First Philippine Industrial Corporation vs.

Court of
Appeals
G.R. No. 125948. December 29, 1998
FIRST
PHILIPPINE
INDUSTRIAL
CORPORATION,
petitioner, vs. COURT OF APPEALS, HONORABLE
PATERNO V. TAC-AN, BATANGAS CITY and ADORACION
C. ARELLANO, in her official capacity as City Treasurer
of Batangas, respondents.
Contracts; Common Carriers; A common carrier is
one who holds himself out to the public as engaged in
the business of transporting persons or property from
place to place, for compensation, offering his services
to the public generally.There is merit in the petition.
A common carrier may be defined, broadly, as one
who holds himself out to the public as engaged in the
business of transporting persons or property from place
to place, for compensation, offering his services to the
public generally. Article 1732 of the Civil Code defines
a common carrier as any person, corporation, firm
or association engaged in the business of carrying or
transporting passengers or goods or both, by land,
water, or air, for compensation, offering their services
to the public.
Same; Same; Test for determining whether a party is a
common carrier of goods.The test for determining
whether a party is a common carrier of goods is: 1. He
must be engaged in the business of carrying goods for
others as a public employment, and must hold himself
out as ready to engage in the transportation of goods
for person generally as a business and not as a casual
occupation; 2. He must undertake to carry goods of the
kind to which his business is confined; 3. He must
undertake to carry by the method by which his
business is conducted and over his established roads;
and 4. The transportation must be for hire.
Same; Same; The fact that petitioner has a limited
clientele does not exclude it from the definition of a
common carrier.Based on the above definitions and
requirements, there is no doubt that petitioner is a
common carrier. It is engaged in the business of
transporting or carrying goods, i.e. petroleum products,
for hire as a public employment. It undertakes to carry
for all persons indifferently, that is, to all persons who
choose to employ its services, and transports the
goods by land and for compensation. The fact that
petitioner has a limited clientele does not exclude it
from the definition of a common carrier.
Same; Same; Words and Phrases; The definition of
common carriers in the Civil Code makes no
distinction as to the means of transporting, as long as
it is by land, water or air.As correctly pointed out by
petitioner, the definition of common carriers in the
Civil Code makes no distinction as to the means of
transporting, as long as it is by land, water or air. It
does not provide that the transportation of the
passengers or goods should be by motor vehicle. In
fact, in the United States, oil pipe line operators are
considered common carriers.
Same; Same; Taxation; Legislative intent in excluding
from the taxing power of the local government unit the
imposition of business tax against common carriers is

to prevent a duplication of the so-called common

carriers tax.It is clear that the legislative intent in
excluding from the taxing power of the local
government unit the imposition of business tax against
common carriers is to prevent a duplication of the socalled common carriers tax. Petitioner is already
paying three (3%) percent common carriers tax on its
gross sales/earnings under the National Internal
Revenue Code. To tax petitioner again on its gross
receipts in its transportation of petroleum business
would defeat the purpose of the Local Government
Code.
PETITION for review on certiorari of a decision of the
Court of Appeals.
The facts are stated in the opinion of the Court.
Quiason, Makalintal, Barot, Torres & Ibarra for
petitioner.
Teodulfo A. Deguito for respondents.
MARTINEZ, J.:
This petition for review on certiorari assails the
Decision of the Court of Appeals dated November 29,
1995, in CA-G.R. SP No. 36801, affirming the decision
of the Regional Trial Court of Batangas City, Branch 84,
in Civil Case No. 4293, which dismissed petitioners
complaint for a business tax refund imposed by the
City of Batangas.
Petitioner is a grantee of a pipeline concession under
Republic Act No. 387, as amended, to contract, install
and operate oil pipelines. The original pipeline
concession was granted in 19671 and renewed by the
Energy Regulatory Board in 1992.2
Sometime in January 1995, petitioner applied for a
mayors permit with the Office of the Mayor of
Batangas City. However, before the mayors permit
could be issued, the respondent City Treasurer required
petitioner to pay a local tax based on its gross receipts
for the fiscal year 1993 pursuant to the Local
Government Code.3 The respondent City Treasurer
assessed a business tax on the petitioner amounting to
P956,076.04 payable in four installments based on the
gross receipts for products pumped at GPS-1 for the
fiscal year 1993 which amounted to P181,681,151.00.
In order not to hamper its operations, petitioner paid
the tax under protest in the amount of P239,019.01 for
the first quarter of 1993.
On January 20, 1994, petitioner filed a letter-protest
addressed to the respondent City Treasurer, the
pertinent portion of which reads:
Please note that our Company (FPIC) is a pipeline
operator with a government concession granted under
the Petroleum Act. It is engaged in the business of
transporting petroleum products from the Batangas
refineries, via pipeline, to Sucat and JTF Pandacan
Terminals. As such, our Company is exempt from
paying tax on gross receipts under Section 133 of the
Local Government Code of 1991 x x x x
Moreover, Transportation contractors are not included
in the enumeration of contractors under Section 131,

Paragraph (h) of the Local Government Code.

Therefore, the authority to impose tax on contractors
and other independent contractors under Section 143,
Paragraph (e) of the Local Government Code does not
include the power to levy on transportation
contractors.
The imposition and assessment cannot be categorized
as a mere fee authorized under Section 147 of the
Local Government Code. The said section limits the
imposition of fees and charges on business to such
amounts as may be commensurate to the cost of
regulation, inspection, and licensing. Hence, assuming
arguendo that FPIC is liable for the license fee, the
imposition thereof based on gross receipts is violative
of the aforecited provision. The amount of P956,076.04
(P239,019.01 per quarter) is not commensurate to the
cost of regulation, inspection and licensing. The fee is
already a revenue raising measure, and not a mere
regulatory imposition.4
On March 8, 1994, the respondent City Treasurer
denied the protest contending that petitioner cannot
be considered engaged in transportation business, thus
it cannot claim exemption under Section 133 (j) of the
Local Government Code.5
On June 15, 1994, petitioner filed with the Regional
Trial Court of Batangas City a complaint6 for tax refund
with prayer for writ of preliminary injunction against
respondents City of Batangas and Adoracion Arellano in
her capacity as City Treasurer. In its complaint,
petitioner alleged, inter alia, that: (1) the imposition
and collection of the business tax on its gross receipts
violates Section 133 of the Local Government Code; (2)
the authority of cities to impose and collect a tax on
the gross receipts of contractors and independent
contractors under Sec. 141 (e) and 151 does not
include the authority to collect such taxes on
transportation contractors for, as defined under Sec.
131 (h), the term contractors excludes transportation
contractors; and, (3) the City Treasurer illegally and
erroneously imposed and collected the said tax, thus
meriting the immediate refund of the tax paid.7
Traversing the complaint, the respondents argued that
petitioner cannot be exempt from taxes under Section
133 (j) of the Local Government Code as said
exemption applies only to transportation contractors
and persons engaged in the transportation by hire and
common carriers by air, land and water. Respondents
assert that pipelines are not included in the term
common carrier which refers solely to ordinary
carriers such as trucks, trains, ships and the like.
Respondents further posit that the term common
carrier under the said code pertains to the mode or
manner by which a product is delivered to its
destination.8
On October 3, 1994, the trial court rendered a decision
dismissing the complaint, ruling in this wise:
x x x Plaintiff is either a contractor or other
independent contractor.
x x x the exemption to tax claimed by the plaintiff has
become unclear. It is a rule that tax exemptions are to
be strictly construed against the taxpayer, taxes being

the lifeblood of the government. Exemption may

therefore be granted only by clear and unequivocal
provisions of law.
Plaintiff claims that it is a grantee of a pipeline
concession under Republic Act 387, (Exhibit A) whose
concession was lately renewed by the Energy
Regulatory Board (Exhibit B). Yet neither said law nor
the deed of concession grant any tax exemption upon
the plaintiff.
Even the Local Government Code imposes a tax on
franchise holders under Sec. 137 of the Local Tax Code.
Such being the situation obtained in this case
(exemption being unclear and equivocal) resort to
distinctions or other considerations may be of help:
1. That the exemption granted under Sec. 133 (j)
encompasses only common carriers so as not to
overburden the riding public or commuters with taxes.
Plaintiff is not a common carrier, but a special carrier
extending its services and facilities to a single specific
or special customer under a special contract.
2. The Local Tax Code of 1992 was basically enacted to
give more and effective local autonomy to local
governments than the previous enactments, to make
them economically and financially viable to serve the
people and discharge their functions with a
concomitant obligation to accept certain devolution of
powers, x x x So, consistent with this policy even
franchise grantees are taxed (Sec. 137) and
contractors are also taxed under Sec. 143 (e) and 151
of the Code.9
Petitioner assailed the aforesaid decision before this
Court via a petition for review. On February 27, 1995,
we referred the case to the respondent Court of
Appeals for consideration and adjudication.10 On
November 29, 1995, the respondent court rendered a
decision11 affirming the trial courts dismissal of
petitioners
complaint.
Petitioners
motion
for
reconsideration was denied on July 18, 1996.12
Hence, this petition. At first, the petition was denied
due course in a Resolution dated November 11,
1996.13 Petitioner moved for a reconsideration which
was granted by this Court in a Resolution14 of January
22, 1997. Thus, the petition was reinstated.
Petitioner claims that the respondent Court of Appeals
erred in holding that (1) the petitioner is not a common
carrier or a transportation contractor, and (2) the
exemption sought for by petitioner is not clear under
the law.
There is merit in the petition.
A common carrier may be defined, broadly, as one
who holds himself out to the public as engaged in the
business of transporting persons or property from place
to place, for compensation, offering his services to the
public generally.
Article 1732 of the Civil Code defines a common
carrier as any person, corporation, firm or
association engaged in the business of carrying or
transporting passengers or goods or both, by land,

water, or air, for compensation, offering their services

to the public.
The test for determining whether a party is a common
carrier of goods is:
1. He must be engaged in the business of carrying
goods for others as a public employment, and must
hold himself out as ready to engage in the
transportation of goods for person generally as a
business and not as a casual occupation;
2. He must undertake to carry goods of the kind to
which his business is confined;
3. He must undertake to carry by the method by which
his business is conducted and over his established
roads; and
4. The transportation must be for hire.15
Based on the above definitions and requirements,
there is no doubt that petitioner is a common carrier. It
is engaged in the business of transporting or carrying
goods, i.e. petroleum products, for hire as a public
employment. It undertakes to carry for all persons
indifferently, that is, to all persons who choose to
employ its services, and transports the goods by land
and for compensation. The fact that petitioner has a
limited clientele does not exclude it from the definition
of a common carrier. In De Guzman vs. Court of
Appeals16 we ruled that:
The above article (Art. 1732, Civil Code) makes no
distinction between one whose principal business
activity is the carrying of persons or goods or both, and
one who does such carrying only as an ancillary
activity (in local idiom, as a sideline). Article 1732 x x
x avoids making any distinction between a person or
enterprise offering transportation service on a regular
or scheduled basis and one offering such service on an
occasional, episodic or unscheduled basis. Neither does
Article 1732 distinguish between a carrier offering its
services to the general public, i.e., the general
community or population, and one who offers services
or solicits business only from a narrow segment of the
general population. We think that Article 1877
deliberately refrained from making such distinctions.
So understood, the concept of common carrier under
Article 1732 may be seen to coincide neatly with the
notion of public service, under the Public Service Act
(Commonwealth Act No. 1416, as amended) which at
least partially supplements the law on common carriers
set forth in the Civil Code. Under Section 13, paragraph
(b) of the Public Service Act, public service includes:
every person that now or hereafter may own, operate,
manage, or control in the Philippines, for hire or
compensation, with general or limited clientele,
whether permanent, occasional or accidental, and done
for general business purposes, any common carrier,
railroad, street railway, traction railway, subway motor
vehicle, either for freight or passenger, or both, with or
without fixed route and whatever may be its
classification, freight or carrier service of any class,
express service, steamboat, or steamship line,
pontines, ferries and water craft, engaged in the
transportation of passengers or freight or both,

shipyard, marine repair shop, wharf or dock, ice plant,

ice-refrigeration plant, canal, irrigation system gas,
electric light heat and power, water supply and power
petroleum, sewerage system, wire or wireless
communications systems, wire or wireless broadcasting
stations and other similar public services. (Italics
supplied)
Also, respondents argument that the term common
car-rier as used in Section 133 (j) of the Local
Government Code refers only to common carriers
transporting goods and passengers through moving
vehicles or vessels either by land, sea or water, is
erroneous.
As correctly pointed out by petitioner, the definition of
common carriers in the Civil Code makes no
distinction as to the means of transporting, as long as
it is by land, water or air. It does not provide that the
transportation of the passengers or goods should be by
motor vehicle. In fact, in the United States, oil pipe line
operators are considered common carriers.17
Under the Petroleum Act of the Philippines (Republic
Act 387), petitioner is considered a common carrier.
Thus, Article 86 thereof provides that:
Art. 86. Pipe line concessionaire as common carrier.
A pipe line shall have the preferential right to utilize
installations for the transportation of petroleum owned
by him, but is obligated to utilize the remaining
transportation capacity pro rata for the transportation
of such other petroleum as may be offered by others
for transport, and to charge without discrimination
such rates as may have been approved by the
Secretary of Agriculture and Natural Resources.
Republic Act 387 also regards petroleum operation as a
public utility. Pertinent portion of Article 7 thereof
provides:
that everything relating to the exploration for and
exploitation of petroleum x x x and everything relating
to the manufacture, refining, storage, or transportation
by special methods of petroleum, is hereby declared to
be a public utility. (Italics Supplied)
The Bureau of Internal Revenue likewise considers the
petitioner a common carrier. In BIR Ruling No. 06983, it declared:
x x x since [petitioner] is a pipeline concessionaire
that is engaged only in transporting petroleum
products, it is considered a common carrier under
Republic Act No. 387 x x x. Such being the case, it is
not subject to withholding tax prescribed by Revenue
Regulations No. 13-78, as amended.
From the foregoing disquisition, there is no doubt that
petitioner is a common carrier and, therefore,
exempt from the business tax as provided for in
Section 133 (j), of the Local Government Code, to wit:
Section 133. Common Limitations on the Taxing
Powers of Local Government Units.Unless otherwise
provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall
not extend to the levy of the following:

xxx

xxx

xxx

(j) Taxes on the gross receipts of transportation

contractors and persons engaged in the transportation
of passengers or freight by hire and common carriers
by air, land or water, except as provided in this Code.
The deliberations conducted in the House of
Representatives on the Local Government Code of
1991 are illuminating:
MR. AQUINO (A.). Thank you, Mr. Speaker.
Mr. Speaker, we would like to proceed to page 95, line
1. It states: SEC. 121 [now Sec. 131]. Common
Limitations on the Taxing Powers of Local Government
Units. x x x
MR. AQUINO (A.). Thank you, Mr. Speaker.
Still on page 95, subparagraph 5, on taxes on the
business of transportation. This appears to be one of
those being deemed to be exempted from the taxing
powers of the local government units. May we know
the reason why the transportation business is being
excluded from the taxing powers of the local
government units?
MR. JAVIER (E.). Mr. Speaker, there is an exception
contained in Section 121 (now Sec. 131), line 16,
paragraph 5. It states that local government units may
not impose taxes on the business of transportation,
except as otherwise provided in this code.
Now, Mr. Speaker, if the Gentleman would care to go to
page 98 of Book II, one can see there that provinces
have the power to impose a tax on business enjoying a
franchise at the rate of not more than one-half of 1
percent of the gross annual receipts. So, transportation
contractors who are enjoying a franchise would be
subject to tax by the province. That is the exception,
Mr. Speaker.
What we want to guard against here, Mr. Speaker, is
the imposition of taxes by local government units on
the carrier business. Local government units may
impose taxes on top of what is already being imposed
by the National Internal Revenue Code which is the socalled common carriers tax. We do not want a
duplication of this tax, so we just provided for an
exception under Section 125 [now Sec. 137] that a
province may impose this tax at a specific rate.
MR. AQUINO (A.). Thank you for that clarification, Mr.
Speaker. x x x18
It is clear that the legislative intent in excluding from
the taxing power of the local government unit the
imposition of business tax against common carriers is
to prevent a duplication of the so-called common
carriers tax.
Petitioner is already paying three (3%) percent
common carriers tax on its gross sales/earnings under
the National Internal Revenue Code.19 To tax petitioner
again on its gross receipts in its transportation of
petroleum business would defeat the purpose of the
Local Government Code.

WHEREFORE, the petition is hereby GRANTED. The

decision of the respondent Court of Appeals dated
November 29, 1995 in CA-G.R. SP No. 36801 is
REVERSED and SET ASIDE.
SO ORDERED.
Bellosillo (Chairman), Puno and Mendoza, JJ., concur.
Petition granted, judgment reversed and set aside.
Notes.It has been held that the true test of a
common carrier is the carriage of passengers or goods,
provided it has space, for all who opt to avail
themselves, its transportation service for a fee.
(National Steel Corporation vs. Court of Appeals, 283
SCRA 45 [1997])
The rights and obligations of a private carrier and a
shipper, including their respective liability for damage
to the cargo, are determined primarily by stipulations
in their contract of private carriage or charter party.
(Id.)

No. L-23645. October 29, 1968.

