I.

General Principles

A. Power of Taxation as Distinguished from Police Power and Eminent Domain

1. G.R. No. 127937 July 28, 1999

NTCvs.HONORABLE CA and PLDT COMPANY, respondents.

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking to
modify the October 30, 1996 Decision and the January 27, 1997 Resolution of the Court of
1 2

Appeals in CA-G.R. SP No. 34063.

3
1âwphi1.nêt

The antecedent facts that matter can be culled as follows:

Sometime in 1988, the National Telecommunications Commission (NTC) served on the Philippine
Long Distance Telephone Company (PLDT) the following assessment notices and demands for
payment:

1. the amount of P7,495,161.00 as supervision and regulation fee

under Section 40 (e) of the PSA for the said year, 1988, computed at
P0.50 per P100.00 of the Protestant's (PLDT) outstanding capital
stock as at December 31, 1987 which then consisted of Serial
Preferred Stock amounting to P1,277,934,390.00 (Billion) and
Common Stock of P221,097,785 (Million) or a total of
P1,499,032,175.00 (Billion).

2. the amount of P9.0 Million as permit fee under Section 40 (f) of the
PSA for the approval of the protestant's increase of its authorized
capital stock from P2.7 Billion to P4.5 Billion; and

3. the amounts of P12,261,600.00 and P33,472,030.00 as permit

fees under Section 40 (g) of the PSA in connection with the
Commission's decisions in NTC Cases Nos. 86-13 and 87-008
respectively, approving the Protestant's equity participation in the
Fiber Optic Interpacific Cable systems and X-5 Service Improvement
and Expansion Program. 4

In its two letter-protests dated February 23, 1988 and July 14, 1988, and position papers dated
5 6

November 8, 1990 and March 12, 1991, respectively, the PLDT challenged the aforesaid
assessments, theorizing inter alia that:

(a) The assessments were being made to raise revenues and not as mere
reimbursements for actual regulatory expenses in violation of the doctrine in PLDT
vs. PSC, 66 SCRA 341 [1975];

(b) The assessment under Section 40 (e) should only have been on the basis of the
par values of private respondent's outstanding capital stock;

(c) Petitioner has no authority to compel private respondents payment of the

assessed fees under Section 40 (f) for the increase of its authorized capital stock
 since petitioner did not render any supervisory or regulatory activity and incurred no
expenses in relation thereto.

xxx xxx xxx 7

On September 29, 1993, the NTC rendered a Decision in NTC Case No. 90-223, denying the
8

protest of PLDT and disposing thus:

FOR ALL THE FOREGOING, finding PLDT's protest to be without merit, the
Commission has no alternative but to uphold the law and DENIES the protest of
PLDT. Unless otherwise restrained by a competent court of law, the Common Carrier
Authorization Department (CCAD) is hereby directed to update its assessments and
collections on PLDT and all public telecommunications carriers for the payment of
the fees in accordance with the provisions of Section 40 (e) (f) and (g) of the Revised
NTC Schedule of Fees and Charges.

This decision takes effect immediately.

SO ORDERED.

On October 22, 1993, PLDT interposed a Motion for Reconsideration, which was denied by NTC in
9

an Order issued on May 3, 1994.

10

On May 12, 1994, PLDT appealed the aforesaid Decision to the Court of Appeals, which came out
with its questioned Decision of October 30, 1996, modifying the disposition of NTC as follows:

WHEREFORE, the assailed decision and order of the respondent Commission dated
September 29, 1993 and May 03, 1994, respectively, in NTC Case No. 90-223 are
hereby MODIFIED. The Commission is ordered to recompute its assessments and
demands for payment from petitioner PLDT as follows.

A. For annual supervision and regulation fees (SRF) under Section 40 (e) of the
Public Service Act, as amended, they should be computed at fifty centavos for each
one hundred pesos or fraction thereof of the par value of the capital stock subscribed
or paid excluding stock dividends, premiums or capital in excess of par.

B. For permit fees for the approval of petitioner's increase of authorized capital stock
under Section 40 (f) of the same Act, they should be computed at fifty for each one
hundred pesos or fraction thereof, regardless of any regulatory service or expense
incurred by respondent.

On November 20, 1996, NTC moved for partial reconsideration of the abovementioned Decision,
with respect to the basis of the assessment under Section 40 (e), i.e., par value of the subscribed
capital stock. It also sought a partial reconsideration of the fee of fifty (P0.50) centavos for the
issuance or increasing of the capital stock under Section 40 (f). 11

With the denial of its motions for reconsideration by the Resolution of the Court of Appeals dated
January 27, 1997, petitioner found its way to this Court via the present Petition; posing as sole issue:

WHETHER THE COURT OF APPEALS ERRED IN HOLDING THAT THE

COMPUTATION OF SUPERVISION AND REGULATION FEES UNDER
 SECTION 40 (F) OF THE PUBLIC SERVICE ACT SHOULD BE BASED ON
THE PAR VALUE OF THE SUBSCRIBED CAPITAL STOCK.

Simply put, the submission of NTC is that the fee under Section 40 (e) should be based on the
market value of PLDT's outstanding capital stock inclusive of stock dividends and premium, and not
on the par value of PLDT's capital stock excluding stock dividends and premium, as contended by
PLDT.

Succinct and clear is the ruling of this Court in the case of Philippine Long Distance Telephone
Company vs. Public Service Commission, 66 SCRA 341, that the basis for computation of the fee to
be charged by NTC on PLDT, is " the capital stock subscribed or paid and not, alternatively, the
property and equipment."

The law in point is clear and categorical. There is no room for construction. It simply calls for
application. To repeat, the fee in question is based on the capital stock subscribed or paid, nothing
less nothing more.

It bears stressing that it is not the NTC that imposed such a fee. It is the legislature itself. Since
Congress has the power to exercise the State inherent powers of Police Power, Eminent Domain
and Taxation, the distinction between police power and the power to tax, which could be significant if
the exercising authority were mere political subdivisions (since delegation by it to such political
subdivisions of one power does not necessarily include the other), would not be of any moment
when, as in the case under consideration, Congress itself exercises the power. All that is to be done
would be to apply and enforce the law when sufficiently definitive and not constitutional infirm.

The term "capital" and other terms used to describe the capital structure of a corporation are of
universal acceptance, and their usages have long been established in jurisprudence. Briefly, capital
refers to the value of the property or assets of a corporation. The capital subscribed is the total
amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for,
which need not necessarily be, and can be more than, the par value of the shares. In fine, it is the
amount that the corporation receives, inclusive of the premiums if any, in consideration of the
original issuance of the shares. In the case of stock dividends, it is the amount that the corporation
transfers from its surplus profit account to its capital account. It is the same amount that can loosely
be termed as the "trust fund" of the corporation. The "Trust Fund" doctrine considers this subscribed
capital as a trust fund for the payment of the debts of the corporation, to which the creditors may
look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be
returned or released to the stockholder (except in the redemption of redeemable shares) without
violating this principle. Thus, dividends must never impair the subscribed capital; subscription
commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the
subscribed capital as the consideration therefor. 12

In the same way that the Court in PLDT vs. PSC has rejected the "value of the property and
equipment" as being the proper basis for the fee imposed by Section 40(e) of the Public Service Act,
as amended by Republic Act No. 3792, so also must the Court disallow the idea of computing the
fee on "the par value of [PLDT's] capital stock subscribed or paid excluding stock dividends,
premiums, or capital in excess of par." Neither, however, is the assessment made by the National
Telecommunications Commission on the basis of the market value of the subscribed or paid-in
capital stock acceptable since it is itself a deviation from the explicit language of the law.

From the pleadings on hand, it can be gleaned that the assessment for supervision and regulation
fee under Section 40(e) made by NTC for 1988, computed at P0.50 per 100 of PLDT's outstanding
capital stock as of December 31, 1987, amounted to P7,495,161.00. The same was based on the
amount of P1,277,934,390.00 of serial preferred stocks and P221,097,785.00 of common stocks or
a total of P1,499,032,175.00. The assessment was reported to include stock dividends, premium on
issued common shares and premium on preferred shares converted into common stock. The 13

actual capital paid or the amount of capital stock paid and for which PLDT received actual payments
were not disclosed or extant in the records before the Court. The only other item available is the
amount assessed by petitioner from PLDT, which had been based on market value of the
outstanding capital stock on given dates. 14

All things studiedly considered, and mindful of the aforesaid ruling of this Court in the case
of Philippine Long Distance Telephone Company vs. Public Service Commission, it should be
reiterated that the proper basis for the computation of subject fee under Section 40(e) of the Public
Service Act, as amended by Republic Act No. 3792, is "the capital stock subscribed or paid and not,
alternatively, the property and equipment. 1âwphi1.nêt

WHEREFORE, the decision of the Court of Appeals, dated October 30, 1996, and its Resolution,
dated January 27, 1997, in CA G.R. SP No. 34063, as well as the decision of the National
Telecommunication Commission, dated September 29, 1993, and Order, dated May 3, 1994, in NTC
case No. 90-223, are hereby SET ASIDE and the National Telecommunication Commission is
hereby ordered to make a re-computation of the fee to be imposed on Philippine Long Distance
Telephone Company on the basis of the latter's capital stock subscribed or paid and strictly in
accordance with the foregoing disquisition and conclusion.

No pronouncement as to costs.

SO ORDERED.

FACTS

In 1988, pursuant to Sec. 40 of the Public Service Act, the National Telecommunications Commission
(NTC) served on the Philippine Long Distance Telephone Company (PLDT) the assessment notices and
demands for supervision and regulation fee and permit fees. PLDT challenged the assessments, arguing
that these were being made to raise revenues and not as mere reimbursements for actual regulatory
expenses, and that the assessments should only have been on the basis of the par values of PLDT’s
outstanding capital stock.

The NTC denied the protest. Subsequently, the CA modified the NTC's order and ordered it to
recompute its assessments and demands for payment from PLDT.

RULING

NTC and CA rulings set aside.

The law in point is clear and categorical: the fee in question is based on the capital stock subscribed or
paid, nothing less nothing more. As such, the SC ordered the NTC to make a recomputation of the fee
to be imposed on PLDT on the basis of the latter’s capital stock subscribed or paid.

Since Congress has the power to exercise the State's inherent powers of police power, eminent domain,
and taxation, the distinction between police power and the power to taxwould not be of any moment
when Congress itself exercises the power. All that is to be done would be to apply and enforce the law
when sufficiently definitive and not constitutionally infirm.
B. Inherent and Constitutional Limitations of Taxation

1) Inherent limitations – public purpose, inherently legislative power, territorial, international

comity

2. 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.

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

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 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.

Facts:
Walter Lutz, as the Judicial Administrator of the Intestate Estate of Antonio
Jayme Ledesma, seeks to recover from J. Antonio Araneta, the Collector of
Internal Revenue, the sum of money paid by the estate as taxes, pursuant
to the Sugar Adjustment Act.

Under Section 3 of said Act, taxes are levied on the owners or persons in
control of the lands devoted to the cultivation of sugar cane. Furthermore,
Section 6 states all the collections made under said Act shall be for aid and
support of the sugar industry exclusively.

Lutz contends that such purpose is not a matter of public concern hence
making the tax levied for that cause unconstitutional and void. The Court
of First Instance dismissed his petition, thus this appeal before the
Supreme Court.

Issue:
Whether or not the tax levied under the Sugar Adjustment Act
(Commonwealth Act 567) is unconstitutional.

Ruling:
The tax levied under the Sugar Adjustment Act is constitutional. The tax
under said Act is levied with a regulatory purpose, to provide means for the
rehabilitation and stabilization of the threatened sugar industry. Since
sugar production is one of the great industries of our nation, its promotion,
protection, and advancement, therefore redounds greatly to the general
welfare. Hence, said objectives of the Act is a public concern and is
therefore constitutional.

It follows that the Legislature may determine within reasonable bounds

what is necessary for its protection and expedient for its promotion. If
objectives 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 with the implement of the state’s
police power. In addition, it is only rational that the taxes be obtained from
those that will directly benefit from it. Therefore, the tax levied under the
Sugar Adjustment Act is held to be constitutional.

Summary of Principles:
 1. The State has the power to levy tax in aid and support of
sugar industry.

As the protection and promotion of the sugar industry is a

matter of public concern, the Legislature may determine
within reasonable bounds what is necessary for its
protection and expedient for its promotion. Here, the
legislative discretion must be allowed full play, subject only
to the test of reasonableness; and it is not contended that
the means provided in section 6 of Commonwealth Act No.
567 bear no relation to the objective pursued or are
oppressive in character. If objective and methods arealike
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.

2. The State has the power to select subject of taxation.

It is inherent in the power to tax that a state be free to select

the subjects of taxation, and it has been repeatedly held
that “inequalities which result from a singling out of one
particular class for taxation or exemption infringe
constitutional limitation.
3, G.R. No. L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant, vs.

MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant appellees.

This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294,
which was certified to Us by the Court of Appeals on October 6, 1969, as involving only pure
questions of law, challenging the power of taxation delegated to municipalities under the Local
Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959).

On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc.,
commenced a complaint with preliminary injunction before the Court of First Instance of Leyte for
that court to declare Section 2 of Republic Act No. 2264. otherwise known as the Local Autonomy
1
Act, unconstitutional as an undue delegation of taxing authority as well as to declare Ordinances
Nos. 23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null and void.

On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state
that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the
production tax rates imposed therein are practically the same, and second, that on January 17,
1963, the acting Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager
of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce compliance by the latter of the
provisions of said Ordinance No. 27, series of 1962.

Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies
and collects "from soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo
for every bottle of soft drink corked." For the purpose of computing the taxes due, the person, firm,
2

company or corporation producing soft drinks shall submit to the Municipal Treasurer a monthly
report, of the total number of bottles produced and corked during the month. 3

On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies
and collects "on soft drinks produced or manufactured within the territorial jurisdiction of this
municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity." For the purpose of computing the taxes due, the person, fun company, partnership,
4

corporation or plant producing soft drinks shall submit to the Municipal Treasurer a monthly report of
the total number of gallons produced or manufactured during the month. 5

The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'

On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the
complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due under
the oft the said Ordinances; and to pay the costs."

From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals,
which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as
amended.

There are three capital questions raised in this appeal:

1. — Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory

and oppressive?

2. — Do Ordinances Nos. 23 and 27 constitute double taxation and impose

percentage or specific taxes?

3. — Are Ordinances Nos. 23 and 27 unjust and unfair?

1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter
of right to every independent government, without being expressly conferred by the people. It is a
6

power that is purely legislative and which the central legislative body cannot delegate either to the
executive or judicial department of the government without infringing upon the theory of separation
of powers. The exception, however, lies in the case of municipal corporations, to which, said theory
does not apply. Legislative powers may be delegated to local governments in respect of matters of
local concern. This is sanctioned by immemorial practice. By necessary implication, the legislative
7 8
power to create political corporations for purposes of local self-government carries with it the power
to confer on such local governmental agencies the power to tax. Under the New Constitution, local
9

governments are granted the autonomous authority to create their own sources of revenue and to
levy taxes. Section 5, Article XI provides: "Each local government unit shall have the power to create
its sources of revenue and to levy taxes, subject to such limitations as may be provided by law."
Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the sphere
of the legislative power to enact and vest in local governments the power of local taxation.

