. The present case, thus, affords an opportunity for us to clarify the above-quoted statements in Central Luzon Drug Corporation46 and Carlos Superdrug Corporation.47

First, we note that the above-quoted disquisition on eminent domain in Central Luzon Drug Corporation48 is obiter dicta and, thus, not binding precedent. As stated earlier, in Central Luzon Drug Corporation,49 we ruled that the BIR acted ultra vires when it effectively treated the 20% discount as a tax deduction, under Sections 2.i and 4 of RR No. 2-94, despite the clear wording of the previous law that the same should be treated as a tax credit. We were, therefore, not confronted in that case with the issue as to whether the 20% discount is an exercise of police power or eminent domain. Second, although we adverted to Central Luzon Drug Corporation50 in our ruling in Carlos Superdrug Corporation,51 this referred only to preliminary matters. A fair reading of Carlos Superdrug Corporation52would show that we categorically ruled therein that the 20% discount is a valid exercise of police power. Thus, even if the current law, through its tax deduction scheme (which abandoned the tax credit scheme under the previous law), does not provide for a peso for peso reimbursement of the 20% discount given by private establishments, no constitutional infirmity obtains because, being a valid exercise of police power, payment of just compensation is not warranted. We have carefully reviewed the basis of our ruling in Carlos Superdrug Corporation53 and we find no cogent reason to overturn, modify or abandon it. We also note that petitioners’ arguments are a mere reiteration of those raised and resolved in Carlos Superdrug Corporation.54 Thus, we sustain Carlos Superdrug Corporation.55

Nonetheless, we deem it proper, in what follows, to amplify our explanation in Carlos Superdrug Corporation56 as to why the 20% discount is a valid exercise of police power and why it may not, under the specific circumstances of this case, be considered as an exercise of the power of eminent domain contrary to the obiter in Central Luzon Drug Corporation.57

Police power versus eminent domain.

Police power is the inherent power of the State to regulate or to restrain the use of liberty and property for public welfare.58

The only limitation is that the restriction imposed should be reasonable, not oppressive.59

In other words, to be a valid exercise of police power, it must have a lawful subject or objective and a lawful method of accomplishing the goal.60

Under the police power of the State, "property rights of individuals may be subjected to restraints and burdens in order to fulfill the objectives of the government."61

The State "may interfere with personal liberty, property, lawful businesses and occupations to promote the general welfare [as long as] the interference [is] reasonable and not arbitrary."62

Eminent domain, on the other hand, is the inherent power of the State to take or appropriate private property for public use.63

The Constitution, however, requires that private property shall not be taken without due process of law and the payment of just compensation.64

Traditional distinctions exist between police power and eminent domain. In the exercise of police power, a property right is impaired by regulation,65 or the use of property is merely prohibited, regulated or restricted66 to promote public welfare. In such cases, there is no compensable taking, hence, payment of just compensation is not required. Examples of these regulations are property condemned for being noxious or intended for noxious purposes (e.g., a building on the verge of collapse to be demolished for public safety, or obscene materials to be destroyed in the interest of public morals)67 as well as zoning ordinances prohibiting the use of property for purposes injurious to the health, morals or safety of the community (e.g., dividing a city’s territory into residential and industrial areas).68

It has, thus, been observed that, in the exercise of police power (as distinguished from eminent domain), although the regulation affects the right of ownership, none of the bundle of rights which constitute ownership is appropriated for use by or for the benefit of the public.69

On the other hand, in the exercise of the power of eminent domain, property interests are appropriated and applied to some public purpose which necessitates the payment of just compensation therefor. Normally, the title to and possession of the property are transferred to the expropriating authority. Examples include the acquisition of lands for the construction of public highways as well as agricultural lands acquired by the government under the agrarian reform law for redistribution to qualified farmer beneficiaries. However, it is a settled rule that the acquisition of title or total destruction of the property is not essential for "taking" under the power of eminent domain to be present.70

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Examples of these include establishment of easements such as where the land owner is perpetually deprived of his proprietary rights because of the hazards posed by electric transmission lines constructed above his property71 or the compelled interconnection of the telephone system between the government and a private company.72

In these cases, although the private property owner is not divested of ownership or possession, payment of just compensation is warranted because of the burden placed on the property for the use or benefit of the public.

The 20% senior citizen discount is an exercise of police power.

It may not always be easy to determine whether a challenged governmental act is an exercise of police power or eminent domain. The very nature of police power as elastic and responsive to various social conditions73 as well as the evolving meaning and scope of public use74 and just compensation75 in eminent domain evinces that these are not static concepts. Because of the exigencies of rapidly changing times, Congress may be compelled to adopt or experiment with different measures to promote the general welfare which may not fall squarely within the traditionally recognized categories of police power and eminent domain. The judicious approach, therefore, is to look at the nature and effects of the challenged governmental act and decide, on the basis thereof, whether the act is the exercise of police power or eminent domain. Thus, we now look at the nature and effects of the 20% discount to determine if it constitutes an exercise of police power or eminent domain. The 20% discount is intended to improve the welfare of senior citizens who, at their age, are less likely to be gainfully employed, more prone to illnesses and other disabilities, and, thus, in need of subsidy in purchasing basic commodities. It may not be amiss to mention also that the discount serves to honor senior citizens who presumably spent the productive years of their lives on contributing to the development and progress of the nation. This distinct cultural Filipino practice of honoring the elderly is an integral part of this law. As to its nature and effects, the 20% discount is a regulation affecting the ability of private establishments to price their products and services relative to a special class of individuals, senior citizens, for which the Constitution affords preferential concern.76

In turn, this affects the amount of profits or income/gross sales that a private establishment can derive from senior citizens. In other words, the subject regulation affects the pricing, and, hence, the profitability of a private establishment. However, it does not purport to appropriate or burden specific properties, used in the operation or conduct of the business of private establishments, for the use or benefit of the public, or senior citizens for that matter, but merely regulates the pricing of goods and services relative to, and the amount of profits or income/gross sales that such private establishments may derive from, senior citizens. The

subject regulation may be said to be similar to, but with substantial distinctions from, price control or rate of return on investment control laws which are traditionally regarded as police power measures.77

These laws generally regulate public utilities or industries/enterprises imbued with public interest in order to protect consumers from exorbitant or unreasonable pricing as well as temper corporate greed by controlling the rate of return on investment of these corporations considering that they have a monopoly over the goods or services that they provide to the general public. The subject regulation differs therefrom in that (1) the discount does not prevent the establishments from adjusting the level of prices of their goods and services, and (2) the discount does not apply to all customers of a given establishment but only to the class of senior citizens. Nonetheless, to the degree material to the resolution of this case, the 20% discount may be properly viewed as belonging to the category of price regulatory measures which affect the profitability of establishments subjected thereto. On its face, therefore, the subject regulation is a police power measure. The obiter in Central Luzon Drug Corporation,78 however, describes the 20% discount as an exercise of the power of eminent domain and the tax credit, under the previous law, equivalent to the amount of discount given as the just compensation therefor. The reason is that (1) the discount would have formed part of the gross sales of the establishment were it not for the law prescribing the 20% discount, and (2) the permanent reduction in total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. The flaw in this reasoning is in its premise. It presupposes that the subject regulation, which impacts the pricing and, hence, the profitability of a private establishment, automatically amounts to a deprivation of property without due process of law. If this were so, then all price and rate of return on investment control laws would have to be invalidated because they impact, at some level, the regulated establishment’s profits or income/gross sales, yet there is no provision for payment of just compensation. It would also mean that overnment cannot set price or rate of return on investment limits, which reduce the profits or income/gross sales of private establishments, if no just compensation is paid even if the measure is not confiscatory. The obiter is, thus, at odds with the settled octrine that the State can employ police power measures to regulate the pricing of goods and services, and, hence, the profitability of business establishments in order to pursue legitimate State objectives for the common good, provided that the regulation does not go too far as to amount to "taking."79

In City of Manila v. Laguio, Jr.,80 we recognized that— x x x a taking also could be found if government regulation of the use of property went "too far." When regulation reaches a certain magnitude, in most if not in all cases there must be an exercise of eminent domain and compensation to support the act. While property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking. No formula or rule can be devised to answer the questions of what is too far and when

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regulation becomes a taking. In Mahon, Justice Holmes recognized that it was "a question of degree and therefore cannot be disposed of by general propositions." On many other occasions as well, the U.S. Supreme Court has said that the issue of when regulation constitutes a taking is a matter of considering the facts in each case. The Court asks whether justice and fairness require that the economic loss caused by public action must be compensated by the government and thus borne by the public as a whole, or whether the loss should remain concentrated on those few persons subject to the public action.81

The impact or effect of a regulation, such as the one under consideration, must, thus, be determined on a case-to-case basis. Whether that line between permissible regulation under police power and "taking" under eminent domain has been crossed must, under the specific circumstances of this case, be subject to proof and the one assailing the constitutionality of the regulation carries the heavy burden of proving that the measure is unreasonable, oppressive or confiscatory. The time-honored rule is that the burden of proving the unconstitutionality of a law rests upon the one assailing it and "the burden becomes heavier when police power is at issue."82

The 20% senior citizen discount has not been shown to be unreasonable, oppressive or confiscatory.

In Alalayan v. National Power Corporation,83 petitioners, who were franchise holders of electric plants, challenged the validity of a law limiting their allowable net profits to no more than 12% per annum of their investments plus two-month operating expenses. In rejecting their plea, we ruled that, in an earlier case, it was found that 12% is a reasonable rate of return and that petitioners failed to prove that the aforesaid rate is confiscatory in view of the presumption of constitutionality.84

We adopted a similar line of reasoning in Carlos Superdrug Corporation85 when we ruled that petitioners therein failed to prove that the 20% discount is arbitrary, oppressive or confiscatory. We noted that no evidence, such as a financial report, to establish the impact of the 20% discount on the overall profitability of petitioners was presented in order to show that they would be operating at a loss due to the subject regulation or that the continued implementation of the law would be unconscionably detrimental to the business operations of petitioners. In the case at bar, petitioners proceeded with a hypothetical computation of the alleged loss that they will suffer similar to what the petitioners in Carlos Superdrug Corporation86 did. Petitioners went directly to this Court without first establishing the factual bases of their claims. Hence, the present recourse must, likewise, fail. Because all laws enjoy the presumption of constitutionality, courts will uphold a law’s validity if any set of facts may be conceived to sustain it.87

On its face, we find that there are at least two conceivable bases to sustain the subject regulation’s validity absent clear and convincing proof that it is unreasonable, oppressive or confiscatory. Congress may have legitimately concluded that business establishments have the capacity to absorb a decrease in profits or income/gross sales due to the 20% discount without substantially affecting the reasonable rate of return on their investments considering (1) not all customers of a business establishment are senior citizens and (2) the level of its profit margins on goods and services offered to the general public. Concurrently, Congress may have, likewise, legitimately concluded that the establishments, which will be required to extend the 20% discount, have the capacity to revise their pricing strategy so that whatever reduction in profits or income/gross sales that they may sustain because of sales to senior citizens, can be recouped through higher mark-ups or from other products not subject of discounts. As a result, the discounts resulting from sales to senior citizens will not be confiscatory or unduly oppressive. In sum, we sustain our ruling in Carlos Superdrug Corporation88 that the 20% senior citizen discount and tax deduction scheme are valid exercises of police power of the State absent a clear showing that it is arbitrary, oppressive or confiscatory.

Conclusion

In closing, we note that petitioners hypothesize, consistent with our previous ratiocinations, that the discount will force establishments to raise their prices in order to compensate for its impact on overall profits or income/gross sales. The general public, or those not belonging to the senior citizen class, are, thus, made to effectively shoulder the subsidy for senior citizens. This, in petitioners’ view, is unfair.

As already mentioned, Congress may be reasonably assumed to have foreseen this eventuality. But, more importantly, this goes into the wisdom, efficacy and expediency of the subject law which is not proper for judicial review. In a way, this law pursues its social equity objective in a non-traditional manner unlike past and existing direct subsidy programs of the government for the poor and marginalized sectors of our society. Verily, Congress must be given sufficient leeway in formulating welfare legislations given the enormous challenges that the government faces relative to, among others, resource adequacy and administrative capability in implementing social reform measures which aim to protect and uphold the interests of those most vulnerable in our society. In the process, the individual, who enjoys the rights, benefits and privileges of living in a democratic polity, must bear his share in supporting measures intended for the common good. This is only fair. In fine, without the requisite showing of a clear and unequivocal breach of the Constitution, the validity of the assailed law must be sustained.

Refutation of the Dissent10

The main points of Justice Carpio’s Dissent may be summarized as follows: (1) the discussion on eminent domain in Central Luzon Drug Corporation89 is not obiter dicta ; (2) allowable taking, in police power, is limited to property that is destroyed or placed outside the commerce of man for public welfare; (3) the amount of mandatory discount is private property within the ambit of Article III, Section 990 of the Constitution; and (4) the permanent reduction in a private establishment’s total revenue, arising from the mandatory discount, is a taking of private property for public use or benefit, hence, an exercise of the power of eminent domain requiring the payment of just compensation. I We maintain that the discussion on eminent domain in Central Luzon Drug Corporation91 is obiter dicta. As previously discussed, in Central Luzon Drug Corporation,92 the BIR, pursuant to Sections 2.i and 4 of RR No. 2-94, treated the senior citizen discount in the previous law, RA 7432, as a tax deduction instead of a tax credit despite the clear provision in that law which stated –

SECTION 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the following:

a) The grant of twenty percent (20%) discount from all establishments relative to utilization of transportation services, hotels and similar lodging establishment, restaurants and recreation centers and purchase of medicines anywhere in the country: Provided, That private establishments may claim the cost as tax credit; (Emphasis supplied)

Thus, the Court ruled that the subject revenue regulation violated the law, viz:

The 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax deduction from the gross income or gross sale of the establishment concerned. A tax credit is used by a private establishment only after the tax has been computed; a tax deduction, before the tax is computed. RA 7432 unconditionally grants a tax credit to all covered entities. Thus, the provisions of the revenue regulation that withdraw or modify such grant are void. Basic is the rule that administrative regulations cannot amend or revoke the law.93

As can be readily seen, the discussion on eminent domain was not necessary in order to arrive at this conclusion. All that was needed was to point out that the revenue regulation contravened the law which it sought to implement. And, precisely, this was done in Central Luzon Drug Corporation94 by comparing the wording of the previous law vis-à-vis the revenue regulation; employing the rules of statutory construction; and applying the settled principle that a regulation cannot amend the law it seeks to implement. A close reading of Central Luzon Drug Corporation95 would show that the Court went on to state that the tax credit "can be deemed" as just compensation only to explain why the

previous law provides for a tax credit instead of a tax deduction. The Court surmised that the tax credit was a form of just compensation given to the establishments covered by the 20% discount. However, the reason why the previous law provided for a tax credit and not a tax deduction was not necessary to resolve the issue as to whether the revenue regulation contravenes the law. Hence, the discussion on eminent domain is obiter dicta.

A court, in resolving cases before it, may look into the possible purposes or reasons that impelled the enactment of a particular statute or legal provision. However, statements made relative thereto are not always necessary in resolving the actual controversies presented before it. This was the case in Central Luzon Drug Corporation96resulting in that unfortunate statement that the tax credit "can be deemed" as just compensation. This, in turn, led to the erroneous conclusion, by deductive reasoning, that the 20% discount is an exercise of the power of eminent domain. The Dissent essentially adopts this theory and reasoning which, as will be shown below, is contrary to settled principles in police power and eminent domain analysis. II The Dissent discusses at length the doctrine on "taking" in police power which occurs when private property is destroyed or placed outside the commerce of man. Indeed, there is a whole class of police power measures which justify the destruction of private property in order to preserve public health, morals, safety or welfare. As earlier mentioned, these would include a building on the verge of collapse or confiscated obscene materials as well as those mentioned by the Dissent with regard to property used in violating a criminal statute or one which constitutes a nuisance. In such cases, no compensation is required. However, it is equally true that there is another class of police power measures which do not involve the destruction of private property but merely regulate its use. The minimum wage law, zoning ordinances, price control laws, laws regulating the operation of motels and hotels, laws limiting the working hours to eight, and the like would fall under this category. The examples cited by the Dissent, likewise, fall under this category: Article 157 of the Labor Code, Sections 19 and 18 of the Social Security Law, and Section 7 of the Pag-IBIG Fund Law. These laws merely regulate or, to use the term of the Dissent, burden the conduct of the affairs of business establishments. In such cases, payment of just compensation is not required because they fall within the sphere of permissible police power measures. The senior citizen discount law falls under this latter category. III The Dissent proceeds from the theory that the permanent reduction of profits or income/gross sales, due to the 20% discount, is a "taking" of private property for public purpose without payment of just compensation. At the outset, it must be emphasized that petitioners never presented any evidence to establish that they were forced to suffer enormous losses or operate at a loss due to the effects of the assailed law. They came directly to this Court and provided a hypothetical computation of the loss they would allegedly suffer due to the operation of the assailed law. The central premise of the Dissent’s argument that the 20% discount results in a permanent reduction in

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profits or income/gross sales, or forces a business establishment to operate at a loss is, thus, wholly unsupported by competent evidence. To be sure, the Court can invalidate a law which, on its face, is arbitrary, oppressive or confiscatory.97

But this is not the case here.

In the case at bar, evidence is indispensable before a determination of a constitutional violation can be made because of the following reasons. First, the assailed law, by imposing the senior citizen discount, does not take any of the properties used by a business establishment like, say, the land on which a manufacturing plant is constructed or the equipment being used to produce goods or services. Second, rather than taking specific properties of a business establishment, the senior citizen discount law merely regulates the prices of the goods or services being sold to senior citizens by mandating a 20% discount. Thus, if a product is sold at P10.00 to the general public, then it shall be sold at P8.00 ( i.e., P10.00 less 20%) to senior citizens. Note that the law does not impose at what specific price the product shall be sold, only that a 20% discount shall be given to senior citizens based on the price set by the business establishment. A business establishment is, thus, free to adjust the prices of the goods or services it provides to the general public. Accordingly, it can increase the price of the above product to P20.00 but is required to sell it at P16.00 (i.e. , P20.00 less 20%) to senior citizens. Third, because the law impacts the prices of the goods or services of a particular establishment relative to its sales to senior citizens, its profits or income/gross sales are affected. The extent of the impact would, however, depend on the profit margin of the business establishment on a particular good or service. If a product costs P5.00 to produce and is sold at P10.00, then the profit98 is P5.0099 or a profit margin100 of 50%.101

Under the assailed law, the aforesaid product would have to be sold at P8.00 to senior citizens yet the business would still earn P3.00102 or a 30%103 profit margin. On the other hand, if the product costs P9.00 to produce and is required to be sold at P8.00 to senior citizens, then the business would experience a loss of P1.00.104

But note that since not all customers of a business establishment are senior citizens, the business establishment may continue to earn P1.00 from non-senior citizens which, in turn, can offset any loss arising from sales to senior citizens.

Fourth, when the law imposes the 20% discount in favor of senior citizens, it does not prevent the business establishment from revising its pricing strategy.

By revising its pricing strategy, a business establishment can recoup any reduction of profits or income/gross sales which would otherwise arise from the giving of the 20% discount. To illustrate, suppose A has two customers: X, a senior citizen, and Y, a non-senior citizen. Prior to the law, A sells his products at P10.00 a piece to X and Y resulting in income/gross sales of P20.00 (P10.00 + P10.00). With the passage of the law, A must now sell his product to X at P8.00 (i.e., P10.00 less 20%) so that his income/gross sales would be P18.00 (P8.00 + P10.00) or lower by P2.00. To prevent this from happening, A decides to increase the price of his products to P11.11 per piece. Thus, he sells his product to X at P8.89 (i.e. , P11.11 less 20%) and to Y at P11.11. As a result, his income/gross sales would still be P20.00105 (P8.89 + P11.11). The capacity, then, of business establishments to revise their pricing strategy makes it possible for them not to suffer any reduction in profits or income/gross sales, or, in the alternative, mitigate the reduction of their profits or income/gross sales even after the passage of the law. In other words, business establishments have the capacity to adjust their prices so that they may remain profitable even under the operation of the assailed law.

The Dissent, however, states that – The explanation by the majority that private establishments can always increase their prices to recover the mandatory discount will only encourage private establishments to adjust their prices upwards to the prejudice of customers who do not enjoy the 20% discount. It was likewise suggested that if a company increases its prices, despite the application of the 20% discount, the establishment becomes more profitable than it was before the implementation of R.A. 7432. Such an economic justification is self-defeating, for more consumers will suffer from the price increase than will benefit from the 20% discount. Even then, such ability to increase prices cannot legally validate a violation of the eminent domain clause.106

But, if it is possible that the business establishment, by adjusting its prices, will suffer no reduction in its profits or income/gross sales (or suffer some reduction but continue to operate profitably) despite giving the discount, what would be the basis to strike down the law? If it is possible that the business establishment, by adjusting its prices, will not be unduly burdened, how can there be a finding that the assailed law is an unconstitutional exercise of police power or eminent domain? That there may be a burden placed on business establishments or the consuming public as a result of the operation of the assailed law is not, by itself, a ground to declare it unconstitutional for this goes into the wisdom and expediency of the law.

The cost of most, if not all, regulatory measures of the government on business establishments is ultimately passed on to the consumers but that, by itself, does not justify the wholesale nullification of these measures. It is a basic postulate of our democratic system of government

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that the Constitution is a social contract whereby the people have surrendered their sovereign powers to the State for the common good.107

All persons may be burdened by regulatory measures intended for the common good or to serve some important governmental interest, such as protecting or improving the welfare of a special class of people for which the Constitution affords preferential concern. Indubitably, the one assailing the law has the heavy burden of proving that the regulation is unreasonable, oppressive or confiscatory, or has gone "too far" as to amount to a "taking." Yet, here, the Dissent would have this Court nullify the law without any proof of such nature.

Further, this Court is not the proper forum to debate the economic theories or realities that impelled Congress to shift from the tax credit to the tax deduction scheme. It is not within our power or competence to judge which scheme is more or less burdensome to business establishments or the consuming public and, thereafter, to choose which scheme the State should use or pursue. The shift from the tax credit to tax deduction scheme is a policy determination by Congress and the Court will respect it for as long as there is no showing, as here, that the subject regulation has transgressed constitutional limitations. Unavoidably, the lack of evidence constrains the Dissent to rely on speculative and hypothetical argumentation when it states that the 20% discount is a significant amount and not a minimal loss (which erroneously assumes that the discount automatically results in a loss when it is possible that the profit margin is greater than 20% and/or the pricing strategy can be revised to prevent or mitigate any reduction in profits or income/gross sales as illustrated above),108 and not all private establishments make a 20% profit margin (which conversely implies that there are those who make more and, thus, would not be greatly affected by this regulation).109

In fine, because of the possible scenarios discussed above, we cannot assume that the 20% discount results in a permanent reduction in profits or income/gross sales, much less that business establishments are forced to operate at a loss under the assailed law. And, even if we gratuitously assume that the 20% discount results in some degree of reduction in profits or income/gross sales, we cannot assume that such reduction is arbitrary, oppressive or confiscatory. To repeat, there is no actual proof to back up this claim, and it could be that the loss suffered by a business establishment was occasioned through its fault or negligence in not adapting to the effects of the assailed law. The law uniformly applies to all business establishments covered thereunder. There is, therefore, no unjust discrimination as the aforesaid business establishments are faced with the same constraints. The necessity of proof is all the more pertinent in this case because, as similarly observed by Justice Velasco in his Concurring Opinion, the law has been in operation for over nine years now. However, the grim picture painted by petitioners on the

unconscionable losses to be indiscriminately suffered by business establishments, which should have led to the closure of numerous business establishments, has not come to pass. Verily, we cannot invalidate the assailed law based on assumptions and conjectures. Without adequate proof, the presumption of constitutionality must prevail. IV At this juncture, we note that the Dissent modified its original arguments by including a new paragraph, to wit:

Section 9, Article III of the 1987 Constitution speaks of private property without any distinction. It does not state that there should be profit before the taking of property is subject to just compensation. The private property referred to for purposes of taking could be inherited, donated, purchased, mortgaged, or as in this case, part of the gross sales of private establishments. They are all private property and any taking should be attended by corresponding payment of just compensation. The 20% discount granted to senior citizens belong to private establishments, whether these establishments make a profit or suffer a loss. In fact, the 20% discount applies to non-profit establishments like country, social, or golf clubs which are open to the public and not only for exclusive membership. The issue of profit or loss to the establishments is immaterial.110

Two things may be said of this argument. First, it contradicts the rest of the arguments of the Dissent. After it states that the issue of profit or loss is immaterial, the Dissent proceeds to argue that the 20% discount is not a minimal loss111 and that the 20% discount forces business establishments to operate at a loss.112

Even the obiter in Central Luzon Drug Corporation,113 which the Dissent essentially adopts and relies on, is premised on the permanent reduction of total revenues and the loss that business establishments will be forced to suffer in arguing that the 20% discount constitutes a "taking" under the power of eminent domain. Thus, when the Dissent now argues that the issue of profit or loss is immaterial, it contradicts itself because it later argues, in order to justify that there is a "taking" under the power of eminent domain in this case, that the 20% discount forces business establishments to suffer a significant loss or to operate at a loss. Second, this argument suffers from the same flaw as the Dissent's original arguments. It is an erroneous characterization of the 20% discount. According to the Dissent, the 20% discount is part of the gross sales and, hence, private property belonging to business establishments. However, as previously discussed, the 20% discount is not private property actually owned and/or used by the business establishment. It should be distinguished from properties like lands or buildings actually used in the operation of a business establishment which, if appropriated for public use, would amount to a "taking" under the power of eminent domain. Instead, the 20% discount is a regulatory measure which impacts the pricing and, hence, the profitability of business establishments. At the

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time the discount is imposed, no particular property of the business establishment can be said to be "taken." That is, the State does not acquire or take anything from the business establishment in the way that it takes a piece of private land to build a public road. While the 20% discount may form part of the potential profits or income/gross sales114 of the business establishment, as similarly characterized by Justice Bersamin in his Concurring Opinion, potential profits or income/gross sales are not private property, specifically cash or money, already belonging to the business establishment. They are a mere expectancy because they are potential fruits of the successful conduct of the business. Prior to the sale of goods or services, a business establishment may be subject to State regulations, such as the 20% senior citizen discount, which may impact the level or amount of profits or income/gross sales that can be generated by such establishment. For this reason, the validity of the discount is to be determined based on its overall effects on the operations of the business establishment.

Again, as previously discussed, the 20% discount does not automatically result in a 20% reduction in profits, or, to align it with the term used by the Dissent, the 20% discount does not mean that a 20% reduction in gross sales necessarily results. Because (1) the profit margin of a product is not necessarily less than 20%, (2) not all customers of a business establishment are senior citizens, and (3) the establishment may revise its pricing strategy, such reduction in profits or income/gross sales may be prevented or, in the alternative, mitigated so that the business establishment continues to operate profitably. Thus, even if we gratuitously assume that some degree of reduction in profits or income/gross sales occurs because of the 20% discount, it does not follow that the regulation is unreasonable, oppressive or confiscatory because the business establishment may make the necessary adjustments to continue to operate profitably. No evidence was presented by petitioners to show otherwise. In fact, no evidence was presented by petitioners at all. Justice Leonen, in his Concurring and Dissenting Opinion, characterizes "profits" (or income/gross sales) as an inchoate right. Another way to view it, as stated by Justice Velasco in his Concurring Opinion, is that the business establishment merely has a right to profits. The Constitution adverts to it as the right of an enterprise to a reasonable return on investment.115

Undeniably, this right, like any other right, may be regulated under the police power of the State to achieve important governmental objectives like protecting the interests and improving the welfare of senior citizens. It should be noted though that potential profits or income/gross sales are relevant in police power and eminent domain analyses because they may, in appropriate cases, serve as an indicia when a regulation has gone "too far" as to amount to a "taking" under the power of eminent domain. When the deprivation or reduction of profits or income/gross sales is shown to be unreasonable, oppressive or confiscatory, then the challenged governmental regulation may be nullified for being a "taking" under the

power of eminent domain. In such a case, it is not profits or income/gross sales which are actually taken and appropriated for public use. Rather, when the regulation causes an establishment to incur losses in an unreasonable, oppressive or confiscatory manner, what is actually taken is capital and the right of the business establishment to a reasonable return on investment. If the business losses are not halted because of the continued operation of the regulation, this eventually leads to the destruction of the business and the total loss of the capital invested therein. But, again, petitioners in this case failed to prove that the subject regulation is unreasonable, oppressive or confiscatory.

V.

The Dissent further argues that we erroneously used price and rate of return on investment control laws to justify the senior citizen discount law. According to the Dissent, only profits from industries imbued with public interest may be regulated because this is a condition of their franchises. Profits of establishments without franchises cannot be regulated permanently because there is no law regulating their profits. The Dissent concludes that the permanent reduction of total revenues or gross sales of business establishments without franchises is a taking of private property under the power of eminent domain. In making this argument, it is unfortunate that the Dissent quotes only a portion of the ponencia – The subject regulation may be said to be similar to, but with substantial distinctions from, price control or rate of return on investment control laws which are traditionally regarded as police power measures. These laws generally regulate public utilities or industries/enterprises imbued with public interest in order to protect consumers from exorbitant or unreasonable pricing as well as temper corporate greed by controlling the rate of return on investment of these corporations considering that they have a monopoly over the goods or services that they provide to the general public. The subject regulation differs therefrom in that (1) the discount does not prevent the establishments from adjusting the level of prices of their goods and services, and (2) the discount does not apply to all customers of a given establishment but only to the class of senior citizens. x x x116

The above paragraph, in full, states –

The subject regulation may be said to be similar to, but with substantial distinctions from, price control or rate of return on investment control laws which are traditionally regarded as police power measures. These laws generally regulate public utilities or industries/enterprises imbued with public interest in order to protect consumers from exorbitant or unreasonable pricing as well as temper corporate greed by controlling the rate of return on investment of these corporations considering that they have a monopoly over the goods or services that they provide to the general public. The subject regulation differs therefrom in that (1) the

14

discount does not prevent the establishments from adjusting the level of prices of their goods and services, and (2) the discount does not apply to all customers of a given establishment but only to the class of senior citizens.

Nonetheless, to the degree material to the resolution of this case, the 20% discount may be properly viewed as belonging to the category of price regulatory measures which affects the profitability of establishments subjected thereto. (Emphasis supplied)

The point of this paragraph is to simply show that the State has, in the past, regulated prices and profits of business establishments. In other words, this type of regulatory measures is traditionally recognized as police power measures so that the senior citizen discount may be considered as a police power measure as well. What is more, the substantial distinctions between price and rate of return on investment control laws vis-à-vis the senior citizen discount law provide greater reason to uphold the validity of the senior citizen discount law. As previously discussed, the ability to adjust prices allows the establishment subject to the senior citizen discount to prevent or mitigate any reduction of profits or income/gross sales arising from the giving of the discount. In contrast, establishments subject to price and rate of return on investment control laws cannot adjust prices accordingly. Certainly, there is no intention to say that price and rate of return on investment control laws are the justification for the senior citizen discount law. Not at all. The justification for the senior citizen discount law is the plenary powers of Congress. The legislative power to regulate business establishments is broad and covers a wide array of areas and subjects. It is well within Congress’ legislative powers to regulate the profits or income/gross sales of industries and enterprises, even those without franchises. For what are franchises but mere legislative enactments? There is nothing in the Constitution that prohibits Congress from regulating the profits or income/gross sales of industries and enterprises without franchises. On the contrary, the social justice provisions of the Constitution enjoin the State to regulate the "acquisition, ownership, use, and disposition" of property and its increments.117

This may cover the regulation of profits or income/gross sales of all businesses, without qualification, to attain the objective of diffusing wealth in order to protect and enhance the right of all the people to human dignity.118

Thus, under the social justice policy of the Constitution, business establishments may be compelled to contribute to uplifting the plight of vulnerable or marginalized groups in our society provided that the regulation is not arbitrary, oppressive or confiscatory, or is not in breach of some specific constitutional limitation. When the Dissent, therefore, states that the "profits of private establishments which are non-

franchisees cannot be regulated permanently, and there is no such law regulating their profits permanently,"119 it is assuming what it ought to prove. First, there are laws which, in effect, permanently regulate profits or income/gross sales of establishments without franchises, and RA 9257 is one such law. And, second, Congress can regulate such profits or income/gross sales because, as previously noted, there is nothing in the Constitution to prevent it from doing so. Here, again, it must be emphasized that petitioners failed to present any proof to show that the effects of the assailed law on their operations has been unreasonable, oppressive or confiscatory. The permanent regulation of profits or income/gross sales of business establishments, even those without franchises, is not as uncommon as the Dissent depicts it to be. For instance, the minimum wage law allows the State to set the minimum wage of employees in a given region or geographical area. Because of the added labor costs arising from the minimum wage, a permanent reduction of profits or income/gross sales would result, assuming that the employer does not increase the prices of his goods or services. To illustrate, suppose it costs a company P5.00 to produce a product and it sells the same at P10.00 with a 50% profit margin. Later, the State increases the minimum wage. As a result, the company incurs greater labor costs so that it now costs P7.00 to produce the same product. The profit per product of the company would be reduced to P3.00 with a profit margin of 30%. The net effect would be the same as in the earlier example of granting a 20% senior citizen discount. As can be seen, the minimum wage law could, likewise, lead to a permanent reduction of profits. Does this mean that the minimum wage law should, likewise, be declared unconstitutional on the mere plea that it results in a permanent reduction of profits? Taking it a step further, suppose the company decides to increase the price of its product in order to offset the effects of the increase in labor cost; does this mean that the minimum wage law, following the reasoning of the Dissent, is unconstitutional because the consuming public is effectively made to subsidize the wage of a group of laborers, i.e., minimum wage earners? The same reasoning can be adopted relative to the examples cited by the Dissent which, according to it, are valid police power regulations. Article 157 of the Labor Code, Sections 19 and 18 of the Social Security Law, and Section 7 of the Pag-IBIG Fund Law would effectively increase the labor cost of a business establishment. This would, in turn, be integrated as part of the cost of its goods or services. Again, if the establishment does not increase its prices, the net effect would be a permanent reduction in its profits or income/gross sales. Following the reasoning of the Dissent that "any form of permanent taking of private property (including profits or income/gross sales)120 is an exercise of eminent domain that requires the State to pay just compensation,"121 then these statutory provisions would, likewise, have to be declared unconstitutional. It does not matter that these benefits are deemed part of the employees’ legislated wages because the net effect is the same, that is, it leads to higher labor costs and a permanent reduction in the profits or income/gross sales of the business establishments.122

15

The point then is this – most, if not all, regulatory measures imposed by the State on business establishments impact, at some level, the latter’s prices and/or profits or income/gross sales.123

If the Court were to sustain the Dissent’s theory, then a wholesale nullification of such measures would inevitably result. The police power of the State and the social justice provisions of the Constitution would, thus, be rendered nugatory. There is nothing sacrosanct about profits or income/gross sales. This, we made clear in Carlos Superdrug Corporation:124

Police power as an attribute to promote the common good would be diluted considerably if on the mere plea of petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated. Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of the provision in question, there is no basis for its nullification in view of the presumption of validity which every law has in its favor.

x x x x

The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing component of the business. While the Constitution protects property rights petitioners must the realities of business and the State, in the exercise of police power, can intervene in the operations of a business which may result in an impairment of property rights in the process.

Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the percept for the protection of property, various laws and jurisprudence, particularly on agrarian reform and the regulation of contracts and public utilities, continously serve as a reminder for the promotion of public good.

Undeniably, the success of the senior citizens program rests largely on the support imparted by petitioners and the other private establishments concerned. This being the case, the means employed in invoking the active participation of the private sector, in order to achieve the purpose or objective of the law, is reasonably and directly related. Without sufficient proof that Section 4(a) of R.A. No. 9257 is arbitrary, and that the continued implementation of the same would be unconscionably detrimental to petitioners, the Court will refrain form quashing a legislative act.125

In conclusion, we maintain that the correct rule in determining whether the subject regulatory measure has amounted to a "taking" under the power of eminent domain is the one laid down in Alalayan v. National

Power Corporation126 and followed in Carlos Superdurg Corporation127 consistent with long standing principles in police power and eminent domain analysis. Thus, the deprivation or reduction of profits or income. Gross sales must be clearly shown to be unreasonable, oppressive or confiscatory. Under the specific circumstances of this case, such determination can only be made upon the presentation of competent proof which petitioners failed to do. A law, which has been in operation for many years and promotes the welfare of a group accorded special concern by the Constitution, cannot and should not be summarily invalidated on a mere allegation that it reduces the profits or income/gross sales of business establishments.

WHEREFORE, the Petition is hereby DISMISSED for lack of merit.

SO ORDERED.

Republic of the PhilippinesSUPREME 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

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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.

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Section 43 of the Local Tax Code directs:

Within ten days after their approval, certified true copies of all provincial, city, municipal and barrioordinances 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

18

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

19

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 PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-75697 June 18, 1987

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

20

unemployment due to the shutdown of numerous moviehouses and theaters;

4. "WHEREAS, in order to ensure national economic recovery, it is imperative for the Government to create an environment conducive to growth and development of all business industries, including the movie industry which has an accumulated investment of about P3 Billion;

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

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

7. WHEREAS, civic-minded citizens and groups have called for remedial measures to curb these blatant malpractices which have flaunted our censorship and copyright laws;

8. WHEREAS, in the face of these grave emergencies corroding the moral values of the people and betraying the national economic recovery program, bold emergency measures must be adopted with dispatch; ... (Numbering of paragraphs supplied).

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

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

2. The tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in violation of the due process clause of the Constitution;

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

4. There is undue delegation of power and authority;

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

6. There is over regulation of the video industry as if it were a nuisance, which it is not.

We shall consider the foregoing objections in seriatim.

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

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

Section 10. Tax on Sale, Lease or Disposition of Videograms. — Notwithstanding any provision of law to the contrary, the province shall collect a tax of thirty percent (30%) of the purchase price or rental rate, as the case may be, for every sale, lease or disposition of a videogram containing a reproduction of any motion picture or audiovisual program. Fifty percent (50%) of the proceeds of the tax collected shall accrue to the province, and the other fifty percent (50%) shall acrrue to the municipality where the tax is collected; PROVIDED, That in Metropolitan Manila, the tax shall be shared equally by the City/Municipality and the Metropolitan Manila Commission.

21

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"

22

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 theprima 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

23

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.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-25043             April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and as judicial co-guardians of JOSE

ROXAS, petitioners, vs.

COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

Leido, Andrada, Perez and Associates for petitioners.Office of the Solicitor General for respondents.

BENGZON, J.P., J.:

Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by hereditary succession the following properties:

(1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu, Batangas province;

(2) A residential house and lot located at Wright St., Malate, Manila; and

(3) Shares of stocks in different corporations.

To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a partnership called Roxas y Compania.

AGRICULTURAL LANDS

At the conclusion of the Second World War, the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia. the parcels which they actually occupied. For its part, the Government, in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers, persuaded the Roxas brothers to part with their landholdings. Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the Government for distribution to actual occupants for a price of P2,079,048.47 plus P300,000.00 for survey and subdivision expenses.

It turned out however that the Government did not have funds to cover the purchase price, and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia. the amount of P1,500,000.00 as loan. Collateral for such loan were the lands proposed to be sold to the farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price but by installment, and contracted with the Rehabilitation Finance Corporation to pay its loan from the proceeds of the yearly amortizations paid by the farmers.

In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and P29,500.71. Fifty percent of said net gain was reported for income tax purposes as gain on the sale of capital asset held for more than one year pursuant to Section 34 of the Tax Code.

RESIDENTIAL HOUSE

During their bachelor days the Roxas brothers lived in the residential house at Wright St., Malate, Manila, which they inherited from their grandparents. After Antonio and Eduardo got married, they resided somewhere else leaving only Jose in the old house. In fairness to his brothers, Jose paid to Roxas y Cia. rentals for the house in the sum of P8,000.00 a year.

ASSESSMENTS

24

On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment of real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise penalty for late payment, and P150.00 tax for dealers of securities for 1952 plus P10.00 compromise penalty for late payment. The assessment for real estate dealer's tax was based on the fact that Roxas y Cia. received house rentals from Jose Roxas in the amount of P8,000.00. Pursuant to Sec. 194 of the Tax Code, an owner of a real estate who derives a yearly rental income therefrom in the amount of P3,000.00 or more is considered a real estate dealer and is liable to pay the corresponding fixed tax.

The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of securities against Roxas y Cia., on the fact that said partnership made profits from the purchase and sale of securities.

In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas Brothers for the years 1953 and 1955, as follows:

1953 1955Antonio Roxas P7,010.00 P5,813.00Eduardo Roxas 7,281.00 5,828.00Jose Roxas 6,323.00 5,588.00

The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the unreported 50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants, and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia. and the Roxas brothers. For the reason that Roxas y Cia. subdivided its Nasugbu farm lands and sold them to the farmers on installment, the Commissioner considered the partnership as engaged in the business of real estate, hence, 100% of the profits derived therefrom was taxed.

