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TAXATION MEANING

G.R. No. 119286 October 13, 2004

PASEO REALTY & DEVELOPMENT CORPORATION, petitioner,


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

DECISION

TINGA, J.:

The changes in the reportorial requirements and payment schedules of corporate income taxes from annual
to quarterly have created problems, especially on the matter of tax refunds. 1 In this case, the Court is called
to resolve the question of whether alleged excess taxes paid by a corporation during a taxable year should
be refunded or credited against its tax liabilities for the succeeding year.

Paseo Realty and Development Corporation, a domestic corporation engaged in the lease of two (2) parcels
of land at Paseo de Roxas in Makati City, seeks a review of the Decision2 of the Court of Appeals
dismissing its petition for review of the resolution3 of the Court of Tax Appeals (CTA) which, in turn,
denied its claim for refund.

The factual antecedents4 are as follows:

On April 16, 1990, petitioner filed its Income Tax Return for the calendar year 1989 declaring a
gross income of ₱1,855,000.00, deductions of ₱1,775,991.00, net income of ₱79,009.00, an
income tax due thereon in the amount of ₱27,653.00, prior year’s excess credit of ₱146,026.00,
and creditable taxes withheld in 1989 of ₱54,104.00 or a total tax credit of ₱200,130.00 and credit
balance of ₱172,477.00.

On November 14, 1991, petitioner filed with respondent a claim for "the refund of excess
creditable withholding and income taxes for the years 1989 and 1990 in the aggregate amount of
₱147,036.15."

On December 27, 1991 alleging that the prescriptive period for refunds for 1989 would expire on
December 30, 1991 and that it was necessary to interrupt the prescriptive period, petitioner filed
with the respondent Court of Tax Appeals a petition for review praying for the refund of
"₱54,104.00 representing creditable taxes withheld from income payments of petitioner for the
calendar year ending December 31, 1989."

On February 25, 1992, respondent Commissioner filed an Answer and by way of special and/or
affirmative defenses averred the following: a) the petition states no cause of action for failure to
allege the dates when the taxes sought to be refunded were paid; b) petitioner’s claim for refund is
still under investigation by respondent Commissioner; c) the taxes claimed are deemed to have
been paid and collected in accordance with law and existing pertinent rules and regulations; d)
petitioner failed to allege that it is entitled to the refund or deductions claimed; e) petitioner’s
contention that it has available tax credit for the current and prior year is gratuitous and does not
ipso facto warrant the refund; f) petitioner failed to show that it has complied with the provision of
Section 230 in relation to Section 204 of the Tax Code.
After trial, the respondent Court rendered a decision ordering respondent Commissioner "to refund
in favor of petitioner the amount of ₱54,104.00, representing excess creditable withholding taxes
paid for January to July1989."

Respondent Commissioner moved for reconsideration of the decision, alleging that the ₱54,104.00
ordered to be refunded "has already been included and is part and parcel of the ₱172,477.00 which
petitioner automatically applied as tax credit for the succeeding taxable year 1990."

In a resolution dated October 21, 1993 Respondent Court reconsidered its decision of July 29,
1993 and dismissed the petition for review, stating that it has "overlooked the fact that the
petitioner’s 1989 Corporate Income Tax Return (Exh. "A") indicated that the amount of
₱54,104.00 subject of petitioner’s claim for refund has already been included as part and parcel of
the ₱172,477.00 which the petitioner automatically applied as tax credit for the succeeding taxable
year 1990."

Petitioner filed a Motion for Reconsideration which was denied by respondent Court on March 10,
1994.5

Petitioner filed a Petition for Review6 dated April 3, 1994 with the Court of Appeals. Resolving the twin
issues of whether petitioner is entitled to a refund of ₱54,104.00 representing creditable taxes withheld in
1989 and whether petitioner applied such creditable taxes withheld to its 1990 income tax liability, the
appellate court held that petitioner is not entitled to a refund because it had already elected to apply the total
amount of ₱172,447.00, which includes the ₱54,104.00 refund claimed, against its income tax liability for
1990. The appellate court elucidated on the reason for its dismissal of petitioner’s claim for refund, thus:

In the instant case, it appears that when petitioner filed its income tax return for the year 1989, it
filled up the box stating that the total amount of ₱172,477.00 shall be applied against its income
tax liabilities for the succeeding taxable year.

Petitioner did not specify in its return the amount to be refunded and the amount to be applied as
tax credit to the succeeding taxable year, but merely marked an "x" to the box indicating "to be
applied as tax credit to the succeeding taxable year." Unlike what petitioner had done when it filed
its income tax return for the year 1988, it specifically stated that out of the ₱146,026.00 the entire
refundable amount, only ₱64,623.00 will be made available as tax credit, while the amount of
₱81,403.00 will be refunded.

In its 1989 income tax return, petitioner filled up the box "to be applied as tax credit to succeeding
taxable year," which signified that instead of refund, petitioner will apply the total amount of
₱172,447.00, which includes the amount of ₱54,104.00 sought to be refunded, as tax credit for its
tax liabilities in 1990. Thus, there is really nothing left to be refunded to petitioner for the year
1989. To grant petitioner’s claim for refund is tantamount to granting twice the refund herein
sought to be refunded, to the prejudice of the Government.

The Court of Appeals denied petitioner’s Motion for Reconsideration7 dated November 8, 1994 in its
Resolution8 dated February 21, 1995 because the motion merely restated the grounds which have already
been considered and passed upon in its Decision.9

Petitioner thus filed the instant Petition for Review10 dated April 14, 1995 arguing that the evidence
presented before the lower courts conclusively shows that it did not apply the ₱54,104.00 to its 1990
income tax liability; that the Decision subject of the instant petition is inconsistent with a final decision11 of
the Sixteenth Division of the appellate court in C.A.-G.R. Sp. No. 32890 involving the same parties and
subject matter; and that the affirmation of the questioned Decision would lead to absurd results in the
manner of claiming refunds or in the application of prior years’ excess tax credits.
The Office of the Solicitor General (OSG) filed a Comment12 dated May 16, 1996 on behalf of respondents
asserting that the claimed refund of ₱54,104.00 was, by petitioner’s election in its Corporate Annual
Income Tax Return for 1989, to be applied against its tax liability for 1990. Not having submitted its tax
return for 1990 to show whether the said amount was indeed applied against its tax liability for 1990,
petitioner’s election in its tax return stands. The OSG also contends that petitioner’s election to apply its
overpaid income tax as tax credit against its tax liabilities for the succeeding taxable year is mandatory and
irrevocable.

On September 2, 1997, petitioner filed a Reply13 dated August 31, 1996 insisting that the issue in this case
is not whether the amount of ₱54,104.00 was included as tax credit to be applied against its 1990 income
tax liability but whether the same amount was actually applied as tax credit for 1990. Petitioner claims that
there is no need to show that the amount of ₱54,104.00 had not been automatically applied against its 1990
income tax liability because the appellate court’s decision in C.A.-G.R. Sp. No. 32890 clearly held that
petitioner charged its 1990 income tax liability against its tax credit for 1988 and not 1989. Petitioner also
disputes the OSG’s assertion that the taxpayer’s election as to the application of excess taxes is irrevocable
averring that there is nothing in the law that prohibits a taxpayer from changing its mind especially if
subsequent events leave the latter no choice but to change its election.

The OSG filed a Rejoinder14 dated March 5, 1997 stating that petitioner’s 1988 tax return shows a prior
year’s excess credit of ₱81,403.00, creditable tax withheld of ₱92,750.00 and tax due of ₱27,127.00.
Petitioner indicated that the prior year’s excess credit of ₱81,403.00 was to be refunded, while the
remaining amount of ₱64,623.00 (₱92,750.00 - ₱27,127.00) shall be considered as tax credit for 1989.
However, in its 1989 tax return, petitioner included the ₱81,403.00 which had already been segregated for
refund in the computation of its excess credit, and specified that the full amount of ₱172,479.00*
(₱81,403.00 + ₱64,623.00 + ₱54,104.00** - ₱27,653.00***) be considered as its tax credit for 1990.
Considering that it had obtained a favorable ruling for the refund of its excess credit for 1988 in CA-G.R.
SP. No. 32890, its remaining tax credit for 1989 should be the excess credit to be applied against its 1990
tax liability. In fine, the OSG argues that by its own election, petitioner can no longer ask for a refund of its
creditable taxes withheld in 1989 as the same had been applied against its 1990 tax due.

In its Resolution15 dated July 16, 1997, the Court gave due course to the petition and required the parties to
simultaneously file their respective memoranda within 30 days from notice. In compliance with this
directive, petitioner submitted its Memorandum16 dated September 18, 1997 in due time, while the OSG
filed its Memorandum17 dated April 27, 1998 only on April 29, 1998 after several extensions.

The petition must be denied.

As a matter of principle, it is not advisable for this Court to set aside the conclusion reached by an agency
such as the CTA which is, by the very nature of its functions, dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an expertise on the subject, unless there has
been an abuse or improvident exercise of its authority. 18

This interdiction finds particular application in this case since the CTA, after careful consideration of the
merits of the Commissioner of Internal Revenue’s motion for reconsideration, reconsidered its earlier
decision which ordered the latter to refund the amount of ₱54,104.00 to petitioner. Its resolution cannot be
successfully assailed based, as it is, on the pertinent laws as applied to the facts.

Petitioner’s 1989 tax return indicates an aggregate creditable tax of ₱172,477.00, representing its 1988
excess credit of ₱146,026.00 and 1989 creditable tax of ₱54,104.00 less tax due for 1989, which it elected
to apply as tax credit for the succeeding taxable year.19 According to petitioner, it successively utilized this
amount when it obtained refunds in CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300) and CTA Case No.
4528 (C.A.-G.R. Sp. No. 32890), and applied its 1990 tax liability, leaving a balance of ₱54,104.00, the
amount subject of the instant claim for refund.20 Represented mathematically, petitioner accounts for its
claim in this wise:
₱172,477.00 Amount indicated in petitioner’s 1989 tax return to be applied as tax credit for the succeeding taxable year

- 25,623.00 Claim for refund in CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300)

₱146,854.00 Balance as of April 16, 1990

- 59,510.00 Claim for refund in CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890)

₱87,344.00 Balance as of January 2, 1991

- 33,240.00 Income tax liability for calendar year 1990 applied as of April 15, 1991

₱54,104.00 Balance as of April 15, 1991 now subject of the instant claim for refund21

Other than its own bare allegations, however, petitioner offers no proof to the effect that its creditable tax
of ₱172,477.00 was applied as claimed above. Instead, it anchors its assertion of entitlement to refund on
an alleged finding in C.A.-G.R. Sp. No. 3289022 involving the same parties to the effect that petitioner
charged its 1990 income tax liability to its tax credit for 1988 and not its 1989 tax credit. Hence, its excess
creditable taxes withheld of ₱54,104.00 for 1989 was left untouched and may be refunded.

Note should be taken, however, that nowhere in the case referred to by petitioner did the Court of Appeals
make a categorical determination that petitioner’s tax liability for 1990 was applied against its 1988 tax
credit. The statement adverted to by petitioner was actually presented in the appellate court’s decision in
CA-G.R. Sp No. 32890 as part of petitioner’s own narration of facts. The pertinent portion of the decision
reads:

It would appear from petitioner’s submission as follows:

x x x since it has already applied to its prior year’s excess credit of ₱81,403.00 (which petitioner
wanted refunded when it filed its 1988 Income Tax Return on April 14, 1989) the income tax
liability for 1988 of ₱28,127.00 and the income tax liability for 1989 of ₱27,653.00, leaving a
balance refundable of ₱25,623.00 subject of C.T.A. Case No. 4439, the ₱92,750.00 (₱64,623.00
plus ₱28,127.00, since this second amount was already applied to the amount refundable of
₱81,403.00) should be the refundable amount. But since the taxpayer again used part of it to
satisfy its income tax liability of ₱33,240.00 for 1990, the amount refundable was ₱59,510.00,
which is the amount prayed for in the claim for refund and also in the petitioner (sic) for review.

That the present claim for refund already consolidates its claims for refund for 1988, 1989, and
1990, when it filed a claim for refund of ₱59,510.00 in this case (CTA Case No. 4528). Hence, the
present claim should be resolved together with the previous claims.23

The confusion as to petitioner’s entitlement to a refund could altogether have been avoided had it presented
its tax return for 1990. Such return would have shown whether petitioner actually applied its 1989 tax
credit of ₱172,477.00, which includes the ₱54,104.00 creditable taxes withheld for 1989 subject of the
instant claim for refund, against its 1990 tax liability as it had elected in its 1989 return, or at least, whether
petitioner’s tax credit of ₱172,477.00 was applied to its approved refunds as it claims.

The return would also have shown whether there remained an excess credit refundable to petitioner after
deducting its tax liability for 1990. As it is, we only have petitioner’s allegation that its tax due for 1990
was ₱33,240.00 and that this was applied against its remaining tax credits using its own "first in, first out"
method of computation.

It would have been different had petitioner not included the ₱54,104.00 creditable taxes for 1989 in the
total amount it elected to apply against its 1990 tax liabilities. Then, all that would have been required of
petitioner are: proof that it filed a claim for refund within the two (2)-year prescriptive period provided
under Section 230 of the NIRC; evidence that the income upon which the taxes were withheld was included
in its return; and to establish the fact of withholding by a copy of the statement (BIR Form No. 1743.1)
issued by the payor24 to the payee showing the amount paid and the amount of tax withheld therefrom.
However, since petitioner opted to apply its aggregate excess credits as tax credit for 1990, it was
incumbent upon it to present its tax return for 1990 to show that the claimed refund had not been
automatically credited and applied to its 1990 tax liabilities.

The grant of a refund is founded on the assumption that the tax return is valid, i.e., that the facts stated
therein are true and correct.25 Without the tax return, it is error to grant a refund since it would be virtually
impossible to determine whether the proper taxes have been assessed and paid.

Why petitioner failed to present such a vital piece of evidence confounds the Court. Petitioner could very
well have attached a copy of its final adjustment return for 1990 when it filed its claim for refund on
November 13, 1991. Annex "B" of its Petition for Review26 dated December 26, 1991 filed with the CTA,
in fact, states that its annual tax return for 1990 was submitted in support of its claim. Yet, petitioner’s tax
return for 1990 is nowhere to be found in the records of this case.