The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense,
would not suffice to invalidate the said law as confiscatory and oppressive. In delegating the
authority, the State is not limited 6 the exact measure of that which is exercised by itself. When it is
said that the taxing power may be delegated to municipalities and the like, it is meant that there may
be delegated such measure of power to impose and collect taxes as the legislature may deem
expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public policy
the State has not deemed wise to tax for more general purposes. This is not to say though that the
10

constitutional injunction against deprivation of property without due process of law may be passed
over under the guise of the taxing power, except when the taking of the property is in the lawful
exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the rule on uniformity of
taxation is observed; (3) either the person or property taxed is within the jurisdiction of the
government levying the tax; and (4) in the assessment and collection of certain kinds of taxes notice
and opportunity for hearing are provided. Due process is usually violated where the tax imposed is
11

for a private as distinguished from a public purpose; a tax is imposed on property outside the State,
i.e., extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and
collecting taxes. But, a tax does not violate the due process clause, as applied to a particular
taxpayer, although the purpose of the tax will result in an injury rather than a benefit to such
taxpayer. Due process does not require that the property subject to the tax or the amount of tax to
be raised should be determined by judicial inquiry, and a notice and hearing as to the amount of the
tax and the manner in which it shall be apportioned are generally not necessary to due process of
law.12

There is no validity to the assertion that the delegated authority can be declared unconstitutional on
the theory of double taxation. It must be observed that the delegating authority specifies the
limitations and enumerates the taxes over which local taxation may not be exercised. The reason is
13

that the State has exclusively reserved the same for its own prerogative. Moreover, double taxation,
in general, is not forbidden by our fundamental law, since We have not adopted as part thereof the
injunction against double taxation found in the Constitution of the United States and some states of
the Union. Double taxation becomes obnoxious only where the taxpayer is taxed twice for the
14

benefit of the same governmental entity or by the same jurisdiction for the same purpose, but not
15 16

in a case where one tax is imposed by the State and the other by the city or municipality. 17

2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because
these two ordinances cover the same subject matter and impose practically the same tax rate. The
thesis proceeds from its assumption that both ordinances are valid and legally enforceable. This is
not so. As earlier quoted, Ordinance No. 23, which was approved on September 25, 1962, levies or
collects from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo
for .every bottle corked, irrespective of the volume contents of the bottle used. When it was
discovered that the producer or manufacturer could increase the volume contents of the bottle and
still pay the same tax rate, the Municipality of Tanauan enacted Ordinance No. 27, approved on
October 28, 1962, imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity. The difference between the two ordinances clearly lies in the tax rate of the soft
drinks produced: in Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in Ordinance
No. 27, it is one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The
intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was
intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal of the latter,
even without words to that effect. Plaintiff-appellant in its brief admitted that defendants-appellees
18

are only seeking to enforce Ordinance No. 27, series of 1962. Even the stipulation of facts confirms
the fact that the Acting Municipal Treasurer of Tanauan, Leyte sought t6 compel compliance by the
plaintiff-appellant of the provisions of said Ordinance No. 27, series of 1962. The aforementioned
admission shows that only Ordinance No. 27, series of 1962 is being enforced by defendants-
appellees. Even the Provincial Fiscal, counsel for defendants-appellees admits in his brief "that
Section 7 of Ordinance No. 27, series of 1962 clearly repeals Ordinance No. 23 as the provisions of
the latter are inconsistent with the provisions of the former."

That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage or
a specific tax. Undoubtedly, the taxing authority conferred on local governments under Section 2,
Republic Act No. 2264, is broad enough as to extend to almost "everything, accepting those which
are mentioned therein." As long as the text levied under the authority of a city or municipal ordinance
is not within the exceptions and limitations in the law, the same comes within the ambit of the
general rule, pursuant to the rules of exclucion attehus and exceptio firmat regulum in cabisus non
excepti The limitation applies, particularly, to the prohibition against municipalities and municipal
19

districts to impose "any percentage tax or other taxes in any form based thereon nor impose taxes
on articles subject to specific tax except gasoline, under the provisions of the National Internal
Revenue Code." For purposes of this particular limitation, a municipal ordinance which prescribes a
set ratio between the amount of the tax and the volume of sale of the taxpayer imposes a sales tax
and is null and void for being outside the power of the municipality to enact. But, the imposition of
20

"a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all soft
drinks produced or manufactured under Ordinance No. 27 does not partake of the nature of a
percentage tax on sales, or other taxes in any form based thereon. The tax is levied on the produce
(whether sold or not) and not on the sales. The volume capacity of the taxpayer's production of soft
drinks is considered solely for purposes of determining the tax rate on the products, but there is not
set ratio between the volume of sales and the amount of the tax. 21

Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified
articles, such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars and
cigarettes, matches firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel
oil, cinematographic films, playing cards, saccharine, opium and other habit-forming drugs. Soft
22

drink is not one of those specified.

3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all
softdrinks, produced or manufactured, or an equivalent of 1-½ centavos per case, cannot be
23

considered unjust and unfair. 24 an increase in the tax alone would not support the claim that the tax
is oppressive, unjust and confiscatory. Municipal corporations are allowed much discretion in
determining the reates of imposable taxes. 25 This is in line with the constutional policy of according
the widest possible autonomy to local governments in matters of local taxation, an aspect that is
given expression in the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is so
excessive as to be prohibitive, courts will go slow in writing off an ordinance as unreasonable. 27
Reluctance should not deter compliance with an ordinance such as Ordinance No. 27 if the purpose
of the law to further strengthen local autonomy were to be realized. 28

Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than ten
crowners or P2,000.00 with ten but not more than twenty crowners imposed on manufacturers,
producers, importers and dealers of soft drinks and/or mineral waters under Ordinance No. 54,
series of 1964, as amended by Ordinance No. 41, series of 1968, of defendant
Municipality, appears not to affect the resolution of the validity of Ordinance No. 27. Municipalities
29

are empowered to impose, not only municipal license taxes upon persons engaged in any business
or occupation but also to levy for public purposes, just and uniform taxes. The ordinance in question
(Ordinance No. 27) comes within the second power of a municipality.

ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as the
Local Autonomy Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the
Municipality of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance No. 23, same series,
is hereby declared of valid and legal effect. Costs against petitioner-appellant.

SO ORDERED.

FACTS:
Pepsi Cola has a bottling plant in the Municipality of Tanauan, Leyte. In
September 1962, the Municipality approved Ordinance No. 23 which levies
and collects “from soft drinks producers and manufacturers a tai of one-
sixteenth (1/16) of a centavo for every bottle of soft drink corked.”

In December 1962, the Municipality also approved Ordinance No. 27 which

levies and collects “on soft drinks produced or manufactured within the
territorial jurisdiction of this municipality a tax of one centavo P0.01) on
each gallon of volume capacity.”

Pepsi Cola assailed the validity of the ordinances as it alleged that they
constitute double taxation in two instances: a) double taxation because
Ordinance No. 27 covers the same subject matter and impose practically
the same tax rate as with Ordinance No. 23, b) double taxation because the
two ordinances impose percentage or specific taxes.

Pepsi Cola also questions the constitutionality of Republic Act 2264 which
allows for the delegation of taxing powers to local government units; that
allowing local governments to tax companies like Pepsi Cola is
confiscatory and oppressive.

The Municipality assailed the arguments presented by Pepsi Cola. It

argued, among others, that only Ordinance No. 27 is being enforced and
that the latter law is an amendment of Ordinance No. 23, hence there is no
double taxation.
ISSUE: Whether or not there is undue delegation of taxing powers.
Whether or not there is double taxation.

RULING:
No. There is no undue delegation. The Constitution even allows such
delegation. Legislative powers may be delegated to local governments in
respect of matters of local concern.

By necessary implication, the legislative power to create political

corporations for purposes of local self-government carries with it the
power to confer on such local governmental agencies the power to tax.
Under the New Constitution, local governments are granted the
autonomous authority to create their own sources of revenue and to levy
taxes.

Section 5, Article XI provides: “Each local government unit shall have the
power to create its sources of revenue and to levy taxes, subject to such
limitations as may be provided by law.” Withal, it cannot be said that
Section 2 of Republic Act No. 2264 emanated from beyond the sphere of
the legislative power to enact and vest in local governments the power of
local taxation.

There is no double taxation. The argument of the Municipality is well

taken. Further, Pepsi Cola’s assertion that the delegation of taxing power
in itself constitutes double taxation cannot be merited. It must be
observed that the delegating authority specifies the limitations and
enumerates the taxes over which local taxation may not be exercised.

The reason is that the State has exclusively reserved the same for its own
prerogative. Moreover, double taxation, in general, is not forbidden by our
fundamental law unlike in other jurisdictions. Double taxation becomes
obnoxious only where the taxpayer is taxed twice for the benefit of the
same governmental entity or by the same jurisdiction for the same
purpose, but not in a case where one tax is imposed by the State and the
other by the city or municipality.

SUMMARY OF PRINCIPLES:

1. When may the power of taxation be delegated to

local governments?

The power of taxation may be delegated to local

governments in respect of matters of local concern.
This is sanctioned by immoral practice. By necessary
implication, the legislative power to create political
corporations for purposes of local self-government
carries with it the power to confer on such local
governmental agencies the power to tax.

The plenary nature of the taxing power thus

delegated, contrary to plaintiff-appellant’s pretense,
would not suffice to invalidate the said law as
confiscatory and oppressive. In delegating the
authority, the State is not limited to the exact
meassure of that which is exercised by itself.

When it is said that the taxing power may be delegated

to municipalities and the like, it is meant taxes there
may be delegated such measure of power to impose
and collect taxes as the legislature may deem
expedient.

Thus, municipalities may be permitted to tax subjects

which for reasons of public policy the State has not
deemed wise to tax for more general purposes.
2. May the taking of property without due process of
law be passed over under the guise of taxing
power?

The taking of property without due process of law may

not be passed over under the guise of taxing power,
except when the latter is exercised lawfully.

This is not to say though that the constitutional

injunction against deprivation of property without due
process of law may be passed over under the guise of
the taxing power, except when the taking of the
property is in the lawful exercise of the taxing power,
as when:
a. the tax is for a public purpose;
b. the rule on uniformity of taxation is
observed;
c. either the person or property taxed is
within the jurisdiction of the government
levying the tax; and
d. in the assessment and collection of certain
kinds of taxes notice and opportunity for
hearing are provided.

3. The delegation of taxing power to local

governments may not be assailed on the ground of
double taxation.

There is no validity to the assertion that the delegated

authority can be declared unconstitutional on the
theory of double taxation. It must be observed that the
 delegating authority specifies the limitations and
enumerates the taxes over which local taxation may
not be exercised.

Moreover, double taxation, in general, is not forbidden

by our fundamental law, since We have not adopted as
part thereof the injunction against double taxation
found in the Constitution of the United States and
some states of the Union.

Double taxation becomes obnoxious only where the

taxpayer is taxed twice for the benefit of the same
governmental entity or by the same jurisdiction for the
same purpose, but not in a case where one tax is
imposed by the State and the other by the city of
municipality.

4. As held in this case, a municipal ordinance which

imposes a tax of P0.01 for every gallon of soft
drinks produced in the municipality does not
partake of a percentage tax.

The imposition of “a tax of one centavo (P0.01) on

each gallon (128 flued ounces, U.S.) of volume
capacity” on all soft drinks produced or manufactured
under Ordinance No. 27 does not partake of the nature
of a percentage tax on sales, or other taxes in any form
based thereon. The tax is levied on the produce
(whether sold or not) and not on the sales.

The volume capacity of the taxpayer’s production of

soft drinks is considered solely for purposes of
determining the tax rate on the products, but there is
 no set ratio between the volume of sales and the
amount of the tax.

5. A municipal tax on soft drinks is not a specific tax,

nor can the tax levied be treated as a specific tax.

Specific taxes are those imposed on specified articles,

such as distilled spirits, wines, cigars and cigarettes,
matches, bunker fuel oil, diesel fuel oil,
cinematographic films, playing cards, saccharine,
opium and other habit-forming drugs.

Soft drinks is not one of those specified.

6. As held in this case, a municipal tax of P0.01 on

each gallon of soft drinks produced is not unfair or
oppressive.

The tax of one centavo (P0.01) on each gallon (128

fluid ounces, U.S.) of volume capacity on all soft
drinks, produced or manufactured, or an equivalent of
1½ centavos per case, cannot be considered unjust
and unfair.

An increase in the tax alone would not support the

claim that the tax is oppressive, unjust and
confiscatory. Municipal corporations are allowed
much discretion in determining the rates of imposable
taxes.

This is in line with the constitutional policy of

according the widest possible autonomy to local
 governments in matters of local taxation, an aspect
that is given expression in the Local Tax Code. Unless
the amount is so excessive as to be prohibitive, courts
will go slow in writing off an ordinance as
unreasonable.

7. As a rule, municipalities are empowered to impose

not only municipal license but just and uniform
taxes for public purposes.

The municipal license tax of P1,000.00 per corking

machine with five but not more than ten crowners
imposed on manufacturers, producers, importers and
dealers of soft drinks and/or mineral waters appears
not to affect the resolution of the validity of Ordinance
No. 27.

Municipalities are empowered to impose, not only

municipal license taxes upon persons engaged in any
business or occupation but also to levy for public
purposes, just and uniform taxes. The ordinance in
question (Ordinance No. 27) comes within the second
power of a municipality.

FACTS:
Pepsi Cola Bottling Company commenced a complaint with preliminary injunction before the Court of First Instance of
Leyte for the court to declare Section 2 of RA 2264 (Local Autonomy Act) unconstitutional as an undue delegation of
taxing authority as well as to declare Ordinances Nos 23 and 27 of municipality of Tanauan, Leyte. Municipal
Ordinance No. 23 (9/25/1962) levies and collects from softdrinks producers and manufacturers a tax of 1/16 of a
centavo for every bottle of softdrink corked. Municipal ordinance no. 27 (10/28/1962) levies and collects on softdrinks
produced or manufactured within the territorial jurisdiction of this municipality a tax of 1 centavo on each gallon of
volume capacity. The taxes imposed are denominated as “municipal production tax”. CFI-Leyte dismissed the
complaint. Hence, this petition.

ISSUES:
 1. Is Section 2 of RA 2264 an undue delegation of power, confiscatory and oppressive?
2. Do ordinances nos. 23 and 27 constitute double taxation and impose percentage or specific taxes?
3. Are ordinance nos. 23 and 27 unjust and unfair?

RULING:

1. No. Under the New Constitution, local governments are granted the autonomous authority to create their
own sources of
revenue and to levy taxes. Section 5, Article XI provides: “Each local government unit shall have the power
to create its sources of revenue and to levy taxes, subject to such limitations as may be provided by law.”
Thus, legislative powers may be delegated to local governments in respect of matters of local concern.
2. No. The intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was
intended as a plain substitute for the prior ordinance no. 23 and operates as a repeal of the latter, even
without words to that effect. The tax is not a percentage tax as the volume capacity of the taxpayer’s
production of softdrinks is considered solely for purposes of determining the tax rate on the products but
there is no set ratio between volume of sales and amount of the tax. Nor can the tax levied be treated as a
specific tax. Softdrink is not one of those specified articles.
3. No. Municipal corporations are allowed much discretion in determining the rates of imposable taxes. This is
in line with the constitutional policy of according the widest possible autonomy to local governments in
matters of local taxation, an aspect that is given expression in the Local Tax Code

2) Constitutional limitations – due process clause, equal protection clause, uniformity and
equity, non- impairment of contracts, non-imprisonment (poll tax), prohibition against
taxation/constitutional exemptions from taxation, judicial power to review legality of tax

4. G.R. No. L-19201 June 16, 1965

REV. FR. CASIMIRO LLADOC, petitioner, vs. The COMMISSIONER OF INTERNAL REVENUE
and The COURT of TAX APPEALS, respondents.

Sometime in 1957, the M.B. Estate, Inc., of Bacolod City, donated P10,000.00 in cash to Rev. Fr.
Crispin Ruiz, then parish priest of Victorias, Negros Occidental, and predecessor of herein petitioner,
for the construction of a new Catholic Church in the locality. The total amount was actually spent for
the purpose intended.

On March 3, 1958, the donor M.B. Estate, Inc., filed the donor's gift tax return. Under date of April
29, 1960, the respondent Commissioner of Internal Revenue issued an assessment for donee's gift
tax against the Catholic Parish of Victorias, Negros Occidental, of which petitioner was the priest.
The tax amounted to P1,370.00 including surcharges, interests of 1% monthly from May 15, 1958 to
June 15, 1960, and the compromise for the late filing of the return.

Petitioner lodged a protest to the assessment and requested the withdrawal thereof. The protest and
the motion for reconsideration presented to the Commissioner of Internal Revenue were denied. The
petitioner appealed to the Court of Tax Appeals on November 2, 1960. In the petition for review, the
Rev. Fr. Casimiro Lladoc claimed, among others, that at the time of the donation, he was not the
parish priest in Victorias; that there is no legal entity or juridical person known as the "Catholic Parish
Priest of Victorias," and, therefore, he should not be liable for the donee's gift tax. It was also
asserted that the assessment of the gift tax, even against the Roman Catholic Church, would not be
valid, for such would be a clear violation of the provisions of the Constitution.
After hearing, the CTA rendered judgment, the pertinent portions of which are quoted below:

... . Parish priests of the Roman Catholic Church under canon laws are similarly situated as
its Archbishops and Bishops with respect to the properties of the church within their parish.
They are the guardians, superintendents or administrators of these properties, with the right
of succession and may sue and be sued.

xxx xxx xxx

The petitioner impugns the, fairness of the assessment with the argument that he should not
be held liable for gift taxes on donation which he did not receive personally since he was not
yet the parish priest of Victorias in the year 1957 when said donation was given. It is
intimated that if someone has to pay at all, it should be petitioner's predecessor, the Rev. Fr.
Crispin Ruiz, who received the donation in behalf of the Catholic parish of Victorias or the
Roman Catholic Church. Following petitioner's line of thinking, we should be equally unfair to
hold that the assessment now in question should have been addressed to, and collected
from, the Rev. Fr. Crispin Ruiz to be paid from income derived from his present parish where
ever it may be. It does not seem right to indirectly burden the present parishioners of Rev. Fr.
Ruiz for donee's gift tax on a donation to which they were not benefited.

xxx xxx xxx

We saw no legal basis then as we see none now, to include within the Constitutional
exemption, taxes which partake of the nature of an excise upon the use made of the
properties or upon the exercise of the privilege of receiving the properties. (Phipps vs.
Commissioner of Internal Revenue, 91 F [2d] 627; 1938, 302 U.S. 742.)