BENJAMIN P. GOMEZ, petitioner-appellee, vs. ENRICO
PALOMAR, in his capacity as Postmaster General; HON.
BRIGIDO R. VALENCIA, in his capacity as Secretary of
Public Works and Communications and DOMINGO
GOPEZ, in his capacity as Acting Postmaster of San
Fernando, Pampanga, respondents-appellants.
Declaratory relief; Remedy cannot be availed of if there
has been breach of statute before filing of action.The
prime specification of an action for declaratory relief is
that it must be brought "before breach or violation" of
the statute has been committed. Rule 64, section 1 so
provides. Section 6 of the same rule, which allows the
court to treat an action for declaratory relief as an
ordinary action, applies only if the breach or violation
occurs after the filing' of the action but before the
termination thereof. If there has been a breach of the
statute before the filing of the action, the remedy of
declaratory relief cannot be availed of, much less can
the suit be converted into an ordinary action.
Constitutional law; Statutory construction; Anti-TB
Stamp Law; Not violative of equal protection clause of
the Constitution.It is claimed that Republic Act 1635,
as amended, otherwise known as the Anti-TB Stamp
Law, is violative of the equal protection clause of the
Constitution because it constitutes mail users into a
class f or the purpose of the tax while leaving untaxed
the rest of the population and that even among postal
patrons the statute discriminatorily grants exemptions.
Held: It is settled that the legislature has the inherent
power to select the subjects of taxation and to grant
exemptions. The classification of mail users is based on
the ability to pay, the enjoyment of a privilege and on
administrative convenience. Tax exemptions have
never been thought of as raising issues under the
equal protection clause.
Same; Same; Same; Passed for a public purpose.The
eradication of a dreaded disease is a public purpose,
but if by public purpose the petitioner means benefit to

a taxpayer as a return for what he pays, then it is

sufficient answer to say that the only benefit to which
the taxpayer is constitutionally entitled is that derived
from his enjoyment of the privileges of living in an
organized society, established and safeguarded by the
devotion of taxes to public purposes.
Same; Same; Same; Imposition of flat rate does not
violate rule of uniformity and equality of taxation.The
imposition of a flat rate rather than a graduated tax
does not infringe the rule of uniformity and equality of
taxation. A tax need not be measured by the weight of
the mail or the extent of the service rendered.
Considerations of administrative convenience and cost
afford an adequate ground for classification. The same
considerations may induce the legislature to impose a
flat tax which in effect is a charge for the transaction,
operating equally on all persons with the class
regardless of the amount involved.
Same; Same; Same; The issuance of administrative
orders by the Postmaster General with the approval of
the Secretary of Public Works and Communications to
implement the Anti-TB Stamp Law does not amount to
undue delegation of legislative power.It is true that
the law does not expressly authorize the collection of
five centavos except through the sale of anti-TB
stamps, but such authority may be implied in so far as
it may be necessary to prevent a failure of the
undertaking. The authority given to the Postmaster
General to raise f unds through the mails must be
liberally construed, consistent with the principle that
where the end is required the appropriate means is
given.
Anti-TB Stamp Law; Money raised from the sales of the
anti-TB stamps not for the benefit of the Philippine
Tuberculosis Society.The Society is not really the
beneficiary but only the agency through which the
State acts in carrying out what is essentially a public
function. The money is treated as a special fund and as
such need not be appropriated by law.
Same; Five centavo charge levied by Republic Act 1635
an excise tax.The f ive centavo charge levied by
Republic Act 1635, as amended, is in the nature of an
excise tax, laid upon the exercise of a privilege, the
privilege of using the mails.
APPEAL from a judgment of the Court of First Instance
of Pampanga. Pasicolan, J.
The facts are stated in the opinion of the Court.
Lorenzo P. Navarro and Narvaro Belar S. Navarro for
petitioner-appellee.
Solicitor General Arturo A. Alafriz, Assistant Solicitor
General Frine C. Zaballero and Solicitor Dominador L.
Quiroz for respondents-appellants.
CASTRO, J.:
This appeal puts in issue the constitutionality of
Republic Act 1635,1 as amended by Republic Act
2631,2 which provides as follows:
"To help raise funds for the Philippine Tuberculosis
Society, the Director of Posts shall order for the period

from August nineteen to September thirty every year

the printing and issue of semi-postal stamps of
different denominations with face value showing the
regular postage charge plus the additional amount of
five centavos for the said purpose, and during the said
period, no mail matter shall be accepted in the mails
unless it bears such semi-postal stamps: Provided, That
no such additional charge of f ive centavos shall be
imposed on newspapers. The additional proceeds
realized from the sale of the semi-postal stamps shall
constitute a special fund and be deposited with the
National Treasury to be expended by the Philippine
Tuberculosis Society in carrying out its noble work to
prevent and eradicate tuberculosis."
The respondent Postmaster General, in implementation
of the law, thereafter issued f our (4) administrative
orders numbered 3 (June 20, 1958), 7 (August 9, 1958),
9 (August 28, 1958), and 10 (July 15, 1960). All these
administrative orders were issued with the approval of
the respondent Secretary of Public Works and
Communications.
The pertinent portions of Adm. Order 3 read as follows:
"Such semi-postal stamps could not be made available
during the period from August 19 to September 30,
1957, for lack of time. However, two denominations of
such stamps, one at '5 + 5' centavos and another at
'10 + 5' centavos, will soon be released for use by the
public on their mails to be posted during the same
period starting with the year 1958.
x

"During the period from August 19 to September 30

each year starting in 1958, no mail matter of whatever
class, and whether domestic or foreign, posted at any
Philippine Post Office and addressed for delivery in this
country or abroad, shall be accepted for mailing unless
it bears at least one such semi-postal stamp showing
the additional value of five centavos intended for the
Philippine Tuberculosis Society.
"In the case of second-class mails and mails prepaid by
means of mail permits or impressions of postage
meters, each piece of such mail shall bear at least one
such semi-postal stamp if posted during the period
above stated starting with the year 1958, in addition to
being charged the usual postage prescribed by existing
regulations. In the case of business reply envelopes
and cards mailed during said period, such stamp
should be collected from the addressees at the time of
delivery. Mails entitled to franking privilege like those
from the office of the President, members of Congress,
and other offices to which such privilege has been
granted, shall each also bear one such semi-postal
stamp if posted during the said period.
"Mail posted during the said period starting in 1958,
which are found in street or post-office mail boxes
without the required semi-postal stamp, shall be
returned to the sender, if known, with a notation calling
for the affixing of such stamp. If the sender is
unknown, the mail matter shall be treated as
nonmailable and forwarded to the Dead Letter Office
for proper disposition."

Adm. Order 7, amending the fifth paragraph of Adm.

Order 3, reads as follows:
"In the case of the f ollowing categories of mail matter
and mails entitled to f ranking privilege which are not
exempted f rom the payment of the five centavos
intended for the Philippine Tuberculosis Society, such
extra charge may be collected in cash, for which official
receipt (General Form No. 13, A) shall be issued,
instead of affixing the semi-postal stamp in the manner
hereinafter indicated:
" '1.Second-class mail.Aside from the postage at the
second-class rate, the extra charge of five centavos for
the Philippine Tuberculosis Society shall be collected on
each separately-addressed piece of second-class mail
matter, and the total sum thus collected shall be
entered in the same official receipt to be issued for the
postage at the second-class rate. In making such entry,
the total number of pieces of second-class mail posted
shall be stated, thus: Total charge for TB Fund on 100
pieces ... P5.00. The extra charge shall be entered
separate from the postage in both of the official receipt
and the Record of Collections.
" '2.First-class and third-class mail permits.Mails to be
posted without postage affixed under permits issued by
this Bureau shall each be charged the usual postage, in
addition to the five-centavo extra charge intended for
said society. The total extra charge thus received shall
be entered in the same official receipt to be issued for
the postage collected, as in subparagraph 1.
" '3.Metered mail.For each piece of mail matter
impressed by postage meter under metered mail
permit issued by this Bureau, the extra charge of five
centavos for said society shall be collected in cash and
an official receipt issued for the total sum thus
received, in the manner indicated in subparagraph 1.
" '4.Business reply cards and envelopes.Upon
delivery of business reply cards and envelopes to
holders of business reply permits, the five-centavo
charge intended for said society shall be collected in
cash on each reply card or envelope delivered, in
addition to the required postage which may also be
paid in cash. An official receipt shall be issued for the
total postage and total extra charge received, in the
manner shown in subparagraph 1.
" '5.Mail entitled to franking privilege.Government
agencies, officials, and other persons entitled to the
franking privilege under existing laws may pay in cash
such extra charge intended for said society, instead of
affixing the semi-postal stamps to their mails, provided
that such mails are presented at the post-office
window, where the five-centavo extra charge for said
society shall be collected on each piece of such mail
matter. In such case, an official receipt -shall be issued
for the total sum thus collected, in the manner stated
in subparagraph 1.
" 'Mail under permits, metered mails and f ranked mails
not presented at the post-office window shall be affixed
with the necessary semi-postal stamps. If found in mail
boxes without such stamps, they shall be treated in the
same way as herein provided for other mails.' "

Adm. Order 9, amending Adm. Order 3, as amended,

exempts
"Government
and its
Agencies and
Instrumentalities Performing Governmental Functions."
Adm. Order 10, amending Adm. Order 3, as amended,
exempts "copies of periodical publications received for
mailing under any class of mail matter, including
newspapers and magazines admitted as second-class
mail."
The FACTS. On September 15, 1963 the petitioner
Benjamin P. Gomez mailed a letter at the post office in
San Fernando, Pampanga. Because this letter,
addressed to a certain Agustin Aquino of 1014
Dagohoy Street, Singalong, Manila did not bear the
special anti-TB stamp required by the statute, it was
returned to the petitioner.
In view of this development. the petitioner brought
thissuit for declaratory relief in the Court of First
Instance of Pampanga, to test the constitutionality of
the statute, as well as the implementing administrative
orders issued, contending that it violates the equal
protection clause of the Constitution as well as the rule
of unif ormity and equality of taxation. The lower court
declared the statute and the orders unconstitutional;
hence this appeal by the respondent postal authorities.
For the reasons set out in this opinion, the judgment
appealed from must be reversed.
I.
Before reaching the merits, we deem it necessary to
dispose of the respondents' contention that declaratory
relief is unavailing because this suit was filed after the
petitioner had committed a breach of the statute.
While conceding that the mailing by the petitioner of a
letter without the additional anti-TB stamp was a
violation of Republic Act 1635, as amended. the trial
court nevertheless refused to dismiss the action on the
ground that under section 6 of Rule 64 of the Rules of
Court, "If before the final termination of the case a
breach or violation of x x x a statute x x x should take
place, the action may thereupon be converted into an
ordinary action."
The prime specification of an action for declaratory
relief is that it must be brought "before breach or
violation" of the statute has been committed. Rule 64,
section 1 so provides. Section 6 of the same rule, which
allows the court to treat an action for declaratory relief
as an ordinary action, applies only if the breach or
violation occurs after the filing of the action but before
the termination thereof.3
Hence, if, as the trial court itself admitted, there had
been a breach of the statute before the filing of this
action, then indeed the remedy of declaratory relief
cannot be availed of, much less can the suit be
converted into an ordinary action.
Nor is there merit in the petitioner's argument that the
mailing of the letter in question did not constitute a
breach of the statute because the statute appears to
he addressed only to postal authorities, The statute, it
is true, in terms provides that "no mail matter shall be
accepted in the mails unless it bears such semi-postal
stamps." It does not follow, however, that only postal

authorities can be guilty of violating it by accepting

mails without the payment of the anti-TB stamp. It is
obvious that they can be guilty of violating the statute
only if there are people who use the mails without
paying for the additional antiTB stamp. Just as in
bribery the mere offer constitutes a breach of the law,
so in the matter of the anti-TB stamp the mere attempt
to use the mails without the stamp constitutes a
violation of the statute. It is not required that the mail
be accepted by postal authorities, That requirement is
relevant only for the purpose of fixing the liability of
postal officials.
Nevertheless, we are of the view that the petitioner's
choice of remedy is correct because this suit was filed
not only with respect to the letter which he mailed on
September 15, 1963, but also with regard to any other
mail that he might sent in the future, Thus, in his
complaint, the petitioner prayed that due course be
given to "other mails without the semi-postal stamps
which he may deliver for mailing x x x if any, during
the period covered by Republic Act 1635, as amended,
as well as other mails hereafter to be sent by or to
other mailers which bear the required postage, without
collection of additional charge of five centavos
prescribed by the same Republic Act." As one whose
mail was returned, the petitioner is certainly interested
in a ruling on the validity of the statute requiring the
use of additional stamps.
II.
We now consider the constitutional objections raised
against the statute and the implementing orders.
1. It is said that the statute is violative of the equal
protection clause of the Constitution. More specifically
the claim is made that it constitutes mail users into a
class f or the purpose of the tax while leaving untaxed
the rest of the population and that even among postal
patrons the statute discriminatorily grants exemption
to newspapers while Administrative Order 9 of the
respondent Postmaster General grants a similar
exemption to offices performing- governmental
functions.
The five centavo charge levied by Republic Act 1635,
as amended, is in the nature of an excise tax, laid upon
the exercise of a privilege, namely, the privilege of
using the mails. As such the objections levelled against
it must be viewed in the light of applicable principles of
taxation.
To begin with, it is settled that the legislature has the
inherent power to select the subjects of taxation and to
grant exemptions.4 This power has aptly been
described as "of wide range and flexibility."'' Indeed, it
is said that in the field of taxation, more than in other
areas, the legislature possesses the greatest freedom
in classification." The reason for this is that
traditionally, classification has been a device for fitting
tax programs to local needs and usages in order to
achieve an equitable distribution of the tax burden.7
That legislative classifications must be reasonable is of
course undenied. But what the petitioner asserts is that
statutory classification of mail users must bear some
reasonable relationship to the end sought to be

attained, and that absent such relationship the

selection
of
mail
users
is
constitutionally
impermissible.
This
is
altogether
a
different
proposition. As explained in Commonwealth v. Life
Assurance Co.8
"While the principle that there must be a reasonable
relationship between classification made by the
legislation and its purpose is undoubtedly true in 'some
contexts, it has no application to a measure whose sole
purpose is to raise revenue x x x. So long as the classif
ication imposed is based upon some standard capable
of reasonable comprehension, be that standard based
upon ability to produce revenue or some other
legitimate distinction, equal protection of the law has
been afforded. See Allied Stores of Ohio, Inc. v. Bowers,
supra, 358 U.S. at 527, 79 S. Ct. at 441; Brown Forman
Co. v. Commonwealth of Kentucky, 2d U.S. 563, 573, 80
S. Ct. 578, 580 (1910)."
We are not wont to invalidate legislation on equal
protection
grounds
except
by
the
clearest
demonstration
that
it
sanctions
invidious
discrimination, which is all that the Constitution
forbids. The remedy for unwise legislation must be
sought in the legislature. Now, the classification of mail
users is not without any reason. It is based on ability to
pay, let alone the enjoyment of a privilege, and on
administrative convenience. In the allocation of the tax
burden, Congress must have concluded that the
contribution to the anti-TB fund can best be assured by
those who can afford the use of the mails.
The classification is likewise based on considerations of
administrative convenience. For it is now a settled
principle of law that "considerations of practical
administrative
convenience
and
cost
in
the
administration of tax laws afford adequate grounds for
imposing a tax on a well recognized and defined
class."9 In the case of the anti-TB stamps, undoubtedly,
the single most important and influential consideration
that led the legislature to select mail users as subjects
of the tax is the relative ease and convenience of
collecting the tax through the post offices. The small
amount of five centavos does not justify the great
expense and inconvenience of collecting through the
regular means of collection. On the other hand, by
placing the duty of collection on postal authorities the
tax was made almost self-enforcing, with as little cost
and as little inconvenience as possible.
And then of course it is not accurate to say that the
statute constituted mail users into a class. Mail users
were already a class by themselves even before the
enactment of the statute and all that the legislature did
was merely to select their class. Legislation is
essentially empiric and Republic Act 1635, as
amended, no more than reflects a distinction that
exists in fact. As Mr. Justice Frankfurter said, "to
recognize differences that exist in fact is living law; to
disregard [them] and concentrate on some abstract
identities is lifeless logic."10
Granted the power to select the subject of taxation, the
State's power to grant exemption must likewise be
conceded as a necessary corollary. Tax exemptions are
too common in the law; they have never been thought
of as raising Issues under the equal protection clause.

It is thus erroneous for the trial court to hold that

because certain mail users are exempted from the levy
the law and administrative officials have sanctioned an
invidious discrimination offensive to the Constitution.
The application of the lower court's theory would
require all mail users to be taxed, a conclusion that is
hardly tenable in the light of differences in status of
mail users. The Constitution does not require this kind
of equality.
As the United States Supreme Court has said, the
legislature may withhold the burden of the tax in order
to foster what it conceives to be a beneficent
enterprise.11 This is the case of newspapers which,
under the amendment introduced by Republic Act
2631, are exempt from the payment of the additional
stamp.
As for the Government and its instrumentalities, their
exemption rests on the State's sovereign immunity
from taxation. The State cannot be taxed without its
consent and such consent, being in derogation of its
sovereignty,
is
to
be
strictly
construed.12
Administrative Order 9 of the respondent Postmaster
General, which lists the various offices and
instrumentalities of the Government exempt from the
payment of the anti-TB stamp, is but a restatement of
this well-known principle of constitutional law.
The trial court likewise held the law invalid on the
ground that it singles out tuberculosis to the exclusion
of other diseases which, it is said, are -equally a
menace to public health. But it is never a requirement
of equal protection that all evils of the same genus be
eradicated or none at all." As this Court has had
occasion to say, "if the law presumably hits the evil
where it is most felt, it is not to be overthrown because
there are other instances to which it might have been
applied."14
2. The petitioner further argues that the tax in question
is invalid, first, because it is not levied for a public
purpose as no special benefits accrue to mail users as
taxpayers, and second, because it violates the rule of
uniformity in taxation.
The eradication of a dreaded disease is a public
purpose, but if by public purpose the petitioner means
benefit to a taxpayer as a return for what he pays, then
it is sufficient answer to say that the only benefit to
which the taxpayer is constitutionally entitled is that
derived from his enjoyment of the privileges of living in
an organized society, established and safeguarded by
the devotion of taxes to public purposes. Any other
view would preclude the levying of taxes except as
they are used to compensate for the burden on those
who pay them and would involve the abandonment of
the most fundamental principle of governmentthat it
exists primarily to provide for the common good.15
Nor is the rule of uniformity and equality of taxation
infringed by the imposition of a flat rate rather than a
graduated tax. A tax need not be measured by the
weight of the mail or the extent of the service
rendered. We have said that considerations of
administrative convenience and cost afford an
adequate ground for classification. The same
considerations may induce the legislature to impose a

flat tax which in effect is a charge for the transaction,

operating equally on all persons with the class
regardless of the amount involved.16 As Mr. Justice
Holmes said in sustaining the validity of a stamp act
which imposed a flat rate of two cents on every $100
face value of stock transferred:
"One of the stocks was worth $30.75 a share of the
face value of $100, the other $172. The inequality of
the tax, so far as actual values are concerned, is
manifest. But, here again equality in this sense has to
yield to practical considerations and usage. There must
be a f ixed and indisputable mode of ascertaining a
stamp tax. In another sense, moreover, there is
equality. When the taxes on two sales are 'equal, the
same number of shares is sold in each case; that is to
say, the same privilege is used to the same extent.
Valuation is not the only thing to be considered. As was
pointed out by the court of appeals, the familiar stamp
tax of 2 cents on checks, irrespective of income or
earning capacity, and many others, illustrate the
necessity and practice of sometimes substituting count
for weight x x x."17
According to the trial court, the money raised from the
sales of the anti-TB stamps is spent f or the benef it of
the Philippine Tuberculosis Society, a private
organization, without appropriation by law. But as the
Solicitor General points out, the Society is not really
the beneficiary but only the agency through which the
State acts in carrying out what is essentially a public
function. The money is treated as a special fund and as
such need not be appropriated by law.18
3. Finally, the claim is made that the statute is so
broadly drawn that to execute it the respondents had
to issue administrative orders far beyond their powers.
Indeed, this is one of the grounds on which the lower
court invalidated Republic Act 1631, as amended,
namely, that it constitutes an undue delegation of
legislative power.
Administrative Order 3, as amended by Administrative
Orders 7 and 10, provides that for certain classes of
mail matters (such as mail permits, metered mails,
business reply cards, etc.), the five-centavo charge
may be paid in cash instead of the purchase of the antiTB stamp. It further states that mails deposited during
the period August 19 to September 30 of each year in
mail boxes without the stamp should be returned to the
sender, if known, otherwise they should be treated as
nonmailable.
It is true that the law does not expressly authorize the
collection of f ive centavos except through the sale of
anti-TB stamps, but such authority may be implied in
so far as it may be necessary to prevent a failure of the
undertaking. The authority given to the Postmaster
General to raise funds through the mails must be
liberally construed, consistent with the principle that
where the end is required the appropriate means are
given.19
The anti-TB stamp is a distinctive stamp which shows
on its face not only the amount of the additional
charge but also that of the regular postage. In the case
of business reply cards, for instance, it is obvious that
to require mailers to affix the anti-TB stamp on their

cards would be to make them pay much more because

the cards likewise bear the amount of the regular
postage.
It is likewise true that the statute does not provide for
the disposition of mails which do not bear the antiTB
stamp, but a declaration therein that "no mail matter
shall be accepted in the mails unless it bears such
semipostal stamp" is a declaration that such mail
matter is nonmailable within the meaning of section
1952 of the Administrative Code. Administrative Order
7 of the Postmaster General is but a restatement of the
law for the guidance of postal officials and employees.
As for Administrative Order 9, we have already said
that in listing the offices and entities of the
Government exempt from the payment of the stamp,
the respondent Postmaster General merely observed
an established principle, namely, that the Government
is exempt from taxation.
ACCORDINGLY, the judgment a quo is reversed, and the
complaint is dismissed, without pronouncement as to
costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal,
Sanchez, Angeles and Capistrano, JJ., concur.
Fernando, J., concurs in a separate opinion.
Zaldivar, J., is on leave.
Notes.See the annotation on "'Scope and Limitations
of Declaratory Judgments," 4 SCRA 823-833.
With respect to the question of equal protection of the
laws and unif ormity of taxation, see the notes under
Ormoc Sugar Company, Inc. vs. Treasurer of Ormoc
City, L-23794, Feb. 17, 1968, 22 SCRA 608, for other
recent cases. See also Pepsi-Cola Bottling Co. of the
Philippines, Inc. vs. City of Butuan, L-22814, Aug. 28,
1968, 24 SCRA 789.