Had petitioner presented its 1990 tax return in refutation of respondent Commissioner’s allegation that it
did not present evidence to prove that its claimed refund had already been automatically credited against its
1990 tax liability, the CTA would not have reconsidered its earlier Decision. As it is, the absence of
petitioner’s 1990 tax return was the principal basis of the CTA’s Resolution reconsidering its earlier
Decision to grant petitioner’s claim for refund.

Petitioner could even still have attached a copy of its 1990 tax return to its petition for review before the
Court of Appeals. The appellate court, being a trier of facts, is authorized to receive it in evidence and
would likely have taken it into account in its disposition of the petition.

In BPI-Family Savings Bank v. Court of Appeals,27 although petitioner failed to present its 1990 tax return,
it presented other evidence to prove its claim that it did not apply and could not have applied the amount in
dispute as tax credit. Importantly, petitioner therein attached a copy of its final adjustment return for 1990
to its motion for reconsideration before the CTA buttressing its claim that it incurred a net loss and is thus
entitled to refund. Considering this fact, the Court held that there is no reason for the BIR to withhold the
tax refund.

In this case, petitioner’s failure to present sufficient evidence to prove its claim for refund is fatal to its
cause. After all, it is axiomatic that a claimant has the burden of proof to establish the factual basis of his or
her claim for tax credit or refund. Tax refunds, like tax exemptions, are construed strictly against the
taxpayer.28

Section 69, Chapter IX, Title II of the National Internal Revenue Code of the Philippines (NIRC) provides:

Sec. 69. Final Adjustment Return.—Every corporation liable to tax under Section 24 shall file a
final adjustment return covering the total net income for the preceding calendar or fiscal year. If
the sum of the quarterly tax payments made during the said taxable year is not equal to the total
tax due on the entire taxable net income of that year the corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly income taxes
paid, the refundable amount shown on its final adjustment return may be credited against
the estimated quarterly income tax liabilities for the taxable quarters of the succeeding
taxable year. [Emphasis supplied]

Revenue Regulation No. 10-77 of the Bureau of Internal Revenue clarifies:

SEC. 7. Filing of final or adjustment return and final payment of income tax. – A final or an
adjustment return on B.I.R. Form No. 1702 covering the total taxable income of the corporation
for the preceding calendar or fiscal year shall be filed on or before the 15th day of the fourth
month following the close of the calendar or fiscal year. The return shall include all the items of
gross income and deductions for the taxable year. The amount of income tax to be paid shall be
the balance of the total income tax shown on the final or adjustment return after deducting
therefrom the total quarterly income taxes paid during the preceding first three quarters of the
same calendar or fiscal year.

Any excess of the total quarterly payments over the actual income tax computed and shown in the
adjustment or final corporate income tax return shall either (a) be refunded to the corporation, or
(b) may be credited against the estimated quarterly income tax liabilities for the quarters of the
succeeding taxable year. The corporation must signify in its annual corporate adjustment return its
intention whether to request for refund of the overpaid income tax or claim for automatic credit to
be applied against its income tax liabilities for the quarters of the succeeding taxable year by
filling up the appropriate box on the corporate tax return (B.I.R. Form No. 1702). [Emphasis
supplied]

As clearly shown from the above-quoted provisions, in case the corporation is entitled to a refund of the
excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return
may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding year. The carrying forward of any excess or overpaid income tax for a given taxable year is
limited to the succeeding taxable year only.

In the recent case of AB Leasing and Finance Corporation v. Commissioner of Internal Revenue, 29 where
the Court declared that "[T]he carrying forward of any excess or overpaid income tax for a given taxable
year then is limited to the succeeding taxable year only," we ruled that since the case involved a claim for
refund of overpaid taxes for 1993, petitioner could only have applied the 1993 excess tax credits to its 1994
income tax liabilities. To further carry-over to 1995 the 1993 excess tax credits is violative of Section 69 of
the NIRC.

In this case, petitioner included its 1988 excess credit of ₱146,026.00 in the computation of its total excess
credit for 1989. It indicated this amount, plus the 1989 creditable taxes withheld of ₱54,104.00 or a total of
₱172,477.00, as its total excess credit to be applied as tax credit for 1990. By its own disclosure, petitioner
effectively combined its 1988 and 1989 tax credits and applied its 1990 tax due of ₱33,240.00 against the
total, and not against its creditable taxes for 1989 only as allowed by Section 69. This is a clear admission
that petitioner’s 1988 tax credit was incorrectly and illegally applied against its 1990 tax liabilities.

Parenthetically, while a taxpayer is given the choice whether to claim for refund or have its excess taxes
applied as tax credit for the succeeding taxable year, such election is not final. Prior verification and
approval by the Commissioner of Internal Revenue is required. The availment of the remedy of tax credit is
not absolute and mandatory. It does not confer an absolute right on the taxpayer to avail of the tax credit
scheme if it so chooses. Neither does it impose a duty on the part of the government to sit back and allow
an important facet of tax collection to be at the sole control and discretion of the taxpayer. 30

Contrary to petitioner’s assertion however, the taxpayer’s election, signified by the ticking of boxes in Item
10 of BIR Form No. 1702, is not a mere technical exercise. It aids in the proper management of claims for
refund or tax credit by leading tax authorities to the direction they should take in addressing the claim.
The amendment of Section 69 by what is now Section 76 of Republic Act No. 8424 31 emphasizes that it is
imperative to indicate in the tax return or the final adjustment return whether a tax credit or refund is sought
by making the taxpayer’s choice irrevocable. Section 76 provides:

SEC. 76. Final Adjustment Return.—Every corporation liable to tax under Section 27 shall file a
final adjustment return covering the total taxable income for the preceding calendar or fiscal year.
If the sum of the quarterly tax payments made during the said taxable year is not equal to the total
tax due on the entire taxable income of that year, the corporation shall either:

(A) Pay the balance of the tax still due; or

(B) Carry-over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income
taxes paid, the excess amount shown on its final adjustment return may be carried over and
credited against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to carry-over and apply the excess quarterly
income tax against income tax due for the taxable quarters of the succeeding taxable years
has been made, such option shall be considered irrevocable for that taxable period and no
application for cash refund or issuance of a tax credit certificate shall be allowed therefore.
[Emphasis supplied]

As clearly seen from this provision, the taxpayer is allowed three (3) options if the sum of its quarterly tax
payments made during the taxable year is not equal to the total tax due for that year: (a) pay the balance of
the tax still due; (b) carry-over the excess credit; or (c) be credited or refunded the amount paid. If the
taxpayer has paid excess quarterly income taxes, it may be entitled to a tax credit or refund as shown in its
final adjustment return which may be carried over and applied against the estimated quarterly income tax
liabilities for the taxable quarters of the succeeding taxable years. However, once the taxpayer has
exercised the option to carry-over and to apply the excess quarterly income tax against income tax due for
the taxable quarters of the succeeding taxable years, such option is irrevocable for that taxable period and
no application for cash refund or issuance of a tax credit certificate shall be allowed.

Had this provision been in effect when the present claim for refund was filed, petitioner’s excess credits for
1988 could have been properly applied to its 1990 tax liabilities. Unfortunately for petitioner, this is not the
case.

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. And since taxes are what we
pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation
and statutes granting tax exemptions are thus construed strictissimi juris against the taxpayer and liberally
in favor of the taxing authority. A claim of refund or exemption from tax payments must be clearly shown
and be based on language in the law too plain to be mistaken. Elsewise stated, taxation is the rule,
exemption therefrom is the exception.32

WHEREFORE, the instant petition is DENIED. The challenged decision of the Court of Appeals is
hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.

POLICE POWER AS AN IMPLEMENT OF POWER OF TAX


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

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio Jayme
Ledesma, plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.

Ernesto J. Gonzaga for appellant.


Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres and
Solicitor Felicisimo R. Rosete for appellee.

REYES, J.B L., J.:

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

Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to the
threat to our industry by the imminent imposition of export taxes upon sugar as provided in the Tydings-
McDuffe Act, and the "eventual loss of its preferential position in the United States market"; wherefore, the
national policy was expressed "to obtain a readjustment of the benefits derived from the sugar industry by
the component elements thereof" and "to stabilize the sugar industry so as to prepare it for the eventuality
of the loss of its preferential position in the United States market and the imposition of the export taxes."

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

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

According to section 6 of the law —

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

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

Second, to readjust the benefits derived from the sugar industry by all of the component elements
thereof — the mill, the landowner, the planter of the sugar cane, and the laborers in the factory and
in the field — so that all might continue profitably to engage therein;lawphi1.net

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

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme
Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the estate
as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-1950; alleging that such tax is
unconstitutional and void, being levied for the aid and support of the sugar industry exclusively, which in
plaintiff's opinion is not a public purpose for which a tax may be constitutioally levied. The action having
been dismissed by the Court of First Instance, the plaintifs appealed the case directly to this Court
(Judiciary Act, section 17).

The basic defect in the plaintiff's position is his assumption that the tax provided for in Commonwealth Act
No. 567 is a pure exercise of the taxing power. Analysis of the Act, and particularly of section 6 (heretofore
quoted in full), will show that the tax is levied with a regulatory purpose, to provide means for the
rehabilitation and stabilization of the threatened sugar industry. In other words, the act is primarily an
exercise of the police power.

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

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

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

Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of public
concern, it follows that the Legislature may determine within reasonable bounds what is necessary for its
protection and expedient for its promotion. Here, the legislative discretion must be allowed fully play,
subject only to the test of reasonableness; and it is not contended that the means provided in section 6 of the
law (above quoted) bear no relation to the objective pursued or are oppressive in character. If objective and
methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds
for their prosecution and attainment. Taxation may be made the implement of the state's police power
(Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L.
Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed. 579).

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

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

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

The decision appealed from is affirmed, with costs against appellant. So ordered.

POWER OF TAX AS AN IMPLEMENT OF ED

CARLOS SUPERDRUG CORP. vs. DSWD, ET. AL


GR No. 166494, June 29, 2007

FACTS:
Ÿ Petitioners, belonging to domestic corporations and proprietors operating drugstores in the Philippines, are
praying for preliminary injunction assailing the constitutionality of Section 4(a) of Republic Act (R.A.) No.
9257, otherwise known as the “Expanded Senior Citizens Act of 2003.” On February 26, 2004, R.A. No.
9257, amending R.A. No. 7432, was signed into law by President Gloria Macapagal-Arroyo and it became
effective on March 21, 2004. Section 4(a) of the Act states:

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

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

Ÿ The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the
net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is granted. Provided, further, That
the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their
gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of
the National Internal Revenue Code, as amended.
Ÿ The DSWD, on May 8, 2004, approved and adopted the Implementing Rules and Regulations of RA No.
9275, Rule VI, Article 8 which contains the proviso that the implementation of the tax deduction shall be
subject to the Revenue Regulations to be issued by the BIR and approved by the DOF. With the new law,
the Drug Stores Association of the Philippines wanted a clarification of the meaning of tax deduction. The
DOF clarified that under a tax deduction scheme, the tax deduction on discounts was subtracted from Net
Sales together with other deductions which are considered as operating expenses before the Tax Due was
computed based on the Net Taxable Income. On the other hand, under a tax credit scheme, the amount of
discounts which is the tax credit item, was deducted directly from the tax due amount.
Ÿ The DOH issued an Administrative Order that the twenty percent discount shall include both prescription
and non-prescription medicines, whether branded or generic. It stated that such discount would be
provided in the purchase of medicines from all establishments supplying medicines for the exclusive use of
the senior citizens.
Ÿ Drug store owners assail the law with the contention that granting the discount would result to loss of profit
and capital especially that such law failed to provide a scheme to justly compensate the discount.

ISSUE: WON Section 4(a) of the Expanded Senior Citizens Act is unconstitutional or not violative of
Article 3 Section 9 of the Constitution which provides that private property shall not be taken for public use
without just compensation and the equal protection clause of Article 3 Section 1.

HELD:
Ÿ The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private
property for public use or benefit. This constitutes compensable taking for which petitioners would
ordinarily become entitled to a just compensation. Just compensation is defined as the full and fair
equivalent of the property taken from its owner by the expropriator. The measure is not the taker’s gain but
the owner’s loss. The word just is used to intensify the meaning of the word compensation, and to convey
the idea that the equivalent to be rendered for the property to be taken shall be real, substantial, full and
ample.
Ÿ The law grants a twenty percent discount to senior citizens for medical and dental services, and diagnostic
and laboratory fees; admission fees charged by theaters, concert halls, circuses, carnivals, and other similar
places of culture, leisure and amusement; fares for domestic land, air and sea travel; utilization of services
in hotels and similar lodging establishments, restaurants and recreation centers; and purchases of medicines
for the exclusive use or enjoyment of senior citizens. As a form of reimbursement, the law provides that
business establishments extending the twenty percent discount to senior citizens may claim the discount as
a tax deduction.
Ÿ The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general
welfare for its object. Police power is not capable of an exact definition, but has been purposely veiled in
general terms to underscore its comprehensiveness to meet all exigencies and provide enough room for an
efficient and flexible response to conditions and circumstances, thus assuring the greatest benefits.
Accordingly, it has been described as “the most essential, insistent and the least limitable of powers,
extending as it does to all the great public needs.” It is “[t]he power vested in the legislature by the
constitution to make, ordain, and establish all manner of wholesome and reasonable laws, statutes, and
ordinances, either with penalties or without, not repugnant to the constitution, as they shall judge to be for
the good and welfare of the commonwealth, and of the subjects of the same.”

G.R. No. 175356 December 3, 2013

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


vs.
SECRETARY OF THE DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT and
THE SECRETARY OF THE DEPARTMENT OF FINANCE, Respondents.
DECISION

DEL CASTILLO, J.:

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

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

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

Factual Antecedents

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

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

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

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

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

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

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

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

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

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

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

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

xxxx

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

Laws Not Amended by Regulations

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

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

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

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

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

xxxx

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

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

SEC. 8. AVAILMENT BY ESTABLISHMENTS OF SALES DISCOUNTS AS DEDUCTION FROM


GROSS INCOME. – Establishments enumerated in subparagraph (6) hereunder granting sales discounts to
senior citizens on the sale of goods and/or services specified thereunder are entitled to deduct the said
discount from gross income subject to the following conditions:

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

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

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

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

(5) The business establishment giving sales discounts to qualified senior citizens is required to
keep separate and accurate record[s] of sales, which shall include the name of the senior citizen,
TIN, OSCA ID, gross sales/receipts, sales discount granted, [date] of [transaction] and invoice
number for every sale transaction to senior citizen.
(6) Only the following business establishments which granted sales discount to senior citizens on
their sale of goods and/or services may claim the said discount granted as deduction from gross
income, namely:

xxxx

(i) Funeral parlors and similar establishments – The beneficiary or any person who shall shoulder the
funeral and burial expenses of the deceased senior citizen shall claim the discount, such as casket,
embalmment, cremation cost and other related services for the senior citizen upon payment and
presentation of [his] death certificate.