The following deductions were disallowed:

ROXAS Y CIA.:

1953

Tickets for Banquet in honor of           S. Osmeña

P 40.00

Gifts of San Miguel beer 28.00

Contributions to —

Philippine Air Force Chapel 100.00

Manila Police Trust Fund 150.00

Philippines Herald's fund for Manila's neediest families

100.00

1955

Contributions to Contribution to           Our Lady of Fatima Chapel, FEU 50.00

ANTONIO ROXAS:

1953

Contributions to —

Pasay City Firemen Christmas Fund 25.00

Pasay City Police Dept. X'mas fund 50.00

1955

Contributions to —

Baguio City Police Christmas fund 25.00

Pasay City Firemen Christmas fund 25.00

Pasay City Police Christmas fund 50.00

EDUARDO ROXAS:

1953

Contributions to —

Hijas de Jesus' Retiro de Manresa 450.00

Philippines Herald's fund for Manila's neediest families

100.00

195

25

5 Contributions to Philippines           Herald's fund for Manila's           neediest families

120.00

JOSE ROXAS:

1955

Contributions to Philippines           Herald's fund for Manila's           neediest families

120.00

The Roxas brothers protested the assessment but inasmuch as said protest was denied, they instituted an appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court heard the appeal and rendered judgment on July 31, 1965 sustaining the assessment except the demand for the payment of the fixed tax on dealer of securities and the disallowance of the deductions for contributions to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de Manresa. The Tax Court's judgment reads:

WHEREFORE, the decision appealed from is hereby affirmed with respect to petitioners Antonio Roxas, Eduardo Roxas, and Jose Roxas who are hereby ordered to pay the respondent Commissioner of Internal Revenue the amounts of P12,808.00, P12,887.00 and P11,857.00, respectively, as deficiency income taxes for the years 1953 and 1955, plus 5% surcharge and 1% monthly interest as provided for in Sec. 51(a) of the Revenue Code; and modified with respect to the partnership Roxas y Cia. in the sense that it should pay only P150.00, as real estate dealer's tax. With costs against petitioners.

Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of Internal Revenue did not appeal.

The issues:

(1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100% taxable?

(2) Are the deductions for business expenses and contributions deductible?

(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers?

The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a real estate dealer because it engaged in the business of selling real estate. The business activity alluded to was the act of subdividing the Nasugbu farm lands and selling them to the farmers-occupants on installment. To bolster his stand on the point, he cites one of the purposes of Roxas y Cia. as contained in its articles of partnership, quoted below:

4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer a ella en el futuro, alquilandoles por los plazos y demas condiciones, estime convenientes y vendiendo aquellas que a juicio de sus gerentes no deben conservarse;

The above-quoted purpose notwithstanding, the proposition of the Commissioner of Internal Revenue cannot be favorably accepted by Us in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees. Although they paid for their respective holdings in installment for a period of ten years, it would nevertheless not make the vendor Roxas y Cia. a real estate dealer during the ten-year amortization period.

It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with, but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless. It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among the farmers at very reasonable terms and prices. However, the Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's burden, went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself. For this magnanimous act, the municipal council of Nasugbu passed a resolution expressing the people's gratitude.

The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg". And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously. It does not conform with Our sense of justice in the instant case for the Government to persuade the taxpayer to lend it a helping hand and later on to penalize him for duly answering the urgent call.

In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34 of the Tax Code the lands sold

26

to the farmers are capital assets, and the gain derived from the sale thereof is capital gain, taxable only to the extent of 50%.

DISALLOWED DEDUCTIONS

Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in honor of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various persons. The deduction were claimed as representation expenses. Representation expenses are deductible from gross income as expenditures incurred in carrying on a trade or business under Section 30(a) of the Tax Code provided the taxpayer proves that they are reasonable in amount, ordinary and necessary, and incurred in connection with his business. In the case at bar, the evidence does not show such link between the expenses and the business of Roxas y Cia. The findings of the Court of Tax Appeals must therefore be sustained.

The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City Firemen, and Baguio City Police Christmas funds, Manila Police Trust Fund, Philippines Herald's fund for Manila's neediest families and Our Lady of Fatima chapel at Far Eastern University.

The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio City Police are not deductible for the reason that the Christmas funds were not spent for public purposes but as Christmas gifts to the families of the members of said entities. Under Section 39(h), a contribution to a government entity is deductible when used exclusively for public purposes. For this reason, the disallowance must be sustained. On the other hand, the contribution to the Manila Police trust fund is an allowable deduction for said trust fund belongs to the Manila Police, a government entity, intended to be used exclusively for its public functions.

The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed on the ground that the Philippines Herald is not a corporation or an association contemplated in Section 30 (h) of the Tax Code. It should be noted however that the contributions were not made to the Philippines Herald but to a group of civic spirited citizens organized by the Philippines Herald solely for charitable purposes. There is no question that the members of this group of citizens do not receive profits, for all the funds they raised were for Manila's neediest families. Such a group of citizens may be classified as an association organized exclusively for charitable purposes mentioned in Section 30(h) of the Tax Code.

Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima chapel at the Far Eastern University on the ground that the said university gives dividends to its stockholders. Located within the premises of the university, the chapel in question has not been shown

to belong to the Catholic Church or any religious organization. On the other hand, the lower court found that it belongs to the Far Eastern University, contributions to which are not deductible under Section 30(h) of the Tax Code for the reason that the net income of said university injures to the benefit of its stockholders. The disallowance should be sustained.

Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it, because although it earned a rental income of P8,000.00 per annum in 1952, said rental income came from Jose Roxas, one of the partners. Section 194 of the Tax Code, in considering as real estate dealers owners of real estate receiving rentals of at least P3,000.00 a year, does not provide any qualification as to the persons paying the rentals. The law, which states: 1äwphï1.ñët

. . . "Real estate dealer" includes any person engaged in the business of buying, selling, exchanging, leasing or renting property on his own account as principal and holding himself out as a full or part-time dealer in real estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of three thousand pesos or more a year: . . . (Emphasis supplied) .

is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or, this point is sustained.1äwphï1.ñët

To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and Jose Roxas. For 1955 they are liable to pay deficiency income tax in the sum of P109.00, P91.00 and P49.00, respectively, computed as follows: *

ANTONIO ROXAS

Net income per return P315,476.59

Add: 1/3 share, profits in Roxas y Cia.P 153,249.15

Less amount declared 146,135.46

Amount understated P 7,113.69

Contributions disallowed 115.0027

P 7,228.69

Less 1/3 share of contributions amounting to P21,126.06 disallowed from partnership but allowed to partners 7,042.02 186.67

Net income per reviewP315,663.26

Less: Exemptions 4,200.00

Net taxable incomeP311,463.26

Tax due 154,169.00

Tax paid 154,060.00

Deficiency P 109.00==========

EDUARDO ROXAS

Net income per returnP 304,166.92

Add: 1/3 share, profits in Roxas y CiaP 153,249.15

Less profits declared 146,052.58

Amount understated P 7,196.57

Less 1/3 share in contributions amounting to P21,126.06 disallowed

7,042.02 155.55

from partnership but allowed to partners

Net income per reviewP304,322.47

Less: Exemptions 4,800.00

Net taxable incomeP299,592.47

Tax Due P147,250.00

Tax paid 147,159.00

Deficiency P91.00===========

JOSE ROXAS

Net income per return P222,681.76

Add: 1/3 share, profits in Roxas y Cia. P153,429.15

Less amount reported 146,135.46

Amount understated 7,113.69

Less 1/3 share of contributions disallowed from partnership but allowed as deductions to partners 7,042.02 71.67

Net income per reviewP222,753.43

Less: Exemption 1,800.00

28

Net income subject to taxP220,953.43

Tax due P102,763.00

Tax paid 102,714.00

Deficiency P 49.00===========

WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered to pay the sum of P150.00 as real estate dealer's fixed tax for 1952, and Antonio Roxas, Eduardo Roxas and Jose Roxas are ordered to pay the respective sums of P109.00, P91.00 and P49.00 as their individual deficiency income tax all corresponding for the year 1955. No costs. So ordered.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

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, 

vs.J. ANTONIO ARANETA, as the Collector of Internal

Revenue, defendant-appellee.

Ernesto J. Gonzaga for appellant.Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor

General Guillermo E. Torres and Solicitor Felicisimo R. Rosete for appellee.

 

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-McDuffe 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."

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 manufactured; 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.

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 preferntial 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;lawphi1.net

29

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 adjourment 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 district 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 rehabilitate 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 or amounts needed for salaries, wages, travelling expenses, equipment, and other sundry expenses of said agency or agencies.

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 plaintiff's opinion is not a public purpose for which a tax may be constitutioally levied. The action having been dismissed by the Court of First Instance, the plaintifs appealed the case directly to this Court (Judiciary Act, section 17).

The basic defect in the plaintiff's 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 is 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 state's 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 lawmaking 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 vs. Kirkwood, 237 U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo, 103 Fla. 552, 139 So. 121).

As stated in Johnson vs. 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 state's wealth and therefore directly or indirectly affecting the welfare of so great a portion of the population of the State is affected to such an extent by public interests as to be within the police power of the sovereign. (128 Sp. 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 fully 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 levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the state's police power (Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 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

30

constitutional limitation" (Carmichael vs. 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; that the legislature is not required by the Constitution to adhere to a policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. 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. vs. 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 improvements 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 vs. 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 PhilippinesSUPREME 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.

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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.

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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,

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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

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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

35

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

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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 PhilippinesSUPREME 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.:

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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"

38

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:39

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.

x x x           x x x          x x x

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 thecomposite 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

40

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 PhilippinesSupreme Court

Manila

THIRD DIVISION

PLANTERS PRODUCTS, INC., G.R. No. 166006Petitioner,Present:YNARES-SANTIAGO, J.,

Chairperson,

AUSTRIA-MARTINEZ,- versus - CHICO-NAZARIO,

NACHURA, andREYES, JJ.

Promulgated:FERTIPHIL CORPORATION,

Respondent. March 14, 2008

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x D E C I S I O N  REYES, R.T., J.:  THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the constitutionality of statutes, executive orders, presidential decrees and other issuances.The Constitution vests that power not only in the Supreme Court but in all Regional Trial Courts. 

The principle is relevant in this petition for review on certiorari of the Decision[1] of the Court of Appeals (CA) affirming with modification

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that ofthe RTC in Makati City,[2] finding petitioner Planters Products, Inc. (PPI) liable to private respondent Fertiphil Corporation (Fertiphil) for the levies it paid under Letter of Instruction (LOI) No. 1465. The Facts 

Petitioner PPI and private respondent Fertiphil are private corporations incorporated under Philippine laws.[3] They are both engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals. 

On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which provided, among others, for the imposition of a capital recovery component (CRC) on the domestic sale of all grades of fertilizers in thePhilippines.[4] The LOI provides: 

3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a capital contribution component of not less than   P 10 per bag.   This capital contribution shall be collected until adequate capital is raised to make PPI viable. Such capital contribution shall be applied by FPA to all domestic sales of fertilizers in the Philippines.[5] (Underscoring supplied)

 Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it

sold in the domestic market to the Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount collected to the Far East Bank and Trust Company, the depositary bank of PPI.Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986.[6]

 After the 1986 Edsa Revolution, FPA voluntarily stopped the

imposition of theP10 levy. With the return of democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No. 1465, but PPI refused to accede to the demand.[7]

 Fertiphil filed a complaint for collection and damages[8] against

FPA and PPI with the RTC in Makati. It questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial of due process of law.[9] Fertiphil alleged that the LOI solely favored PPI, a privately owned corporation, which used the proceeds to maintain its monopoly of the fertilizer industry. 

In its Answer,[10] FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 was a valid exercise of the police power of the State in ensuring the stability of the fertilizer industry in the country. It also averred that Fertiphil did not sustain any damage from the

LOI because the burden imposed by the levy fell on the ultimate consumer, not the seller. RTC Disposition On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as follows: 

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff and against the defendant Planters Product, Inc., ordering the latter to pay the former:

 1) the sum of P6,698,144.00 with interest

at 12% from the time of judicial demand;

2) the sum of P100,000 as attorneys fees;3) the cost of suit. SO ORDERED.[11]

    Ruling that the imposition of the P10 CRC was an exercise of the States inherent power of taxation, the RTC invalidated the levy for violating the basic principle that taxes can only be levied for public purpose, viz.: 

It is apparent that the imposition of P10 per fertilizer bag sold in the country by LOI 1465 is purportedly in the exercise of the power of taxation. It is a settled principle that the power of taxation by the state is plenary. Comprehensive and supreme, the principal check upon its abuse resting in the responsibility of the members of the legislature to their constituents. However, there are two kinds of limitations on the power of taxation: the inherent limitations and the constitutional limitations. One of the inherent limitations is that a tax may be levied only for public purposes: 

The power to tax can be resorted to only for a constitutionally valid public purpose. By the same token, taxes may not be levied for purely private purposes, for building up of private fortunes, or for the redress of private wrongs. They cannot be levied for the improvement of

42

private property, or for the benefit, and promotion of private enterprises, except where the aid is incident to the public benefit. It is well-settled principle of constitutional law that no general tax can be levied except for the purpose of raising money which is to be expended for public use. Funds cannot be exacted under the guise of taxation to promote a purpose that is not of public interest. Without such limitation, the power to tax could be exercised or employed as an authority to destroy the economy of the people. A tax, however, is not held void on the ground of want of public interest unless the want of such interest is clear. (71 Am. Jur. pp. 371-372) 

In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the Fertilizer and Pesticide Authority pursuant to the P10 per bag of fertilizer sold imposition under LOI 1465 which, in turn, remitted the amount to the defendant Planters Products, Inc. thru the latters depository bank, Far East Bank and Trust Co. Thus, by virtue of LOI 1465 the plaintiff, Fertiphil Corporation, which is a private domestic corporation, became poorer by the amount of P6,698,144.00 and the defendant, Planters Product, Inc., another private domestic corporation, became richer by the amount of P6,698,144.00. Tested by the standards of constitutionality as set forth in the afore-quoted jurisprudence, it is quite evident that LOI 1465 insofar as it imposes the amount of P10 per fertilizer bag sold in the country and orders that the said amount should go to the defendant Planters Product, Inc. is unlawful because it violates the mandate that a tax can be levied only for a public purpose and not to benefit, aid and promote a private enterprise such as Planters Product, Inc.[12]

 PPI moved for reconsideration but its motion was denied. [13] PPI then filed a notice of appeal with the RTC but it failed to pay the requisite appeal docket fee. In a separate but related proceeding, this Court[14] allowed the appeal of PPI and remanded the case to the CA for proper disposition. CA Decision 

On November 28, 2003, the CA handed down its decision affirming with modification that of the RTC, with the following fallo: 

IN VIEW OF ALL THE FOREGOING, the decision appealed from is herebyAFFIRMED, subject to the MODIFICATION that the award of attorneys fees is hereby DELETED.[15]

 In affirming the RTC decision, the CA ruled that the lis mota of the complaint for collection was the constitutionality of LOI No. 1465, thus: 

The question then is whether it was proper for the trial court to exercise its power to judicially determine the constitutionality of the subject statute in the instant case. As a rule, where the controversy can be settled on other grounds, the courts will not resolve the constitutionality of a law (Lim v. Pacquing, 240 SCRA 649 [1995]). The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of political departments are valid, absent a clear and unmistakable showing to the contrary. However, the courts are not precluded from exercising such power when the following requisites are obtaining in a controversy before it: First, there must be before the court an actual case calling for the exercise of judicial review. Second, the question must be ripe for adjudication. Third, the person challenging the validity of the act must have standing to challenge. Fourth, the question of constitutionality must have been raised at the earliest opportunity; and lastly, the issue of constitutionality must be the very lis mota of the case (Integrated Bar of the Philippines v. Zamora, 338 SCRA 81 [2000]).

 Indisputably, the present case was primarily instituted for collection and damages.However, a perusal of the complaint also reveals that the instant action is founded on the claim that the levy imposed was an unlawful and unconstitutional special assessment. Consequently, the requisite that the constitutionality of the law in question be the very lis mota of the case is present, making it proper for the trial court to rule on the constitutionality of LOI 1465.[16]

 The CA held that even on the assumption that LOI No. 1465 was issued under the police power of the state, it is still unconstitutional because it did not promote public welfare. The CA explained:

43

 In declaring LOI 1465 unconstitutional, the trial

court held that the levy imposed under the said law was an invalid exercise of the States power of taxation inasmuch as it violated the inherent and constitutional prescription that taxes be levied only for public purposes.   It reasoned out that the amount collected under the levy was remitted to the depository bank of   PPI , which the latter used to advance its private interest. On the other hand, appellant submits that the subject statutes passage was a valid exercise of police power. In addition, it disputes the court a quos findings arguing that the collections under LOI 1465 was for the benefit of Planters Foundation, Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers, the stock ownership of PPI. Of the three fundamental powers of the State, the exercise of police power has been characterized as the most essential, insistent and the least limitable of powers, extending as it does to all the great public needs. It may be exercised as long as the activity or the property sought to be regulated has some relevance to public welfare (Constitutional Law, by Isagani A. Cruz, p. 38, 1995 Edition). Vast as the power is, however, it must be exercised within the limits set by the Constitution, which requires the concurrence of a lawful subject and a lawful method.Thus, our courts have laid down the test to determine the validity of a police measure as follows: (1) the interests of the public generally, as distinguished from those of a particular class, requires its exercise; and (2) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals (National Development Company v. Philippine Veterans Bank, 192 SCRA 257 [1990]). It is upon applying this established tests that We sustain the trial courts holding LOI 1465 unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the country is an undertaking imbued with public interest.   However, the method by which LOI 1465 sought to achieve this is by no means a measure that will promote the public welfare.   The governments commitment to support the successful rehabilitation and continued viability of PPI, a private corporation, is an

unmistakable attempt to mask the subject statutes impartiality.   There is no way to treat the self-interest of a favored entity,   like PPI, as identical with the general interest of the countrys farmers or even the Filipino people in general.   Well to stress, substantive due process exacts fairness and equal protection disallows distinction where none is needed. When a statutes public purpose is spoiled by private interest, the use of police power becomes a travesty which must be struck down for being an arbitrary exercise of government power. To rule in favor of appellant would contravene the general principle that revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private individuals.[17]

 The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for the benefit of Planters Foundation, Inc., a foundation created to hold in trust the stock ownership of PPI. The CA stated: 

Appellant next claims that the collections under LOI 1465 was for the benefit of Planters Foundation, Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers, the stock ownership of PFI on the strength of Letter of Undertaking (LOU) issued by then Prime Minister Cesar Virata on April 18, 1985 and affirmed by the Secretary of Justice in an Opinion dated October 12, 1987, to wit: 

2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in its fertilizer pricing formula a capital recovery component, the proceeds of which will be used initially for the purpose of funding the unpaid portion of the outstanding capital stock of Planters presently held in trust by Planters Foundation, Inc. (Planters Foundation), which unpaid capital is estimated at approximately P206 million (subject to validation by Planters and Planters Foundation) (such unpaid portion of the outstanding capital stock of Planters being hereafter referred to as the Unpaid Capital), and subsequently for such capital increases as may be required for the continuing viability of Planters. The capital recovery component shall be in the minimum amount of P10 per bag,

44

which will be added to the price of all domestic sales of fertilizer in the Philippines by any importer and/or fertilizer mother company. In this connection, the Republic hereby acknowledges that the advances by Planters to Planters Foundation which were applied to the payment of the Planters shares now held in trust by Planters Foundation, have been assigned to, among others, the Creditors. Accordingly, the Republic, through FPA, hereby agrees to deposit the proceeds of the capital recovery component in the special trust account designated in the notice dated April 2, 1985, addressed by counsel for the Creditors to Planters Foundation. Such proceeds shall be deposited by FPA on or before the 15th day of each month.   The capital recovery component shall continue to be charged and collected until payment in full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any carrying cost accruing from the date hereof on the amounts which may be outstanding from time to time of the Unpaid Capital and/or the Subsidy Receivables and (d) the capital increases contemplated in paragraph 2 hereof. For the purpose of the foregoing clause (c), the carrying cost shall be at such rate as will represent the full and reasonable cost to Planters of servicing its debts, taking into account both its peso and foreign currency-denominated obligations. (Records, pp. 42-43) 

Appellants proposition is open to question, to say the least. The LOU issued by then Prime Minister Virata taken together with the Justice Secretarys Opinion does not preponderantly demonstrate that the collections made were held in trust in favor of millions of farmers. Unfortunately for appellant, in the absence of sufficient evidence to establish its claims, this Court is

constrained to rely on what is explicitly provided in LOI 1465 that one of the primary aims in imposing the levy is to support the successful rehabilitation and continued viability of PPI.[18]

 PPI moved for reconsideration but its motion was denied.[19] It then

filed the present petition with this Court. Issues Petitioner PPI raises four issues for Our consideration, viz.: I

THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BE DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTION AND DAMAGES WHERE THE ISSUE OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR ENTITY WHICH   HASNO STANDING TO DO SO . IILOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE FERTILIZER SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT TO THE EXERCISE OF TAXATION   ANDPOLICE POWER FOR PUBLIC PURPOSES . IIITHE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS REMITTED TO THE GOVERNMENT,   AND   BECAME GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE   AND   VALIDLY ENACTED LAW WHICH IMPOSED DUTIES   AND   CONFERRED RIGHTS BY VIRTUE OF THE PRINCIPLE OF OPERATIVE   FACT  PRIOR TO ANY DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465. IVTHE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO APPLICATION IN THE INSTANT CASE.[20] (Underscoring supplied)

 Our Ruling We shall first tackle the procedural issues of locus standi and the jurisdiction of theRTC to resolve constitutional issues.

45

 Fertiphil has locus standi because it suffered direct injury; doctrine of standing is a mere procedural technicality which may be waived. 

PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465 because it does not have a personal and substantial interest in the case or will sustain direct injury as a result of its enforcement.[21] It asserts that Fertiphil did not suffer any damage from the CRC imposition because incidence of the levy fell on the ultimate consumer or the farmers themselves, not on the seller fertilizer company.[22]

 We cannot agree. The doctrine of locus standi or the right of

appearance in a court of justice has been adequately discussed by this Court in a catena of cases.Succinctly put, the doctrine requires a litigant to have a material interest in the outcome of a case. In private suits, locus standi requires a litigant to be a real party in interest, which is defined as the party who stands to be benefited or injured by the judgment in the suit or the party entitled to the avails of the suit.[23]

 In public suits, this Court recognizes the difficulty of applying the

doctrine especially when plaintiff asserts a public right on behalf of the general public because of conflicting public policy issues.  [24] On one end, there is the right of the ordinary citizen to petition the courts to be freed from unlawful government intrusion and illegal official action. At the other end, there is the public policy precluding excessive judicial interference in official acts, which may unnecessarily hinder the delivery of basic public services. 

In this jurisdiction, We have adopted the direct injury test to determine locus standi in public suits. In People v. Vera,[25] it was held that a person who impugns the validity of a statute must have a personal and substantial interest in the case such that he has sustained, or will sustain direct injury as a result. The direct injury test in public suits is similar to the real party in interest rule for private suits under Section 2, Rule 3 of the 1997 Rules of Civil Procedure.[26]

 Recognizing that a strict application of the direct injury test may

hamper public interest, this Court relaxed the requirement in cases of transcendental importance or with far reaching implications. Being a mere procedural technicality, it has also been held that locus standi may be waived in the public interest.[27]

  

  

Whether or not the complaint for collection is characterized as a private or public suit, Fertiphil has locus standi to file it. Fertiphil suffered a direct injury from the enforcement of LOI No. 1465. It was required, and it did pay, the P10 levy imposed for every bag of fertilizer sold on the domestic market. It may be true that Fertiphil has passed some or all of the levy to the ultimate consumer, but that does not disqualify it from attacking the constitutionality of the LOI or from seeking a refund. As seller, it bore the ultimate burden of paying the levy. It faced the possibility of severe sanctions for failure to pay the levy. The fact of payment is sufficient injury to Fertiphil. 

Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was compelled to factor in its product the levy. The levy certainly rendered the fertilizer products of Fertiphil and other domestic sellers much more expensive. The harm to their business consists not only in fewer clients because of the increased price, but also in adopting alternative corporate strategies to meet the demands of LOI No. 1465.Fertiphil and other fertilizer sellers may have shouldered all or part of the levy just to be competitive in the market. The harm occasioned on the business of Fertiphil is sufficient injury for purposes of locus standi. 

Even assuming arguendo that there is no direct injury, We find that the liberal policy consistently adopted by this Court on locus standi must apply. The issues raised by Fertiphil are of paramount public importance. It involves not only the constitutionality of a tax law but, more importantly, the use of taxes for public purpose.Former President Marcos issued LOI No. 1465 with the intention of rehabilitating an ailing private company. This is clear from the text of the LOI. PPI is expressly named in the LOI as the direct beneficiary of the levy. Worse, the levy was made dependent and conditional upon PPI becoming financially viable. The LOI provided that the capital contribution shall be collected until adequate capital is raised to make PPI viable. The constitutionality of the levy is already in doubt on a plain reading of the statute. It is Our constitutional duty to squarely resolve the issue as the final arbiter of all justiciable controversies. The doctrine of standing, being a mere procedural technicality, should be waived, if at all, to adequately thresh out an important constitutional issue. RTC may resolve constitutional issues; the constitutional issue was adequately raised in the complaint; it is the lis mota of the case. 

46

PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It asserts that the constitutionality of the LOI cannot be collaterally attacked in a complaint for collection.[28] Alternatively, the resolution of the constitutional issue is not necessary for a determination of the complaint for collection.[29]

 Fertiphil counters that the constitutionality of the LOI was

adequately pleaded in its complaint. It claims that the constitutionality of LOI No. 1465 is the very lis mota of the case because the trial court cannot determine its claim without resolving the issue.[30]

 It is settled that the RTC has jurisdiction to resolve the

constitutionality of a statute, presidential decree or an executive order. This is clear from Section 5, Article VIII of the 1987 Constitution, which provides:   

SECTION 5. The Supreme Court shall have the following powers: x x x x 

(2) Review, revise, reverse, modify, or affirm on appeal or   certiorari , as the law or the Rules of Court may provide, final judgments and orders of lower courts in: 

(a) All cases in which the constitutionality or validity of anytreaty, international or executive agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question. (Underscoring supplied)

 In Mirasol v. Court of Appeals,[31] this Court recognized the power

of the RTCto resolve constitutional issues, thus: 

On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to consider the constitutionality of a statute, presidential decree, or executive order. The Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or regulation not only in this Court, but in all Regional Trial Courts.[32]

 In the recent case of Equi-Asia Placement, Inc. v. Department of

Foreign Affairs,[33] this Court reiterated:

 There is no denying that regular courts have

jurisdiction over cases involving the validity or constitutionality of a rule or regulation issued by administrative agencies.Such jurisdiction, however, is not limited to the Court of Appeals or to this Court alone for even the regional trial courts can take cognizance of actions assailing a specific rule or set of rules promulgated by administrative bodies. Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or regulation in the courts, including the regional trial courts.[34]

 Judicial review of official acts on the ground of unconstitutionality

may be sought or availed of through any of the actions cognizable by courts of justice, not necessarily in a suit for declaratory relief. Such review may be had in criminal actions, as in People v. Ferrer[35] involving the constitutionality of the now defunct Anti-Subversion law, or in ordinary actions, as in Krivenko v. Register of Deeds[36]involving the constitutionality of laws prohibiting aliens from acquiring public lands.The constitutional issue, however, (a) must be properly raised and presented in the case,and (b) its resolution is necessary to a determination of the case, i.e., the issue of constitutionality must be the very lis mota presented.[37]

 Contrary to PPIs claim, the constitutionality of LOI No. 1465 was

properly and adequately raised in the complaint for collection filed with the RTC. The pertinent portions of the complaint allege: 

6. The CRC of P10 per bag levied under LOI 1465 on domestic sales of all grades of fertilizer in the Philippines, is unlawful, unjust, uncalled for, unreasonable, inequitable and oppressive because:x x x x

 (c) It favors only one private

domestic corporation, i.e., defendant PPPI, and imposed at the expense and disadvantage of the other fertilizer importers/distributors who were themselves in tight business situation and were then exerting all efforts and maximizing management and marketing skills to remain viable;

 x x x x

 47

(e) It was a glaring example of crony capitalism, a forced program through which the PPI, having been presumptuously masqueraded as the fertilizer industry itself, was the sole and anointed beneficiary;

 7. The CRC was an unlawful; and unconstitutional

special assessment and its imposition is tantamount to illegal exaction amounting to a denial of due process since the persons of entities which had to bear the burden of paying the   CRC   derived no benefit therefrom ; that on the contrary it was used by PPI in trying to regain its former despicable monopoly of the fertilizer industry to the detriment of other distributors and importers.[38] (Underscoring supplied)

 The constitutionality of LOI No. 1465 is also the very lis mota of

the complaint for collection. Fertiphil filed the complaint to compel PPI to refund the levies paid under the statute on the ground that the law imposing the levy is unconstitutional. The thesis is that an unconstitutional law is void. It has no legal effect. Being void, Fertiphil had no legal obligation to pay the levy. Necessarily, all levies duly paid pursuant to an unconstitutional law should be refunded under the civil code principle against unjust enrichment. The refund is a mere consequence of the law being declared unconstitutional. The RTC surely cannot order PPI to refund Fertiphil if it does not declare the LOI unconstitutional. It is the unconstitutionality of the LOI which triggers the refund. The issue of constitutionality is the very lis mota of the complaint with theRTC. The P10 levy under LOI No. 1465 is an exercise of the power of taxation. At any rate, the Court holds that the RTC and the CA did not err in ruling against the constitutionality of the LOI. 

PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of taxation. It claims that the LOI was implemented for the purpose of assuring the fertilizer supply and distribution in the country and for benefiting a foundation created by law to hold in trust for millions of farmers their stock ownership in PPI. 

Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a private company. The levy was imposed to pay the corporate debt of PPI.Fertiphil also argues that, even if the LOI is

enacted under the police power, it is still unconstitutional because it did not promote the general welfare of the people or public interest. 

Police power and the power of taxation are inherent powers of the State. These powers are distinct and have different tests for validity. Police power is the power of the State to enact legislation that may interfere with personal liberty or property in order to promote the general welfare,[39] while the power of taxation is the power to levy taxes to be used for public purpose. The main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue generation. The lawful subjects and lawful means tests are used to determine the validity of a law enacted under the police power.[40] The power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations. 

We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation power. While it is true that the power of taxation can be used as an implement of police power, [41] the primary purpose of the levy is revenue generation.If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax.[42]

 In Philippine Airlines, Inc. v. Edu,[43] it was held that the imposition

of a vehicle registration fee is not an exercise by the State of its police power, but of its taxation power, thus: 

It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61 of the Land Transportation and Traffic Code that the legislative intent and purpose behind the law requiring owners of vehicles to pay for their registration ismainly to raise funds for the construction and maintenance of highways and to a much lesser degree, pay for the operating expenses of the administering agency. x x x Fees may be properly regarded as taxes even though they also serve as an instrument of regulation.

 Taxation may be made the implement of the

state's police power (Lutz v. Araneta, 98 Phil. 148). If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. Such is the case of motor vehicle registration fees. The same provision appears as Section 59(b) in the Land Transportation Code. It is patent therefrom that the legislators had in mind a regulatory tax as the law refers to the imposition on the registration, operation or ownership of a motor vehicle as a tax or fee. x x x Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act

48

5448 need not be an additional tax. Rep. Act 4136 also speaks of other fees such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal to be revenue-raising. Thus, they are not mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle registration fee and chauffeurs license fee. Such fees are to go into the expenditures of the Land Transportation Commission as provided for in the last proviso of Sec. 61.[44] (Underscoring supplied)

 The P10 levy under LOI No. 1465 is too excessive to serve a mere

regulatory purpose. The levy, no doubt, was a big burden on the seller or the ultimate consumer. It increased the price of a bag of fertilizer by as much as five percent.[45] A plain reading of the LOI also supports the conclusion that the levy was for revenue generation. The LOI expressly provided that the levy was imposed until adequate capital is raised to make PPI viable. Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it was not for a public purpose. The levy was imposed to give undue benefit to PPI. 

An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public purpose. They cannot be used for purely private purposes or for the exclusive benefit of private persons.[46] The reason for this is simple. The power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be used only for a public purpose. It would be a robbery for the State to tax its citizens and use the funds generated for a private purpose. As an old United States case bluntly put it: To lay with one hand, the power of the government on the property of the citizen, and with the other to bestow it upon favored individuals to aid private enterprises and build up private fortunes, is nonetheless a robbery because it is done under the forms of law and is called taxation.[47]

 The term public purpose is not defined. It is an elastic concept

that can be hammered to fit modern standards. Jurisprudence states that public purpose should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social

justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform. 

While the categories of what may constitute a public purpose are continually expanding in light of the expansion of government functions, the inherent requirement that taxes can only be exacted for a public purpose still stands. Public purpose is the heart of a tax law. When a tax law is only a mask to exact funds from the public when its true intent is to give undue benefit and advantage to a private enterprise, that law will not satisfy the requirement of public purpose. 

The purpose of a law is evident from its text or inferable from other secondary sources. Here, We agree with the RTC and that CA that the levy imposed under LOI No. 1465 was not for a public purpose. 

First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. The purpose is explicit from Clause 3 of the law, thus: 

3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a capital contribution component of not less than   P 10 per bag.   This capital contribution shall be collected until adequate capital is raised to make PPI viable. Such capital contribution shall be applied by FPA to all domestic sales of fertilizers in the Philippines.[48] (Underscoring supplied)

   

It is a basic rule of statutory construction that the text of a statute should be given a literal meaning. In this case, the text of the LOI is plain that the levy was imposed in order to raise capital for PPI. The framers of the LOI did not even hide the insidious purpose of the law. They were cavalier enough to name PPI as the ultimate beneficiary of the taxes levied under the LOI. We find it utterly repulsive that a tax law would expressly name a private company as the ultimate beneficiary of the taxes to be levied from the public. This is a clear case of crony capitalism. 

Second, the LOI provides that the imposition of the P10 levy was conditional and dependent upon PPI becoming financially viable. This suggests that the levy was actually imposed to benefit PPI. The LOI notably does not fix a maximum amount when PPI is deemed financially viable. Worse, the liability of Fertiphil and other domestic sellers of fertilizer to pay the levy is made indefinite. They are required to continuously pay the levy until adequate capital is raised for PPI. 

Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and deposited by FPA to Far East Bank and Trust

49

Company, the depositary bank of PPI.[49] This proves that PPI benefited from the LOI. It is also proves that the main purpose of the law was to give undue benefit and advantage to PPI. 

Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of Understanding[50] dated May 18, 1985 signed by then Prime Minister Cesar Virata reveals that PPI was in deep financial problem because of its huge corporate debts. There were pending petitions for rehabilitation against PPI before the Securities and Exchange Commission. The government guaranteed payment of PPIs debts to its foreign creditors. To fund the payment, President Marcos issued LOI No. 1465. The pertinent portions of the letter of understanding read: 

Republic of the PhilippinesOffice of the Prime MinisterManila LETTER OF UNDERTAKING 

May 18, 1985

 TO: THE BANKING AND FINANCIAL INSTITUTIONSLISTED IN ANNEX A HERETO WHICH ARECREDITORS (COLLECTIVELY, THE CREDITORS)OF PLANTERS PRODUCTS, INC. (PLANTERS) Gentlemen: This has reference to Planters which is the principal importer and distributor of fertilizer, pesticides and agricultural chemicals in the Philippines. As regards Planters, the Philippine Government confirms its awareness of the following: (1) that Planters has outstanding obligations in foreign currency and/or pesos, to the Creditors, (2) thatPlanters is currently experiencing financial difficulties, and (3) that there are presently pending with the Securities and Exchange Commission of the Philippines a petition filed at Planters own behest for the suspension of payment of all its obligations, and a separate petition filed by Manufacturers Hanover Trust Company, Manila Offshore Branch for the appointment of a rehabilitation receiver for Planters. In connection with the foregoing, the Republic of the Philippines (the Republic) confirms that it considers and continues to consider Planters as a major fertilizer distributor. Accordingly, for and in consideration of your

expressed willingness to consider and participate in the effort to rehabilitate Planters, the Republic hereby manifests its full and unqualified support of the successful rehabilitation and continuing viability of Planters, and to that end, hereby binds and obligates itself to the creditors and Planters, as follows: x x x x 

2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in its fertilizer pricing formula a capital recovery component, the proceeds of which will be used initially for the purpose of funding the unpaid portion of the outstanding capital stock of Planters presently held in trust by Planters Foundation, Inc. (Planters Foundation), which unpaid capital is estimated at approximately P206 million (subject to validation by Planters and Planters Foundation) such unpaid portion of the outstanding capital stock of Planters being hereafter referred to as the Unpaid Capital), and subsequently for such capital increases as may be required for the continuing viability of Planters. x x x x 

The capital recovery component shall continue to be charged and collected until payment in full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any carrying cost accruing from the date hereof on the amounts which may be outstanding from time to time of the Unpaid Capital and/or the Subsidy Receivables, and (d) the capital increases contemplated in paragraph 2 hereof.For the purpose of the foregoing clause (c), the carrying cost shall be at such rate as will represent the full and reasonable cost to Planters of servicing its debts, taking into account both its peso and foreign currency-denominated obligations. 

REPUBLIC OF THE PHILIPPINESBy:(signed)CESAR E. A. VIRATA

Prime Minister and Minister of Finance[51]

 It is clear from the Letter of Understanding that the levy was

imposed precisely to pay the corporate debts of PPI. We cannot agree with PPI that the levy was imposed to ensure the stability of the fertilizer

50

industry in the country. The letter of understanding and the plain text of the LOI clearly indicate that the levy was exacted for the benefit of a private corporation. 

All told, the RTC and the CA did not err in holding that the levy imposed under LOI No. 1465 was not for a public purpose. LOI No. 1465 failed to comply with the public purpose requirement for tax laws. The LOI is still unconstitutional even if enacted under the police power; it did not promote public interest. Even if We consider LOI No. 1695 enacted under the police power of the State, it would still be invalid for failing to comply with the test of lawful subjects and lawful means. Jurisprudence states the test as follows: (1) the interest of the public generally, as distinguished from those of particular class, requires its exercise; and (2) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals.[52]

For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote public interest. The law was enacted to give undue advantage to a private corporation.We quote with approval the CA ratiocination on this point, thus: 

It is upon applying this established tests that We sustain the trial courts holding LOI 1465 unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the country is an undertaking imbued with public interest. However, the method by which LOI 1465 sought to achieve this is by no means a measure that will promote the public welfare. The governments commitment to support the successful rehabilitation and continued viability of PPI, a private corporation, is an unmistakable attempt to mask the subject statutes impartiality.   There is no way to treat the self-interest of a favored entity, like PPI, as identical with the general interest of the countrys farmers or even the Filipino people in general. Well to stress, substantive due process exacts fairness and equal protection disallows distinction where none is needed.When a statutes public purpose is spoiled by private interest, the use of police power becomes a travesty which must be struck down for being an arbitrary exercise of government power. To rule in favor of appellant would contravene the general principle that revenues derived from taxes cannot be used for

purely private purposes or for the exclusive benefit of private individuals. (Underscoring supplied)

 The general rule is that an unconstitutional law is void; the doctrine of operative fact is inapplicable. 

PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared unconstitutional. It banks on the doctrine of operative fact, which provides that an unconstitutional law has an effect before being declared unconstitutional. PPI wants to retain the levies paid under LOI No. 1465 even if it is subsequently declared to be unconstitutional. 

We cannot agree. It is settled that no question, issue or argument will be entertained on appeal, unless it has been raised in the court a quo.[53] PPI did not raise the applicability of the doctrine of operative fact with the RTC and the CA. It cannot belatedly raise the issue with Us in order to extricate itself from the dire effects of an unconstitutional law. 

At any rate, We find the doctrine inapplicable. The general rule is that an unconstitutional law is void. It produces no rights, imposes no duties and affords no protection. It has no legal effect. It is, in legal contemplation, inoperative as if it has not been passed.[54] Being void, Fertiphil is not required to pay the levy. All levies paid should be refunded in accordance with the general civil code principle against unjust enrichment. The general rule is supported by Article 7 of the Civil Code, which provides: 

ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance shall not be excused by disuse or custom or practice to the contrary.

 When the courts declare a law to be inconsistent

with the Constitution, the former shall be void and the latter shall govern.

 The doctrine of operative fact, as an exception to the general rule,

only applies as a matter of equity and fair play.[55] It nullifies the effects of an unconstitutional law by recognizing that the existence of a statute prior to a determination of unconstitutionality is an operative fact and may have consequences which cannot always be ignored. The past cannot always be erased by a new judicial declaration.[56]

 The doctrine is applicable when a declaration of

unconstitutionality will impose an undue burden on those who have relied on the invalid law. Thus, it was applied to a criminal case when a declaration of unconstitutionality would put the accused in double

51

jeopardy[57] or would put in limbo the acts done by a municipality in reliance upon a law creating it.[58]

 Here, We do not find anything iniquitous in ordering PPI to refund

the amounts paid by Fertiphil under LOI No. 1465. It unduly benefited from the levy. It was proven during the trial that the levies paid were remitted and deposited to its bank account.Quite the reverse, it would be inequitable and unjust not to order a refund. To do so would unjustly enrich PPI at the expense of Fertiphil. Article 22 of the Civil Code explicitly provides that every person who, through an act of performance by another comes into possession of something at the expense of the latter without just or legal ground shall return the same to him. We cannot allow PPI to profit from an unconstitutional law. Justice and equity dictate that PPI must refund the amounts paid by Fertiphil. WHEREFORE, the petition is DENIED. The Court of Appeals Decision datedNovember 28, 2003 is AFFIRMED.

EN BANC  ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S. ALBANO,

G.R. No. 168056

Petitioners, Present:DAVIDE, JR., C . J .,PUNO,PANGANIBAN,QUISUMBING,YNARES-SANTIAGO,SANDOVAL-GUTIERREZ,

- versus - CARPIO,AUSTRIA-MARTINEZ

,CORONA,CARPIO-MORALES,CALLEJO, SR.,AZCUNA,TINGA,CHICO-NAZARIO, andGARCIA, JJ.

THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY OF THE DEPARTMENT OF FINANCE CESAR PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR.,Respondents.x - - - - - - - - - - - - - - - - - - - - - - - - - xAQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. ESTRADA, PANFILO M. LACSON, ALFREDO S. LIM, JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEA III,

G.R. No. 168207

Petitioners,- versus -EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA, SECRETARY OF FINANCE, GUILLERMO L. PARAYNO, JR., COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE,Respondents.x - - - - - - - - - - - - - - - - - - - - - - - - - xASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its President, ROSARIO ANTONIO; PETRON DEALERS ASSOCIATION represented by its President, RUTH E. BARBIBI; ASSOCIATION OF CALTEX DEALERS OF THE PHILIPPINES represented by its President, MERCEDITAS A. GARCIA; ROSARIO ANTONIO doing business under the name and style of ANB NORTH SHELL SERVICE STATION; LOURDES MARTINEZ doing business under the name and style of SHELL GATE N. DOMINGO; BETHZAIDA TAN doing business under the name and style of ADVANCE SHELL STATION; REYNALDO P. MONTOYA doing business under the name and style of NEW LAMUAN SHELL SERVICE STATION; EFREN SOTTO

G.R. No. 168461

52

doing business under the name and style of RED FIELD SHELL SERVICE STATION; DONICA CORPORATION represented by its President, DESI TOMACRUZ; RUTH E. MARBIBI doing business under the name and style of R&R PETRON STATION; PETER M. UNGSON doing business under the name and style of CLASSIC STAR GASOLINE SERVICE STATION; MARIAN SHEILA A. LEE doing business under the name and style of NTE GASOLINE & SERVICE STATION; JULIAN CESAR P. POSADAS doing business under the name and style of STARCARGA ENTERPRISES; ADORACION MAEBO doing business under the name and style of CMA MOTORISTS CENTER; SUSAN M. ENTRATA doing business under the name and style of LEONAS GASOLINE STATION and SERVICE CENTER; CARMELITA BALDONADO doing business under the name and style of FIRST CHOICE SERVICE CENTER; MERCEDITAS A. GARCIA doing business under the name and style of LORPED SERVICE CENTER; RHEAMAR A. RAMOS doing business under the name and style of RJRAM PTT GAS STATION; MA. ISABEL VIOLAGO doing business under the name and style of VIOLAGO-PTT SERVICE CENTER; MOTORISTS HEART CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; MOTORISTS HARVARD CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; MOTORISTS HERITAGE CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; PHILIPPINE STANDARD OIL CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; ROMEO MANUEL doing business under the name and style of ROMMAN GASOLINE STATION; ANTHONY ALBERT CRUZ III doing business under the name and style of TRUE SERVICE STATION,Petitioners,- versus -CESAR V. PURISIMA, in his capacity as Secretary of the Department of Finance and GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of Internal Revenue,Respondents.x - - - - - - - - - - - - - - - - - - - - - - - - - xFRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA, RODOLFO G. PLAZA, DARLENE ANTONINO-

G.R. No. 168463

CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C. AGARAO, JR. JUAN EDGARDO M. ANGARA, JUSTIN MARC SB. CHIPECO, FLORENCIO G. NOEL, MUJIV S. HATAMAN, RENATO B. MAGTUBO, JOSEPH A. SANTIAGO, TEOFISTO DL. GUINGONA III, RUY ELIAS C. LOPEZ, RODOLFO Q. AGBAYANI and TEODORO A. CASIO,Petitioners,- versus -

CESAR V. PURISIMA, in his capacity as Secretary of Finance, GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of Internal Revenue, and EDUARDO R. ERMITA, in his capacity as Executive Secretary,

Respondents.x - - - - - - - - - - - - - - - - - - - - - - - - - xBATAAN GOVERNOR ENRIQUE T. GARCIA, JR. G.R. No.

168730Petitioner,- versus -HON. EDUARDO R. ERMITA, in his capacity as the Executive Secretary; HON. MARGARITO TEVES, in his capacity as Secretary of Finance; HON. JOSE MARIO BUNAG, in his capacity as the OIC Commissioner of the Bureau of Internal Revenue; and HON. ALEXANDER AREVALO, in his capacity as the OIC Commissioner of the Bureau of Customs,

Promulgated:

Respondents. September 1, 2005

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x  D E C I S I O N  AUSTRIA-MARTINEZ, J.:

53

  

The expenses of government, having for their object the interest of all, should be borne by everyone, and the more man enjoys the advantages of society, the more he ought to hold himself honored in contributing to those expenses.-Anne Robert Jacques Turgot (1727-1781)French statesman and economist Mounting budget deficit, revenue generation, inadequate fiscal

allocation for education, increased emoluments for health workers, and wider coverage for full value-added tax benefits these are the reasons why Republic Act No. 9337 (R.A. No. 9337)[1]was enacted. Reasons, the wisdom of which, the Court even with its extensive constitutional power of review, cannot probe. The petitioners in these cases, however, question not only the wisdom of the law, but also perceived constitutional infirmities in its passage.

 Every law enjoys in its favor the presumption of constitutionality.

Their arguments notwithstanding, petitioners failed to justify their call for the invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional.

 LEGISLATIVE HISTORY

 R.A. No. 9337 is a consolidation of three legislative bills namely,

House Bill Nos. 3555 and 3705, and Senate Bill No. 1950. House Bill No. 3555[2] was introduced on first reading

on January 7, 2005. The House Committee on Ways and Means approved the bill, in substitution of House Bill No. 1468, which Representative (Rep.) Eric D. Singson introduced on August 8, 2004. The President certified the bill on January 7, 2005 for immediate enactment. On January 27, 2005, the House of Representatives approved the bill on second and third reading.

 House Bill No. 3705[3] on the other hand, substituted House Bill

No. 3105 introduced by Rep. Salacnib F. Baterina, and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its mother bill is House Bill No. 3555. The House Committee on Ways and Means approved the bill on February 2, 2005. The President also certified it as urgent on February 8, 2005. The House of Representatives approved the bill on second and third reading on February 28, 2005.

 Meanwhile, the Senate Committee on Ways and Means

approved Senate Bill No. 1950[4] on March 7, 2005, in substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into consideration House Bill Nos. 3555 and 3705. Senator Ralph G. Recto sponsored Senate Bill No.

1337, while Senate Bill Nos. 1838 and 1873 were both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The President certified the bill on March 11, 2005, and was approved by the Senate on second and third reading on April 13, 2005.

 On the same date, April 13, 2005, the Senate agreed to the

request of the House of Representatives for a committee conference on the disagreeing provisions of the proposed bills.

 Before long, the Conference Committee on the Disagreeing

Provisions of House Bill No. 3555, House Bill No. 3705, and Senate Bill No. 1950, after having met and discussed in full free and conference, recommended the approval of its report, which the Senate did on May 10, 2005, and with the House of Representatives agreeing thereto the next day, May 11, 2005.

 On May 23, 2005, the enrolled copy of the consolidated House

and Senate version was transmitted to the President, who signed the same into law on May 24, 2005. Thus, came R.A. No. 9337.

 July 1, 2005 is the effectivity date of R.A. No. 9337.[5] When said

date came, the Court issued a temporary restraining order, effective immediately and continuing until further orders, enjoining respondents from enforcing and implementing the law.

 Oral arguments were held on July 14, 2005. Significantly, during

the hearing, the Court speaking through Mr. Justice Artemio V. Panganiban, voiced the rationale for its issuance of the temporary restraining order on July 1, 2005, to wit:

J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little background. You know when the law took effect on July 1, 2005, the Court issued a TRO at about 5 oclock in the afternoon. But before that, there was a lot of complaints aired on television and on radio. Some people in a gas station were complaining that the gas prices went up by 10%. Some people were complaining that their electric bill will go up by 10%. Other times people riding in domestic air carrier were complaining that the prices that theyll have to pay would have to go up by 10%. While all that was being aired, per your presentation and per our own understanding of

54

the law, thats not true. Its not true that the e-vat law necessarily increased prices by 10% uniformly isnt it?

 ATTY. BANIQUED : No, Your Honor. J. PANGANIBAN : It is not? ATTY. BANIQUED : Its not, because, Your Honor, there is

an Executive Order that granted the Petroleum companies some subsidy . . . interrupted

  J. PANGANIBAN : Thats correct . . . ATTY. BANIQUED : . . . and therefore that was meant to

temper the impact . . . interrupted  J. PANGANIBAN : . . . mitigating measures . . . ATTY. BANIQUED : Yes, Your Honor. J. PANGANIBAN : As a matter of fact a part of the

mitigating measures would be the elimination of the Excise Tax and the import duties. That is why, it is not correct to say that the VAT as to petroleum dealers increased prices by 10%.

 ATTY. BANIQUED : Yes, Your Honor. J. PANGANIBAN : And therefore, there is no justification for

increasing the retail price by 10% to cover the E-Vat tax. If you consider the excise tax and the import duties, the Net Tax would probably be in the neighborhood of 7%? We are not going into exact figures I am just trying to deliver a point that different industries, different products, different services are hit differently. So its not correct to say that all prices must go up by 10%.

ATTY. BANIQUED : Youre right, Your Honor.  J. PANGANIBAN : Now. For instance, Domestic Airline

companies, Mr. Counsel, are at present imposed a Sales Tax of 3%. When this E-Vat law took effect the Sales Tax was also removed as a mitigating measure. So, therefore, there is no justification to increase the fares by 10% at best 7%, correct?

 ATTY. BANIQUED : I guess so, Your Honor, yes. J. PANGANIBAN : There are other products that the people

were complaining on that first day, were being increased arbitrarily by 10%. And thats one reason among many others this Court had to issue TRO because of the confusion in the implementation. Thats why we added as an issue in this case, even if its tangentially taken up by the pleadings of the parties, the confusion in the implementation of the E-vat. Our people were subjected to the mercy of that confusion of an across the board increase of 10%, which you yourself now admit and I think even the Government will admit is incorrect. In some cases, it should be 3% only, in some cases it should be 6% depending on these mitigating measures and the location and situation of each product, of each service, of each company, isnt it?

 ATTY. BANIQUED : Yes, Your Honor. J. PANGANIBAN : Alright. So thats one reason why we had

to issue a TRO pending the clarification of all these and we wish the government will take time to clarify all these by means of a more detailed implementing

55

rules, in case the law is upheld by this Court. . . .[6]

  

The Court also directed the parties to file their respective Memoranda.

 G.R. No. 168056

 Before R.A. No. 9337 took effect, petitioners ABAKADA

GURO Party List, et al., filed a petition for prohibition on May 27, 2005. They question the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6 imposes a 10% VAT on sale of services and use or lease of properties. These questioned provisions contain a uniform proviso authorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after any of the following conditions have been satisfied, to wit:

 . . . That the President, upon the recommendation

of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:

 (i) Value-added tax collection as a percentage of

Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or

 (ii) National government deficit as a percentage of

GDP of the previous year exceeds one and one-half percent (1 %).  Petitioners argue that the law is unconstitutional, as it constitutes

abandonment by Congress of its exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution.

 G.R. No. 168207

 On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a

petition forcertiorari likewise assailing the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.

Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to 12%, on the ground that it amounts to an undue delegation of legislative power, petitioners also contend that the increase in the VAT rate to 12% contingent on any of the two

conditions being satisfied violates the due process clause embodied in Article III, Section 1 of the Constitution, as it imposes an unfair and additional tax burden on the people, in that: (1) the 12% increase is ambiguous because it does not state if the rate would be returned to the original 10% if the conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as the people are unsure of the applicable VAT rate from year to year; and (3) the increase in the VAT rate, which is supposed to be an incentive to the President to raise the VAT collection to at least 2 4/5of the GDP of the previous year, should only be based on fiscal adequacy.

 Petitioners further claim that the inclusion of a stand-by

authority granted to the President by the Bicameral Conference Committee is a violation of the no-amendment rule upon last reading of a bill laid down in Article VI, Section 26(2) of the Constitution.

 G.R. No. 168461 

Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell Dealers, Inc., et al., assailing the following provisions of R.A. No. 9337:

1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable goods shall be amortized over a 60-month period, if the acquisition, excluding the VAT components, exceeds One Million Pesos (P1, 000,000.00);

 2) Section 8, amending Section 110 (B) of the NIRC,

imposing a 70% limit on the amount of input tax to be credited against the output tax; and

 3) Section 12, amending Section 114 (c) of the NIRC,

authorizing the Government or any of its political subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5% final withholding tax on gross payments of goods and services, which are subject to 10% VAT under Sections 106 (sale of goods and properties) and 108 (sale of services and use or lease of properties) of the NIRC.

  Petitioners contend that these provisions are unconstitutional for

being arbitrary, oppressive, excessive, and confiscatory. Petitioners argument is premised on the constitutional right of

non-deprivation of life, liberty or property without due process of law under Article III, Section 1 of the Constitution. According to petitioners, the contested sections impose limitations on the amount of input tax that

56

may be claimed. Petitioners also argue that the input tax partakes the nature of a property that may not be confiscated, appropriated, or limited without due process of law. Petitioners further contend that like any other property or property right, the input tax credit may be transferred or disposed of, and that by limiting the same, the government gets to tax a profit or value-added even if there is no profit or value-added.

 Petitioners also believe that these provisions violate the

constitutional guarantee of equal protection of the law under Article III, Section 1 of the Constitution, as the limitation on the creditable input tax if: (1) the entity has a high ratio of input tax; or (2) invests in capital equipment; or (3) has several transactions with the government, is not based on real and substantial differences to meet a valid classification.

 Lastly, petitioners contend that the 70% limit is anything but

progressive, violative of Article VI, Section 28(1) of the Constitution, and that it is the smaller businesses with higher input tax to output tax ratio that will suffer the consequences thereof for it wipes out whatever meager margins the petitioners make.

 G.R. No. 168463

 Several members of the House of Representatives led by Rep.

Francis Joseph G. Escudero filed this petition for certiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on the following grounds:

 1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an

undue delegation of legislative power, in violation of Article VI, Section 28(2) of the Constitution;

 2) The Bicameral Conference Committee acted without

jurisdiction in deleting the no pass on provisions present in Senate Bill No. 1950 and House Bill No. 3705; and

 3) Insertion by the Bicameral Conference Committee of

Sections 27, 28, 34, 116, 117, 119, 121, 125,[7] 148, 151, 236, 237 and 288, which were present in Senate Bill No. 1950, violates Article VI, Section 24(1) of the Constitution, which provides that all appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives

 G.R. No. 168730 

On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorariand prohibition on July 20, 2005, alleging unconstitutionality

of the law on the ground that the limitation on the creditable input tax in effect allows VAT-registered establishments to retain a portion of the taxes they collect, thus violating the principle that tax collection and revenue should be solely allocated for public purposes and expenditures. Petitioner Garcia further claims that allowing these establishments to pass on the tax to the consumers is inequitable, in violation of Article VI, Section 28(1) of the Constitution.

 RESPONDENTS COMMENT 

The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily, respondents contend that R.A. No. 9337 enjoys the presumption of constitutionality and petitioners failed to cast doubt on its validity.

 Relying on the case of Tolentino vs. Secretary of Finance, 235

SCRA630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the bicameral proceedings, exclusive origination of revenue measures and the power of the Senate concomitant thereto, have already been settled. With regard to the issue of undue delegation of legislative power to the President, respondents contend that the law is complete and leaves no discretion to the President but to increase the rate to 12% once any of the two conditions provided therein arise.

 Respondents also refute petitioners argument that the increase to

12%, as well as the 70% limitation on the creditable input tax, the 60-month amortization on the purchase or importation of capital goods exceeding P1,000,000.00, and the 5% final withholding tax by government agencies, is arbitrary, oppressive, and confiscatory, and that it violates the constitutional principle on progressive taxation, among others.

 Finally, respondents manifest that R.A. No. 9337 is the anchor of

the governments fiscal reform agenda. A reform in the value-added system of taxation is the core revenue measure that will tilt the balance towards a sustainable macroeconomic environment necessary for economic growth.

 ISSUES

 The Court defined the issues, as follows: PROCEDURAL ISSUE 

Whether R.A. No. 9337 violates the following provisions of the Constitution:

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a. Article VI, Section 24, andb. Article VI, Section 26(2)

 SUBSTANTIVE ISSUES 1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following provisions of the Constitution: 

a. Article VI, Section 28(1), andb. Article VI, Section 28(2)

 2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution: 

a. Article VI, Section 28(1), andb. Article III, Section 1

  RULING OF THE COURT

 As a prelude, the Court deems it apt to restate the general

principles and concepts of value-added tax (VAT), as the confusion and inevitably, litigation, breeds from a fallacious notion of its nature.

 The VAT is a tax on spending or consumption. It is levied on the

sale, barter, exchange or lease of goods or properties and services.[8] Being an indirect tax on expenditure, the seller of goods or services may pass on the amount of tax paid to the buyer, [9] with the seller acting merely as a tax collector.[10] The burden of VAT is intended to fall on the immediate buyers and ultimately, the end-consumers.

 In contrast, a direct tax is a tax for which a taxpayer is directly

liable on the transaction or business it engages in, without transferring the burden to someone else.[11] Examples are individual and corporate income taxes, transfer taxes, and residence taxes.[12]

 In the Philippines, the value-added system of sales taxation has

long been in existence, albeit in a different mode. Prior to 1978, the system was a single-stage tax computed under the cost deduction method and was payable only by the original sellers. The single-stage system was subsequently modified, and a mixture of the cost deduction method and tax credit method was used to determine the value-added tax payable.[13]Under the tax credit method, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.[14]

 

It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT system was rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the tax credit method.[15]

  E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT

Law,[16]R.A. No. 8241 or the Improved VAT Law,[17] R.A. No. 8424 or the Tax Reform Act of 1997,[18] and finally, the presently beleaguered R.A. No. 9337, also referred to by respondents as the VAT Reform Act.

 The Court will now discuss the issues in logical sequence. PROCEDURAL ISSUEI.

Whether R.A. No. 9337 violates the following provisions of the Constitution:

 a. Article VI, Section 24, and

b. Article VI, Section 26(2) 

A. The Bicameral Conference Committee Petitioners Escudero, et al., and Pimentel, et al., allege that the

Bicameral Conference Committee exceeded its authority by: 1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337; 2) Deleting entirely the no pass-on provisions found in both the House and Senate bills; 3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax; and 4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition to the value-added tax.  Petitioners now beseech the Court to define the powers of the

Bicameral Conference Committee. It should be borne in mind that the power of internal regulation

and discipline are intrinsic in any legislative body for, as unerringly elucidated by Justice Story, [i]f the power did not exist, it would be utterly impracticable to transact the business of the nation, either at all, or at least with decency, deliberation, and order.

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[19] Thus, Article VI, Section 16 (3) of the Constitution provides that each House may determine the rules of its proceedings. Pursuant to this inherent constitutional power to promulgate and implement its own rules of procedure, the respective rules of each house of Congress provided for the creation of a Bicameral Conference Committee. 

Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:

 Sec. 88. Conference Committee. In the event that

the House does not agree with the Senate on the amendment to any bill or joint resolution, the differences may be settled by the conference committees of both chambers.

 In resolving the differences with the Senate, the

House panel shall, as much as possible, adhere to and support the House Bill. If the differences with the Senate are so substantial that they materially impair the House Bill, the panel shall report such fact to the House for the latters appropriate action.

 Sec. 89. Conference Committee Reports. . . . Each

report shall contain a detailed, sufficiently explicit statement of the changes in or amendments to the subject measure.

 . . . The Chairman of the House panel may be

interpellated on the Conference Committee Report prior to the voting thereon. The House shall vote on the Conference Committee Report in the same manner and procedure as it votes on a bill on third and final reading.  Rule XII, Section 35 of the Rules of the Senate states: 

Sec. 35. In the event that the Senate does not agree with the House of Representatives on the provision of any bill or joint resolution, the differences shall be settled by a conference committee of both Houses which shall meet within ten (10) days after their composition. The President shall designate the members of the Senate Panel in the conference committee with the approval of the Senate.

 Each Conference Committee Report shall contain

a detailed and sufficiently explicit statement of the

changes in, or amendments to the subject measure, and shall be signed by a majority of the members of each House panel, voting separately.

 A comparative presentation of the conflicting

House and Senate provisions and a reconciled version thereof with the explanatory statement of the conference committee shall be attached to the report.

 . . .

  The creation of such conference committee was apparently in

response to a problem, not addressed by any constitutional provision, where the two houses of Congress find themselves in disagreement over changes or amendments introduced by the other house in a legislative bill. Given that one of the most basic powers of the legislative branch is to formulate and implement its own rules of proceedings and to discipline its members, may the Court then delve into the details of how Congress complies with its internal rules or how it conducts its business of passing legislation? Note that in the present petitions, the issue is not whether provisions of the rules of both houses creating the bicameral conference committee are unconstitutional, but whether the bicameral conference committee has strictly complied with the rules of both houses, thereby remaining within the jurisdiction conferred upon it by Congress.

 In the recent case of Farias vs. The Executive Secretary,[20] the

Court En Banc,unanimously reiterated and emphasized its adherence to the enrolled bill doctrine, thus, declining therein petitioners plea for the Court to go behind the enrolled copy of the bill. Assailed in said case was Congresss creation of two sets of bicameral conference committees, the lack of records of said committees proceedings, the alleged violation of said committees of the rules of both houses, and the disappearance or deletion of one of the provisions in the compromise bill submitted by the bicameral conference committee. It was argued that such irregularities in the passage of the law nullified R.A. No. 9006, or the Fair Election Act.

 Striking down such argument, the Court held thus: 

Under the enrolled bill doctrine, the signing of a bill by the Speaker of the House and the Senate President and the certification of the Secretaries of both Houses of Congress that it was passed are conclusive of its due enactment. A review of cases reveals the Courts consistent adherence to the rule. The Court finds no reason to deviate from the salutary rule in this case where the irregularities alleged by the petitioners mostly involved the internal rules of Congress, e.g.,

59

creation of the 2ndor 3rd Bicameral Conference Committee by the House. This Court is not the proper forum for the enforcement of these internal rules of Congress, whether House or Senate. Parliamentary rules are merely procedural and with their observance the courts have no concern. Whatever doubts there may be as to the formal validity of Rep. Act No. 9006 must be resolved in its favor. The Court reiterates its ruling in Arroyo vs. De Venecia, viz.:

 But the cases, both here and

abroad, in varying forms of expression, all deny to the courts the power to inquire into allegations that, in enacting a law, a House of Congress failed to comply with its own rules, in the absence of showing that there was a violation of a constitutional provision or the rights of private individuals. In Osmea v. Pendatun, it was held: At any rate, courts have declared that the rules adopted by deliberative bodies are subject to revocation, modification or waiver at the pleasure of the body adopting them. And it has been said that Parliamentary rules are merely procedural, and with their observance, the courts have no concern. They may be waived or disregarded by the legislative body. Consequently, mere failure to conform to parliamentary usage will not invalidate the action (taken by a deliberative body) when the requisite number of members have agreed to a particular measure.[21] (Emphasis supplied)

  The foregoing declaration is exactly in point with the present

cases, where petitioners allege irregularities committed by the conference committee in introducing changes or deleting provisions in the House and Senate bills. Akin to the Farias case,[22] the present petitions also raise an issue regarding the actions taken by the conference committee on matters regarding Congress compliance with its own internal rules. As stated earlier, one of the most basic and inherent power of the legislature is the power to formulate rules for its proceedings and the discipline of its

members. Congress is the best judge of how it should conduct its own business expeditiously and in the most orderly manner. It is also the soleconcern of Congress to instill discipline among the members of its conference committee if it believes that said members violated any of its rules of proceedings. Even the expanded jurisdiction of this Court cannot apply to questions regarding only the internal operation of Congress, thus, the Court is wont to deny a review of the internal proceedings of a co-equal branch of government. 

Moreover, as far back as 1994 or more than ten years ago, in the case ofTolentino vs. Secretary of Finance,[23] the Court already made the pronouncement that[i]f a change is desired in the practice [of the Bicameral Conference Committee] it must be sought in Congress since this question is not covered by any constitutional provision but is only an internal rule of each house. [24] To date, Congress has not seen it fit to make such changes adverted to by the Court. It seems, therefore, that Congress finds the practices of the bicameral conference committee to be very useful for purposes of prompt and efficient legislative action. 

Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the bicameral conference committees, the Court deems it necessary to dwell on the issue. The Court observes that there was a necessity for a conference committee because a comparison of the provisions of House Bill Nos. 3555 and 3705 on one hand, and Senate Bill No. 1950 on the other, reveals that there were indeed disagreements. As pointed out in the petitions, said disagreements were as follows:

House Bill No. 3555

House Bill No.3705 Senate Bill No. 1950

With regard to Stand-By Authority in favor of President

Provides for 12% VAT on every sale of goods or properties (amending Sec. 106 of NIRC); 12% VAT on importation of goods (amending Sec. 107 of NIRC); and 12% VAT on sale of services and use or lease of properties

Provides for 12% VAT in general on sales of goods or properties and reduced rates for sale of certain locally manufactured goods and petroleum products and raw materials to be used in the manufacture thereof (amending Sec. 106 of

Provides for a single rate of 10% VAT on sale of goods or properties (amending Sec. 106 of NIRC), 10% VAT on sale of services including sale of electricity by

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(amending Sec. 108 of NIRC)

NIRC); 12% VAT on importation of goods and reduced rates for certain imported products including petroleum products (amending Sec. 107 of NIRC); and 12% VAT on sale of services and use or lease of properties and a reduced rate for certain services including power generation (amending Sec. 108 of NIRC)

generation companies, transmission and distribution companies, and use or lease of properties (amending Sec. 108 of NIRC)

With regard to the no pass-on provision

No similar provision Provides that the VAT imposed on power generation and on the sale of petroleum products shall be absorbed by generation companies or sellers, respectively, and shall not be passed on to consumers

Provides that the VAT imposed on sales of electricity by generation companies and services of transmission companies and distribution companies, as well as those of franchise grantees of electric utilities shall not apply to residentialend-users. VAT shall be absorbed by generation, transmission, and distribution companies.

With regard to 70% limit on input tax credit

Provides that the input tax credit for capital goods on which a VAT has been paid shall be equally distributed over 5 years or the depreciable life of such capital goods; the input tax credit for goods and services other than capital goods shall not exceed 5% of the total amount of such goods and services; and for persons engaged in retail trading of goods, the allowable input tax credit shall not exceed 11% of the total amount of goods purchased.

No similar provision Provides that the input tax credit for capital goods on which a VAT has been paid shall be equally distributed over 5 years or the depreciable life of such capital goods; the input tax credit for goods and services other than capital goods shall not exceed 90% of the output VAT.

 

With regard to amendments to be made to NIRC provisions regarding income and excise taxes

No similar provision

No similar provision Provided for amendments to several NIRC provisions regarding corporate income, percentage, franchise and excise taxes

  The disagreements between the provisions in the House bills and

the Senate bill were with regard to (1) what rate of VAT is to be imposed; (2) whether only the VAT imposed on electricity generation, transmission and distribution companies should not be passed on to consumers, as proposed in the Senate bill, or both the VAT imposed on electricity generation, transmission and distribution companies and the VAT imposed on sale of petroleum products should not be passed on to consumers, as proposed in the House bill; (3) in what manner input tax credits should be

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limited; (4) and whether the NIRC provisions on corporate income taxes, percentage, franchise and excise taxes should be amended.

 There being differences and/or disagreements on the foregoing

provisions of the House and Senate bills, the Bicameral Conference Committee was mandated by the rules of both houses of Congress to act on the same by settling said differences and/or disagreements. The Bicameral Conference Committee acted on the disagreeing provisions by making the following changes:

 1. With regard to the disagreement on the rate of VAT to be

imposed, it would appear from the Conference Committee Report that the Bicameral Conference Committee tried to bridge the gap in the difference between the 10% VAT rate proposed by the Senate, and the various rates with 12% as the highest VAT rate proposed by the House, by striking a compromise whereby the present 10% VAT rate would be retained until certain conditions arise, i.e., the value-added tax collection as a percentage of gross domestic product (GDP) of the previous year exceeds 2 4/5%, or National Government deficit as a percentage of GDP of the previous year exceeds 1%, when the President, upon recommendation of the Secretary of Finance shall raise the rate of VAT to 12% effective January 1, 2006.

 2. With regard to the disagreement on whether only the VAT

imposed on electricity generation, transmission and distribution companies should not be passed on to consumers or whether both the VAT imposed on electricity generation, transmission and distribution companies and the VAT imposed on sale of petroleum products may be passed on to consumers, the Bicameral Conference Committee chose to settle such disagreement by altogether deleting from its Report any no pass-on provision.

 3. With regard to the disagreement on whether input tax

credits should be limited or not, the Bicameral Conference Committee decided to adopt the position of the House by putting a limitation on the amount of input tax that may be credited against the output tax, although it crafted its own language as to the amount of the limitation on input tax credits and the manner of computing the same by providing thus:

 (A) Creditable Input Tax. . . . . . . Provided, The input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for depreciation is

allowed under this Code, shall be spread evenly over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds one million Pesos (P1,000,000.00): PROVIDED, however, that if the estimated useful life of the capital good is less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such shorter period: . . . (B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters: PROVIDED that the input tax inclusive of input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the output VAT: PROVIDED, HOWEVER, THAT any input tax attributable to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, . . .  

4. With regard to the amendments to other provisions of the NIRC on corporate income tax, franchise, percentage and excise taxes, the conference committee decided to include such amendments and basically adopted the provisions found in Senate Bill No. 1950, with some changes as to the rate of the tax to be imposed.

 Under the provisions of both the Rules of the House of

Representatives and Senate Rules, the Bicameral Conference Committee is mandated to settle the differences between the disagreeing provisions in the House bill and the Senate bill. The term settle is synonymous to reconcile and harmonize.[25] To reconcile or harmonize disagreeing provisions, the Bicameral Conference Committee may then (a) adopt the specific provisions of either the House bill or Senate bill, (b) decide that neither provisions in the House bill or the provisions in the Senate bill wouldbe carried into the final form of the bill, and/or (c) try to arrive at a compromise between the disagreeing provisions.

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  In the present case, the changes introduced by the Bicameral

Conference Committee on disagreeing provisions were meant only to reconcile and harmonize the disagreeing provisions for it did not inject any idea or intent that is wholly foreign to the subject embraced by the original provisions.

 The so-called stand-by authority in favor of the President,

whereby the rate of 10% VAT wanted by the Senate is retained until such time that certain conditions arise when the 12% VAT wanted by the House shall be imposed, appears to be a compromise to try to bridge the difference in the rate of VAT proposed by the two houses of Congress. Nevertheless, such compromise is still totally within the subject of what rate of VAT should be imposed on taxpayers.

 The no pass-on provision was deleted altogether. In the

transcripts of the proceedings of the Bicameral Conference Committee held on May 10, 2005, Sen. Ralph Recto, Chairman of the Senate Panel, explained the reason for deleting the no pass-onprovision in this wise:

 . . . the thinking was just to keep the VAT law or

the VAT bill simple. And we were thinking that no sector should be a beneficiary of legislative grace, neither should any sector be discriminated on. The VAT is an indirect tax. It is a pass on-tax. And lets keep it plain and simple. Lets not confuse the bill and put a no pass-on provision. Two-thirds of the world have a VAT system and in this two-thirds of the globe, I have yet to see a VAT with a no pass-though provision. So, the thinking of the Senate is basically simple, lets keep the VAT simple.[26] (Emphasis supplied)Rep. Teodoro Locsin further made the manifestation that the no

pass-onprovision never really enjoyed the support of either House.[27]

 With regard to the amount of input tax to be credited against

output tax, the Bicameral Conference Committee came to a compromise on the percentage rate of the limitation or cap on such input tax credit, but again, the change introduced by the Bicameral Conference Committee was totally within the intent of both houses to put a cap on input tax that may becredited against the output tax. From the inception of the subject revenue bill in the House of Representatives, one of the major objectives was to plug a glaring loophole in the tax policy and administration by creating vital restrictions on the claiming of input VAT tax credits . . . and [b]y introducing limitations on the claiming of tax credit, we are capping a major leakage that has placed our collection efforts at an apparent disadvantage.[28]

 

As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Senate Bill No. 1950, since said provisions were among those referred to it, the conference committee had to act on the same and it basically adopted the version of the Senate.

 Thus, all the changes or modifications made by the Bicameral

Conference Committee were germane to subjects of the provisions referredto it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion amounting to lack or excess of jurisdiction committed by the Bicameral Conference Committee. In the earlier cases of Philippine Judges Association vs. Prado[29] and Tolentino vs. Secretary of Finance,[30] the Court recognized the long-standing legislative practice of giving said conference committee ample latitude for compromising differences between the Senate and the House. Thus, in the Tolentinocase, it was held that:

 . . . it is within the power of a conference

committee to include in its report an entirely new provision that is not found either in the House bill or in the Senate bill. If the committee can propose an amendment consisting of one or two provisions, there is no reason why it cannot propose several provisions, collectively considered as an amendment in the nature of a substitute, so long as such amendment is germane to the subject of the bills before the committee. After all, its report was not final but needed the approval of both houses of Congress to become valid as an act of the legislative department. The charge that in this case the Conference Committee acted as a third legislative chamber is thus without any basis.[31] (Emphasis supplied)

  B. R.A. No. 9337 Does Not Violate Article

VI, Section 26(2) of the Constitution on the No-Amendment Rule  Article VI, Sec. 26 (2) of the Constitution, states: 

No bill passed by either House shall become a law unless it has passed three readings on separate days, and printed copies thereof in its final form have been distributed to its Members three days before its passage, except when the President certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment

63

thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays entered in the Journal.  Petitioners argument that the practice where a bicameral

conference committee is allowed to add or delete provisions in the House bill and the Senate bill after these had passed three readings is in effect a circumvention of the no amendment rule (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince the Court to deviate from its ruling in the Tolentino case that:

 Nor is there any reason for requiring that the

Committees Report in these cases must have undergone three readings in each of the two houses. If that be the case, there would be no end to negotiation since each house may seek modification of the compromise bill. . . .

 Art. VI. 26 (2) must, therefore, be construed

as referring only to bills introduced for the first time in either house of Congress, not to the conference committee report.[32] (Emphasis supplied)  The Court reiterates here that the no-amendment rule refers

only to the procedure to be followed by each house of Congress with regard to bills initiated in each of said respective houses, before said bill is transmitted to the other house for its concurrence or amendment. Verily, to construe said provision in a way as to proscribe any further changes to a bill after one house has voted on it would lead to absurdity as this would mean that the other house of Congress would be deprived of its constitutional power to amend or introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to mean that the introduction by the Bicameral Conference Committee of amendments and modifications to disagreeing provisions in bills that have been acted upon by both houses of Congress is prohibited.

 C. R.A. No. 9337 Does Not Violate Article

VI, Section 24 of the Constitution on Exclusive Origination of Revenue Bills  Coming to the issue of the validity of the amendments made

regarding the NIRC provisions on corporate income taxes and percentage, excise taxes. Petitioners refer to the following provisions, to wit:

 Sectio

n 27 Rates of Income Tax on Domestic Corporation

28(A)(1)

Tax on Resident Foreign Corporation

28(B)(1)

Inter-corporate Dividends

34(B)(1)

Inter-corporate Dividends

116 Tax on Persons Exempt from VAT

117 Percentage Tax on domestic carriers and keepers of Garage

119 Tax on franchises121 Tax on banks and Non-

Bank Financial Intermediaries

148 Excise Tax on manufactured oils and other fuels

151 Excise Tax on mineral products

236 Registration requirements

237 Issuance of receipts or sales or commercial invoices

288 Disposition of Incremental Revenue

  Petitioners claim that the amendments to these provisions of the

NIRC did not at all originate from the House. They aver that House Bill No. 3555 proposed amendments only regarding Sections 106, 107, 108, 110 and 114 of the NIRC, while House Bill No. 3705 proposed amendments only to Sections 106, 107,108, 109, 110 and 111 of the NIRC; thus, the other sections of the NIRC which the Senate amended but which amendments were not found in the House bills are not intended to be amended by the House of Representatives. Hence, they argue that since the proposed amendments did not originate from the House, such amendments are a violation of Article VI, Section 24 of the Constitution.

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The argument does not hold water. Article VI, Section 24 of the Constitution reads: 

Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives but the Senate may propose or concur with amendments.  In the present cases, petitioners admit that it was indeed House

Bill Nos. 3555 and 3705 that initiated the move for amending provisions of the NIRC dealing mainly with the value-added tax. Upon transmittal of said House bills to the Senate, the Senate came out with Senate Bill No. 1950 proposing amendments not only to NIRC provisions on the value-added tax but also amendments to NIRC provisions on other kinds of taxes. Is the introduction by the Senate of provisions not dealing directly with the value- added tax, which is the only kind of tax being amended in the House bills, still within the purview of the constitutional provision authorizing the Senate to propose or concur with amendments to a revenue bill that originated from the House?

 The foregoing question had been squarely answered in

the Tolentino case, wherein the Court held, thus: 

. . . To begin with, it is not the law but the revenue bill which is required by the Constitution to originate exclusively in the House of Representatives. It is important to emphasize this, because a bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. . . . At this point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue statute and not only the bill which initiated the legislative process culminating in the enactment of the law must substantially be the same as the House bill would be to deny the Senates power not only to concur with amendments but also to propose amendments. It would be to violate the coequality of legislative power of the two houses of Congress and in fact make the House superior to the Senate.

  Given, then, the power of the Senate to

propose amendments, the Senate can propose its own version even with respect to bills which are

required by the Constitution to originate in the House.

. . . Indeed, what the Constitution simply means is

that the initiative for filing revenue, tariff or tax bills, bills authorizing an increase of the public debt, private bills and bills of local application must come from the House of Representatives on the theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are elected at large, are expected to approach the same problems from the national perspective. Both views are thereby made to bear on the enactment of such laws.[33] (Emphasis supplied)  Since there is no question that the revenue bill exclusively

originated in the House of Representatives, the Senate was acting within itsconstitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain any prohibition or limitation on the extent of the amendments that may be introduced by the Senate to the House revenue bill.

 Furthermore, the amendments introduced by the Senate to the

NIRC provisions that had not been touched in the House bills are still in furtherance of the intent of the House in initiating the subject revenue bills. The Explanatory Note of House Bill No. 1468, the very first House bill introduced on the floor, which was later substituted by House Bill No. 3555, stated:

 One of the challenges faced by the present

administration is the urgent and daunting task of solving the countrys serious financial problems. To do this, government expenditures must be strictly monitored and controlled and revenues must be significantly increased. This may be easier said than done, but our fiscal authorities are still optimistic the government will be operating on a balanced budget by the year 2009. In fact, several measures that will result to significant expenditure savings have been identified by the administration. It is supported with a credible package of revenue measures that include measures to improve tax administration and

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control the leakages in revenues from income taxes and the value-added tax (VAT). (Emphasis supplied)  Rep. Eric D. Singson, in his sponsorship speech for House Bill No.

3555, declared that: 

In the budget message of our President in the year 2005, she reiterated that we all acknowledged that on top of our agenda must be the restoration of the health of our fiscal system.

 In order to considerably lower the consolidated

public sector deficit and eventually achieve a balanced budget by the year 2009, we need to seize windows of opportunities which might seem poignant in the beginning, but in the long run prove effective and beneficial to the overall status of our economy. One such opportunity is a review of existing tax rates, evaluating the relevance given our present conditions.[34] (Emphasis supplied)  Notably therefore, the main purpose of the bills emanating from

the House of Representatives is to bring in sizeable revenues for the governmentto supplement our countrys serious financial problems, and improve tax administration and control of the leakages in revenues from income taxes and value-added taxes. As these house bills were transmitted to the Senate, the latter, approaching the measures from the point of national perspective, can introduce amendments within the purposes of those bills. It can provide for ways that would soften the impact of the VAT measure on the consumer, i.e., by distributing the burden across all sectors instead of putting it entirely on the shoulders of the consumers. The sponsorship speech of Sen. Ralph Recto on why the provisions on income tax on corporation were included is worth quoting:

 All in all, the proposal of the Senate Committee on

Ways and Means will raiseP64.3 billion in additional revenues annually even while by mitigating prices of power, services and petroleum products.

 However, not all of this will be wrung out of VAT.

In fact, only P48.7 billion amount is from the VAT on twelve goods and services. The rest of the tab P10.5 billion- will be picked by corporations.

 What we therefore prescribe is a burden sharing

between corporate Philippinesand the consumer. Why

should the latter bear all the pain? Why should the fiscal salvation be only on the burden of the consumer?

 The corporate worlds equity is in form of the

increase in the corporate income tax from 32 to 35 percent, but up to 2008 only. This will raise P10.5 billion a year. After that, the rate will slide back, not to its old rate of 32 percent, but two notches lower, to 30 percent.

 Clearly, we are telling those with the capacity to

pay, corporations, to bear with this emergency provision that will be in effect for 1,200 days, while we put our fiscal house in order. This fiscal medicine will have an expiry date.

 For their assistance, a reward of tax reduction

awaits them. We intend to keep the length of their sacrifice brief. We would like to assure them that not because there is a light at the end of the tunnel, this government will keep on making the tunnel long.

 The responsibility will not rest solely on the weary

shoulders of the small man. Big business will be there to share the burden.[35]

  As the Court has said, the Senate can propose amendments and

in fact, the amendments made on provisions in the tax on income of corporations are germane to the purpose of the house bills which is to raise revenues for the government.

  Likewise, the Court finds the sections referring to other

percentage and excise taxes germane to the reforms to the VAT system, as these sections would cushion the effects of VAT on consumers. Considering that certain goods and services which were subject to percentage tax and excise tax would no longer be VAT-exempt, the consumer would be burdened more as they would be paying the VAT in addition to these taxes. Thus, there is a need to amend these sections to soften the impact of VAT. Again, in his sponsorship speech, Sen. Recto said:

 However, for power plants that run on oil, we will

reduce to zero the present excise tax on bunker fuel, to lessen the effect of a VAT on this product.

 For electric utilities like Meralco, we will wipe out

the franchise tax in exchange for a VAT. 

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And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the VAT chain, we will however bring down the excise tax on socially sensitive products such as diesel, bunker, fuel and kerosene.