G.R. No. 167330.September 18, 2009.*

PHILIPPINE HEALTH CARE PROVIDERS, INC., petitioner,
vs.
COMMISSIONER
OF
INTERNAL
REVENUE,
respondent.
Statutory Construction; It is a cardinal rule in statutory
construction that no word, clause sentence, provision
or part of a statute shall be considered surplusage or
superfluous, meaningless, void and insignificant.It is
a cardinal rule in statutory construction that no word,
clause, sentence, provision or part of a statute shall be
considered surplusage or superfluous, meaningless,
void and insignificant. To this end, a construction which
renders every word operative is preferred over that
which makes some words idle and nugatory. This
principle is expressed in the maxim Ut magis valeat
quam pereat, that is, we choose the interpretation
which gives effect to the whole of the statuteits
every word.
Health Maintenance Organizations; Various courts in
the United States, whose jurisprudence has a
persuasive effect on our decisions, have determined
that Health Maintenance Organizations (HMOs) are not

in the insurance business.Various courts in the United

States, whose jurisprudence has a persuasive effect on
our decisions, have determined that HMOs are not in
the insurance business. One test that they have
applied is whether the assumption of risk and
indemnification of loss (which are elements of an
insurance business) are the principal object and
purpose of the organization or whether they are merely
incidental to its business. If these are the principal
objectives, the business is that of insurance. But if they
are merely incidental and service is the principal
purpose, then the business is not insurance. Applying
the principal object and purpose test, there is
significant American case law supporting the argument
that a corporation (such as an HMO, whether or not
organized for profit), whose main object is to provide
the members of a group with health services, is not
engaged in the insurance business.
Insurance Law; Even if petitioner assumes the risk of
paying the cost of these services even if significantly
more than what the member has prepaid, it
nevertheless cannot be considered as being engaged
in the insurance business.The mere presence of risk
would be insufficient to override the primary purpose
of the business to provide medical services as needed,
with payment made directly to the provider of these
services. In short, even if petitioner assumes the risk of
paying the cost of these services even if significantly
more than what the member has prepaid, it
nevertheless cannot be considered as being engaged
in the insurance business.
Administrative Agencies; It is well-settled that the
interpretation of an administrative agency which is
tasked to implement a statute is accorded great
respect and ordinarily controls the interpretation of
laws by the courts.It is significant that petitioner, as
an HMO, is not part of the insurance industry. This is
evident from the fact that it is not supervised by the
Insurance Commission but by the Department of
Health. In fact, in a letter dated September 3, 2000,
the Insurance Commissioner confirmed that petitioner
is not engaged in the insurance business. This
determination of the commissioner must be accorded
great weight. It is well-settled that the interpretation of
an administrative agency which is tasked to implement
a statute is accorded great respect and ordinarily
controls the interpretation of laws by the courts. The
reason behind this rule was explained in Nestl
Philippines, Inc. v. Court of Appeals, 203 SCRA 504
(1991): The rationale for this rule relates not only to
the emergence of the multifarious needs of a modern
or modernizing society and the establishment of
diverse administrative agencies for addressing and
satisfying those needs; it also relates to the
accumulation of experience and growth of specialized
capabilities by the administrative agency charged with
implementing a particular statute. In Asturias Sugar
Central, Inc. vs. Commissioner of Customs, 29 SCRA
617 (1969) the Court stressed that executive officials
are presumed to have familiarized themselves with all
the considerations pertinent to the meaning and
purpose of the law, and to have formed an
independent, conscientious and competent expert
opinion thereon. The courts give much weight to the
government agency officials charged with the
implementation of the law, their competence,

expertness, experience and informed judgment, and

the fact that they frequently are the drafters of the law
they interpret.
Taxation; Tax laws may not be extended by implication
beyond the clear import of their language, nor their
operation enlarged so as to embrace matters not
specifically provided.In construing this provision, we
should be guided by the principle that tax statutes are
strictly construed against the taxing authority. This is
because taxation is a destructive power which
interferes with the personal and property rights of the
people and takes from them a portion of their property
for the support of the government. Hence, tax laws
may not be extended by implication beyond the clear
import of their language, nor their operation enlarged
so as to embrace matters not specifically provided.
Contracts; Insurance Law; Even if a contract contains
all the elements of a contract, if its primary purpose is
the rendering of service; it is not a contract of
insurance.In our jurisdiction, a commentator of our
insurance laws has pointed out that, even if a contract
contains all the elements of an insurance contract, if its
primary purpose is the rendering of service, it is not a
contract of insurance: It does not necessarily follow
however, that a contract containing all the four
elements mentioned above would be an insurance
contract. The primary purpose of the parties in making
the contract may negate the existence of an insurance
contract. For example, a law firm which enters into
contracts with clients whereby in consideration of
periodical payments, it promises to represent such
clients in all suits for or against them, is not engaged in
the insurance business. Its contracts are simply for the
purpose of rendering personal services. On the other
hand, a contract by which a corporation, in
consideration of a stipulated amount, agrees at its own
expense to defend a physician against all suits for
damages for malpractice is one of insurance, and the
corporation will be deemed as engaged in the business
of insurance. Unlike the lawyers retainer contract, the
essential purpose of such a contract is not to render
personal services, but to indemnify against loss and
damage resulting from the defense of actions for
malpractice.
Same; Same; Although risk is a primary element of an
insurance contract, it is not necessarily true that risk
alone is sufficient to establish it.Although risk is a
primary element of an insurance contract, it is not
necessarily true that risk alone is sufficient to establish
it. Almost anyone who undertakes a contractual
obligation always bears a certain degree of financial
risk. Consequently, there is a need to distinguish
prepaid service contracts (like those of petitioner) from
the usual insurance contracts.
Health Maintenance Organizations; Documentary
Stamp Tax; If it had been the intent of the legislature to
impose Documentary Stamp Tax (DST) on health care
agreements, it could have done so in clear and
categorical terms.We can clearly see from these two
histories (of the DST on the one hand and HMOs on the
other) that when the law imposing the DST was first
passed, HMOs were yet unknown in the Philippines.
However, when the various amendments to the DST
law were enacted, they were already in existence in

the Philippines and the term had in fact already been

defined by RA 7875. If it had been the intent of the
legislature to impose DST on health care agreements,
it could have done so in clear and categorical terms. It
had many opportunities to do so. But it did not. The
fact that the NIRC contained no specific provision on
the DST liability of health care agreements of HMOs at
a time they were already known as such, belies any
legislative intent to impose it on them. As a matter of
fact, petitioner was assessed its DST liability only on
January 27, 2000, after more than a decade in the
business as an HMO.
Taxation; The power to tax is an incident of
sovereignty
and
is
unlimited
in
its
range,
acknowledging in its very nature no limits, so that
security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax
on the constituency who is to pay it.As a general
rule, the power to tax is an incident of sovereignty and
is unlimited in its range, acknowledging in its very
nature no limits, so that security against its abuse is to
be found only in the responsibility of the legislature
which imposes the tax on the constituency who is to
pay it. So potent indeed is the power that it was once
opined that the power to tax involves the power to
destroy. Petitioner claims that the assessed DST to
date which amounts to P376 million is way beyond its
net worth of P259 million. Respondent never disputed
these assertions. Given the realities on the ground,
imposing the DST on petitioner would be highly
oppressive. It is not the purpose of the government to
throttle private business. On the contrary, the
government ought to encourage private enterprise.
Petitioner, just like any concern organized for a lawful
economic activity, has a right to maintain a legitimate
business. As aptly held in Roxas, et al. v. CTA, et al., 23
SCRA 276 (1968): The power of taxation is sometimes
called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill
the hen that lays the golden egg.
Same; Documentary Stamp Tax; We held in a recent
case that Documentary Stamp Tax (DST) is one of the
taxes covered by the tax amnesty program under RA
9480.We held in a recent case that DST is one of the
taxes covered by the tax amnesty program under RA
9480. There is no other conclusion to draw than that
petitioners liability for DST for the taxable years 1996
and 1997 was totally extinguished by its availment of
the tax amnesty under RA 9480.
Judgments; When a minute resolution denies or
dismisses a petition for failure to comply with formal
and substantive requirements, the challenged decision,
together with its findings of fact and legal conclusions
are deemed sustained.It is true that, although
contained in a minute resolution, our dismissal of the
petition was a disposition of the merits of the case.
When we dismissed the petition, we effectively
affirmed the CA ruling being questioned. As a result,
our ruling in that case has already become final. When
a minute resolution denies or dismisses a petition for
failure to comply with formal and substantive
requirements, the challenged decision, together with

its findings of fact and legal conclusions, are deemed

sustained. But what is its effect on other cases?
Health Maintenance Organizations; Taxation; Taking
into account that health care agreements are clearly
not within the ambit of Section 185 of the National
Internal Revenue Code (NIRC) and there was never any
legislative intent to impose the same on Health
Maintenance Organization (HMO) like petitioner, the
same should not be arbitrarily and unjustly included in
its coverage.Taking into account that health care
agreements are clearly not within the ambit of Section
185 of the NIRC and there was never any legislative
intent to impose the same on HMOs like petitioner, the
same should not be arbitrarily and unjustly included in
its coverage. It is a matter of common knowledge that
there is a great social need for adequate medical
services at a cost which the average wage earner can
afford. HMOs arrange, organize and manage health
care treatment in the furtherance of the goal of
providing a more efficient and inexpensive health care
system made possible by quantity purchasing of
services and economies of scale. They offer
advantages over the pay-for-service system (wherein
individuals are charged a fee each time they receive
medical services), including the ability to control costs.
They protect their members from exposure to the high
cost of hospitalization and other medical expenses
brought about by a fluctuating economy. Accordingly,
they play an important role in society as partners of
the State in achieving its constitutional mandate of
providing its citizens with affordable health services.
MOTION FOR RECONSIDERATION and SUPPLEMENTAL
MOTION FOR RECONSIDERATION of a decision of the
Supreme Court.
The facts are stated in the resolution of the Court.
Divina & Uy Law Offices for petitioner.
Litigation and Prosecution Division for respondent.
RESOLUTION
CORONA,J.:
ARTICLEII
Declaration of Principles and State Policies
Section15.The State shall protect and promote the
right to health of the people and instill health
consciousness among them.
ARTICLEXIII
Social Justice and Human Rights
Section11.The State shall adopt an integrated and
comprehensive approach to health development which
shall endeavor to make essential goods, health and
other social services available to all the people at
affordable cost. There shall be priority for the needs of
the underprivileged sick, elderly, disabled, women, and
children. The State shall endeavor to provide free
medical care to paupers.1

For resolution are a motion for reconsideration and

supplemental motion for reconsideration dated July 10,
2008 and July 14, 2008, respectively, filed by petitioner
Philippine Health Care Providers, Inc.2
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary
purpose is [t]o establish, maintain, conduct and
operate a prepaid group practice health care delivery
system or a health maintenance organization to take
care of the sick and disabled persons enrolled in the
health care plan and to provide for the administrative,
legal, and financial responsibilities of the organization.
Individuals enrolled in its health care programs pay an
annual membership fee and are entitled to various
preventive, diagnostic and curative medical services
provided by its duly licensed physicians, specialists and
other professional technical staff participating in the
group practice health delivery system at a hospital or
clinic owned, operated or accredited by it.
Philippine Health Care Providers Inc. vs. Commission on
Internal Revenue
xxxxxxxxx
On January 27, 2000, respondent Commissioner of
Internal Revenue [CIR] sent petitioner a formal demand
letter and the corresponding assessment notices
demanding the payment of deficiency taxes, including
surcharges and interest, for the taxable years 1996
and 1997 in the total amount of P224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)]
assessment was imposed on petitioners health care
agreement with the members of its health care
program pursuant to Section 185 of the 1997 Tax Code
xxxx.
xxxxxxxxx
Petitioner protested the assessment in a letter dated
February 23, 2000. As respondent did not act on the
protest, petitioner filed a petition for review in the
Court of Tax Appeals (CTA) seeking the cancellation of
the deficiency VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision, the
dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant
Petition for Review is PARTIALLY GRANTED. Petitioner is
hereby ORDERED to PAY the deficiency VAT amounting
to P22,054,831.75 inclusive of 25% surcharge plus 20%
interest from January 20, 1997 until fully paid for the
1996 VAT deficiency and P31,094,163.87 inclusive of
25% surcharge plus 20% interest from January 20,
1998 until fully paid for the 1997 VAT deficiency.
Accordingly, VAT Ruling No. [231]-88 is declared void
and without force and effect. The 1996 and 1997
deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED
to DESIST from collecting the said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of
Appeals (CA)] insofar as it cancelled the DST

assessment. He claimed that petitioners health care

agreement was a contract of insurance subject to DST
under Section 185 of the 1997 Tax Code.

(e)Assuming arguendo that petitioners agreements

are contracts of indemnity, they are not those
contemplated under Section 185.

On August 16, 2004, the CA rendered its decision. It

held that petitioners health care agreement was in the
nature of a non-life insurance contract subject to DST.

(f)Assuming arguendo that petitioners agreements

are akin to health insurance, health insurance is not
covered by Section 185.

WHEREFORE, the petition for review is GRANTED.

The Decision of the Court of Tax Appeals, insofar as it
cancelled and set aside the 1996 and 1997 deficiency
documentary stamp tax assessment and ordered
petitioner to desist from collecting the same is
REVERSED and SET ASIDE.

(g)The agreements do not fall under the phrase

other branch of insurance mentioned in Section 185.

Respondent is ordered to pay the amounts of

P55,746,352.19 and P68,450,258.73 as deficiency
Documentary Stamp Tax for 1996 and 1997,
respectively, plus 25% surcharge for late payment and
20% interest per annum from January 27, 2000,
pursuant to Sections 248 and 249 of the Tax Code, until
the same shall have been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied
it. Hence, petitioner filed this case.
xxxxxxxxx
In a decision dated June 12, 2008, the Court denied the
petition and affirmed the CAs decision. We held that
petitioners health care agreement during the pertinent
period was in the nature of non-life insurance which is
a contract of indemnity, citing Blue Cross Healthcare,
Inc. v. Olivares3 and Philamcare Health Systems, Inc. v.
CA.4 We also ruled that petitioners contention that it is
a health maintenance organization (HMO) and not an
insurance company is irrelevant because contracts
between
companies
like
petitioner
and
the
beneficiaries under their plans are treated as insurance
contracts. Moreover, DST is not a tax on the business
transacted but an excise on the privilege, opportunity
or facility offered at exchanges for the transaction of
the business.
Unable to accept our verdict, petitioner filed the
present motion for reconsideration and supplemental
motion for reconsideration, asserting the following
arguments:
(a)The DST under Section 185 of the National Internal
Revenue of 1997 is imposed only on a company
engaged in the business of fidelity bonds and other
insurance policies. Petitioner, as an HMO, is a service
provider, not an insurance company.
(b)The Court, in dismissing the appeal in CIR v.
Philippine National Bank, affirmed in effect the CAs
disposition that health care services are not in the
nature of an insurance business.
(c)Section 185 should be strictly construed.
(d)Legislative intent to exclude health care
agreements from items subject to DST is clear,
especially in the light of the amendments made in the
DST law in 2002.

(h)The June 12, 2008 decision should only apply

prospectively.
(i)Petitioner availed of the tax amnesty benefits
under RA5 9480 for the taxable year 2005 and all prior
years. Therefore, the questioned assessments on the
DST are now rendered moot and academic.6
Oral arguments were held in Baguio City on April 22,
2009. The parties submitted their memoranda on June
8, 2009.
In its motion for reconsideration, petitioner reveals for
the first time that it availed of a tax amnesty under RA
94807 (also known as the Tax Amnesty Act of 2007)
by fully paying the amount of P5,127,149.08
representing 5% of its net worth as of the year ending
December 31, 2005.8
We find merit in petitioners motion for reconsideration.
Petitioner was formally registered and incorporated
with the Securities and Exchange Commission on June
30, 1987.9 It is engaged in the dispensation of the
following medical services to individuals who enter into
health care agreements with it:
Preventive medical services such as periodic
monitoring of health problems, family planning
counseling, consultation and advices on diet, exercise
and other healthy habits, and immunization;
Diagnostic medical services such as routine physical
examinations, x-rays, urinalysis, fecalysis, complete
blood count, and the like and
Curative medical services which pertain to the
performing of other remedial and therapeutic
processes in the event of an injury or sickness on the
part of the enrolled member.10
Individuals enrolled in its health care program pay an
annual membership fee. Membership is on a year-toyear basis. The medical services are dispensed to
enrolled members in a hospital or clinic owned,
operated or accredited by petitioner, through
physicians, medical and dental practitioners under
contract with it. It negotiates with such health care
practitioners regarding payment schemes, financing
and other procedures for the delivery of health
services. Except in cases of emergency, the
professional services are to be provided only by
petitioners physicians, i.e. those directly employed by
it11
also provides hospital services such as room and
board accommodation, laboratory services, operating
rooms, x-ray facilities and general nursing care.13 If

and when a member avails of the benefits under the

agreement, petitioner pays the participating physicians
and other health care providers for the services
rendered, at pre-agreed rates.14
To avail of petitioners health care programs, the
individual members are required to sign and execute a
standard health care agreement embodying the terms
and conditions for the provision of the health care
services. The same agreement contains the various
health care services that can be engaged by the
enrolled member, i.e., preventive, diagnostic and
curative medical services. Except for the curative
aspect of the medical service offered, the enrolled
member may actually make use of the health care
services being offered by petitioner at any time.
Health Maintenance Organizations Are
Not Engaged In The Insurance Business
We said in our June 12, 2008 decision that it is
irrelevant that petitioner is an HMO and not an insurer
because its agreements are treated as insurance
contracts and the DST is not a tax on the business but
an excise on the privilege, opportunity or facility used
in the transaction of the business.15
_______________