It is a cardinal rule in taxation that exemptions from payment thereof are highly disfavored by
law, and the party claiming exemption must justify his claim by a clear, positive, or express
grant of such privilege by law. (Collector vs. Manila Jockey Club, G.R. No. L-8755, March 23,
1956; 53 O.G. 3762.)

The phrase "exempt from taxation" as employed in Section 22(3), Article VI of the
Constitution of the Philippines, should not be interpreted to mean exemption from all kinds of
taxes. Statutes exempting charitable and religious property from taxation should be
construed fairly though strictly and in such manner as to give effect to the main intent of the
lawmakers. (Roman Catholic Church vs. Hastrings 5 Phil. 701.)

xxx xxx xxx

WHEREFORE, in view of the foregoing considerations, the decision of the respondent

Commissioner of Internal Revenue appealed from, is hereby affirmed except with regard to
the imposition of the compromise penalty in the amount of P20.00 (Collector of Internal
Revenue v. U.S.T., G.R. No. L-11274, Nov. 28, 1958); ..., and the petitioner, the Rev. Fr.
Casimiro Lladoc is hereby ordered to pay to the respondent the amount of P900.00 as
donee's gift tax, plus the surcharge of five per centum (5%) as ad valorem penalty under
Section 119 (c) of the Tax Code, and one per centum (1%) monthly interest from May 15,
1958 to the date of actual payment. The surcharge of 25% provided in Section 120 for failure
to file a return may not be imposed as the failure to file a return was not due to willful neglect.
( ... ) No costs.
The above judgment is now before us on appeal, petitioner assigning two (2) errors allegedly
committed by the Tax Court, all of which converge on the singular issue of whether or not petitioner
should be liable for the assessed donee's gift tax on the P10,000.00 donated for the construction of
the Victorias Parish Church.

Section 22 (3), Art. VI of the Constitution of the Philippines, exempts from taxation
cemeteries, churches and parsonages or convents, appurtenant thereto, and all lands, buildings,
and improvements used exclusively for religious purposes. The exemption is only from the payment
of taxes assessed on such properties enumerated, as property taxes, as contra distinguished from
excise taxes. In the present case, what the Collector assessed was a donee's gift tax; the
assessment was not on the properties themselves. It did not rest upon general ownership; it was an
excise upon the use made of the properties, upon the exercise of the privilege of receiving the
properties (Phipps vs. Com. of Int. Rec. 91 F 2d 627). Manifestly, gift tax is not within the exempting
provisions of the section just mentioned. A gift tax is not a property tax, but an excise tax imposed on
the transfer of property by way of gift inter vivos, the imposition of which on property used
exclusively for religious purposes, does not constitute an impairment of the Constitution. As well
observed by the learned respondent Court, the phrase "exempt from taxation," as employed in the
Constitution (supra) should not be interpreted to mean exemption from all kinds of taxes. And there
being no clear, positive or express grant of such privilege by law, in favor of petitioner, the exemption
herein must be denied.

The next issue which readily presents itself, in view of petitioner's thesis, and Our finding that a tax
liability exists, is, who should be called upon to pay the gift tax? Petitioner postulates that he should
not be liable, because at the time of the donation he was not the priest of Victorias. We note the
merit of the above claim, and in order to put things in their proper light, this Court, in its Resolution of
March 15, 1965, ordered the parties to show cause why the Head of the Diocese to which the parish
of Victorias pertains, should not be substituted in lieu of petitioner Rev. Fr. Casimiro Lladoc it
appearing that the Head of such Diocese is the real party in interest. The Solicitor General, in
representation of the Commissioner of Internal Revenue, interposed no objection to such a
substitution. Counsel for the petitioner did not also offer objection thereto.

On April 30, 1965, in a resolution, We ordered the Head of the Diocese to present whatever legal
issues and/or defenses he might wish to raise, to which resolution counsel for petitioner, who also
appeared as counsel for the Head of the Diocese, the Roman Catholic Bishop of Bacolod,
manifested that it was submitting itself to the jurisdiction and orders of this Court and that it was
presenting, by reference, the brief of petitioner Rev. Fr. Casimiro Lladoc as its own and for all
purposes.

In view here of and considering that as heretofore stated, the assessment at bar had been properly
made and the imposition of the tax is not a violation of the constitutional provision exempting
churches, parsonages or convents, etc. (Art VI, sec. 22 [3], Constitution), the Head of the Diocese,
to which the parish Victorias Pertains, is liable for the payment thereof.

The decision appealed from should be, as it is hereby affirmed insofar as tax liability is concerned; it
is modified, in the sense that petitioner herein is not personally liable for the said gift tax, and that the
Head of the Diocese, herein substitute petitioner, should pay, as he is presently ordered to pay, the
said gift tax, without special, pronouncement as to costs.

FACTS:
M.B. Estate, Inc. donated P10,000.00 in cash to the parish priest of Victorias, Negros Occidental, for
the construction of a new Catholic Church in the locality. The total amount was actually spent for the
purpose intended.

A year later, M.B. Estate, Inc., filed the donor's gift tax return. CIR issued an assessment for donee's
gift tax against the parish, of which petitioner was the priest.

Petitioner filed a protest which was denied by the CIR. He then filed an appeal with the CTA citing
that he was not the parish priest at the time of donation, that there is no legal entity or juridical
person known as the "Catholic Parish Priest of Victorias," and, therefore, he should not be liable for
the donee's gift tax and that assessment of the gift tax is unconstitutional.

The CTA denied the appeal thus this case.

ISSUE: Whether petitioner and the parish are liable for the donee's gift tax.

RULING:

Yes for the parish. The Constitution only made mention of property tax and not of excise tax as
stated in Section 22, par 3. The assessment of the CIR did not rest upon general ownership; it was an
excise upon the use made of the properties, upon the exercise of the privilege of receiving the
properties. A gift tax is not a property tax, but an excise tax imposed on the transfer of property by
way of gift inter vivos, the imposition of which on property used exclusively for religious purposes,
does not constitute an impairment of the Constitution.

No for the petitioner. The Court ordered petitioner to be substituted by the Head of Diocese to pay
the said gift tax after the CIR and Solicitor General did not object to such substitution.

5. G.R. No. L-24756 October 31, 1968

CITY OF BAGUIO, plaintiff-appellee, vs. FORTUNATO DE LEON, defendant-appellant.

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

In its decision of December 19, 1964, it declared the above ordinance as amended, valid and
subsisting, and held defendant-appellant liable for the fees therein prescribed as a real estate
dealer. Hence, this appeal. Assume the validity of such ordinance, and there would be no question
about the liability of defendant-appellant for the above license fee, it being shown in the partial
stipulation of facts, that he was "engaged in the rental of his property in Baguio" deriving income
therefrom during the period covered by the first quarter of 1958 to the fourth quarter of 1962.
The source of authority for the challenged ordinance is supplied by Republic Act No. 329, amending
the city charter of Baguio2 empowering it to fix the license fee and regulate "businesses, trades and
occupations as may be established or practiced in the City."

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

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

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

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

There is here a misapprehension of the Judiciary Act. The City Court has jurisdiction. Only recently,
on September 7, 1968 to be exact, we rejected a contention similar in character in Nemenzo v.
Sabillano.4 The plaintiff in that case filed a claim for the payment of his salary before the Justice of
the Peace Court of Pagadian, Zamboanga del Sur. The question of jurisdiction was raised; the
defendant Mayor asserted that what was in issue was the enforcement of the decision of the
Commission of Civil Service; the Justice of the Peace Court was thus without jurisdiction to try the
case. The above plea was curtly dismissed by Us, as what was involved was "an ordinary money
claim" and therefore "within the original jurisdiction of the Justice of the Peace Court where it was
filed, considering the amount involved." Such is likewise the situation here.
Moreover, in City of Manila v. Bugsuk Lumber Co.,5 a suit to collect from a defendant this license fee
corresponding to the years 1951 and 1952 was filed with the Municipal Court of Manila, in view of
the amount involved. The thought that the municipal court lacked jurisdiction apparently was not
even in the minds of the parties and did not receive any consideration by this Court.

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

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

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

2. To repeat the challenged ordinance cannot be considered ultra vires as there is more than ample
statutory authority for the enactment thereof. Nonetheless, its validity on constitutional grounds is
challenged because of the allegation that it imposed double taxation, which is repugnant to the due
process clause, and that it violated the requirement of uniformity. We do not view the matter thus.

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

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

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

There was no occasion in that case to consider the possible effect on such a constitutional
requirement where there is a classification. The opportunity came in Eastern Theatrical Co. v.
Alfonso.13 Thus: "Equality and uniformity in taxation means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate. The taxing power has the authority to
make reasonable and natural classifications for purposes of taxation; ..." About two years later,
Justice Tuason, speaking for this Court in Manila Race Horses Trainers Assn. v. De la
Fuente14 incorporated the above excerpt in his opinion and continued: "Taking everything into
account, the differentiation against which the plaintiffs complain conforms to the practical dictates of
justice and equity and is not discriminatory within the meaning of the Constitution."

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

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

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

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

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

WHEREFORE, the lower court decision of December 19, 1964, is hereby affirmed. Costs against
defendant-appellant.

FACTS:
The City of Baguio passed a license fee on any person, entity or corporation doing business in the City. The
ordinance
sourced its authority from RA 329, thereby amending the city charter empowering it to fix the license fee and regulate
businesses, trades and occupation as may be established in the City. De Leon was assessed for P50 annual fee it
being shown that he was engaged in property rental and deriving income therefrom. The latter assailed the validity of
the ordinance arguing that it is ultra vires for there is no statutory authority which expressly grants the City of Baguio
to levy such tax and that there it imposed double taxation and violates the requirement of uniformity.

ISSUE:
Is the ordinance valid?

RULING:
Yes. First, RA 329 was enacted amending Section 2553 of the Revised Administrative Code empowering the City
Council not only to impose a license fee but to levy a tax for purposes of revenue, thus the ordinance cannot be
considered ultra vires for there is more than ample statutory for the enactment thereof.
Second, an argument against double taxation may not be invoked where one tax is imposed by the state and the
other imposed by the City.
Third, violation of uniformity is out of place it being widely recognized that there is nothing inherently obnoxious in the
requirement that license fees of taxes be enacted with respect to the same occupation, calling or activity by both the
state and the political subdivision thereof.

6. G.R. No. 195909 September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, vs.

ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

x-----------------------x

G.R. No. 195960

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER, vs.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

The Case

These are consolidated petitions for review on certiorari under Rule 45 of the Rules of Court
1

assailing the Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its
Resolution of 1 March 2011 in CTA Case No. 6746. This Court resolves this case on a pure
2

question of law, which involves the interpretation of Section 27(B) vis-à-vis Section 30(E) and (G) of
the National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of
proprietary non-profit hospitals.

The Facts

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit
corporation. Under its articles of incorporation, among its corporate purposes are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent,
charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to
the sick, diseased and disabled persons; provided that purely medical and surgical services
shall be performed by duly licensed physicians and surgeons who may be freely and
individually contracted by patients;

(b) To provide a career of health science education and provide medical services to the
community through organized clinics in such specialties as the facilities and resources of the
corporation make possible;

(c) To carry on educational activities related to the maintenance and promotion of health as
well as provide facilities for scientific and medical researches which, in the opinion of the
Board of Trustees, may be justified by the facilities, personnel, funds, or other requirements
that are available;

(d) To cooperate with organized medical societies, agencies of both government and private
sector; establish rules and regulations consistent with the highest professional ethics;

xxxx 3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting to ₱76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax. The BIR reduced the amount to
₱63,935,351.57 during trial in the First Division of the CTA. 4

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax
assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the
NIRC. Thus, St. Luke's appealed to the CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential
tax rate on the income of proprietary non-profit hospitals, should be applicable to St. Luke's.
According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the
exemption on non-profit hospitals that were previously categorized as non-stock, non-profit
corporations under Section 26 of the 1997 Tax Code x x x." It is a specific provision which prevails
5

over the general exemption on income tax granted under Section 30(E) and (G) for non-stock, non-
profit charitable institutions and civic organizations promoting social welfare.6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its
revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers and
employees directly benefit from its profits and assets. St. Luke's had total revenues of
₱1,730,367,965 or approximately ₱1.73 billion from patient services in 1998. 7
St. Luke's contended that the BIR should not consider its total revenues, because its free services to
patients was ₱218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less
operating expenses) of ₱334,642,615. St. Luke's also claimed that its income does not inure to the
8

benefit of any individual.

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare
purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does
not destroy its income tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA
that Section 27(B) applies to St. Luke's. The petition raises the sole issue of whether the enactment
of Section 27(B) takes proprietary non-profit hospitals out of the income tax exemption under Section
30 of the NIRC and instead, imposes a preferential rate of 10% on their taxable income. The BIR
prays that St. Luke's be ordered to pay ₱57,659,981.19 as deficiency income and expanded
withholding tax for 1998 with surcharges and interest for late payment.

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding
of a part of its income, as well as the payment of surcharge and delinquency interest. There is no
9

ground for this Court to undertake such a factual review. Under the Constitution and the Rules of
10

Court, this Court's review power is generally limited to "cases in which only an error or question of
11

law is involved." This Court cannot depart from this limitation if a party fails to invoke a recognized
12

exception.

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision
dated 23 February 2009 which held:

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED.
Accordingly, the 1998 deficiency VAT assessment issued by respondent against petitioner in the
amount of ₱110,000.00 is hereby CANCELLED and WITHDRAWN. However, petitioner is hereby
ORDERED to PAY deficiency income tax and deficiency expanded withholding tax for the taxable
year 1998 in the respective amounts of ₱5,496,963.54 and ₱778,406.84 or in the sum of
₱6,275,370.38, x x x.

xxxx

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the
total amount of ₱6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to
Section 249(C)(3) of the NIRC of 1997.

SO ORDERED. 13

The deficiency income tax of ₱5,496,963.54, ordered by the CTA En Banc to be paid, arose from the
failure of St. Luke's to prove that part of its income in 1998 (declared as "Other Income-Net") came
14

from charitable activities. The CTA cancelled the remainder of the ₱63,113,952.79 deficiency
assessed by the BIR based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En
Banc held was not applicable to St. Luke's. 15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section
30(E) and (G) of the NIRC. This ruling would exempt all income derived by St. Luke's from services
to its patients, whether paying or non-paying. The CTA reiterated its earlier decision in St. Luke's
Medical Center, Inc. v. Commissioner of Internal Revenue, which examined the primary purposes
16

of St. Luke's under its articles of incorporation and various documents identifying St. Luke's as a
17

charitable institution.

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, which states that "a
18

charitable institution does not lose its charitable character and its consequent exemption from
taxation merely because recipients of its benefits who are able to pay are required to do so, where
funds derived in this manner are devoted to the charitable purposes of the institution x x x." The19

generation of income from paying patients does not per se destroy the charitable nature of St.
Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, which20

ruled that the old NIRC (Commonwealth Act No. 466, as amended) "positively exempts from
21

taxation those corporations or associations which, otherwise, would be subject thereto, because of
the existence of x x x net income." The NIRC of 1997 substantially reproduces the provision on
22

charitable institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is lost
whenever there is net income, the Court in Jesus Sacred Heart College declared: "[E]very
responsible organization must be run to at least insure its existence, by operating within the limits of
its own resources, especially its regular income. In other words, it should always strive, whenever
possible, to have a surplus." 23

The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. The CTA
24

explained that to apply the 10% preferential rate, Section 27(B) requires a hospital to be "non-profit."
On the other hand, Congress specifically used the word "non-stock" to qualify a charitable
"corporation or association" in Section 30(E) of the NIRC. According to the CTA, this is unique in the
present tax code, indicating an intent to exempt this type of charitable organization from income tax.
Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is clear that non-
stock, non-profit hospitals operated exclusively for charitable purpose are exempt from income tax
on income received by them as such, applying the provision of Section 30(E) of the NIRC of 1997,
as amended." 25

The Issue

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B)
of the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit
hospitals.