 . . . What do all these exercises point to? These are

not contortions of giving to the left hand what was taken from the right. Rather, these sprang from our concern of softening the impact of VAT, so that the people can cushion the blow of higher prices they will have to pay as a result of VAT.[36]

 The other sections amended by the Senate pertained to matters

of tax administration which are necessary for the implementation of the changes in the VAT system.

 To reiterate, the sections introduced by the Senate are germane

to the subject matter and purposes of the house bills, which is to supplement our countrys fiscal deficit, among others. Thus, the Senate acted within its power to propose those amendments.

 SUBSTANTIVE ISSUESI.Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following provisions of the Constitution: 

a. Article VI, Section 28(1), andb. Article VI, Section 28(2)

A. No Undue Delegation of Legislative Power  Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al.,

and Escudero, et al. contend in common that Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC giving the President thestand-by authority to raise the VAT rate from 10% to 12% when a certain condition is met, constitutes undue delegation of the legislative power to tax.

 The assailed provisions read as follows: 

SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows: 

SEC. 106. Value-Added Tax on Sale of Goods or Properties. 

(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied. (i)                 value-added tax

collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or

 (ii) national government deficit as a

percentage of GDP of the previous year exceeds one and one-half percent (1 %).

 SEC. 5. Section 107 of the same Code, as

amended, is hereby further amended to read as follows: SEC. 107. Value-Added Tax on Importation of

Goods.(A) In General. There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the

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quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any: provided, further, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) after any of the following conditions has been satisfied. (i) value-added tax collection as a

percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).

 SEC. 6. Section 108 of the same Code, as

amended, is hereby further amended to read as follows: SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services: provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied.

 (i) value-added tax collection as a

percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the

previous year exceeds one and one-half percent (1 %).(Emphasis supplied)

 Petitioners allege that the grant of the stand-by authority to the

President to increase the VAT rate is a virtual abdication by Congress of its exclusive power to tax because such delegation is not within the purview of Section 28 (2), Article VI of the Constitution, which provides:

 The Congress may, by law, authorize the

President to fix within specified limits, and may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the government.  They argue that the VAT is a tax levied on the sale, barter or

exchange of goods and properties as well as on the sale or exchange of services, which cannot be included within the purview of tariffs under the exempted delegation as the latter refers to customs duties, tolls or tribute payable upon merchandise to the government and usually imposed on goods or merchandise imported or exported.

 Petitioners ABAKADA GURO Party List, et al., further contend that

delegating to the President the legislative power to tax is contrary to republicanism. They insist that accountability, responsibility and transparency should dictate the actions of Congress and they should not pass to the President the decision to impose taxes. They also argue that the law also effectively nullified the Presidents power of control, which includes the authority to set aside and nullify the acts of her subordinates like the Secretary of Finance, by mandating the fixing of the tax rate by the President upon the recommendation of the Secretary of Finance.

 Petitioners Pimentel, et al. aver that the President has ample

powers to cause, influence or create the conditions provided by the law to bring about either or both the conditions precedent.

 On the other hand, petitioners Escudero, et al. find bizarre and

revolting the situation that the imposition of the 12% rate would be subject to the whim of the Secretary of Finance, an unelected bureaucrat, contrary to the principle of no taxation without representation. They submit that the Secretary of Finance is not mandated to give a favorable recommendation and he may not even give his recommendation. Moreover, they allege that no guiding standards are provided in the law on what basis and as to how he will make his recommendation. They claim, nonetheless, that any recommendation of the Secretary of Finance can easily be brushed aside by the President since the former is a mere

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alter ego of the latter, such that, ultimately, it is the President who decides whether to impose the increased tax rate or not.

 A brief discourse on the principle of non-delegation of powers is

instructive. The principle of separation of powers ordains that each of the

three great branches of government has exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated sphere.[37] A logicalcorollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin maxim: potestas delegata non delegari potest which means what has been delegated, cannot be delegated.[38] This doctrine is based on the ethical principle that such as delegated power constitutes not only a right but a duty to be performed by the delegate through the instrumentality of his own judgment and not through the intervening mind of another.[39]

 With respect to the Legislature, Section 1 of Article VI of the

Constitution provides that the Legislative power shall be vested in the Congress of the Philippineswhich shall consist of a Senate and a House of Representatives. The powers which Congress is prohibited from delegating are those which are strictly, or inherently and exclusively, legislative. Purely legislative power, which can never be delegated, has been described as the authority to make a complete law complete as to the time when it shall take effect and as to whom it shall be applicable and to determine the expediency of its enactment.[40] Thus, the rule is that in order that a court may be justified in holding a statute unconstitutional as a delegation of legislative power, it must appear that the power involved is purely legislative in nature that is, one appertaining exclusively to the legislative department. It is the nature of the power, and not the liability of its use or the manner of its exercise, which determines the validity of its delegation.

 Nonetheless, the general rule barring delegation of legislative

powers is subject to the following recognized limitations or exceptions: (1) Delegation of tariff powers to the President under

Section 28 (2) of Article VI of the Constitution;(2) Delegation of emergency powers to the President

under Section 23 (2) of Article VI of the Constitution;

(3) Delegation to the people at large;(4) Delegation to local governments; and(5) Delegation to administrative bodies. 

 In every case of permissible delegation, there must be a showing

that the delegation itself is valid. It is valid only if the law (a) is complete in itself, setting forth therein the policy to be executed, carried out, or implemented by the delegate;[41] and (b) fixes a standard the limits of which are sufficiently determinate and determinable to which the delegate must conform in the performance of his functions.[42] A sufficient standard is one which defines legislative policy, marks its limits, maps out its boundaries and specifies the public agency to apply it. It indicates the circumstances under which the legislative command is to be effected.[43] Both tests are intended to prevent a total transference of legislative authority to the delegate, who is not allowed to step into the shoes of the legislature and exercise a power essentially legislative.[44]

 In People vs. Vera,[45] the Court, through eminent Justice Jose P.

Laurel, expounded on the concept and extent of delegation of power in this wise:

 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.

 . . . The true distinction, says Judge Ranney, is

between the delegation of power to make the law, which necessarily involves a discretion as to what it shall be, and conferring an 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.

 . . . It is contended, however, that a legislative act

may be made to the effect as law after it leaves the hands of the legislature. It is true that laws may be made effective on certain contingencies, as by proclamation of the executive or the adoption by the people of a particular community. In Wayman vs. Southard, the Supreme Court of the United States ruled that the legislature may delegate a power not legislative which it may itself rightfully exercise. The power to ascertain facts is such a power which may be delegated. There is nothing essentially legislative in ascertaining the existence of facts or conditions as the basis of the

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taking into effect of a law. That is a mental process common to all branches of the government. Notwithstanding the apparent tendency, however, to relax the rule prohibiting delegation of legislative authority on account of the complexity arising from social and economic forces at work in this modern industrial age, the orthodox pronouncement of Judge Cooley in his work on Constitutional Limitations finds restatement in Prof. Willoughby's treatise on the Constitution of the United States in the following language speaking of declaration of legislative power to administrative agencies: The principle which permits the legislature to provide that the administrative agent may determine when the circumstances are such as require the application of a law is defended upon the ground that at the time this authority is granted, the rule of public policy, which is the essence of the legislative act, is determined by the legislature. In other words, the legislature, as it is its duty to do, determines that, under given circumstances, certain executive or administrative action is to be taken, and that, under other circumstances, different or no action at all is to be taken. What is thus left to the administrative official is not the legislative determination of what public policy demands, but simply the ascertainment of what the facts of the case require to be done according to the terms of the law by which he is governed. The efficiency of an Act as a declaration of legislative will must, of course, come from Congress, but the ascertainment of the contingency upon which the Act shall take effect may be left to such agencies as it may designate. The legislature, then, may provide that a law shall take effect upon the happening of future specified contingencies leaving to some other person or body the power to determine when the specified contingency has arisen. (Emphasis supplied).[46]

  In Edu vs. Ericta,[47] the Court reiterated: 

What cannot be delegated is the authority under the Constitution to make laws and to alter and repeal them; the test is the completeness of the statute in all its terms and provisions when it leaves the hands of the legislature. To determine whether or not there is an undue delegation of legislative power, the inquiry must be directed to the scope and definiteness of the measure

enacted. The legislative does not abdicate its functions when it describes what job must be done, who is to do it, and what is the scope of his authority. For a complex economy, that may be the only way in which the legislative process can go forward. A distinction has rightfully been made between delegation of power to make the laws which necessarily involves a discretion as to what it shall be, which constitutionally may not be done, and delegation of authority or discretion as to its execution to be exercised under and in pursuance of the law, to which no valid objection can be made. The Constitution is thus not to be regarded as denying the legislature the necessary resources of flexibility and practicability. (Emphasis supplied).[48]

  Clearly, the legislature may delegate to executive officers or

bodies the power to determine certain facts or conditions, or the happening of contingencies, on which the operation of a statute is, by its terms, made to depend, but the legislature must prescribe sufficient standards, policies or limitations on their authority.[49] While the power to tax cannot be delegated to executive agencies, details as to the enforcement and administration of an exercise of such power may be left to them, including the power to determine the existence of facts on which its operation depends.[50]

 The rationale for this is that the preliminary ascertainment of

facts as basis for the enactment of legislation is not of itself a legislative function, but is simply ancillary to legislation. Thus, the duty of correlating information and making recommendations is the kind of subsidiary activity which the legislature may perform through its members, or which it may delegate to others to perform. Intelligent legislation on the complicated problems of modern society is impossible in the absence of accurate information on the part of the legislators, and any reasonable method of securing such information is proper.[51] The Constitution as a continuously operative charter of government does not require that Congress find for itselfevery fact upon which it desires to base legislative action or that it make for itself detailed determinations which it has declared to be prerequisite to application of legislative policy to particular facts and circumstances impossible for Congress itself properly to investigate.[52]

 In the present case, the challenged section of R.A. No. 9337 is the

commonproviso in Sections 4, 5 and 6 which reads as follows: 

That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006,

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raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:

 (i) Value-added tax collection as a

percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or

 (ii) National government deficit as

a percentage of GDP of the previous year exceeds one and one-half percent (1 %).

  

The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts upon which enforcement and administration of the increase rate under the law is contingent. The legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the control of the executive.

 No discretion would be exercised by the President. Highlighting

the absence of discretion is the fact that the word shall is used in the common proviso.  The use of the word shall connotes a mandatory order.  Its use in a statute denotes an imperative obligation and is inconsistent with the idea of discretion.[53] Where the law is clear and unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it that the mandate is obeyed.[54]

 Thus, it is the ministerial duty of the President to immediately

impose the 12% rate upon the existence of any of the conditions specified by Congress. This is a duty which cannot be evaded by the President. Inasmuch as the law specifically uses the word shall, the exercise of discretion by the President does not come into play. It is a clear directive to impose the 12% VAT rate when the specified conditions are present. The time of taking into effect of the 12% VAT rate is based on the happening of a certain specified contingency, or upon the ascertainment of certain facts or conditions by a person or body other than the legislature itself.

 The Court finds no merit to the contention of petitioners ABAKADA

GURO Party List, et al. that the law effectively nullified the Presidents power of control over the Secretary of Finance by mandating the fixing of the tax rate by the President upon the recommendation of the Secretary of Finance. The Court cannot also subscribe to the position of petitionersPimentel, et al. that the word shall should be interpreted to mean may in view of the phrase upon the recommendation of the Secretary of Finance. Neither does the Court find persuasive the submission of petitioners Escudero, et al. that any recommendation by the Secretary of Finance can

easily be brushed aside by the President since the former is a mere alter ego of the latter.

 When one speaks of the Secretary of Finance as the alter ego of

the President, it simply means that as head of the Department of Finance he is the assistant and agent of the Chief Executive. The multifarious executive and administrative functions of the Chief Executive are performed by and through the executive departments, and the acts of the secretaries of such departments, such as the Department of Finance, performed and promulgated in the regular course of business, are, unless disapproved or reprobated by the Chief Executive, presumptively the acts of the Chief Executive. The Secretary of Finance, as such, occupies a political position and holds office in an advisory capacity, and, in the language of Thomas Jefferson, "should be of the President's bosom confidence" and, in the language of Attorney-General Cushing, is subject to the direction of the President."[55]

  In the present case, in making his recommendation to the

President on the existence of either of the two conditions, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate. In such instance, he is not subject to the power of control and direction of the President. He is acting as the agent of the legislative department, to determine and declare the event upon which its expressed will is to take effect.[56] The Secretary of Finance becomes the means or tool by which legislative policy is determined and implemented, considering that he possesses all the facilities to gather data and information and has a much broader perspective to properly evaluate them. His function is to gather and collate statistical data and other pertinent information and verify if any of the two conditions laid out by Congress is present. His personality in such instance is in reality but a projection of that of Congress. Thus, being the agent of Congress and not of the President, the President cannot alter or modify or nullify, or set aside the findings of the Secretary of Finance and to substitute the judgment of the former for that of the latter.

 Congress simply granted the Secretary of Finance the authority to

ascertain the existence of a fact, namely, whether by December 31, 2005, the value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (24/5%) or the national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1%). If either of these two instances has occurred, the Secretary of Finance, by legislative mandate, must submit such information to the President. Then the 12% VAT rate must be imposed by the President effective January 1, 2006. There is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is constitutionally permissible.[57] Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the

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scope of his authority; in our complex economy that is frequently the only way in which the legislative process can go forward.[58]

 As to the argument of petitioners ABAKADA GURO Party List, et

al. that delegating to the President the legislative power to tax is contrary to the principle of republicanism, the same deserves scant consideration. Congress did not delegate the power to tax but the mere implementation of the law. The intent and will to increase the VAT rate to 12% came from Congress and the task of the President is to simply execute the legislative policy. That Congress chose to do so in such a manner is not within the province of the Court to inquire into, its task being to interpret the law.[59]

 The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence or create the conditions to bring about either or both the conditions precedent does not deserve any merit as this argument is highly speculative. The Court does not rule on allegations which are manifestly conjectural, as these may not exist at all. The Court deals with facts, not fancies; on realities, not appearances. When the Court acts on appearances instead of realities, justice and law will be short-lived.

 B. The 12% Increase VAT Rate Does Not

Impose an Unfair and Unnecessary Additional Tax Burden  

Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and additional tax burden on the people. Petitioners also argue that the 12% increase, dependent on any of the 2 conditions set forth in the contested provisions, is ambiguous because it does not state if the VAT rate would be returned to the original 10% if the rates are no longer satisfied. Petitioners also argue that such rate is unfair and unreasonable, as the people are unsure of the applicable VAT rate from year to year.

 Under the common provisos of Sections 4, 5 and 6 of R.A. No.

9337, if any of the two conditions set forth therein are satisfied, the President shall increase the VAT rate to 12%. The provisions of the law are clear. It does not provide for a return to the 10% rate nor does it empower the President to so revert if, after the rate is increased to 12%, the VAT collection goes below the 24/5 of the GDP of the previous year or that the national government deficit as a percentage of GDP of the previous year does not exceed 1%.

 Therefore, no statutory construction or interpretation is needed. 

Neither can conditions or limitations be introduced where none is provided for.  Rewriting the law is a forbidden ground that only Congress may tread upon.[60]

 Thus, in the absence of any provision providing for a return to the

10% rate, which in this case the Court finds none, petitioners argument is, at best, purely speculative. There is no basis for petitioners fear of a fluctuating VAT rate because the law itself does not provide that the rate should go back to 10% if the conditions provided in Sections 4, 5 and 6 are no longer present. The rule is that where the provision of the law is clear and unambiguous, so that there is no occasion for the court's seeking the legislative intent, the law must be taken as it is, devoid of judicial addition or subtraction.[61]

 Petitioners also contend that the increase in the VAT rate, which

was allegedly an incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should be based on fiscal adequacy.

 Petitioners obviously overlooked that increase in VAT collection is

not the onlycondition. There is another condition, i.e., the national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).

 Respondents explained the philosophy behind these alternative

conditions: 1.      VAT/GDP Ratio > 2.8% 

The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less than 2.8%, it means that government has weak or no capability of implementing the VAT or that VAT is not effective in the function of the tax collection. Therefore, there is no value to increase it to 12% because such action will also be ineffectual.

 2.      Natl Govt Deficit/GDP >1.5% 

The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of government has reached a relatively sound position or is towards the direction of a balanced budget position. Therefore, there is no need to increase the VAT rate since the fiscal house is in a relatively healthy position. Otherwise stated, if the ratio is more than 1.5%, there is indeed a need to increase the VAT rate.[62]

  That the first condition amounts to an incentive to the President

to increase the VAT collection does not render it unconstitutional so long as there is a public purpose for which the law was passed, which in this

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case, is mainly to raise revenue. In fact,fiscal adequacy dictated the need for a raise in revenue.

 The principle of fiscal adequacy as a characteristic of a sound tax

system was originally stated by Adam Smith in his Canons of Taxation (1776), as:

IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.[63]

  It simply means that sources of revenues must be adequate to

meet government expenditures and their variations.[64]

 The dire need for revenue cannot be ignored. Our country is in a

quagmire of financial woe. During the Bicameral Conference Committee hearing, then Finance Secretary Purisima bluntly depicted the countrys gloomy state of economic affairs, thus:

 First, let me explain the position that

the Philippines finds itself in right now. We are in a position where 90 percent of our revenue is used for debt service. So, for every peso of revenue that we currently raise, 90 goes to debt service. Thats interest plus amortization of our debt. So clearly, this is not a sustainable situation. Thats the first fact.

 The second fact is that our debt to GDP level is

way out of line compared to other peer countries that borrow money from that international financial markets. Our debt to GDP is approximately equal to our GDP. Again, that shows you that this is not a sustainable situation.

 The third thing that Id like to point out is the

environment that we are presently operating in is not as benign as what it used to be the past five years.

 What do I mean by that? In the past five years, weve been lucky because

we were operating in a period of basically global growth and low interest rates. The past few months, we have seen an inching up, in fact, a rapid increase in the interest rates in the leading economies of the world. And, therefore, our ability to borrow at reasonable prices is going to be challenged. In fact, ultimately, the question is our ability to access the financial markets.

 When the President made her speech in July last

year, the environment was not as bad as it is now, at least based on the forecast of most financial institutions. So, we were assuming that raising 80 billion would put us in a position where we can then convince them to improve our ability to borrow at lower rates. But conditions have changed on us because the interest rates have gone up. In fact, just within this room, we tried to access the market for a billion dollars because for this year alone, thePhilippines will have to borrow 4 billion dollars. Of that amount, we have borrowed 1.5 billion. We issued last January a 25-year bond at 9.7 percent cost. We were trying to access last week and the market was not as favorable and up to now we have not accessed and we might pull back because the conditions are not very good.

 So given this situation, we at the Department of

Finance believe that we really need to front-end our deficit reduction. Because it is deficit that is causing the increase of the debt and we are in what we call a debt spiral. The more debt you have, the more deficit you have because interest and debt service eats and eats more of your revenue. We need to get out of this debt spiral. And the only way, I think, we can get out of this debt spiral is really have a front-end adjustment in our revenue base.[65]

  The image portrayed is chilling. Congress passed the law hoping

for rescue from an inevitable catastrophe. Whether the law is indeed sufficient to answer the states economic dilemma is not for the Court to judge. In the Farias case, the Court refused to consider the various arguments raised therein that dwelt on the wisdom of Section 14 of R.A. No. 9006 (The Fair Election Act), pronouncing that:

 . . . policy matters are not the concern of the

Court. Government policy is within the exclusive dominion of the political branches of the government. It is not for this Court to look into the wisdom or propriety of legislative determination. Indeed, whether an enactment is wise or unwise, whether it is based on sound economic theory, whether it is the best means to achieve the desired results, whether, in short, the legislative discretion within its prescribed limits should be exercised in a particular manner are matters for the judgment of the legislature, and the serious conflict of opinions does not suffice to bring them within the range of judicial cognizance.[66]

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 In the same vein, the Court in this case will not dawdle on the

purpose of Congress or the executive policy, given that it is not for the judiciary to "pass upon questions of wisdom, justice or expediency of legislation.[67]

 II.Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution: 

a. Article VI, Section 28(1), andb. Article III, Section 1

  

A. Due Process and Equal Protection Clauses  Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue

that Section 8 of R.A. No. 9337, amending Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending Section 114 (C) of the NIRC are arbitrary, oppressive, excessive and confiscatory. Their argument is premised on the constitutional right against deprivation of life, liberty of property without due process of law, as embodied in Article III, Section 1 of the Constitution.

 Petitioners also contend that these provisions violate the

constitutional guarantee of equal protection of the law.The doctrine is that where the due process and equal protection

clauses are invoked, considering that they are not fixed rules but rather broad standards, there is a need for proof of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail.[68]

 Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC

imposes a limitation on the amount of input tax that may be credited against the output tax. It states, in part: [P]rovided, that the input tax inclusive of the input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the output VAT:

 Input Tax is defined under Section 110(A) of the NIRC, as

amended, as the value-added tax due from or paid by a VAT-registered person on the importation of goods or local purchase of good and services, including lease or use of property, in the course of trade or business, from a VAT-registered person, and Output Tax is the value-added tax due on the sale or lease of taxable goods or properties or services by any person registered or required to register under the law.

 

 Petitioners claim that the contested sections impose limitations

on the amount of input tax that may be claimed. In effect, a portion of the input tax that has already been paid cannot now be credited against the output tax.

 Petitioners argument is not absolute. It assumes that the input tax

exceeds 70% of the output tax, and therefore, the input tax in excess of 70% remains uncredited. However, to the extent that the input tax is less than 70% of the output tax, then 100% of such input tax is still creditable.

 More importantly, the excess input tax, if any, is retained in a

businesss books of accounts and remains creditable in the succeeding quarter/s. This is explicitly allowed by Section 110(B), which provides that if the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters. In addition, Section 112(B) allows a VAT-registered person to apply for the issuance of a tax credit certificate or refund for any unused input taxes, to the extent that such input taxes have not been applied against the output taxes. Such unused input tax may be used in payment of his other internal revenue taxes.

 The non-application of the unutilized input tax in a given quarter

is not ad infinitum, as petitioners exaggeratedly contend. Their analysis of the effect of the 70% limitation is incomplete and one-sided. It ends at the net effect that there will be unapplied/unutilized inputs VAT for a given quarter. It does not proceed further to the fact that such unapplied/unutilized input tax may be credited in the subsequent periods as allowed by the carry-over provision of Section 110(B) or that it may later on be refunded through a tax credit certificate under Section 112(B).

 Therefore, petitioners argument must be rejected. On the other hand, it appears that petitioner Garcia failed to

comprehend the operation of the 70% limitation on the input tax. According to petitioner, the limitation on the creditable input tax in effect allows VAT-registered establishments to retain a portion of the taxes they collect, which violates the principle that tax collection and revenue should be for public purposes and expenditures

 As earlier stated, the input tax is the tax paid by a person, passed

on to him by the seller, when he buys goods. Output tax meanwhile is the tax due to the person when he sells goods. In computing the VAT payable, three possible scenarios may arise:

 First, if at the end of a taxable quarter the output taxes charged

by the seller are equal to the input taxes that he paid and passed on by the suppliers, then no payment is required; 

 

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Second, when the output taxes exceed the input taxes, the person shall be liable for the excess, which has to be paid to the Bureau of Internal Revenue (BIR);[69] and 

 Third, if the input taxes exceed the output taxes, the excess shall

be carried over to the succeeding quarter or quarters.  Should the input taxes result from zero-rated or effectively zero-rated transactions, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes, at the taxpayers option.[70]

 Section 8 of R.A. No. 9337 however, imposed a 70% limitation on

the input tax. Thus, a person can credit his input tax only up to the extent of 70% of the output tax. In laymans term, the value-added taxes that a person/taxpayer paid and passed on to him by a seller can only be credited up to 70% of the value-added taxes that is due to him on a taxable transaction. There is no retention of any tax collection because the person/taxpayer has already previously paid the input tax to a seller, and the seller will subsequently remit such input tax to the BIR. The party directly liable for the payment of the tax is the seller.[71] What only needs to be done is for the person/taxpayer to apply or credit these input taxes, as evidenced by receipts, against his output taxes.

 Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also

argue that the input tax partakes the nature of a property that may not be confiscated, appropriated, or limited without due process of law.

 The input tax is not a property or a property right within the

constitutional purview of the due process clause. A VAT-registered persons entitlement to the creditable input tax is a mere statutory privilege.

 The distinction between statutory privileges and vested rights

must be borne in mind for persons have no vested rights in statutory privileges. The state may change or take away rights, which were created by the law of the state, although it may not take away property, which was vested by virtue of such rights.[72]

 Under the previous system of single-stage taxation, taxes paid at

every level of distribution are not recoverable from the taxes payable, although it becomes part of the cost, which is deductible from the gross revenue. When Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all sales, it was then that the crediting of the input tax paid on purchase or importation of goods and services by VAT-registered persons against the output tax was introduced.[73] This was adopted by the Expanded VAT Law (R.A. No. 7716),[74] and The Tax Reform Act of 1997 (R.A. No. 8424).[75]The right to credit input tax as against the output tax is clearly a privilege created by law, a privilege that also the law can remove, or in this case, limit.

 

Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337, amending Section 110(A) of the NIRC, which provides:

 SEC. 110. Tax Credits. (A) Creditable Input Tax. 

Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos (P1,000,000.00): Provided, however, That if the estimated useful life of the capital goods is less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such a shorter period: Provided, finally, That in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or license upon payment of the compensation, rental, royalty or fee.  The foregoing section imposes a 60-month period within which to

amortize the creditable input tax on purchase or importation of capital goods with acquisition cost ofP1 Million pesos, exclusive of the VAT component. Such spread out only poses a delay in the crediting of the input tax. Petitioners argument is without basis because the taxpayer is not permanently deprived of his privilege to credit the input tax.

 It is worth mentioning that Congress admitted that the spread-out

of the creditable input tax in this case amounts to a 4-year interest-free loan to the government.[76] In the same breath, Congress also justified its move by saying that the provision was designed to raise an annual revenue of 22.6 billion.[77] The legislature also dispelled the fear that the provision will fend off foreign investments, saying that foreign investors have other tax incentives provided by law, and citing the case of China, where despite a 17.5% non-creditable VAT, foreign investments were not deterred.[78] Again, for whatever is the purpose of the 60-month amortization, this involves executive economic policy and legislative wisdom in which the Court cannot intervene.

 With regard to the 5% creditable withholding tax imposed on

payments made by the government for taxable transactions, Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads:

 

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SEC. 114. Return and Payment of Value-added Tax. (C) Withholding of Value-added Tax. The

Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and services which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes of this Section, the payor or person in control of the payment shall be considered as the withholding agent.

 The value-added tax withheld under this Section

shall be remitted within ten (10) days following the end of the month the withholding was made.  Section 114(C) merely provides a method of collection, or as

stated by respondents, a more simplified VAT withholding system. The government in this case is constituted as a withholding agent with respect to their payments for goods and services.

 Prior to its amendment, Section 114(C) provided for different

rates of value-added taxes to be withheld -- 3% on gross payments for purchases of goods; 6% on gross payments for services supplied by contractors other than by public works contractors; 8.5% on gross payments for services supplied by public work contractors; or 10% on payment for the lease or use of properties or property rights to nonresident owners. Under the present Section 114(C), these different rates, except for the 10% on lease or property rights payment to nonresidents, were deleted, and a uniform rate of 5% is applied.

 The Court observes, however, that the law the used the

word final. In tax usage,final, as opposed to creditable, means full. Thus, it is provided in Section 114(C): final value-added tax at the rate of five percent (5%).

 In Revenue Regulations No. 02-98, implementing R.A. No. 8424

(The Tax Reform Act of 1997), the concept of final withholding tax on income was explained, to wit:

 SECTION 2.57. Withholding of Tax at Source

 (A) Final Withholding Tax. Under the final

withholding tax system the amount of income tax withheld by the withholding agent is constituted as full and final payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of underwithholding, the deficiency tax shall be collected from the payor/withholding agent. 

(B) Creditable Withholding Tax. Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. Taxes withheld on income payments covered by the expanded withholding tax (referred to in Sec. 2.57.2 of these regulations) and compensation income (referred to in Sec. 2.78 also of these regulations) are creditable in nature.  As applied to value-added tax, this means that taxable

transactions with the government are subject to a 5% rate, which constitutes as full payment of the tax payable on the transaction. This represents the net VAT payable of the seller. The other 5% effectively accounts for the standard input VAT (deemed input VAT), in lieu of the actual input VAT directly or attributable to the taxable transaction.[79]

 The Court need not explore the rationale behind the provision. It

is clear that Congress intended to treat differently taxable transactions with the government.[80]This is supported by the fact that under the old provision, the 5% tax withheld by the government remains creditable against the tax liability of the seller or contractor, to wit:

 SEC. 114. Return and Payment of Value-added

Tax. (C) Withholding of Creditable Value-added

Tax. The Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods from sellers and services rendered by contractors which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added tax due at the rate of three percent (3%) of the gross payment for the purchase of goods and six percent (6%) on gross receipts for services rendered by

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contractors on every sale or installment payment which shall be creditable against the value-added tax liability of the seller or contractor: Provided, however, That in the case of government public works contractors, the withholding rate shall be eight and one-half percent (8.5%): Provided, further, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For this purpose, the payor or person in control of the payment shall be considered as the withholding agent.

 The valued-added tax withheld under this Section

shall be remitted within ten (10) days following the end of the month the withholding was made. (Emphasis supplied)  As amended, the use of the word final and the deletion of the

word creditableexhibits Congresss intention to treat transactions with the government differently. Since it has not been shown that the class subject to the 5% final withholding tax has been unreasonably narrowed, there is no reason to invalidate the provision. Petitioners, as petroleum dealers, are not the only ones subjected to the 5% final withholding tax. It applies to all those who deal with the government.

 Moreover, the actual input tax is not totally lost or uncreditable,

as petitioners believe. Revenue Regulations No. 14-2005 or the Consolidated Value-Added Tax Regulations 2005 issued by the BIR, provides that should the actual input tax exceed 5% of gross payments, the excess may form part of the cost. Equally, should the actual input tax be less than 5%, the difference is treated as income.[81]

 Petitioners also argue that by imposing a limitation on the

creditable input tax, the government gets to tax a profit or value-added even if there is no profit or value-added.

 Petitioners stance is purely hypothetical, argumentative, and

again, one-sided. The Court will not engage in a legal joust where premises are what ifs, arguments, theoretical and facts, uncertain. Any disquisition by the Court on this point will only be, as Shakespeare describes life in Macbeth,[82] full of sound and fury, signifying nothing.

 Whats more, petitioners contention assumes the proposition that

there is no profit or value-added. It need not take an astute businessman to know that it is a matter of exception that a business will sell goods or services without profit or value-added. It cannot be overstressed that a business is created precisely for profit.

 

The equal protection clause under the Constitution means that no person or class of persons shall be deprived of the same protection of laws which is enjoyed by other persons or other classes in the same place and in like circumstances.[83]

 The power of the State to make reasonable and natural

classifications for the purposes of taxation has long been established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the amounts to be raised, the methods of assessment, valuation and collection, the States power is entitled to presumption of validity. As a rule, the judiciary will not interfere with such power absent a clear showing of unreasonableness, discrimination, or arbitrariness.[84]

 Petitioners point out that the limitation on the creditable input tax

if the entity has a high ratio of input tax, or invests in capital equipment, or has several transactions with the government, is not based on real and substantial differences to meet a valid classification.

 The argument is pedantic, if not outright baseless. The law does

not make any classification in the subject of taxation, the kind of property, the rates to be levied or the amounts to be raised, the methods of assessment, valuation and collection. Petitioners alleged distinctions are based on variables that bear different consequences. While the implementation of the law may yield varying end results depending on ones profit margin and value-added, the Court cannot go beyond what the legislature has laid down and interfere with the affairs of business.

The equal protection clause does not require the universal application of the laws on all persons or things without distinction. This might in fact sometimes result in unequal protection. What the clause requires is equality among equals as determined according to a valid classification. By classification is meant the grouping of persons or things similar to each other in certain particulars and different from all others in these same particulars.[85]

 Petitioners brought to the Courts attention the introduction of

Senate Bill No. 2038 by Sens. S.R. Osmea III and Ma. Ana Consuelo A.S. Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric D. Singson. The proposed legislation seeks to amend the 70% limitation by increasing the same to 90%. This, according to petitioners, supports their stance that the 70% limitation is arbitrary and confiscatory. On this score, suffice it to say that these are still proposed legislations. Until Congress amends the law, and absent any unequivocal basis for its unconstitutionality, the 70% limitation stays.

 B. Uniformity and Equitability of Taxation

  Article VI, Section 28(1) of the Constitution reads:

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 The rule of taxation shall be uniform and

equitable. The Congress shall evolve a progressive system of taxation.  Uniformity in taxation means that all taxable articles or kinds of

property of the same class shall be taxed at the same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere with all people at all times.[86]

 In this case, the tax law is uniform as it provides a standard rate

of 0% or 10% (or 12%) on all goods and services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of goods and properties, importation of goods, and sale of services and use or lease of properties. These same sections also provide for a 0% rate on certain sales and transaction.

 Neither does the law make any distinction as to the type of

industry or trade that will bear the 70% limitation on the creditable input tax, 5-year amortization of input tax paid on purchase of capital goods or the 5% final withholding tax by the government. It must be stressed that the rule of uniform taxation does not deprive Congress of the power to classify subjects of taxation, and only demands uniformity within the particular class.[87]

 R.A. No. 9337 is also equitable. The law is equipped with a

threshold margin. The VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or services with gross annual sales or receipts not exceeding P1,500,000.00.[88] Also, basic marine and agricultural food products in their original state are still not subject to the tax,[89] thus ensuring that prices at the grassroots level will remain accessible. As was stated inKapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:[90]

 The disputed sales tax is also equitable. It is

imposed only on sales of goods or services by persons engaged in business with an aggregate gross annual sales exceedingP200,000.00. Small corner sari-sari stores are consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products, so that the costs of basic food and other necessities, spared as they are from the incidence of the VAT, are expected to be relatively lower and within the reach of the general public.  

It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly favors those with high profit margins. Congress was not oblivious to this. Thus, to equalize the weighty burden the law entails, the law, under Section 116, imposed a 3% percentage tax on VAT-exempt persons under Section 109(v), i.e., transactions with gross annual sales and/or receipts not exceeding P1.5 Million. This acts as a equalizer because in effect, bigger businesses that qualify for VAT coverage and VAT-exempt taxpayers stand on equal-footing.

 Moreover, Congress provided mitigating measures to cushion the

impact of the imposition of the tax on those previously exempt. Excise taxes on petroleum products[91] and natural gas[92] were reduced. Percentage tax on domestic carriers was removed.[93] Power producers are now exempt from paying franchise tax.[94]

 Aside from these, Congress also increased the income tax rates of

corporations, in order to distribute the burden of taxation. Domestic, foreign, and non-resident corporations are now subject to a 35% income tax rate, from a previous 32%.[95]Intercorporate dividends of non-resident foreign corporations are still subject to 15% final withholding tax but the tax credit allowed on the corporations domicile was increased to 20%.[96] The Philippine Amusement and Gaming Corporation (PAGCOR) is not exempt from income taxes anymore.[97] Even the sale by an artist of his works or services performed for the production of such works was not spared.

 All these were designed to ease, as well as spread out, the burden

of taxation, which would otherwise rest largely on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is equitable.

 C.                           Progressivity of Taxation 

 Lastly, petitioners contend that the limitation on the creditable

input tax is anything but regressive. It is the smaller business with higher input tax-output tax ratio that will suffer the consequences.

 Progressive taxation is built on the principle of the taxpayers

ability to pay. This principle was also lifted from Adam Smiths Canons of Taxation, and it states:

 I. The subjects of every state ought to contribute towards

the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

Taxation is progressive when its rate goes up depending on the resources of the person affected.[98]

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 The VAT is an antithesis of progressive taxation. By its very

nature, it is regressive. The principle of progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer or business for every goods bought or services enjoyed is the same regardless of income. Inother words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in the income earned by a person or profit margin marked by a business, such that the higher the income or profit margin, the smaller the portion of the income or profit that is eaten by VAT. A converso, the lower the income or profit margin, the bigger the part that the VAT eats away. At the end of the day, it is really the lower income group or businesses with low-profit margins that is always hardest hit.

 Nevertheless, the Constitution does not really prohibit the

imposition of indirect taxes, like the VAT. What it simply provides is that Congress shall "evolve a progressive system of taxation." The Court stated in the Tolentino case, thus:

 The Constitution does not really prohibit the

imposition of indirect taxes which, like the VAT, are regressive. What it simply provides is that Congress shall evolve a progressive system of taxation. The constitutional provision has been interpreted to mean simply that direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be minimized. (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation of Art. VIII, 17 (1) of the 1973 Constitution from which the present Art. VI, 28 (1) was taken. Sales taxes are also regressive.

 Resort to indirect taxes should be minimized but

not avoided entirely because it is difficult, if not impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No. 7716, 3, amending 102 (b) of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, 4 amending 103 of the NIRC)[99]

  

CONCLUSION 

It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid measure to resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear on the plight of the masses. But it does not have the panacea for the malady that the law seeks to remedy. As in other cases, the Court cannot strike down a law as unconstitutional simply because of its yokes.

 Let us not be overly influenced by the plea that

for every wrong there is a remedy, and that the judiciary should stand ready to afford relief. There are undoubtedly many wrongs the judicature may not correct, for instance, those involving political questions. . . .

 Let us likewise disabuse our minds from the

notion that the judiciary is the repository of remedies for all political or social ills; We should not forget that the Constitution has judiciously allocated the powers of government to three distinct and separate compartments; and that judicial interpretation has tended to the preservation of the independence of the three, and a zealous regard of the prerogatives of each, knowing full well that one is not the guardian of the others and that, for official wrong-doing, each may be brought to account, either by impeachment, trial or by the ballot box.[100]

  The words of the Court in Vera vs. Avelino[101] holds true then, as it

still holds true now. All things considered, there is no raison d'tre for the unconstitutionality of R.A. No. 9337.

 WHEREFORE, Republic Act No. 9337 not being unconstitutional,

the petitions in G.R. Nos. 168056, 168207, 168461, 168463, and 168730, are hereby DISMISSED.

 There being no constitutional impediment to the full enforcement

and implementation of R.A. No. 9337, the temporary restraining order issued by the Court on July 1, 2005 is LIFTED upon finality of herein decision.

 SO ORDERED.

79

FIRST DIVISION

G.R. No. 181756, June 15, 2015

MACTAN-CEBU INTERNATIONAL AIRPORT AUTHORITY (MCIAA), Petitioner, v. CITY OF LAPU-LAPU AND ELENA T.

PACALDO, Respondents.

D E C I S I O N

LEONARDO-DE CASTRO, J.:

This is a clear opportunity for this Court to clarify the effects of our two previous decisions, issued a decade apart, on the power of local government units to collect real property taxes from airport authorities located within their area, and the nature or the juridical personality of said airport authorities.

Before us is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure seeking to reverse and set aside the October 8, 2007 Decision1 of the Court of Appeals (Cebu City) inCA-G.R. SP No. 01360 and the February 12, 2008 Resolution2 denying petitioner’s motion for reconsideration.

THE FACTS

Petitioner Mactan-Cebu International Airport Authority (MCIAA) was created by Congress on July 31, 1990 under Republic Act No. 69583 to “undertake the economical, efficient and effective control, management and supervision of the Mactan International Airport in the Province of Cebu and the Lahug Airport in Cebu City x x x and such other airports as may be established in the Province of Cebu.” It is represented in this case by the Office of the Solicitor General.

Respondent City of Lapu-Lapu is a local government unit and political subdivision, created and existing under its own charter with capacity to sue and be sued. Respondent Elena T. Pacaldo was impleaded in her capacity as the City Treasurer of respondent City.

Upon its creation, petitioner enjoyed exemption from realty taxes under the following provision of Republic Act No. 6958:chanRoblesvirtualLawlibrarySection 14. Tax Exemptions. – The Authority shall be exempt from realty taxes imposed by the National Government or any of its political subdivisions, agencies and instrumentalities: Provided, That no tax exemption herein granted shall extend to any subsidiary which may be organized by the Authority.chanroblesvirtuallawlibraryOn September 11, 1996, however, this Court rendered a decision in Mactan-Cebu International Airport Authority v. Marcos4 (the 1996 MCIAA case) declaring that upon the effectivity of Republic Act No. 7160 (The Local Government Code of 1991), petitioner was no longer exempt from real estate taxes. The Court held:chanRoblesvirtualLawlibrarySince the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC, exemptions from payment of real property taxes granted to natural or juridical persons, including government-owned or controlled corporations, except as provided in the said section, and the petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that its exemption from such tax granted it in Section 14 of its Charter, R.A. No. 6958, has been withdrawn. x x x.chanroblesvirtuallawlibraryOn January 7, 1997, respondent City issued to petitioner a Statement of Real Estate Tax assessing the lots comprising the Mactan International Airport in the amount of P162,058,959.52. Petitioner complained that there were discrepancies in said Statement of Real Estate Tax as follows:chanRoblesvirtualLawlibrary(a) [T]he statement included lots and buildings not found in the inventory of petitioner’s real properties;

(b) [S]ome of the lots were covered by two separate tax declarations which resulted in double assessment;

(c) [There were] double entries pertaining to the same lots; and

(d) [T]he statement included lots utilized exclusively for governmental purposes.5

Respondent City amended its billing and sent a new Statement of Real Estate Tax to petitioner in the amount of P151,376,134.66. Petitioner averred that this amount covered real estate taxes on the lots utilized solely and exclusively for public or governmental purposes such as the airfield, runway and taxiway, and the lots on which they are situated.6chanrobleslaw

Petitioner paid respondent City the amount of four million pesos 80

(P4,000,000.00) monthly, which was later increased to six million pesos (P6,000,000.00) monthly. As of December 2003, petitioner had paid respondent City a total of P275,728,313.36.7chanrobleslaw

Upon request of petitioner’s General Manager, the Secretary of the Department of Justice (DOJ) issued Opinion No. 50, Series of 1998,8 and we quote the pertinent portions of said Opinion below:chanRoblesvirtualLawlibraryYou further state that among the real properties deemed transferred to MCIAA are the airfield, runway, taxiway and the lots on which the runway and taxiway are situated, the tax declarations of which were transferred in the name of the MCIAA. In 1997, the City of Lapu-Lapu imposed real estate taxes on these properties invoking the provisions of the Local Government Code.