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

RULE VI DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS

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

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

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

Issues

Petitioners raise the following issues:

A.

WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR CONTROVERSY.

B.

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

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

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

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

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

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

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

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

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

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

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

Respondents’ Arguments

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

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

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

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

Our Ruling
The Petition lacks merit.

There exists an actual case or controversy.

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

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

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

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

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

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

In that case, we ruled:

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private
property. Compelling drugstore owners and establishments to grant the discount will result in a loss of
profit and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2)
the law failed to provide a scheme whereby drugstores will be justly compensated for the discount.
Examining petitioners’ arguments, it is apparent that what petitioners are ultimately questioning is the
validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount
that they extend to senior citizens. Based on the afore-stated DOF Opinion, the tax deduction scheme does
not fully reimburse petitioners for the discount privilege accorded to senior citizens. This is because the
discount is treated as a deduction, a tax-deductible expense that is subtracted from the gross income and
results in a lower taxable income. Stated otherwise, it is an amount that is allowed by law to reduce the
income prior to the application of the tax rate to compute the amount of tax which is due. Being a tax
deduction, the discount does not reduce taxes owed on a peso for peso basis but merely offers a fractional
reduction in taxes owed. Theoretically, the treatment of the discount as a deduction reduces the net income
of the private establishments concerned. The discounts given would have entered the coffers and formed
part of the gross sales of the private establishments, were it not for R.A. No. 9257. The permanent
reduction in their total revenues is a forced subsidy corresponding to the taking of private property for
public use or benefit. This constitutes compensable taking for which petitioners would ordinarily become
entitled to a just compensation. Just compensation is defined as the full and fair equivalent of the property
taken from its owner by the expropriator. The measure is not the taker’s gain but the owner’s loss. The
word just is used to intensify the meaning of the word compensation, and to convey the idea that the
equivalent to be rendered for the property to be taken shall be real, substantial, full and ample. A tax
deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet the
definition of just compensation. Having said that, this raises the question of whether the State, in promoting
the health and welfare of a special group of citizens, can impose upon private establishments the burden of
partly subsidizing a government program. The Court believes so. The Senior Citizens Act was enacted
primarily to maximize the contribution of senior citizens to nation-building, and to grant benefits and
privileges to them for their improvement and well-being as the State considers them an integral part of our
society. The priority given to senior citizens finds its basis in the Constitution as set forth in the law
itself.1âwphi1 Thus, the Act provides: SEC. 2. Republic Act No. 7432 is hereby amended to read as
follows:

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

xxx xxx xxx

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

To implement the above policy, the law grants a twenty percent discount to senior citizens for medical and
dental services, and diagnostic and laboratory fees; admission fees charged by theaters, concert halls,
circuses, carnivals, and other similar places of culture, leisure and amusement; fares for domestic land, air
and sea travel; utilization of services in hotels and similar lodging establishments, restaurants and
recreation centers; and purchases of medicines for the exclusive use or enjoyment of senior citizens. As a
form of reimbursement, the law provides that business establishments extending the twenty percent
discount to senior citizens may claim the discount as a tax deduction. The law is a legitimate exercise of
police power which, similar to the power of eminent domain, has general welfare for its object. Police
power is not capable of an exact definition, but has been purposely veiled in general terms to underscore its
comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible response
to conditions and circumstances, thus assuring the greatest benefits. Accordingly, it has been described as
"the most essential, insistent and the least limitable of powers, extending as it does to all the great public
needs." It is "[t]he power vested in the legislature by the constitution to make, ordain, and establish all
manner of wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not
repugnant to the constitution, as they shall judge to be for the good and welfare of the commonwealth, and
of the subjects of the same." For this reason, when the conditions so demand as determined by the
legislature, property rights must bow to the primacy of police power because property rights, though
sheltered by due process, must yield to general welfare. Police power as an attribute to promote the
common good would be diluted considerably if on the mere plea of petitioners that they will suffer loss of
earnings and capital, the questioned provision is invalidated. Moreover, in the absence of evidence
demonstrating the alleged confiscatory effect of the provision in question, there is no basis for its
nullification in view of the presumption of validity which every law has in its favor. Given these, it is
incorrect for petitioners to insist that the grant of the senior citizen discount is unduly oppressive to their
business, because petitioners have not taken time to calculate correctly and come up with a financial report,
so that they have not been able to show properly whether or not the tax deduction scheme really works
greatly to their disadvantage. In treating the discount as a tax deduction, petitioners insist that they will
incur losses because, referring to the DOF Opinion, for every ₱1.00 senior citizen discount that petitioners
would give, P0.68 will be shouldered by them as only P0.32 will be refunded by the government by way of
a tax deduction. To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive
maintenance drug Norvasc as an example. According to the latter, it acquires Norvasc from the distributors
at ₱37.57 per tablet, and retails it at ₱39.60 (or at a margin of 5%). If it grants a 20% discount to senior
citizens or an amount equivalent to ₱7.92, then it would have to sell Norvasc at ₱31.68 which translates to
a loss from capital of ₱5.89 per tablet. Even if the government will allow a tax deduction, only ₱2.53 per
tablet will be refunded and not the full amount of the discount which is ₱7.92. In short, only 32% of the
20% discount will be reimbursed to the drugstores. Petitioners’ computation is flawed. For purposes of
reimbursement, the law states that the cost of the discount shall be deducted from gross income, the amount
of income derived from all sources before deducting allowable expenses, which will result in net income.
Here, petitioners tried to show a loss on a per transaction basis, which should not be the case. An income
statement, showing an accounting of petitioners' sales, expenses, and net profit (or loss) for a given period
could have accurately reflected the effect of the discount on their income. Absent any financial statement,
petitioners cannot substantiate their claim that they will be operating at a loss should they give the discount.
In addition, the computation was erroneously based on the assumption that their customers consisted
wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on income, not on the amount of the
discount.

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

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

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

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

Petitioners argue that we have previously ruled in Central Luzon Drug Corporation37 that the 20% discount
is an exercise of the power of eminent domain, thus, requiring the payment of just compensation. They urge
us to re-examine our ruling in Carlos Superdrug Corporation38 which allegedly reversed the ruling in
Central Luzon Drug Corporation.39

They also point out that Carlos Superdrug Corporation40 recognized that the tax deduction scheme under
the assailed law does not provide for sufficient just compensation. We agree with petitioners’ observation
that there are statements in Central Luzon Drug Corporation41 describing the 20% discount as an exercise
of the power of eminent domain, viz.:
[T]he privilege enjoyed by senior citizens does not come directly from the State, but rather from the private
establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be
deemed as their just compensation for private property taken by the State for public use. The concept of
public use is no longer confined to the traditional notion of use by the public, but held synonymous with
public interest, public benefit, public welfare, and public convenience. The discount privilege to which our
senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong.
The discounts given would have entered the coffers and formed part of the gross sales of the private
establishments concerned, were it not for RA 7432. The permanent reduction in their total revenues is a
forced subsidy corresponding to the taking of private property for public use or benefit. As a result of the
20 percent discount imposed by RA 7432, respondent becomes entitled to a just compensation. This term
refers not only to the issuance of a tax credit certificate indicating the correct amount of the discounts
given, but also to the promptness in its release. Equivalent to the payment of property taken by the State,
such issuance — when not done within a reasonable time from the grant of the discounts — cannot be
considered as just compensation. In effect, respondent is made to suffer the consequences of being
immediately deprived of its revenues while awaiting actual receipt, through the certificate, of the equivalent
amount it needs to cope with the reduction in its revenues. Besides, the taxation power can also be used as
an implement for the exercise of the power of eminent domain. Tax measures are but "enforced
contributions exacted on pain of penal sanctions" and "clearly imposed for a public purpose." In recent
years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and
the equitable distribution of wealth. While it is a declared commitment under Section 1 of RA 7432, social
justice "cannot be invoked to trample on the rights of property owners who under our Constitution and laws
are also entitled to protection. The social justice consecrated in our [C]onstitution [is] not intended to take
away rights from a person and give them to another who is not entitled thereto." For this reason, a just
compensation for income that is taken away from respondent becomes necessary. It is in the tax credit that
our legislators find support to realize social justice, and no administrative body can alter that fact. To put it
differently, a private establishment that merely breaks even — without the discounts yet — will surely start
to incur losses because of such discounts. The same effect is expected if its mark-up is less than 20 percent,
and if all its sales come from retail purchases by senior citizens. Aside from the observation we have
already raised earlier, it will also be grossly unfair to an establishment if the discounts will be treated
merely as deductions from either its gross income or its gross sales.1âwphi1 Operating at a loss through no
fault of its own, it will realize that the tax credit limitation under RR 2-94 is inutile, if not improper. Worse,
profit-generating businesses will be put in a better position if they avail themselves of tax credits denied
those that are losing, because no taxes are due from the latter.42 (Italics in the original; emphasis supplied)

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

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private
property. Compelling drugstore owners and establishments to grant the discount will result in a loss of
profit and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2)
the law failed to provide a scheme whereby drugstores will be justly compensated for the discount.
Examining petitioners’ arguments, it is apparent that what petitioners are ultimately questioning is the
validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount
that they extend to senior citizens. Based on the afore-stated DOF Opinion, the tax deduction scheme does
not fully reimburse petitioners for the discount privilege accorded to senior citizens. This is because the
discount is treated as a deduction, a tax-deductible expense that is subtracted from the gross income and
results in a lower taxable income. Stated otherwise, it is an amount that is allowed by law to reduce the
income prior to the application of the tax rate to compute the amount of tax which is due. Being a tax
deduction, the discount does not reduce taxes owed on a peso for peso basis but merely offers a fractional
reduction in taxes owed. Theoretically, the treatment of the discount as a deduction reduces the net income
of the private establishments concerned. The discounts given would have entered the coffers and formed
part of the gross sales of the private establishments, were it not for R.A. No. 9257. The permanent
reduction in their total revenues is a forced subsidy corresponding to the taking of private property for
public use or benefit. This constitutes compensable taking for which petitioners would ordinarily become
entitled to a just compensation. Just compensation is defined as the full and fair equivalent of the property
taken from its owner by the expropriator. The measure is not the taker’s gain but the owner’s loss. The
word just is used to intensify the meaning of the word compensation, and to convey the idea that the
equivalent to be rendered for the property to be taken shall be real, substantial, full and ample. A tax
deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet the
definition of just compensation. Having said that, this raises the question of whether the State, in promoting
the health and welfare of a special group of citizens, can impose upon private establishments the burden of
partly subsidizing a government program. The Court believes so.44

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

First, we note that the above-quoted disquisition on eminent domain in Central Luzon Drug Corporation48
is obiter dicta and, thus, not binding precedent. As stated earlier, in Central Luzon Drug Corporation,49 we
ruled that the BIR acted ultra vires when it effectively treated the 20% discount as a tax deduction, under
Sections 2.i and 4 of RR No. 2-94, despite the clear wording of the previous law that the same should be
treated as a tax credit. We were, therefore, not confronted in that case with the issue as to whether the 20%
discount is an exercise of police power or eminent domain. Second, although we adverted to Central Luzon
Drug Corporation50 in our ruling in Carlos Superdrug Corporation,51 this referred only to preliminary
matters. A fair reading of Carlos Superdrug Corporation52 would show that we categorically ruled therein
that the 20% discount is a valid exercise of police power. Thus, even if the current law, through its tax
deduction scheme (which abandoned the tax credit scheme under the previous law), does not provide for a
peso for peso reimbursement of the 20% discount given by private establishments, no constitutional
infirmity obtains because, being a valid exercise of police power, payment of just compensation is not
warranted. We have carefully reviewed the basis of our ruling in Carlos Superdrug Corporation53 and we
find no cogent reason to overturn, modify or abandon it. We also note that petitioners’ arguments are a
mere reiteration of those raised and resolved in Carlos Superdrug Corporation.54 Thus, we sustain Carlos
Superdrug Corporation.55

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

Police power versus eminent domain.

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

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

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

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

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

Eminent domain, on the other hand, is the inherent power of the State to take or appropriate private
property for public use.63
The Constitution, however, requires that private property shall not be taken without due process of law and
the payment of just compensation.64

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

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

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

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

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

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

It may not always be easy to determine whether a challenged governmental act is an exercise of police
power or eminent domain. The very nature of police power as elastic and responsive to various social
conditions73 as well as the evolving meaning and scope of public use74 and just compensation75 in
eminent domain evinces that these are not static concepts. Because of the exigencies of rapidly changing
times, Congress may be compelled to adopt or experiment with different measures to promote the general
welfare which may not fall squarely within the traditionally recognized categories of police power and
eminent domain. The judicious approach, therefore, is to look at the nature and effects of the challenged
governmental act and decide, on the basis thereof, whether the act is the exercise of police power or
eminent domain. Thus, we now look at the nature and effects of the 20% discount to determine if it
constitutes an exercise of police power or eminent domain. The 20% discount is intended to improve the
welfare of senior citizens who, at their age, are less likely to be gainfully employed, more prone to illnesses
and other disabilities, and, thus, in need of subsidy in purchasing basic commodities. It may not be amiss to
mention also that the discount serves to honor senior citizens who presumably spent the productive years of
their lives on contributing to the development and progress of the nation. This distinct cultural Filipino
practice of honoring the elderly is an integral part of this law. As to its nature and effects, the 20% discount
is a regulation affecting the ability of private establishments to price their products and services relative to a
special class of individuals, senior citizens, for which the Constitution affords preferential concern.76
In turn, this affects the amount of profits or income/gross sales that a private establishment can derive from
senior citizens. In other words, the subject regulation affects the pricing, and, hence, the profitability of a
private establishment. However, it does not purport to appropriate or burden specific properties, used in the
operation or conduct of the business of private establishments, for the use or benefit of the public, or senior
citizens for that matter, but merely regulates the pricing of goods and services relative to, and the amount of
profits or income/gross sales that such private establishments may derive from, senior citizens. The subject
regulation may be said to be similar to, but with substantial distinctions from, price control or rate of return
on investment control laws which are traditionally regarded as police power measures.77

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

In City of Manila v. Laguio, Jr.,80 we recognized that— x x x a taking also could be found if government
regulation of the use of property went "too far." When regulation reaches a certain magnitude, in most if
not in all cases there must be an exercise of eminent domain and compensation to support the act. While
property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking. No
formula or rule can be devised to answer the questions of what is too far and when regulation becomes a
taking. In Mahon, Justice Holmes recognized that it was "a question of degree and therefore cannot be
disposed of by general propositions." On many other occasions as well, the U.S. Supreme Court has said
that the issue of when regulation constitutes a taking is a matter of considering the facts in each case. The
Court asks whether justice and fairness require that the economic loss caused by public action must be
compensated by the government and thus borne by the public as a whole, or whether the loss should remain
concentrated on those few persons subject to the public action.81

The impact or effect of a regulation, such as the one under consideration, must, thus, be determined on a
case-to-case basis. Whether that line between permissible regulation under police power and "taking" under
eminent domain has been crossed must, under the specific circumstances of this case, be subject to proof
and the one assailing the constitutionality of the regulation carries the heavy burden of proving that the
measure is unreasonable, oppressive or confiscatory. The time-honored rule is that the burden of proving
the unconstitutionality of a law rests upon the one assailing it and "the burden becomes heavier when police
power is at issue."82
The 20% senior citizen discount has not been shown to be unreasonable, oppressive or confiscatory.