12 This is referred to as the Group Practice Model

wherein the HMO contracts with a private practice
group to provide health services to its members. (Id.,
at pp. 268, 271, 592.) Thus, it is both a service provider
and a service contractor. It is a service provider when it
directly provides the health care services through its
salaried employees. It is a service contractor when it
contracts with third parties for the delivery of health
services to its members.
Petitioner, however, submits that it is of critical
importance to characterize the business it is engaged
in, that is, to determine whether it is an HMO or an
insurance company, as this distinction is indispensable
in turn to the issue of whether or not it is liable for DST
on its health care agreements.16
A second hard look at the relevant law and
jurisprudence convinces the Court that the arguments
of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of
1997 (NIRC of 1997) provides:
Section185.Stamp tax on fidelity bonds and other
insurance policies.On all policies of insurance or
bonds or obligations of the nature of indemnity for loss,
damage, or liability made or renewed by any person,
association or company or corporation transacting the
business of accident, fidelity, employers liability, plate,
glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life,
marine, inland, and fire insurance), and all bonds,
undertakings, or recognizances, conditioned for the
performance of the duties of any office or position, for
the doing or not doing of anything therein specified,
and on all obligations guaranteeing the validity or

legality of any bond or other obligations issued by any

province, city, municipality, or other public body or
organization, and on all obligations guaranteeing the
title to any real estate, or guaranteeing any mercantile
credits, which may be made or renewed by any such
person, company or corporation, there shall be
collected a documentary stamp tax of fifty centavos
(P0.50) on each four pesos (P4.00), or fractional part
thereof, of the premium charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no
word, clause, sentence, provision or part of a statute
shall be considered surplusage or superfluous,
meaningless, void and insignificant. To this end, a
construction which renders every word operative is
preferred over that which makes some words idle and
nugatory.17 This principle is expressed in the maxim Ut
magis valeat quam pereat, that is, we choose the
interpretation which gives effect to the whole of the
statuteits every word.18
From the language of Section 185, it is evident that two
requisites must concur before the DST can apply,
namely: (1) the document must be a policy of
insurance or an obligation in the nature of indemnity
and (2) the maker should be transacting the business
of accident, fidelity, employers liability, plate, glass,
steam boiler, burglar, elevator, automatic sprinkler, or
other branch of insurance (except life, marine, inland,
and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or
The National Health Insurance Act of 1995), an HMO
is an entity that provides, offers or arranges for
coverage of designated health services needed by plan
members for a fixed prepaid premium.19 The
payments do not vary with the extent, frequency or
type of services provided.
The question is: was petitioner, as an HMO, engaged in
the business of insurance during the pertinent taxable
years? We rule that it was not.
Section 2 (2) of PD20 1460 (otherwise known as the
Insurance Code) enumerates what constitutes doing
an insurance business or transacting an insurance
business:
a)making or proposing to make, as insurer, any
insurance contract;
b)making or proposing to make, as surety, any
contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity
of the surety;
c)doing any kind of business, including a reinsurance
business, specifically recognized as constituting the
doing of an insurance business within the meaning of
this Code;
d)doing or proposing to do any business in substance
equivalent to any of the foregoing in a manner
designed to evade the provisions of this Code.
In the application of the provisions of this Code, the
fact that no profit is derived from the making of
insurance contracts, agreements or transactions or
that no separate or direct consideration is received

therefore, shall not be deemed conclusive to show that

the making thereof does not constitute the doing or
transacting of an insurance business.
Various courts in the United States, whose
jurisprudence has a persuasive effect on our
decisions,21 have determined that HMOs are not in the
insurance business. One test that they have applied is
whether the assumption of risk and indemnification of
loss (which are elements of an insurance business) are
the principal object and purpose of the organization or
whether they are merely incidental to its business. If
these are the principal objectives, the business is that
of insurance. But if they are merely incidental and
service is the principal purpose, then the business is
not insurance.
_______________

21 Our Insurance Code was based on California and

New York laws. When a statute has been adopted from
some other state or country and said statute has
previously been construed by the courts of such state
or country, the statute is deemed to have been
adopted with the construction given. (Prudential
Guarantee and Assurance Inc. v. Trans-Asia Shipping
Lines, Inc., G.R. No. 151890, 20 June 2006, 491 SCRA
411, 439; Constantino v. Asia Life Ins. Co., 87 Phil. 248,
251 [1950]; Gercio v. Sun Life Assurance Co. of
Canada, 48 Phil. 53, 59 [1925]; Cerezo v. Atlantic, Gulf
& Pacific Co., 33 Phil. 425, 428-429 [1916]).
Applying the principal object and purpose test,22
there is significant American case law supporting the
argument that a corporation (such as an HMO, whether
or not organized for profit), whose main object is to
provide the members of a group with health services, is
not engaged in the insurance business.
The rule was enunciated in Jordan v. Group Health
Association23 wherein the Court of Appeals of the
District of Columbia Circuit held that Group Health
Association should not be considered as engaged in
insurance activities since it was created primarily for
the distribution of health care services rather than the
assumption of insurance risk.
xxx Although Group Healths activities may be
considered in one aspect as creating security against
loss from illness or accident more truly they constitute
the quantity purchase of well-rounded, continuous
medical service by its members. xxx The functions of
such an organization are not identical with those of
insurance or indemnity companies. The latter are
concerned primarily, if not exclusively, with risk and
the consequences of its descent, not with service, or its
extension in kind, quantity or distribution; with the
unusual occurrence, not the daily routine of living.
Hazard is predominant. On the other hand, the
cooperative is concerned principally with getting
service rendered to its members and doing so at lower
prices made possible by quantity purchasing and
economies in operation. Its primary purpose is to
reduce the cost rather than the risk of medical care; to
broaden the service to the individual in kind and
quantity; to enlarge the number receiving it; to

regularize it as an everyday incident of living, like

purchasing food and clothing or oil and gas, rather than
merely protecting against the financial loss caused by
extraordinary and unusual occurrences, such as death,
disaster at sea, fire and tornado. It is, in this instance,
to take care of colds, ordinary aches and pains, minor
ills and all the temporary bodily discomforts as well as
the more serious and unusual illness. To summarize,
the distinctive features of the cooperative are the
rendering of service, its extension, the bringing of
physician and patient together, the preventive
features, the regularization of service as well as
payment, the substantial reduction in cost by quantity
purchasing in short, getting the medical job done and
paid for; not, except incidentally to these features, the
indemnification for cost after the services is rendered.
Except the last, these are not distinctive or generally
characteristic of the insurance arrangement. There is,
therefore, a substantial difference between contracting
in this way for the rendering of service, even on the
contingency that it be needed, and contracting merely
to stand its cost when or after it is rendered.
That an incidental element of risk distribution or
assumption may be present should not outweigh all
other factors. If attention is focused only on that
feature, the line between insurance or indemnity and
other types of legal arrangement and economic
function becomes faint, if not extinct. This is especially
true when the contract is for the sale of goods or
services on contingency. But obviously it was not the
purpose of the insurance statutes to regulate all
arrangements for assumption or distribution of risk.
That view would cause them to engulf practically all
contracts, particularly conditional sales and contingent
service agreements. The fallacy is in looking only at the
risk element, to the exclusion of all others present or
their subordination to it. The question turns, not on
whether risk is involved or assumed, but on whether
that or something else to which it is related in the
particular plan is its principal object purpose.24
(Emphasis supplied)
In California Physicians Service v. Garrison,25 the
California court felt that, after scrutinizing the plan of
operation as a whole of the corporation, it was service
rather than indemnity which stood as its principal
purpose.
There is another and more compelling reason for
holding that the service is not engaged in the
insurance
business.
Absence
or
presence
of
assumption of risk or peril is not the sole test to be
applied in determining its status. The question, more
broadly, is whether, looking at the plan of operation as
a whole, service rather than indemnity is its principal
object and purpose. Certainly the objects and purposes
of the corporation organized and maintained by the
California physicians have a wide scope in the field of
social service. Probably there is no more impelling
need than that of adequate medical care on a
voluntary, low-cost basis for persons of small income.
The medical profession unitedly is endeavoring to meet
that need. Unquestionably this is service of a high
order and not indemnity.26(Emphasis supplied)
American courts have pointed out that the main
difference between an HMO and an insurance company

is that HMOs undertake to provide or arrange for the

provision of medical services through participating
physicians
while
insurance
companies
simply
undertake to indemnify the insured for medical
expenses incurred up to a pre-agreed limit. Somerset
Orthopedic Associates, P.A. v. Horizon Blue Cross and
Blue Shield of New Jersey27 is clear on this point:
The basic distinction between medical service
corporations and ordinary health and accident insurers
is that the former undertake to provide prepaid medical
services through participating physicians, thus
relieving subscribers of any further financial burden,
while the latter only undertake to indemnify an insured
for medical expenses up to, but not beyond, the
schedule of rates contained in the policy.
xxxxxxxxx
The primary purpose of a medical service corporation,
however, is an undertaking to provide physicians who
will render services to subscribers on a prepaid basis.
Hence, if there are no physicians participating in the
medical service corporations plan, not only will the
subscribers be deprived of the protection which they
might reasonably have expected would be provided,
but the corporation will, in effect, be doing business
solely as a health and accident indemnity insurer
without having qualified as such and rendering itself
subject to the more stringent financial requirements of
the General Insurance Laws.
A participating provider of health care services is one
who agrees in writing to render health care services to
or for persons covered by a contract issued by health
service corporation in return for which the health
service corporation agrees to make payment directly to
the participating provider.28 (Emphasis supplied)
Consequently, the mere presence of risk would be
insufficient to override the primary purpose of the
business to provide medical services as needed, with
payment made directly to the provider of these
services.29 In short, even if petitioner assumes the risk
of paying the cost of these services even if significantly
more than what the member has prepaid, it
nevertheless cannot be considered as being engaged
in the insurance business.
By the same token, any indemnification resulting from
the payment for services rendered in case of
emergency by non-participating health providers would
still be incidental to petitioners purpose of providing
and arranging for health care services and does not
transform it into an insurer. To fulfill its obligations to its
members under the agreements, petitioner is required
to set up a system and the facilities for the delivery of
such medical services. This indubitably shows that
indemnification is not its sole object.
In fact, a substantial portion of petitioners services
covers preventive and diagnostic medical services
intended to keep members from developing medical
conditions or diseases.30 As an HMO, it is its obligation
to maintain the good health of its members.
Accordingly, its health care programs are designed to
prevent or to minimize the possibility of any
assumption of risk on its part. Thus, its undertaking

under its agreements is not to indemnify its members

against any loss or damage arising from a medical
condition but, on the contrary, to provide the health
and medical services needed to prevent such loss or
damage.31
Overall, petitioner appears to provide insurance-type
benefits to its members (with respect to its curative
medical services), but these are incidental to the
principal activity of providing them medical care. The
insurance-like aspect of petitioners business is
miniscule compared to its noninsurance activities.
Therefore, since it substantially provides health care
services rather than insurance services, it cannot be
considered as being in the insurance business.
It is important to emphasize that, in adopting the
principal purpose test used in the above-quoted U.S.
cases, we are not saying that petitioners operations
are identical in every respect to those of the HMOs or
health providers which were parties to those cases.
What we are stating is that, for the purpose of
determining what doing an insurance business
means, we have to scrutinize the operations of the
business as a whole and not its mere components. This
is of course only prudent and appropriate, taking into
account the burdensome and strict laws, rules and
regulations applicable to insurers and other entities
engaged in the insurance business. Moreover, we are
also not unmindful that there are other American
authorities who have found particular HMOs to be
actually engaged in insurance activities.32
Lastly, it is significant that petitioner, as an HMO, is not
part of the insurance industry. This is evident from the
fact that it is not supervised by the Insurance
Commission but by the Department of Health.33 In
fact, in a letter dated September 3, 2000, the
Insurance Commissioner confirmed that petitioner is
not engaged in the insurance business. This
determination of the commissioner must be accorded
great weight. It is well-settled that the interpretation of
an administrative agency which is tasked to implement
a statute is accorded great respect and ordinarily
controls the interpretation of laws by the courts. The
reason behind this rule was explained in Nestl
Philippines, Inc. v. Court of Appeals:34
The rationale for this rule relates not only to the
emergence of the multifarious needs of a modern or
modernizing society and the establishment of diverse
administrative agencies for addressing and satisfying
those needs; it also relates to the accumulation of
experience and growth of specialized capabilities by
the administrative agency charged with implementing
a particular statute. In Asturias Sugar Central, Inc. vs.
Commissioner of Customs,35 the Court stressed that
executive officials are presumed to have familiarized
themselves with all the considerations pertinent to the
meaning and purpose of the law, and to have formed
an independent, conscientious and competent expert
opinion thereon. The courts give much weight to the
government agency officials charged with the
implementation of the law, their competence,
expertness, experience and informed judgment, and
the fact that they frequently are the drafters of the law
they interpret.36

A Health Care Agreement is Not an Insurance Contract

Contemplated Under Section 185 of the NIRC of 1997
Section 185 states that DST is imposed on all policies
of insurance or obligations of the nature of indemnity
for loss, damage, or liability. In our decision dated
June 12, 2008, we ruled that petitioners health care
agreements are contracts of indemnity and are
therefore insurance contracts:
It is incorrect to say that the health care agreement
is not based on loss or damage because, under the
said agreement, petitioner assumes the liability and
indemnifies its member for hospital, medical and
related expenses (such as professional fees of
physicians). The term loss or damage is broad
enough to cover the monetary expense or liability a
member will incur in case of illness or injury.
Under the health care agreement, the rendition of
hospital, medical and professional services to the
member in case of sickness, injury or emergency or his
availment of so-called out-patient services (including
physical examination, x-ray and laboratory tests,
medical consultations, vaccine administration and
family planning counseling) is the contingent event
which gives rise to liability on the part of the member.
In case of exposure of the member to liability, he would
be entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its
member from liability by paying for expenses arising
from the stipulated contingencies belies its claim that
its services are prepaid. The expenses to be incurred
by each member cannot be predicted beforehand, if
they can be predicted at all. Petitioner assumes the risk
of paying for the costs of the services even if they are
significantly and substantially more than what the
member has prepaid. Petitioner does not bear the
costs alone but distributes or spreads them out among
a large group of persons bearing a similar risk, that is,
among all the other members of the health care
program. This is insurance.37
We reconsider. We shall quote once again the pertinent
portion of Section 185:
Section185.Stamp tax on fidelity bonds and other
insurance policies.On all policies of insurance or
bonds or obligations of the nature of indemnity for loss,
damage, or liability made or renewed by any person,
association or company or corporation transacting the
business of accident, fidelity, employers liability, plate,
glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life,
marine, inland, and fire insurance), xxxx (Emphasis
supplied)
In construing this provision, we should be guided by
the principle that tax statutes are strictly construed
against the taxing authority.38 This is because taxation
is a destructive power which interferes with the
personal and property rights of the people and takes
from them a portion of their property for the support of
the government.39 Hence, tax laws may not be
extended by implication beyond the clear import of
their language, nor their operation enlarged so as to
embrace matters not specifically provided.40

We are aware that, in Blue Cross and Philamcare, the

Court pronounced that a health care agreement is in
the nature of non-life insurance, which is primarily a
contract of indemnity. However, those cases did not
involve the interpretation of a tax provision. Instead,
they dealt with the liability of a health service provider
to a member under the terms of their health care
agreement. Such contracts, as contracts of adhesion,
are liberally interpreted in favor of the member and
strictly against the HMO. For this reason, we reconsider
our ruling that Blue Cross and Philamcare are
applicable here.
Section 2 (1) of the Insurance Code defines a contract
of insurance as an agreement whereby one undertakes
for a consideration to indemnify another against loss,
damage or liability arising from an unknown or
contingent event. An insurance contract exists where
the following elements concur:
1.The insured has an insurable interest;
2.The insured is subject to a risk of loss by the
happening of the designed peril;
3.The insurer assumes the risk;
4. Such assumption of risk is part of a general
scheme to distribute actual losses among a large group
of persons bearing a similar risk and
5.In consideration of the insurers promise, the
insured pays a premium.41
Do the agreements between petitioner and
members possess all these elements? They do not.

its

First.In our jurisdiction, a commentator of our

insurance laws has pointed out that, even if a contract
contains all the elements of an insurance contract, if its
primary purpose is the rendering of service, it is not a
contract of insurance:
It does not necessarily follow however, that a contract
containing all the four elements mentioned above
would be an insurance contract. The primary purpose
of the parties in making the contract may negate the
existence of an insurance contract. For example, a law
firm which enters into contracts with clients whereby in
consideration of periodical payments, it promises to
represent such clients in all suits for or against them, is
not engaged in the insurance business. Its contracts
are simply for the purpose of rendering personal
services. On the other hand, a contract by which a
corporation, in consideration of a stipulated amount,
agrees at its own expense to defend a physician
against all suits for damages for malpractice is one of
insurance, and the corporation will be deemed as
engaged in the business of insurance. Unlike the
lawyers retainer contract, the essential purpose of
such a contract is not to render personal services, but
to indemnify against loss and damage resulting from
the defense of actions for malpractice.42 (Emphasis
supplied)
Second.Not all the necessary elements of a contract
of insurance are present in petitioners agreements. To
begin with, there is no loss, damage or liability on the
part of the member that should be indemnified by

petitioner as an HMO. Under the agreement, the

member pays petitioner a predetermined consideration
in exchange for the hospital, medical and professional
services rendered by the petitioners physician or
affiliated physician to him. In case of availment by a
member of the benefits under the agreement,
petitioner does not reimburse or indemnify the
member as the latter does not pay any third party.
Instead, it is the petitioner who pays the participating
physicians and other health care providers for the
services rendered at pre-agreed rates. The member
does not make any such payment.
In other words, there is nothing in petitioners
agreements that gives rise to a monetary liability on
the part of the member to any third party-provider of
medical services which might in turn necessitate
indemnification from petitioner. The terms indemnify
or indemnity presuppose that a liability or claim has
already been incurred. There is no indemnity precisely
because the member merely avails of medical services
to be paid or already paid in advance at a pre-agreed
price under the agreements.
Third.According to the agreement, a member can
take advantage of the bulk of the benefits anytime,
e.g. laboratory services, x-ray, routine annual physical
examination and consultations, vaccine administration
as well as family planning counseling, even in the
absence of any peril, loss or damage on his or her part.
Fourth.In case of emergency, petitioner is obliged to
reimburse the member who receives care from a nonparticipating physician or hospital. However, this is
only a very minor part of the list of services available.
The assumption of the expense by petitioner is not
confined to the happening of a contingency but
includes incidents even in the absence of illness or
injury.
In Michigan Podiatric Medical Association v. National
Foot Care Program, Inc.,43 although the health care
contracts called for the defendant to partially
reimburse a subscriber for treatment received from a
non-designated doctor, this did not make defendant an
insurer. Citing Jordan, the Court determined that the
primary activity of the defendant (was) the provision of
podiatric services to subscribers in consideration of
prepayment for such services.44 Since indemnity of
the insured was not the focal point of the agreement
but the extension of medical services to the member at
an affordable cost, it did not partake of the nature of a
contract of insurance.
Fifth.Although risk is a primary element of an
insurance contract, it is not necessarily true that risk
alone is sufficient to establish it. Almost anyone who
undertakes a contractual obligation always bears a
certain degree of financial risk. Consequently, there is
a need to distinguish prepaid service
contracts (like those of petitioner) from the usual
insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business
risk when it offers to provide health services: the risk
that it might fail to earn a reasonable return on its
investment. But it is not the risk of the type peculiar

only to insurance companies. Insurance risk, also

known as actuarial risk, is the risk that the cost of
insurance claims might be higher than the premiums
paid. The amount of premium is calculated on the basis
of assumptions made relative to the insured.45
However, assuming that petitioners commitment to
provide medical services to its members can be
construed as an acceptance of the risk that it will shell
out more than the prepaid fees, it still will not qualify
as an insurance contract because petitioners objective
is to provide medical services at reduced cost, not to
distribute risk like an insurer.
In sum, an examination of petitioners agreements with
its members leads us to conclude that it is not an
insurance contract within the context of our Insurance
Code.
There Was no Legislative Intent to Impose
DST on Health Care Agreements of HMOs
Furthermore, militating in convincing fashion against
the imposition of DST on petitioners health care
agreements under Section 185 of the NIRC of 1997 is
the provisions legislative history. The text of Section
185 came into U.S. law as early as 1904 when HMOs
and health care agreements were not even in existence
in this jurisdiction. It was imposed under Section 116,
Article XI of Act No. 1189 (otherwise known as the
Internal Revenue Law of 1904)46 enacted on July
2,1904 and became effective on August 1, 1904.
Except for the rate of tax, Section 185 of the NIRC of
1997 is a verbatim reproduction of the pertinent
portion of Section 116, to wit:
ARTICLEXI
Stamp Taxes on Specified Objects
Section116.There shall be levied, collected, and paid
for and in respect to the several bonds, debentures, or
certificates of stock and indebtedness, and other
documents,
instruments,
matters,
and
things
mentioned and described in this section, or for or in
respect to the vellum, parchment, or paper upon which
such instrument, matters, or things or any of them
shall be written or printed by any person or persons
who shall make, sign, or issue the same, on and after
January first, nineteen hundred and five, the several
taxes following:
xxxxxxxxx
Third xxx (c) on all policies of insurance or bond or
obligation of the nature of indemnity for loss, damage,
or liability made or renewed by any person,
association, company, or corporation transacting the
business of accident, fidelity, employers liability, plate
glass, steam boiler, burglar, elevator, automatic
sprinkle, or other branch of insurance (except life,
marine, inland, and fire insurance) xxxx (Emphasis
supplied)
On February 27, 1914, Act No. 2339 (the Internal
Revenue Law of 1914) was enacted revising and
consolidating the laws relating to internal revenue. The
aforecited pertinent portion of Section 116, Article XI of

Act No. 1189 was completely reproduced as Section 30

(l), Article III of Act No. 2339. The very detailed and
exclusive enumeration of items subject to DST was
thus retained.

known as such, belies any legislative intent to impose

it on them. As a matter of fact, petitioner was assessed
its DST liability only on January 27, 2000, after more
than a decade in the business as an HMO.50

On December 31, 1916, Section 30 (l), Article III of Act

No. 2339 was again reproduced as Section 1604 (l),
Article IV of Act No. 2657 (Administrative Code). Upon
its amendment on March 10, 1917, the pertinent DST
provision became Section 1449 (l) of Act No. 2711,
otherwise known as the Administrative Code of 1917.