It is your view that these properties are not subject to real property tax because they are exclusively used for airport purposes. You said that the runway and taxiway are not only used by the commercial airlines but also by the Philippine Air Force and other government agencies. As such and in conjunction with the above interpretation of Section 15 of R.A. No. 6958, you believe that these properties are considered owned by the Republic of the Philippines. Hence, this request for opinion.

The query is resolved in the affirmative. The properties used for airport purposes (i.e. airfield, runway, taxiway and the lots on which the runway and taxiway are situated) are owned by the Republic of the Philippines.

x x x x

Under the Law on Public Corporations, the legislature has complete control over the property which a municipal corporation has acquired in its public or governmental capacity and which is devoted to public or governmental use. The municipality in dealing with said property is subject to such restrictions and limitations as the legislature may impose. On the other hand, property which a municipal corporation acquired in its private or proprietary capacity, is held by it in the same character as a private individual. Hence, the legislature in dealing with such property, is subject to the constitutional restrictions concerning property (Martin, Public Corporations [1997], p. 30; see also Province of Zamboanga del [Norte] v. City of Zamboanga [131 Phil. 446]). The same may be said of properties transferred to the MCIAA and used for airport purposes, such as those involved herein. Since such properties are of public dominion, they are deemed held by the MCIAA in trust for the Government and can be alienated only as may be provided by law.

Based on the foregoing, it is our considered opinion that the properties used for airport purposes, such as the airfield, runway and taxiway and the lots on which the runway and taxiway are

located, are owned by the State or by the Republic of the Philippines and are merely held in trust by the MCIAA, notwithstanding that certificates of titles thereto may have been issued in the name of the MCIAA. (Emphases added.)Based on the above DOJ Opinion, the Department of Finance issued a 2nd Indorsement to the City Treasurer of Lapu-Lapu dated August 3, 1998,9 which reads:chanRoblesvirtualLawlibraryThe distinction as to which among the MCIAA properties are still considered “owned by the State or by the Republic of the Philippines,” such as the resolution in the above-cited DOJ Opinion No. 50, for purposes of real property tax exemption is hereby deemed tenable considering that the subject “airfield, runway, taxiway and the lots on which the runway and taxiway are situated” appears to be the subject of real property tax assessment and collection of the city government of Lapu-Lapu, hence, the same are definitely located within the jurisdiction of Lapu-Lapu City.

Moreover, then Undersecretary Antonio P. Belicena of the Department of Finance, in his 1st Indorsement dated May 18, 1998, advanced that “this Department (DOF) interposes no objection to the request of Mactan Cebu International Airport Authority for exemption from payment of real property tax on the property used for airport purposes” mentioned above.

The City Assessor, therefore, is hereby instructed to transfer the assessment of the subject airfield, runway, taxiway and the lots on which the runway and taxiway are situated, from the “Taxable Roll” to the “Exempt Roll” of real properties.

The City Treasurer thereat should be informed on the action taken for his immediate appropriate action. (Emphases added.)Respondent City Treasurer Elena T. Pacaldo sent petitioner a Statement of Real Property Tax Balances up to the year 2002 reflecting the amount of P246,395,477.20. Petitioner claimed that the statement again included the lots utilized solely and exclusively for public purpose such as the airfield, runway, and taxiway and the lots on which these are built. Respondent Pacaldo then issued Notices of Levy on 18 sets of real properties of petitioner.10chanrobleslaw

Petitioner filed a petition for prohibition11 with the Regional Trial Court (RTC) of Lapu-Lapu City with prayer for the issuance of a temporary restraining order (TRO) and/or a writ of preliminary injunction, docketed as SCA No. 6056-L. Branch 53 of RTC Lapu-Lapu City then issued a 72-hour TRO. The petition for prohibition sought to enjoin respondent City from issuing a warrant of levy against petitioner’s properties and from selling them at public auction for delinquency in realty tax obligations. The petition likewise prayed for a declaration that the airport terminal building, the airfield, runway, taxiway and the lots on which they are situated are exempted from real estate taxes after due hearing. Petitioner based its claim of exemption on DOJ Opinion No. 50.

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The RTC issued an Order denying the motion for extension of the TRO. Thus, on December 10, 2003, respondent City auctioned 27 of petitioner’s properties. As there was no interested bidder who participated in the auction sale, respondent City forfeited and purchased said properties. The corresponding Certificates of Sale of Delinquent Property were issued to respondent City.12chanrobleslaw

Petitioner claimed before the RTC that it had discovered that respondent City did not pass any ordinance authorizing the collection of real property tax, a tax for the special education fund (SEF), and a penalty interest for its nonpayment. Petitioner argued that without the corresponding tax ordinances, respondent City could not impose and collect real property tax, an additional tax for the SEF, and penalty interest from petitioner.13chanrobleslaw

The RTC issued an Order14 on December 28, 2004 granting petitioner’s application for a writ of preliminary injunction. The pertinent portions of the Order are quoted below:chanRoblesvirtualLawlibraryThe supervening legal issue has rendered it imperative that the matter of the consolidation of the ownership of the auctioned properties be placed on hold. Furthermore, it is the view of the Court that great prejudice and damage will be suffered by petitioner if it were to lose its dominion over these properties now when the most important legal issue has still to be resolved by the Court. Besides, the respondents and the intervenor have not sufficiently shown cause why petitioner’s application should not be granted.

WHEREFORE, the foregoing considered, petitioner’s application for a writ of preliminary injunction is granted. Consequently, upon the approval of a bond in the amount of one million pesos (P1,000,000.00), let a writ of preliminary injunction issue enjoining the respondents, the intervenor, their agents or persons acting in [their] behalf, to desist from consolidating and exercising ownership over the properties of the petitioner.chanroblesvirtuallawlibraryHowever, upon motion of respondents, the RTC lifted the writ of preliminary injunction in an Order15dated December 5, 2005. The RTC reasoned as follows:chanRoblesvirtualLawlibraryThe respondent City, in the course of the hearing of its motion, presented to this Court a certified copy of its Ordinance No. 44 (Omnibus Tax Ordinance of the City of Lapu-Lapu), Section 25 whereof authorized the collection of a rate of one and one-half (1 ½) [per centum] from owners, executors or administrators of any real estate lying within the jurisdiction of the City of Lapu-Lapu, based on the assessed value as shown in the latest revision.

Though this ordinance was enacted prior to the effectivity of Republic Act No. 7160 (Local Government Code of 1991), to the mind of the Court this ordinance is still a valid and effective ordinance in view of Sec. 529 of RA

7160 x x x [and the] Implementing Rules and Regulations of RA 7160 x x x.

x x x x

The tax collected under Ordinance No. 44 is within the rates prescribed by RA 7160, though the 25% penalty collected is higher than the 2% interest allowed under Sec. 255 of the said law which provides:chanRoblesvirtualLawlibraryIn case of failure to pay the basic real property tax or any other tax levied under this Title upon the expiration of the periods as provided in Section 250, or when due, as the case may be, shall subject the taxpayer to the payment of interest at the rate of two percent (2%) per month on the unpaid amount or a fraction thereof, until the delinquent tax shall have been fully paid: Provided, however, That in no case shall the total interest on the unpaid tax or portion thereof exceed thirty-six (36) months.chanroblesvirtuallawlibraryThis difference does not however detract from the essential enforceability and effectivity of Ordinance No. 44 pursuant to Section 529 of RA 7160 and Article 278 of the Implementing Rules and Regulations. The outcome of this disparity is simply that respondent City can only collect an interest of 2% per month on the unpaid tax. Consequently, respondent City [has] to recompute the petitioner’s tax liability.

It is also the Court’s perception that respondent City can still collect the additional 1% tax on real property without an ordinance to this effect. It may be recalled that Republic Act No. 5447 has created the Special Education Fund which is constituted from the proceeds of the additional tax on real property imposed by the law. Respondent City has collected this tax as mandated by this law without any ordinance for the purpose, as there is no need for it. Even when RA 5447 was amended by PD 464 (Real Property Tax Code), respondent City had continued to collect the tax, as it used to.

It is true that RA 7160 has repealed RA 5447, but what has been repealed are only Section 3, a(3) and b(2) which concern the allocation of the additional tax, considering that under RA 7160, the proceeds of the additional 1% tax on real property accrue exclusively to the Special Education Fund. Nevertheless, RA 5447 has not been totally repealed; there is only a partial repeal.

It may be observed that there is no requirement in RA 7160 that an ordinance be enacted to enable the collection of the additional 1% tax. This is so since RA 5447 is still in force and effect, and the declared policy of the government in enacting the law, which is to contribute to the financial support of the goals of education as provided in the Constitution, necessitates the continued and uninterrupted collection of the tax. Considering that this is a tax of far-reaching importance, to require the passage of an ordinance in order that the tax may be collected would be

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to place the collection of the tax at the option of the local legislature. This would run counter to the declared policy of the government when the SEF was created and the tax imposed.

As regards the allegation of respondents that this Court has no jurisdiction to entertain the instant petition, the Court deems it proper, at this stage of the proceedings, not to treat this issue, as it involves facts which are yet to be established.

x x x [T]he Court’s issuance of a writ of preliminary injunction may appear to be a futile gesture in the light of Section 263 of RA 7160. x x x.

x x x x

It would seem from the foregoing provisions, that once the taxpayer fails to redeem within the one-year period, ownership fully vests on the local government unit concerned. Thus, when in the present case petitioner failed to redeem the parcels of land acquired by respondent City, the ownership thereof became fully vested on respondent City without the latter having to perform any other acts to perfect its ownership. Corollary thereto, ownership on the part of respondent City has become a fait accompli.

WHEREFORE, in the light of the foregoing considerations, respondents’ motion for reconsideration is granted, and the order of this Court dated December 28, 2004 is hereby reconsidered. Consequently, the writ of preliminary injunction issued by this Court is hereby lifted.chanroblesvirtuallawlibraryAggrieved, petitioner filed a petition for certiorari16 with the Court of Appeals (Cebu City), with urgent prayer for the issuance of a TRO and/or writ of preliminary injunction, docketed as CA-G.R. SP No. 01360. The Court of Appeals (Cebu City) issued a TRO17 on January 5, 2006 and shortly thereafter, issued a writ of preliminary injunction18 on February 17, 2006.

RULING OF THE COURT OF APPEALS

The Court of Appeals (Cebu City) promulgated the questioned Decision on October 8, 2007, holding that petitioner is a government-owned or controlled corporation and its properties are subject to realty tax. The dispositive portion of the questioned Decision reads:chanRoblesvirtualLawlibraryWHEREFORE, in view of the foregoing, judgment is hereby rendered by us as follows:

a. We DECLARE the airport terminal building, the airfield, runway, taxiway and the lots on which they are situated NOT EXEMPT from the real estate tax imposed by the respondent City of Lapu-Lapu;

b. We DECLARE the imposition and collection of the real estate tax, the additional levy for the Special Education Fund and the penalty interest as VALID and LEGAL. However, pursuant to Section 255 of the Local Government Code, respondent city can only collect an interest of 2% per month on the unpaid tax which total interest shall, in no case, exceed thirty-six (36) months;

c. We DECLARE the sale in public auction of the aforesaid properties and the eventual forfeiture and purchase of the subject property by the respondent City of Lapu-Lapu as NULL and VOID. However, petitioner MCIAA’s property is encumbered only by a limited lien possessed by the respondent City of Lapu-Lapu in accord with Section 257 of the Local Government Code.19

Petitioner filed a Motion for Partial Reconsideration20 of the questioned Decision covering only the portion of said decision declaring that petitioner is a GOCC and, therefore, not exempt from the realty tax and special education fund imposed by respondent City. Petitioner cited Manila International Airport Authority v. Court of Appeals21 (the 2006 MIAA case) involving the City of Parañaque and the Manila International Airport Authority. Petitioner claimed that it had been described by this Court as a government instrumentality, and that it followed “as a logical consequence that petitioner is exempt from the taxing powers of respondent City of Lapu-Lapu.”22 Petitioner alleged that the 1996 MCIAA case had been overturned by the Court in the 2006 MIAA case. Petitioner thus prayed that it be declared exempt from paying the realty tax, special education fund, and interest being collected by respondent City.

On February 12, 2008, the Court of Appeals denied petitioner’s motion for partial reconsideration in the questioned Resolution.

The Court of Appeals followed and applied the precedent established in the 1996 MCIAA case and refused to apply the 2006 MIAA case. The Court of Appeals wrote in the questioned Decision: “We find that our position is in line with the coherent and cohesive interpretation of the relevant provisions of the Local Government Code on local taxation enunciated in the [1996 MCIAA] case which to our mind is more elegant and rational and provides intellectual clarity than the one provided by the Supreme Court in the [2006] MIAA case.”23chanrobleslaw

In the questioned Decision, the Court of Appeals held that petitioner’s airport terminal building, airfield, runway, taxiway, and the lots on which they are situated are not exempt from real estate tax reasoning as follows:chanRoblesvirtualLawlibraryUnder the Local Government Code (LGC for brevity), enacted pursuant to the constitutional mandate of local autonomy, all natural and juridical persons, including government-owned or controlled corporations (GOCCs), instrumentalities and agencies, are no longer exempt from local taxes

83

even if previously granted an exemption. The only exemptions from local taxes are those specifically provided under the Code itself, or those enacted through subsequent legislation.

Thus, the LGC, enacted pursuant to Section 3, Article X of the Constitution, provides for the exercise by local government units of their power to tax, the scope thereof or its limitations, and the exemptions from local taxation.

Section 133 of the LGC prescribes the common limitations on the taxing powers of local government units. x x x.

x x x x

The above-stated provision, however, qualified the exemption of the National Government, its agencies and instrumentalities from local taxation with the phrase “unless otherwise provided herein.”

Section 232 of the LGC provides for the power of the local government units (LGUs for brevity) to levy real property tax. x x x.

x x x x

Section 234 of the LGC provides for the exemptions from payment of real property taxes and withdraws previous exemptions granted to natural and juridical persons, including government-owned and controlled corporations, except as provided therein. x x x.

x x x x

Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. x x x.24 (Citations omitted.)The Court of Appeals went on to state that contrary to the ruling of the Supreme Court in the 2006 MIAAcase, it finds and rules that:chanRoblesvirtualLawlibrarya) Section 133 of the LGC is not an absolute prohibition on the power of the LGUs to tax the National Government, its agencies and instrumentalities as the same is qualified by Sections 193, 232 and 234 which “otherwise provided”; and

b) Petitioner MCIAA is a GOCC.25 (Emphasis ours.)The Court of Appeals ratiocinated in the following manner:chanRoblesvirtualLawlibraryPursuant to the explicit provision of Section 193 of the LGC, exemptions previously enjoyed by persons, whether natural or juridical, like the petitioner MCIAA, are deemed withdrawn upon the effectivity of the Code. Further, the last paragraph of Section 234 of the Code also unequivocally withdrew, upon the Code’s effectivity, exemptions from payment of real property taxes previously granted to natural or juridical persons, including

government-owned or controlled corporations, except as provided in the said section. Petitioner MCIAA, undoubtedly a juridical person, it follows that its exemption from such tax granted under Section 14 of R.A. 6958 has been withdrawn.

x x x x

From the [1996 MCIAA] ruling, it is acknowledged that, under Section 133 of the LGC, instrumentalities were generally exempt from all forms of local government taxation, unless otherwise provided in the Code. On the other hand, Section 232 “otherwise provided” insofar as it allowed local government units to levy an ad valorem real property tax, irrespective of who owned the property. At the same time, the imposition of real property taxes under Section 232 is, in turn, qualified by the phrase “not hereinafter specifically exempted.” The exemptions from real property taxes are enumerated in Section 234 of the Code which specifically states that only real properties owned by the Republic of the Philippines or any of its political subdivisions are exempted from the payment of the tax. Clearly, instrumentalities or GOCCs do not fall within the exceptions under Section 234 of the LGC.

Thus, as ruled in the [1996 MCIAA] case, the prohibition on taxing the national government, its agencies and instrumentalities under Section 133 is qualified by Sections 232 and 234, and accordingly, the only relevant exemption now applicable to these bodies is what is now provided under Section 234(a) of the Code. It may be noted that the express withdrawal of previously granted exemptions to persons from the payment of real property tax by the LGC does not even make any distinction as to whether the exempt person is a governmental entity or not. As Sections 193 and 234 of the Code both state, the withdrawal applies to “all persons, including GOCCs,” thus encompassing the two classes of persons recognized under our laws, natural persons and juridical persons.

x x x x

The question of whether or not petitioner MCIAA is an instrumentality or a GOCC has already been lengthily but soundly, cogently and lucidly answered in the [1996 MCIAA] case x x x.

x x x x

Based on the foregoing, the claim of the majority of the Supreme Court in the [2006MIAA] case that MIAA (and also petitioner MCIAA) is not a government-owned or controlled corporation but an instrumentality based on Section 2(10) of the Administrative Code of 1987 appears to be unsound. In the [2006 MIAA] case, the majority justifies MIAA’s purported exemption on Section 133(o) of the Local Government Code which places agencies and instrumentalities: as generally exempt from the taxation

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powers of the LGUs. It further went on to hold that “By express mandate of the Local Government Code, local governments cannot impose any kind of tax on national government instrumentalities like the MIAA.” x x x.26 (Citations omitted.)The Court of Appeals further cited Justice Tinga’s dissent in the 2006 MIAA case as well as provisions from petitioner MCIAA’s charter to show that petitioner is a GOCC.27 The Court of Appeals wrote:chanRoblesvirtualLawlibraryThese cited provisions establish the fitness of the petitioner MCIAA to be the subject of legal relations. Under its charter, it has the power to acquire, possess and incur obligations. It also has the power to contract in its own name and to acquire title to movable or immovable property. More importantly, it may likewise exercise powers of a corporation under the Corporation Code. Moreover, based on its own allegation, it even recognized itself as a GOCC when it alleged in its petition for prohibition filed before the lower court that it “is a body corporate organized and existing under Republic Act No. 6958 x x x.”

We also find to be not meritorious the assertion of petitioner MCIAA that the respondent city can no longer challenge the tax-exempt character of the properties since it is estopped from doing so when respondent City of Lapu-Lapu, through its former mayor, Ernest H. Weigel, Jr., had long ago conceded that petitioner’s properties are exempt from real property tax.

It is not denied by the respondent city that it considered, through its former mayor, Ernest H. Weigel, Jr., petitioner’s subject properties, specifically the runway and taxiway, as exempt from taxes. However, as astutely pointed out by the respondent city it “can never be in estoppel, particularly in matters involving taxes. It is a well-known rule that erroneous application and enforcement of the law by public officers do not preclude subsequent correct application of the statute, and that the Government is never estopped by mistake or error on the part of its agents.”28 (Citations omitted.)The Court of Appeals established the following:chanRoblesvirtualLawlibrarya) [R]espondent City was able to prove and establish that it has a valid and existing ordinance for the imposition of realty tax against petitioner MCIAA;

b) [T]he imposition and collection of additional levy of 1% Special Education Fund (SEF) is authorized by law, Republic Act No. 5447; and

c) [T]he collection of penalty interest for delinquent taxes is not only authorized by law but is likewise [sanctioned] by respondent City’s ordinance.29

The Court of Appeals likewise held that respondent City has a valid and existing local tax ordinance, Ordinance No. 44, or the Omnibus Tax Ordinance of Lapu-Lapu City, which provided for the imposition of real property tax. The relevant provision reads:chanRoblesvirtualLawlibrary

Chapter 5 – Tax on Real Property Ownership

Section 25. RATE OF TAX. - A rate of one and one-half (1 ½) percentum shall be collected from owners, executors or administrators of any real estate lying within the territorial jurisdiction of the City of Lapu-Lapu, based on the assessed value as shown in the latest revision.30

The Court of Appeals found that even if Ordinance No. 44 was enacted prior to the effectivity of the LGC, it remained in force and effect, citing Section 529 of the LGC and Article 278 of the LGC’s Implementing Rules and Regulations.31chanrobleslaw

As regards the Special Education Fund, the Court of Appeals held that respondent City can still collect the additional 1% tax on real property even without an ordinance to this effect, as this is authorized by Republic Act No. 5447, as amended by Presidential Decree No. 464 (the Real Property Tax Code), which does not require an enabling tax ordinance. The Court of Appeals affirmed the RTC’s ruling that Republic Act No. 5447 was still in force and effect notwithstanding the passing of the LGC, as the latter only partially repealed the former law. What Section 534 of the LGC repealed was Section 3 a(3) and b(2) of Republic Act No. 5447, and not the entire law that created the Special Education Fund.32 The repealed provisions referred to allocation of taxes on Virginia type cigarettes and duties on imported leaf tobacco and the percentage remittances to the taxing authority concerned. The Court of Appeals, citing The Commission on Audit of the Province of Cebu v. Province of Cebu,33 held that “[t]he failure to add a specific repealing clause particularly mentioning the statute to be repealed indicates that the intent was not to repeal any existing law on the matter, unless an irreconcilable inconsistency and repugnancy exists in the terms of the new and the old laws.”34 The Court of Appeals quoted the RTC’s discussion on this issue, which we reproduce below:chanRoblesvirtualLawlibraryIt may be observed that there is no requirement in RA 7160 that an ordinance be enacted to enable the collection of the additional 1% tax. This is so since R.A. 5447 is still in force and effect, and the declared policy of the government in enacting the law, which is to contribute to the financial support of the goals of education as provided in the Constitution, necessitates the continued and uninterrupted collection of the tax. Considering that this is a tax of far-reaching importance, to require the passage of an ordinance in order that the tax may be collected would be to place the collection of the tax at the option of the local legislature. This would run counter to the declared policy of the government when the SEF was created and the tax imposed.35

Regarding the penalty interest, the Court of Appeals found that Section 30 of Ordinance No. 44 of respondent City provided for a penalty surcharge of 25% of the tax due for a given year. Said provision reads:chanRoblesvirtualLawlibrarySection 30. – PENALTY FOR FAILURE TO PAY TAX. – Failure to pay the tax provided for under this Chapter within the time fixed in Section 27, shall

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subject the taxpayer to a surcharge of twenty-five percent (25%), without interest.36

The Court of Appeals however declared that after the effectivity of the Local Government Code, the respondent City could only collect penalty surcharge up to the extent of 72%, covering a period of three years or 36 months, for the entire delinquent property.37 This was lower than the 25% per annum surcharge imposed by Ordinance No. 44.38 The Court of Appeals affirmed the findings of the RTC in the decision quoted below:chanRoblesvirtualLawlibraryThe tax collected under Ordinance No. 44 is within the rates prescribed by RA 7160, though the 25% penalty collected is higher than the 2% allowed under Sec. 255 of the said law which provides:ChanRoblesVirtualawlibrary

x x x x

This difference does not however detract from the essential enforceability and effectivity of Ordinance No. 44 pursuant to Section 529 of RA No. 7160 and Article 278 of the Implementing Rules and Regulations. The outcome of this disparity is simply that respondent City can only collect an interest of 2% per month on the unpaid tax. Consequently, respondent city will have to [recompute] the petitioner’s tax liability.39

It is worthy to note that the Court of Appeals nevertheless held that even if it is clear that respondent City has the power to impose real property taxes over petitioner, “it is also evident and categorical that, under Republic Act No. 6958, the properties of petitioner MCIAA may not be conveyed or transferred to any person or entity except to the national government.”40 The relevant provisions of the said law are quoted below:chanRoblesvirtualLawlibrarySection 4. Functions, Powers and Duties. – The Authority shall have the following functions, powers and duties:ChanRoblesVirtualawlibrary

x x x x

(e) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose of any land, building, airport facility, or property of whatever kind and nature, whether movable or immovable, or any interest therein: Provided, That any asset located in theMactan International Airport important to national security shall not be subject to alienation or mortgage by the Authority nor to transfer to any entity other than the National Government[.]

Section 13. Borrowing Power. – The Authority may, in accordance with Section 21, Article XII of the Constitution and other existing laws, rules and regulations on local or foreign borrowing, raise funds, either from local or international sources, by way of loans, credit or securities, and other borrowing instruments with the power to create pledges, mortgages and other voluntary liens or encumbrances on any of its assets or properties, subject to the prior approval of the President of the Philippines.

All loans contracted by the Authority under this section, together with all interests and other sums payable in respect thereof, shall constitute a charge upon all the revenues and assets of the Authority and shall rank equally with one another, but shall have priority over any other claim or charge on the revenue and assets of the Authority: Provided, That this provision shall not be construed as a prohibition or restriction on the power of the Authority to create pledges, mortgages and other voluntary liens or encumbrances on any asset or property of the Authority.

The payment of the loans or other indebtedness of the Authority may be guaranteed by the National Government subject to the approval of the President of the Philippines.chanroblesvirtuallawlibraryThe Court of Appeals concluded that “it is clear that petitioner MCIAA is denied by its charter the absolute right to dispose of its property to any person or entity except to the national government and it is not empowered to obtain loans or encumber its property without the approval of the President.”41 The questioned Decision contained the following conclusion:chanRoblesvirtualLawlibraryWith the advent of RA 7160, the Local Government Code, the power to tax is no longer vested exclusively on Congress. LGUs, through its local legislative bodies, are now given direct authority to levy taxes, fees and other charges pursuant to Article X, Section 5 of the 1987 Constitution. And one of the most significant provisions of the LGC is the removal of the blanket inclusion of instrumentalities and agencies of the national government from the coverage of local taxation. The express withdrawal by the Code of previously granted exemptions from realty taxes applied to instrumentalities and government-owned or controlled corporations (GOCCs) such as the petitioner Mactan-Cebu International Airport Authority. Thus, petitioner MCIAA became a taxable person in view of the withdrawal of the realty tax exemption that it previously enjoyed under Section 14 of RA No. 6958 of its charter. As expressed and categorically held in theMactan case, the removal and withdrawal of tax exemptions previously enjoyed by persons, natural or juridical, are consistent with the State policy to ensure autonomy to local governments and the objective of the Local Government Code that they enjoy genuine and meaningful local autonomy to enable them to attain their fullest development as self-reliant communities and make them effective partners in the attainment of national goals.

However, in the case at bench, petitioner MCIAA’s charter expressly bars the alienation or mortgage of its property to any person or entity except to the national government. Therefore, while petitioner MCIAA is a taxable person for purposes of real property taxation, respondent City of Lapu-Lapu is prohibited from seizing, selling and owning these properties by and through a public auction in order to satisfy petitioner MCIAA’s tax liability.42 (Citations omitted.)

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In the questioned Resolution that affirmed its questioned Decision, the Court of Appeals denied petitioner’s motion for reconsideration based on the following grounds:chanRoblesvirtualLawlibraryFirst, the MCIAA case remains the controlling law on the matter as the same is the established precedent; not the MIAA case but the MCIAA case since the former, as keenly pointed out by the respondent City of Lapu-Lapu, has not yet attained finality as there is still yet a pending motion for reconsideration filed with the Supreme Court in the aforesaid case.

Second, and more importantly, the ruling of the Supreme Court in the MIAA case cannot be similarly invoked in the case at bench. The said case cannot be considered as the “law of the case.” The “law of the case” doctrine has been defined as that principle under which determinations of questions of law will generally be held to govern a case throughout all its subsequent stages where such determination has already been made on a prior appeal to a court of last resort. It is merely a rule of procedure and does not go to the power of the court, and will not be adhered to where its application will result in an unjust decision. It relates entirely to questions of law, and is confined in its operation to subsequent proceedings in the same case. According to said doctrine, whatever has been irrevocably established constitutes the law of the case only as to the same parties in the same case and not to different parties in an entirely different case. Besides, pending resolution of the aforesaid motion for reconsideration in the MIAA case, the latter case has not irrevocably established anything.

Thus, after a thorough and judicious review of the allegations in petitioner’s motion for reconsideration, this Court resolves to deny the same as the matters raised therein had already been exhaustively discussed in the decision sought to be reconsidered, and that no new matters were raised which would warrant the modification, much less reversal, thereof.43 (Emphasis added, citations omitted.)PETITIONER’S THEORY

Petitioner is before us now claiming that this Court, in the 2006 MIAA case, had expressly declared that petitioner, while vested with corporate powers, is not considered a government-owned or controlled corporation, but is a government instrumentality like the Manila International Airport Authority (MIAA), Philippine Ports Authority (PPA), University of the Philippines, and Bangko Sentral ng Pilipinas (BSP). Petitioner alleges that as a government instrumentality, all its airport lands and buildings are exempt from real estate taxes imposed by respondent City.44chanrobleslaw

Petitioner alleges that Republic Act No. 6958 placed “a limitation on petitioner’s administration of its assets and properties” as it provides under Section 4(e) that “any asset in the international airport important to national security cannot be alienated or mortgaged by petitioner or

transferred to any entity other than the National Government.”45chanrobleslaw

Thus, petitioner claims that the Court of Appeals (Cebu City) gravely erred in disregarding the following:chanRoblesvirtualLawlibraryI

PETITIONER IS A GOVERNMENT INSTRUMENTALITY AS EXPRESSLY DECLARED BY THE HONORABLE COURT IN THE MIAA CASE. AS SUCH, IT IS EXEMPT FROM PAYING REAL ESTATE TAXES IMPOSED BY RESPONDENT CITY OF LAPU-LAPU.

II

THE PROPERTIES OF PETITIONER CONSISTING OF THE AIRPORT TERMINAL BUILDING, AIRFIELD, RUNWAY, TAXIWAY, INCLUDING THE LOTS ON WHICH THEY ARE SITUATED, ARE EXEMPT FROM REAL PROPERTY TAXES.

III

RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE REAL PROPERTY TAX WITHOUT ANY APPROPRIATE ORDINANCE.

IV

RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE AN ADDITIONAL 1% TAX FOR THE SPECIAL EDUCATION FUND IN THE ABSENCE OF ANY CORRESPONDING ORDINANCE.

V

RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE ANY INTEREST SANS ANY ORDINANCE MANDATING ITS IMPOSITION.46

Petitioner claims the following similarities with MIAA:

1. MCIAA belongs to the same class and performs identical functions as MIAA;

2. MCIAA is a public utility like MIAA;

3. MIAA was organized to operate the international and domestic airport in Paranaque City for public use, while MCIAA was organized to operate the international and domestic airport inMactan for public use.

4. Both are attached agencies of the Department of Transportation and Communications.47

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Petitioner compares its charter (Republic Act No. 6958) with that of MIAA (Executive Order No. 903).

Section 3 of Executive Order No. 903 provides:chanRoblesvirtualLawlibrarySec. 3. Creation of the Manila International Airport Authority. There is hereby established a body corporate to be known as the Manila International Airport Authority which shall be attached to the Ministry of Transportation and Communications. The principal office of the Authority shall be located at the New Manila International Airport. The Authority may establish such offices, branches, agencies or subsidiaries as it may deem proper and necessary; x x x.chanroblesvirtuallawlibrarySection 2 of Republic Act No. 6958 reads:chanRoblesvirtualLawlibrarySection 2. Creation of the Mactan-Cebu International Airport Authority. – There is hereby established a body corporate to be known as the Mactan-Cebu International Airport Authority which shall be attached to the Department of Transportation and Communications. The principal office of the Authority shall be located at the MactanInternational Airport, Province of Cebu.

The Authority may have such branches, agencies or subsidiaries as it may deem proper and necessary.chanroblesvirtuallawlibraryAs to MIAA’s purposes and objectives, Section 4 of Executive Order No. 903 reads:chanRoblesvirtualLawlibrarySec. 4. Purposes and Objectives. The Authority shall have the following purposes and objectives:ChanRoblesVirtualawlibrary

(a) To help encourage and promote international and domestic air traffic in the Philippines as a means of making the Philippines a center of international trade and tourism and accelerating the development of the means of transportation and communications in the country;

(b) To formulate and adopt for application in the Airport internationally acceptable standards of airport accommodation and service; and

(c) To upgrade and provide safe, efficient, and reliable airport facilities for international and domestic air travel.chanroblesvirtuallawlibraryPetitioner claims that the above purposes and objectives are analogous to those enumerated in its charter, specifically Section 3 of Republic Act No. 6958, which reads:chanRoblesvirtualLawlibrarySection 3. Primary Purposes and Objectives. – The Authority shall principally undertake the economical, efficient and effective control, management and supervision of the Mactan International Airport in the Province of Cebu and the Lahug Airport in Cebu City, hereinafter collectively referred to as the airports, and such other airports as may be established in the Province of Cebu. In addition, it shall have the following objectives:ChanRoblesVirtualawlibrary

(a) To encourage, promote and develop international and domestic air

traffic in the central Visayas and Mindanao regions as a means of making the regions centers of international trade and tourism, and accelerating the development of the means of transportation and communications in the country; and

(b) To upgrade the services and facilities of the airports and to formulate internationally acceptable standards of airport accommodation and service.chanroblesvirtuallawlibraryThe powers, functions and duties of MIAA under Section 5 of Executive Order No. 903 are:ChanRoblesVirtualawlibrary

Sec. 5. Functions, Powers and Duties. The Authority shall have the following functions, powers and duties:chanRoblesvirtualLawlibrary(a) To formulate, in coordination with the Bureau of Air Transportation

and other appropriate government agencies, a comprehensive and integrated policy and program for the Airport and to implement, review and update such policy and program periodically;

(b) To control, supervise, construct, maintain, operate and provide such facilities or services as shall be necessary for the efficient functioning of the Airport;

(c) To promulgate rules and regulations governing the planning, development, maintenance, operation and improvement of the Airport, and to control and/or supervise as may be necessary the construction of any structure or the rendition of any services within the Airport;

(d) To sue and be sued in its corporate name;(e) To adopt and use a corporate seal;(f) To succeed by its corporate name;(g) To adopt its by-laws, and to amend or repeal the same from time to

time;(h) To execute or enter into contracts of any kind or nature;(i) To acquire, purchase, own, administer, lease, mortgage, sell or

otherwise dispose of any land, building, airport facility, or property of whatever kind and nature, whether movable or immovable, or any interest therein;

(j) To exercise the power of eminent domain in the pursuit of its purposes and objectives;

(k) To levy, and collect dues, charges, fees or assessments for the use of the Airport premises, works, appliances, facilities or concessions or for any service provided by the Authority, subject to the approval of the Minister of Transportation and Communications in consultation with the Minister of Finance, and subject further to the provisions of Batas Pambansa Blg. 325 where applicable;

(l) To invest its idle funds, as it may deem proper, in government securities and other evidences of indebtedness of the government;

(m)To provide services, whether on its own or otherwise, within the Airport and the approaches thereof, which shall include but shall not be limited to, the following:(1) Aircraft movement and allocation of parking areas of aircraft on

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the ground;(2) Loading or unloading of aircrafts;(3) Passenger handling and other services directed towards the care,

convenience and security of passengers, visitors and other airport users; and

(4) Sorting, weighing, measuring, warehousing or handling of baggage and goods.

(n) To perform such other acts and transact such other business, directly or indirectly necessary, incidental or conducive to the attainment of the purposes and objectives of the Authority, including the adoption of necessary measures to remedy congestion in the Airport; and

(o) To exercise all the powers of a corporation under the Corporation Law, insofar as these powers are not inconsistent with the provisions of this Executive Order.

Petitioner claims that MCIAA has related functions, powers and duties under Section 4 of Republic Act No. 6958, as shown in the provision quoted below:chanRoblesvirtualLawlibrarySection 4. Functions, Powers and Duties. – The Authority shall have the following functions, powers and duties:ChanRoblesVirtualawlibrary

(a) To formulate a comprehensive and integrated development policy and program for the airports and to implement, review and update such policy and program periodically;

(b) To control, supervise, construct, maintain, operate and provide such facilities or services as shall be necessary for the efficient functioning of the airports;

(c) To promulgate rules and regulations governing the planning, development, maintenance, operation and improvement of the airports, and to control and supervise the construction of any structure or the rendition of any service within the airports;

(d) To exercise all the powers of a corporation under the Corporation Code of the Philippines, insofar as those powers are not inconsistent with the provisions of this Act;

(e) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose of any land, building, airport facility, or property of whatever kind and nature, whether movable or immovable, or any interest therein: Provided, That any asset located in theMactan International Airport important to national security shall not be subject to alienation or mortgage by the Authority nor to transfer to any entity other than the National Government;

(f) To exercise the power of eminent domain in the pursuit of its purposes and objectives;

(g) To levy and collect dues, charges, fees or assessments for the use of

airport premises, works, appliances, facilities or concessions, or for any service provided by the Authority;

(h) To retain and appropriate dues, fees and charges collected by the Authority relative to the use of airport premises for such measures as may be necessary to make the Authority more effective and efficient in the discharge of its assigned tasks;

(i) To invest its idle funds, as it may deem proper, in government securities and other evidences of indebtedness; and

(j) To provide services, whether on its own or otherwise, within the airports and the approaches thereof as may be necessary or in connection with the maintenance and operation of the airports and their facilities.chanroblesvirtuallawlibraryPetitioner claims that like MIAA, it has police authority within its premises, as shown in their respective charters quoted below:chanRoblesvirtualLawlibraryEO 903, Sec. 6. Police Authority. — The Authority shall have the power to exercise such police authority as may be necessary within its premises to carry out its functions and attain its purposes and objectives, without prejudice to the exercise of functions within the same premises by the Ministry of National Defense through the Aviation Security Command (AVSECOM) as provided in LOI 961: Provided, That the Authority may request the assistance of law enforcement agencies, including request for deputization as may be required. x x x.

R.A. No. 6958, Section 5. Police Authority. – The Authority shall have the power to exercise such police authority as may be necessary within its premises or areas of operation to carry out its functions and attain its purposes and objectives: Provided, That the Authority may request the assistance of law enforcement agencies, including request for deputization as may be required. x x x.chanroblesvirtuallawlibraryPetitioner pointed out other similarities in the two charters, such as:ChanRoblesVirtualawlibrary

1. Both MCIAA and MIAA are covered by the Civil Service Law, rules and regulations (Section 15, Executive Order No. 903; Section 12, Republic Act No. 6958);

2. Both charters contain a proviso on tax exemptions (Section 21, Executive Order No. 903; Section 14, Republic Act No. 6958);

3. Both MCIAA and MIAA are required to submit to the President an annual report generally dealing with their activities and operations (Section 14, Executive Order No. 903; Section 11, Republic Act No. 6958); and

4. Both have borrowing power subject to the approval of the President (Section 16, Executive Order No. 903; Section 13, Republic Act No.

89

6958).48chanrobleslaw

Petitioner suggests that it is because of its similarity with MIAA that this Court, in the 2006 MIAA case, placed it in the same class as MIAA and considered it as a government instrumentality.

Petitioner submits that since it is also a government instrumentality like MIAA, the following conclusion arrived by the Court in the 2006 MIAA case is also applicable to petitioner:chanRoblesvirtualLawlibraryUnder Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which governs the legal relation and status of government units, agencies and offices within the entire government machinery, MIAA is a government instrumentality and not a government-owned or controlled corporation. Under Section 133(o) of the Local Government Code, MIAA as a government instrumentality is not a taxable person because it is not subject to “[t]axes, fees or charges of any kind” by local governments. The only exception is when MIAA leases its real property to a “taxable person” as provided in Section 234(a) of the Local Government Code, in which case the specific real property leased becomes subject to real estate tax. Thus, only portions of the Airport Lands and Buildings leased to taxable persons like private parties are subject to real estate tax by the City of Parañaque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to public use, are properties of public dominion and thus owned by the State or the Republic of the Philippines. Article 420 specifically mentions “ports x x x constructed by the State,” which includes public airports and seaports, as properties of public dominion and owned by the Republic. As properties of public dominion owned by the Republic, there is no doubt whatsoever that the Airport Lands and Buildings are expressly exempt from real estate tax under Section 234(a) of the Local Government Code. This Court has also repeatedly ruled that properties of public dominion are not subject to execution or foreclosure sale.49(Emphases added.)Petitioner insists that its properties consisting of the airport terminal building, airfield, runway, taxiway and the lots on which they are situated are not subject to real property tax because they are actually, solely and exclusively used for public purposes.50 They are indispensable to the operation of the MactanInternational Airport and by their very nature, these properties are exempt from tax. Said properties belong to the State and are merely held by petitioner in trust. As earlier mentioned, petitioner claims that these properties are important to national security and cannot be alienated, mortgaged, or transferred to any entity except the National Government.