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

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

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

Conclusion

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

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

PURPOSE AND SCOPE OF TAX


Caltex Philippines, Inc. v Commission on Audit GR No. 92585, May 8, 1992

FACTS:
In 1989, COA sent a letter to Caltex, directing it to remit its collection to the Oil Price Stabilization Fund
(OPSF), excluding that unremitted for the years 1986 and 1988, of the additional tax on petroleum products
authorized under the PD 1956. Pending such remittance, all of its claims for reimbursement from the OPSF
shall be held in abeyance. The grant total of its unremitted collections of the above tax is P1,287,668,820.
Caltex submitted a proposal to COA for the payment and the recovery of claims. COA approved the
proposal but prohibited Caltex from further offsetting remittances and reimbursements for the current and
ensuing years. Caltex moved for reconsideration but was denied. Hence, the present petition.

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

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

G.R. No. 158540 July 8, 2004

SOUTHERN CROSS CEMENT CORPORATION, petitioner,


vs.
THE PHILIPPINE CEMENT MANUFACTURERS CORP., THE SECRETARY OF THE
DEPARTMENT OF TRADE & INDUSTRY, THE SECRETARY OF THE DEPARTMENT OF
FINANCE, and THE COMMISSIONER OF THE BUREAU OF CUSTOMS, respondents.

DECISION

TINGA, J.:

"Good fences make good neighbors," so observed Robert Frost, the archetype of traditional New England
detachment. The Frost ethos has been heeded by nations adjusting to the effects of the liberalized global
market.1 The Philippines, for one, enacted Republic Act (Rep. Act) No. 8751 (on the imposition of
countervailing duties), Rep. Act No. 8752 (on the imposition of anti-dumping duties) and, finally, Rep. Act
No. 8800, also known as the Safeguard Measures Act ("SMA")2 soon after it joined the General Agreement
on Tariff and Trade (GATT) and the World Trade Organization (WTO) Agreement.3

The SMA provides the structure and mechanics for the imposition of emergency measures, including
tariffs, to protect domestic industries and producers from increased imports which inflict or could inflict
serious injury on them.4 The wisdom of the policies behind the SMA, however, is not put into question by
the petition at bar. The questions submitted to the Court relate to the means and the procedures ordained in
the law to ensure that the determination of the imposition or non-imposition of a safeguard measure is
proper.

Antecedent Facts

Petitioner Southern Cross Cement Corporation ("Southern Cross") is a domestic corporation engaged in the
business of cement manufacturing, production, importation and exportation. Its principal stockholders are
Taiheiyo Cement Corporation and Tokuyama Corporation, purportedly the largest cement manufacturers in
Japan.5

Private respondent Philippine Cement Manufacturers Corporation6 ("Philcemcor") is an association of


domestic cement manufacturers. It has eighteen (18) members,7 per Record. While Philcemcor heralds
itself to be an association of domestic cement manufacturers, it appears that considerable equity holdings, if
not controlling interests in at least twelve (12) of its member-corporations, were acquired by the three
largest cement manufacturers in the world, namely Financiere Lafarge S.A. of France, Cemex S.A. de C.V.
of Mexico, and Holcim Ltd. of Switzerland (formerly Holderbank Financiere Glaris, Ltd., then Holderfin
B.V.).8

On 22 May 2001, respondent Department of Trade and Industry ("DTI") accepted an application from
Philcemcor, alleging that the importation of gray Portland cement9 in increased quantities has caused
declines in domestic production, capacity utilization, market share, sales and employment; as well as
caused depressed local prices. Accordingly, Philcemcor sought the imposition at first of provisional, then
later, definitive safeguard measures on the import of cement pursuant to the SMA. Philcemcor filed the
application in behalf of twelve (12) of its member-companies.10

After preliminary investigation, the Bureau of Import Services of the DTI, determined that critical
circumstances existed justifying the imposition of provisional measures.11 On 7 November 2001, the DTI
issued an Order, imposing a provisional measure equivalent to Twenty Pesos and Sixty Centavos (P20.60)
per forty (40) kilogram bag on all importations of gray Portland cement for a period not exceeding two
hundred (200) days from the date of issuance by the Bureau of Customs (BOC) of the implementing
Customs Memorandum Order.12 The corresponding Customs Memorandum Order was issued on 10
December 2001, to take effect that same day and to remain in force for two hundred (200) days.13

In the meantime, the Tariff Commission, on 19 November 2001, received a request from the DTI for a
formal investigation to determine whether or not to impose a definitive safeguard measure on imports of
gray Portland cement, pursuant to Section 9 of the SMA and its Implementing Rules and Regulations. A
notice of commencement of formal investigation was published in the newspapers on 21 November 2001.
Individual notices were likewise sent to concerned parties, such as Philcemcor, various importers and
exporters, the Embassies of Indonesia, Japan and Taiwan, contractors/builders associations, industry
associations, cement workers' groups, consumer groups, non-government organizations and concerned
government agencies.14 A preliminary conference was held on 27 November 2001, attended by several
concerned parties, including Southern Cross.15 Subsequently, the Tariff Commission received several
position papers both in support and against Philcemcor's application.16 The Tariff Commission also visited
the corporate offices and manufacturing facilities of each of the applicant companies, as well as that of
Southern Cross and two other cement importers.17

On 13 March 2002, the Tariff Commission issued its Formal Investigation Report ("Report"). Among the
factors studied by the Tariff Commission in its Report were the market share of the domestic industry,18
production and sales,19 capacity utilization,20 financial performance and profitability,21 and return on
sales.22 The Tariff Commission arrived at the following conclusions:

1. The circumstances provided in Article XIX of GATT 1994 need not be demonstrated since the
product under consideration (gray Portland cement) is not the subject of any Philippine obligation
or tariff concession under the WTO Agreement. Nonetheless, such inquiry is governed by the
national legislation (R.A. 8800) and the terms and conditions of the Agreement on Safeguards.

2. The collective output of the twelve (12) applicant companies constitutes a major proportion of
the total domestic production of gray Portland cement and blended Portland cement.

3. Locally produced gray Portland cement and blended Portland cement (Pozzolan) are "like" to
imported gray Portland cement.

4. Gray Portland cement is being imported into the Philippines in increased quantities, both in
absolute terms and relative to domestic production, starting in 2000. The increase in volume of
imports is recent, sudden, sharp and significant.

5. The industry has not suffered and is not suffering significant overall impairment in its condition,
i.e., serious injury.

6. There is no threat of serious injury that is imminent from imports of gray Portland cement.

7. Causation has become moot and academic in view of the negative determination of the elements
of serious injury and imminent threat of serious injury.23

Accordingly, the Tariff Commission made the following recommendation, to wit:

The elements of serious injury and imminent threat of serious injury not having been established,
it is hereby recommended that no definitive general safeguard measure be imposed on the
importation of gray Portland cement.24

The DTI received the Report on 14 March 2002. After reviewing the report, then DTI Secretary Manuel
Roxas II ("DTI Secretary") disagreed with the conclusion of the Tariff Commission that there was no
serious injury to the local cement industry caused by the surge of imports.25 In view of this disagreement,
the DTI requested an opinion from the Department of Justice ("DOJ") on the DTI Secretary's scope of
options in acting on the Commission's recommendations. Subsequently, then DOJ Secretary Hernando
Perez rendered an opinion stating that Section 13 of the SMA precluded a review by the DTI Secretary of
the Tariff Commission's negative finding, or finding that a definitive safeguard measure should not be
imposed.26

On 5 April 2002, the DTI Secretary promulgated a Decision. After quoting the conclusions of the Tariff
Commission, the DTI Secretary noted the DTI's disagreement with the conclusions. However, he also cited
the DOJ Opinion advising the DTI that it was bound by the negative finding of the Tariff Commission.
Thus, he ruled as follows:

The DTI has no alternative but to abide by the [Tariff] Commission's recommendations.

IN VIEW OF THE FOREGOING, and in accordance with Section 13 of RA 8800 which states:

"In the event of a negative final determination; or if the cash bond is in excess of the
definitive safeguard duty assessed, the Secretary shall immediately issue, through the
Secretary of Finance, a written instruction to the Commissioner of Customs,
authorizing the return of the cash bond or the remainder thereof, as the case may be,
previously collected as provisional general safeguard measure within ten (10) days
from the date a final decision has been made; Provided, that the government shall not
be liable for any interest on the amount to be returned. The Secretary shall not accept
for consideration another petition from the same industry, with respect to the same
imports of the product under consideration within one (1) year after the date of
rendering such a decision."

The DTI hereby issues the following:

The application for safeguard measures against the importation of gray Portland cement filed by
PHILCEMCOR (Case No. 02-2001) is hereby denied.27 (Emphasis in the original)

Philcemcor received a copy of the DTI Decision on 12 April 2002. Ten days later, it filed with the Court of
Appeals a Petition for Certiorari, Prohibition and Mandamus28 seeking to set aside the DTI Decision, as
well as the Tariff Commission's Report. Philcemcor likewise applied for a Temporary Restraining
Order/Injunction to enjoin the DTI and the BOC from implementing the questioned Decision and Report. It
prayed that the Court of Appeals direct the DTI Secretary to disregard the Report and to render judgment
independently of the Report. Philcemcor argued that the DTI Secretary, vested as he is under the law with
the power of review, is not bound to adopt the recommendations of the Tariff Commission; and, that the
Report is void, as it is predicated on a flawed framework, inconsistent inferences and erroneous
methodology.29

On 10 June 2002, Southern Cross filed its Comment.30 It argued that the Court of Appeals had no
jurisdiction over Philcemcor's Petition, for it is on the Court of Tax Appeals ("CTA") that the SMA
conferred jurisdiction to review rulings of the Secretary in connection with the imposition of a safeguard
measure. It likewise argued that Philcemcor's resort to the special civil action of certiorari is improper,
considering that what Philcemcor sought to rectify is an error of judgment and not an error of jurisdiction
or grave abuse of discretion, and that a petition for review with the CTA was available as a plain, speedy
and adequate remedy. Finally, Southern Cross echoed the DOJ Opinion that Section 13 of the SMA
precludes a review by the DTI Secretary of a negative finding of the Tariff Commission.

After conducting a hearing on 19 June 2002 on Philcemcor's application for preliminary injunction, the
Court of Appeals' Twelfth Division31 granted the writ sought in its Resolution dated 21 June 2002.32
Seven days later, on 28 June 2002, the two-hundred (200)-day period for the imposition of the provisional
measure expired. Despite the lapse of the period, the BOC continued to impose the provisional measure on
all importations of Portland cement made by Southern Cross. The uninterrupted assessment of the tariff,
according to Southern Cross, worked to its detriment to the point that the continued imposition would
eventually lead to its closure.33

Southern Cross timely filed a Motion for Reconsideration of the Resolution on 9 September 2002. Alleging
that Philcemcor was not entitled to provisional relief, Southern Cross likewise sought a clarificatory order
as to whether the grant of the writ of preliminary injunction could extend the earlier imposition of the
provisional measure beyond the two hundred (200)-day limit imposed by law. The appeals' court failed to
take immediate action on Southern Cross's motion despite the four (4) motions for early resolution the latter
filed between September of 2002 and February of 2003. After six (6) months, on 19 February 2003, the
Court of Appeals directed Philcemcor to comment on Southern Cross's Motion for Reconsideration.34
After Philcemcor filed its Opposition35 on 13 March 2003, Southern Cross filed another set of four (4)
motions for early resolution.

Despite the efforts of Southern Cross, the Court of Appeals failed to directly resolve the Motion for
Reconsideration. Instead, on 5 June 2003, it rendered a Decision,36 granting in part Philcemcor's petition.
The appellate court ruled that it had jurisdiction over the petition for certiorari since it alleged grave abuse
of discretion. It refused to annul the findings of the Tariff Commission, citing the rule that factual findings
of administrative agencies are binding upon the courts and its corollary, that courts should not interfere in
matters addressed to the sound discretion and coming under the special technical knowledge and training of
such agencies.37 Nevertheless, it held that the DTI Secretary is not bound by the factual findings of the
Tariff Commission since such findings are merely recommendatory and they fall within the ambit of the
Secretary's discretionary review. It determined that the legislative intent is to grant the DTI Secretary the
power to make a final decision on the Tariff Commission's recommendation.38 The dispositive portion of
the Decision reads:

WHEREFORE, based on the foregoing premises, petitioner's prayer to set aside the findings of
the Tariff Commission in its assailed Report dated March 13, 2002 is DENIED. On the other
hand, the assailed April 5, 2002 Decision of the Secretary of the Department of Trade and Industry
is hereby SET ASIDE. Consequently, the case is REMANDED to the public respondent
Secretary of Department of Trade and Industry for a final decision in accordance with RA 8800
and its Implementing Rules and Regulations.

SO ORDERED.39

On 23 June 2003, Southern Cross filed the present petition, assailing the appellate court's Decision for
departing from the accepted and usual course of judicial proceedings, and not deciding the substantial
questions in accordance with law and jurisprudence. The petition argues in the main that the Court of
Appeals has no jurisdiction over Philcemcor's petition, the proper remedy being a petition for review with
the CTA conformably with the SMA, and; that the factual findings of the Tariff Commission on the
existence or non-existence conditions warranting the imposition of general safeguard measures are binding
upon the DTI Secretary.