Considering that Section 185 did not change since

1904 (except for the rate of tax), it would be safe to
say that health care agreements were never, at any
time, recognized as insurance contracts or deemed
engaged in the business of insurance within the
context of the provision.

Section 1449 (1) eventually became Sec. 222 of

Commonwealth Act No. 466 (the NIRC of 1939), which
codified all the internal revenue laws of the Philippines.
In an amendment introduced by RA 40 on October 1,
1946, the DST rate was increased but the provision
remained substantially the same.

The Power To Tax Is Not

Thereafter, on June 3, 1977, the same provision with

the same DST rate was reproduced in PD 1158 (NIRC of
1977) as Section 234. Under PDs 1457 and 1959,
enacted on June 11, 1978 and October 10, 1984
respectively, the DST rate was again increased.
Effective January 1, 1986, pursuant to Section 45 of PD
1994, Section 234 of the NIRC of 1977 was renumbered
as Section 198. And under Section 23 of EO47 273
dated July 25, 1987, it was again renumbered and
became Section 185.
On December 23, 1993, under RA 7660, Section 185
was amended but, again, only with respect to the rate
of tax.
Notwithstanding the comprehensive amendment of the
NIRC of 1977 by RA 8424 (or the NIRC of 1997), the
subject legal provision was retained as the present
Section 185. In 2004, amendments to the DST
provisions were introduced by RA 924348 but Section
185 was untouched.
On the other hand, the concept of an HMO was
introduced in the Philippines with the formation of
Bancom Health Care Corporation in 1974. The same
pioneer HMO was later reorganized and renamed
Integrated Health Care Services, Inc. (or Intercare).
However, there are those who claim that Health
Maintenance, Inc. is the HMO industry pioneer, having
set foot in the Philippines as early as 1965 and having
been formally incorporated in 1991. Afterwards, HMOs
proliferated quickly and currently, there are 36
registered HMOs with a total enrollment of more than 2
million.49
We can clearly see from these two histories (of the DST
on the one hand and HMOs on the other) that when the
law imposing the DST was first passed, HMOs were yet
unknown in the Philippines. However, when the various
amendments to the DST law were enacted, they were
already in existence in the Philippines and the term
had in fact already been defined by RA 7875. If it had
been the intent of the legislature to impose DST on
health care agreements, it could have done so in clear
and categorical terms. It had many opportunities to do
so. But it did not. The fact that the NIRC contained no
specific provision on the DST liability of health care
agreements of HMOs at a time they were already

The Power To Destroy

As a general rule, the power to tax is an incident of
sovereignty
and
is
unlimited
in
its
range,
acknowledging in its very nature no limits, so that
security against its abuse is to be found only in the
responsibility of the legislature which im
poses the tax on the constituency who is to pay it.51
So potent indeed is the power that it was once opined
that the power to tax involves the power to
destroy.52
Petitioner claims that the assessed DST to date which
amounts to P376 million53 is way beyond its net worth
of P259 million.54 Respondent never disputed these
assertions. Given the realities on the ground, imposing
the DST on petitioner would be highly oppressive. It is
not the purpose of the government to throttle private
business. On the contrary, the government ought to
encourage private enterprise.55 Petitioner, just like any
concern organized for a lawful economic activity, has a
right to maintain a legitimate business.56 As aptly held
in Roxas, et al. v. CTA, et al.:57
The power of taxation is sometimes called also the
power to destroy. Therefore it should be exercised with
caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the hen that lays
the golden egg.58
Legitimate enterprises enjoy the constitutional
protection not to be taxed out of existence. Incurring
losses because of a tax imposition may be an
acceptable consequence but killing the business of an
entity is another matter and should not be allowed. It is
counter-productive and ultimately subversive of the
nations thrust towards a better economy which will
ultimately benefit the majority of our people.59
Petitioners Tax Liability
Was Extinguished Under
the Provisions of RA 9840
Petitioner asserts that, regardless of the arguments,
the DST assessment for taxable years 1996 and 1997
became moot and academic60 when it availed of the
tax amnesty under RA 9480 on December 10, 2007. It
paid P5,127,149.08 representing 5% of its net worth as
of the year ended December 31, 2005 and complied
with all requirements of the tax amnesty. Under Section
6(a) of RA 9480, it is entitled to immunity from

payment of taxes as well as additions thereto, and the

appurtenant civil, criminal or administrative penalties
under the 1997 NIRC, as amended, arising from the
failure to pay any and all internal revenue taxes for
taxable year 2005 and prior years.61
Far from disagreeing with petitioner,
manifested in its memorandum:

respondent

Section 6 of [RA 9840] provides that availment of tax

amnesty entitles a taxpayer to immunity from payment
of the tax involved, including the civil, criminal, or
administrative penalties provided under the 1997
[NIRC], for tax liabilities arising in 2005 and the
preceding years.
In view of petitioners availment of the benefits of [RA
9840], and without conceding the merits of this case as
discussed above, respondent concedes that such tax
amnesty extinguishes the tax liabilities of petitioner.
This admission, however, is not meant to preclude a
revocation of the amnesty granted in case it is found to
have been granted under circumstances amounting to
tax fraud under Section 10 of said amnesty law.62
(Emphasis supplied)
Furthermore, we held in a recent case that DST is one
of the taxes covered by the tax amnesty program
under RA 9480.63 There is no other conclusion to draw
than that petitioners liability for DST for the taxable
years 1996 and 1997 was totally extinguished by its
availment of the tax amnesty under RA 9480.
Is the Court Bound by a Minute
Resolution in Another Case?
Petitioner raises another interesting issue in its motion
for reconsideration: whether this Court is bound by the
ruling of the CA64 in CIR v. Philippine National Bank65
that a health care agreement of Philamcare Health
Systems is not an insurance contract for purposes of
the DST.
In support of its argument, petitioner cites the August
29, 2001 minute resolution of this Court dismissing the
appeal in Philippine National Bank (G.R. No. 148680).66
Petitioner argues that the dismissal of G.R. No. 148680
by minute resolution was a judgment on the merits;
hence, the Court should apply the CA ruling there that
a health care agreement is not an insurance contract.
It is true that, although contained in a minute
resolution, our dismissal of the petition was a
disposition of the merits of the case. When we
dismissed the petition, we effectively affirmed the CA
ruling being questioned. As a result, our ruling in that
case has already become final.67 When a minute
resolution denies or dismisses a petition for failure to
comply with formal and substantive requirements, the
challenged decision, together with its findings of fact
and legal conclusions, are deemed sustained.68 But
what is its effect on other cases?
With respect to the same subject matter and the same
issues concerning the same parties, it constitutes res
judicata.69 However, if other parties or another subject
matter (even with the same parties and issues) is
involved, the minute resolution is not binding

precedent. Thus, in CIR v. Baier-Nickel,70 the Court

noted that a previous case, CIR v. Baier-Nickel71
involving the same parties and the same issues, was
previously disposed of by the Court thru a minute
resolution dated February 17, 2003 sustaining the
ruling of the CA. Nonetheless, the Court ruled that the
previous case ha(d) no bearing on the latter case
because the two cases involved different subject
matters as they were concerned with the taxable
income of different taxable years.72
Besides, there are substantial, not simply formal,
distinctions between a minute resolution and a
decision. The constitutional requirement under the first
paragraph of Section 14, Article VIII of the Constitution
that the facts and the law on which the judgment is
based must be expressed clearly and distinctly applies
only to decisions, not to minute resolutions. A minute
resolution is signed only by the clerk of court by
authority of the justices, unlike a decision. It does not
require the certification of the Chief Justice. Moreover,
unlike decisions, minute resolutions are not published
in the Philippine Reports. Finally, the proviso of Section
4(3) of Article VIII speaks of a decision.73 Indeed, as a
rule, this Court lays down doctrines or principles of law
which constitute binding precedent in a decision duly
signed by the members of the Court and certified by
the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No.
148680 and since petitioners liability for DST on its
health care agreement was not the subject matter of
G.R. No. 148680, petitioner cannot successfully invoke
the minute resolution in that case (which is not even
binding precedent) in its favor. Nonetheless, in view of
the reasons already discussed, this does not detract in
any way from the fact that petitioners health care
agreements are not subject to DST.
(3) Cases or matters heard by a Division shall be
decided or resolved with the concurrence of a majority
of the members who actually took part in the
deliberation on the issues in the case and voted
thereon, and in no case, without the concurrence of at
least three of such members. When the required
number is not obtained, the case shall be decided En
Banc: Provided, that no doctrine or principle of law laid
down by the Court in a decision rendered En Banc or in
Division may be modified or reversed except by the
Court sitting En Banc. (Emphasis supplied)
A Final Note
Taking into account that health care agreements are
clearly not within the ambit of Section 185 of the NIRC
and there was never any legislative intent to impose
the same on HMOs like petitioner, the same should not
be arbitrarily and unjustly included in its coverage.
It is a matter of common knowledge that there is a
great social need for adequate medical services at a
cost which the average wage earner can afford. HMOs
arrange, organize and manage health care treatment in
the furtherance of the goal of providing a more
efficient and inexpensive health care system made
possible by quantity purchasing of services and
economies of scale. They offer advantages over the
pay-for-service system (wherein individuals are

charged a fee each time they receive medical

services), including the ability to control costs. They
protect their members from exposure to the high cost
of hospitalization and other medical expenses brought
about by a fluctuating economy. Accordingly, they play
an important role in society as partners of the State in
achieving its constitutional mandate of providing its
citizens with affordable health services.
The rate of DST under Section 185 is equivalent to
12.5% of the premium charged.74 Its imposition will
elevate the cost of health care services. This will in turn
necessitate an increase in the membership fees,
resulting in either placing health services beyond the
reach of the ordinary wage earner or driving the
industry to the ground. At the end of the day, neither
side wins, considering the indispensability of the
services offered by HMOs.
WHEREFORE, the motion for reconsideration is
GRANTED. The August 16, 2004 decision of the Court of
Appeals in CA-G.R. SP No. 70479 is REVERSED and SET
ASIDE.

removal from Base K , a nd as the one w hich act uall y

took d elivery the reo moved the same from the U.S.
Military Base, is the importer within the meaning of
Section 186 of the Revenue Code, as it stood before
the enactment of Republic Act No. 594, and its sales of
the surplus goods are the original sales taxable under
said section and not the sale to it by Dee Hong Lue.
Same; Same; Taxpayer's failure to file returns; What
period to be reckoned; Assessment.Where a taxpayer
falls to file its return as required by Section 183 of the
Tax Code, the period to be reckoned with is that
embodied in Section 332 of the same Code which
provides that in case of failure to file the return the tax
may be assessed within 10 years after discovery of the
falsity, fraud or omission of the payment of the proper
tax.
Same; Corporation; Assets of dissolved corporation.
The creditor of a dissolved corporation may follow its
assets once they passed into the hands of the
stockholders.
Same; Same; Effect of dissolution on tax due; Right of
government to collect.That the hands of the
government can not, of course, collect taxes from a
defunct corporation, it loses thereby none of its rights
to assess taxes which had been due from the
corporation, and to collect them from persons who, by
reason of transactions with the corporation, hold
property against which the tax can be enforced and
that the legal death of the corporation no more
prevents such action than would the physical death of
an individual prevent the government from assessing
taxes against him and collecting them, from his
administrator who holds the property which the
decedent had formerly possessed.
APPEAL from a decision of the Court of Tax Appeals.
The facts are stated in the opinion of the Court.
Sycip, Salazar & Associates for petitioners.
Solicitor General for respondent.
BAUTISTA ANGELO, J.:

No. L-15778. April 23, 1962.

TAN TIONG Bio, ET AL., petitioners, vs. COMMISSIONER
OF INTERNAL REVENUE, respondent.
Taxation; Sales tax; When buyer of surplus goods
considered importer.A person who buys surplus
goods from the foreign liquidation commission and who
removes the goods bought from the U.S. Military Bases
in the Philippines is considered an importer of such
goods and is subject to the sales tax or compensation
tax as the case may be.
Same; Same; Same; Case at bar.The Central
Syndicate as owner of the "Mystery Pile" before its

On October 19, 1946, the Central Syndicate, a

corporation organized under the laws of the
Philippines, thru its General Manager, David Sycip, sent
a letter to the Collector of Internal Revenue advising
the latter that it purchased from Dee Hong Lue the
entire stock of surplus properties which the said Dee
Hong Lue had bought o f r the Foreign Liquidation
Commission and that as it assumed Dee Hong Lue's
obligation to pay the 3-1/2% sales tax on said surplus
goods, it was remitting the sum of P43,750.00 in his
behalf as deposit to answer for the payment of said
sales tax with the understanding that it would later be
adjusted after the determination of the exact
consideration of the sale.
On January 31, 1948, the syndicate again wrote the
Collector requesting the refund of P1,103.28
representing alleged excess payment of sales tax due
to the adjustment and reduction of the purchase price
in the amount of P31,522.18. Said letter was referred
to an agent for verification and report. On September

18, 1951, after a thorough investigation of the facts

and circumstances surrounding the transaction, the
agent reported (1) that Dee Hong Lue purchased the
surplus goods as trustee for the Central Syndicate
which was in the process of organization at the time of
the bidding; (2) that it was the representatives of the
Central Syndicate that removed the surplus goods from
their base at Leyte on February 21, 1947; (3) that the
syndicate must have realized a gross profit of 18.8%
from its sales thereof; and (4) that if the sales tax were
to be assessed on its gross sales it would still be liable
for the amount of P33,797.88 as deficiency sales tax
and surcharge in addition to the amount of P43,750.00
which the corporation had deposited in the name of
Dee Hong Lue as estimated sales tax due from the
latter.
Based on the above findings of the agent in charge of
the investigation, the Collector decided that the
Central Syndicate was the importer and original seller
of the surplus goods in question and, therefore, the one
liable to pay the sales tax. Accordingly, on January 4,
1952, the Collector assessed against the syndicate the
amount of P33,797.88 and P300.00 as deficiency sales
tax, inclusive of the 25% surcharge and compromise
penalty, respectively, and on the same date, in .a
separate letter, he denied the request of the syndicate
for the refund of the sum of P1,103.28.
On September 8, 1954, the Central Syndicate elevated
the case to the Court of Tax Appeals questioning the
ruling of the Collector which denies its claim for refund
as well as the assessment made against it of the sum
of P33,797.88, plus the sum of P300.00 as compromise
penalty, as stated above. The Collector filed his answer
thereto wherein he reiterated his ruling and prayed
that the Central Syndicate be ordered to pay the
deficiency sales tax and surcharge as demanded in his
letters dated January 4, 1952 and August 5, 1954. On
October 28, 1954, the syndicate filed a motion
requesting that the issue of prescription it has raised
against the collection of the tax be first determined as
a preliminary question, but action thereon was
deferred by the Court of Tax Appeals until after the trial
of the case on the merits.
On November 5, 1954, the Collector filed a motion
requiring the syndicate to file a bond to guarantee the
payment of the tax assessed against it which motion
was denied by the Court of Tax Appeals on the ground
that that cannot be legally done it appearing that the
syndicate is already a non-existing entity due to the
expiration of its corporate existence. In view of this
development, the Collector filed a motion to dismiss
the appeal on the ground of lack of personality on the
part of the syndicate, which met an opposition on the
part of the latter, but on January 25, 1955, the Court of
Tax Appeals issued a resolution dismissing the appeal
primarily on the ground that the Central Syndicate has
no personality to maintain the action then pending
before it. From this order the syndicate appealed to the
Supreme Court wherein it intimated that the appeal
should not be dismissed because it could be
substituted by its successors-in-interest, to wit: Tan
Tiong Bio, Yu Khe Thai, Alfonso Sycip, Dee Hong Lue,
Lim Shui Ty, Sy Seng Tong, Sy En, Co Giap and David
Sycip. And taking cue from this suggestion, this Court
ruled against the dismissal and held: "The resolution

appealed from is set aside and the respondent court is

ordered to permit the substitution of the officers and
directors of the defunct Central Syndicate as
appellants, and to proceed with the hearing of the
appeal upon its merits." In permitting the substitution,
this Court labored under the premise that said officers
and directors "may be held personally liable for the
unpaid deficiency assessments made by the Collector
of Internal Revenue against the defunct syndicate."
After trial, the Court of Tax Appeals rendered decision
the dispositive part of which reads as follows:
"WHEREFORE, in view of the foregoing considerations,
the decision of the Collector of Internal Revenue
appealed from is hereby affirmed, except with regard
to the imposition of the compromise penalty of P300.00
the collection of which is unauthorized and illegal in
the absence of a compromise agreement between the
parties. (Collector of Internal Revenue vs. University of
Sto. Tomas, G R. No. L-11274, November 28, 1958;
Collector of Internal Revenue vs. Bautista & Tan, G.R.
No. L-12250, May 27, 1959.)
"The petitioners Tan Tiong Bio, Yu Khe Thai, Lim Shui
Ty, Alfonso Sycip, Sy En alias Sy Seng Sui, Dee Hong
Lue, and Sy Seng Tong, who appear in the Articles of
Incorpora tion of the Central Syndicate Annex A (pp.
60-66, CTA rec.; as incorporators and directors of the
corporation, the second named being in addition its
President and the seventh its Treasurer, are hereby
ordered to pay jointly and severally, to the Collector of
Internal Revenue, the sum of P33,797.88 as deficiency
sales tax and surcharge on the surplus goods
purchased by them from the Foreign Liquidation
Commission on July 5, 1946, from which they realized
an estimated gross sales of P1,447,551.65, with costs.
x x x"
Petitioners interposed the present appeal.
The important issues to be determined in this appeal
are: (1) whether the importer of the surplus goods in
question the sale of which is subject to the present tax
liability is Dee Hong Lue or the Central Syndicate who
has been substituted by the present petitioners; (2)
whether the deficiency sales tax which is now sought
to be collected has already prescribed; and (3) the
Central Syndicate having already been dissolved
because of the expiration of its corporate existence,
whether the sales tax in question can be enforced
against its successors-in-interest who are the present
petitioners.
1. Petitioners contend that the Central Syndicate
cannot be held liable for the deficiency sales tax in
question because it is not the importer of the surplus
goods purchased from the Foreign Liquidation
Commission for the reason that said surplus goods
were purchased by Dee Hong Lue as shown by the
contract executed between him and the Forei gn
Liquidat ion Commis sio n a nd t he f the Central
Syndicate only purchased the same from Dee Hong Lue
and not from the Foreign Liquidation Commission as
shown by Exhibit 13.
This contention cannot be sustained. As correctly
observed by the Court of Tax Appeals, the