Petitioner prays that judgment be rendered:chanRoblesvirtualLawlibrary

a) Declaring petitioner exempt from paying real property taxes as it is a government instrumentality;

b) Declaring respondent City of Lapu-Lapu as bereft of any authority to levy and collect the basic real property tax, the additional tax for the SEF and the penalty interest for its failure to pass the corresponding tax ordinances; and

c) Declaring, in the alternative, the airport lands and buildings of petitioner as exempt from real property taxes as they are used solely and exclusively for public purpose.51

In its Consolidated Reply filed through the OSG, petitioner claims that the 2006 MIAA ruling has overturned the 1996 MCIAA ruling. Petitioner cites Justice Dante O. Tinga’s dissent in the MIAA ruling, as follows:chanRoblesvirtualLawlibrary[The] ineluctable conclusion is that the majority rejects the rationale and ruling in Mactan. The majority provides for a wildly different interpretation of Section 133, 193 and 234 of the Local Government Code than that employed by the Court in Mactan. Moreover, the parties in Mactan and in this case are similarly situated, as can be obviously deducted from the fact that both petitioners are airport authorities operating under similarly worded charters. And the fact that the majority cites doctrines contrapuntal to the Local Government Code as in Basco and Maceda evinces an intent to go against the Court’s jurisprudential trend adopting the philosophy of expanded local government rule under the Local Government Code.

x x x The majority is obviously inconsistent with Mactan and there is no way these two rulings can stand together. Following basic principles in statutory construction, Mactan will be deemed as giving way to this new ruling.

x x x x

There is no way the majority can be justified unless Mactan is overturned. The MCIAA and the MIAA are similarly situated. They are both, as will be demonstrated, GOCCs, commonly engaged in the business of operating an airport. They are the owners of airport properties they respectively maintain and hold title over these properties in their name. These entities are both owned by the State, and denied by their respective charters the absolute right to dispose of their properties without prior approval elsewhere. Both of them are not empowered to obtain loans or encumber their properties without prior approval the prior approval of the President.52 (Citations omitted.)Petitioner likewise claims that the enactment of Ordinance No. 070-2007 is an admission on respondent City’s part that it must have a tax measure to be able to impose a tax or special assessment. Petitioner avers that assuming that it is a non-exempt entity or that its airport lands and buildings are not exempt, it was only upon the effectivity of Ordinance No. 070-2007 on January 1, 2008 that respondent City could properly impose the basic real property tax, the additional tax for the SEF, and the interest

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in case of nonpayment.53chanrobleslaw

Petitioner filed its Memorandum54 on June 17, 2009.

RESPONDENTS’ THEORY

In their Comment,55 respondents point out that petitioner partially moved for a reconsideration of the questioned Decision only as to the issue of whether petitioner is a GOCC or not. Thus, respondents declare that the other portions of the questioned decision had already attained finality and ought not to be placed in issue in this petition for certiorari. Thus, respondents discussed the other issues raised by petitioner with reservation as to this objection.

Respondents summarized the issues and the grounds relied upon as follows:chanRoblesvirtualLawlibrarySTATEMENT OF THE ISSUES

WHETHER OR NOT PETITIONER IS A GOVERNMENT INSTRUMENTALITY EXEMPT FROM PAYING REAL PROPERTY TAXES

WHETHER OR NOT RESPONDENT CITY CAN [IMPOSE] REALTY TAX, SPECIAL EDUCATION FUND AND PENALTY INTEREST

WHETHER OR NOT THE AIRPORT TERMINAL BUILDING, AIRFIELD, RUNWAY, TAXIWAY INCLUDING THE LOTS ON WHICH THEY ARE SITUATED ARE EXEMPT FROM REALTY TAXES

GROUNDS RELIED UPON

1. PETITIONER IS A GOCC HENCE NOT EXEMPT FROM REALTY TAXES

2. TERMINAL BUILDING, RUNWAY, TAXIWAY ARE NOT EXEMPT FROM REALTY TAXES

3. ESTOPPEL DOES NOT LIE AGAINST GOVERNMENT

4. CITY CAN COLLECT REALTY TAX AND INTEREST

5. CITY CAN COLLECT SEF

6. MCIAA HAS NOT SHOWN ANY IRREPARABLE INJURY WARRANTING INJUNCTIVE RELIEF

7. MCIAA HAS NOT COMPLIED WITH PROVISION OF THE LGC56

Respondents claim that “the mere mention of MCIAA in the MIAA v. [Court of Appeals] case does not make it the controlling case on the

matter.”57 Respondents further claim that the 1996 MCIAA case where this Court held that petitioner is a GOCC is the controlling jurisprudence. Respondents point out that petitioner and MIAA are two very different entities. Respondents argue that petitioner is a GOCC contrary to its assertions, based on its Charter and on DOJ Opinion No. 50.

Respondents contend that if petitioner is not a GOCC but an instrumentality of the government, still the following statement in the 1996 MCIAA case applies:chanRoblesvirtualLawlibraryBesides, nothing can prevent Congress from decreeing that even instrumentalities or agencies of the Government performing governmental functions may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt its wisdom.58

Respondents argue that MCIAA properties such as the terminal building, taxiway and runway are not exempt from real property taxation. As discussed in the 1996 MCIAA case, Section 234 of the LGC omitted GOCCs such as MCIAA from entities enjoying tax exemptions. Said decision also provides that the transfer of ownership of the land to petitioner was absolute and petitioner cannot evade payment of taxes.59chanrobleslaw

Even if the following issues were not raised by petitioner in its motion for reconsideration of the questioned Decision, and thus the ruling pertaining to these issues in the questioned decision had become final, respondents still discussed its side over its objections as to the propriety of bringing these up before this Court.

1. Estoppel does not lie against the government.

2. Respondent City can collect realty taxes and interest.

a. Based on the Local Government Code (Sections 232, 233, 255) and its IRR (Sections 241, 247).

b. The City of Lapu-Lapu passed in 1980 Ordinance No. 44, or the Omnibus Tax Ordinance, wherein the imposition of real property tax was made. This Ordinance was in force and effect by virtue of Article 278 of the IRR of Republic Act No. 7160.60chanrobleslaw

c. Ordinance No. 070-2007, known as the Revised Lapu-Lapu City Revenue Code, imposed real property taxes, special education fund and further provided for the payment of interest and surcharges. Thus, the issue is passé and is moot and academic.

3. Respondent City can collect Special Education Fund.

a. The LGC does not require the enactment of an ordinance for the collection of the SEF.

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b. Congress did not entirely repeal the SEF law, hence, its levy, imposition and collection need not be covered by ordinance. Besides, the City has enacted the Revenue Code containing provisions for the levy and collection of the SEF.61

Furthermore, respondents aver that:ChanRoblesVirtualawlibrary

1. Collection of taxes is beyond the ambit of injunction.

a. Respondents contend that the petition only questions the denial of the writ of preliminary injunction by the RTC and the Court of Appeals. Petitioner failed to show irreparable injury.

b. Comparing the alleged damage that may be caused petitioner and the direct affront and challenge against the power to tax, which is an attribute of sovereignty, it is but appropriate that injunctive relief should be denied.

2. Petitioner did not comply with LGC provisions on payment under protest.

a. Petitioner should have protested the tax imposition as provided in Article 285 of the IRR of Republic Act No. 7160. Section 252 of Republic Act No. 716062 requires that the taxpayer’s protest can only be entertained if the tax is first paid under protest.63

Respondents submitted their Memorandum64 on June 30, 2009, wherein they allege that the 1996MCIAA case is still good law, as shown by the following cases wherein it was quoted:

1. National Power Corporation v. Local Board of Assessment Appeals of Batangas [545 Phil. 92 (2007)];

2. Mactan-Cebu International Airport Authority v. Urgello [549 Phil. 302 (2007)];

3. Quezon City v. ABS-CBN Broadcasting Corporation [588 Phil. 785 (2008)]; and

4. The City of Iloilo v. Smart Communications, Inc. [599 Phil. 492 (2009)].

Respondents assert that the constant reference to the 1996 MCIAA case “could hardly mean that the doctrine has breathed its last” and that the 1996 MCIAA case stands as precedent and is controlling on petitioner MCIAA.65chanrobleslaw

Respondents allege that the issue for consideration is whether it is proper for petitioner to raise the issue of whether it is not liable to pay real property taxes, special education fund (SEF), interests and/or surcharges.66 Respondents argue that the Court of Appeals was correct in declaring petitioner liable for realty taxes, etc., on the terminal building, taxiway, and runway. Respondent City relies on the following grounds:chanRoblesvirtualLawlibrary

1. The case of MCIAA v. Marcos, et al., is controlling on petitioner MCIAA;

2. MCIAA is a corporation;

3. Section 133 in relation to Sections 232 and 234 of the Local Government Code of 1991 authorizes the collection of real property taxes (etc.) from MCIAA;

4. Terminal Building, Runway & Taxiway are not of the Public Dominion and are not exempt from realty taxes, special education fund and interest;

5. Respondent City can collect realty tax, interest/surcharge, and Special Education Fund from MCIAA; [and]

6. Estoppel does not lie against the government.67

THIS COURT’S RULING

The petition has merit. The petitioner is an instrumentality of the government; thus, its properties actually, solely and exclusively used for public purposes, consisting of the airport terminal building, airfield, runway, taxiway and the lots on which they are situated, are not subject to real property tax and respondent City is not justified in collecting taxes from petitioner over said properties.

DISCUSSION

The Court of Appeals (Cebu City) erred in declaring that the 1996 MCIAA case still controls and that petitioner is a GOCC. The 2006 MIAA case governs.

The Court of Appeals’ reliance on the 1996 MCIAA case is misplaced and its staunch refusal to apply the 2006 MIAA case is patently erroneous. The Court of Appeals, finding for respondents, refused to apply the ruling in the 2006 MIAA case on the premise that the same had not yet reached finality, and that as far as MCIAA is concerned, the 1996 MCIAA case is still good law.68chanrobleslaw

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While it is true, as respondents allege, that the 1996 MCIAA case was cited in a long line of cases,69still, in 2006, the Court en banc decided a case that in effect reversed the 1996 Mactan ruling. The 2006 MIAA case had, since the promulgation of the questioned Decision and Resolution, reached finality and had in fact been either affirmed or cited in numerous cases by the Court.70 The decision became final and executory on November 3, 2006.71 Furthermore, the 2006 MIAA case was decided by the Court en banc while the 1996 MCIAA case was decided by a Division. Hence, the 1996 MCIAA case should be read in light of the subsequent and unequivocal ruling in the 2006 MIAA case.

To recall, in the 2006 MIAA case, we held that MIAA’s airport lands and buildings are exempt from real estate tax imposed by local governments; that it is not a GOCC but an instrumentality of the national government, with its real properties being owned by the Republic of the Philippines, and these are exempt from real estate tax. Specifically referring to petitioner, we stated as follows:chanRoblesvirtualLawlibraryMany government instrumentalities are vested with corporate powers but they do not become stock or non-stock corporations, which is a necessary condition before an agency or instrumentality is deemed a government-owned or controlled corporation. Examples are the Mactan International Airport Authority, the Philippine Ports Authority, the University of the Philippines and Bangko Sentral ng Pilipinas. All these government instrumentalities exercise corporate powers but they are not organized as stock or non-stock corporations as required by Section 2(13) of the Introductory Provisions of the Administrative Code. These government instrumentalities are sometimes loosely called government corporate entities. However, they are not government-owned or controlled corporations in the strict sense as understood under the Administrative Code, which is the governing law defining the legal relationship and status of government entities.72 (Emphases ours.)In the 2006 MIAA case, the issue before the Court was “whether the Airport Lands and Buildings of MIAA are exempt from real estate tax under existing laws.”73 We quote the extensive discussion of the Court that led to its finding that MIAA’s lands and buildings were exempt from real estate tax imposed by local governments:chanRoblesvirtualLawlibraryFirst, MIAA is not a government-owned or controlled corporation but an instrumentality of the National Government and thus exempt from local taxation. Second, the real properties of MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax.

1. MIAA is Not a Government-Owned or Controlled Corporation

x x x x

There is no dispute that a government-owned or controlled corporation is

not exempt from real estate tax. However, MIAA is not a government-owned or controlled corporation. Section 2(13) of the Introductory Provisions of the Administrative Code of 1987 defines a government-owned or controlled corporation as follows:chanRoblesvirtualLawlibrarySEC. 2. General Terms Defined. - x x x

(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its capital stock: x x x.chanroblesvirtuallawlibraryA government-owned or controlled corporation must be “organized as a stock or non-stock corporation.” MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock corporation because it has no capital stock divided into shares. MIAA has no stockholders or voting shares. x x x

x x x x

Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.

Section 3 of the Corporation Code defines a stock corporation as one whose “capital stock is divided into shares and x x x authorized to distribute to the holders of such shares dividends x x x.” MIAA has capital but it is not divided into shares of stock. MIAA has no stockholders or voting shares. Hence, MIAA is not a stock corporation.

MIAA is also not a non-stock corporation because it has no members. Section 87 of the Corporation Code defines a non-stock corporation as “one where no part of its income is distributable as dividends to its members, trustees or officers.” A non-stock corporation must have members. Even if we assume that the Government is considered as the sole member of MIAA, this will not make MIAA a non-stock corporation. Non-stock corporations cannot distribute any part of their income to their members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of its annual gross operating income to the National Treasury. This prevents MIAA from qualifying as a non-stock corporation.

Section 88 of the Corporation Code provides that non-stock corporations are “organized for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like chambers.” MIAA is not organized for any of these purposes. MIAA, a public utility, is organized to operate an international and domestic airport for public use.

Since MIAA is neither a stock nor a non-stock corporation, MIAA

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does not qualify as a government-owned or controlled corporation. What then is the legal status of MIAA within the National Government?

MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental functions. MIAA is like any other government instrumentality, the only difference is that MIAA is vested with corporate powers. Section 2(10) of the Introductory Provisions of the Administrative Code defines a government “instrumentality” as follows:chanRoblesvirtualLawlibrarySEC. 2. General Terms Defined. - x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. x x x.chanroblesvirtuallawlibraryWhen the law vests in a government instrumentality corporate powers, the instrumentality does not become a corporation. Unless the government instrumentality is organized as a stock or non-stock corporation, it remains a government instrumentality exercising not only governmental but also corporate powers. Thus, MIAA exercises the governmental powers of eminent domain, police authority and the levying of fees and charges. At the same time, MIAA exercises “all the powers of a corporation under the Corporation Law, insofar as these powers are not inconsistent with the provisions of this Executive Order.”

Likewise, when the law makes a government instrumentality operationally autonomous, the instrumentality remains part of the National Government machinery although not integrated with the department framework. The MIAA Charter expressly states that transforming MIAA into a “separate and autonomous body” will make its operation more “financially viable.”

Many government instrumentalities are vested with corporate powers but they do not become stock or non-stock corporations, which is a necessary condition before an agency or instrumentality is deemed a government-owned or controlled corporation. Examples are the Mactan International Airport Authority,the Philippine Ports Authority, the University of the Philippines and Bangko Sentral ng Pilipinas. All these government instrumentalities exercise corporate powers but they are not organized as stock or non-stock corporations as required by Section 2(13) of the Introductory Provisions of the Administrative Code. These government instrumentalities are sometimes loosely called government corporate entities. However, they are not government-owned or controlled corporations in the strict sense as understood under the Administrative Code, which is the

governing law defining the legal relationship and status of government entities.74 (Emphases ours, citations omitted.)The Court in the 2006 MIAA case went on to discuss the limitation on the taxing power of the local governments as against the national government or its instrumentality:chanRoblesvirtualLawlibraryA government instrumentality like MIAA falls under Section 133(o) of the Local Government Code, which states:chanRoblesvirtualLawlibrarySEC. 133. Common Limitations on the Taxing Powers of Local Government Units. - Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following:ChanRoblesVirtualawlibrary

x x x x

(o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities and local government units. x x x.chanroblesvirtuallawlibrary

Section 133(o) recognizes the basic principle that local governments cannot tax the national government, which historically merely delegated to local governments the power to tax. While the 1987 Constitution now

includes taxation as one of the powers of local governments, local governments may only exercise such power “subject to such guidelines

and limitations as the Congress may provide.”

When local governments invoke the power to tax on national government instrumentalities, such power is construed strictly against local governments.The rule is that a tax is never presumed

and there must be clear language in the law imposing the tax. Any doubt whether a person, article or activity is taxable is resolved against

taxation. This rule applies with greater force when local governments seek to tax national government instrumentalities.

Another rule is that a tax exemption is strictly construed against the taxpayer claiming the exemption. However, when Congress grants an

exemption to a national government instrumentality from local taxation, such exemption is construed liberally in favor of the national government

instrumentality. x x x.

x x x x

There is, moreover, no point in national and local governments taxing each other, unless a sound and compelling policy requires

such transfer of public funds from one government pocket to another.

There is also no reason for local governments to tax national government instrumentalities for rendering essential public

services to inhabitants of local governments. The only exception is when the legislature clearly intended to tax government instrumentalities

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for the delivery of essential public services for sound and compelling policy considerations. There must be express language in the law

empowering local governments to tax national government instrumentalities. Any doubt whether such power exists is resolved

against local governments.

Thus, Section 133 of the Local Government Code states that “unless otherwise provided” in the Code, local governments cannot tax national

government instrumentalities. x x x.75(Emphases ours, citations omitted.)The Court emphasized that the airport lands and buildings of MIAA are owned by the Republic and belong to the public domain. The Court said:chanRoblesvirtualLawlibraryThe Airport Lands and Buildings of MIAA are property of public dominion and therefore owned by the State or the Republic of the Philippines. x x x.

x x x x

No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like “roads, canals, rivers, torrents, ports and bridges constructed by the State,” are owned by the State. The term “ports” includes seaports and airports. The MIAA Airport Lands and Buildings constitute a “port” constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are properties of public dominion and thus owned by the State or the Republic of the Philippines.

The Airport Lands and Buildings are devoted to public use because they are used by the public for international and domestic travel and transportation. The fact that the MIAA collects terminal fees and other charges from the public does not remove the character of the Airport Lands and Buildings as properties for public use. x x x.

x x x x

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines, constitute the bulk of the income that maintains the operations of MIAA. The collection of such fees does not change the character of MIAA as an airport for public use. Such fees are often termed user’s tax. This means taxing those among the public who actually use a public facility instead of taxing all the public including those who never use the particular public facility. A user’s tax is more equitable - a principle of taxation mandated in the 1987 Constitution.

The Airport Lands and Buildings of MIAA x x x are properties of public dominion because they are intended for public use. As properties of public dominion, they indisputably belong to the State or the Republic of the Philippines.76 (Emphases supplied, citations omitted.)

The Court also held in the 2006 MIAA case that airport lands and buildings are outside the commerce of man.As properties of public dominion, the Airport Lands and Buildings are outside the commerce of man. The Court has ruled repeatedly that properties of public dominion are outside the commerce of man. As early as 1915, this Court already ruled in Municipality of Cavite v. Rojas that properties devoted to public use are outside the commerce of man, thus:ChanRoblesVirtualawlibrary

x x x x

The Civil Code, Article 1271, prescribes that everything which is not outside the commerce of man may be the object of a contract, x x x.

x x x x

The Court has also ruled that property of public dominion, being outside the commerce of man, cannot be the subject of an auction sale.

Properties of public dominion, being for public use, are not subject to levy, encumbrance or disposition through public or private sale. Any encumbrance, levy on execution or auction sale of any property of public dominion is void for being contrary to public policy. Essential public services will stop if properties of public dominion are subject to encumbrances, foreclosures and auction sale. This will happen if the City of Parañaque can foreclose and compel the auction sale of the 600-hectare runway of the MIAA for non-payment of real estate tax.

Before MIAA can encumber the Airport Lands and Buildings, the President must first withdraw from public use the Airport Lands and Buildings. x x x.

x x x x

Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings from public use, these properties remain properties of public dominion and are inalienable. Since the Airport Lands and Buildings are inalienable in their present status as properties of public dominion, they are not subject to levy on execution or foreclosure sale. As long as the Airport Lands and Buildings are reserved for public use, their ownership remains with the State or the Republic of the Philippines.

The authority of the President to reserve lands of the public domain for public use, and to withdraw such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the Administrative Code of 1987, which states:chanRoblesvirtualLawlibrarySEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government. - (1) The President shall have the power to reserve for

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settlement or public use, and for specific public purposes, any of the lands of the public domain, the use of which is not otherwise directed by law. The reserved land shall thereafter remain subject to the specific public purpose indicated until otherwise provided by law or proclamation;x x x x

There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by law or presidential proclamation from public use, they are properties of public dominion, owned by the Republic and outside the commerce of man.77

Thus, the Court held that MIAA is “merely holding title to the Airport Lands and Buildings in trust for the Republic. [Under] Section 48, Chapter 12, Book I of the Administrative Code [which] allows instrumentalities like MIAA to hold title to real properties owned by the Republic.”78chanrobleslaw

The Court in the 2006 MIAA case cited Section 234(a) of the Local Government Code and held that said provision exempts from real estate tax any “[r]eal property owned by the Republic of the Philippines.”79The Court emphasized, however, that “portions of the Airport Lands and Buildings that MIAA leases to private entities are not exempt from real estate tax.” The Court further held:chanRoblesvirtualLawlibraryThis exemption should be read in relation with Section 133(o) of the same Code, which prohibits local governments from imposing “[t]axes, fees or charges of any kind on the National Government, its agencies and instrumentalities x x x.” The real properties owned by the Republic are titled either in the name of the Republic itself or in the name of agencies or instrumentalities of the National Government. The Administrative Code allows real property owned by the Republic to be titled in the name of agencies or instrumentalities of the national government. Such real properties remain owned by the Republic and continue to be exempt from real estate tax.

The Republic may grant the beneficial use of its real property to an agency or instrumentality of the national government. This happens when title of the real property is transferred to an agency or instrumentality even as the Republic remains the owner of the real property. Such arrangement does not result in the loss of the tax exemption. Section 234(a) of the Local Government Code states that real property owned by the Republic loses its tax exemption only if the “beneficial use thereof has been granted, for consideration or otherwise, to a taxable person.” MIAA, as a government instrumentality, is not a taxable person under Section 133(o) of the Local Government Code. Thus, even if we assume that the Republic has granted to MIAA the beneficial use of the Airport Lands and Buildings, such fact does not make these real properties subject to real estate tax.

However, portions of the Airport Lands and Buildings that MIAA leases to private entities are not exempt from real estate tax. For example, the

land area occupied by hangars that MIAA leases to private corporations is subject to real estate tax. In such a case, MIAA has granted the beneficial use of such land area for a consideration to a taxable person and therefore such land area is subject to real estate tax. x x x.80

Significantly, the Court reiterated the above ruling and applied the same reasoning in Manila International Airport Authority v. City of Pasay,81 thus:chanRoblesvirtualLawlibraryThe only difference between the 2006 MIAA case and this case is that the 2006 MIAA case involved airport lands and buildings located in Parañaque City while this case involved airport lands and buildings located in Pasay City. The 2006 MIAA case and this case raised the same threshold issue: whether the local government can impose real property tax on the airport lands, consisting mostly of the runways, as well as the airport buildings, of MIAA. x x x.

x x x x

The definition of “instrumentality” under Section 2(10) of the Introductory Provisions of the Administrative Code of 1987 uses the phrase “includes x x x government-owned or controlled corporations” which means that a government “instrumentality” may or may not be a “government-owned or controlled corporation.” Obviously, the term government “instrumentality” is broader than the term “government-owned or controlled corporation.” x x x.

x x x x

The fact that two terms have separate definitions means that while a government “instrumentality” may include a “government-owned or controlled corporation,” there may be a government “instrumentality” that will not qualify as a “government-owned or controlled corporation.”

A close scrutiny of the definition of “government-owned or controlled corporation” in Section 2(13) will show that MIAA would not fall under such definition. MIAA is a government “instrumentality” that does not qualify as a “government-owned or controlled corporation.” x x x.

x x x x

Thus, MIAA is not a government-owned or controlled corporation but a government instrumentality which is exempt from any kind of tax from the local governments. Indeed, the exercise of the taxing power of local government units is subject to the limitations enumerated in Section 133 of the Local Government Code. Under Section 133(o) of the Local Government Code, local government units have no power to tax instrumentalities of the national government like the MIAA. Hence, MIAA is not liable to pay real property tax for the NAIA Pasay properties.

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Furthermore, the airport lands and buildings of MIAA are properties of public dominion intended for public use, and as such are exempt from real property tax under Section 234(a) of the Local Government Code. However, under the same provision, if MIAA leases its real property to a taxable person, the specific property leased becomes subject to real property tax. In this case, only those portions of the NAIA Pasay properties which are leased to taxable persons like private parties are subject to real property tax by the City of Pasay. (Emphases added, citations omitted.)The Court not only mentioned petitioner MCIAA as similarly situated as MIAA. It also mentioned several other government instrumentalities, among which was the Philippine Fisheries Development Authority. Thus, applying the 2006 MIAA ruling, the Court, in Philippine Fisheries Development Authority v. Court of Appeals,82 held:chanRoblesvirtualLawlibraryOn the basis of the parameters set in the MIAA case, the Authority should be classified as an instrumentality of the national government. As such, it is generally exempt from payment of real property tax, except those portions which have been leased to private entities.

In the MIAA case, petitioner Philippine Fisheries Development Authority was cited as among the instrumentalities of the national government. x x x.

x x x x

Indeed, the Authority is not a GOCC but an instrumentality of the government. The Authority has a capital stock but it is not divided into shares of stocks. Also, it has no stockholders or voting shares. Hence, it is not a stock corporation. Neither [is it] a non-stock corporation because it has no members.

The Authority is actually a national government instrumentality which is defined as an agency of the national government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. When the law vests in a government instrumentality corporate powers, the instrumentality does not become a corporation. Unless the government instrumentality is organized as a stock or non-stock corporation, it remains a government instrumentality exercising not only governmental but also corporate powers.

Thus, the Authority which is tasked with the special public function to carry out the government’s policy “to promote the development of the country’s fishing industry and improve the efficiency in handling, preserving, marketing, and distribution of fish and other aquatic products,” exercises the governmental powers of eminent domain, and the power to levy fees and charges. At the same time, the Authority

exercises “the general corporate powers conferred by laws upon private and government-owned or controlled corporations.”

x x x x

In light of the foregoing, the Authority should be classified as an instrumentality of the national government which is liable to pay taxes only with respect to the portions of the property, the beneficial use of which were vested in private entities. When local governments invoke the power to tax on national government instrumentalities, such power is construed strictly against local governments. The rule is that a tax is never presumed and there must be clear language in the law imposing the tax. Any doubt whether a person, article or activity is taxable is resolved against taxation. This rule applies with greater force when local governments seek to tax national government instrumentalities.

Thus, the real property tax assessments issued by the City of Iloilo should be upheld only with respect to the portions leased to private persons. In case the Authority fails to pay the real property taxes due thereon, said portions cannot be sold at public auction to satisfy the tax delinquency. x x x.

x x x x

In sum, the Court finds that the Authority is an instrumentality of the national government, hence, it is liable to pay real property taxes assessed by the City of Iloilo on the IFPC only with respect to those portions which are leased to private entities. Notwithstanding said tax delinquency on the leased portions of the IFPC, the latter or any part thereof, being a property of public domain, cannot be sold at public auction. This means that the City of Iloilo has to satisfy the tax delinquency through means other than the sale at public auction of the IFPC. (Citations omitted.)Another government instrumentality specifically mentioned in the 2006 MIAA case was the Philippine Ports Authority (PPA). Hence, in Curata v. Philippine Ports Authority,83 the Court held that the PPA is similarly situated as MIAA, and ruled in this wise:chanRoblesvirtualLawlibraryThis Court’s disquisition in Manila International Airport Authority v. Court of Appeals – ruling that MIAA is not a government-owned and/or controlled corporation (GOCC), but an instrumentality of the National Government and thus exempt from local taxation, and that its real properties are owned by the Republic of the Philippines –– is instructive. x x x. These findings are squarely applicable to PPA, as it is similarly situated as MIAA. First, PPA is likewise not a GOCC for not having shares of stocks or members. Second, the docks, piers and buildings it administers are likewise owned by the Republic and, thus, outside the commerce of man. Third, PPA is a mere trustee of these properties. Hence, like MIAA, PPA is clearly a government instrumentality, an agency of the government vested with corporate powers to perform efficiently its

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governmental functions.

Therefore, an undeniable conclusion is that the funds of PPA partake of government funds, and such may not be garnished absent an allocation by its Board or by statutory grant. If the PPA funds cannot be garnished and its properties, being government properties, cannot be levied via a writ of execution pursuant to a final judgment, then the trial court likewise cannot grant discretionary execution pending appeal, as it would run afoul of the established jurisprudence that government properties are exempt from execution. What cannot be done directly cannot be done indirectly. (Citations omitted.)In Government Service Insurance System v. City Treasurer and City Assessor of the City of Manila84 the Court found that the GSIS was also a government instrumentality and not a GOCC, applying the 2006MIAA case even though the GSIS was not among those specifically mentioned by the Court as similarly situated as MIAA. The Court said:chanRoblesvirtualLawlibraryGSIS an instrumentality of the National Government

Apart from the foregoing consideration, the Court’s fairly recent ruling in Manila International Airport Authority v. Court of Appeals, a case likewise involving real estate tax assessments by a Metro Manila city on the real properties administered by MIAA, argues for the non-tax liability of GSIS for real estate taxes. x x x.

x x x x

While perhaps not of governing sway in all fours inasmuch as what were involved in Manila International Airport Authority, e.g., airfields and runways, are properties of the public dominion and, hence, outside the commerce of man, the rationale underpinning the disposition in that case is squarely applicable to GSIS, both MIAA and GSIS being similarly situated. First, while created under CA 186 as a non-stock corporation, a status that has remained unchanged even when it operated under PD 1146 and RA 8291, GSIS is not, in the context of the aforequoted Sec. 193 of the LGC, a GOCC following the teaching of Manila International Airport Authority, for, like MIAA, GSIS’s capital is not divided into unit shares. Also, GSIS has no members to speak of. And by members, the reference is to those who, under Sec. 87 of the Corporation Code, make up the non-stock corporation, and not to the compulsory members of the system who are government employees. Its management is entrusted to a Board of Trustees whose members are appointed by the President.

Second, the subject properties under GSIS’s name are likewise owned by the Republic. The GSIS is but a mere trustee of the subject properties which have either been ceded to it by the Government or acquired for the enhancement of the system. This particular property arrangement is clearly shown by the fact that the disposal or conveyance of said subject

properties are either done by or through the authority of the President of the Philippines. x x x. (Emphasis added, citations omitted.)All the more do we find that petitioner MCIAA, with its many similarities to the MIAA, should be classified as a government instrumentality, as its properties are being used for public purposes, and should be exempt from real estate taxes. This is not to derogate in any way the delegated authority of local government units to collect realty taxes, but to uphold the fundamental doctrines of uniformity in taxation and equal protection of the laws, by applying all the jurisprudence that have exempted from said taxes similar authorities, agencies, and instrumentalities, whether covered by the 2006 MIAA ruling or not.

To reiterate, petitioner MCIAA is vested with corporate powers but it is not a stock or non-stock corporation, which is a necessary condition before an agency or instrumentality is deemed a government-owned or controlled corporation. Like MIAA, petitioner MCIAA has capital under its charter but it is not divided into shares of stock. It also has no stockholders or voting shares. Republic Act No. 6958 provides:chanRoblesvirtualLawlibrarySection 9. Capital. – The [Mactan-Cebu International Airport] Authority shall have an authorized capital stock equal to and consisting of:ChanRoblesVirtualawlibrary

(a) The value of fixed assets (including airport facilities, runways and equipment) and such other properties, movable and immovable, currently administered by or belonging to the airports as valued on the date of the effectivity of this Act;

(b) The value of such real estate owned and/or administered by the airports; and

(c) Government contribution in such amount as may be deemed an appropriate initial balance. Such initial amount, as approved by the President of the Philippines, which shall be more or less equivalent to six (6) months working capital requirement of the Authority, is hereby authorized to be appropriated in the General Appropriations Act of the year following its enactment into law.chanroblesvirtuallawlibraryThereafter, the government contribution to the capital of the Authority shall be provided for in the General Appropriations Act.

Like in MIAA, the airport lands and buildings of MCIAA are properties of public dominion because they are intended for public use. As properties of public dominion, they indisputably belong to the State or the Republic of the Philippines, and are outside the commerce of man. This, unless petitioner leases its real property to a taxable person, the specific property leased becomes subject to real property tax; in which case, only those portions of petitioner’s properties which are leased to taxable persons like private parties are subject to real property tax by the City of Lapu-Lapu.

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We hereby adopt and apply to petitioner MCIAA the findings and conclusions of the Court in the 2006MIAA case, and we quote:chanRoblesvirtualLawlibraryTo summarize, MIAA is not a government-owned or controlled corporation under Section 2(13) of the Introductory Provisions of the Administrative Code because it is not organized as a stock or non-stock corporation. Neither is MIAA a government-owned or controlled corporation under Section 16, Article XII of the 1987 Constitution because MIAA is not required to meet the test of economic viability. MIAA is a government instrumentality vested with corporate powers and performing essential public services pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code. As a government instrumentality, MIAA is not subject to any kind of tax by local governments under Section 133(o) of the Local Government Code. The exception to the exemption in Section 234(a) does not apply to MIAA because MIAA is not a taxable entity under the Local Government Code. Such exception applies only if the beneficial use of real property owned by the Republic is given to a taxable entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus are properties of public dominion. Properties of public dominion are owned by the State or the Republic. x x x.

x x x x

The term “ports x x x constructed by the State” includes airports and seaports. The Airport Lands and Buildings of MIAA are intended for public use, and at the very least intended for public service. Whether intended for public use or public service, the Airport Lands and Buildings are properties of public dominion. As properties of public dominion, the Airport Lands and Buildings are owned by the Republic and thus exempt from real estate tax under Section 234(a) of the Local Government Code.

4. Conclusion

Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which governs the legal relation and status of government units, agencies and offices within the entire government machinery, MIAA is a government instrumentality and not a government-owned or controlled corporation. Under Section 133(o) of the Local Government Code, MIAA as a government instrumentality is not a taxable person because it is not subject to “[t]axes, fees or charges of any kind” by local governments. The only exception is when MIAA leases its real property to a “taxable person” as provided in Section 234(a) of the Local Government Code, in which case the specific real property leased becomes subject to real estate tax. Thus, only portions of the Airport Lands and Buildings leased to taxable persons like private parties are subject to real estate tax by the City of Parañaque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to public use, are properties of public dominion and thus owned by the State or the Republic of the Philippines. Article 420 specifically mentions “ports x x x constructed by the State,” which includes public airports and seaports, as properties of public dominion and owned by the Republic. As properties of public dominion owned by the Republic, there is no doubt whatsoever that the Airport Lands and Buildings are expressly exempt from real estate tax under Section 234(a) of the Local Government Code. This Court has also repeatedly ruled that properties of public dominion are not subject to execution or foreclosure sale.85 (Emphases added.)WHEREFORE, we hereby GRANT the petition. We REVERSE and SET ASIDE the Decision datedOctober 8, 2007 and the Resolution dated February 12, 2008 of the Court of Appeals (Cebu City) in CA-G.R. SP No. 01360. Accordingly, we DECLARE:

1. Petitioner’s properties that are actually, solely and exclusively used for public purpose, consisting of the airport terminal building, airfield, runway, taxiway and the lots on which they are situated,EXEMPT from real property tax imposed by the City of Lapu-Lapu.

2. VOID all the real property tax assessments, including the additional tax for the special education fund and the penalty interest, as well as the final notices of real property tax delinquencies, issued by the City of Lapu-Lapu on petitioner’s properties, except the assessment covering the portions that petitioner has leased to private parties.

3. NULL and VOID the sale in public auction of 27 of petitioner’s properties and the eventual forfeiture and purchase of the said properties by respondent City of Lapu-Lapu. We likewise declare VOID the corresponding Certificates of Sale of Delinquent Property issued to respondent City of Lapu-Lapu.

SO ORDERED.cralawlawlibrary

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 115455 August 25, 199499

ARTURO M. TOLENTINO, petitioner, vs.

THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 115525 August 25, 1994

JUAN T. DAVID, petitioner, vs.

TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as Secretary of Finance; LIWAYWAY VINZONS-CHATO, as Commissioner of Internal Revenue; and their AUTHORIZED

AGENTS OR REPRESENTATIVES, respondents.

G.R. No. 115543 August 25, 1994

RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners, 

vs.THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE

COMMISSIONERS OF THE BUREAU OF INTERNAL REVENUE AND BUREAU OF CUSTOMS, respondents.

G.R. No. 115544 August 25, 1994

PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; PUBLISHING CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE

L. PAVIA; and OFELIA L. DIMALANTA, petitioners, vs.

HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue; HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary; and HON. ROBERTO B. DE

OCAMPO, in his capacity as Secretary of Finance, respondents.

G.R. No. 115754 August 25, 1994

CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA), petitioner, 

vs.THE COMMISSIONER OF INTERNAL REVENUE, respondent.

G.R. No. 115781 August 25, 1994

KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM

TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN,

FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF

ATTORNEYS FOR BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT COALITION, INC.,

PHILIPPINE BIBLE SOCIETY, INC., and WIGBERTO TAÑADA,petitioners, 

vs.THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE

COMMISSIONER OF INTERNAL REVENUE and THE COMMISSIONER OF CUSTOMS, respondents.

G.R. No. 115852 August 25, 1994

PHILIPPINE AIRLINES, INC., petitioner, vs.

THE SECRETARY OF FINANCE, and COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 115873 August 25, 1994

COOPERATIVE UNION OF THE PHILIPPINES, petitioners, vs.

HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal Revenue, HON. TEOFISTO T. GUINGONA, JR., in his

capacity as Executive Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of Finance, respondents.

G.R. No. 115931 August 25, 1994

PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC., and ASSOCIATION OF PHILIPPINE BOOK-SELLERS, petitioners, 

vs.HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V. CHATO, as the Commissioner of Internal Revenue

and HON. GUILLERMO PARAYNO, JR., in his capacity as the Commissioner of Customs, respondents.

Arturo M. Tolentino for and in his behalf.

Donna Celeste D. Feliciano and Juan T. David for petitioners in G.R. No. 115525.

Roco, Bunag, Kapunan, Migallos and Jardeleza for petitioner R.S. Roco.

Villaranza and Cruz for petitioners in G.R. No. 115544.

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Carlos A. Raneses and Manuel M. Serrano for petitioner in G.R. No. 115754.

Salonga, Hernandez & Allado for Freedon From Debts Coalition, Inc. & Phil. Bible Society.

Estelito P. Mendoza for petitioner in G.R. No. 115852.

Panganiban, Benitez, Parlade, Africa & Barinaga Law Offices for petitioners in G.R. No. 115873.

R.B. Rodriguez & Associates for petitioners in G.R. No. 115931.

Reve A.V. Saguisag for MABINI.

 

MENDOZA, J.:

The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services. It is equivalent to 10% of the gross selling price or gross value in money of goods or properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of services. Republic Act No. 7716 seeks to widen the tax base of the existing VAT system and enhance its administration by amending the National Internal Revenue Code.

These are various suits for certiorari and prohibition, challenging the constitutionality of Republic Act No. 7716 on various grounds summarized in the resolution of July 6, 1994 of this Court, as follows:

I. Procedural Issues:

A. Does Republic Act No. 7716 violate Art. VI, § 24 of the Constitution?

B. Does it violate Art. VI, § 26(2) of the Constitution?

C. What is the extent of the power of the Bicameral Conference Committee?

II. Substantive Issues:

A. Does the law violate the following provisions in the Bill of Rights (Art. III)?

1. §1

2. § 4

3. § 5

4. § 10

B. Does the law violate the following other provisions of the Constitution?

1. Art. VI, § 28(1)

2. Art. VI, § 28(3)

These questions will be dealt in the order they are stated above. As will presently be explained not all of these questions are judicially cognizable, because not all provisions of the Constitution are self executing and, therefore, judicially enforceable. The other departments of the government are equally charged with the enforcement of the Constitution, especially the provisions relating to them.

I. PROCEDURAL ISSUES

The contention of petitioners is that in enacting Republic Act No. 7716, or the Expanded Value-Added Tax Law, Congress violated the Constitution because, although H. No. 11197 had originated in the House of Representatives, it was not passed by the Senate but was simply consolidated with the Senate version (S. No. 1630) in the Conference Committee to produce the bill which the President signed into law. The following provisions of the Constitution are cited in support of the proposition that because Republic Act No. 7716 was passed in this manner, it did not originate in the House of Representatives and it has not thereby become a law:

Art. VI, § 24: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.

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Id., § 26(2): No bill passed by either House shall become a law unless it has passed three readings on separate days, and printed copies thereof in its final form have been distributed to its Members three days before its passage, except when the President certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas andnays entered in the Journal.

It appears that on various dates between July 22, 1992 and August 31, 1993, several bills 1 were introduced in the House of Representatives seeking to amend certain provisions of the National Internal Revenue Code relative to the value-added tax or VAT. These bills were referred to the House Ways and Means Committee which recommended for approval a substitute measure, H. No. 11197, entitled

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 106, 107, 108 AND 110 OF TITLE IV, 112, 115 AND 116 OF TITLE V, AND 236, 237 AND 238 OF TITLE IX, AND REPEALING SECTIONS 113 AND 114 OF TITLE V, ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED

The bill (H. No. 11197) was considered on second reading starting November 6, 1993 and, on November 17, 1993, it was approved by the House of Representatives after third and final reading.

It was sent to the Senate on November 23, 1993 and later referred by that body to its Committee on Ways and Means.

On February 7, 1994, the Senate Committee submitted its report recommending approval of S. No. 1630, entitled

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 107, 108, AND 110 OF TITLE IV, 112 OF TITLE V, AND 236, 237, AND 238 OF TITLE IX, AND REPEALING SECTIONS 113, 114 and 116 OF TITLE V, ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES

It was stated that the bill was being submitted "in substitution of Senate Bill No. 1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197."

On February 8, 1994, the Senate began consideration of the bill (S. No. 1630). It finished debates on the bill and approved it on second reading on March 24, 1994. On the same day, it approved the bill on third reading by the affirmative votes of 13 of its members, with one abstention.

H. No. 11197 and its Senate version (S. No. 1630) were then referred to a conference committee which, after meeting four times (April 13, 19, 21 and 25, 1994), recommended that "House Bill No. 11197, in consolidation with Senate Bill No. 1630, be approved in accordance with the attached copy of the bill as reconciled and approved by the conferees."

The Conference Committee bill, entitled "AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES," was thereafter approved by the House of Representatives on April 27, 1994 and by the Senate on May 2, 1994. The enrolled bill was then presented to the President of the Philippines who, on May 5, 1994, signed it. It became Republic Act No. 7716. On May 12, 1994, Republic Act No. 7716 was published in two newspapers of general circulation and, on May 28, 1994, it took effect, although its implementation was suspended until June 30, 1994 to allow time for the registration of business entities. It would have been enforced on July 1, 1994 but its enforcement was stopped because the Court, by the vote of 11 to 4 of its members, granted a temporary restraining order on June 30, 1994.