The timely filing of Southern Cross's petition before this Court necessarily prevented the Court of Appeals
Decision from becoming final.40 Yet on 25 June 2003, the DTI Secretary issued a new Decision, ruling
this time that that in light of the appellate court's Decision there was no longer any legal impediment to his
deciding Philcemcor's application for definitive safeguard measures.41 He made a determination that,
contrary to the findings of the Tariff Commission, the local cement industry had suffered serious injury as a
result of the import surges.42 Accordingly, he imposed a definitive safeguard measure on the importation
of gray Portland cement, in the form of a definitive safeguard duty in the amount of P20.60/40 kg. bag for
three years on imported gray Portland Cement.43

On 7 July 2003, Southern Cross filed with the Court a "Very Urgent Application for a Temporary
Restraining Order and/or A Writ of Preliminary Injunction" ("TRO Application"), seeking to enjoin the
DTI Secretary from enforcing his Decision of 25 June 2003 in view of the pending petition before this
Court. Philcemcor filed an opposition, claiming, among others, that it is not this Court but the CTA that has
jurisdiction over the application under the law.

On 1 August 2003, Southern Cross filed with the CTA a Petition for Review, assailing the DTI Secretary's
25 June 2003 Decision which imposed the definite safeguard measure. Prescinding from this action,
Philcemcor filed with this Court a Manifestation and Motion to Dismiss in regard to Southern Cross's
petition, alleging that it deliberately and willfully resorted to forum-shopping. It points out that Southern
Cross's TRO Application seeks to enjoin the DTI Secretary's second decision, while its Petition before the
CTA prays for the annulment of the same decision.44

Reiterating its Comment on Southern Cross's Petition for Review, Philcemcor also argues that the CTA,
being a special court of limited jurisdiction, could only review the ruling of the DTI Secretary when a
safeguard measure is imposed, and that the factual findings of the Tariff Commission are not binding on the
DTI Secretary.45

After giving due course to Southern Cross's Petition, the Court called the case for oral argument on 18
February 2004.46 At the oral argument, attended by the counsel for Philcemcor and Southern Cross and the
Office of the Solicitor General, the Court simplified the issues in this wise: (i) whether the Decision of the
DTI Secretary is appealable to the CTA or the Court of Appeals; (ii) assuming that the Court of Appeals
has jurisdiction, whether its Decision is in accordance with law; and, (iii) whether a Temporary Restraining
Order is warranted.47
During the oral arguments, counsel for Southern Cross manifested that due to the imposition of the general
safeguard measures, Southern Cross was forced to cease operations in the Philippines in November of
2003.48

Propriety of the Temporary Restraining Order

Before the merits of the Petition, a brief comment on Southern Cross's application for provisional relief. It
sought to enjoin the DTI Secretary from enforcing the definitive safeguard measure he imposed in his 25
June 2003 Decision. The Court did not grant the provisional relief for it would be tantamount to enjoining
the collection of taxes, a peremptory judicial act which is traditionally frowned upon,49 unless there is a
clear statutory basis for it.50 In that regard, Section 218 of the Tax Reform Act of 1997 prohibits any court
from granting an injunction to restrain the collection of any national internal revenue tax, fee or charge
imposed by the internal revenue code.51 A similar philosophy is expressed by Section 29 of the SMA,
which states that the filing of a petition for review before the CTA does not stop, suspend, or otherwise toll
the imposition or collection of the appropriate tariff duties or the adoption of other appropriate safeguard
measures.52 This evinces a clear legislative intent that the imposition of safeguard measures, despite the
availability of judicial review, should not be enjoined notwithstanding any timely appeal of the imposition.

The Forum-Shopping Issue

In the same breath, we are not convinced that the allegation of forum-shopping has been duly proven, or
that sanction should befall upon Southern Cross and its counsel. The standard by Section 5, Rule 7 of the
1997 Rules of Civil Procedure in order that sanction may be had is that "the acts of the party or his counsel
clearly constitute willful and deliberate forum shopping."53 The standard implies a malicious intent to
subvert procedural rules, and such state of mind is not evident in this case.

The Jurisdictional Issue

On to the merits of the present petition.

In its assailed Decision, the Court of Appeals, after asserting only in brief that it had jurisdiction over
Philcemcor's Petition, discussed the issue of whether or not the DTI Secretary is bound to adopt the
negative recommendation of the Tariff Commission on the application for safeguard measure. The Court of
Appeals maintained that it had jurisdiction over the petition, as it alleged grave abuse of discretion on the
part of the DTI Secretary, thus:

A perusal of the instant petition reveals allegations of grave abuse of discretion on the part of the
DTI Secretary in rendering the assailed April 5, 2002 Decision wherein it was ruled that he had no
alternative but to abide by the findings of the Commission on the matter of safeguard measures for
the local cement industry. Abuse of discretion is admittedly within the ambit of certiorari.

Grave abuse of discretion implies such capricious and whimsical exercise of judgment as is
equivalent to lack of jurisdiction. It is alleged that, in the assailed Decision, the DTI Secretary
gravely abused his discretion in wantonly evading to discharge his duty to render an independent
determination or decision in imposing a definitive safeguard measure.54

We do not doubt that the Court of Appeals' certiorari powers extend to correcting grave abuse of discretion
on the part of an officer exercising judicial or quasi-judicial functions.55 However, the special civil action
of certiorari is available only when there is no plain, speedy and adequate remedy in the ordinary course of
law.56 Southern Cross relies on this limitation, stressing that Section 29 of the SMA is a plain, speedy and
adequate remedy in the ordinary course of law which Philcemcor did not avail of. The Section reads:
Section 29. Judicial Review. – Any interested party who is adversely affected by the ruling of the
Secretary in connection with the imposition of a safeguard measure may file with the CTA, a
petition for review of such ruling within thirty (30) days from receipt thereof. Provided, however,
that the filing of such petition for review shall not in any way stop, suspend or otherwise toll the
imposition or collection of the appropriate tariff duties or the adoption of other appropriate
safeguard measures, as the case may be.

The petition for review shall comply with the same requirements and shall follow the same rules
of procedure and shall be subject to the same disposition as in appeals in connection with adverse
rulings on tax matters to the Court of Appeals.57 (Emphasis supplied)

It is not difficult to divine why the legislature singled out the CTA as the court with jurisdiction to review
the ruling of the DTI Secretary in connection with the imposition of a safeguard measure. The Court has
long recognized the legislative determination to vest sole and exclusive jurisdiction on matters involving
internal revenue and customs duties to such a specialized court.58 By the very nature of its function, the
CTA is dedicated exclusively to the study and consideration of tax problems and has necessarily developed
an expertise on the subject.59

At the same time, since the CTA is a court of limited jurisdiction, its jurisdiction to take cognizance of a
case should be clearly conferred and should not be deemed to exist on mere implication.60 Concededly,
Rep. Act No. 1125, the statute creating the CTA, does not extend to it the power to review decisions of the
DTI Secretary in connection with the imposition of safeguard measures.61 Of course, at that time which
was before the advent of trade liberalization the notion of safeguard measures or safety nets was not yet in
vogue.

Undeniably, however, the SMA expanded the jurisdiction of the CTA by including review of the rulings of
the DTI Secretary in connection with the imposition of safeguard measures. However, Philcemcor and the
public respondents agree that the CTA has appellate jurisdiction over a decision of the DTI Secretary
imposing a safeguard measure, but not when his ruling is not to impose such measure.

In a related development, Rep. Act No. 9282, enacted on 30 March 2004, expressly vests unto the CTA
jurisdiction over "[d]ecisions of the Secretary of Trade and Industry, in case of nonagricultural product,
commodity or article xxx involving xxx safeguard measures under Republic Act No. 8800, where either
party may appeal the decision to impose or not to impose said duties."62 Had Rep. Act No. 9282
already been in force at the beginning of the incidents subject of this case, there would have been no need
to make any deeper inquiry as to the extent of the CTA's jurisdiction. But as Rep. Act No. 9282 cannot be
applied retroactively to the present case, the question of whether such jurisdiction extends to a decision not
to impose a safeguard measure will have to be settled principally on the basis of the SMA.

Under Section 29 of the SMA, there are three requisites to enable the CTA to acquire jurisdiction over the
petition for review contemplated therein: (i) there must be a ruling by the DTI Secretary; (ii) the petition
must be filed by an interested party adversely affected by the ruling; and (iii) such ruling must be in
connection with the imposition of a safeguard measure. The first two requisites are clearly present. The
third requisite deserves closer scrutiny.

Contrary to the stance of the public respondents and Philcemcor, in this case where the DTI Secretary
decides not to impose a safeguard measure, it is the CTA which has jurisdiction to review his decision. The
reasons are as follows:

First. Split jurisdiction is abhorred.

Essentially, respondents' position is that judicial review of the DTI Secretary's ruling is exercised by two
different courts, depending on whether or not it imposes a safeguard measure, and in either case the court
exercising jurisdiction does so to the exclusion of the other. Thus, if the DTI decision involves the
imposition of a safeguard measure it is the CTA which has appellate jurisdiction; otherwise, it is the Court
of Appeals. Such setup is as novel and unusual as it is cumbersome and unwise. Essentially, respondents
advocate that Section 29 of the SMA has established split appellate jurisdiction over rulings of the DTI
Secretary on the imposition of safeguard measure.

This interpretation cannot be favored, as the Court has consistently refused to sanction split jurisdiction.63
The power of the DTI Secretary to adopt or withhold a safeguard measure emanates from the same
statutory source, and it boggles the mind why the appeal modality would be such that one appellate court is
qualified if what is to be reviewed is a positive determination, and it is not if what is appealed is a negative
determination. In deciding whether or not to impose a safeguard measure, provisional or general, the DTI
Secretary would be evaluating only one body of facts and applying them to one set of laws. The reviewing
tribunal will be called upon to examine the same facts and the same laws, whether or not the determination
is positive or negative.

In short, if we were to rule for respondents we would be confirming the exercise by two judicial bodies of
jurisdiction over basically the same subject matter¾precisely the split-jurisdiction situation which is
anathema to the orderly administration of justice.64 The Court cannot accept that such was the legislative
motive especially considering that the law expressly confers on the CTA, the tribunal with the specialized
competence over tax and tariff matters, the role of judicial review without mention of any other court that
may exercise corollary or ancillary jurisdiction in relation to the SMA. The provision refers to the Court of
Appeals but only in regard to procedural rules and dispositions of appeals from the CTA to the Court of
Appeals.65

The principle enunciated in Tejada v. Homestead Property Corporation66 is applicable to the case at bar:

The Court agrees with the observation of the [that] when an administrative agency or body is
conferred quasi-judicial functions, all controversies relating to the subject matter pertaining to
its specialization are deemed to be included within the jurisdiction of said administrative
agency or body. Split jurisdiction is not favored.67

Second. The interpretation of the provisions of the SMA favors vesting untrammeled appellate jurisdiction
on the CTA.

A plain reading of Section 29 of the SMA reveals that Congress did not expressly bar the CTA from
reviewing a negative determination by the DTI Secretary nor conferred on the Court of Appeals such
review authority. Respondents note, on the other hand, that neither did the law expressly grant to the CTA
the power to review a negative determination. However, under the clear text of the law, the CTA is vested
with jurisdiction to review the ruling of the DTI Secretary "in connection with the imposition of a
safeguard measure." Had the law been couched instead to incorporate the phrase "the ruling imposing a
safeguard measure," then respondent's claim would have indisputable merit. Undoubtedly, the phrase "in
connection with" not only qualifies but clarifies the succeeding phrase "imposition of a safeguard measure."
As expounded later, the phrase also encompasses the opposite or converse ruling which is the non-
imposition of a safeguard measure.

In the American case of Shaw v. Delta Air Lines, Inc.,68 the United States Supreme Court, in interpreting a
key provision of the Employee Retirement Security Act of 1974, construed the phrase "relates to" in its
normal sense which is the same as "if it has connection with or reference to."69 There is no serious dispute
that the phrase "in connection with" is synonymous to "relates to" or "reference to," and that all three
phrases are broadly expansive. This is affirmed not just by jurisprudential fiat, but also the acquired
connotative meaning of "in connection with" in common parlance. Consequently, with the use of the phrase
"in connection with," Section 29 allows the CTA to review not only the ruling imposing a safeguard
measure, but all other rulings related or have reference to the application for such measure.
Now, let us determine the maximum scope and reach of the phrase "in connection with" as used in Section
29 of the SMA. A literalist reading or linguistic survey may not satisfy. Even the US Supreme Court in
New York State Blue Cross Plans v. Travelers Ins.70 conceded that the phrases "relate to" or "in connection
with" may be extended to the farthest stretch of indeterminacy for, universally, relations or connections are
infinite and stop nowhere.71 Thus, in the case the US High Court, examining the same phrase of the same
provision of law involved in Shaw, resorted to looking at the statute and its objectives as the alternative to
an "uncritical literalism."72 A similar inquiry into the other provisions of the SMA is in order to determine
the scope of review accorded therein to the CTA.73

The authority to decide on the safeguard measure is vested in the DTI Secretary in the case of non-
agricultural products, and in the Secretary of the Department of Agriculture in the case of agricultural
products.74 Section 29 is likewise explicit that only the rulings of the DTI Secretary or the Agriculture
Secretary may be reviewed by the CTA.75 Thus, the acts of other bodies that were granted some powers by
the SMA, such as the Tariff Commission, are not subject to direct review by the CTA.

Under the SMA, the Department Secretary concerned is authorized to decide on several matters. Within
thirty (30) days from receipt of a petition seeking the imposition of a safeguard measure, or from the date
he made motu proprio initiation, the Secretary shall make a preliminary determination on whether the
increased imports of the product under consideration substantially cause or threaten to cause serious injury
to the domestic industry.76 Such ruling is crucial since only upon the Secretary's positive preliminary
determination that a threat to the domestic industry exists shall the matter be referred to the Tariff
Commission for formal investigation, this time, to determine whether the general safeguard measure should
be imposed or not.77 Pursuant to a positive preliminary determination, the Secretary may also decide that
the imposition of a provisional safeguard measure would be warranted under Section 8 of the SMA.78 The
Secretary is also authorized to decide, after receipt of the report of the Tariff Commission, whether or not
to impose the general safeguard measure, and if in the affirmative, what general safeguard measures should
be applied.79 Even after the general safeguard measure is imposed, the Secretary is empowered to extend
the safeguard measure,80 or terminate, reduce or modify his previous rulings on the general safeguard
measure.81

With the explicit grant of certain powers involving safeguard measures by the SMA on the DTI Secretary,
it follows that he is empowered to rule on several issues. These are the issues which arise in connection
with, or in relation to, the imposition of a safeguard measure. They may arise at different stages – the
preliminary investigation stage, the post-formal investigation stage, or the post-safeguard measure stage –
yet all these issues do become ripe for resolution because an initiatory action has been taken seeking the
imposition of a safeguard measure. It is the initiatory action for the imposition of a safeguard measure that
sets the wheels in motion, allowing the Secretary to make successive rulings, beginning with the
preliminary determination.