The Ruling of the Court

St. Luke's Petition in G.R. No. 195960

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the
petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall
raise only questions of law which must be distinctly set forth." St. Luke's cites Martinez v. Court of
Appeals which permits factual review "when the Court of Appeals [in this case, the CTA] manifestly
26

overlooked certain relevant facts not disputed by the parties and which, if properly considered, would
justify a different conclusion." 27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA
"disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the
nature of the 'Other Income-Net' x x x." This is not a case of overlooking or failing to consider
28
relevant evidence. The CTA obviously considered the evidence and concluded that it is self-serving.
The CTA declared that it has "gone through the records of this case and found no other evidence
aside from the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x."
29

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25%
surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the
time prescribed for its payment in the notice of assessment[.]" St. Luke's is also liable to pay 20%
30

delinquency interest under Section 249(C)(3) of the NIRC. As explained by the CTA En Banc, the
31

amount of ₱6,275,370.38 in the dispositive portion of the CTA First Division Decision includes only
deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency interest. 32

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section
27(B) in the NIRC of 1997 vis-à-vis Section 30(E) and (G) on the income tax exemption of charitable
and social welfare institutions. The 10% income tax rate under Section 27(B) specifically pertains to
proprietary educational institutions and proprietary non-profit hospitals. The BIR argues that
Congress intended to remove the exemption that non-profit hospitals previously enjoyed under
Section 27(E) of the NIRC of 1977, which is now substantially reproduced in Section 30(E) of the
NIRC of 1997. Section 27(B) of the present NIRC provides:
33

SEC. 27. Rates of Income Tax on Domestic Corporations. -

xxxx

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and
hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except
those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof
shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated
trade, business or other activity' means any trade, business or other activity, the conduct of which is
not substantially related to the exercise or performance by such educational institution or hospital of
its primary purpose or function. A 'proprietary educational institution' is any private school maintained
and administered by private individuals or groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may
be, in accordance with existing laws and regulations. (Emphasis supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a
charitable institution and an organization promoting social welfare. The arguments of St. Luke's
focus on the wording of Section 30(E) exempting from income tax non-stock, non-profit charitable
institutions. St. Luke's asserts that the legislative intent of introducing Section 27(B) was only to
34

remove the exemption for "proprietary non-profit" hospitals. The relevant provisions of Section 30
35

state:

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:

xxxx
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income
or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific
person;

xxxx

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B)
of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under
Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand,
can be construed together without the removal of such tax exemption. The effect of the introduction
of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-
profit educational institutions and proprietary non-profit hospitals, among the institutions covered by
36

Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate
rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-
profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following the
definition of a "proprietary educational institution" as "any private school maintained and
administered by private individuals or groups" with a government permit. "Non-profit" means no net
income or asset accrues to or benefits any member or specific person, with all the net income or
asset devoted to the institution's purposes and all its activities conducted not for profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino
Inc. de Cebu, this Court considered as non-profit a sports club organized for recreation and
37

entertainment of its stockholders and members. The club was primarily funded by membership fees
and dues. If it had profits, they were used for overhead expenses and improving its golf course. The 38

club was non-profit because of its purpose and there was no evidence that it was engaged in a
profit-making enterprise. 39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court
defined "charity" in Lung Center of the Philippines v. Quezon City as "a gift, to be applied
40

consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing
their minds and hearts under the influence of education or religion, by assisting them to establish
themselves in life or [by] otherwise lessening the burden of government." A non-profit club for the
41

benefit of its members fails this test. An organization may be considered as non-profit if it does not
distribute any part of its income to stockholders or members. However, despite its being a tax
exempt institution, any income such institution earns from activities conducted for profit is taxable, as
expressly provided in the last paragraph of Section 30.
To be a charitable institution, however, an organization must meet the substantive test of charity in
Lung Center. The issue in Lung Center concerns exemption from real property tax and not income
tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an
indefinite number of persons which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which
should have been spent to address public needs, because certain private entities already assume a
part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of
taxes by the government is compensated by its relief from doing public works which would have
been funded by appropriations from the Treasury. 42

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for
a tax exemption are specified by the law granting it. The power of Congress to tax implies the power
to exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that
"[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the
Members of Congress." The requirements for a tax exemption are strictly construed against the
43

taxpayer because an exemption restricts the collection of taxes necessary for the existence of the
44

government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution
for the purpose of exemption from real property taxes. This ruling uses the same premise as
Hospital de San Juan and Jesus Sacred Heart College which says that receiving income from
45 46

paying patients does not destroy the charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients, whether out-patient, or confined
in the hospital, or receives subsidies from the government, so long as the money received is devoted
or used altogether to the charitable object which it is intended to achieve; and no money inures to
the private benefit of the persons managing or operating the institution. 47

For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that "[c]haritable institutions,
churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable,
or educational purposes shall be exempt from taxation." The test of exemption is not strictly a
48

requirement on the intrinsic nature or character of the institution. The test requires that the institution
use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung
Center of the Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to remove from the
tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E)
of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of
the NIRC defines the corporation or association that is exempt from income tax. On the other hand,
Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that
the institution "actually, directly and exclusively" use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

 (2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted "exclusively"
for charitable purposes. The organization of the institution refers to its corporate form, as shown by
its articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC
specifically requires that the corporation or association be non-stock, which is defined by the
Corporation Code as "one where no part of its income is distributable as dividends to its members,
trustees, or officers" and that any profit "obtain[ed] as an incident to its operations shall, whenever
49

necessary or proper, be used for the furtherance of the purpose or purposes for which the
corporation was organized." However, under Lung Center, any profit by a charitable institution must
50

not only be plowed back "whenever necessary or proper," but must be "devoted or used altogether
to the charitable object which it is intended to achieve." 51

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the
NIRC requires that these operations be exclusive to charity. There is also a specific requirement that
"no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person." The use of lands, buildings and improvements of the institution is but
a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not
ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property "actually, directly and exclusively"
for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be "organized and operated exclusively" for charitable purposes. Likewise,
to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be "operated
exclusively" for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated
exclusively" by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts
"any" activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax
exempt. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation
or association [must be] organized and operated exclusively for x x x charitable x x x purposes x x
x." It likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated
exclusively" for the promotion of social welfare.

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable
purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the "income of whatever
kind and character" of a charitable institution "from any of its activities conducted for profit,
regardless of the disposition made of such income, shall be subject to tax." Prior to the introduction
of Section 27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate
under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to paying patients. It cannot
be disputed that a hospital which receives approximately ₱1.73 billion from paying patients is not an
institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are
income received from "activities conducted for profit." Indeed, St. Luke's admits that it derived
52

profits from its paying patients. St. Luke's declared ₱1,730,367,965 as "Revenues from Services to
Patients" in contrast to its "Free Services" expenditure of ₱218,187,498. In its Comment in G.R. No.
195909, St. Luke's showed the following "calculation" to support its claim that 65.20% of its "income
after expenses was allocated to free or charitable services" in 1998. 53

REVENUES FROM SERVICES TO PATIENTS ₱1,730,367,965.00

OPERATING EXPENSES

Professional care of patients ₱1,016,608,394.00

Administrative 287,319,334.00

Household and Property 91,797,622.00

₱1,395,725,350.00

INCOME FROM OPERATIONS ₱334,642,615.00 100%

Free Services -218,187,498.00 -65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES ₱116,455,117.00 34.80%

OTHER INCOME 17,482,304.00

EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a
privilege exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for the
words "used exclusively" without doing violence to the Constitution and the law. Solely is
synonymous with exclusively. 54

The Court cannot expand the meaning of the words "operated exclusively" without violating the
NIRC. Services to paying patients are activities conducted for profit. They cannot be considered any
other way. There is a "purpose to make profit over and above the cost" of services. The ₱1.73
55

billion total revenues from paying patients is not even incidental to St. Luke's charity expenditure of
₱218,187,498 for non-paying patients.
St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating income in
1998. However, if a part of the remaining 34.80% of the operating income is reinvested in property,
equipment or facilities used for services to paying and non-paying patients, then it cannot be said
that the income is "devoted or used altogether to the charitable object which it is intended to
achieve." The income is plowed back to the corporation not entirely for charitable purposes, but for
56

profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that
income from activities for profit is taxable "regardless of the disposition made of such income."

Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase
"any activity conducted for profit." However, it quoted a deposition of Senator Mariano Jesus
Cuenco, who was a member of the Committee of Conference for the Senate, which introduced the
phrase "or from any activity conducted for profit."

P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un hospital, no cree Vd. que es
una actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha
universidad?

xxxx

R. Si el hospital se limita a recibir enformos pobres, mi contestación seria afirmativa; pero

considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de
buena posición social económica, lo que se paga por estos enfermos debe estar sujeto a 'income
tax', y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any
activity conducted for profit.'
57

The question was whether having a hospital is essential to an educational institution like the College
of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid
rooms generally occupied by people of good economic standing, then it should be subject to income
tax. He said that this was one of the reasons Congress inserted the phrase "or any activity
conducted for profit."

The question in Jesus Sacred Heart College involves an educational institution. However, it is
58

applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on
the activities of charitable institutions. Activities for profit should not escape the reach of taxation.
Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an
institution from tax. An institution cannot use its corporate form to prevent its profitable activities from
being taxed.

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the clear
and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an
institution be "operated exclusively" for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if
it earns income from its for-profit activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate
but now at the preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is
spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for
charitable institutions should therefore be limited to institutions beneficial to the public and those
which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to
the detriment of the government and other taxpayers. 1âwphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely
tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section
27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits
are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is
entitled to the preferential tax rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.
However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which
opined that St. Luke's is "a corporation for purely charitable and social welfare purposes"59 and thus
exempt from income tax. In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the
60 61

Court said that "good faith and honest belief that one is not subject to tax on the basis of previous
interpretation of government agencies tasked to implement the tax law, are sufficient justification to
delete the imposition of surcharges and interest." 62

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY
GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its
Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center,
Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income
tax rate under Section 27(B) of the National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National
Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals
are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1,
Rule 45 of the Rules of Court.

SO ORDERED.

CIR vs St. Luke's 2012

FACTS: St. Luke’s Medical Center, Inc. is a hospital organized as a non-stock and non-profit corporation.
The BIR assessed St. Luke’s deficiency taxes for 1998, comprised of deficiency income tax, value-added
tax, withholding tax on compensation and expanded withholding tax. St. Luke’s filed an administrative
protest with the BIR against the deficiency tax assessments. The BIR did not act on the protest within the
180-day period under Section 228 of the NIRC. Thus, St. Luke’s appealed to the CTA.

BIR’s contentions: The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10%
preferential tax rate on the income of proprietary nonprofit hospitals, should be applicable to St. Luke’s.
According to the BIR, Section 27(B), introduced in 1997, “is a new provision intended to amend the
exemption on non-profit hospitals that were previously categorized as non-stock, non-profit corporations
under Section 26 of the 1997 Tax Code x x x.” It is a specific provision which prevails over the general
exemption on income tax granted under Section 30(E) and (G) for non-stock, non-profit charitable
institutions and civic organizations promoting social welfare. The BIR claimed that St. Luke’s was actually
operating for profit in 1998 because only 13% of its revenues came from charitable purposes. Moreover,
the hospital’s board of trustees, officers and employees directly benefit from its profits and assets.

St. Luke’s contention: St. Luke’s contended that the BIR should not consider its total revenues, because
its free services to patients was P218,187,498 or 65.20% of its 1998 operating income. St. Luke’s also
claimed that its income does not inure to the benefit of any individual. St. Luke’s maintained that it is a
non-stock and non-profit institution for charitable and social welfare purposes under Section 30(E) and
(G) of the NIRC. It argued that the making of profit per se does not destroy its income tax exemption.

ISSUE/S: Whether St. Luke’s is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC,
which imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals.

RULING: There is no dispute that St. Luke’s is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke’s from paying taxes. This only refers to
the organization of St. Luke’s. Even if St. Luke’s meets the test of charity, a charitable institution is not
ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the Constitution
requires that a charitable institution use the property “actually, directly and exclusively” for charitable
purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable
institution must be “organized and operated exclusively” for charitable purposes. Likewise, to be exempt
from income taxes, Section 30(G) of the NIRC requires that the institution be “operated exclusively” for
social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words “organized and operated
exclusively.”
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under this Code

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution
conducts “any” activity for profit, such activity is not tax exempt even as its not-for-profit activities remain
tax exempt. This paragraph qualifies the requirements in Section 30(E) that the “[n]on-stock corporation
or association [must be] organized and operated exclusively for x x x charitable x x x purposes x x x.” It
likewise qualifies the requirement in Section 30(G) that the civic organization must be “operated
exclusively” for the promotion of social welfare.

Thus, even if the charitable institution must be “organized and operated exclusively” for charitable
purposes, it is nevertheless allowed to engage in “activities conducted for profit” without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the “income of whatever kind
and character” of a charitable institution “from any of its activities conducted for profit, regardless of
the disposition made of such income, shall be subject to tax.”

In 1998, St. Luke’s had total revenues of P1,730,367,965 from services to paying patients. It cannot be
disputed that a hospital which receives approximately P1.73 billion from paying patients is not an
institution “operated exclusively” for charitable purposes. Clearly, revenues from paying patients are
income received from “activities conducted for profit.” Services to paying patients are activities conducted
for profit. They cannot be considered any other way. There is a “purpose to make profit over and above
the cost” of services.

The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or social
welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only
on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of
Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be “operated
exclusively” for charitable or social welfare purposes to be completely exempt from income tax. An
institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit
activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject
to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to
Section 27(B).
Facts:

1. Luke’s Medical Center, Inc. is a hospital organized as a non-stock

and non-profit corporation.
2. The BIR assessed St. Luke’s deficiency taxes amounting to
P76,063,116.06 for 1998, comprised of deficiency income tax, VAT,
withholding tax on compensation and expanded withholding tax.
3. Luke’s filed an administrative protest with the BIR against the
deficiency tax assessments.
4. The BIR argued before the CTA that Section 27(B) of the NIRC,
which imposes a 10% preferential tax rate on the income of
proprietary non-profit hospitals, should be applicable to St. Luke’
5. The BIR claimed that St. Luke’s was actually operating for profit in
1998 because only 13% of its revenues came from charitable
purposes. Moreover, the hospital’s board of trustees, officers and
employees directly benefit from its profits and assets. St. Luke’s
had total revenues of P1,730,367,965 or approximately P1.73 billion
from patient services in 1998.
6. Luke’s contended that the BIR should not consider its total
revenues, because its free services to patients was P218,187,498 or
65.20% of its 1998 operating income of P334,642,615. St. Luke’s
also claimed that its income does not inure to the benefit of any
individual.
7. Luke’s maintained that it is a non-stock and non-profit institution for
charitable and social welfare purposes under Section 30(E) and (G)
of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.

Issue: Whether St. Luke’s is liable for deficiency income tax in 1998
under Section 27(B) of the NIRC, which imposes a preferential tax rate
of 10% on the income of proprietary non-profit hospitals.

Ruling:

The issue raised by the BIR is a purely legal one. It involves the effect
of the introduction of Section 27(B) in the NIRC of 1997 vis-à-vis
Section 30(E) and (G) on the income tax exemption of charitable and
social welfare institutions. The 10% income tax rate under Section
27(B) specifically pertains to proprietary educational institutions and
proprietary non-profit hospitals.
Section 27(B) of the NIRC does not remove the income tax exemption
of proprietary non-profit hospitals under Section 30(E) and (G). Section
27(B) on one hand, and Section 30(E) and (G) on the other hand, can be
construed together without the removal of such tax exemption.

The effect of the introduction of Section 27(B) is to subject the taxable

income of two specific institutions, namely, proprietary non-profit
educational institutions and proprietary non-profit hospitals, among
the institutions covered by Section 30, to the 10% preferential rate
under Section 27(B) instead of the ordinary 30% corporate rate under
the last paragraph of Section 30 in relation to Section 27(A)(1).

The only qualifications for hospitals are that they must be proprietary
and non-profit. “Proprietary” means private, following the definition of
a “proprietary educational institution” as “any private school
maintained and administered by private individuals or groups” with a
government permit. “Non-profit” means no net income or asset
accrues to or benefits any member or specific person, with all the net
income or asset devoted to the institution’s purposes and all its
activities conducted not for profit.

“Non-profit” does not necessarily mean “charitable.”

The Court defined “charity” in Lung Center of the Philippines v. Quezon

City as “a gift, to be applied consistently with existing laws, for the
benefit of an indefinite number of persons, either by bringing their
minds and hearts under the influence of education or religion, by
assisting them to establish themselves in life or by otherwise
lessening the burden of government.”

To be a charitable institution, however, an organization must meet the

substantive test of charity in Lung Center. The issue in Lung Center
concerns exemption from real property tax and not income tax.
However, it provides for the test of charity in our jurisdiction.