First. Petitioners' contention is that Republic Act No. 7716 did not "originate exclusively" in the House of Representatives as required by Art. VI, §24 of the Constitution, because it is in fact the result of the consolidation of two distinct bills, H. No. 11197 and S. No. 1630. In this connection, petitioners point out that although Art. VI, SS 24 was adopted from the American Federal Constitution, 2 it is notable in two respects: the verb "shall originate" is qualified in the Philippine Constitution by the word "exclusively" and the phrase "as on other bills" in the American version is omitted. This means, according to them, that to be considered as having originated in the House, Republic Act No. 7716 must retain the essence of H. No. 11197.

This argument will not bear analysis. To begin with, it is not the law — but the revenue bill — which is required by the Constitution to "originate exclusively" in the House of Representatives. It is important to emphasize this, because a bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole.

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The possibility of a third version by the conference committee will be discussed later. At this point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue statute — and not only the bill which initiated the legislative process culminating in the enactment of the law — must substantially be the same as the House bill would be to deny the Senate's power not only to "concur with amendments" but also to "propose amendments." It would be to violate the coequality of legislative power of the two houses of Congress and in fact make the House superior to the Senate.

The contention that the constitutional design is to limit the Senate's power in respect of revenue bills in order to compensate for the grant to the Senate of the treaty-ratifying power 3 and thereby equalize its powers and those of the House overlooks the fact that the powers being compared are different. We are dealing here with the legislative power which under the Constitution is vested not in any particular chamber but in the Congress of the Philippines, consisting of "a Senate and a House of Representatives." 4 The exercise of the treaty-ratifying power is not the exercise of legislative power. It is the exercise of a check on the executive power. There is, therefore, no justification for comparing the legislative powers of the House and of the Senate on the basis of the possession of such nonlegislative power by the Senate. The possession of a similar power by the U.S. Senate 5 has never been thought of as giving it more legislative powers than the House of Representatives.

In the United States, the validity of a provision (§ 37) imposing an ad valorem tax based on the weight of vessels, which the U.S. Senate had inserted in the Tariff Act of 1909, was upheld against the claim that the provision was a revenue bill which originated in the Senate in contravention of Art. I, § 7 of the U.S. Constitution. 6 Nor is the power to amend limited to adding a provision or two in a revenue bill emanating from the House. The U.S. Senate has gone so far as changing the whole of bills following the enacting clause and substituting its own versions. In 1883, for example, it struck out everything after the enacting clause of a tariff bill and wrote in its place its own measure, and the House subsequently accepted the amendment. The U.S. Senate likewise added 847 amendments to what later became the Payne-Aldrich Tariff Act of 1909; it dictated the schedules of the Tariff Act of 1921; it rewrote an extensive tax revision bill in the same year and recast most of the tariff bill of 1922. 7 Given, then, the power of the Senate to propose amendments, the Senate can propose its own version even with respect to bills which are required by the Constitution to originate in the House.

It is insisted, however, that S. No. 1630 was passed not in substitution of H. No. 11197 but of another Senate bill (S. No. 1129) earlier filed and that what the Senate did was merely to "take [H. No. 11197] into consideration" in enacting S. No. 1630. There is really no difference between the Senate preserving H. No. 11197 up to the enacting clause

and then writing its own version following the enacting clause (which, it would seem, petitioners admit is an amendment by substitution), and, on the other hand, separately presenting a bill of its own on the same subject matter. In either case the result are two bills on the same subject.

Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or tax bills, bills authorizing an increase of the public debt, private bills and bills of local application must come from the House of Representatives on the theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are elected at large, are expected to approach the same problems from the national perspective. Both views are thereby made to bear on the enactment of such laws.

Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the House, so long as action by the Senate as a body is withheld pending receipt of the House bill. The Court cannot, therefore, understand the alarm expressed over the fact that on March 1, 1993, eight months before the House passed H. No. 11197, S. No. 1129 had been filed in the Senate. After all it does not appear that the Senate ever considered it. It was only after the Senate had received H. No. 11197 on November 23, 1993 that the process of legislation in respect of it began with the referral to the Senate Committee on Ways and Means of H. No. 11197 and the submission by the Committee on February 7, 1994 of S. No. 1630. For that matter, if the question were simply the priority in the time of filing of bills, the fact is that it was in the House that a bill (H. No. 253) to amend the VAT law was first filed on July 22, 1992. Several other bills had been filed in the House before S. No. 1129 was filed in the Senate, and H. No. 11197 was only a substitute of those earlier bills.

Second. Enough has been said to show that it was within the power of the Senate to propose S. No. 1630. We now pass to the next argument of petitioners that S. No. 1630 did not pass three readings on separate days as required by the Constitution 8 because the second and third readings were done on the same day, March 24, 1994. But this was because on February 24, 1994 9 and again on March 22, 1994, 10 the President had certified S. No. 1630 as urgent. The presidential certification dispensed with the requirement not only of printing but also that of reading the bill on separate days. The phrase "except when the President certifies to the necessity of its immediate enactment, etc." in Art. VI, § 26(2) qualifies the two stated conditions before a bill can become a law: (i) the bill has passed three readings on separate days and (ii) it has been printed in its final form and distributed three days before it is finally approved.

In other words, the "unless" clause must be read in relation to the "except" clause, because the two are really coordinate clauses of the

103

same sentence. To construe the "except" clause as simply dispensing with the second requirement in the "unless" clause (i.e., printing and distribution three days before final approval) would not only violate the rules of grammar. It would also negate the very premise of the "except" clause: the necessity of securing the immediate enactment of a bill which is certified in order to meet a public calamity or emergency. For if it is only the printing that is dispensed with by presidential certification, the time saved would be so negligible as to be of any use in insuring immediate enactment. It may well be doubted whether doing away with the necessity of printing and distributing copies of the bill three days before the third reading would insure speedy enactment of a law in the face of an emergency requiring the calling of a special election for President and Vice-President. Under the Constitution such a law is required to be made within seven days of the convening of Congress in emergency session. 11

That upon the certification of a bill by the President the requirement of three readings on separate days and of printing and distribution can be dispensed with is supported by the weight of legislative practice. For example, the bill defining the certiorari jurisdiction of this Court which, in consolidation with the Senate version, became Republic Act No. 5440, was passed on second and third readings in the House of Representatives on the same day (May 14, 1968) after the bill had been certified by the President as urgent. 12

There is, therefore, no merit in the contention that presidential certification dispenses only with the requirement for the printing of the bill and its distribution three days before its passage but not with the requirement of three readings on separate days, also.

It is nonetheless urged that the certification of the bill in this case was invalid because there was no emergency, the condition stated in the certification of a "growing budget deficit" not being an unusual condition in this country.

It is noteworthy that no member of the Senate saw fit to controvert the reality of the factual basis of the certification. To the contrary, by passing S. No. 1630 on second and third readings on March 24, 1994, the Senate accepted the President's certification. Should such certification be now reviewed by this Court, especially when no evidence has been shown that, because S. No. 1630 was taken up on second and third readings on the same day, the members of the Senate were deprived of the time needed for the study of a vital piece of legislation?

The sufficiency of the factual basis of the suspension of the writ of habeas corpus or declaration of martial law under Art. VII, § 18, or the existence of a national emergency justifying the delegation of extraordinary powers to the President under Art. VI, § 23(2), is subject to judicial review

because basic rights of individuals may be at hazard. But the factual basis of presidential certification of bills, which involves doing away with procedural requirements designed to insure that bills are duly considered by members of Congress, certainly should elicit a different standard of review.

Petitioners also invite attention to the fact that the President certified S. No. 1630 and not H. No. 11197. That is because S. No. 1630 was what the Senate was considering. When the matter was before the House, the President likewise certified H. No. 9210 the pending in the House.

Third. Finally it is contended that the bill which became Republic Act No. 7716 is the bill which the Conference Committee prepared by consolidating H. No. 11197 and S. No. 1630. It is claimed that the Conference Committee report included provisions not found in either the House bill or the Senate bill and that these provisions were "surreptitiously" inserted by the Conference Committee. Much is made of the fact that in the last two days of its session on April 21 and 25, 1994 the Committee met behind closed doors. We are not told, however, whether the provisions were not the result of the give and take that often mark the proceedings of conference committees.

Nor is there anything unusual or extraordinary about the fact that the Conference Committee met in executive sessions. Often the only way to reach agreement on conflicting provisions is to meet behind closed doors, with only the conferees present. Otherwise, no compromise is likely to be made. The Court is not about to take the suggestion of a cabal or sinister motive attributed to the conferees on the basis solely of their "secret meetings" on April 21 and 25, 1994, nor read anything into the incomplete remarks of the members, marked in the transcript of stenographic notes by ellipses. The incomplete sentences are probably due to the stenographer's own limitations or to the incoherence that sometimes characterize conversations. William Safire noted some such lapses in recorded talks even by recent past Presidents of the United States.

In any event, in the United States conference committees had been customarily held in executive sessions with only the conferees and their staffs in attendance. 13 Only in November 1975 was a new rule adopted requiring open sessions. Even then a majority of either chamber's conferees may vote in public to close the meetings. 14

As to the possibility of an entirely new bill emerging out of a Conference Committee, it has been explained:

Under congressional rules of procedure, conference committees are not expected to make any material

104

change in the measure at issue, either by deleting provisions to which both houses have already agreed or by inserting new provisions. But this is a difficult provision to enforce. Note the problem when one house amends a proposal originating in either house by striking out everything following the enacting clause and substituting provisions which make it an entirely new bill. The versions are now altogether different, permitting a conference committee to draft essentially a new bill. . . . 15

The result is a third version, which is considered an "amendment in the nature of a substitute," the only requirement for which being that the third version be germane to the subject of the House and Senate bills. 16

Indeed, this Court recently held that it is within the power of a conference committee to include in its report an entirely new provision that is not found either in the House bill or in the Senate bill. 17 If the committee can propose an amendment consisting of one or two provisions, there is no reason why it cannot propose several provisions, collectively considered as an "amendment in the nature of a substitute," so long as such amendment is germane to the subject of the bills before the committee. After all, its report was not final but needed the approval of both houses of Congress to become valid as an act of the legislative department. The charge that in this case the Conference Committee acted as a third legislative chamber is thus without any basis. 18

Nonetheless, it is argued that under the respective Rules of the Senate and the House of Representatives a conference committee can only act on the differing provisions of a Senate bill and a House bill, and that contrary to these Rules the Conference Committee inserted provisions not found in the bills submitted to it. The following provisions are cited in support of this contention:

Rules of the Senate

Rule XII:

§ 26. In the event that the Senate does not agree with the House of Representatives on the provision of any bill or joint resolution, the differences shall be settled by a conference committee of both Houseswhich shall meet within ten days after their composition.

The President shall designate the members of the conference committee in accordance with subparagraph (c), Section 3 of Rule III.

Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the changes in or amendments to the subject measure, and shall be signed by the conferees.

The consideration of such report shall not be in order unless the report has been filed with the Secretary of the Senate and copies thereof have been distributed to the Members.

(Emphasis added)

Rules of the House of Representatives

Rule XIV:

§ 85. Conference Committee Reports. — In the event that the House does not agree with the Senate on the amendments to any bill or joint resolution, the differences may be settled by conference committees of both Chambers.

The consideration of conference committee reports shall always be in order, except when the journal is being read, while the roll is being called or the House is dividing on any question. Each of the pages of such reports shall be signed by the conferees. Each report shall contain a detailed, sufficiently explicit statement of the changes in or amendments to the subject measure.

The consideration of such report shall not be in order unless copies thereof are distributed to the Members: Provided, That in the last fifteen days of each session period it shall be deemed sufficient that three copies of the report, signed as above provided, are deposited in the office of the Secretary General.

(Emphasis added)

To be sure, nothing in the Rules limits a conference committee to a consideration of conflicting provisions. But Rule XLIV, § 112 of the Rules of the Senate is cited to the effect that "If there is no Rule applicable to a specific case the precedents of the Legislative Department of the Philippines shall be resorted to, and as a supplement of these, the Rules contained in Jefferson's Manual." The following is then quoted from the Jefferson's Manual:

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The managers of a conference must confine themselves to the differences committed to them. . . and may not include subjects not within disagreements, even though germane to a question in issue.

Note that, according to Rule XLIX, § 112, in case there is no specific rule applicable, resort must be to the legislative practice. The Jefferson's Manual is resorted to only as supplement. It is common place in Congress that conference committee reports include new matters which, though germane, have not been committed to the committee. This practice was admitted by Senator Raul S. Roco, petitioner in G.R. No. 115543, during the oral argument in these cases. Whatever, then, may be provided in the Jefferson's Manual must be considered to have been modified by the legislative practice. If a change is desired in the practice it must be sought in Congress since this question is not covered by any constitutional provision but is only an internal rule of each house. Thus, Art. VI, § 16(3) of the Constitution provides that "Each House may determine the rules of its proceedings. . . ."

This observation applies to the other contention that the Rules of the two chambers were likewise disregarded in the preparation of the Conference Committee Report because the Report did not contain a "detailed and sufficiently explicit statement of changes in, or amendments to, the subject measure." The Report used brackets and capital letters to indicate the changes. This is a standard practice in bill-drafting. We cannot say that in using these marks and symbols the Committee violated the Rules of the Senate and the House. Moreover, this Court is not the proper forum for the enforcement of these internal Rules. To the contrary, as we have already ruled, "parliamentary rules are merely procedural and with their observance the courts have no concern." 19 Our concern is with the procedural requirements of the Constitution for the enactment of laws. As far as these requirements are concerned, we are satisfied that they have been faithfully observed in these cases.

Nor is there any reason for requiring that the Committee's Report in these cases must have undergone three readings in each of the two houses. If that be the case, there would be no end to negotiation since each house may seek modifications of the compromise bill. The nature of the bill, therefore, requires that it be acted upon by each house on a "take it or leave it" basis, with the only alternative that if it is not approved by both houses, another conference committee must be appointed. But then again the result would still be a compromise measure that may not be wholly satisfying to both houses.

Art. VI, § 26(2) must, therefore, be construed as referring only to bills introduced for the first time in either house of Congress, not to the conference committee report. For if the purpose of requiring three readings is to give members of Congress time to study bills, it cannot be

gainsaid that H. No. 11197 was passed in the House after three readings; that in the Senate it was considered on first reading and then referred to a committee of that body; that although the Senate committee did not report out the House bill, it submitted a version (S. No. 1630) which it had prepared by "taking into consideration" the House bill; that for its part the Conference Committee consolidated the two bills and prepared a compromise version; that the Conference Committee Report was thereafter approved by the House and the Senate, presumably after appropriate study by their members. We cannot say that, as a matter of fact, the members of Congress were not fully informed of the provisions of the bill. The allegation that the Conference Committee usurped the legislative power of Congress is, in our view, without warrant in fact and in law.

Fourth. Whatever doubts there may be as to the formal validity of Republic Act No. 7716 must be resolved in its favor. Our cases 20 manifest firm adherence to the rule that an enrolled copy of a bill is conclusive not only of its provisions but also of its due enactment. Not even claims that a proposed constitutional amendment was invalid because the requisite votes for its approval had not been obtained 21 or that certain provisions of a statute had been "smuggled" in the printing of the bill 22 have moved or persuaded us to look behind the proceedings of a coequal branch of the government. There is no reason now to depart from this rule.

No claim is here made that the "enrolled bill" rule is absolute. In fact in one case 23 we "went behind" an enrolled bill and consulted the Journal to determine whether certain provisions of a statute had been approved by the Senate in view of the fact that the President of the Senate himself, who had signed the enrolled bill, admitted a mistake and withdrew his signature, so that in effect there was no longer an enrolled bill to consider.

But where allegations that the constitutional procedures for the passage of bills have not been observed have no more basis than another allegation that the Conference Committee "surreptitiously" inserted provisions into a bill which it had prepared, we should decline the invitation to go behind the enrolled copy of the bill. To disregard the "enrolled bill" rule in such cases would be to disregard the respect due the other two departments of our government.

Fifth. An additional attack on the formal validity of Republic Act No. 7716 is made by the Philippine Airlines, Inc., petitioner in G.R. No. 11582, namely, that it violates Art. VI, § 26(1) which provides that "Every bill passed by Congress shall embrace only one subject which shall be expressed in the title thereof." It is contended that neither H. No. 11197 nor S. No. 1630 provided for removal of exemption of PAL transactions from the payment of the VAT and that this was made only in the

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Conference Committee bill which became Republic Act No. 7716 without reflecting this fact in its title.

The title of Republic Act No. 7716 is:

AN ACT RESTRUCTURING THE VALUE- ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES.

Among the provisions of the NIRC amended is § 103, which originally read:

§ 103. Exempt transactions. — The following shall be exempt from the value-added tax:

. . . .

(q) Transactions which are exempt under special laws or international agreements to which the Philippines is a signatory. Among the transactions exempted from the VAT were those of PAL because it was exempted under its franchise (P.D. No. 1590) from the payment of all "other taxes . . . now or in the near future," in consideration of the payment by it either of the corporate income tax or a franchise tax of 2%.

As a result of its amendment by Republic Act No. 7716, § 103 of the NIRC now provides:

§ 103. Exempt transactions. — The following shall be exempt from the value-added tax:

. . . .

(q) Transactions which are exempt under special laws, except those granted under Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .

The effect of the amendment is to remove the exemption granted to PAL, as far as the VAT is concerned.

The question is whether this amendment of § 103 of the NIRC is fairly embraced in the title of Republic Act No. 7716, although no mention is made therein of P.D. No. 1590 as among those which the statute amends. We think it is, since the title states that the purpose of the statute is to expand the VAT system, and one way of doing this is to widen its base by withdrawing some of the exemptions granted before. To insist that P.D. No. 1590 be mentioned in the title of the law, in addition to § 103 of the NIRC, in which it is specifically referred to, would be to insist that the title of a bill should be a complete index of its content.

The constitutional requirement that every bill passed by Congress shall embrace only one subject which shall be expressed in its title is intended to prevent surprise upon the members of Congress and to inform the people of pending legislation so that, if they wish to, they can be heard regarding it. If, in the case at bar, petitioner did not know before that its exemption had been withdrawn, it is not because of any defect in the title but perhaps for the same reason other statutes, although published, pass unnoticed until some event somehow calls attention to their existence. Indeed, the title of Republic Act No. 7716 is not any more general than the title of PAL's own franchise under P.D. No. 1590, and yet no mention is made of its tax exemption. The title of P.D. No. 1590 is:

AN ACT GRANTING A NEW FRANCHISE TO PHILIPPINE AIRLINES, INC. TO ESTABLISH, OPERATE, AND MAINTAIN AIR-TRANSPORT SERVICES IN THE PHILIPPINES AND BETWEEN THE PHILIPPINES AND OTHER COUNTRIES.

The trend in our cases is to construe the constitutional requirement in such a manner that courts do not unduly interfere with the enactment of necessary legislation and to consider it sufficient if the title expresses the general subject of the statute and all its provisions are germane to the general subject thus expressed. 24

It is further contended that amendment of petitioner's franchise may only be made by special law, in view of § 24 of P.D. No. 1590 which provides:

This franchise, as amended, or any section or provision hereof may only be modified, amended, or repealed expressly by a special law or decree that shall specifically modify, amend, or repeal this franchise or any section or provision thereof.

This provision is evidently intended to prevent the amendment of the franchise by mere implication resulting from the enactment of a later inconsistent statute, in consideration of the fact that a franchise is a contract which can be altered only by consent of the parties. Thus in Manila Railroad Co. v.

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Rafferty, 25 it was held that an Act of the U.S. Congress, which provided for the payment of tax on certain goods and articles imported into the Philippines, did not amend the franchise of plaintiff, which exempted it from all taxes except those mentioned in its franchise. It was held that a special law cannot be amended by a general law.

In contrast, in the case at bar, Republic Act No. 7716 expressly amends PAL's franchise (P.D. No. 1590) by specifically excepting from the grant of exemptions from the VAT PAL's exemption under P.D. No. 1590. This is within the power of Congress to do under Art. XII, § 11 of the Constitution, which provides that the grant of a franchise for the operation of a public utility is subject to amendment, alteration or repeal by Congress when the common good so requires.

II. SUBSTANTIVE ISSUES

A. Claims of Press Freedom, Freedom of Thought and Religious Freedom

The Philippine Press Institute (PPI), petitioner in G.R. No. 115544, is a nonprofit organization of newspaper publishers established for the improvement of journalism in the Philippines. On the other hand, petitioner in G.R. No. 115781, the Philippine Bible Society (PBS), is a nonprofit organization engaged in the printing and distribution of bibles and other religious articles. Both petitioners claim violations of their rights under § § 4 and 5 of the Bill of Rights as a result of the enactment of the VAT Law.

The PPI questions the law insofar as it has withdrawn the exemption previously granted to the press under § 103 (f) of the NIRC. Although the exemption was subsequently restored by administrative regulation with respect to the circulation income of newspapers, the PPI presses its claim because of the possibility that the exemption may still be removed by mere revocation of the regulation of the Secretary of Finance. On the other hand, the PBS goes so far as to question the Secretary's power to grant exemption for two reasons: (1) The Secretary of Finance has no power to grant tax exemption because this is vested in Congress and requires for its exercise the vote of a majority of all its members 26 and (2) the Secretary's duty is to execute the law.

§ 103 of the NIRC contains a list of transactions exempted from VAT. Among the transactions previously granted exemption were:

(f) Printing, publication, importation or sale of books and any newspaper, magazine, review, or bulletin which

appears at regular intervals with fixed prices for subscription and sale and which is devoted principally to the publication of advertisements.

Republic Act No. 7716 amended § 103 by deleting ¶ (f) with the result that print media became subject to the VAT with respect to all aspects of their operations. Later, however, based on a memorandum of the Secretary of Justice, respondent Secretary of Finance issued Revenue Regulations No. 11-94, dated June 27, 1994, exempting the "circulation income of print media pursuant to § 4 Article III of the 1987 Philippine Constitution guaranteeing against abridgment of freedom of the press, among others." The exemption of "circulation income" has left income from advertisements still subject to the VAT.

It is unnecessary to pass upon the contention that the exemption granted is beyond the authority of the Secretary of Finance to give, in view of PPI's contention that even with the exemption of the circulation revenue of print media there is still an unconstitutional abridgment of press freedom because of the imposition of the VAT on the gross receipts of newspapers from advertisements and on their acquisition of paper, ink and services for publication. Even on the assumption that no exemption has effectively been granted to print media transactions, we find no violation of press freedom in these cases.

To be sure, we are not dealing here with a statute that on its face operates in the area of press freedom. The PPI's claim is simply that, as applied to newspapers, the law abridges press freedom. Even with due recognition of its high estate and its importance in a democratic society, however, the press is not immune from general regulation by the State. It has been held:

The publisher of a newspaper has no immunity from the application of general laws. He has no special privilege to invade the rights and liberties of others. He must answer for libel. He may be punished for contempt of court. . . . Like others, he must pay equitable and nondiscriminatory taxes on his business. . . . 27

The PPI does not dispute this point, either.

What it contends is that by withdrawing the exemption previously granted to print media transactions involving printing, publication, importation or sale of newspapers, Republic Act No. 7716 has singled out the press for discriminatory treatment and that within the class of mass media the law discriminates against print media by giving broadcast media favored treatment. We have carefully examined this argument, but we are unable to find a differential treatment of the press by the law, much less any

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censorial motivation for its enactment. If the press is now required to pay a value-added tax on its transactions, it is not because it is being singled out, much less targeted, for special treatment but only because of the removal of the exemption previously granted to it by law. The withdrawal of exemption is all that is involved in these cases. Other transactions, likewise previously granted exemption, have been delisted as part of the scheme to expand the base and the scope of the VAT system. The law would perhaps be open to the charge of discriminatory treatment if the only privilege withdrawn had been that granted to the press. But that is not the case.

The situation in the case at bar is indeed a far cry from those cited by the PPI in support of its claim that Republic Act No. 7716 subjects the press to discriminatory taxation. In the cases cited, the discriminatory purpose was clear either from the background of the law or from its operation. For example, in Grosjean v. American Press Co., 28 the law imposed a license tax equivalent to 2% of the gross receipts derived from advertisements only on newspapers which had a circulation of more than 20,000 copies per week. Because the tax was not based on the volume of advertisement alone but was measured by the extent of its circulation as well, the law applied only to the thirteen large newspapers in Louisiana, leaving untaxed four papers with circulation of only slightly less than 20,000 copies a week and 120 weekly newspapers which were in serious competition with the thirteen newspapers in question. It was well known that the thirteen newspapers had been critical of Senator Huey Long, and the Long-dominated legislature of Louisiana respondent by taxing what Long described as the "lying newspapers" by imposing on them "a tax on lying." The effect of the tax was to curtail both their revenue and their circulation. As the U.S. Supreme Court noted, the tax was "a deliberate and calculated device in the guise of a tax to limit the circulation of information to which the public is entitled in virtue of the constitutional guaranties." 29 The case is a classic illustration of the warning that the power to tax is the power to destroy.

In the other case 30 invoked by the PPI, the press was also found to have been singled out because everything was exempt from the "use tax" on ink and paper, except the press. Minnesota imposed a tax on the sales of goods in that state. To protect the sales tax, it enacted a complementary tax on the privilege of "using, storing or consuming in that state tangible personal property" by eliminating the residents' incentive to get goods from outside states where the sales tax might be lower. The Minnesota Star Tribune was exempted from both taxes from 1967 to 1971. In 1971, however, the state legislature amended the tax scheme by imposing the "use tax" on the cost of paper and ink used for publication. The law was held to have singled out the press because (1) there was no reason for imposing the "use tax" since the press was exempt from the sales tax and (2) the "use tax" was laid on an "intermediate transaction rather than the ultimate retail sale." Minnesota had a heavy burden of justifying the differential treatment and it failed to do so. In addition, the U.S. Supreme

Court found the law to be discriminatory because the legislature, by again amending the law so as to exempt the first $100,000 of paper and ink used, further narrowed the coverage of the tax so that "only a handful of publishers pay any tax at all and even fewer pay any significant amount of tax." 31 The discriminatory purpose was thus very clear.

More recently, in Arkansas Writers' Project, Inc. v. Ragland, 32 it was held that a law which taxed general interest magazines but not newspapers and religious, professional, trade and sports journals was discriminatory because while the tax did not single out the press as a whole, it targeted a small group within the press. What is more, by differentiating on the basis of contents (i.e., between general interest and special interests such as religion or sports) the law became "entirely incompatible with the First Amendment's guarantee of freedom of the press."

These cases come down to this: that unless justified, the differential treatment of the press creates risks of suppression of expression. In contrast, in the cases at bar, the statute applies to a wide range of goods and services. The argument that, by imposing the VAT only on print media whose gross sales exceeds P480,000 but not more than P750,000, the law discriminates 33 is without merit since it has not been shown that as a result the class subject to tax has been unreasonably narrowed. The fact is that this limitation does not apply to the press along but to all sales. Nor is impermissible motive shown by the fact that print media and broadcast media are treated differently. The press is taxed on its transactions involving printing and publication, which are different from the transactions of broadcast media. There is thus a reasonable basis for the classification.

The cases canvassed, it must be stressed, eschew any suggestion that "owners of newspapers are immune from any forms of ordinary taxation." The license tax in the Grosjean case was declared invalid because it was "one single in kind, with a long history of hostile misuse against the freedom of thepress." 34 On the other hand, Minneapolis Star acknowledged that "The First Amendment does not prohibit all regulation of the press [and that] the States and the Federal Government can subject newspapers to generally applicable economic regulations without creating constitutional problems." 35

What has been said above also disposes of the allegations of the PBS that the removal of the exemption of printing, publication or importation of books and religious articles, as well as their printing and publication, likewise violates freedom of thought and of conscience. For as the U.S. Supreme Court unanimously held in Jimmy Swaggart Ministries v. Board of Equalization, 36 the Free Exercise of Religion Clause does not prohibit imposing a generally applicable sales and use tax on the sale of religious materials by a religious organization.

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This brings us to the question whether the registration provision of the law, 37 although of general applicability, nonetheless is invalid when applied to the press because it lays a prior restraint on its essential freedom. The case ofAmerican Bible Society v. City of Manila 38 is cited by both the PBS and the PPI in support of their contention that the law imposes censorship. There, this Court held that an ordinance of the City of Manila, which imposed a license fee on those engaged in the business of general merchandise, could not be applied to the appellant's sale of bibles and other religious literature. This Court relied on Murdock v. Pennsylvania, 39 in which it was held that, as a license fee is fixed in amount and unrelated to the receipts of the taxpayer, the license fee, when applied to a religious sect, was actually being imposed as a condition for the exercise of the sect's right under the Constitution. For that reason, it was held, the license fee "restrains in advance those constitutional liberties of press and religion and inevitably tends to suppress their exercise." 40

But, in this case, the fee in § 107, although a fixed amount (P1,000), is not imposed for the exercise of a privilege but only for the purpose of defraying part of the cost of registration. The registration requirement is a central feature of the VAT system. It is designed to provide a record of tax credits because any person who is subject to the payment of the VAT pays an input tax, even as he collects an output tax on sales made or services rendered. The registration fee is thus a mere administrative fee, one not imposed on the exercise of a privilege, much less a constitutional right.

For the foregoing reasons, we find the attack on Republic Act No. 7716 on the ground that it offends the free speech, press and freedom of religion guarantees of the Constitution to be without merit. For the same reasons, we find the claim of the Philippine Educational Publishers Association (PEPA) in G.R. No. 115931 that the increase in the price of books and other educational materials as a result of the VAT would violate the constitutional mandate to the government to give priority to education, science and technology (Art. II, § 17) to be untenable.

 

B. Claims of Regressivity, Denial of Due Process, Equal Protection, and Impairmentof Contracts

There is basis for passing upon claims that on its face the statute violates the guarantees of freedom of speech, press and religion. The possible "chilling effect" which it may have on the essential freedom of the mind and conscience and the need to assure that the channels of

communication are open and operating importunately demand the exercise of this Court's power of review.

There is, however, no justification for passing upon the claims that the law also violates the rule that taxation must be progressive and that it denies petitioners' right to due process and that equal protection of the laws. The reason for this different treatment has been cogently stated by an eminent authority on constitutional law thus: "[W]hen freedom of the mind is imperiled by law, it is freedom that commands a momentum of respect; when property is imperiled it is the lawmakers' judgment that commands respect. This dual standard may not precisely reverse the presumption of constitutionality in civil liberties cases, but obviously it does set up a hierarchy of values within the due process clause." 41

Indeed, the absence of threat of immediate harm makes the need for judicial intervention less evident and underscores the essential nature of petitioners' attack on the law on the grounds of regressivity, denial of due process and equal protection and impairment of contracts as a mere academic discussion of the merits of the law. For the fact is that there have even been no notices of assessments issued to petitioners and no determinations at the administrative levels of their claims so as to illuminate the actual operation of the law and enable us to reach sound judgment regarding so fundamental questions as those raised in these suits.

Thus, the broad argument against the VAT is that it is regressive and that it violates the requirement that "The rule of taxation shall be uniform and equitable [and] Congress shall evolve a progressive system of taxation." 42Petitioners in G.R. No. 115781 quote from a paper, entitled "VAT Policy Issues: Structure, Regressivity, Inflation and Exports" by Alan A. Tait of the International Monetary Fund, that "VAT payment by low-income households will be a higher proportion of their incomes (and expenditures) than payments by higher-income households. That is, the VAT will be regressive." Petitioners contend that as a result of the uniform 10% VAT, the tax on consumption goods of those who are in the higher-income bracket, which before were taxed at a rate higher than 10%, has been reduced, while basic commodities, which before were taxed at rates ranging from 3% to 5%, are now taxed at a higher rate.

Just as vigorously as it is asserted that the law is regressive, the opposite claim is pressed by respondents that in fact it distributes the tax burden to as many goods and services as possible particularly to those which are within the reach of higher-income groups, even as the law exempts basic goods and services. It is thus equitable. The goods and properties subject to the VAT are those used or consumed by higher-income groups. These include real properties held primarily for sale to customers or held for lease in the ordinary course of business, the right or privilege to use industrial, commercial or scientific equipment, hotels, restaurants and

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similar places, tourist buses, and the like. On the other hand, small business establishments, with annual gross sales of less than P500,000, are exempted. This, according to respondents, removes from the coverage of the law some 30,000 business establishments. On the other hand, an occasional paper 43 of the Center for Research and Communication cities a NEDA study that the VAT has minimal impact on inflation and income distribution and that while additional expenditure for the lowest income class is only P301 or 1.49% a year, that for a family earning P500,000 a year or more is P8,340 or 2.2%.

Lacking empirical data on which to base any conclusion regarding these arguments, any discussion whether the VAT is regressive in the sense that it will hit the "poor" and middle-income group in society harder than it will the "rich," as the Cooperative Union of the Philippines (CUP) claims in G.R. No. 115873, is largely an academic exercise. On the other hand, the CUP's contention that Congress' withdrawal of exemption of producers cooperatives, marketing cooperatives, and service cooperatives, while maintaining that granted to electric cooperatives, not only goes against the constitutional policy to promote cooperatives as instruments of social justice (Art. XII, § 15) but also denies such cooperatives the equal protection of the law is actually a policy argument. The legislature is not required to adhere to a policy of "all or none" in choosing the subject of taxation. 44

Nor is the contention of the Chamber of Real Estate and Builders Association (CREBA), petitioner in G.R. 115754, that the VAT will reduce the mark up of its members by as much as 85% to 90% any more concrete. It is a mere allegation. On the other hand, the claim of the Philippine Press Institute, petitioner in G.R. No. 115544, that the VAT will drive some of its members out of circulation because their profits from advertisements will not be enough to pay for their tax liability, while purporting to be based on the financial statements of the newspapers in question, still falls short of the establishment of facts by evidence so necessary for adjudicating the question whether the tax is oppressive and confiscatory.

Indeed, regressivity is not a negative standard for courts to enforce. What Congress is required by the Constitution to do is to "evolve a progressive system of taxation." This is a directive to Congress, just like the directive to it to give priority to the enactment of laws for the enhancement of human dignity and the reduction of social, economic and political inequalities (Art. XIII, § 1), or for the promotion of the right to "quality education" (Art. XIV, § 1). These provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable rights.

At all events, our 1988 decision in Kapatiran 45 should have laid to rest the questions now raised against the VAT. There similar arguments made against the original VAT Law (Executive Order No. 273) were held to be

hypothetical, with no more basis than newspaper articles which this Court found to be "hearsay and [without] evidentiary value." As Republic Act No. 7716 merely expands the base of the VAT system and its coverage as provided in the original VAT Law, further debate on the desirability and wisdom of the law should have shifted to Congress.

Only slightly less abstract but nonetheless hypothetical is the contention of CREBA that the imposition of the VAT on the sales and leases of real estate by virtue of contracts entered into prior to the effectivity of the law would violate the constitutional provision that "No law impairing the obligation of contracts shall be passed." It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing power of the State. For not only are existing laws read into contracts in order to fix obligations as between parties, but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace and good order of society. 46

In truth, the Contract Clause has never been thought as a limitation on the exercise of the State's power of taxation save only where a tax exemption has been granted for a valid consideration. 47 Such is not the case of PAL in G.R. No. 115852, and we do not understand it to make this claim. Rather, its position, as discussed above, is that the removal of its tax exemption cannot be made by a general, but only by a specific, law.

The substantive issues raised in some of the cases are presented in abstract, hypothetical form because of the lack of a concrete record. We accept that this Court does not only adjudicate private cases; that public actions by "non-Hohfeldian" 48 or ideological plaintiffs are now cognizable provided they meet the standing requirement of the Constitution; that under Art. VIII, § 1, ¶ 2 the Court has a "special function" of vindicating constitutional rights. Nonetheless the feeling cannot be escaped that we do not have before us in these cases a fully developed factual record that alone can impart to our adjudication the impact of actuality 49 to insure that decision-making is informed and well grounded. Needless to say, we do not have power to render advisory opinions or even jurisdiction over petitions for declaratory judgment. In effect we are being asked to do what the Conference Committee is precisely accused of having done in these cases — to sit as a third legislative chamber to review legislation.

We are told, however, that the power of judicial review is not so much power as it is duty imposed on this Court by the Constitution and that we would be remiss in the performance of that duty if we decline to look behind the barriers set by the principle of separation of powers. Art. VIII, § 1, ¶ 2 is cited in support of this view:

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Judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government.

To view the judicial power of review as a duty is nothing new. Chief Justice Marshall said so in 1803, to justify the assertion of this power in Marbury v. Madison:

It is emphatically the province and duty of the judicial department to say what the law is. Those who apply the rule to particular cases must of necessity expound and interpret that rule. If two laws conflict with each other, the courts must decide on the operation of each. 50

Justice Laurel echoed this justification in 1936 in Angara v. Electoral Commission:

And when the judiciary mediates to allocate constitutional boundaries, it does not assert any superiority over the other departments; it does not in reality nullify or invalidate an act of the legislature, but only asserts the solemn and sacred obligation assigned to it by the Constitution to determine conflicting claims of authority under the Constitution and to establish for the parties in an actual controversy the rights which that instrument secures and guarantees to them. 51

This conception of the judicial power has been affirmed in severalcases 52 of this Court following Angara.

It does not add anything, therefore, to invoke this "duty" to justify this Court's intervention in what is essentially a case that at best is not ripe for adjudication. That duty must still be performed in the context of a concrete case or controversy, as Art. VIII, § 5(2) clearly defines our jurisdiction in terms of "cases," and nothing but "cases." That the other departments of the government may have committed a grave abuse of discretion is not an independent ground for exercising our power. Disregard of the essential limits imposed by the case and controversy requirement can in the long run only result in undermining our authority as a court of law. For, as judges, what we are called upon to render is judgment according to law, not according to what may appear to be the opinion of the day.

_______________________________

In the preceeding pages we have endeavored to discuss, within limits, the validity of Republic Act No. 7716 in its formal and substantive aspects as this has been raised in the various cases before us. To sum up, we hold:

(1) That the procedural requirements of the Constitution have been complied with by Congress in the enactment of the statute;

(2) That judicial inquiry whether the formal requirements for the enactment of statutes — beyond those prescribed by the Constitution — have been observed is precluded by the principle of separation of powers;

(3) That the law does not abridge freedom of speech, expression or the press, nor interfere with the free exercise of religion, nor deny to any of the parties the right to an education; and

(4) That, in view of the absence of a factual foundation of record, claims that the law is regressive, oppressive and confiscatory and that it violates vested rights protected under the Contract Clause are prematurely raised and do not justify the grant of prospective relief by writ of prohibition.

WHEREFORE, the petitions in these cases are DISMISSED.

Bidin, Quiason, and Kapunan, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 115455 October 30, 1995

ARTURO M. TOLENTINO, petitioner, vs.

THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 115525 October 30, 1995

JUAN T. DAVID, petitioner, vs.

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TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as Secretary of Finance; LIWAYWAY VINZONS-CHATO, as Commissioner of Internal Revenue; and their AUTHORIZED

AGENTS OR REPRESENTATIVES, respondents.

G.R. No. 115543 October 30, 1995

RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners, 

vs.THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE

COMMISSIONERS OF THE BUREAU OF INTERNAL REVENUE AND BUREAU OF CUSTOMS, respondents.

G.R. No. 115544 October 30, 1995

PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; KAMAHALAN PUBLISHING CORPORATION; PHILIPPINE

JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L. DIMALANTA, petitioners, 

vs.HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of

Internal Revenue; HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary; and HON. ROBERTO B. DE

OCAMPO, in his capacity as Secretary of Finance, respondents.

G.R. No. 115754 October 30, 1995

CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA), petitioner, 

vs.THE COMMISSIONER OF INTERNAL REVENUE, respondent.

G.R. No. 115781 October 30, 1995

KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM

TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V. VICTORINO,

JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF ATTORNEYS FOR BROTHERHOOD, INTEGRITY AND NATIONALISM,

INC. ("MABINI"), FREEDOM FROM DEBT COALITION, INC., and PHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO

TAÑADA,petitioners, vs.

THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE

COMMISSIONER OF INTERNAL REVENUE and THE COMMISSIONER OF CUSTOMS, respondents.

G.R. No. 115852 October 30, 1995

PHILIPPINE AIRLINES, INC., petitioner, vs.

THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 115873 October 30, 1995

COOPERATIVE UNION OF THE PHILIPPINES, petitioner, vs.

HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal Revenue, HON. TEOFISTO T. GUINGONA, JR., in his

capacity as Executive Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of Finance, respondents.

G.R. No. 115931 October 30, 1995

PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and ASSOCIATION OF PHILIPPINE BOOK SELLERS, petitioners, 

vs.HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V. CHATO, as the Commissioner of Internal Revenue;

and HON. GUILLERMO PARAYNO, JR., in his capacity as the Commissioner of Customs, respondents.

R E S O L U T I O N

 

MENDOZA, J.:

These are motions seeking reconsideration of our decision dismissing the petitions filed in these cases for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded Value-Added Tax Law. The motions, of which there are 10 in all, have been filed by the several petitioners in these cases, with the exception of the Philippine Educational Publishers Association, Inc. and the Association of Philippine Booksellers, petitioners in G.R. No. 115931.

The Solicitor General, representing the respondents, filed a consolidated comment, to which the Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute, Inc., petitioner in G.R. No.

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115544, and Juan T. David, petitioner in G.R. No. 115525, each filed a reply. In turn the Solicitor General filed on June 1, 1995 a rejoinder to the PPI's reply.

On June 27, 1995 the matter was submitted for resolution.