Clearly, therefore, the scope and reach of the phrase "in connection with," as intended by Congress, pertain
to all rulings of the DTI Secretary or Agriculture Secretary which arise from the time an application or
motu proprio initiation for the imposition of a safeguard measure is taken. Indeed, the incidents which
require resolution come to the fore only because there is an initial application or action seeking the
imposition of a safeguard measure. From the legislative standpoint, it was a matter of sense and practicality
to lump up the questions related to the initiatory application or action for safeguard measure and to assign
only one court and; that is the CTA to initially review all the rulings related to such initiatory application or
action. Both directions Congress put in place by employing the phrase "in connection with" in the law.

Given the relative expanse of decisions subject to judicial review by the CTA under Section 29, we do not
doubt that a negative ruling refusing to impose a safeguard measure falls within the scope of its
jurisdiction. On a literal level, such negative ruling is "a ruling of the Secretary in connection with the
imposition of a safeguard measure," as it is one of the possible outcomes that may result from the initial
application or action for a safeguard measure. On a more critical level, the rulings of the DTI Secretary in
connection with a safeguard measure, however diverse the outcome may be, arise from the same grant of
jurisdiction on the DTI Secretary by the SMA.82 The refusal by the DTI Secretary to grant a safeguard
measure involves the same grant of authority, the same statutory prescriptions, and the same degree of
discretion as the imposition by the DTI Secretary of a safeguard measure.

The position of the respondents is one of "uncritical literalism"83 incongruent with the animus of the law.
Moreover, a fundamentalist approach to Section 29 is not warranted, considering the absurdity of the
consequences.

Third. Interpretatio Talis In Ambiguis Semper Fienda Est, Ut Evitur Inconveniens Et Absurdum.84

Even assuming arguendo that Section 29 has not expressly granted the CTA jurisdiction to review a
negative ruling of the DTI Secretary, the Court is precluded from favoring an interpretation that would
cause inconvenience and absurdity.85 Adopting the respondents' position favoring the CTA's minimal
jurisdiction would unnecessarily lead to illogical and onerous results.

Indeed, it is illiberal to assume that Congress had intended to provide appellate relief to rulings imposing a
safeguard measure but not to those declining to impose the measure. Respondents might argue that the right
to relief from a negative ruling is not lost since the applicant could, as Philcemcor did, question such ruling
through a special civil action for certiorari under Rule 65 of the 1997 Rules of Civil Procedure, in lieu of an
appeal to the CTA. Yet these two reliefs are of differing natures and gravamen. While an appeal may be
predicated on errors of fact or errors of law, a special civil action for certiorari is grounded on grave abuse
of discretion or lack of or excess of jurisdiction on the part of the decider. For a special civil action for
certiorari to succeed, it is not enough that the questioned act of the respondent is wrong. As the Court
clarified in Sempio v. Court of Appeals:

A tribunal, board or officer acts without jurisdiction if it/he does not have the legal power to
determine the case. There is excess of jurisdiction where, being clothed with the power to
determine the case, the tribunal, board or officer oversteps its/his authority as determined by law.
And there is grave abuse of discretion where the tribunal, board or officer acts in a capricious,
whimsical, arbitrary or despotic manner in the exercise of his judgment as to be said to be
equivalent to lack of jurisdiction. Certiorari is often resorted to in order to correct errors of
jurisdiction. Where the error is one of law or of fact, which is a mistake of judgment, appeal is the
remedy.86

It is very conceivable that the DTI Secretary, after deliberate thought and careful evaluation of the
evidence, may either make a negative preliminary determination as he is so empowered under Section 7 of
the SMA, or refuse to adopt the definitive safeguard measure under Section 13 of the same law. Adopting
the respondents' theory, this negative ruling is susceptible to reversal only through a special civil action for
certiorari, thus depriving the affected party the chance to elevate the ruling on appeal on the rudimentary
grounds of errors in fact or in law. Instead, and despite whatever indications that the DTI Secretary acted
with measure and within the bounds of his jurisdiction are, the aggrieved party will be forced to resort to a
gymnastic exercise, contorting the straight and narrow in an effort to discombobulate the courts into
believing that what was within was actually beyond and what was studied and deliberate actually whimsical
and capricious. What then would be the remedy of the party aggrieved by a negative ruling that simply
erred in interpreting the facts or the law? It certainly cannot be the special civil action for certiorari, for as
the Court held in Silverio v. Court of Appeals: "Certiorari is a remedy narrow in its scope and inflexible in
its character. It is not a general utility tool in the legal workshop."87

Fortunately, this theoretical quandary need not come to pass. Section 29 of the SMA is worded in such a
way that it places under the CTA's judicial review all rulings of the DTI Secretary, which are connected
with the imposition of a safeguard measure. This is sound and proper in light of the specialized jurisdiction
of the CTA over tax matters. In the same way that a question of whether to tax or not to tax is properly a
tax matter, so is the question of whether to impose or not to impose a definitive safeguard measure.
On another note, the second paragraph of Section 29 similarly reveals the legislative intent that rulings of
the DTI Secretary over safeguard measures should first be reviewed by the CTA and not the Court of
Appeals. It reads:

The petition for review shall comply with the same requirements and shall follow the same rules
of procedure and shall be subject to the same disposition as in appeals in connection with adverse
rulings on tax matters to the Court of Appeals.

This is the only passage in the SMA in which the Court of Appeals is mentioned. The express wish of
Congress is that the petition conform to the requirements and procedure under Rule 43 of the Rules of Civil
Procedure. Since Congress mandated that the form and procedure adopted be analogous to a review of a
CTA ruling by the Court of Appeals, the legislative contemplation could not have been that the appeal be
directly taken to the Court of Appeals.

Issue of Binding Effect of Tariff


Commission's Factual Determination
on DTI Secretary.

The next issue for resolution is whether the factual determination made by the Tariff Commission under the
SMA is binding on the DTI Secretary. Otherwise stated, the question is whether the DTI Secretary may
impose general safeguard measures in the absence of a positive final determination by the Tariff
Commission.

The Court of Appeals relied upon Section 13 of the SMA in ruling that the findings of the Tariff
Commission do not necessarily constitute a final decision. Section 13 details the procedure for the adoption
of a safeguard measure, as well as the steps to be taken in case there is a negative final determination. The
implication of the Court of Appeals' holding is that the DTI Secretary may adopt a definitive safeguard
measure, notwithstanding a negative determination made by the Tariff Commission.

Undoubtedly, Section 13 prescribes certain limitations and restrictions before general safeguard measures
may be imposed. However, the most fundamental restriction on the DTI Secretary's power in that
respect is contained in Section 5 of the SMA¾that there should first be a positive final determination
of the Tariff Commission¾which the Court of Appeals curiously all but ignored. Section 5 reads:

Sec. 5. Conditions for the Application of General Safeguard Measures. – The Secretary shall
apply a general safeguard measure upon a positive final determination of the [Tariff]
Commission that a product is being imported into the country in increased quantities, whether
absolute or relative to the domestic production, as to be a substantial cause of serious injury or
threat thereof to the domestic industry; however, in the case of non-agricultural products, the
Secretary shall first establish that the application of such safeguard measures will be in the public
interest. (emphasis supplied)

The plain meaning of Section 5 shows that it is the Tariff Commission that has the power to make a
"positive final determination." This power lodged in the Tariff Commission, must be distinguished from the
power to impose the general safeguard measure which is properly vested on the DTI Secretary.88

All in all, there are two condition precedents that must be satisfied before the DTI Secretary may impose a
general safeguard measure on grey Portland cement. First, there must be a positive final determination by
the Tariff Commission that a product is being imported into the country in increased quantities (whether
absolute or relative to domestic production), as to be a substantial cause of serious injury or threat to the
domestic industry. Second, in the case of non-agricultural products the Secretary must establish that the
application of such safeguard measures is in the public interest.89 As Southern Cross argues, Section 5 is
quite clear-cut, and it is impossible to finagle a different conclusion even through overarching methods of
statutory construction. There is no safer nor better settled canon of interpretation that when language is
clear and unambiguous it must be held to mean what it plainly expresses:90 In the quotable words of an
illustrious member of this Court, thus:

[I]f a statute is clear, plain and free from ambiguity, it must be given its literal meaning and
applied without attempted interpretation. The verba legis or plain meaning rule rests on the valid
presumption that the words employed by the legislature in a statute correctly express its intent or
will and preclude the court from construing it differently. The legislature is presumed to know the
meaning of the words, to have used words advisedly, and to have expressed its intent by the use of
such words as are found in the statute.91

Moreover, Rule 5 of the Implementing Rules and Regulations of the SMA,92 which interprets Section 5 of
the law, likewise requires a positive final determination on the part of the Tariff Commission before the
application of the general safeguard measure.

The SMA establishes a distinct allocation of functions between the Tariff Commission and the DTI
Secretary. The plain meaning of Section 5 shows that it is the Tariff Commission that has the power to
make a "positive final determination." This power, which belongs to the Tariff Commission, must be
distinguished from the power to impose general safeguard measure properly vested on the DTI Secretary.
The distinction is vital, as a "positive final determination" clearly antecedes, as a condition precedent, the
imposition of a general safeguard measure. At the same time, a positive final determination does not
necessarily result in the imposition of a general safeguard measure. Under Section 5, notwithstanding the
positive final determination of the Tariff Commission, the DTI Secretary is tasked to decide whether or not
that the application of the safeguard measures is in the public interest.

It is also clear from Section 5 of the SMA that the positive final determination to be undertaken by the
Tariff Commission does not entail a mere gathering of statistical data. In order to arrive at such
determination, it has to establish causal linkages from the statistics that it compiles and evaluates: after
finding there is an importation in increased quantities of the product in question, that such importation is a
substantial cause of serious threat or injury to the domestic industry.

The Court of Appeals relies heavily on the legislative record of a congressional debate during deliberations
on the SMA to assert a purported legislative intent that the findings of the Tariff Commission do not bind
the DTI Secretary.93 Yet as explained earlier, the plain meaning of Section 5 emphasizes that only if the
Tariff Commission renders a positive determination could the DTI Secretary impose a safeguard measure.
Resort to the congressional records to ascertain legislative intent is not warranted if a statute is clear, plain
and free from ambiguity. The legislature is presumed to know the meaning of the words, to have used
words advisedly, and to have expressed its intent by the use of such words as are found in the statute.94

Indeed, the legislative record, if at all to be availed of, should be approached with extreme caution, as
legislative debates and proceedings are powerless to vary the terms of the statute when the meaning is
clear.95 Our holding in Civil Liberties Union v. Executive Secretary96 on the resort to deliberations of the
constitutional convention to interpret the Constitution is likewise appropriate in ascertaining statutory
intent:

While it is permissible in this jurisdiction to consult the debates and proceedings of the
constitutional convention in order to arrive at the reason and purpose of the resulting Constitution,
resort thereto may be had only when other guides fail as said proceedings are powerless to vary
the terms of the Constitution when the meaning is clear. Debates in the constitutional convention
"are of value as showing the views of the individual members, and as indicating the reasons for
their votes, but they give us no light as to the views of the large majority who did not talk xxx. We
think it safer to construe the constitution from what appears upon its face."97

Moreover, it is easy to selectively cite passages, sometimes out of their proper context, in order to assert a
misleading interpretation. The effect can be dangerous. Minority or solitary views, anecdotal ruminations,
or even the occasional crude witticisms, may improperly acquire the mantle of legislative intent by the sole
virtue of their publication in the authoritative congressional record. Hence, resort to legislative
deliberations is allowable when the statute is crafted in such a manner as to leave room for doubt on the
real intent of the legislature.

Section 5 plainly evinces legislative intent to restrict the DTI Secretary's power to impose a general
safeguard measure by preconditioning such imposition on a positive determination by the Tariff
Commission. Such legislative intent should be given full force and effect, as the executive power to impose
definitive safeguard measures is but a delegated power¾the power of taxation, by nature and by command
of the fundamental law, being a preserve of the legislature.98 Section 28(2), Article VI of the 1987
Constitution confirms the delegation of legislative power, yet ensures that the prerogative of Congress to
impose limitations and restrictions on the executive exercise of this power:

The Congress may, by law, authorize the President to fix within specified limits, and subject to
such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage
and wharfage dues, and other duties or imposts within the framework of the national development
program of the Government.99

The safeguard measures which the DTI Secretary may impose under the SMA may take the following
variations, to wit: (a) an increase in, or imposition of any duty on the imported product; (b) a decrease in or
the imposition of a tariff-rate quota on the product; (c) a modification or imposition of any quantitative
restriction on the importation of the product into the Philippines; (d) one or more appropriate adjustment
measures, including the provision of trade adjustment assistance; and (e) any combination of the above-
described actions. Except for the provision of trade adjustment assistance, the measures enumerated by the
SMA are essentially imposts, which precisely are the subject of delegation under Section 28(2), Article VI
of the 1987 Constitution.100

This delegation of the taxation power by the legislative to the executive is authorized by the Constitution
itself.101 At the same time, the Constitution also grants the delegating authority (Congress) the right to
impose restrictions and limitations on the taxation power delegated to the President.102 The restrictions
and limitations imposed by Congress take on the mantle of a constitutional command, which the executive
branch is obliged to observe.