In other words, charitable institutions provide for free goods and

services to the public which would otherwise fall on the shoulders of
government. Thus, as a matter of efficiency, the government forgoes
taxes which should have been spent to address public needs, because
certain private entities already assume a part of the burden. This is
the rationale for the tax exemption of charitable institutions.

Charitable institutions, however, are not ipso facto entitled to a tax

exemption. The requirements for a tax exemption are specified by the
law granting it. The requirements for a tax exemption are strictly
construed against the taxpayer because an exemption restricts the
collection of taxes necessary for the existence of the government.

The Court in Lung Center declared that the Lung Center of the
Philippines is a charitable institution for the purpose of exemption
from real property taxes. This ruling uses the same premise as
Hospital de San Juan and Jesus Sacred Heart College which says that
receiving income from paying patients does not destroy the charitable
nature of a hospital.

For real property taxes, the incidental generation of income is

permissible because the test of exemption is the use of the property.
The test of exemption is not strictly a requirement on the intrinsic
nature or character of the institution. The test requires that the
institution use the property in a certain way, i.e. for a charitable
purpose. Thus, the Court held that the Lung Center of the Philippines
did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use
requirement is simply to remove from the tax exemption that portion of
the property not devoted to charity.

In the NIRC, Congress decided to extend the exemption to income

taxes. However, the way Congress crafted Section 30(E) of the NIRC is
materially different from Section 28(3), Article VI of the Constitution.
Section 30(E) of the NIRC defines the corporation or association that is
exempt from income tax. On the other hand, Section 28(3), Article VI
of the Constitution does not define a charitable institution, but
requires that the institution “actually, directly and exclusively” use
the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must

be:
 A non-stock corporation or association;
 Organized exclusively for charitable purposes;
 Operated exclusively for charitable purposes;
 No part of its net income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any specific person.

Thus, both the organization and operations of the charitable

institution must be devoted “exclusively” for charitable
purposes. The organization of the institution refers to its corporate
form, as shown by its articles of incorporation, by-laws and other
constitutive documents.

Section 30(E) of the NIRC specifically requires that the corporation or

association be non-stock, which is defined by the Corporation Code as
“one where no part of its income is distributable as dividends to its
members, trustees, or officers” and that any profit “obtained as an
incident to its operations shall, whenever necessary or proper, be used
for the furtherance of the purpose or purposes for which the
corporation was organized.”

However, the last paragraph of Section 30 of the NIRC qualifies the

words “organized and operated exclusively” by providing
that: Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal,
or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed
under this Code.

In 1998, St. Luke’s had total revenues of P1,730,367,965 from services

to paying patients. It cannot be disputed that a hospital which
receives approximately P1.73 billion from paying patients is not an
institution “operated exclusively” for charitable purposes. Clearly,
revenues from paying patients are income received from “activities
conducted for profit.” Indeed, St. Luke’s admits that it derived profits
from its paying patients. St. Luke’s declared P1,730,367,965 as
“Revenues from Services to Patients” in contrast to its “Free Services”
expenditure of P218,187,498.
Services to paying patients are activities conducted for profit. They
cannot be considered any other way. There is a “purpose to make
profit over and above the cost” of services. The P1.73 billion total
revenues from paying patients is not even incidental to St. Luke’s
charity expenditure of P218,187,498 for non-paying patients.

The Court finds that St. Luke’s is a corporation that is not “operated
exclusively” for charitable or social welfare purposes insofar as its
revenues from paying patients are concerned. This ruling is based not
only on a strict interpretation of a provision granting tax exemption,
but also on the clear and plain text of Section 30(E) and (G). Section
30(E) and (G) of the NIRC requires that an institution be “operated
exclusively” for charitable or social welfare purposes to be completely
exempt from income tax.

C. Requisites of A Valid Tax

7. G.R. No. L-75697

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

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

On November 5, 1985, a month after the promulgation of the abovementioned decree, Presidential
Decree No. 1994 amended the National Internal Revenue Code providing, inter alia:

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

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

The rationale behind the enactment of the DECREE, is set out in its preambular clauses as follows:
 1. WHEREAS, the proliferation and unregulated circulation of videograms including, among
others, videotapes, discs, cassettes or any technical improvement or variation thereof, have
greatly prejudiced the operations of moviehouses and theaters, and have caused a sharp
decline in theatrical attendance by at least forty percent (40%) and a tremendous drop in the
collection of sales, contractor's specific, amusement and other taxes, thereby resulting in
substantial losses estimated at P450 Million annually in government revenues;

2. WHEREAS, videogram(s) establishments collectively earn around P600 Million per annum
from rentals, sales and disposition of videograms, and such earnings have not been
subjected to tax, thereby depriving the Government of approximately P180 Million in taxes
each year;

3. WHEREAS, the unregulated activities of videogram establishments have also affected the
viability of the movie industry, particularly the more than 1,200 movie houses and theaters
throughout the country, and occasioned industry-wide displacement and unemployment due
to the shutdown of numerous moviehouses and theaters;

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

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

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

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

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

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

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

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

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

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

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

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

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

We shall consider the foregoing objections in seriatim.

1. The Constitutional requirement that "every bill shall embrace only one subject which shall be
expressed in the title thereof" is sufficiently complied with if the title be comprehensive enough to
1

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. An act having a
2

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." The rule also is that the constitutional requirement as to the title of a bill
3

should not be so narrowly construed as to cripple or impede the power of legislation. It should be
4

given practical rather than technical construction. 5

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

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

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

xxx xxx xxx

The foregoing provision is allied and germane to, and is reasonably necessary for the
accomplishment of, the general object of the DECREE, which is the regulation of the video industry
through the Videogram Regulatory Board as expressed in its title. The tax provision is not
inconsistent with, nor foreign to that general subject and title. As a tool for regulation it is simply one
6

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. The power to impose taxes is one so unlimited in force and so searching in extent, that the
8

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. In imposing a tax, the legislature acts upon its
9

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". Taxation has been
12

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." Besides, in the very
14
language of the decree, the authority of the BOARD to solicit such assistance is for a "fixed and
limited period" with the deputized agencies concerned being "subject to the direction and control of
the BOARD." That the grant of such authority might be the source of graft and corruption would not
stigmatize the DECREE as unconstitutional. Should the eventuality occur, the aggrieved parties will
not be without adequate remedy in law.

5. The DECREE is not violative of the ex post facto principle. An ex post facto law is, among other
categories, one which "alters the legal rules of evidence, and authorizes conviction upon less or
different testimony than the law required at the time of the commission of the offense." It is
petitioner's position that Section 15 of the DECREE in providing that:

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

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

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

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

Applied to the challenged provision, there is no question that there is a rational connection between the fact
proved, which is non-registration, and the ultimate fact presumed which is violation of the DECREE,
besides the fact that the prima facie presumption of violation of the DECREE attaches only after a forty-
five-day period counted from its effectivity and is, therefore, neither retrospective in character.

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

The enactment of the Decree since April 10, 1986 has not brought about the "demise" of the video
industry. On the contrary, video establishments are seen to have proliferated in many places
notwithstanding the 30% tax imposed.

In the last analysis, what petitioner basically questions is the necessity, wisdom and expediency of
the DECREE. These considerations, however, are primarily and exclusively a matter of legislative
concern.

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

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

WHEREFORE, the instant Petition is hereby dismissed.

No costs.

SO ORDERED.

FACTS:

Presidential Decree No. 1987, entitled "An Act Creating the Videogram Regulatory Board," was
promulgated on October 5, 1985.

A month later, Presidential Decree No. 1994 amended the National Internal Revenue Code, providing
that 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.

In September 1986, Valentin Tio, who was doing business under the name and style of OMI
Enterprises, filed a petition challenging the constitutionality of PD No. 1987, 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.

ISSUE:

Whether PD No. 1987 is unconstitutional. -- NO.

HELD:

The Supreme Court held that PD No. 1987 is constitutional.

The tax provision of PD No. 1987 is not a rider.

In fact, said provision is not 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.

The tax imposed is not harsh and oppressive, confiscatory, and in restraint of trade.

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. That being
said, the rate of tax is a matter better addressed to the taxing legislature.

The Decree does not constitute 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 Decree is not an ex post facto law.

An ex post facto law is 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. Applied to
the challenged provision, there is no question that there is a rational connection between the fact
proved, which is non-registration, and the ultimate fact presumed which is violation of the DECREE,
besides the fact that the prima facie presumption of violation of the DECREE attaches only after a
forty-five-day period counted from its effectivity and is, therefore, neither retrospective in character.

The video industry is not being over-regulated.

The video industry 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.

Facts: The case is a petition filed by petitioner on behalf of videogram operators adversely affected by Presidential
Decree No. 1987, “An Act Creating the Videogram Regulatory Board” with broad powers to regulate and supervise
the videogram industry.

A month after the promulgation of the said Presidential Decree, the amended the National Internal Revenue Code
provided that:

“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.”

“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 accrue 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.”

The rationale behind the tax provision is to curb 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 movie houses and theaters. Such unregulated circulation 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.

Videogram(s) establishments collectively earn around P600 Million per annum from rentals, sales and disposition of
videograms, and these earnings have not been subjected to tax, thereby depriving the Government of approximately
P180 Million in taxes each year.

The unregulated activities of videogram establishments have also affected the viability of the movie industry.

Issues:

(1) Whether or not tax imposed by the DECREE is a valid exercise of police power.

(2) Whether or nor the DECREE is constitutional.

Held: Taxation has been made the implement of the state’s police power. 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.
We find no clear violation of the Constitution which would justify us in pronouncing Presidential Decree No. 1987 as
unconstitutional and void. 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.”

WHEREFORE, the instant Petition is hereby dismissed. No costs.

D. Tax as Distinguished from other Forms of Exactions

8. G.R. No. 92585 May 8, 1992

CALTEX PHILIPPINES, INC., petitioner, vs.

THE HONORABLE COMMISSION ON AUDIT, HONORABLE COMMISSIONER BARTOLOME C.
FERNANDEZ and HONORABLE COMMISSIONER ALBERTO P. CRUZ, respondents.

This is a petition erroneously brought under Rule 44 of the Rules of Court questioning the authority
1

of the Commission on Audit (COA) in disallowing petitioner's claims for reimbursement from the Oil
Price Stabilization Fund (OPSF) and seeking the reversal of said Commission's decision denying its
claims for recovery of financing charges from the Fund and reimbursement of underrecovery arising
from sales to the National Power Corporation, Atlas Consolidated Mining and Development
Corporation (ATLAS) and Marcopper Mining Corporation (MAR-COPPER), preventing it from
exercising the right to offset its remittances against its reimbursement vis-a-vis the OPSF and
disallowing its claims which are still pending resolution before the Office of Energy Affairs (OEA) and
the Department of Finance (DOF).

Pursuant to the 1987 Constitution, any decision, order or ruling of the Constitutional
2

Commissions may be brought to this Court on certiorari by the aggrieved party within thirty (30)
3

days from receipt of a copy thereof. The certiorari referred to is the special civil action
for certiorari under Rule 65 of the Rules of Court. 4

Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the findings
and rulings of the administrator of the fund itself and in disallowing a claim which is still pending
resolution at the OEA level, and (b) "grave abuse of discretion and completely without
jurisdiction" in declaring that petitioner cannot avail of the right to offset any amount that it may be
5

required under the law to remit to the OPSF against any amount that it may receive by way of
reimbursement therefrom are sufficient to bring this petition within Rule 65 of the Rules of Court,
and, considering further the importance of the issues raised, the error in the designation of the
remedy pursued will, in this instance, be excused.

The issues raised revolve around the OPSF created under Section 8 of Presidential Decree (P.D.)
No. 1956, as amended by Executive Order (E.O.) No. 137. As amended, said Section 8 reads as
follows:
Sec. 8 . There is hereby created a Trust Account in the books of accounts of the
Ministry of Energy to be designated as Oil Price Stabilization Fund (OPSF) for the
purpose of minimizing frequent price changes brought about by exchange rate
adjustments and/or changes in world market prices of crude oil and imported
petroleum products. The Oil Price Stabilization Fund may be sourced from any of the
following:

a) Any increase in the tax collection from ad valorem tax or customs

duty imposed on petroleum products subject to tax under this Decree
arising from exchange rate adjustment, as may be determined by the
Minister of Finance in consultation with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax

exemptions of government corporations, as may be determined by
the Minister of Finance in consultation with the Board of Energy;

c) Any additional amount to be imposed on petroleum products to

augment the resources of the Fund through an appropriate Order that
may be issued by the Board of Energy requiring payment by persons
or companies engaged in the business of importing, manufacturing
and/or marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs
paid by oil companies in the importation of crude oil and petroleum
products is less than the peso costs computed using the reference
foreign exchange rate as fixed by the Board of Energy.

The Fund herein created shall be used for the following:

1) To reimburse the oil companies for cost increases in crude oil and
imported petroleum products resulting from exchange rate
adjustment and/or increase in world market prices of crude oil;

2) To reimburse the oil companies for possible cost under-recovery

incurred as a result of the reduction of domestic prices of petroleum
products. The magnitude of the underrecovery, if any, shall be
determined by the Ministry of Finance. "Cost underrecovery" shall
include the following:

i. Reduction in oil company take as directed by the

Board of Energy without the corresponding reduction
in the landed cost of oil inventories in the possession
of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result

of foregoing government mandated price reductions;

iii. Other factors as may be determined by the Ministry

of Finance to result in cost underrecovery.
 The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of
Energy.

The material operative facts of this case, as gathered from the pleadings of the parties, are not
disputed.

On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to as
Petitioner, directing the latter to remit to the OPSF its collection, excluding that unremitted for the
years 1986 and 1988, of the additional tax on petroleum products authorized under the aforesaid
Section 8 of P.D. No. 1956 which, as of 31 December 1987, amounted to P335,037,649.00 and
informing it that, pending such remittance, all of its claims for reimbursement from the OPSF shall be
held in abeyance. 6

On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification with
the OEA showed that the grand total of its unremitted collections of the above tax is
P1,287,668,820.00, broken down as follows:

1986 — P233,190,916.00
1987 — 335,065,650.00
1988 — 719,412,254.00;

directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from
receipt of the letter; advising it that the COA will hold in abeyance the audit of all its claims for
reimbursement from the OPSF; and directing it to desist from further offsetting the taxes collected
against outstanding claims in 1989 and subsequent periods. 7

In its letter of 3 May 1989, petitioner requested the COA for an early release of its reimbursement
certificates from the OPSF covering claims with the Office of Energy Affairs since June 1987 up to
March 1989, invoking in support thereof COA Circular No. 89-299 on the lifting of pre-audit of
government transactions of national government agencies and government-owned or controlled
corporations. 8

In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the reimbursement certificates from the OPSF
and repeated its earlier directive to petitioner to forward payment of the latter's unremitted collections to the OPSF to facilitate COA's audit
action on the reimbursement claims. 9

By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal for the
payment of the collections and the recovery of claims, since the outright payment of the sum of
P1.287 billion to the OEA as a prerequisite for the processing of said claims against the OPSF will
cause a very serious impairment of its cash position. The proposal reads: 10

We, therefore, very respectfully propose the following:

(1) Any procedural arrangement acceptable to COA to facilitate

monitoring of payments and reimbursements will be administered by
the ERB/Finance Dept./OEA, as agencies designated by law to
administer/regulate OPSF.

(2) For the retroactive period, Caltex will deliver to OEA, P1.287
billion as payment to OPSF, similarly OEA will deliver to Caltex the
same amount in cash reimbursement from OPSF.
 (3) The COA audit will commence immediately and will be conducted
expeditiously.

(4) The review of current claims (1989) will be conducted

expeditiously to preclude further accumulation of reimbursement from
OPSF.

On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921
accepting the above-stated proposal but prohibiting petitioner from further offsetting remittances and
reimbursements for the current and ensuing years. Decision No. 921 reads:
11

This pertains to the within separate requests of Mr. Manuel A. Estrella, President,
Petron Corporation, and Mr. Francis Ablan, President and Managing Director, Caltex
(Philippines) Inc., for reconsideration of this Commission's adverse action embodied
in its letters dated February 2, 1989 and March 9, 1989, the former directing
immediate remittance to the Oil Price Stabilization Fund of collections made by the
firms pursuant to P.D. 1956, as amended by E.O. No. 137, S. 1987, and the latter
reiterating the same directive but further advising the firms to desist from offsetting
collections against their claims with the notice that "this Commission will hold in
abeyance the audit of all . . . claims for reimbursement from the OPSF."