I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners (Tolentino, Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber of Real Estate and Builders Association (CREBA)) reiterate previous claims made by them that R.A. No. 7716 did not "originate exclusively" in the House of Representatives as required by Art. VI, §24 of the Constitution. Although they admit that H. No. 11197 was filed in the House of Representatives where it passed three readings and that afterward it was sent to the Senate where after first reading it was referred to the Senate Ways and Means Committee, they complain that the Senate did not pass it on second and third readings. Instead what the Senate did was to pass its own version (S. No. 1630) which it approved on May 24, 1994. Petitioner Tolentino adds that what the Senate committee should have done was to amend H. No. 11197 by striking out the text of the bill and substituting it with the text of S. No. 1630. That way, it is said, "the bill remains a House bill and the Senate version just becomes the text (only the text) of the House bill."

The contention has no merit.

The enactment of S. No. 1630 is not the only instance in which the Senate proposed an amendment to a House revenue bill by enacting its own version of a revenue bill. On at least two occasions during the Eighth Congress, the Senate passed its own version of revenue bills, which, in consolidation with House bills earlier passed, became the enrolled bills. These were:

R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BY EXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX AND DUTY EXEMPTION AND TAX CREDIT ON CAPITAL EQUIPMENT) which was approved by the President on April 10, 1992. This Act is actually a consolidation of H. No. 34254, which was approved by the House on January 29, 1992, and S. No. 1920, which was approved by the Senate on February 3, 1992.

R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE REWARD TO ANY FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) which was approved by the President on May 22, 1992. This Act is a consolidation of H. No. 22232, which was approved by the House of Representatives on August 2, 1989, and S. No. 807, which was approved by the Senate on October 21, 1991.

On the other hand, the Ninth Congress passed revenue laws which were also the result of the consolidation of House and Senate bills. These are the following, with indications of the dates on which the laws were approved by the President and dates the separate bills of the two chambers of Congress were respectively passed:

1. R.A. NO. 7642

AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING FOR THIS PURPOSE THE PERTINENT SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992).

House Bill No. 2165, October 5, 1992

Senate Bill No. 32, December 7, 1992

2. R.A. NO. 7643

AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE TO REQUIRE THE PAYMENT OF THE VALUE-ADDED TAX EVERY MONTH AND TO ALLOW LOCAL GOVERNMENT UNITS TO SHARE IN VAT REVENUE, AMENDING FOR THIS PURPOSE CERTAIN SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992)

House Bill No. 1503, September 3, 1992

Senate Bill No. 968, December 7, 1992

3. R.A. NO. 7646

AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE TO PRESCRIBE THE PLACE FOR PAYMENT OF INTERNAL REVENUE TAXES BY LARGE TAXPAYERS, AMENDING FOR THIS PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED (February 24, 1993)

House Bill No. 1470, October 20, 1992

Senate Bill No. 35, November 19, 1992

4. R.A. NO. 7649114

AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL SUBDIVISIONS, INSTRUMENTALITIES OR AGENCIES INCLUDING GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS (GOCCS) TO DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE AT THE RATE OF THREE PERCENT (3%) ON GROSS PAYMENT FOR THE PURCHASE OF GOODS AND SIX PERCENT (6%) ON GROSS RECEIPTS FOR SERVICES RENDERED BY CONTRACTORS (April 6, 1993)

House Bill No. 5260, January 26, 1993

Senate Bill No. 1141, March 30, 1993

5. R.A. NO. 7656

AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS TO DECLARE DIVIDENDS UNDER CERTAIN CONDITIONS TO THE NATIONAL GOVERNMENT, AND FOR OTHER PURPOSES (November 9, 1993)

House Bill No. 11024, November 3, 1993

Senate Bill No. 1168, November 3, 1993

6. R.A. NO. 7660

AN ACT RATIONALIZING FURTHER THE STRUCTURE AND ADMINISTRATION OF THE DOCUMENTARY STAMP TAX, AMENDING FOR THE PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, ALLOCATING FUNDS FOR SPECIFIC PROGRAMS, AND FOR OTHER PURPOSES (December 23, 1993)

House Bill No. 7789, May 31, 1993

Senate Bill No. 1330, November 18, 1993

7. R.A. NO. 7717

AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF SHARES OF STOCK LISTED AND TRADED THROUGH THE LOCAL STOCK EXCHANGE OR THROUGH INITIAL PUBLIC OFFERING, AMENDING FOR THE PURPOSE

THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, BY INSERTING A NEW SECTION AND REPEALING CERTAIN SUBSECTIONS THEREOF (May 5, 1994)

House Bill No. 9187, November 3, 1993

Senate Bill No. 1127, March 23, 1994

Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the exercise of its power to propose amendments to bills required to originate in the House, passed its own version of a House revenue measure. It is noteworthy that, in the particular case of S. No. 1630, petitioners Tolentino and Roco, as members of the Senate, voted to approve it on second and third readings.

On the other hand, amendment by substitution, in the manner urged by petitioner Tolentino, concerns a mere matter of form. Petitioner has not shown what substantial difference it would make if, as the Senate actually did in this case, a separate bill like S. No. 1630 is instead enacted as a substitute measure, "taking into Consideration . . . H.B.11197."

Indeed, so far as pertinent, the Rules of the Senate only provide:

RULE XXIX

AMENDMENTS

xxx xxx xxx

§68. Not more than one amendment to the original amendment shall be considered.

No amendment by substitution shall be entertained unless the text thereof is submitted in writing.

Any of said amendments may be withdrawn before a vote is taken thereon.

§69. No amendment which seeks the inclusion of a legislative provision foreign to the subject matter of a bill (rider) shall be entertained.

xxx xxx xxx

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§70-A. A bill or resolution shall not be amended by substituting it with another which covers a subject distinct from that proposed in the original bill or resolution. (emphasis added).

Nor is there merit in petitioners' contention that, with regard to revenue bills, the Philippine Senate possesses less power than the U.S. Senate because of textual differences between constitutional provisions giving them the power to propose or concur with amendments.

Art. I, §7, cl. 1 of the U.S. Constitution reads:

All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills.

Art. VI, §24 of our Constitution reads:

All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.

The addition of the word "exclusively" in the Philippine Constitution and the decision to drop the phrase "as on other Bills" in the American version, according to petitioners, shows the intention of the framers of our Constitution to restrict the Senate's power to propose amendments to revenue bills. Petitioner Tolentino contends that the word "exclusively" was inserted to modify "originate" and "the words 'as in any other bills' (sic) were eliminated so as to show that these bills were not to be like other bills but must be treated as a special kind."

The history of this provision does not support this contention. The supposed indicia of constitutional intent are nothing but the relics of an unsuccessful attempt to limit the power of the Senate. It will be recalled that the 1935 Constitution originally provided for a unicameral National Assembly. When it was decided in 1939 to change to a bicameral legislature, it became necessary to provide for the procedure for lawmaking by the Senate and the House of Representatives. The work of proposing amendments to the Constitution was done by the National Assembly, acting as a constituent assembly, some of whose members, jealous of preserving the Assembly's lawmaking powers, sought to curtail the powers of the proposed Senate. Accordingly they proposed the following provision:

All bills appropriating public funds, revenue or tariff bills, bills of local application, and private bills shall originate exclusively in the Assembly, but the Senate may propose or concur with amendments. In case of disapproval by the Senate of any such bills, the Assembly may repass the same by a two-thirds vote of all its members, and thereupon, the bill so repassed shall be deemed enacted and may be submitted to the President for corresponding action. In the event that the Senate should fail to finally act on any such bills, the Assembly may, after thirty days from the opening of the next regular session of the same legislative term, reapprove the same with a vote of two-thirds of all the members of the Assembly. And upon such reapproval, the bill shall be deemed enacted and may be submitted to the President for corresponding action.

The special committee on the revision of laws of the Second National Assembly vetoed the proposal. It deleted everything after the first sentence. As rewritten, the proposal was approved by the National Assembly and embodied in Resolution No. 38, as amended by Resolution No. 73. (J. ARUEGO, KNOW YOUR CONSTITUTION 65-66 (1950)). The proposed amendment was submitted to the people and ratified by them in the elections held on June 18, 1940.

This is the history of Art. VI, §18 (2) of the 1935 Constitution, from which Art. VI, §24 of the present Constitution was derived. It explains why the word "exclusively" was added to the American text from which the framers of the Philippine Constitution borrowed and why the phrase "as on other Bills" was not copied. Considering the defeat of the proposal, the power of the Senate to propose amendments must be understood to be full, plenary and complete "as on other Bills." Thus, because revenue bills are required to originate exclusively in the House of Representatives, the Senate cannot enact revenue measures of its own without such bills. After a revenue bill is passed and sent over to it by the House, however, the Senate certainly can pass its own version on the same subject matter. This follows from the coequality of the two chambers of Congress.

That this is also the understanding of book authors of the scope of the Senate's power to concur is clear from the following commentaries:

The power of the Senate to propose or concur with amendments is apparently without restriction. It would seem that by virtue of this power, the Senate can practically re-write a bill required to come from the House and leave only a trace of the original bill. For example, a general revenue bill passed by the lower house of the United States Congress contained provisions for the imposition of an inheritance tax . This was changed by the

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Senate into a corporation tax. The amending authority of the Senate was declared by the United States Supreme Court to be sufficiently broad to enable it to make the alteration. [Flint v. Stone Tracy Company, 220 U.S. 107, 55 L. ed. 389].

(L. TAÑADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES 247 (1961))

The above-mentioned bills are supposed to be initiated by the House of Representatives because it is more numerous in membership and therefore also more representative of the people. Moreover, its members are presumed to be more familiar with the needs of the country in regard to the enactment of the legislation involved.

The Senate is, however, allowed much leeway in the exercise of its power to propose or concur with amendments to the bills initiated by the House of Representatives. Thus, in one case, a bill introduced in the U.S. House of Representatives was changed by the Senate to make a proposed inheritance tax a corporation tax. It is also accepted practice for the Senate to introduce what is known as an amendment by substitution, which may entirely replace the bill initiated in the House of Representatives.

(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).

In sum, while Art. VI, §24 provides that all appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills must "originate exclusively in the House of Representatives," it also adds, "but the Senate may propose or concur with amendments." In the exercise of this power, the Senate may propose an entirely new bill as a substitute measure. As petitioner Tolentino states in a high school text, a committee to which a bill is referred may do any of the following:

(1) to endorse the bill without changes; (2) to make changes in the bill omitting or adding sections or altering its language; (3) to make and endorse an entirely new bill as a substitute, in which case it will be known as a committee bill; or (4) to make no report at all.

(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))

To except from this procedure the amendment of bills which are required to originate in the House by prescribing that the number of the House bill and its other parts up to the enacting clause must be preserved although the text of the Senate amendment may be incorporated in place of the original body of the bill is to insist on a mere technicality. At any rate there is no rule prescribing this form. S. No. 1630, as a substitute measure, is therefore as much an amendment of H. No. 11197 as any which the Senate could have made.

II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they assume that S. No. 1630 is an independent and distinct bill. Hence their repeated references to its certification that it was passed by the Senate "in substitution of S.B. No. 1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197," implying that there is something substantially different between the reference to S. No. 1129 and the reference to H. No. 11197. From this premise, they conclude that R.A. No. 7716 originated both in the House and in the Senate and that it is the product of two "half-baked bills because neither H. No. 11197 nor S. No. 1630 was passed by both houses of Congress."

In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mere amendments of the corresponding provisions of H. No. 11197. The very tabular comparison of the provisions of H. No. 11197 and S. No. 1630 attached as Supplement A to the basic petition of petitioner Tolentino, while showing differences between the two bills, at the same time indicates that the provisions of the Senate bill were precisely intended to be amendments to the House bill.

Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate bill was a mere amendment of the House bill, H. No. 11197 in its original form did not have to pass the Senate on second and three readings. It was enough that after it was passed on first reading it was referred to the Senate Committee on Ways and Means. Neither was it required that S. No. 1630 be passed by the House of Representatives before the two bills could be referred to the Conference Committee.

There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630. When the House bill and Senate bill, which became R.A. No. 1405 (Act prohibiting the disclosure of bank deposits), were referred to a conference committee, the question was raised whether the two bills could be the subject of such conference, considering that the bill from one house had not been passed by the other and vice versa. As Congressman Duran put the question:

MR. DURAN. Therefore, I raise this question of order as to procedure: If a House bill is passed by the House but not passed by the Senate, and a Senate bill of a similar nature is passed in the Senate but never passed in the House,

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can the two bills be the subject of a conference, and can a law be enacted from these two bills? I understand that the Senate bill in this particular instance does not refer to investments in government securities, whereas the bill in the House, which was introduced by the Speaker, covers two subject matters: not only investigation of deposits in banks but also investigation of investments in government securities. Now, since the two bills differ in their subject matter, I believe that no law can be enacted.

Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:

THE SPEAKER. The report of the conference committee is in order. It is precisely in cases like this where a conference should be had. If the House bill had been approved by the Senate, there would have been no need of a conference; but precisely because the Senate passed another bill on the same subject matter, the conference committee had to be created, and we are now considering the report of that committee.

(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))

III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630 are distinct and unrelated measures also accounts for the petitioners' (Kilosbayan's and PAL's) contention that because the President separately certified to the need for the immediate enactment of these measures, his certification was ineffectual and void. The certification had to be made of the version of the same revenue bill which at the moment was being considered. Otherwise, to follow petitioners' theory, it would be necessary for the President to certify as many bills as are presented in a house of Congress even though the bills are merely versions of the bill he has already certified. It is enough that he certifies the bill which, at the time he makes the certification, is under consideration. Since on March 22, 1994 the Senate was considering S. No. 1630, it was that bill which had to be certified. For that matter on June 1, 1993 the President had earlier certified H. No. 9210 for immediate enactment because it was the one which at that time was being considered by the House. This bill was later substituted, together with other bills, by H. No. 11197.

As to what Presidential certification can accomplish, we have already explained in the main decision that the phrase "except when the President certifies to the necessity of its immediate enactment, etc." in Art. VI, §26 (2) qualifies not only the requirement that "printed copies [of a bill] in its final form [must be] distributed to the members three days

before its passage" but also the requirement that before a bill can become a law it must have passed "three readings on separate days." There is not only textual support for such construction but historical basis as well.

Art. VI, §21 (2) of the 1935 Constitution originally provided:

(2) No bill shall be passed by either House unless it shall have been printed and copies thereof in its final form furnished its Members at least three calendar days prior to its passage, except when the President shall have certified to the necessity of its immediate enactment. Upon the last reading of a bill, no amendment thereof shall be allowed and the question upon its passage shall be taken immediately thereafter, and the yeas and nays entered on the Journal.

When the 1973 Constitution was adopted, it was provided in Art. VIII, §19 (2):

(2) No bill shall become a law unless it has passed three readings on separate days, and printed copies thereof in its final form have been distributed to the Members three days before its passage, except when the Prime Minister certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays entered in the Journal.

This provision of the 1973 document, with slight modification, was adopted in Art. VI, §26 (2) of the present Constitution, thus:

(2) No bill passed by either House shall become a law unless it has passed three readings on separate days, and printed copies thereof in its final form have been distributed to its Members three days before its passage, except when the President certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays entered in the Journal.

The exception is based on the prudential consideration that if in all cases three readings on separate days are required and a bill has to be printed in final form before it can be passed, the need for a law may be rendered

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academic by the occurrence of the very emergency or public calamity which it is meant to address.

Petitioners further contend that a "growing budget deficit" is not an emergency, especially in a country like the Philippines where budget deficit is a chronic condition. Even if this were the case, an enormous budget deficit does not make the need for R.A. No. 7716 any less urgent or the situation calling for its enactment any less an emergency.

Apparently, the members of the Senate (including some of the petitioners in these cases) believed that there was an urgent need for consideration of S. No. 1630, because they responded to the call of the President by voting on the bill on second and third readings on the same day. While the judicial department is not bound by the Senate's acceptance of the President's certification, the respect due coequal departments of the government in matters committed to them by the Constitution and the absence of a clear showing of grave abuse of discretion caution a stay of the judicial hand.

At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate where it was discussed for six days. Only its distribution in advance in its final printed form was actually dispensed with by holding the voting on second and third readings on the same day (March 24, 1994). Otherwise, sufficient time between the submission of the bill on February 8, 1994 on second reading and its approval on March 24, 1994 elapsed before it was finally voted on by the Senate on third reading.

The purpose for which three readings on separate days is required is said to be two-fold: (1) to inform the members of Congress of what they must vote on and (2) to give them notice that a measure is progressing through the enacting process, thus enabling them and others interested in the measure to prepare their positions with reference to it. (1 J. G. SUTHERLAND, STATUTES AND STATUTORY CONSTRUCTION §10.04, p. 282 (1972)). These purposes were substantially achieved in the case of R.A. No. 7716.

IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the Movement of Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in violation of the constitutional policy of full public disclosure and the people's right to know (Art. II, §28 and Art. III, §7) the Conference Committee met for two days in executive session with only the conferees present.

As pointed out in our main decision, even in the United States it was customary to hold such sessions with only the conferees and their staffs in attendance and it was only in 1975 when a new rule was adopted

requiring open sessions. Unlike its American counterpart, the Philippine Congress has not adopted a rule prescribing open hearings for conference committees.

It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, at least staff members were present. These were staff members of the Senators and Congressmen, however, who may be presumed to be their confidential men, not stenographers as in this case who on the last two days of the conference were excluded. There is no showing that the conferees themselves did not take notes of their proceedings so as to give petitioner Kilosbayan basis for claiming that even in secret diplomatic negotiations involving state interests, conferees keep notes of their meetings. Above all, the public's right to know was fully served because the Conference Committee in this case submitted a report showing the changes made on the differing versions of the House and the Senate.

Petitioners cite the rules of both houses which provide that conference committee reports must contain "a detailed, sufficiently explicit statement of the changes in or other amendments." These changes are shown in the bill attached to the Conference Committee Report. The members of both houses could thus ascertain what changes had been made in the original bills without the need of a statement detailing the changes.

The same question now presented was raised when the bill which became R.A. No. 1400 (Land Reform Act of 1955) was reported by the Conference Committee. Congressman Bengzon raised a point of order. He said:

MR. BENGZON. My point of order is that it is out of order to consider the report of the conference committee regarding House Bill No. 2557 by reason of the provision of Section 11, Article XII, of the Rules of this House which provides specifically that the conference report must be accompanied by a detailed statement of the effects of the amendment on the bill of the House. This conference committee report is not accompanied by that detailed statement, Mr. Speaker. Therefore it is out of order to consider it.

Petitioner Tolentino, then the Majority Floor Leader, answered:

MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in connection with the point of order raised by the gentleman from Pangasinan.

There is no question about the provision of the Rule cited by the gentleman from Pangasinan, but this provision

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applies to those cases where only portions of the bill have been amended. In this case before us an entire bill is presented; therefore, it can be easily seen from the reading of the bill what the provisions are. Besides, this procedure has been an established practice.

After some interruption, he continued:

MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the reason for the provisions of the Rules, and the reason for the requirement in the provision cited by the gentleman from Pangasinan is when there are only certain words or phrases inserted in or deleted from the provisions of the bill included in the conference report, and we cannot understand what those words and phrases mean and their relation to the bill. In that case, it is necessary to make a detailed statement on how those words and phrases will affect the bill as a whole; but when the entire bill itself is copied verbatim in the conference report, that is not necessary. So when the reason for the Rule does not exist, the Rule does not exist.

(2 CONG. REC. NO. 2, p. 4056. (emphasis added))

Congressman Tolentino was sustained by the chair. The record shows that when the ruling was appealed, it was upheld by viva voce and when a division of the House was called, it was sustained by a vote of 48 to 5. (Id., p. 4058)

Nor is there any doubt about the power of a conference committee to insert new provisions as long as these are germane to the subject of the conference. As this Court held in Philippine Judges Association v. Prado, 227 SCRA 703 (1993), in an opinion written by then Justice Cruz, the jurisdiction of the conference committee is not limited to resolving differences between the Senate and the House. It may propose an entirely new provision. What is important is that its report is subsequently approved by the respective houses of Congress. This Court ruled that it would not entertain allegations that, because new provisions had been added by the conference committee, there was thereby a violation of the constitutional injunction that "upon the last reading of a bill, no amendment thereto shall be allowed."

Applying these principles, we shall decline to look into the petitioners' charges that an amendment was made upon the last reading of the bill that eventually became R.A. No. 7354 and that copies thereof in its final form were not

distributed among the members of each House. Both the enrolled bill and the legislative journals certify that the measure was duly enacted i.e., in accordance with Article VI, Sec. 26 (2) of the Constitution. We are bound by such official assurances from a coordinate department of the government, to which we owe, at the very least, a becoming courtesy.

(Id. at 710. (emphasis added))

It is interesting to note the following description of conference committees in the Philippines in a 1979 study:

Conference committees may be of two types: free or instructed. These committees may be given instructions by their parent bodies or they may be left without instructions. Normally the conference committees are without instructions, and this is why they are often critically referred to as "the little legislatures." Once bills have been sent to them, the conferees have almost unlimited authority to change the clauses of the bills and in fact sometimes introduce new measures that were not in the original legislation. No minutes are kept, and members' activities on conference committees are difficult to determine. One congressman known for his idealism put it this way: "I killed a bill on export incentives for my interest group [copra] in the conference committee but I could not have done so anywhere else." The conference committee submits a report to both houses, and usually it is accepted. If the report is not accepted, then the committee is discharged and new members are appointed.

(R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND LEGISLATURES: A COMPARATIVE ANALYSIS 163 (J. D. LEES AND M. SHAW, eds.)).

In citing this study, we pass no judgment on the methods of conference committees. We cite it only to say that conference committees here are no different from their counterparts in the United States whose vast powers we noted in Philippine Judges Association v. Prado, supra. At all events, under Art. VI, §16(3) each house has the power "to determine the rules of its proceedings," including those of its committees. Any meaningful change in the method and procedures of Congress or its committees must therefore be sought in that body itself.

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V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates Art. VI, §26 (1) of the Constitution which provides that "Every bill passed by Congress shall embrace only one subject which shall be expressed in the title thereof." PAL contends that the amendment of its franchise by the withdrawal of its exemption from the VAT is not expressed in the title of the law.

Pursuant to §13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu of all other taxes, duties, royalties, registration, license and other fees and charges of any kind, nature, or description, imposed, levied, established, assessed or collected by any municipal, city, provincial or national authority or government agency, now or in the future."

PAL was exempted from the payment of the VAT along with other entities by §103 of the National Internal Revenue Code, which provides as follows:

§103. Exempt transactions. — The following shall be exempt from the value-added tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws or international agreements to which the Philippines is a signatory.

R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by amending §103, as follows:

§103. Exempt transactions. — The following shall be exempt from the value-added tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws, except those granted under Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .

The amendment of §103 is expressed in the title of R.A. No. 7716 which reads:

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE

NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES.

By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT) SYSTEM [BY] WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED AND FOR OTHER PURPOSES," Congress thereby clearly expresses its intention to amend any provision of the NIRC which stands in the way of accomplishing the purpose of the law.

PAL asserts that the amendment of its franchise must be reflected in the title of the law by specific reference to P.D. No. 1590. It is unnecessary to do this in order to comply with the constitutional requirement, since it is already stated in the title that the law seeks to amend the pertinent provisions of the NIRC, among which is §103(q), in order to widen the base of the VAT. Actually, it is the bill which becomes a law that is required to express in its title the subject of legislation. The titles of H. No. 11197 and S. No. 1630 in fact specifically referred to §103 of the NIRC as among the provisions sought to be amended. We are satisfied that sufficient notice had been given of the pendency of these bills in Congress before they were enacted into what is now R.A.No. 7716.

In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PAL was rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL CORPORATION, DEFINING ITS POWERS, FUNCTIONS AND RESPONSIBILITIES, PROVIDING FOR REGULATION OF THE INDUSTRY AND FOR OTHER PURPOSES CONNECTED THEREWITH. It contained a provision repealing all franking privileges. It was contended that the withdrawal of franking privileges was not expressed in the title of the law. In holding that there was sufficient description of the subject of the law in its title, including the repeal of franking privileges, this Court held:

To require every end and means necessary for the accomplishment of the general objectives of the statute to be expressed in its title would not only be unreasonable but would actually render legislation impossible. [Cooley, Constitutional Limitations, 8th Ed., p. 297] As has been correctly explained:

The details of a legislative act need not be specifically stated in its title, but matter germane to the subject as expressed in the title, and adopted to the accomplishment of the object in view, may properly be included in the act. Thus,

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it is proper to create in the same act the machinery by which the act is to be enforced, to prescribe the penalties for its infraction, and to remove obstacles in the way of its execution. If such matters are properly connected with the subject as expressed in the title, it is unnecessary that they should also have special mention in the title. (Southern Pac. Co. v. Bartine, 170 Fed. 725)

(227 SCRA at 707-708)

VI. Claims of press freedom and religious liberty. We have held that, as a general proposition, the press is not exempt from the taxing power of the State and that what the constitutional guarantee of free press prohibits are laws which single out the press or target a group belonging to the press for special treatment or which in any way discriminate against the press on the basis of the content of the publication, and R.A. No. 7716 is none of these.

Now it is contended by the PPI that by removing the exemption of the press from the VAT while maintaining those granted to others, the law discriminates against the press. At any rate, it is averred, "even nondiscriminatory taxation of constitutionally guaranteed freedom is unconstitutional."

With respect to the first contention, it would suffice to say that since the law granted the press a privilege, the law could take back the privilege anytime without offense to the Constitution. The reason is simple: by granting exemptions, the State does not forever waive the exercise of its sovereign prerogative.

Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to which other businesses have long ago been subject. It is thus different from the tax involved in the cases invoked by the PPI. The license tax in Grosjean v. American Press Co., 297 U.S. 233, 80 L. Ed. 660 (1936) was found to be discriminatory because it was laid on the gross advertising receipts only of newspapers whose weekly circulation was over 20,000, with the result that the tax applied only to 13 out of 124 publishers in Louisiana. These large papers were critical of Senator Huey Long who controlled the state legislature which enacted the license tax. The censorial motivation for the law was thus evident.

On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S. 575, 75 L. Ed. 2d 295 (1983), the tax was found to be discriminatory because although it could have been made

liable for the sales tax or, in lieu thereof, for the use tax on the privilege of using, storing or consuming tangible goods, the press was not. Instead, the press was exempted from both taxes. It was, however, later made to pay a special use tax on the cost of paper and ink which made these items "the only items subject to the use tax that were component of goods to be sold at retail." The U.S. Supreme Court held that the differential treatment of the press "suggests that the goal of regulation is not related to suppression of expression, and such goal is presumptively unconstitutional." It would therefore appear that even a law that favors the press is constitutionally suspect. (See the dissent of Rehnquist, J. in that case)

Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn "absolutely and unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those previously granted to PAL, petroleum concessionaires, enterprises registered with the Export Processing Zone Authority, and many more are likewise totally withdrawn, in addition to exemptions which are partially withdrawn, in an effort to broaden the base of the tax.

The PPI says that the discriminatory treatment of the press is highlighted by the fact that transactions, which are profit oriented, continue to enjoy exemption under R.A. No. 7716. An enumeration of some of these transactions will suffice to show that by and large this is not so and that the exemptions are granted for a purpose. As the Solicitor General says, such exemptions are granted, in some cases, to encourage agricultural production and, in other cases, for the personal benefit of the end-user rather than for profit. The exempt transactions are:

(a) Goods for consumption or use which are in their original state (agricultural, marine and forest products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods or services to enhance agriculture (milling of palay, corn, sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used for the manufacture of feeds).

(b) Goods used for personal consumption or use (household and personal effects of citizens returning to the Philippines) or for professional use, like professional instruments and implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of petroleum products subject to excise tax and services subject to percentage tax.

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(d) Educational services, medical, dental, hospital and veterinary services, and services rendered under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)

The PPI asserts that it does not really matter that the law does not discriminate against the press because "even nondiscriminatory taxation on constitutionally guaranteed freedom is unconstitutional." PPI cites in support of this assertion the following statement in Murdock v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):

The fact that the ordinance is "nondiscriminatory" is immaterial. The protection afforded by the First Amendment is not so restricted. A license tax certainly does not acquire constitutional validity because it classifies the privileges protected by the First Amendment along with the wares and merchandise of hucksters and peddlers and treats them all alike. Such equality in treatment does not save the ordinance. Freedom of press, freedom of speech, freedom of religion are in preferred position.

The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for regulation. Its imposition on the press is unconstitutional because it lays a prior restraint on the exercise of its right. Hence, although its application to others, such those selling goods, is valid, its application to the press or to religious groups, such as the Jehovah's Witnesses, in connection with the latter's sale of religious books and pamphlets, is unconstitutional. As the U.S. Supreme Court put it, "it is one thing to impose a tax on income or property of a preacher. It is quite another thing to exact a tax on him for delivering a sermon."

A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil. 386 (1957) which invalidated a city ordinance requiring a business license fee on those engaged in the sale of general merchandise. It was held that the tax could not be imposed on the sale of bibles by the American Bible Society without restraining the free exercise of its right to propagate.

The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege, much less a constitutional right. It is imposed on the sale, barter, lease or exchange of goods or properties or the sale or exchange of services and the lease of properties purely for revenue purposes. To subject the press to its payment is not to burden the exercise of its right any more than to make the press pay income tax or subject it to general regulation is not to violate its freedom under the Constitution.

Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds derived from the sales are used to subsidize the cost of printing copies which are given free to those who cannot afford to pay so that to tax the sales would be to increase the price, while reducing the volume of sale. Granting that to be the case, the resulting burden on the exercise of religious freedom is so incidental as to make it difficult to differentiate it from any other economic imposition that might make the right to disseminate religious doctrines costly. Otherwise, to follow the petitioner's argument, to increase the tax on the sale of vestments would be to lay an impermissible burden on the right of the preacher to make a sermon.

On the other hand the registration fee of P1,000.00 imposed by §107 of the NIRC, as amended by §7 of R.A. No. 7716, although fixed in amount, is really just to pay for the expenses of registration and enforcement of provisions such as those relating to accounting in §108 of the NIRC. That the PBS distributes free bibles and therefore is not liable to pay the VAT does not excuse it from the payment of this fee because it also sells some copies. At any rate whether the PBS is liable for the VAT must be decided in concrete cases, in the event it is assessed this tax by the Commissioner of Internal Revenue.

VII. Alleged violations of the due process, equal protection and contract clauses and the rule on taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies transactions as covered or exempt without reasonable basis and (3) violates the rule that taxes should be uniform and equitable and that Congress shall "evolve a progressive system of taxation."

With respect to the first contention, it is claimed that the application of the tax to existing contracts of the sale of real property by installment or on deferred payment basis would result in substantial increases in the

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monthly amortizations to be paid because of the 10% VAT. The additional amount, it is pointed out, is something that the buyer did not anticipate at the time he entered into the contract.

The short answer to this is the one given by this Court in an early case: "Authorities from numerous sources are cited by the plaintiffs, but none of them show that a lawful tax on a new subject, or an increased tax on an old one, interferes with a contract or impairs its obligation, within the meaning of the Constitution. Even though such taxation may affect particular contracts, as it may increase the debt of one person and lessen the security of another, or may impose additional burdens upon one class and release the burdens of another, still the tax must be paid unless prohibited by the Constitution, nor can it be said that it impairs the obligation of any existing contract in its true legal sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574 (1919)). Indeed not only existing laws but also "the reservation of the essential attributes of sovereignty, is . . . read into contracts as a postulate of the legal order." (Philippine-American Life Ins. Co. v. Auditor General, 22 SCRA 135, 147 (1968)) Contracts must be understood as having been made in reference to the possible exercise of the rightful authority of the government and no obligation of contract can extend to the defeat of that authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)).

It is next pointed out that while §4 of R.A. No. 7716 exempts such transactions as the sale of agricultural products, food items, petroleum, and medical and veterinary services, it grants no exemption on the sale of real property which is equally essential. The sale of real property for socialized and low-cost housing is exempted from the tax, but CREBA claims that real estate transactions of "the less poor," i.e., the middle class, who are equally homeless, should likewise be exempted.

The sale of food items, petroleum, medical and veterinary services, etc., which are essential goods and services was already exempt under §103, pars. (b) (d) (1) of the NIRC before the enactment of R.A. No. 7716. Petitioner is in error in claiming that R.A. No. 7716 granted exemption to these transactions, while subjecting those of petitioner to the payment of the VAT. Moreover, there is a difference between the "homeless poor" and the "homeless less poor" in the example given by petitioner, because the second group or middle class can afford to rent houses in the meantime that they cannot yet buy their own homes. The two social classes are thus differently situated in life. "It is inherent in the power to tax that the 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.'" (Lutz v. Araneta, 98 Phil. 148, 153 (1955). Accord, City of Baguio v. De Leon, 134 Phil. 912 (1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984); Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).

Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI, §28(1) which provides that "The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation."

Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. To satisfy this requirement it is enough that the statute or ordinance applies equally to all persons, forms and corporations placed in similar situation. (City of Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra)

Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted. R.A. No. 7716 merely expands the base of the tax. The validity of the original VAT Law was questioned in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383 (1988) on grounds similar to those made in these cases, namely, that the law was "oppressive, discriminatory, unjust and regressive in violation of Art. VI, §28(1) of the Constitution." (At 382) Rejecting the challenge to the law, this Court held:

As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. . . .

The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public, which are not exempt, at the constant rate of 0% or 10%.

The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged in business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-sari stores are consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products, so that the costs of basic food and other necessities, spared as they are from the incidence of the VAT, are expected to be relatively lower and within the reach of the general public.

(At 382-383)

The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative Union of the Philippines, Inc. (CUP), while petitioner Juan T. David argues that the law contravenes the mandate of Congress to provide for a progressive system of taxation because the law imposes a

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flat rate of 10% and thus places the tax burden on all taxpayers without regard to their ability to pay.

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it simply provides is that Congress shall "evolve a progressive system of taxation." The constitutional provision has been interpreted to mean simply that "direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be minimized." (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. (1977)). Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation of Art. VIII, §17(1) of the 1973 Constitution from which the present Art. VI, §28(1) was taken. Sales taxes are also regressive.

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No. 7716, §3, amending §102 (b) of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, §4, amending §103 of the NIRC).

Thus, the following transactions involving basic and essential goods and services are exempted from the VAT:

(a) Goods for consumption or use which are in their original state (agricultural, marine and forest products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods or services to enhance agriculture (milling of palay, corn sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used for the manufacture of feeds).

(b) Goods used for personal consumption or use (household and personal effects of citizens returning to the Philippines) and or professional use, like professional instruments and implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of petroleum products subject to excise tax and services subject to percentage tax.

(d) Educational services, medical, dental, hospital and veterinary services, and services rendered under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)

On the other hand, the transactions which are subject to the VAT are those which involve goods and services which are used or availed of mainly by higher income groups. These include real properties held primarily for sale to customers or for lease in the ordinary course of trade or business, the right or privilege to use patent, copyright, and other similar property or right, the right or privilege to use industrial, commercial or scientific equipment, motion picture films, tapes and discs, radio, television, satellite transmission and cable television time, hotels, restaurants and similar places, securities, lending investments, taxicabs, utility cars for rent, tourist buses, and other common carriers, services of franchise grantees of telephone and telegraph.

The problem with CREBA's petition is that it presents broad claims of constitutional violations by tendering issues not at retail but at wholesale and in the abstract. There is no fully developed record which can impart to adjudication the impact of actuality. There is no factual foundation to show in the concrete the application of the law to actual contracts and exemplify its effect on property rights. For the fact is that petitioner's members have not even been assessed the VAT. Petitioner's case is not made concrete by a series of hypothetical questions asked which are no different from those dealt with in advisory opinions.

The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here, does not suffice. There must be a factual foundation of such unconstitutional taint. Considering that petitioner here would condemn such a provision as void on its face, he has not made out a case. This is merely to adhere to the authoritative doctrine that where the due process and

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equal protection clauses are invoked, considering that they are not fixed rules but rather broad standards, there is a need for proof of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail.

(Sison, Jr. v. Ancheta, 130 SCRA at 661)

Adjudication of these broad claims must await the development of a concrete case. It may be that postponement of adjudication would result in a multiplicity of suits. This need not be the case, however. Enforcement of the law may give rise to such a case. A test case, provided it is an actual case and not an abstract or hypothetical one, may thus be presented.

Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues. Otherwise, adjudication would be no different from the giving of advisory opinion that does not really settle legal issues.

We are told that it is our duty under Art. VIII, §1, ¶2 to decide whenever a claim is made that "there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the government." This duty can only arise if an actual case or controversy is before us. Under Art . VIII, §5 our jurisdiction is defined in terms of "cases" and all that Art. VIII, §1, ¶2 can plausibly mean is that in the exercise of that jurisdiction we have the judicial power to determine questions of grave abuse of discretion by any branch or instrumentality of the government.

Put in another way, what is granted in Art. VIII, §1, ¶2 is "judicial power," which is "the power of a court to hear and decide cases pending between parties who have the right to sue and be sued in the courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as distinguished from legislative and executive power. This power cannot be directly appropriated until it is apportioned among several courts either by the Constitution, as in the case of Art. VIII, §5, or by statute, as in the case of the Judiciary Act of 1948 (R.A. No. 296) and the Judiciary Reorganization Act of 1980 (B.P. Blg. 129). The power thus apportioned constitutes the court's "jurisdiction," defined as "the power conferred by law upon a court or judge to take cognizance of a case, to the exclusion of all others." (United States v. Arceo, 6 Phil. 29 (1906)) Without an actual case coming within its jurisdiction, this Court cannot inquire into any allegation of grave abuse of discretion by the other departments of the government.

VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative Union of the Philippines (CUP), after briefly surveying the

course of legislation, argues that it was to adopt a definite policy of granting tax exemption to cooperatives that the present Constitution embodies provisions on cooperatives. To subject cooperatives to the VAT would therefore be to infringe a constitutional policy. Petitioner claims that in 1973, P.D. No. 175 was promulgated exempting cooperatives from the payment of income taxes and sales taxes but in 1984, because of the crisis which menaced the national economy, this exemption was withdrawn by P.D. No. 1955; that in 1986, P.D. No. 2008 again granted cooperatives exemption from income and sales taxes until December 31, 1991, but, in the same year, E.O. No. 93 revoked the exemption; and that finally in 1987 the framers of the Constitution "repudiated the previous actions of the government adverse to the interests of the cooperatives, that is, the repeated revocation of the tax exemption to cooperatives and instead upheld the policy of strengthening the cooperatives by way of the grant of tax exemptions," by providing the following in Art. XII:

§1. The goals of the national economy are a more equitable distribution of opportunities, income, and wealth; a sustained increase in the amount of goods and services produced by the nation for the benefit of the people; and an expanding productivity as the key to raising the quality of life for all, especially the underprivileged.

The State shall promote industrialization and full employment based on sound agricultural development and agrarian reform, through industries that make full and efficient use of human and natural resources, and which are competitive in both domestic and foreign markets. However, the State shall protect Filipino enterprises against unfair foreign competition and trade practices.

In the pursuit of these goals, all sectors of the economy and all regions of the country shall be given optimum opportunity to develop. Private enterprises, including corporations, cooperatives, and similar collective organizations, shall be encouraged to broaden the base of their ownership.

§15. The Congress shall create an agency to promote the viability and growth of cooperatives as instruments for social justice and economic development.

Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled out cooperatives by withdrawing their exemption from income and sales taxes under P.D. No. 175, §5. What P.D. No. 1955, §1 did was to withdraw the exemptions and preferential treatments

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theretofore granted to private business enterprises in general, in view of the economic crisis which then beset the nation. It is true that after P.D. No. 2008, §2 had restored the tax exemptions of cooperatives in 1986, the exemption was again repealed by E.O. No. 93, §1, but then again cooperatives were not the only ones whose exemptions were withdrawn. The withdrawal of tax incentives applied to all, including government and private entities. In the second place, the Constitution does not really require that cooperatives be granted tax exemptions in order to promote their growth and viability. Hence, there is no basis for petitioner's assertion that the government's policy toward cooperatives had been one of vacillation, as far as the grant of tax privileges was concerned, and that it was to put an end to this indecision that the constitutional provisions cited were adopted. Perhaps as a matter of policy cooperatives should be granted tax exemptions, but that is left to the discretion of Congress. If Congress does not grant exemption and there is no discrimination to cooperatives, no violation of any constitutional policy can be charged.

Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are exempt from taxation. Such theory is contrary to the Constitution under which only the following are exempt from taxation: charitable institutions, churches and parsonages, by reason of Art. VI, §28 (3), and non-stock, non-profit educational institutions by reason of Art. XIV, §4 (3).

CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperatives the equal protection of the law because electric cooperatives are exempted from the VAT. The classification between electric and other cooperatives (farmers cooperatives, producers cooperatives, marketing cooperatives, etc.) apparently rests on a congressional determination that there is greater need to provide cheaper electric power to as many people as possible, especially those living in the rural areas, than there is to provide them with other necessities in life. We cannot say that such classification is unreasonable.

We have carefully read the various arguments raised against the constitutional validity of R.A. No. 7716. We have in fact taken the extraordinary step of enjoining its enforcement pending resolution of these cases. We have now come to the conclusion that the law suffers from none of the infirmities attributed to it by petitioners and that its enactment by the other branches of the government does not constitute a grave abuse of discretion. Any question as to its necessity, desirability or expediency must be addressed to Congress as the body which is electorally responsible, remembering that, as Justice Holmes has said, "legislators are the ultimate guardians of the liberties and welfare of the people in quite as great a degree as are the courts." (Missouri, Kansas & Texas Ry. Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is not right, as petitioner in G.R. No. 115543 does in arguing that we should

enforce the public accountability of legislators, that those who took part in passing the law in question by voting for it in Congress should later thrust to the courts the burden of reviewing measures in the flush of enactment. This Court does not sit as a third branch of the legislature, much less exercise a veto power over legislation.

WHEREFORE, the motions for reconsideration are denied with finality and the temporary restraining order previously issued is hereby lifted.

SO ORDERED.

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