The SMA empowered the DTI Secretary, as alter ego of the President,103 to impose definitive general
safeguard measures, which basically are tariff imposts of the type spoken of in the Constitution. However,
the law did not grant him full, uninhibited discretion to impose such measures. The DTI Secretary authority
is derived from the SMA; it does not flow from any inherent executive power. Thus, the limitations
imposed by Section 5 are absolute, warranted as they are by a constitutional fiat.104

Philcemcor cites our 1912 ruling in Lamb v. Phipps105 to assert that the DTI Secretary, having the final
decision on the safeguard measure, has the power to evaluate the findings of the Tariff Commission and
make an independent judgment thereon. Given the constitutional and statutory limitations governing the
present case, the citation is misplaced. Lamb pertained to the discretion of the Insular Auditor of the
Philippine Islands, whom, as the Court recognized, "[t]he statutes of the United States require[d] xxx to
exercise his judgment upon the legality xxx [of] provisions of law and resolutions of Congress providing
for the payment of money, the means of procuring testimony upon which he may act."106

Thus in Lamb, while the Court recognized the wide latitude of discretion that may have been vested on the
Insular Auditor, it also recognized that such latitude flowed from, and is consequently limited by, statutory
grant. However, in this case, the provision of the Constitution in point expressly recognizes the authority of
Congress to prescribe limitations in the case of tariffs, export/import quotas and other such safeguard
measures. Thus, the broad discretion granted to the Insular Auditor of the Philippine Islands cannot be
analogous to the discretion of the DTI Secretary which is circumscribed by Section 5 of the SMA.
For that matter, Cariño v. Commissioner on Human Rights,107 likewise cited by Philcemcor, is also
inapplicable owing to the different statutory regimes prevailing over that case and the present petition. In
Cariño, the Court ruled that the constitutional power of the Commission on Human Rights (CHR) to
investigate human rights' violations did not extend to adjudicating claims on the merits.108 Philcemcor
claims that the functions of the Tariff Commission being "only investigatory," it could neither decide nor
adjudicate.109

The applicable law governing the issue in Cariño is Section 18, Article XIII of the Constitution, which
delineates the powers and functions of the CHR. The provision does not vest on the CHR the power to
adjudicate cases, but only to investigate all forms of human rights violations.110 Yet, without modifying
the thorough disquisition of the Court in Cariño on the general limitations on the investigatory power, the
precedent is inapplicable because of the difference in the involved statutory frameworks. The Constitution
does not repose binding effect on the results of the CHR's investigation.111 On the other hand, through
Section 5 of the SMA and under the authority of Section 28(2), Article VI of the Constitution, Congress did
intend to bind the DTI Secretary to the determination made by the Tariff Commission.112 It is of no
consequence that such determination results from the exercise of investigatory powers by the Tariff
Commission since Congress is well within its constitutional mandate to limit the authority of the DTI
Secretary to impose safeguard measures in the manner that it sees fit.

The Court of Appeals and Philcemcor also rely on Section 13 of the SMA and Rule 13 of the SMA's
Implementing Rules in support of the view that the DTI Secretary may decide independently of the
determination made by the Tariff Commission. Admittedly, there are certain infelicities in the language of
Section 13 and Rule 13. But reliance should not be placed on the textual imprecisions. Rather, Section 13
and Rule 13 must be viewed in light of the fundamental prescription imposed by Section 5. 113

Section 13 of the SMA lays down the procedure to be followed after the Tariff Commission renders its
report. The provision reads in full:

SEC. 13. Adoption of Definitive Measures. — Upon its positive determination, the Commission
shall recommend to the Secretary an appropriate definitive measure, in the form of:

(a) An increase in, or imposition of, any duty on the imported product;

(b) A decrease in or the imposition of a tariff-rate quota (MAV) on the product;

(c) A modification or imposition of any quantitative restriction on the importation of the product
into the Philippines;

(d) One or more appropriate adjustment measures, including the provision of trade adjustment
assistance;

(e) Any combination of actions described in subparagraphs (a) to (d).

The Commission may also recommend other actions, including the initiation of international
negotiations to address the underlying cause of the increase of imports of the product, to alleviate
the injury or threat thereof to the domestic industry, and to facilitate positive adjustment to import
competition.

The general safeguard measure shall be limited to the extent of redressing or preventing the injury
and to facilitate adjustment by the domestic industry from the adverse effects directly attributed to
the increased imports: Provided, however, That when quantitative import restrictions are used,
such measures shall not reduce the quantity of imports below the average imports for the three (3)
preceding representative years, unless clear justification is given that a different level is necessary
to prevent or remedy a serious injury.

A general safeguard measure shall not be applied to a product originating from a developing
country if its share of total imports of the product is less than three percent (3%): Provided,
however, That developing countries with less than three percent (3%) share collectively account
for not more than nine percent (9%) of the total imports.

The decision imposing a general safeguard measure, the duration of which is more than one (1)
year, shall be reviewed at regular intervals for purposes of liberalizing or reducing its intensity.
The industry benefiting from the application of a general safeguard measure shall be required to
show positive adjustment within the allowable period. A general safeguard measure shall be
terminated where the benefiting industry fails to show any improvement, as may be determined by
the Secretary.

The Secretary shall issue a written instruction to the heads of the concerned government agencies
to implement the appropriate general safeguard measure as determined by the Secretary within
fifteen (15) days from receipt of the report.

In the event of a negative final determination, or if the cash bond is in excess of the definitive
safeguard duty assessed, the Secretary shall immediately issue, through the Secretary of Finance, a
written instruction to the Commissioner of Customs, authorizing the return of the cash bond or the
remainder thereof, as the case may be, previously collected as provisional general safeguard
measure within ten (10) days from the date a final decision has been made: Provided, That the
government shall not be liable for any interest on the amount to be returned. The Secretary shall
not accept for consideration another petition from the same industry, with respect to the same
imports of the product under consideration within one (1) year after the date of rendering such a
decision.

When the definitive safeguard measure is in the form of a tariff increase, such increase shall not be
subject or limited to the maximum levels of tariff as set forth in Section 401(a) of the Tariff and
Customs Code of the Philippines.

To better comprehend Section 13, note must be taken of the distinction between the investigatory and
recommendatory functions of the Tariff Commission under the SMA.

The word "determination," as used in the SMA, pertains to the factual findings on whether there are
increased imports into the country of the product under consideration, and on whether such increased
imports are a substantial cause of serious injury or threaten to substantially cause serious injury to the
domestic industry.114 The SMA explicitly authorizes the DTI Secretary to make a preliminary
determination,115 and the Tariff Commission to make the final determination.116 The distinction is
fundamental, as these functions are not interchangeable. The Tariff Commission makes its determination
only after a formal investigation process, with such investigation initiated only if there is a positive
preliminary determination by the DTI Secretary under Section 7 of the SMA.117 On the other hand, the
DTI Secretary may impose definitive safeguard measure only if there is a positive final determination made
by the Tariff Commission.118

In contrast, a "recommendation" is a suggested remedial measure submitted by the Tariff Commission


under Section 13 after making a positive final determination in accordance with Section 5. The Tariff
Commission is not empowered to make a recommendation absent a positive final determination on its
part.119 Under Section 13, the Tariff Commission is required to recommend to the [DTI] Secretary an
"appropriate definitive measure."120 The Tariff Commission "may also recommend other actions,
including the initiation of international negotiations to address the underlying cause of the increase of
imports of the products, to alleviate the injury or threat thereof to the domestic industry and to facilitate
positive adjustment to import competition."121

The recommendations of the Tariff Commission, as rendered under Section 13, are not obligatory on the
DTI Secretary. Nothing in the SMA mandates the DTI Secretary to adopt the recommendations made by
the Tariff Commission. In fact, the SMA requires that the DTI Secretary establish that the application of
such safeguard measures is in the public interest, notwithstanding the Tariff Commission's recommendation
on the appropriate safeguard measure based on its positive final determination.122 The non-binding force
of the Tariff Commission's recommendations is congruent with the command of Section 28(2), Article VI
of the 1987 Constitution that only the President may be empowered by the Congress to impose appropriate
tariff rates, import/export quotas and other similar measures.123 It is the DTI Secretary, as alter ego of the
President, who under the SMA may impose such safeguard measures subject to the limitations imposed
therein. A contrary conclusion would in essence unduly arrogate to the Tariff Commission the executive
power to impose the appropriate tariff measures. That is why the SMA empowers the DTI Secretary to
adopt safeguard measures other than those recommended by the Tariff Commission.

Unlike the recommendations of the Tariff Commission, its determination has a different effect on the DTI
Secretary. Only on the basis of a positive final determination made by the Tariff Commission under Section
5 can the DTI Secretary impose a general safeguard measure. Clearly, then the DTI Secretary is bound by
the determination made by the Tariff Commission.

Some confusion may arise because the sixth paragraph of Section 13124 uses the variant word
"determined" in a different context, as it contemplates "the appropriate general safeguard measure as
determined by the Secretary within fifteen (15) days from receipt of the report." Quite plainly, the word
"determined" in this context pertains to the DTI Secretary's power of choice of the appropriate safeguard
measure, as opposed to the Tariff Commission's power to determine the existence of conditions necessary
for the imposition of any safeguard measure. In relation to Section 5, such choice also relates to the
mandate of the DTI Secretary to establish that the application of safeguard measures is in the public
interest, also within the fifteen (15) day period. Nothing in Section 13 contradicts the instruction in Section
5 that the DTI Secretary is allowed to impose the general safeguard measures only if there is a positive
determination made by the Tariff Commission.

Unfortunately, Rule 13.2 of the Implementing Rules of the SMA is captioned "Final Determination by the
Secretary." The assailed Decision and Philcemcor latch on this phraseology to imply that the factual
determination rendered by the Tariff Commission under Section 5 may be amended or reversed by the DTI
Secretary. Of course, implementing rules should conform, not clash, with the law that they seek to
implement, for a regulation which operates to create a rule out of harmony with the statute is a nullity.125
Yet imperfect draftsmanship aside, nothing in Rule 13.2 implies that the DTI Secretary can set aside the
determination made by the Tariff Commission under the aegis of Section 5. This can be seen by examining
the specific provisions of Rule 13.2, thus:

RULE 13.2. Final Determination by the Secretary

RULE 13.2.a. Within fifteen (15) calendar days from receipt of the Report of the
Commission, the Secretary shall make a decision, taking into consideration the measures
recommended by the Commission.

RULE 13.2.b. If the determination is affirmative, the Secretary shall issue, within two (2)
calendar days after making his decision, a written instruction to the heads of the
concerned government agencies to immediately implement the appropriate general
safeguard measure as determined by him. Provided, however, that in the case of non-
agricultural products, the Secretary shall first establish that the imposition of the
safeguard measure will be in the public interest.
RULE 13.2.c. Within two (2) calendar days after making his decision, the Secretary shall
also order its publication in two (2) newspapers of general circulation. He shall also
furnish a copy of his Order to the petitioner and other interested parties, whether
affirmative or negative. (Emphasis supplied.)

Moreover, the DTI Secretary does not have the power to review the findings of the Tariff Commission for
it is not subordinate to the Department of Trade and Industry ("DTI"). It falls under the supervision, not of
the DTI nor of the Department of Finance (as mistakenly asserted by Southern Cross),126 but of the
National Economic Development Authority, an independent planning agency of the government of
co-equal rank as the DTI.127 As the supervision and control of a Department Secretary is limited to the
bureaus, offices, and agencies under him,128 the DTI Secretary generally cannot exercise review authority
over actions of the Tariff Commission. Neither does the SMA specifically authorize the DTI Secretary to
alter, amend or modify in any way the determination made by the Tariff Commission. The most that the
DTI Secretary could do to express displeasure over the Tariff Commission's actions is to ignore its
recommendation, but not its determination.

The word "determination" as used in Rule 13.2 of the Implementing Rules is dissonant with the same word
as employed in the SMA, which in the latter case is undeviatingly in reference to the determination made
by the Tariff Commission. Beyond the resulting confusion, however, the divergent use in Rule 13.2 is
explicable as the Rule textually pertains to the power of the DTI Secretary to review the recommendations
of the Tariff Commission, not the latter's determination. Indeed, an examination of the specific provisions
show that there is no real conflict to reconcile. Rule 13.2 respects the logical order imposed by the SMA.
The Rule does not remove the essential requirement under Section 5 that a positive final determination be
made by the Tariff Commission before a definitive safeguard measure may be imposed by the DTI
Secretary.

The assailed Decision characterizes the findings of the Tariff Commission as merely recommendatory and
points to the DTI Secretary as the authority who renders the final decision.129 At the same time,
Philcemcor asserts that the Tariff Commission's functions are merely investigatory, and as such do not
include the power to decide or adjudicate. These contentions, viewed in the context of the fundamental
requisite set forth by Section 5, are untenable. They run counter to the statutory prescription that a positive
final determination made by the Tariff Commission should first be obtained before the definitive safeguard
measures may be laid down.

Was it anomalous for Congress to have provided for a system whereby the Tariff Commission may
preclude the DTI, an office of higher rank, from imposing a safeguard measure? Of course, this Court does
not inquire into the wisdom of the legislature but only charts the boundaries of powers and functions set in
its enactments. But then, it is not difficult to see the internal logic of this statutory framework.

For one, as earlier stated, the DTI cannot exercise review powers over the Tariff Commission which is not
its subordinate office.

Moreover, the mechanism established by Congress establishes a measure of check and balance involving
two different governmental agencies with disparate specializations. The matter of safeguard measures is of
such national importance that a decision either to impose or not to impose then could have ruinous effects
on companies doing business in the Philippines. Thus, it is ideal to put in place a system which affords all
due deliberation and calls to fore various governmental agencies exercising their particular specializations.

Finally, if this arrangement drawn up by Congress makes it difficult to obtain a general safeguard measure,
it is because such safeguard measure is the exception, rather than the rule. The Philippines is obliged to
observe its obligations under the GATT, under whose framework trade liberalization, not protectionism, is
laid down. Verily, the GATT actually prescribes conditions before a member-country may impose a
safeguard measure. The pertinent portion of the GATT Agreement on Safeguards reads:
2. A Member may only apply a safeguard measure to a product only if that member has
determined, pursuant to the provisions set out below, that such product is being imported into its
territory in such increased quantities, absolute or relative to domestic production, and under such
conditions as to cause or threaten to cause serious injury to the domestic industry that produces
like or directly competitive products.130

3. (a) A Member may apply a safeguard measure only following an investigation by the competent
authorities of that Member pursuant to procedures previously established and made public in
consonance with Article X of the GATT 1994. This investigation shall include reasonable public
notice to all interested parties and public hearings or other appropriate means in which importers,
exporters and other interested parties could present evidence and their views, including the
opportunity to respond to the presentations of other parties and to submit their views, inter alia, as
to whether or not the application of a safeguard measure would be in the public interest. The
competent authorities shall publish a report setting forth their findings and reasoned conclusions
reached on all pertinent issues of fact and law.131

The SMA was designed not to contradict the GATT, but to complement it. The two requisites laid down in
Section 5 for a positive final determination are the same conditions provided under the GATT Agreement
on Safeguards for the application of safeguard measures by a member country. Moreover, the investigatory
procedure laid down by the SMA conforms to the procedure required by the GATT Agreement on
Safeguards. Congress has chosen the Tariff Commission as the competent authority to conduct such
investigation. Southern Cross stresses that applying the provision of the GATT Agreement on Safeguards,
the Tariff Commission is clearly empowered to arrive at binding conclusions.132 We agree: binding on the
DTI Secretary is the Tariff Commission's determinations on whether a product is imported in increased
quantities, absolute or relative to domestic production and whether any such increase is a substantial cause
of serious injury or threat thereof to the domestic industry.133

Satisfied as we are with the proper statutory paradigm within which the SMA should be analyzed, the flaws
in the reasoning of the Court of Appeals and in the arguments of the respondents become apparent. To
better understand the dynamics of the procedure set up by the law leading to the imposition of definitive
safeguard measures, a brief step-by-step recount thereof is in order.