overwhelming evidence presented by the Collector

points to the conclusion that Dee Hong Lue purchased
the surplus goods in question not for himself but for
the Central Syndicate which was then in the process of
incorporation such that the deed of sale Exhibit 13
which purports to show that Dee Hong Lue sold said
goods to the syndicate for a consideration of
P1,250,000.00 (the same amount paid by Dee Hong
Lue to the Foreign Liquidation Commission) "is but a
ruse to evade payment of a greater amount of
percentage tax." The aforesaid conclusion of the lower
court was arrived at after a thorough analysis of the
evidence on record, pertinent portion of which we
quote hereunder with approval:
"Exhibit '38-A' for the respondent (p. 178, BIR rec.)
shows that as early as July 23, 1946, or before the
organization and incorporation of Central Syndicate,
Mr. David Sycip, who was subsequently appointed
General Manager of the corporation, together with
Messrs. Sy En alias Sy Seng Sui (one of the
incorporators of Central Syndicate), Serge Gordeof and
Chiu Siu Bun (an employee of the same corporation),
for and in the name of Central Syndicate then in the
process of organization, went to Leyte to take over the
surplus properties sold by the FLC to Dee Hong Lue,
which the latter held in trust for the corporation.
Exhibit 38-A, which is a certificate issued by no less
than David Sycip himself who was subsequently
appointed General Manager of the corporation admits
in express terms the following "x p , p, the sur plus pro
pert y sol d by th e F quidation Commission to Dee
Hong Lue (and held in trust by the latter for the
Syndicate x x x." (Italics ours.) We give full weight and
credence to the adverse admissions made by David
Sycip against the petitioners as appearing in his
certificate, Exhibit 38-A (p. 178, BIR rec.) "considering
that at the time he made them, he was a person jointly
interested with the petitioners in the transaction over
which there was yet no controversy over any sales tax
liability. (Secs. 11 and 33, Rule 123, Rules of Court;
Clem vs. Forbeso, Tex. Cir. App. 10 S.W. 2d 223; Street
vs. Masterson, Tex. Cir. App. 277 S.W. 407.)
"Exhibit '39' for the respondent (pp. 184-187, BIR rec.)
which is a letter of Mr. Yu Khe Thai, President, Director
and biggest stockholder of Central Syndicate (Exhibit
A, pp. 60-65, CTA rec.) dated September 17, 1946 and
addressed to the Commanding General AFWESPAC,
Manila, contains the following categorical admissions
which corroborate the admissions made by David
Sycip; that the so-called Leyte 'Mystery Pile' surplus
properties were owned by Central Syndicate by virtue
of a purchase from the FLC, effected in the name of
Dee Hong Lue on July 5, 1946, inasmuch as Central
Syndicate was then still in the process of organization;
that Dee Hong Lue held the said surplus properties in
trust until the mere formal turnover to the corporation
on August 20, 1946, when the corporation had already
been organized and incorporated under the laws of the
Philippines; and that on July 23, 1946 viz., twenty-two
(22) days before the incorporation of Central Syndicate
on August 15, 1946 'our General Manager, Mr. David
Sycip accompanied by one of our directors, Mr. Sy En,
arrived in Leyte to take over the properties.'
"Before passing on to the rest of the evidence
supporting the finding of respondent, we would like to

call attention to this significant detail. It is stated in the

letter, Exhibit 39 (pp. 184-187, BIR rec.) of Mr. Yu Khe
Thai that 'on July 23, 1946, our General Manager, Mr.
David Sycip, accompanied by one of our directors, Mr.
Sy En, arrived in Leyte to take over the properties/ We
ask: Why was there such a hurry on the part of the
promoters of Central Syndicate in taking over the
surplus properties when the formal agreement, Exhibit
13 (p. 66, BIR rec.), purporting to be a contract of sale
of the 'Mystery Pile' between Dee Hong Lue as vendor,
and the Central Syndicate, as vendee, for the amount
of P1,250,000.00, was effected twenty-eight (28) days
later viz., on August 20, 1946? Is this not another clear
and unmistakable indication that from the very start,
as is the theory of the respondent, the real purchasers
of the 'Mystery Pile' from the FLC and as such the
'importers' of the goods, were the Central Syndicate
and/or the group of big financiers composing it before
said corporation was incorporated on August 15, 1946;
and, that Dee Hong Lue acted merely as agent of these
persons when he purchased the pile from the FLC? As a
general rule, one does not exercise all the acts of
ownership over a property especially if it involves a big
amount until after the documents evidencing such
ownership are fully accomplished.
"Moreover, it appears that on October 3, 1946, Dee
Hong Lue was investigated by Major Primitivo San
Agustin, Jr., G-2 of the Philippine Army, because of the
discovery of some gun parts found in his shipment of
surplus material from Palo, Leyte.
"In his sworn statement, Exhibit 16 (pp. 133-139, BIR
rec.) before said officer, Dee Hong Lue admitted the
following That he paid the FLC the amount of
P1,250,000.00 'with the checks of Yu Khe Thai, maybe
also Alfonso Sycip and my checks with many others';
that 'at the beginning h i w as try in g t the pile o f or
mys elf wit hout te lling other peo ple a n d othe of
mine.' 'Watkins came to me and he bid for me for
P600,000 or P700,000, but later on when the price
went up to P1,250,000, I talked to my friends who said
I could get money.' 'So, I bought it with their checks
and mine' (Exhibit 16-B, p. 138, BIR rec.) and, that after
buying the 'Mystery Pile', he (Dee Hong Lue) never
inspected the same personally. (p. 141, BIR rec.)
"In his affidavit, Exhibit 15 (p. 144, BIR rec.) Dee Hong
Lue admitted that of the amount of P1,250,000.00
which he paid in two installments sometime in July,
1946, to the FLC, P1,181,250.00 (should be
P1,181,000.00) of the amount came from the following:
Yu Khe Thai who advanced to him P250,000.00; Sy
Seng
TongP375,000.00;
Alfonso
Z.
Sycip
P375,000.00; Tan Tiong BioP125,000.00; Robert Dee
Se WeeP25,000.00; and, Jose S. LimP31,000.00
that his understanding with these persons was that
should they eventually join him in Central Syndicate,
such advances would be adjusted to constitute their
investments; and, that soon after the 'Mystery Pile' was
purchased from the FLC, all the above-named persons
with the exception of Robert Dee Se Wee and Jose S.
Lim, formed the Central Syndicate and a re-allocation
of shares was made corresponding to the amounts
advanced by them.
"Added to these, we have before us other documentary
evidence for the respondent consisting of Exhibits 18,

19, 20, 21, 23, 24, 25, 26, 27, 28 and 29 (pp. 85, 88,
92-96, 99-103, 117-128, 119-120, 121-128, BIR rec.) all
tending to prove the same thing 9 7 th at the Cen tral
Synd icate and /or t he gro financiers composing it and
not Dee Hong Lue was the real purchaser (importer) of
the 'Mystery Pile' from the FLC; that in the contract of
sale between Dee Hong Lue and the FLC the former
acted principally as agent (Article 1930, New Civil
Code) of the petitioners Yu Khe Thai, Sy Seng Tong,
Alfonso Z. Sycip and Tan Tiong Bio who advanced the
purchased price of P1,125,000.00 out of the
P1,250,000.00 paid to the FLC, Dee Hong Lue being the
purchaser in his own right only with respect to the
amount of P69,000.00; and, that the deed, Exhibit 13
(p. 77, BIR rec.) purporting to show that Dee Hong Lue
sold the 'Mystery Pile' to the Central Syndicate for a
consideration of P1,250.000.00 is but a use to evade
payment of a greater amount of percentage tax.
"To our mind, the deed of sale, Exhibit 13 (p. 66, BIR
rec.) as well as the circumstances surrounding the
incorporation of the Central Syndicate, are shrouded
with as much mystery as the so-called 'Mystery Pile'
subject of the transaction. But, as oil is to water, the
truth and underlying motives behind these transactions
have to surface in the end. Petitioners would want us to
believe that Dee Hong Lue bought i n h is own r igh for
himself
the
surplus
goods
in
question
for
P1,250,000.00 from the FLC and then, by virtue of a
valid contract of sale, Exhibit 13 (p. 66, BIR rec.)
transferred and conveyed the same to the Central
Syndicate at cost. If this be so, what need was there for
Dee Hong Lue to agree in the immediate organization
and incorporation of the Central Syndicate with six
other capitalists when he could very well have
disposed of the surplus goods to the public in his
individual capacity and keep all the profits to himself
without sharing 9/10th of it to the other six
incorporators
and stockholders
of
the newly
incorporated Syndicate.
"It appears that Dee Hong Lue 'sold' the pile to the
Central Syndicate for exactly the same price barely
forty-six (46) days after acquiring it from FLC and
exactly five (5) days after the Syndicate was registered
with the Securities and Exchange Commission on
August 19, 1946. This is indeed most unusual for a
businessman like Dee Hong Lue who, it is to be
presumed, was out to make a killin g wh en he acqui
red surplus goods from the FLC for the staggering
amount of P1,750,000.00 in cash.
"Again, why did Dee Hong Lue waste all his time and
effort not to say his good connections with the FLC by
acquiring the goods from that agency only to sell it for
the same amount to the Central Syndicate? This would
have been understandable if Dee Hong Lue were the
biggest and controlling stockholder of the Syndicate.
He could perhaps reason out to himself, 'the profits
which h i am sacrific ing no w in this sa the Syndicate,
h i wi ll ge t it a ny way in t he form of d from it after it
shall have disposed of all the "Mystery Pile" to the
public.' But then, how could this be possible when Dee
Hong Lue was the smallest subscriber to the capital
stock of the Syndicate? It appears from the Articles of
Incorporation that of the authorized capital stock of the
corporation in the amount of P500,000.00, Dee Hong

Lue subscribes to only P20,000.00 or 1/25th of the

capital stock authorized and of this amount only
P5,000.00 was paid by him at the time of incorporation.
So here is an experienced businessman like Dee Hong
Lue who, following the theory of petitioners' counsel,
bought the "Mystery Pile" for himself for P1,250,000.00
in cash, and after a few days sold the same at cost to a
corporation wherein he owned only 1/25th of the
authorized capital stock and wherein he was not even
an officer, thus doling out to the other six incorporators
and stockholders net profits in the sum conservatively
estimated by the respondent to be P206,116.45 out of
a total of P229,073.83 which normally could all go to
him. We take judicial notice of the fact that as a result
of our immense losses in property throughout the
archipelago during the Japanese occupation, either
through destruction or systematic commandeering by
the enemy and our own forces, surplus properties
commanded a very good price in the open market after
the liberation and that quite a number of surplus
dealers made immense fortunes out of it. We believe
the respondent was quite charitable if not more than
fair to the Central Syndicate in. computing the profits
realized by it in the resale of the 'Mystery Pile' to the
public at only 18.8% of the acquisition price.
"Now, from the side of the Central Syndicate. This
corporation, as its articles of incorporation, Exhibit A
(pp. 60-66, CTA rec.) will show, was incorporated on
August 15, 1946 with an authorized capital stock of
P500,000.00 of which P200,000.00 worth was
subscribed by seven (7) persons and P50,000.00
paidup in cash at the time of incorporation. Five (5)
days after its incorporation, as the Deed of Sale,
Exhibit 13 (p. 66, BIR rec.) purports to show, the said
corporation bought from Dee Hong Lue the 'Mystery
Pile' for P1,250,000.00 in cash. This is indeed quite
phenomenal and fantastic not to say the utmost
degree of high finance considering that the corporation
had a subscribed capital stock of only P200,000.00 of
which only P50,000.00 was paid-up at the time of
incorporation and with not the least proof showing that
it never borrowed money in its own name from outside
source to raise the enormous amount allegedl y pa id
Dee Hong Lue nor evidence to show that it had by then
in so short a time as five (5) days accumulated a
substantial reserve to meet Dee Hong Lue's selling
price.
"Furthermore, at first blush it would seem quite difficul
to understand why the seven (7) incorporators and
stockholders of the Central Syndicate formed a
corporation with a subscribed capital stock of only
P200,000.00, and with cash on hand of only
P50.000.00 knowing fully well that there was a
transaction awaiting the newly registered corporation
involving an outlay of P1,250,000.00 in cash. We
believe this was done after mature deliberation and for
some ulterior motive. As we see it, the only logical
answer is that the incorporators wanted to limit
whatever civil liability that might arise in favor of third
persons, as the present tax liabilit y h as now ari se n,
up amount of their subscriptions, although the surplus
deal they transacted and which we believe was the
only purpose in the incorporation of the Central
Syndicate, was very much over and above their
authorized capital. Moreover, by limiting its capital, the
corporation was also able to save on incidental

expenses, such as attorney's fee and the filing fee paid

to the Securities and Exchange Commission, which
were based on the amount of the authorized capital
stock.
Another mystery worth unravelling is what happened
to the Pl,181,240.00 (should be Pl,181,000.00) which
Dee Hong Lue in his affidavit. Exhibit 15 (p. 144, BIR
rec.) claims to have received from Messrs. "Uy Khe
Thai, Sy Seng Tong, Alfonso Z. Sycip, Tan Tiong Bio (all
incorporators of the Syndicate) and two others as
'advances' with which to pay the FLC. There is no
evidence on record to show that Dee Hong Lue ever
returned this amount to those six (6) persons after he
supposedly received Pl.250,000.00 from the newly
incorporated Syndicate by virtue of the Deed of Sale,
Exhibit 13. This is the explanation that Dee Hong Lue
gave in this regard as appearing in his affidavit, Exhibit
15: 'That soon after the above-mentioned property was
purchased, the above parties, with the exception of
Robert Dee Se Wee and Jose S. Lim decided to join the
proposed Central Syndicate and a re-allocation of
shares was made for the reason that some of the
above parties in turn had to get advances from third
parties.' If this were true, why was it that Messrs. Yu
Khe Thai, Sy Seng Tong, Alfonso Z. Sycip and Tan Tiong
Bio who advanced P250,000.00; P375.000.00 and
P125,000.00 to Dee Hong Lue were made to appear in
the Articles of incorporation of the Central Syndicate as
having subscribed to shares worth only P40,000.00;
P30,000.00; P30,000.00 and P20,000.00 and of having
paid only P10,000.00, P7.500.00, P7.500.00, and
P5.000.00 on their subscriptions, respectively? Would it
not be more in keeping with corporate practice,
following the explanation of Dee Hong Lue, to just
credit those four (4) persons in the corporation with
shares worth the amount advanced by them to Dee
Hong Lue?
"On the basis of the above figures, the re-allocation of
shares in favor of the four (4) incorporators who
advanced enormous sums for the Syndicate seems at
first glance to be totally disproportionate and unfair to
them. However, in the final analysis it is not so as we
will now show. Immediately after the incorporation of
the Syndicate, as the evidence shows, Dee Hong Lue
was made to execute a deed of transfer under the
guise of a contract of sale, conveying full and complete
ownership of the 'Mystery Pile' to the newly organized
corporation. So we have, on the face of the Articles of
Incorporation and Exhibit 13, a corporation with assets
worth only P50.000.00 cash owning properties worth
over a million pesos. Obviously, the incorporators of
the Syndicate, particularly those four who advanced
enormous sums to Dee Hong Lue, are not ordinary
businessmen who could easily be taken for a ride. With
the precipitated execution of the 'Deed of Sale' by Dee
Hong Lue in favor of the Syndicate, transferring and
conveying ownership over the entire pile to the latter,
the recoupment of their advances from the newly
acquired assets of the corporation was sufficiently
secured, and at the same time, by making the
document appear to be a deed of sale instead of a
deed of transfer as it should be under Article 1891 of
the New Civil Code, they have reduced (at least
attempted to) their sales tax liability with the argument
that Dee Hong Lue was the original 'purchaser' or
'importer' of the goods and therefore the taxable sale

was that one made by him to the Syndicate and not

the sales made by the latter to the public. After going
over the Articles of Incorporation of the Central
Syndicate and the other circumstances of this case, we
draw the conclusion that it was organized just for this
particular transaction that its life span was expressly
limited to two (2) years from and after the date of
incorporation just to give it time to dispose of the
'Mystery Pile' to the public and then liquidate all its
assets among the seven incorporators-stockholders as
in fact it was done on August 15, 1948; that from the
very start, the seven (7) incorporators had intended it
to be a closed corporation without the least intention of
ever selling to other persons the remaining authorized
capital stock of P300,000.00 still unsubscribed; and,
that upon its liquidation, the seven (7) incorporators
composing it got much more than their investments
including those who advanced P1,181,000.00 to the
FLC for the corporation."
Petitioners would dispute the finding that Dee Hong
Lue merely acted as a trustee of the Central Syndicate
when he purchased the surplus goods in question from
the Foreign Liquidation Commission on July 5, 1946
considering that on that date the syndicate has not yet
been incorporated on the theory that no legal relation
may exist between parties one of whom has yet no
legal existence. Technically this may be true, but the
fact remains that it cannot be denied that Dee Hong
Lue purchased the goods on behalf of those who
advanced the money for the purchase thereof who
later became the incorporators and only stockholders
of the syndicate with the understanding that the
amounts they had respectively advanced would be
their investment and would represent their interest in
the corporation. And this is further evidenced by the
fact that this purchase made by Dee Hong Lue was
later approved and adopted as the act of the Central
Syndicate itself as can be gleaned from the certificate
executed by David Sycip, general manager of said
syndicate, on September 16, 1946, wherein he
emphasized that the persons named therein (from
whom Dee Hong Lue obtained the money) merely
acted on behalf of the syndicate and in fact were the
ones who went to Leyte to take over the aforesaid
surplus goods. In any event, even if Dee Hong Lue may
be deemed as the purchaser of the surplus goods in his
own right, nevertheless, the corporation still may be
regarded as the importer of the same goods for the
reason that Dee Hong Lue transferred to it all his rights
and interests in the contract with the Foreign
Liquidation Commission, and it was said corporation
that took delivery thereof from the place where they
were stored in Leyte as may be seen from the letter of
Dee Hong Lue to the Foreign Liquidation Commission
dated September 2, 1946 and the letter of the Central
Syndicate to the said Commission bearing the same
date. Under these facts, it is clear that the Central
Syndicate is the importer of the surplus goods as
correctly observed by Judge Umali in his concurring
opinion, from which we quote:
"It is now well settled that a person who bought surplus
goods from the Foreign Liquidation Commission and
who removed the goods bought from the U.S. military
bases in the Philippines is considered an importer of
such goods and is subject to the sales tax or
compensating tax, as the case may be. (Go Cheng Tee