It appears that under letters of authority issued by the Chairman, Energy Regulatory
Board, the aforenamed oil companies were allowed to offset the amounts due to the
Oil Price Stabilization Fund against their outstanding claims from the said Fund for
the calendar years 1987 and 1988, pending with the then Ministry of Energy, the
government entity charged with administering the OPSF. This Commission, however,
expressing serious doubts as to the propriety of the offsetting of all types of
reimbursements from the OPSF against all categories of remittances, advised these
oil companies that such offsetting was bereft of legal basis. Aggrieved thereby, these
companies now seek reconsideration and in support thereof clearly manifest their
intent to make arrangements for the remittance to the Office of Energy Affairs of the
amount of collections equivalent to what has been previously offset, provided that
this Commission authorizes the Office of Energy Affairs to prepare the corresponding
checks representing reimbursement from the OPSF. It is alleged that the
implementation of such an arrangement, whereby the remittance of collections due to
the OPSF and the reimbursement of claims from the Fund shall be made within a
period of not more than one week from each other, will benefit the Fund and not
unduly jeopardize the continuing daily cash requirements of these firms.

Upon a circumspect evaluation of the circumstances herein obtaining, this

Commission perceives no further objectionable feature in the proposed arrangement,
provided that 15% of whatever amount is due from the Fund is retained by the Office
of Energy Affairs, the same to be answerable for suspensions or disallowances,
errors or discrepancies which may be noted in the course of audit and surcharges for
late remittances without prejudice to similar future retentions to answer for any
deficiency in such surcharges, and provided further that no offsetting of remittances
and reimbursements for the current and ensuing years shall be allowed.

Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive Director
Wenceslao R. De la Paz of the Office of Energy Affairs: 12

Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and
based on our initial verification of documents submitted to us by your Office in
support of Caltex (Philippines), Inc. offsets (sic) for the year 1986 to May 31, 1989,
as well as its outstanding claims against the Oil Price Stabilization Fund (OPSF) as
of May 31, 1989, we are pleased to inform your Office that Caltex (Philippines), Inc.
shall be required to remit to OPSF an amount of P1,505,668,906, representing
remittances to the OPSF which were offset against its claims reimbursements (net of
unsubmitted claims). In addition, the Commission hereby authorize (sic) the Office of
Energy Affairs (OEA) to cause payment of P1,959,182,612 to Caltex, representing
claims initially allowed in audit, the details of which are presented hereunder: . . .

As presented in the foregoing computation the disallowances totalled P387,683,535,

which included P130,420,235 representing those claims disallowed by OEA, details
of which is (sic) shown in Schedule 1 as summarized as follows:

Disallowance of COA
Particulars Amount

Recovery of financing charges P162,728,475 /a

Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558
——————
P257,263,300

Disallowances of OEA 130,420,235

————————— ——————
Total P387,683,535

The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate
that recovery of financing charges by oil companies is not among the items for which
the OPSF may be utilized. Therefore, it is our view that recovery of financing charges
has no legal basis. The mechanism for such claims is provided in DOF Circular 1-87.

b. Product Sales –– Sales to International Vessels/Airlines

BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order
No. 87-03-095 indicating that (sic) February 7, 1987 as the effectivity date that (sic)
oil companies should pay OPSF impost on export sales of petroleum products.
Effective February 7, 1987 sales to international vessels/airlines should not be
included as part of its domestic sales. Changing the effectivity date of the resolution
from February 7, 1987 to October 20, 1987 as covered by subsequent ERB
Resolution No. 88-12 dated November 18, 1988 has allowed Caltex to include in
their domestic sales volumes to international vessels/airlines and claim the
corresponding reimbursements from OPSF during the period. It is our opinion that
the effectivity of the said resolution should be February 7, 1987.
 c. Inventory losses –– Settlement of Ad Valorem

We reviewed the system of handling Borrow and Loan (BLA) transactions including
the related BLA agreement, as they affect the claims for reimbursements of ad
valorem taxes. We observed that oil companies immediately settle ad valorem taxes
for BLA transaction (sic). Loan balances therefore are not tax paid inventories of
Caltex subject to reimbursements but those of the borrower. Hence, we recommend
reduction of the claim for July, August, and November, 1987 amounting to
P14,034,786.

d. Sales to Atlas/Marcopper

LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the
suspension of payment of all taxes, duties, fees, imposts and other charges whether
direct or indirect due and payable by the copper mining companies in distress to the
national and local governments." It is our opinion that LOI 1416 which implements
the exemption from payment of OPSF imposts as effected by OEA has no legal
basis.

Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the amount
as herein authorized shall be subject to availability of funds of OPSF as of May 31,
1989 and applicable auditing rules and regulations. With regard to the disallowances,
it is further informed that the aggrieved party has 30 days within which to appeal the
decision of the Commission in accordance with law.

On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the decision
based on the following grounds: 13

A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES,

ORDERS, RESOLUTIONS, CIRCULARS ISSUED BY THE DEPARTMENT OF
FINANCE AND THE ENERGY REGULATORY BOARD PURSUANT TO
EXECUTIVE ORDER NO. 137.

xxx xxx xxx

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF

EXECUTIVE POWER BY DEPARTMENT OF FINANCE AND ENERGY
REGULATORY BOARD ARE LEGAL AND SHOULD BE RESPECTED AND
APPLIED UNLESS DECLARED NULL AND VOID BY COURTS OR REPEALED BY
LEGISLATION.

xxx xxx xxx

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS

AUTHORIZED BY THE EXECUTIVE BRANCH OF GOVERNMENT, REMAINS
VALID.

xxx xxx xxx

On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request for
Reconsideration. 14
On 16 February 1990, the COA, with Chairman Domingo taking no part and with Commissioner
Fernandez dissenting in part, handed down Decision No. 1171 affirming the disallowance for
recovery of financing charges, inventory losses, and sales to MARCOPPER and ATLAS, while
allowing the recovery of product sales or those arising from export sales. Decision No. 1171 reads
15

as follows:

Anent the recovery of financing charges you contend that Caltex Phil. Inc. has
the .authority to recover financing charges from the OPSF on the basis of
Department of Finance (DOF) Circular 1-87, dated February 18, 1987, which allowed
oil companies to "recover cost of financing working capital associated with crude oil
shipments," and provided a schedule of reimbursement in terms of peso per barrel. It
appears that on November 6, 1989, the DOF issued a memorandum to the President
of the Philippines explaining the nature of these financing charges and justifying their
reimbursement as follows:

As part of your program to promote economic recovery, . . . oil

companies (were authorized) to refinance their imports of crude oil
and petroleum products from the normal trade credit of 30 days up to
360 days from date of loading . . . Conformably . . ., the oil companies
deferred their foreign exchange remittances for purchases by
refinancing their import bills from the normal 30-day payment term up
to the desired 360 days. This refinancing of importations carried
additional costs (financing charges) which then became, due to
government mandate, an inherent part of the cost of the purchases of
our country's oil requirement.

We beg to disagree with such contention. The justification that financing charges
increased oil costs and the schedule of reimbursement rate in peso per barrel
(Exhibit 1) used to support alleged increase (sic) were not validated in our
independent inquiry. As manifested in Exhibit 2, using the same formula which the
DOF used in arriving at the reimbursement rate but using comparable percentages
instead of pesos, the ineluctable conclusion is that the oil companies are actually
gaining rather than losing from the extension of credit because such extension
enables them to invest the collections in marketable securities which have much
higher rates than those they incur due to the extension. The Data we used were
obtained from CPI (CALTEX) Management and can easily be verified from our
records.

With respect to product sales or those arising from sales to international vessels or
airlines, . . ., it is believed that export sales (product sales) are entitled to claim
refund from the OPSF.

As regard your claim for underrecovery arising from inventory losses, . . . It is the
considered view of this Commission that the OPSF is not liable to refund such surtax
on inventory losses because these are paid to BIR and not OPSF, in view of which
CPI (CALTEX) should seek refund from BIR. . . .

Finally, as regards the sales to Atlas and Marcopper, it is represented that you are
entitled to claim recovery from the OPSF pursuant to LOI 1416 issued on July 17,
1984, since these copper mining companies did not pay CPI (CALTEX) and OPSF
imposts which were added to the selling price.
 Upon a circumspect evaluation, this Commission believes and so holds that the CPI
(CALTEX) has no authority to claim reimbursement for this uncollected OPSF impost
because LOI 1416 dated July 17, 1984, which exempts distressed mining companies
from "all taxes, duties, import fees and other charges" was issued when OPSF was
not yet in existence and could not have contemplated OPSF imposts at the time of its
formulation. Moreover, it is evident that OPSF was not created to aid distressed
mining companies but rather to help the domestic oil industry by stabilizing oil prices.

Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it
imputes to the COA the commission of the following errors: 16

RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF

FINANCING CHARGES FROM THE OPSF.

II

RESPONDENT COMMISSION ERRED IN DISALLOWING

CPI's CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM
17

SALES TO NPC.

III

RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR

REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER.

IV

RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING

ITS LEGAL RIGHT TO OFFSET ITS REMITTANCES AGAINST ITS
REIMBURSEMENT VIS-A-VIS THE OPSF.

RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH

ARE STILL PENDING RESOLUTION BY (SIC) THE OEA AND THE DOF.

In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition
within ten (10) days from notice.18

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the
Office of the Solicitor General, filed their Comment.19

This Court resolved to give due course to this petition on 30 May 1991 and required the parties to file
their respective Memoranda within twenty (20) days from notice. 20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment
filed on 6 September 1990 be considered as the Memorandum for respondents. 21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.
I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:

(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added a
second purpose, to wit:

2) To reimburse the oil companies for possible cost underrecovery incurred as a

result of the reduction of domestic prices of petroleum products. The magnitude of
the underrecovery, if any, shall be determined by the Ministry of Finance. "Cost
underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of Energy

without the corresponding reduction in the landed cost of oil
inventories in the possession of the oil companies at the time of the
price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing

government mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to

result in cost underrecovery.

the "other factors" mentioned therein that may be determined by the Ministry (now Department) of
Finance may include financing charges for "in essence, financing charges constitute unrecovered
cost of acquisition of crude oil incurred by the oil companies," as explained in the 6 November 1989
Memorandum to the President of the Department of Finance; they "directly translate to cost
underrecovery in cases where the money market placement rates decline and at the same time the
tax on interest income increases. The relationship is such that the presence of underrecovery or
overrecovery is directly dependent on the amount and extent of financing charges."

(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on the
basis of Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of financing working capital associated
with crude oil shipments, the following guidelines on the utilization of the Oil Price
Stabilization Fund pertaining to the payment of the foregoing (sic) exchange risk
premium and recovery of financing charges will be implemented:

1. The OPSF foreign exchange premium shall be reduced to a flat

rate of one (1) percent for the first (6) months and 1/32 of one percent
per month thereafter up to a maximum period of one year, to be
applied on crude oil' shipments from January 1, 1987. Shipments with
outstanding financing as of January 1, 1987 shall be charged on the
basis of the fee applicable to the remaining period of financing.

2. In addition, for shipments loaded after January 1987, oil

companies shall be allowed to recover financing charges directly from
the OPSF per barrel of crude oil based on the following schedule:

Financing Period Reimbursement Rate

Pesos per Barrel
 Less than 180 days None
180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28

The above rates shall be subject to review every sixty

days. 22

Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised the
Office of Energy Affairs as follows:

HON. VICENTE T. PATERNO

Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila

Dear Sir:

This refers to the letters of the Oil Industry dated December 4, 1986 and February 5,
1987 and subsequent discussions held by the Price Review committee on February
6, 1987.

On the basis of the representations made, the Department of Finance recognizes the
necessity to reduce the foreign exchange risk premium accruing to the Oil Price
Stabilization Fund (OPSF). Such a reduction would allow the industry to recover
partly associated financing charges on crude oil imports. Accordingly, the OPSF
foreign exchange risk fee shall be reduced to a flat charge of 1% for the first six (6)
months plus 1/32% of 1% per month thereafter up to a maximum period of one year,
effective January 1, 1987. In addition, since the prevailing company take would still
leave unrecovered financing charges, reimbursement may be secured from the
OPSF in accordance with the provisions of the attached Department of Finance
circular. 23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the
guidelines for the computation of the foreign exchange risk fee and the recovery of financing charges
from the OPSF, to wit:

B. FINANCE CHARGES

1. Oil companies shall be allowed to recover financing charges

directly from the OPSF for both crude and product shipments loaded
after January 1, 1987 based on the following rates:

Financing Period Reimbursement Rate

(PBbl.)

Less than 180 days None

180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
 300 days to 359 days 6.16
360 days to more 8.28

2. The above rates shall be subject to review every sixty days. 24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing further
guidelines on the recoverability of financing charges, to wit:

Following are the supplemental rules to Department of Finance Circular No. 1-87
dated February 18, 1987 which allowed the recovery of financing charges directly
from the Oil Price Stabilization Fund. (OPSF):

1. The Claim for reimbursement shall be on a per shipment basis.

2. The claim shall be filed with the Office of Energy Affairs together
with the claim on peso cost differential for a particular shipment and
duly certified supporting documents provided for under Ministry of
Finance No. 11-85.

3. The reimbursement shall be on the form of reimbursement

certificate (Annex A) to be issued by the Office of Energy Affairs. The
said certificate may be used to offset against amounts payable to the
OPSF. The oil companies may also redeem said certificates in cash if
not utilized, subject to availability of funds.
25

The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-12-
017. 26

The COA can neither ignore these issuances nor formulate its own interpretation of the laws in the
light of the determination of executive agencies. The determination by the Department of Finance
and the OEA that financing charges are recoverable from the OPSF is entitled to great weight and
consideration. The function of the COA, particularly in the matter of allowing or disallowing certain
27

expenditures, is limited to the promulgation of accounting and auditing rules for, among others, the
disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or
uses of government funds and properties. 28

(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's claim
that petitioner is gaining, instead of losing, from the extension of credit, is belatedly raised and not
supported by expert analysis.

In impeaching the validity of petitioner's assertions, the respondents argue that:

1. The Constitution gives the COA discretionary power to disapprove irregular or

unnecessary government expenditures and as the monetary claims of petitioner are
not allowed by law, the COA acted within its jurisdiction in denying them;

2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges
from the OPSF;
 3. Under the principle of ejusdem generis, the "other factors" mentioned in the
second purpose of the OPSF pursuant to E.O. No. 137 can only include "factors
which are of the same nature or analogous to those enumerated;"

4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of

the Department of Finance violates P.D. No. 1956 and E.O. No. 137; and

5. Department of Finance rules and regulations implementing P.D. No. 1956 do not
likewise allow reimbursement of financing
charges. 29

We find no merit in the first assigned error.

As to the power of the COA, which must first be resolved in view of its primacy, We find the theory of
petitioner –– that such does not extend to the disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures, or use of government funds and properties, but only to
the promulgation of accounting and auditing rules for, among others, such disallowance –– to be
untenable in the light of the provisions of the 1987 Constitution and related laws.

Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:

Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to
examine, audit, and settle all accounts pertaining to the revenue and receipts of, and
expenditures or uses of funds and property, owned or held in trust by, or pertaining
to, the Government, or any of its subdivisions, agencies, or instrumentalities,
including government-owned and controlled corporations with original charters, and
on a post-audit basis: (a) constitutional bodies, commissions and offices that have
been granted fiscal autonomy under this Constitution; (b) autonomous state colleges
and universities; (c) other government-owned or controlled corporations and their
subsidiaries; and (d) such non-governmental entities receiving subsidy or equity,
directly or indirectly, from or through the government, which are required by law or
the granting institution to submit to such audit as a condition of subsidy or equity.
However, where the internal control system of the audited agencies is inadequate,
the Commission may adopt such measures, including temporary or special pre-audit,
as are necessary and appropriate to correct the deficiencies. It shall keep the general
accounts, of the Government and, for such period as may be provided by law,
preserve the vouchers and other supporting papers pertaining thereto.

(2) The Commission shall have exclusive authority, subject to the limitations in this
Article, to define the scope of its audit and examination, establish the techniques and
methods required therefor, and promulgate accounting and auditing rules and
regulations, including those for the prevention and disallowance of irregular,
unnecessary, excessive, extravagant, or, unconscionable expenditures, or uses of
government funds and properties.