v. Meer, 47 O.G. 269; Saura Import and Export v. Meer,

G.R. No. L-2927, Jan. 26, 1951; P.M.P. Navigation v.
Meer, G.R. No. L-4621, March 24, 1953; Soriano y Cia v.
Coll. of Int. Rev., 51 O.G. 4548.) In this case it
appearing that the Central Syndicate was the owner of
the 'Mystery Pile' before its removal from Base K and
that it was the one which actuall y to ok deliv ery the
reo f and r emo same from the U.S. military base, it is
the importer within the meaning of Section 186 of the
Revenue Code, as it stood before the enactment of
Republic Act No. 594, and its sales of the surplus goods
are the original sales taxable under said section and
not the sale to it by Dee Hong Lue."
2. Since the Central Syndicate, as we have already
pointed out, was the importer of the surplus goods in
question, it was its duty under Section 183 of the
Internal Revenue Code to file a return of its gross sales
within 20 days after the end of each quarter in order
that the office of the internal revenue may assess the
sales tax that may be due thereon, but, as the record
shows, the Central Syndicate failed to file any return of
its quarterly sales on the pretext that it was Dee Hong
Lue who imported the surplus goods and it merely
purchased them from said importer. This is in fact what
the syndicate intended to impress upon the Collector
when it wrote to him its letter of October 19, 1946
informing him that it purchased from Dee Hong Lue the
entire stock of the surplus goods which the latter had
bought from the Foreign Liquidation Commission and
was therefore depositing in his name the sum of
P43,750.00 to -answer for his sales tax liability, but this
letter certainly cannot be considered as a return that
may set in operation the application of the prescriptive
period provided for in Section 331 of the Tax Code, for,
evidently, said letter if at all could only be considered
as such in behalf of Dee Hong Lue and not in behalf of
the Central Syndicate because such is the only nature
and import of the letter. Besides, how can such letter
be considered as a return of the sales of the Central
Syndicate whent it was only on February 21, 1947
when it removed the surplus goods in question from
their base at Leyte? How can such return inure to the
benefit of the syndicate when the same surplus goods
which were removed on said date could not have been
sold by the corporation earlier than the aforesaid date?
It is obvious that the letter of October 19, 1946 cannot
possibly be considered as a return filed by the
syndicate and so cannot serve as basis for the
computation of the prescriptive period of five years
prescribed by law.
Nor can the fact that the Collector did not include in
the assessment a surcharge of 50% serve as an
argument that a return had already been filed, for such
failure can only mean that an oversight had been
committed in the non-inclusion of said surcharge. The
syndicate having failed to file its quarterly returns as
required by Section 183 of the Tax Code, the period
that has to be reckoned with is that embodied in
Section 332 of the same Code which provides that in
case of failure to file the return the tax may be
assessed within 10 years after discovery of the falsity,
fraud or omission of the payment of the proper tax.
Since it appears that the Collector discovered the
failure of the syndicate to file the return only on
September 12, 1951 he has therefore up to September
18, 1061 within which to assess or collect the

deficiency tax in question. Consequently the

assessment made on January 4, 1952 was made within
the prescribed period.
3. Petitioners argue (1) that the Court of Tax Ap- peals
acted in excess of its jurisdiction in holding them liable
as officers or directors of the defunct Central Syndicate
for the tax liability of the latter; (2) that petitioners
cannot be held liable for said tax liability there being
no statutory provision in this jurisdiction authorizing
the government to proceed against the stockholders of
a defunct corporation as transferees of the corporate
assets upon liquidation; (3) that assuming that the
stockholders can be held so liable, they are only liable
to the extent of the benefits derived by them from the
corporation and there is no evidence showing that
petitioners had been the beneficiaries of the defunct
syndicate; (4) that considering that the Collector
instituted the present action on September 23, 1954
when he filed his answer to the appeal of petitioners,
said action was already barred by prescription pursuant
to Sections 77 and 78 of the Corporation Law which
allows corporations to continue as a body corporate
only for three years from its dissolution; and (5) that
assuming that petitioners are liable to pay the tax,
their liability is not solidary, but only limited to the
benefits derived by them from the corporation.
It should be stated at the outset that it was petitioners
themselves who caused their substitution as parties in
the present case, being the successors-in-interest of
the defunct syndicate, when they appealed this case to
the Supreme Court for which reason the latter Court
declared that "the respondent Court of Tax Appeals
should have allowed the substitution of its former
officers and directors as parties-appellants, since they
are proper parties in interest insofar as they may be
(and in fact are) held personally liable for the unpaid
deficiency assessments made by the Collector of
Internal Revenue against the defunct Syndicate." In
fact, because of this directive their substitution was
effected. They cannot, therefore, be now heard to
complain if they are made responsible for the tax
liability of the defunct syndicate whose representation
they assumed and whose assets were distributed
among them.
In the second place, there is good authority to the
effect that the creditor of a dissolved corporation may
follow its assets once they passed into the hands of the
stockholders. Thus, recognized are the following rules
in American jurisprudence: The dissolution of a
corporation does not extinguish the debts due or owing
to it (Bacon v. Robertson, 18 How. 480, 15 L. Ed., 406;
Curron v. State, 16 How. 304, 14 L. Ed., 705). A creditor
of a dissolved corporation may follow its assets, as in
the nature of a trust fund, into the hands of its
stockholders (MacWilliams v. Excelsier Coal Co. [1924]
298 Fed. 384). An indebtedness of a corporation to the
federal government for income and excess profit taxes
is not extinguished by the dissolution of the
corporation (Quinn v. McLeudon, 152 Ark. 271, 238
S.W., 32). And it has been stated, with reference to the
effect of dissolution upon taxes due from a corporation,
"that the hands of the government cannot, of course,
collect taxes from a defunct corporation, it loses
thereby none of its rights to assess taxes which had
been due from the corporation, and to collect them

from persons, who by reason of transactions with the

corporation, hold property against which the tax can be
enforced and that the legal death of the corporation no
more prevents such action than would the physical
death of an individual prevent the government from
assessing taxes against him and collecting them from
his administrator, who holds the property which the
decedent had formerly possessed" (Wonder Bakeries
Co. v. U.S. [1934] Ct. Cl. 3 F. Supp. 288). Bearing in
mind that our corporation law is of American origin, the
foregoing authorities have persuasive effect in
considering similar cases in this jurisdiction. This must
have been taken into account when in G.R. No. L-8800
this Court said that petitioners could be held personally
liable for the taxes in question as successors-in-interest
of the defunct corporation.
Considering that .the Central Syndicate realized from
the sale of the surplus goods a net profit of
P229,073.83, and that the sale of said goods was the
only transaction undertaken by said syndicate, there
being no evidence to the contrary, the conclusion is
that said net profit remained intact and was distributed
among the stockholders when the corporation
liquidated and distributed its assets on August 15,
1918, immediately after the sale of the said surplus
goods. Petitioners are therefore the beneficiaries of the
defunct corporation and as such should be held liable
to pay the taxes in question. However, there being no
express provision requiring the stockholders of the
corporation to be solidarily liable for its debts which
liability must be express and cannot be presumed,
petitioners should be held to be liable for the tax in
question only in proportion to their shares in the
distribution of the assets of the defunct corporation.
The decision of the trial court should be modified
accordingly.
WHEREFORE, with the above modification, we hereby
affirm the decision appealed from, with costs against
petitioners.
Bengzon, C.J., Padilla, Labrador, Concepcion, Reyes,
J.B.L., Paredes and Dizon, JJ., concur.
Barrera. J., took no part.
Decision modified.

[No, 11572. September 22, 1916.]

FRANCIS A. CHURCHILL and STEWART TAIT ET AL.,
plaintiffs and appellants, vs. VENANCIO CONCEPCION,
as Acting Collector of Internal Revenue, defendant and
appellee.
1.REVENUE STATUTES; VALIDITY OF.The validity of a
revenue statute or the exercise of the taxing power of
the Legislature is not dependent upon the opinion of
two interested witnesses to the effect that a certain tax
is confiscatory when it is agreed that a number of other
persons have paid such tax.
2.TAXATION; POWER OF THE PHILIPPINE LEGISLATURE;
SIGNS AND BILLBOARDS.The Legislature having the
power to impose a tax upon signs, signboards, and
billboards, the courts will not attempt to restrict such

power in the absence of a showing that the exercise

thereof on the part of the Legislature was so abused as
to make it clear to the judicial mind that the power had
been exercised for the sole purpose of destroying
rights which could not be rightfully destroyed
consistently with the principles of freedom and justice.
3.ID.; UNIFORMITY OF.Uniformity in taxation means
that all taxable articles or kinds of property of the
same classes shall be taxed at the same rate. A tax is
uniform when it operates with the same .force and
effect in every place where the subject of it is found.
4.ID.; ID.A tax of P2 a square meter or fraction
thereof imposed upon every electric sign, billboard,
etc., wherever found in the Philippine Islands, satisfies
the requirement of the Philippine Bill "that the rule of
taxation in said Islands shall be uniform."
APPEAL from a judgment of the Court of First Instance
of Manila. Ostrand, J.
The facts are stated in the opinion of the court.
Aitken & DeSelms for appellants.
Attorney-General Avancea for appellee.
TRENT, J.:
Section 100 of Act No. 2339, passed February 27, 1914,
effective July 1, 1914, imposed an annual tax of P4 per
square meter upon "electric signs, billboards, and
spaces used for posting or displaying temporary signs,
and all signs displayed on premises not occupied by
buildings." This section was subsequently amended by
Act No. 2432, effective January 1, 1915, by reducing
the tax on such signs, billboards, etc., to P2 per square
meter or fraction thereof. Section 26 of Act No. 2432
was in turn amended by Act No. 2445, but this
amendment does not in any way affect the questions
involved in the case under consideration. The taxes
imposed by Act No. 2432, as amended, were ratified by
the Congress of the United States on March 4, 1915.
The ratifying clause reads as follows:
"The internal-revenue taxes imposed by the Philippine
Legislature under the law enacted by that body on
December twenty-third, nineteen hundred and fourteen
(Act No. 2432), as amended by the law enacted by it
on January sixteenth, nineteen hundred and fifteen (Act
No. 2445), are hereby legalized and ratified, and the
collection of all such taxes heretofore or hereafter is
hereby legalized, ratified and confirmed as fully to all
intents and purposes as if the same had by prior Act of
Congress been specifically authorized and directed."
Francis A. Churchill and Stewart Tait, copartners doing
business under the firm name and style of the
Mercantile Advertising Agency, owners of a sign or
billboard containing an area of 52 square meters
constructed on private property in the city of Manila
and exposed to public view, were taxed thereon P104.
The tax was paid under protest and the plaintiffs
having exhausted all their administrative remedies
instituted the present action under section 140 of Act
No. 2339 against the Collector of Internal Revenue to
recover back the amount thus paid. From a judgment

dismissing the complaint upon the merits, with costs,

the plaintiffs appealed.
It is now urged that the trial court erred:
"(1) In not holding that the tax as imposed by virtue of
Act No. 2339, as amended by Act No. 2432, as
amended by Act No. 2445, constitutes deprivation of
property without compensation or due process of law,
because it is confiscatory and unjustly discriminatory
and (2) in not holding that the said tax is void for lack
of uniformity, because it is not graded according to
value; because the classification on which it is based is
mere arbitrary selection and not based on any
reasonable ground; and furthermore, because it
constitutes double taxation."
We will first inquire whether the tax in question is
confiscatory as to the business of the plaintiff. Upon
this point the lower court, in accepting the testimony of
the plaintiff Churchill, to the effect that "the billboard in
question cost P300 to construct, that its annual gross
earning power is P268, and that the annual tax is
P104," found "that for a five years' period the gross
income from the billboard would be P1,340, and that
the expenditures for original construction and taxes
would amount to P820, leaving a balance of P520,"
held that "unless the tax equals or exceeds the gross
income, the court would hardly be justified in declaring
the tax confiscatory." These findings of fact and
conclusions of law are attacked upon the ground that
the court failed to take into-consideration the pertinent
facts that the annual depreciation of the billboard is 20
per cent; that at the end of five years the capital of
P300 would be completely lost; that the plaintiffs are
entitled to receive a reasonable rate of interest on this
capital; and that there should be charged against the
billboard its proportion of the overhead charges such
as labor, management, maintenance, rental of office
premises, rental or purchase of ground space for board,
repair, paints, oils, etc., resulting in an actual loss per
year on the business, instead of an apparent profit of
P520 for five years, or P44 for one year, If these
contentions rested upon a sound basis it might be said
that the tax is, in a sense, confiscatory; but they do
not, as we will attempt to show from the evidence of
record.
The plaintiff Churchill testified in part as follows:
"Q. In your opinion, Mr. Churchill, state what you would
think of the rates that are charged by you for
advertising purposes in connection with this board;
could they be raised?A. No.
"Q. Why?A. The business wouldn't allow it; the
business wouldn't afford it; and otherwise it would
mean bankruptcy to try to increase it.
"Q. Who couldn't afford it? Explain it fully Mr. Churchill?
A, The merchants couldn't afford to pay more.
On cross-examination: "Q. It is a fact, is it not, Mr.
Churchill, that since the passage of Act No. 2339 you
have never made any attempt to raise the advertising
rates?A. It would be impossible to raise them.
"Q. My question is: You have never made any attempt
to raise them?A. We have talked it over with the

merchants and talked over the price on the event of a

tax being put at a reasonable amount, about putting up
some increase.
"Q. But you have never made an actual attempt to
increase your rates?A. I would consider that an actual
attempt.
"Q. You have never fixed the rate higher than it is now?
A. No; no."
It was agreed that Tait, the other plaintiff, would testify
to the same effect. The parties, plaintiffs and
defendant, further agreed "that a number of persons
have voluntarily and without protest paid the taxes
imposed by section 100 of Act No. 2339, as amended
by Act No. 2432, and in turn amended by Act No.
2445."
It will thus be seen that the contention that the rates
charged for advertising cannot be raised is purely
hypothetical, based entirely upon the opinion of the
plaintiffs, unsupported by actual test, and that the
plaintiffs themselves admit that a number of other
persons have voluntarily and without protest paid the
tax herein complained of. Under these circumstances,
can it be held as a matter of fact that the.tax is
confiscatory or that, as a matter of law, the tax is
unconstitutional? Is the exercise of the taxing power of
the Legislature dependent upon and restricted by the
opinion of two interested witnesses? There can be but
one answer to these questions, especially in view of
the fact that others are paying the tax and presumably
making a reasonable profit f rom their business.
In Chicago and Grand Trunk Railway Co. vs. Wellman
(143 U. S,, 339), a question similar to the one now
under consideration was raised and decided by the
Supreme Court of the United States. The principal
contention made in that case was that an Act of the
Legislature of Michigan fixing the amount per mile to
be charged by railways for the transportation of a
passenger was unconstitutional, on the ground that the
rate so fixed was confiscatory. It was agreed in the
pleadings that the total earnings and income of the
company from all sources for a given year were less
than the expenses for the same period. In addition to
this agreed statement of facts, two witnesses were
called, one the traffic manager and the other the
treasurer of the company. Their testimony was to the
effect that in view of the competition prevailing at
Chicago for through business, it was impossible to
increase the freight rates then charged by the
company because it would throw the volume of
business into the hands of competing roads. In
overruling the contention of the company that the act
in question was unconstitutional on the ground that the
rate fixed thereby was confiscatory, the court said:
"Surely, before the courts are called upon to adjudge
an act of the legislature fixing the maximum passenger
rates for railroad companies to be unconstitutional, on
the ground that its enforcement would prevent the
stockholders from receiving any dividends on their
investments, or the bondholders any interest on their
loans, they should be fully advised as to what is done
with the receipts and earnings of the company; for if so
advised, it might clearly appear that a prudent and

honest management would, within the rates

prescribed, secure to the bondholders their interest,
and to the stockholders reasonable dividends. While
the protection of vested rights of property Is a supreme
duty of the courts, it has not come to this, that the
legislative power rests subservient to the discretion of
any railroad corporation which may, by exhorbitant and
unreasonable salaries, or in some other improper way,
transfer its earnings into what it is pleased to call
'operating expenses.' "
It is further alleged that the tax in question is
unconstitutional because "the law herein complained of
was enacted for the sole purpose of destroying
billboards and advertising business depending on the
use of signs or billboards." If it be conceded that the
Legislature has the power to impose a tax upon signs,
signboards, and billboards, then "the judicial cannot
prescribe to the legislative department of the
Government limitation upon the exercise of its
acknowledged powers." (Veazie Bank vs. Fenno, 8
Wall., 533, 548.) That the Philippine Legislature has the
power to impose such taxes, we think there can be no
serious doubt, because "the power to impose taxes is
one so unlimited in force and so searching in extent,
that the courts scarcely venture to declare that it is
subject to any restrictions whatever, except such as
rest in the discretion of the authority which exercises it.
It reaches to every trade or occupation; to every object
of industry, use, or enjoyment; to every species of
possession; and it imposes a burden which, in case of
failure to discharge it, may be followed by seizure and
sale or confiscation of property. No attribute of
sovereignty is more pervading, and at no point does
the power of the government affect more constantly
and intimately all the relations of life than through the
exactions made under it." (Cooley's Constitutional
Limitations, 6th Edition, p. 587.)
In McCray vs. U, S. (195 U. S., 27), the court, in ruling
adversely to the contention that a federal tax on
oleomargarine artificially colored was void because the
real purpose of Congress was not to raise revenue but
to tax out of existence a substance not harmful of itself
and one which might be lawf ully manufactured and
sold, said:
"Whilst, as a result of our written constitution, it Is
axiomatic that the judicial department of the
government is charged with the solemn duty of
enforcing the Constitution, and therefore, in cases
properly presented, of determining whether a given
manifestation of authority has exceeded the power
conferred by that instrument, no instance is afforded
from the foundation of the government where an act
which was within a power conferred, was declared to
be repugnant to the Constitution, because it appeared
to the judicial mind that the particular exertion of
constitutional power was either unwise or unjust. To
announce such a principle would amount to declaring
that, in our constitutional system, the judiciary was not
only charged with the duty of upholding the
Constitution, but also with the responsibility of
correcting every possible abuse arising from the
exercise by the other departments of their conceded
authority, So to hold would be to overthrow the entire
distinction between the.legislative, judicial, and
executive departments of the government, upon which

our system is founded, and would be a mere act of

judicial usurpation."
If a case were presented where the abuse of the taxing
power of the local legislature was so extreme as to
make it plain to the judicial mind that the power had
been exercised for the sole purpose of destroying
rights which could not be rightfully destroyed
consistently with the principles of freedom and justice
upon which the Philippine Government rests, then it
would be the duty of the courts to say that such an
arbitrary act was not merely an abuse of the power,
but was the exercise of an authority not conferred.
(McCray vs. U. S., supra.) But the instant case is not
one of that character, for the reason that the tax herein
complained of falls far short of being confiscatory.
Consequently, it cannot be held that the Legislature
has gone beyond the power conferred upon it by the
Philippine Bill in so far as the amount of the tax is
concerned.
Is the tax void for lack of uniformity or because it is not
graded according to value or constitutes double
taxation, or because the classification upon which it is
based is mere arbitrary selection and not based on any
reasonable grounds ? The only limitation, in so f ar as
these questions are concerned, placed upon the
Philippine Legislature in the exercise of its taxing power
is that found in section 5 of the Philippine Bill, wherein
it is declared "that the rule of taxation in said Islands
shall be uniform."
"Uniformity in taxationsays Black on Constitutional
Law, page 292means that all taxable articles or kinds
of property, of the same class, shall be taxed at the
same rate. It does not mean that lands, chattels,
securities,
incomes,
occupations,
f
ranchises,
privileges, necessities, and luxuries, shall all be
assessed at the same rate. Different articles may be
taxed at different amounts, provided the rate is
uniform on the same class everywhere, with all people,
and at all times."
A tax is uniform when it operates with the same force
and effect in every place where the subject of it is
found (State Railroad Tax Cases, 92 U. S., 575.) The
words "uniform throughout the United States," as
required of a tax by the Constitution, do not signify an
intrinsic, but simply a geographical, uniformity, and
such uniformity is therefore the only uniformity which
is prescribed by the Constitution. (Patton vs. Brady,
184 U. S., 608; 46 L. Ed., 713.) A tax is uniform, within
the constitutional requirement, when it operates with
the same force and effect in every place where the
subject of it is found. (Edye vs. Robertson, 112 U. S.,
580; 28 L. Ed., 798.) "Uniformity," as applied to the
constitutional provision that all taxes shall be uniform,
means that all property belonging to the same class
shall be taxed alike. (Adams vs. Mississippi State Bank,
23 South, 395, citing Mississippi Mills vs. Cook, 56
Miss., 40.) The statute under consideration imposes a
tax of P2 per square meter or fraction thereof upon
every electric sign, bill-board, etc., wherever found in
the Philippine Islands. Or in other words, "the rule of
taxation" upon such signs is uniform throughout the
Islands. The rule, which we have just quoted from the
Philippine Bill, does not require taxes to be graded
according to the value of the subject or subjects upon

which they are imposed, especially those levied as

privilege or occupation taxes. We can hardly see
wherein the tax in question constitutes double
taxation. The fact that the land upon which the
billboards are located is taxed at so much per unit and
the billboards at so much per square meter does not
constitute "double taxation." Double taxation, within
the true meaning of that expression, does not
necessarily affect its validity. (1 Cooley on Taxation, 3d
ed., 389.) And again, it is not for the judiciary to say
that the classification upon which the tax is based "is
mere arbitrary selection and not based upon any
reasonable grounds." The Legislature selected signs
and billboards as a subject for taxation and it must be
presumed that it, in so doing, acted with a full
knowledge of the situation.
For the foregoing reasons, the judgment appealed from
is affirmed, with costs against the appellants. So
ordered.
Torres, Johnson, Carson, and Araullo, JJ., concur.

G.R. No. 138334. August 25, 2003.*

ESTELA L. CRISOSTOMO, petitioner, vs. THE COURT OF
APPEALS
and
CARAVAN
TRAVEL
&
TOURS
INTERNATIONAL, INC., respondents.
Civil Law; Common Carriers; Damages; Definition of
common carrier.By definition, a contract of carriage
or transportation is one whereby a certain person or
association of persons obligate themselves to transport
persons, things, or news from one place to another for
a fixed price. Such person or association of persons are
regarded as carriers and are classified as private or
special carriers and common or public carriers. A
common carrier is defined under Article 1732 of the
Civil Code as persons, corporations, firms or
associations engaged in the business of carrying or
transporting passengers or goods or both, by lane,
water or air, for compensation, offering their services
to the public.
Same; Same; Same; Respondent is not an entity
engaged in the business of transporting either
passengers or goods and is therefore neither a private
nor a common carrier.It is obvious from the above
definition that respondent is not an entity engaged in
the business of transporting either passengers or
goods and is there fore, neither, a private nor a
common carrier. Respondent did not undertake to
transport petitioner from one place to another since its
covenant with its customers is simply to make travel
arrangements in their behalf. Respondents services as
a travel agency include procuring tickets and
facilitating travel permits or visas as well as booking
customers for tours.
Same; Same; Same; Respondent not being a common
carrier but a travel agency is not bound under the law
to observe extraordinary diligence in the performance
of its obligation.The nature of the contractual relation
between petitioner and respondent is determinative of
the degree of care required in the performance of the

latters obligation under the contract. For reasons of

public policy, a common carrier in a contract of
carriage is bound by law to carry passengers as far as
human care and foresight can provide using the utmost
diligence of very cautious persons and with due regard
for all the circumstances. As earlier stated, however,
respondent is not a common carrier but a travel
agency. It is thus not bound under the law to observe
extraordinary diligence in the performance of its
obligation, as petitioner claims.
Same; Same; The degree of diligence required depends
on the circumstances of the specific obligation and
whether one has been negligent is a question of fact.
The negligence of the obligor in the performance of the
obligation renders him liable for damages for the
resulting loss suffered by the obligee. Fault or
negligence of the obligor consists in his failure to
exercise due care and prudence in the performance of
the obligation as the nature of the obligation so
demands. There is no fixed standard of diligence
applicable to each and every contractual obligation
and each case must be determined upon its particular
facts. The degree of diligence required depends on the
circumstances of the specific obligation and whether
one has been negligent is a question of fact that is to
be determined after taking into account the particulars
of each case.
PETITION for review on certiorari of a decision of the
Court of Appeals.
The facts are stated in the opinion of the Court.
Bonifacio Law Office for petitioner.
Cabochan, Reyes & Capones Law Offices for private
respondent.
YNARES-SANTIAGO, J.:
In May 1991, petitioner Estela L. Crisostomo contracted
the services of respondent Caravan Travel and Tours
International, Inc. to arrange and facilitate her booking,
ticketing and accommodation in a tour dubbed Jewels
of Europe. The package tour included the countries of
England, Holland, Germany, Austria, Liechstenstein,
Switzerland and France at a total cost of P74,322.70.
Petitioner was given a 5% discount on the amount,
which included airfare, and the booking fee was also
waived because petitioners niece, Meriam Menor, was
respondent companys ticketing manager.
Pursuant to said contract, Menor went to her aunts
residence on June 12, 1991a Wednesdayto deliver
petitioners travel documents and plane tickets.
Petitioner, in turn, gave Menor the full payment for the
package tour. Menor then told her to be at the Ninoy
Aquino International Airport (NAIA) on Saturday, two
hours before her flight on board British Airways.
Without checking her travel documents, petitioner
went to NAIA on Saturday, June 15, 1991, to take the
flight for the first leg of her journey from Manila to
Hong Kong. To petitioners dismay, she discovered that
the flight she was supposed to take had already
departed the previous day. She learned that her plane
ticket was for the flight scheduled on June 14, 1991.
She thus called up Menor to complain.

Subsequently, Menor prevailed upon petitioner to take

another tourthe British Pageantwhich included
England, Scotland and Wales in its itinerary. For this
tour package, petitioner was asked anew to pay
US$785.00 or P20,881.00 (at the then prevailing
exchange rate of P26.60). She gave respondent
US$300 or P7,980.00 as partial payment and
commenced the trip in July 1991.
Upon petitioners return from Europe, she demanded
from respondent the reimbursement of P61,421.70,
representing the difference between the sum she paid
for Jewels of Europe and the amount she owed
respondent for the British Pageant tour. Despite
several demands, respondent company refused to
reimburse the amount, contending that the same was
non-refundable.1 Petitioner was thus constrained to file
a complaint against respondent for breach of contract
of carriage and damages, which was docketed as Civil
Case No. 92-133 and raffled to Branch 59 of the
Regional Trial Court of Makati City.
In her complaint,2 petitioner alleged that her failure to
join Jewels of Europe was due to respondents fault
since it did not clearly indicate the departure date on
the plane ticket. Respondent was also negligent in
informing her of the wrong flight schedule through its
employee Menor. She insisted that the British
Pageant was merely a substitute for the Jewels of
Europe tour, such that the cost of the former should
be properly set-off against the sum paid for the latter.
For its part, respondent company, through its
Operations Manager, Concepcion Chipeco, denied
responsibility for petitioners failure to join the first
tour. Chipeco insisted that petitioner was informed of
the correct departure date, which was clearly and
legibly printed on the plane ticket. The travel
documents were given to petitioner two days ahead of
the scheduled trip. Petitioner had only herself to blame
for missing the flight, as she did not bother to read or
confirm her flight schedule as printed on the ticket.
Respondent explained that it can no longer reimburse
the amount paid for Jewels of Europe, considering
that the same had already been remitted to its
principal in Singapore, Lotus Travel Ltd., which had
already billed the same even if petitioner did not join
the tour. Lotus European tour organizer, Insight
International Tours Ltd., determines the cost of a
package tour based on a minimum number of
projected participants. For this reason, it is accepted
industry practice to disallow refund for individuals who
failed to take a booked tour.3
Lastly, respondent maintained that the British
Pageant was not a substitute for the package tour that
petitioner missed. This tour was independently
procured by petitioner after realizing that she made a
mistake in missing her flight for Jewels of Europe.
Petitioner was allowed to make a partial payment of
only US$300.00 for the second tour because her niece
was then an employee of the travel agency.
Consequently, respondent prayed that petitioner be
ordered to pay the balance of P12,901.00 for the
British Pageant package tour.

After due proceedings, the trial court rendered a

decision,4 the dispositive part of which reads:
WHEREFORE, premises considered,
hereby rendered as follows:

judgment

is

1. Ordering the defendant to return and/or refund to

the plaintiff the amount of Fifty Three Thousand Nine
Hundred Eighty Nine Pesos and Forty Three Centavos
(P53,989.43) with legal interest thereon at the rate of
twelve percent (12%) per annum starting January 16,
1992, the date when the complaint was filed;
2. Ordering the defendant to pay the plaintiff the
amount of Five Thousand (P5,000.00) Pesos as and for
reasonable attorneys fees;
3. Dismissing the defendants counterclaim, for lack of
merit; and
4. With costs against the defendant.
SO ORDERED.5
The trial court held that respondent was negligent in
erroneously advising petitioner of her departure date
through its employee, Menor, who was not presented
as witness to rebut petitioners testimony. However,
petitioner should have verified the exact date and time
of departure by looking at her ticket and should have
simply not relied on Menors verbal representation. The
trial court thus declared that petitioner was guilty of
contributory negligence and accordingly, deducted
10% from the amount being claimed as refund.
Respondent appealed to the Court of Appeals, which
likewise found both parties to be at fault. However, the
appellate court held that petitioner is more negligent
than respondent because as a lawyer and well-traveled
person, she should have known better than to simply
rely on what was told to her. This being so, she is not
entitled to any form of damages. Petitioner also
forfeited her right to the Jewels of Europe tour and
must therefore pay respondent the balance of the price
for the British Pageant tour. The dispositive portion of
the judgment appealed from reads as follows:
WHEREFORE, premises considered, the decision of the
Regional Trial Court dated October 26, 1995 is hereby
REVERSED and SET ASIDE. A new judgment is hereby
ENTERED requiring the plaintiff-appellee to pay to the
defendant-appellant the amount of P12,901.00,
representing the balance of the price of the British
Pageant Package Tour, the same to earn legal interest
at the rate of SIX PERCENT (6%) per annum, to be
computed from the time the counterclaim was filed
until the finality of this decision. After this decision
becomes final and executory, the rate of TWELVE
PERCENT (12%) interest per annum shall be
additionally imposed on the total obligation until
payment thereof is satisfied. The award of attorneys
fees is DELETED. Costs against the plaintiff-appellee.
SO ORDERED.6
Upon denial of her motion for reconsideration,7
petitioner filed the instant petition under Rule 45 on
the following grounds:

I
It is respectfully submitted that the Honorable Court of
Appeals committed a reversible error in reversing and
setting aside the decision of the trial court by ruling
that the petitioner is not entitled to a refund of the cost
of unavailed jewels of Europe tour she being equally,
if not more,negligent than the private respondent, for
in the contract of carriage the common carrier is
obliged to observe utmost care and extra-ordinary
diligence which is higher in degree than (he ordinary
diligence required of the passenger. Thus, even if the
petitioner and private respondent were both negligent,
the petitioner cannot be considered to be equally, or
worse, more guilty than the private respondent. At
best, petitioners negligence is only contributory while
the private respondent [is guilty] of gross negligence
making the principle of pari delicto inapplicable in the
case;
II
The Honorable Court of Appeals also erred in not ruling
that the Jewels of Europe tour was not indivisible and
the amount paid therefor refundable;
III
The Honorable Court erred in not granting to the
petitioner the consequential damages due her as a
result of breach of contract of carriage.8
Petitioner contends that respondent did not observe
the standard of care required of a common carrier
when it informed her wrongly of the flight schedule.
She could not be deemed more negligent than
respondent since the latter is required by law to
exercise extraordinary diligence in the fulfillment of its
obligation. If she were negligent at all, the same is
merely contributory and not the proximate cause of the
damage she suffered. Her loss could only be attributed
to respondent as it was the direct consequence of its
employees gross negligence.
Petitioners contention has no merit.
By definition, a contract of carriage or transportation is
one whereby a certain person or association of persons
obligate themselves to transport persons, things, or
news from one place to another for a fixed price.9 Such
person or association of persons are regarded as
carriers and are classified as private or special carriers
and common or public carriers.10 A common carrier is
defined under Article 1732 of the Civil Code as persons,
corporations, firms or associations engaged in the
business of carrying or transporting passengers or
goods or both, by lane, water or air, for compensation,
offering their services to the public.
It is obvious from the above definition that respondent
is not an entity engaged in the business of transporting
either passengers or goods and is there fore, neither, a
private nor a common carrier. Respondent did not
undertake to transport petitioner from one place to
another since its covenant with its customers is simply
to make travel arrangements in their behalf.
Respondents services as a travel agency include
procuring tickets and facilitating travel permits or visas
as well as booking customers for tours.

While petitioner concededly bought her plane ticket

through the efforts of respondent company, this does
not mean that the latter ipso facto is a common carrier.
At most, respondent acted merely as an agent of the
airline, with whom petitioner ultimately contracted for
her carriage to Europe. Respondents obligation to
petitioner in this regard was simply to see to it that
petitioner was properly booked with the airline for the
appointed date and time. Her transport to the place of
destination, meanwhile, pertained directly to the
airline.
The object of petitioners contractual relation with
respondent is the latters service of arranging and
facilitating
petitioners
booking,
ticketing
and
accommodation in the package tour. In contrast, the
object of a contract of carriage is the transportation of
passengers or goods. It is in this sense that the
contract between the parties in this case was an
ordinary one for services and not one of carriage.
Petitioners submission is premised on a wrong
assumption.
The nature of the contractual relation between
petitioner and respondent is determinative of the
degree of care required in the performance of the
latters obligation under the contract. For reasons of
public policy, a common carrier in a contract of
carriage is bound by law to carry passengers as far as
human care and foresight can provide using the utmost
diligence of very cautious persons and with due regard
for all the circumstances.11 As earlier stated, however,
respondent is not a common carrier but a travel
agency. It is thus not bound under the law to observe
extraordinary diligence in the performance of its
obligation, as petitioner claims.
Since the contract between the parties is an ordinary
one for services, the standard of care required of
respondent is that of a good father of a family under
Article 1173 of the Civil Code.12 This connotes
reasonable care consistent with that which an
ordinarily prudent person would have observed when
confronted with a similar situation. The test to
determine
whether
negligence
attended
the
performance of an obligation is: did the defendant in
doing the alleged negligent act use that reasonable
care and caution which an ordinarily prudent person
would have used in the same situation? If not, then he
is guilty of negligence.13
In the case at bar, the lower court found Menor
negligent when she allegedly informed petitioner of the
wrong day of departure. Petitioners testimony was
accepted as indubitable evidence of Menors alleged
negligent act since respondent did not call Menor to
the witness stand to refute the allegation. The lower
court applied the presumption under Rule 131, Section
3 (e)14 of the Rules of Court that evidence willfully
suppressed would be adverse if produced and thus
considered petitioners uncontradicted testimony to be
sufficient proof of her claim.
On the other hand, respondent has consistently denied
that Menor was negligent and maintains that
petitioners assertion is belied by the evidence on
record. The date and time of departurewas legibly
written on the plane ticket and the travel papers were

delivered two days in advance precisely so that

petitioner could prepare for the trip. It performed all its
obligations to enable petitioner to join the tour and
exercised due diligence in its dealings with the latter.
We agree with respondent.
Respondents failure to present Menor as witness to
rebut petitioners testimony could not give rise to an
inference unfavorable to the former. Menor was already
working in France at the time of the filing of the
complaint,15 thereby making it physically impossible
for respondent to present her as a witness. Then too,
even if it were possible for respondent to secure
Menors testimony, the presumption under Rule 131,
Section 3(e) would still not apply. The opportunity and
possibility for obtaining Menors testimony belonged to
both parties, considering that Menor was not just
respondents employee, but also petitioners niece. It
was thus error for the lower court to invoke the
presumption that respondent willfully suppressed
evidence under Rule 131, Section 3(e). Said
presumption would logically be inoperative if the
evidence is not intentionally omitted but is simply
unavailable, or when the same could have been
obtained by both parties.16
In sum, we do not agree with the finding of the lower
court that Menors negligence concurred with the
negligence of petitioner and resultantly caused
damage to the latter. Menors negligence was not
sufficiently proved, considering that the only evidence
presented
on
this
score
was
petitioners
uncorroborated narration of the events. It is wellsettled that the party alleging a fact has the burden of
proving it and a mere allegation cannot take the place
of evidence.17 If the plaintiff, upon whom rests the
burden of proving his cause of action, fails to show in a
satisfactory manner facts upon which he bases his
claim, the defendant is under no obligation to prove his
exception or defense.18
Contrary to petitioners claim, the evidence on record
shows that respondent exercised due diligence in
performing its obligations under the contract and
followed standard procedure in rendering its services to
petitioner. As correctly observed by the lower court, the
plane ticket19 issued to petitioner clearly reflected the
departure date and time, contrary to s petitioners
contention. The travel documents, consisting of the
tour itinerary, vouchers and instructions, were likewise
delivered to petitioner two days prior to the trip.
Respondent also properly booked petitioner for the
tour, prepared the necessary documents and procured
the plane tickets. It arranged petitioners hotel
accommodation as well as food, land transfers and
sightseeing excursions, in accordance with its avowed
undertaking.
Therefore, it is clear that respondent performed its
prestation under the contract as well as everything
else that was essential to book petitioner for the tour.
Had petitioner exercised due diligence in the conduct
of her affairs, there would have been no reason for her
to miss the flight. Needless to say, after the travel

papers were delivered to petitioner, it became

incumbent upon her to take ordinary care of her
concerns. This undoubtedly would require that she at
least read the documents in order to assure herself of
the important details regarding the trip.
The negligence of the obligor in the performance of the
obligation renders him liable for damages for the
resulting loss suffered by the obligee. Fault or
negligence of the obligor consists in his failure to
exercise due care and prudence in the performance of
the obligation as the nature of the obligation so
demands.20 There is no fixed standard of diligence
applicable to each and every contractual obligation
and each case must be determined upon its particular
facts. The degree of diligence required depends on the
circumstances of the specific obligation and whether
one has been negligent is a question of fact that is to
be determined after taking into account the particulars
of each case.21
The lower court declared that respondents employee
was negligent. This factual finding, however, is not
supported by the evidence on record. While factual
findings below are generally conclusive upon this court,
the rule is subject to certain exceptions, as when the
trial court overlooked, misunderstood, or misapplied
some facts or circumstances of weight and substance
which will affect the result of the case.22
In the case at bar, the evidence on record shows that
respondent company performed its duty diligently and
did not commit any contractual breach. Hence,
petitioner cannot recover and must bear her own
damage.
WHEREFORE, the instant petition is DENIED for lack of
merit. The decision of the Court of Appeals in CA-G.R.
CV No. 51932 is AFFIRMED. Accordingly, petitioner is
ordered to pay respondent the amount of P12,901.00
representing the balance of the price of the British
Pageant Package Tour, with legal interest thereon at
the rate of 6% per annum, to be computed from the
time the counterclaim was filed until the finality of this
Decision. After this Decision becomes final and
executory, the rate of 12% per annum shall be imposed
until the obligation is fully settled, this interim period
being deemed to be by then an equivalent to a
forbearance of credit.23
SO ORDERED.
Davide, Jr. (C.J., Chairman), Vitug, Carpio and
Azcuna, JJ., concur.
Petition denied, assailed judgment affirmed.
Note.A common carrier is a person or corporation
whose regular business is to carry passengers or
property for all persons who may choose to employ
and to remunerate him. (Caltex [Philippines], Inc. vs.
Sulpicio Lines, Inc., 315 SCRA 709 [1999])
o0o