These present powers, consistent with the declared independence of the Commission, are broader
30

and more extensive than that conferred by the 1973 Constitution. Under the latter, the Commission
was empowered to:

Examine, audit, and settle, in accordance with law and regulations, all accounts
pertaining to the revenues, and receipts of, and expenditures or uses of funds and
property, owned or held in trust by, or pertaining to, the Government, or any of its
 subdivisions, agencies, or instrumentalities including government-owned or
controlled corporations, keep the general accounts of the Government and, for such
period as may be provided by law, preserve the vouchers pertaining thereto; and
promulgate accounting and auditing rules and regulations including those for the
prevention of irregular, unnecessary, excessive, or extravagant expenditures or uses
of funds and property. 31

Upon the other hand, under the 1935 Constitution, the power and authority of the COA's precursor,
the General Auditing Office, were, unfortunately, limited; its very role was markedly passive. Section
2 of Article XI thereof provided:

Sec. 2. The Auditor General shall examine, audit, and settle all accounts pertaining
to the revenues and receipts from whatever source, including trust funds derived
from bond issues; and audit, in accordance with law and administrative regulations,
all expenditures of funds or property pertaining to or held in trust by the Government
or the provinces or municipalities thereof. He shall keep the general accounts of the
Government and the preserve the vouchers pertaining thereto. It shall be the duty of
the Auditor General to bring to the attention of the proper administrative officer
expenditures of funds or property which, in his opinion, are irregular, unnecessary,
excessive, or extravagant. He shall also perform such other functions as may be
prescribed by law.

As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant expenditures

or uses of funds, the 1935 Constitution did not grant the Auditor General the power to issue rules
and regulations to prevent the same. His was merely to bring that matter to the attention of the
proper administrative officer.

The ruling on this particular point, quoted by petitioner from the cases of Guevarra
vs. Gimenez and Ramos vs. Aquino, are no longer controlling as the two (2) were decided in the
32 33

light of the 1935 Constitution.

There can be no doubt, however, that the audit power of the Auditor General under the 1935
Constitution and the Commission on Audit under the 1973 Constitution authorized them to
disallow illegal expenditures of funds or uses of funds and property. Our present Constitution retains
that same power and authority, further strengthened by the definition of the COA's general
jurisdiction in Section 26 of the Government Auditing Code of the Philippines and Administrative
34

Code of 1987. Pursuant to its power to promulgate accounting and auditing rules and regulations
35

for the prevention of irregular, unnecessary, excessive or extravagant expenditures or uses of

funds, the COA promulgated on 29 March 1977 COA Circular No. 77-55. Since the COA is
36

responsible for the enforcement of the rules and regulations, it goes without saying that failure to
comply with them is a ground for disapproving the payment of the proposed expenditure. As
observed by one of the Commissioners of the 1986 Constitutional Commission, Fr. Joaquin G.
Bernas: 37

It should be noted, however, that whereas under Article XI, Section 2, of the 1935
Constitution the Auditor General could not correct "irregular, unnecessary, excessive
or extravagant" expenditures of public funds but could only "bring [the matter] to the
attention of the proper administrative officer," under the 1987 Constitution, as also
under the 1973 Constitution, the Commission on Audit can "promulgate accounting
and auditing rules and regulations including those for the prevention and
disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable
expenditures or uses of government funds and properties." Hence, since the
 Commission on Audit must ultimately be responsible for the enforcement of these
rules and regulations, the failure to comply with these regulations can be a ground for
disapproving the payment of a proposed expenditure.

Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more active
role and invested it with broader and more extensive powers, they did not intend merely to make the
COA a toothless tiger, but rather envisioned a dynamic, effective, efficient and independent
watchdog of the Government.

The issue of the financing charges boils down to the validity of Department of Finance Circular No.
1-87, Department of Finance Circular No. 4-88 and the implementing circulars of the OEA, issued
pursuant to Section 8, P.D. No. 1956, as amended by E.O. No. 137, authorizing it to determine
"other factors" which may result in cost underrecovery and a consequent reimbursement from the
OPSF.

The Solicitor General maintains that, following the doctrine of ejusdem generis, financing charges
are not included in "cost underrecovery" and, therefore, cannot be considered as one of the "other
factors." Section 8 of P.D. No. 1956, as amended by E.O. No. 137, does not explicitly define what
"cost underrecovery" is. It merely states what it includes. Thus:

. . . "Cost underrecovery" shall include the following:

i. Reduction in oil company takes as directed by the Board of Energy without the
corresponding reduction in the landed cost of oil inventories in the possession of the
oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government

mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.

These "other factors" can include only those which are of the same class or nature as the two
specifically enumerated in subparagraphs (i) and (ii). A common characteristic of both is that they
are in the nature of government mandated price reductions. Hence, any other factor which seeks to
be a part of the enumeration, or which could qualify as a cost underrecovery, must be of the same
class or nature as those specifically enumerated.

Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance broad
and unrestricted authority to determine or define "other factors."

Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here general words follow an enumeration of persons or
things, by words of a particular and specific meaning, such general words are not to be construed in
their widest extent, but are held to be as applying only to persons or things of the same kind or class
as those specifically mentioned. A reading of subparagraphs (i) and (ii) easily discloses that they
38

do not have a common characteristic. The first relates to price reduction as directed by the Board of
Energy while the second refers to reduction in internal ad valorem taxes. Therefore, subparagraph
(iii) cannot be limited by the enumeration in these subparagraphs. What should be considered for
purposes of determining the "other factors" in subparagraph (iii) is the first sentence of paragraph (2)
of the Section which explicitly allows cost underrecovery only if such were incurred as a result of the
reduction of domestic prices of petroleum products.

Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in the
sense that such were incurred as a result of the inability to fully offset financing expenses from yields
in money market placements, they do not, however, fall under the foregoing provision of P.D. No.
1956, as amended, because the same did not result from the reduction of the domestic price of
petroleum products. Until paragraph (2), Section 8 of the decree, as amended, is further amended
by Congress, this Court can do nothing. The duty of this Court is not to legislate, but to apply or
interpret the law. Be that as it may, this Court wishes to emphasize that as the facts in this case
have shown, it was at the behest of the Government that petitioner refinanced its oil import
payments from the normal 30-day trade credit to a maximum of 360 days. Petitioner could be correct
in its assertion that owing to the extended period for payment, the financial institution which
refinanced said payments charged a higher interest, thereby resulting in higher financing expenses
for the petitioner. It would appear then that equity considerations dictate that petitioner should
somehow be allowed to recover its financing losses, if any, which may have been sustained because
it accommodated the request of the Government. Although under Section 29 of the National Internal
Revenue Code such losses may be deducted from gross income, the effect of that loss would be
merely to reduce its taxable income, but not to actually wipe out such losses. The Government then
may consider some positive measures to help petitioner and others similarly situated to obtain
substantial relief. An amendment, as aforestated, may then be in order.

Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the
Department of Finance to determine or define "other factors" is to uphold an undue delegation of
legislative power, it clearly appearing that the subject provision does not provide any standard for the
exercise of the authority. It is a fundamental rule that delegation of legislative power may be
sustained only upon the ground that some standard for its exercise is provided and that the
legislature, in making the delegation, has prescribed the manner of the exercise of the delegated
authority.39

Finally, whether petitioner gained or lost by reason of the extensive credit is rendered irrelevant by
reason of the foregoing disquisitions. It may nevertheless be stated that petitioner failed to disprove
COA's claim that it had in fact gained in the process. Otherwise stated, petitioner failed to sufficiently
show that it incurred a loss. Such being the case, how can petitioner claim for reimbursement? It
cannot have its cake and eat it too.

II. Anent the claims arising from sales to the National Power Corporation, We find for the petitioner.
The respondents themselves admit in their Comment that underrecovery arising from sales to NPC
are reimbursable because NPC was granted full exemption from the payment of taxes; to prove this,
respondents trace the laws providing for such exemption. The last law cited is the Fiscal Incentives
40

Regulatory Board's Resolution No. 17-87 of 24 June 1987 which provides, in part, "that the tax and
duty exemption privileges of the National Power Corporation, including those pertaining to its
domestic purchases of petroleum and petroleum products . . . are restored effective March 10,
1987." In a Memorandum issued on 5 October 1987 by the Office of the President, NPC's tax
exemption was confirmed and approved.

Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum products to
the NPC is evident in the recently passed Republic Act No. 6952 establishing the Petroleum Price
Standby Fund to support the OPSF. The pertinent part of Section 2, Republic Act No. 6952
41

provides:

Sec. 2. Application of the Fund shall be subject to the following conditions:

 (1) That the Fund shall be used to reimburse the oil companies for (a)
cost increases of imported crude oil and finished petroleum products
resulting from foreign exchange rate adjustments and/or increases in
world market prices of crude oil; (b) cost underrecovery incurred as a
result of fuel oil sales to the National Power Corporation (NPC); and
(c) other cost underrecoveries incurred as may be finally decided by
the Supreme
Court; . . .

Hence, petitioner can recover its claim arising from sales of petroleum products to the National
Power Corporation.

III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER, petitioner
relies on Letter of Instruction (LOI) 1416, dated 17 July 1984, which ordered the suspension of
payments of all taxes, duties, fees and other charges, whether direct or indirect, due and payable by
the copper mining companies in distress to the national government. Pursuant to this LOI, then
Minister of Energy, Hon. Geronimo Velasco, issued Memorandum Circular No. 84-11-22 advising
the oil companies that Atlas Consolidated Mining Corporation and Marcopper Mining Corporation are
among those declared to be in distress.

In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18 August
1989 letter to Executive Director Wenceslao R. de la Paz, states that "it is our opinion that LOI 1416
which implements the exemption from payment of OPSF imposts as effected by OEA has no legal
basis;" in its Decision No. 1171, it ruled that "the CPI (CALTEX) (Caltex) has no authority to claim
42

reimbursement for this uncollected impost because LOI 1416 dated July 17, 1984, . . . was issued
when OPSF was not yet in existence and could not have contemplated OPSF imposts at the time of
its formulation." It is further stated that: "Moreover, it is evident that OPSF was not created to aid
43

distressed mining companies but rather to help the domestic oil industry by stabilizing oil prices."

In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have intended
to exempt said distressed mining companies from the payment of OPSF dues for the following
reasons:

a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956
creating the OPSF was promulgated on October 10, 1984, while E.O. 137, amending
P.D. 1956, was issued on February 25, 1987.

b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in line
with the government's effort to prevent the collapse of the copper industry. P.D No.
1956, as amended, was issued for the purpose of minimizing frequent price changes
brought about by exchange rate adjustments and/or changes in world market prices
of crude oil and imported petroleum product's; and

c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other
charges, whether direct or indirect, due and payable by the copper mining companies
in distress to the Notional and Local Governments . . ." On the other hand, OPSF
dues are not payable by (sic) distressed copper companies but by oil companies. It is
to be noted that the copper mining companies do not pay OPSF dues. Rather, such
imposts are built in or already incorporated in the prices of oil products.
44
Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed mining
companies, it does not accord petitioner the same privilege with respect to its obligation to pay
OPSF dues.

We concur with the disquisitions of the respondents. Aside from such reasons, however, it is
apparent that LOI 1416 was never published in the Official Gazette as required by Article 2 of the
45

Civil Code, which reads:

Laws shall take effect after fifteen days following the completion of their publication in
the Official Gazette, unless it is otherwise provided. . . .

In applying said provision, this Court ruled in the case of Tañada vs. Tuvera: 46

WHEREFORE, the Court hereby orders respondents to publish in the Official

Gazette all unpublished presidential issuances which are of general application, and
unless so published they shall have no binding force and effect.

Resolving the motion for reconsideration of said decision, this Court, in its Resolution promulgated
on 29 December 1986, ruled:
47

We hold therefore that all statutes, including those of local application and private
laws, shall be published as a condition for their effectivity, which shall begin fifteen
days after publication unless a different effectivity date is fixed by the legislature.

Covered by this rule are presidential decrees and executive orders promulgated by
the President in the exercise of legislative powers whenever the same are validly
delegated by the legislature or, at present, directly conferred by the Constitution.
Administrative rules and regulations must also be published if their purpose is to
enforce or implement existing laws pursuant also to a valid delegation.

xxx xxx xxx

WHEREFORE, it is hereby declared that all laws as above defined shall immediately
upon their approval, or as soon thereafter as possible, be published in full in the
Official Gazette, to become effective only after fifteen days from their publication, or
on another date specified by the legislature, in accordance with Article 2 of the Civil
Code.

LOI 1416 has, therefore, no binding force or effect as it was never published in the Official Gazette
after its issuance or at any time after the decision in the abovementioned cases.

Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued on 18
June 1987. As amended, the said provision now reads:

Laws shall take effect after fifteen days following the completion of their publication
either in the Official Gazette or in a newspaper of general circulation in the
Philippines, unless it is otherwise provided.

We are not aware of the publication of LOI 1416 in any newspaper of general circulation pursuant to
Executive Order No. 200.
Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim must still
fail. Tax exemptions as a general rule are construed strictly against the grantee and liberally in favor
of the taxing authority. The burden of proof rests upon the party claiming exemption to prove that it
48

is in fact covered by the exemption so claimed. The party claiming exemption must therefore be
expressly mentioned in the exempting law or at least be within its purview by clear legislative intent.

In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to ATLAS
and MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though LOI 1416 may
suspend the payment of taxes by copper mining companies, it does not give petitioner the same
privilege with respect to the payment of OPSF dues.

IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the
Department of Finance has still to issue a final and definitive ruling thereon; accordingly, it was
premature for COA to disallow it. By doing so, the latter acted beyond its jurisdiction. Respondents,
49

on the other hand, contend that said amount was already disallowed by the OEA for failure to
substantiate it. In fact, when OEA submitted the claims of petitioner for pre-audit, the
50

abovementioned amount was already excluded.

An examination of the records of this case shows that petitioner failed to prove or substantiate its
contention that the amount of P130,420,235.00 is still pending before the OEA and the DOF.
Additionally, We find no reason to doubt the submission of respondents that said amount has
already been passed upon by the OEA. Hence, the ruling of respondent COA disapproving said
claim must be upheld.

V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF from
petitioner may be offset against petitioner's outstanding claims from said fund. Petitioner contends
that it should be allowed to offset its claims from the OPSF against its contributions to the fund as
this has been allowed in the past, particularly in the years 1987 and 1988. 51

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on
compensation and Section 21, Book V, Title I-B of the Revised Administrative Code which provides
for "Retention of Money for Satisfaction of Indebtedness to Government." Petitioner also mentions
52

communications from the Board of Energy and the Department of Finance that supposedly authorize
compensation.

Respondents, on the other hand, citing Francia vs. IAC and Fernandez, contend that there can be
53

no offsetting of taxes against the claims that a taxpayer may have against the government, as taxes
do not arise from contracts or depend upon the will of the taxpayer, but are imposed by law.
Respondents also allege that petitioner's reliance on Section 21, Book V, Title I-B of the Revised
Administrative Code, is misplaced because "while this provision empowers the COA to withhold
payment of a government indebtedness to a person who is also indebted to the government and
apply the government indebtedness to the satisfaction of the obligation of the person to the
government, like authority or right to make compensation is not given to the private person." The54

reason for this, as stated in Commissioner of Internal Revenue vs. Algue, Inc., is that money due
55

the government, either in the form of taxes or other dues, is its lifeblood and should be collected
without hindrance. Thus, instead of giving petitioner a reason for compensation or set-off, the
Revised Administrative Code makes it the respondents' duty to collect petitioner's indebtedness to
the OPSF.

Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a
result of taxation because "P.D. 1956, amended, did not create a source of taxation; it instead
established a special fund . . .," and that the OPSF contributions do not go to the general fund of
56
the state and are not used for public purpose, i.e., not for the support of the government, the
administration of law, or the payment of public expenses. This alleged lack of a public purpose
behind OPSF exactions distinguishes such from a tax. Hence, the ruling in the Francia case is
inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support the
OPSF; the said law provides in part that:

Sec. 2. Application of the fund shall be subject to the following conditions:

xxx xxx xxx

(3) That no amount of the Petroleum Price Standby Fund shall be

used to pay any oil company which has an outstanding obligation to
the Government without said obligation being offset first, subject to
the requirements of compensation or offset under the Civil Code.

We find no merit in petitioner's contention that the OPSF contributions are not for a public purpose
because they go to a special fund of the government. Taxation is no longer envisioned as a measure
merely to raise revenue to support the existence of the government; taxes may be levied with a
regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry
which is affected with public interest as to be within the police power of the state. There can be no
57

doubt that the oil industry is greatly imbued with public interest as it vitally affects the general
welfare. Any unregulated increase in oil prices could hurt the lives of a majority of the people and
cause economic crisis of untold proportions. It would have a chain reaction in terms of, among
others, demands for wage increases and upward spiralling of the cost of basic commodities. The
stabilization then of oil prices is of prime concern which the state, via its police power, may properly
address.

Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF is
taxation. No amount of semantical juggleries could dim this fact.

It is settled that a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government and taxpayer
58

are not mutually creditors and debtors of each other and a claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be set-off. 59

We may even further state that technically, in respect to the taxes for the OPSF, the oil companies
merely act as agents for the Government in the latter's collection since the taxes are, in reality,
passed unto the end-users –– the consuming public. In that capacity, the petitioner, as one of such
companies, has the primary obligation to account for and remit the taxes collected to the
administrator of the OPSF. This duty stems from the fiduciary relationship between the two;
petitioner certainly cannot be considered merely as a debtor. In respect, therefore, to its collection
for the OPSF vis-a-vis its claims for reimbursement, no compensation is likewise legally feasible.
Firstly, the Government and the petitioner cannot be said to be mutually debtors and creditors of
each other. Secondly, there is no proof that petitioner's claim is already due and liquidated. Under
Article 1279 of the Civil Code, in order that compensation may be proper, it is necessary that:

(1) each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
 (2) both debts consist in a sum of :money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;

(3) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.

That compensation had been the practice in the past can set no valid precedent. Such a practice
has no legal basis. Lastly, R.A. No. 6952 does not authorize oil companies to offset their claims
against their OPSF contributions. Instead, it prohibits the government from paying any amount from
the Petroleum Price Standby Fund to oil companies which have outstanding obligations with the
government, without said obligation being offset first subject to the rules on compensation in the Civil
Code.

WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the challenged
decision of the Commission on Audit, except that portion thereof disallowing petitioner's claim for
reimbursement of underrecovery arising from sales to the National Power Corporation, which is
hereby allowed.

With costs against petitioner.

SO ORDERED.

FACTS

The Commission on Audit (COA) ordered Caltex Philippines to remit to the OPSF its collection of
additional tax on petroleum products as authorized under P.D. 1956. Pending such remittance, all CPI’s
claims for reimbursement would be held in abeyance, too, and Caltex should desist from further
offsetting the taxes it collected against its own outstanding claims for reimbursement.

Caltex argued that it should be allowed to offset its claims from the OPSF against its contributions to
the fund as this had been allowed in the past. But COA insisted that there can be no offsetting of taxes
against the claims that a taxpayer may have against the government, as taxes do not arise from
contracts or depend upon the will of the taxpayer, but are imposed by law.

RULING

The Supreme Court ruled in favor of COA.

A taxpayer may not offset taxes due from the claims that he may have against the government. Taxes
cannot be the subject of compensation because the government and taxpayer are not mutual creditors
and debtors of each other, and a claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set off. Too, Caltex's position that the OPSF contributions are not for public purpose is
untenable.

The SC said that axation is no longer envisioned as a measure merely to raise revenue to support the
existence of the government; taxes may be levied with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry, which is affected with public interest as to be
within the police power of the state.
FACTS:
In 1989, COA sent a letter to Caltex, directing it to remit its collection to the Oil Price Stabilization Fund (OPSF),
excluding that unremitted for the years 1986 and 1988, of the additional tax on petroleum products authorized under
the PD 1956. Pending such remittance, all of its claims for reimbursement from the OPSF shall be held in abeyance.
The grant total of its unremitted collections of the above tax is P1,287,668,820.
Caltex submitted a proposal to COA for the payment and the recovery of claims. COA approved the proposal but
prohibited Caltex from further offsetting remittances and reimbursements for the current and ensuing years. Caltex
moved for reconsideration but was denied. Hence, the present petition.

ISSUE:
Whether the amounts due from Caltex to the OPSF may be offsetted against Caltex’s outstanding claims from said
funds

RULING:
No. Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of government.
Taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a
threatened industry which is affected with public interest as to be within the police power of the State.
PD 1956, as amended by EO 137, explicitly provides that the source of OPSF is taxation. A taxpayer may not offset
taxes due from the claims he may have against the government. Taxes cannot be subject of compensation because
the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a
debt, demand,, contract or judgment as is allowed to be set-off.
Hence, COA decision is affirmed except that Caltex’s claim for reimbursement of underrecovery arising from sales to
the National Power Corporation is allowed.

9. G.R. No. L-36081 April 24, 1989

PROGRESSIVE DEVELOPMENT CORPORATION, petitioner , vs. QUEZON CITY, respondent.

On 24 December 1969, the City Council of respondent Quezon City adopted Ordinance No. 7997,
Series of 1969, otherwise known as the Market Code of Quezon City, Section 3 of which provided:

Sec. 3. Supervision Fee.- Privately owned and operated public markets shall submit
monthly to the Treasurer's Office, a certified list of stallholders showing the amount of
stall fees or rentals paid daily by each stallholder, ... and shall pay 10% of the gross
receipts from stall rentals to the City, ... , as supervision fee. Failure to submit said
list and to pay the corresponding amount within the period herein prescribed shall
subject the operator to the penalties provided in this Code ... including revocation of
permit to operate. ... .1

The Market Code was thereafter amended by Ordinance No. 9236, Series of 1972, on 23 March
1972, which reads:

SECTION 1. There is hereby imposed a five percent (5 %) tax on gross receipts on

rentals or lease of space in privately-owned public markets in Quezon City.

xxx xxx xxx

SECTION 3. For the effective implementation of this Ordinance, owners of privately

owned public markets shall submit ... a monthly certified list of stallholders of lessees
of space in their markets showing ... :
 a. name of stallholder or lessee;

b. amount of rental;

c. period of lease, indicating therein whether the same is on a daily, monthly or yearly
basis.

xxx xxx xxx

SECTION 4. ... In case of consistent failure to pay the percentage tax for the (3)
consecutive months, the City shall revoke the permit of the privately-owned market to
operate and/or take any other appropriate action or remedy allowed by law for the
collection of the overdue percentage tax and surcharge.

xxx xxx xxx 2

On 15 July 1972, petitioner Progressive Development Corporation, owner and operator of a public
market known as the "Farmers Market & Shopping Center" filed a Petition for Prohibition with
Preliminary Injunction against respondent before the then Court of First Instance of Rizal on the
ground that the supervision fee or license tax imposed by the above-mentioned ordinances is in
reality a tax on income which respondent may not impose, the same being expressly prohibited by
Republic Act No. 2264, as amended.

In its Answer, respondent, through the City Fiscal, contended that it had authority to enact the
questioned ordinances, maintaining that the tax on gross receipts imposed therein is not a tax on
income. The Solicitor General also filed an Answer arguing that petitioner, not having paid the ten
percent (10%) supervision fee prescribed by Ordinance No. 7997, had no personality to question,
and was estopped from questioning, its validity; that the tax on gross receipts was not a tax on
income but one imposed for the enjoyment of the privilege to engage in a particular trade or
business which was within the power of respondent to impose.

In its Supplemental Petition of 23 September 1972, petitioner alleged having paid under protest the
five percent (5%) tax under Ordinance No. 9236 for the months of June to September 1972. Two (2)
days later, on 25 September 1972, petitioner moved for judgment on the pleadings, alleging that the
material facts had been admitted by the parties.

On 21 October 1972, the lower court dismissed the petition, ruling 3 that the questioned imposition is not a tax on
income, but rather a privilege tax or license fee which local governments, like respondent, are empowered to impose and collect.

Having failed to obtain reconsideration of said decision, petitioner came to us on the present Petition
for Review.

The only issue to be resolved here is whether the tax imposed by respondent on gross receipts of
stall rentals is properly characterized as partaking of the nature of an income tax or, alternatively, of
a license fee.

We begin with the fact that Section 12, Article III of Republic Act No. 537, otherwise known as the
Revised Charter of Quezon City, authorizes the City Council:

xxx xxx xxx

 (b) To provide for the levy and collection of taxes and other city revenues and apply
the same to the payment of city expenses in accordance with appropriations.

(c) To tax, fix the license fee, and regulate the business of the following:

... preparation and sale of meat, poultry, fish, game, butter, cheese, lard vegetables,
bread and other provisions. 4

The scope of legislative authority conferred upon the Quezon City Council in respect of businesses like that of the petitioner, is
comprehensive: the grant of authority is not only" [to] regulate" and "fix the license fee," but also " to tax" 5

Moreover, Section 2 of Republic Act No. 2264, as amended, otherwise known as the Local Autonomy Act, provides that:

Any provision of law to the contrary notwithstanding, all chartered

cities, municipalities and municipal districts shall have authority to impose municipal
license taxes or fees upon persons engaged in any occupation or business, or
exercising privileges in chartered cities, municipalities or municipal districts by
requiring them to secure licenses at rates fixed by the municipal board or city council
of the city, the municipal council of the municipality, or the municipal district council of
the municipal district; to collect fees and charges for service rendered by the city,
municipality or municipal district; to regulate and impose reasonable fees for services
rendered in connection with any business, profession or occupation being conducted
within the city, municipality or municipal district and otherwise to levy for public
purposes just and uniform taxes licenses or fees: ... 6

It is now settled that Republic Act No. 2264 confers upon local governments broad taxing authority
extending to almost "everything, excepting those which are mentioned therein," provided that the tax
levied is "for public purposes, just and uniform," does not transgress any constitutional provision and
is not repugnant to a controlling statute. 7 Both the Local Autonomy Act and the Charter of respondent clearly show that
respondent is authorized to fix the license fee collectible from and regulate the business of petitioner as operator of a privately-owned public
market.

Petitioner, however, insist that the "supervision fee" collected from rentals, being a return from
capital invested in the construction of the Farmers Market, practically operates as a tax on income,
one of those expressly excepted from respondent's taxing authority, and thus beyond the latter's
competence. Petitioner cites the same Section 2 of the Local Autonomy Act which goes on to state: 8

... Provided, however, That no city, municipality or municipal district may levy or
impose any of the following:

xxx xxx xxx

(g) Taxes on income of any kind whatsoever;

The term "tax" frequently applies to all kinds of exactions of monies which become public funds. It is
often loosely used to include levies for revenue as well as levies for regulatory purposes such that
license fees are frequently called taxes although license fee is a legal concept distinguishable
from tax: the former is imposed in the exercise of police power primarily for purposes of regulation,
while the latter is imposed under the taxing power primarily for purposes of raising revenues. 9 Thus, if
the generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary
purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax. 10
To be considered a license fee, the imposition questioned must relate to an occupation or activity
that so engages the public interest in health, morals, safety and development as to require regulation
for the protection and promotion of such public interest; the imposition must also bear a reasonable
relation to the probable expenses of regulation, taking into account not only the costs of direct
regulation but also its incidental consequences as well. 11 When an activity, occupation or profession is of such a
character that inspection or supervision by public officials is reasonably necessary for the safeguarding and furtherance of public health,
morals and safety, or the general welfare, the legislature may provide that such inspection or supervision or other form of regulation shall be
carried out at the expense of the persons engaged in such occupation or performing such activity, and that no one shall engage in the
occupation or carry out the activity until a fee or charge sufficient to cover the cost of the inspection or supervision has been
paid. 12 Accordingly, a charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held to be a tax
rather than an exercise of the police power. 13

In the case at bar, the "Farmers Market & Shopping Center" was built by virtue of Resolution No. 7350 passed on 30 January 1967 by
respondents's local legislative body authorizing petitioner to establish and operate a market with a permit to sell fresh meat, fish, poultry and
other foodstuffs. 14 The same resolution imposed upon petitioner, as a condition for continuous operation, the obligation to "abide by and
comply with the ordinances, rules and regulations prescribed for the establishment, operation and maintenance of markets in Quezon
City." 15

The "Farmers' Market and Shopping Center" being a public market in the' sense of a market open to
and inviting the patronage of the general public, even though privately owned, petitioner's operation
thereof required a license issued by the respondent City, the issuance of which, applying the
standards set forth above, was done principally in the exercise of the respondent's police
power. 16 The operation of a privately owned market is, as correctly noted by the Solicitor General, equivalent to or quite the same as the
operation of a government-owned market; both are established for the rendition of service to the general public, which warrants close
supervision and control by the respondent City, 17 for the protection of the health of the public by insuring, e.g., the maintenance of sanitary
and hygienic conditions in the market, compliance of all food stuffs sold therein with applicable food and drug and related standards, for the
prevention of fraud and imposition upon the buying public, and so forth.

We believe and so hold that the five percent (5%) tax imposed in Ordinance No. 9236 constitutes,
not a tax on income, not a city income tax (as distinguished from the national income tax imposed by
the National Internal Revenue Code) within the meaning of Section 2 (g) of the Local Autonomy Act,
but rather a license tax or fee for the regulation of the business in which the petitioner is engaged.
While it is true that the amount imposed by the questioned ordinances may be considered in
determining whether the exaction is really one for revenue or prohibition, instead of one of regulation
under the police power, 18 it nevertheless will be presumed to be reasonable. Local' governments are allowed wide discretion in
determining the rates of imposable license fees even in cases of purely police power measures, in the absence of proof as to particular
municipal conditions and the nature of the business being taxed as well as other detailed factors relevant to the issue of arbitrariness or
unreasonableness of the questioned rates. 19 Thus:

[A]n ordinance carries with it the presumption of validity. The question of

reasonableness though is open to judicial inquiry. Much should be left thus to the
discretion of municipal authorities. Courts will go slow in writing off an ordinance as
unreasonable unless the amount is so excessive as to be prohibitory, arbitrary,
unreasonable, oppressive, or confiscatory. A rule which has gained acceptance is
that factors relevant to such an inquiry are the municipal conditions as a whole and
the nature of the business made subject to imposition. 20

Petitioner has not shown that the rate of the gross receipts tax is so unreasonably large and
excessive and so grossly disproportionate to the costs of the regulatory service being performed by
the respondent as to compel the Court to characterize the imposition as a revenue measure
exclusively. The lower court correctly held that the gross receipts from stall rentals have been used
only as a basis for computing the fees or taxes due respondent to cover the latter's administrative
expenses, i.e., for regulation and supervision of the sale of foodstuffs to the public. The use of the
gross amount of stall rentals as basis for determining the collectible amount of license tax, does not
by itself, upon the one hand, convert or render the license tax into a prohibited city tax on income.
Upon the other hand, it has not been suggested that such basis has no reasonable relationship to
the probable costs of regulation and supervision of the petitioner's kind of business. For, ordinarily,
the higher the amount of stall rentals, the higher the aggregate volume of foodstuffs and related
items sold in petitioner's privately owned market; and the higher the volume of goods sold in such
private market, the greater the extent and frequency of inspection and supervision that may be
reasonably required in the interest of the buying public. Moreover, what we started with should be
recalled here: the authority conferred upon the respondent's City Council is not merely "to regulate"
but also embraces the power "to tax" the petitioner's business.

Finally, petitioner argues that respondent is without power to impose a gross receipts tax for revenue
purposes absent an express grant from the national government. As a general rule, there must be a
statutory grant for a local government unit to impose lawfully a gross receipts tax, that unit not
having the inherent power of taxation. 21 The rule, however, finds no application in the instant case where what is involved is
an exercise of, principally, the regulatory power of the respondent City and where that regulatory power is expressly accompanied by the
taxing power.

ACCORDINGLY, the Decision of the then Court of First Instance of Rizal, Quezon City, Branch 18,
is hereby AFFIRMED and the Court Resolved to DENY the Petition for lack of merit.

SO ORDERED.

Facts:

On December 24, 1969, the City Council of Quezon City adopted Ordinance No. 7997,
otherwise known as the Market Code of Quezon City, where privately owned and operated
public markets were imposed a 5% supervision fee on gross receipts on rentals/lease of privately
owned market spaces in the city.

On July 15, 1972, Progressive Development Corporation (Progressive), owner and operator of a
public market known as the “Farmers Market & Shopping Center” filed a Petition for Prohibition
with Preliminary Injunction against Quezon City on the ground that the supervision fee or license
tax imposed is in reality a tax on income which Quezon City may not impose, the same being
expressly prohibited by Republic Act No. 2264, as amended, otherwise known as the Local
Autonomy Act.

In its Answer, Quezon City, through the City Fiscal, contended that it had authority to enact the
questioned ordinances, maintaining that the tax on gross receipts imposed therein is not a tax on
income.

The lower court ruled that the questioned imposition is not a tax on income, but rather a privilege
tax or license fee which local governments, like Quezon City, are empowered to impose and
collect.

ISSUE:

Whether the tax imposed by Quezon City on gross receipts of stall rentals is properly
characterized as partaking of the nature of an income tax.

HELD:
No. It is a license fee for the regulation of the business in which Progressive is engaged. The
controverted ordinance constitutes, not a tax on income, not a city income tax (as distinguished
from the national income tax imposed by the National Internal Revenue Code) within the
meaning of Section 2 (g) of the Local Autonomy Act. While it is true that the amount imposed
by the questioned ordinances may be considered in determining whether the exaction is really
one for revenue or prohibition, instead of one of regulation under the police power, it
nevertheless will be presumed to be reasonable.

Notes: LOCAL GOVERNMENT UNITS; NO INHERENT POWER TO TAX. — As a general

rule, there must be a statutory grant for a local government unit to impose lawfully a gross
receipts tax, that unit not having the inherent power of taxation. The rule, however, finds no
application in the instant case where what is involved is an exercise of, principally, the
regulatory power of the respondent City and where that regulatory power is expressly
accompanied by the taxing power.