1. After the initiation of an action involving a general safeguard measure,134 the DTI Secretary makes a
preliminary determination whether the increased imports of the product under consideration substantially
cause or threaten to substantially cause serious injury to the domestic industry,135 and whether the
imposition of a provisional measure is warranted under Section 8 of the SMA.136 If the preliminary
determination is negative, it is implied that no further action will be taken on the application.

2. When his preliminary determination is positive, the Secretary immediately transmits the records covering
the application to the Tariff Commission for immediate formal investigation.137

3. The Tariff Commission conducts its formal investigation, keyed towards making a final determination.
In the process, it holds public hearings, providing interested parties the opportunity to present evidence or
otherwise be heard.138 To repeat, Section 5 enumerates what the Tariff Commission is tasked to
determine: (a) whether a product is being imported into the country in increased quantities, irrespective of
whether the product is absolute or relative to the domestic production; and (b) whether the importation in
increased quantities is such that it causes serious injury or threat to the domestic industry.139 The findings
of the Tariff Commission as to these matters constitute the final determination, which may be either
positive or negative.

4. Under Section 13 of the SMA, if the Tariff Commission makes a positive determination, the Tariff
Commission "recommends to the [DTI] Secretary an appropriate definitive measure." The Tariff
Commission "may also recommend other actions, including the initiation of international negotiations to
address the underlying cause of the increase of imports of the products, to alleviate the injury or threat
thereof to the domestic industry, and to facilitate positive adjustment to import competition."140

5. If the Tariff Commission makes a positive final determination, the DTI Secretary is then to decide,
within fifteen (15) days from receipt of the report, as to what appropriate safeguard measures should he
impose.

6. However, if the Tariff Commission makes a negative final determination, the DTI Secretary cannot
impose any definitive safeguard measure. Under Section 13, he is instructed instead to return whatever cash
bond was paid by the applicant upon the initiation of the action for safeguard measure.

The Effect of the Court's Decision

The Court of Appeals erred in remanding the case back to the DTI Secretary, with the instruction that the
DTI Secretary may impose a general safeguard measure even if there is no positive final determination
from the Tariff Commission. More crucially, the Court of Appeals could not have acquired jurisdiction
over Philcemcor's petition for certiorari in the first place, as Section 29 of the SMA properly vests
jurisdiction on the CTA. Consequently, the assailed Decision is an absolute nullity, and we declare it as
such.

What is the effect of the nullity of the assailed Decision on the 5 June 2003 Decision of the DTI Secretary
imposing the general safeguard measure? We have recognized that any initial judicial review of a DTI
ruling in connection with the imposition of a safeguard measure belongs to the CTA. At the same time, the
Court also recognizes the fundamental principle that a null and void judgment cannot produce any legal
effect. There is sufficient cause to establish that the 5 June 2003 Decision of the DTI Secretary resulted
from the assailed Court of Appeals Decision, even if the latter had not yet become final. Conversely, it can
be concluded that it was because of the putative imprimatur of the Court of Appeals' Decision that the DTI
Secretary issued his ruling imposing the safeguard measure. Since the 5 June 2003 Decision derives its
legal effect from the void Decision of the Court of Appeals, this ruling of the DTI Secretary is consequently
void. The spring cannot rise higher than the source.

The DTI Secretary himself acknowledged that he drew stimulating force from the appellate court's
Decision for in his own 5 June 2003 Decision, he declared:

From the aforementioned ruling, the CA has remanded the case to the DTI Secretary for a final
decision. Thus, there is no legal impediment for the Secretary to decide on the application.141

The inescapable conclusion is that the DTI Secretary needed the assailed Decision of the Court of Appeals
to justify his rendering a second Decision. He explicitly invoked the Court of Appeals' Decision as basis for
rendering his 5 June 2003 ruling, and implicitly recognized that without such Decision he would not have
the authority to revoke his previous ruling and render a new, obverse ruling.

It is clear then that the 25 June 2003 Decision of the DTI Secretary is a product of the void Decision, it
being an attempt to carry out such null judgment. There is therefore no choice but to declare it void as well,
lest we sanction the perverse existence of a fruit from a non-existent tree. It does not even matter what the
disposition of the 25 June 2003 Decision was, its nullity would be warranted even if the DTI Secretary
chose to uphold his earlier ruling denying the application for safeguard measures.

It is also an unfortunate spectacle to behold the DTI Secretary, seeking to enforce a judicial decision which
is not yet final and actually pending review on appeal. Had it been a judge who attempted to enforce a
decision that is not yet final and executory, he or she would have readily been subjected to sanction by this
Court. The DTI Secretary may be beyond the ambit of administrative review by this Court, but we are
capacitated to allocate the boundaries set by the law of the land and to exact fealty to the legal order,
especially from the instrumentalities and officials of government.
WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals is DECLARED
NULL AND VOID and SET ASIDE. The Decision of the DTI Secretary dated 25 June 2003 is also
DECLARED NULL AND VOID and SET ASIDE. No Costs.

SO ORDERED.

MEANING OF TAX

G.R. No. L-29485 November 21, 1980

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
AYALA SECURITIES CORPORATION and THE HONORABLE COURT OF TAX APPEALS,
respondents.

TEEHANKEE, J.:

Before the Court is petitioner Commissioner of Internal Revenue's motion for reconsideration of the Court's
decision of April 8, 1976 wherein the Court affirmed in toto the appealed decision of respondent Court of
Tax Appeals, the dispositive portion of which provides as follows:

WHEREFORE, the decision of the respondent Commissioner of Internal Revenue


assessing petitioner the amount of P758,687.04 as 25% surtax and interest is reversed.
Accordingly, said assessment of respondent for 1955 is hereby cancelled and declared of
no force and effect, Without pronouncement as to costs.

This Court's decision under reconsideration held that the assessment made on February 21, 1961 by
petitioner against respondent corporation (and received by the latter on March 22, 1961) in the sum of
P758,687.04 on its surplus of P2,758,442.37 for its fiscal year ending September 30, 1955 fell under the
five-year prescriptive period provided in section 331 of the National Internal Revenue Code and that the
assessment had, therefore, been made after the expiration of the said five-year prescriptive period and was
of no binding force and effect .

Petitioner has urged that

A perusal of Sections 331 and 332(a) will reveal that they refer to a tax, the basis of
which is required by law to be reported in a return such as for example, income tax or
sales tax. However, the surtax imposed by Section 25 of the Tax Code is not one such
tax. Accumulated surplus are never returned for tax purposes, as there is no law requiring
that such surplus be reported in a return for purposes of the 25% surtax. In fact, taxpayers
resort to all means and devices to cover up the fact that they have unreasonably
accumulated surplus.

Petitioner, therefore, submits that

As there is no law requiring taxpayers to file returns of their accumulated surplus, it is


obvious that neither Section 33 nor Section 332(a) of the Tax Code applies in a case
involving the 25% surtax imposed by Section 25 of the Tax Code. ...
Petitioner cites the Court of Tax Appeals' ruling in the earlier case of United Equipment & Supply Company
vs. Commissioner of Internal Revenue (CTA Case No. 1795, October 30, 1971) which was appealed by
petitioner taxpayer to this Court in G. R. No. L-35653 bearing the same title, which appeal was denied by
this Court en banc for lack of merit as per its Resolution of October 25, 1972, In said case, the tax court
squarely ruled that the provisions of sections 331 and 332 of the National Internal Revenue Code for
prescriptive periods of five 5 and ten (10) years after the filing of the return do not apply to the tax on the
taxpayer's unreasonably accumulated surplus under section 25 of the Tax Code since no return is required
to be filed by law or by regulation on such unduly ac cumulated surplus on earnings, reasoning as follows:

In resisting the assessment amounting to P10,864.26 as accumulated earnings tax for 1957, petitioner also
invoked the defense of prescription against the right of respondent to assess the said tax. It is contended that
since its income tax return for 1957 was filed in 1958, and with the clarification by respondent in his letter
dated May 14, 1963, that the amount sought to be collected was petitioner's surtax liability under Section
25 rather than deficiency corporate income tax under Section 24 of the National Internal Revenue Code, the
assessment has already prescribed under Section 331 of the same Code.

Section 331 of the Revenue Code provides:

SEC. 331. Period of limitation upon assessment and collection. — Except as provided in
the succeeding section, internal revenue taxes shall be assessed within five years after the
return was filed, and no proceeding in court without assessment for the collection of such
taxes shall be begun after the expiration of such period. For the purpose of this section a
return filed before the last day prescribed by law for the filing thereof shall be considered
as filed on such last day; Provided, That this limitation shall not apply to cases already
investigated prior to the approval of this Code.

Obviously, Section 331 applies to, assessment of National Internal Revenue Taxes which
requires the filing of returns. A return, the filing of which is necessary to start the running
of tile five-year period for making an assessment, must be one which is required for the
particular tax. Consequently, it has been held that the filing of an income tax return does
not start the running of the statute of limitation for assessment of the sales tax. (Butuan
Sawmill, Inc. v. Court of Tax Appeals, G.R. No. L-20601, Feb. 28, 1966, 16 SCRA 277).

Although petitioner filed an income tax return, no return was filed covering its surplus
profits which were improperly accumulated. In fact, no return could have been filed, and
the law could not possibly require, for obvious reasons, the filing of a return covering
unreasonable accumulation of corporate surplus profits. A tax imposed upon
unreasonable accumulation of surplus is in the nature of a penalty. (Helvering v. National
Grocery Co., 304 U.S. 282). It would not be proper for the law to compel a corporation to
report improper accumulation of surplus. Accordingly, Section 331 limiting the right to
assess internal revenue taxes within five years from the date the return was filed or was
due does not apply.

Neither does Section 332 apply. Said Section provides:

SEC. 332 Exceptions as to period of limitation of assessment and collection of taxes.—


(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax
may be begun without assessment, at any time within ten years after the discovery of the
falsity, fraud, or omission.

(b) Where before the expiration of the time prescribed in the preceding
section for the assessment of the tax, both the Commissioner of Internal
Revenue and the taxpayer have consented in writing to its assessment
after such time, the tax may be assessed at any time prior to the
expiration of the period agreed upon. The period so agreed upon may
be extended by subsequent agreements in writing made before the
expiration of the period previously agreed upon.

(c) Where the assessment of any internal revenue tax has been made
within the period of limitation above-prescribed such tax may be
collected by distraint or levy by a proceeding in court, but only if begun
(1) within five years after the assessment of the tax, or (2) prior to the
expiration of any period for collection agreed upon in writing by the
Commissioner of Internal Revenue and the taxpayer before the
expiration of such five-year period. The period so agreed upon may be
extended by subsequent agreements in writing made before the
expiration of the period previously agreed upon.

It will be noted that Section 332 has reference to national internal revenue taxes which
require the filing of returns. This is implied, from the provision that the ten-year period
for assessment specified therein treats of the filing of a false or fraudulent return or of a
failure to file a return. There can be no failure or omission to file a return where no return
is required to be filed by law or by regulation. It is, therefore, our opinion that the ten-
year period for making in assessment under Section 332 does not apply to internal
revenue taxes which do not require the filing of a return.

It is well settled limitations upon the right of the government to assess and collect taxes
will not be presumed in the absence of clear legislation to the contrary. The existence of a
time limit beyond which the government may recover unpaid taxes is purely dependent
upon some express statutory provision, (51 Am. Jur. 867; 10 Mertens Law of Federal
Income Taxation, par. 57. 02.). It follows that in the absence of express statutory
provision, the right of the government to assess unpaid taxes is imprescriptible. Since
there is no express statutory provision limiting the right of the Commissioner of Internal
Revenue to assess the tax on unreasonable accumulation of surplus provided in Section
25 of the Revenue Code, said tax may be assessed at any time. (Emphasis supplied)

Such ruling was in effect upheld by this Court en banc upon its dismissal of the taxpayer's appeal for lack
of merit as above stated.

The Court is persuaded by the fundamental principle invoked by petitioner that limitations upon the right of
the government to assess and collect taxes will not be presumed in the absence of clear legislation to the
contrary and that where the government has not by express statutory provision provided a limitation upon
its right to assess unpaid taxes, such right is imprescriptible.

The Court, therefore, reconsiders its ruling in its decision under reconsideration that the right to assess and
collect the assessment in question had prescribed after five years, and instead rules that there is no such
time limit on the right of the Commissioner of Internal Revenue to assess the 25% tax on unreasonably
accumulated surplus provided in section 25 of the Tax Code, since there is no express statutory provision
limiting such right or providing for its prescription. The underlying purpose of the additional tax in
question on a corporation's improperly accumulated profits or surplus is as set forth in the text of section 25
of the Tax Code itself 1 to avoid the situation where a corporation unduly retains its surplus instead of
declaring and paving dividends to its shareholders or members who would then have to pay the income tax
due on such dividends received by them. The record amply shows that respondent corporation is a mere
holding company of its shareholders through its mother company, a registered co-partnership then set up by
the individual shareholders belonging to the same family and that the prima facie evidence and
presumption set up by the Tax Code, therefore applied without having been adequately rebutted by the
respondent corporation.
Thus, Mr. Lamberto J. Cabral, the accountant of the corporation, testified before the court as follows:

Atty. Garces

The investigation, Your Honor, shows that for the year 1955, the Ayala
Securities Corporation had 175,000 outstanding shares of stock and out
of these shares of Ayala Securities Corporation, the Ayala and
Company owned 174,996 shares of stock.

Q. Is that right, Mr. Cabral?

Atty. Ong

Objection, Your Honor, on the materiality of the


question.

Judge Alvarez

What is the materiality of the question?

Atty. Garces

We want to prove to this honorable Court that Ayala Securities


Corporation is a holding or investment company, the parent company
being Ayala and Company.

Judge Alvarez

Witness may answer.

A. I think so; yes.

Q. And Ayala and Company's owned almost wholly by the Zobel


Family and the Ayala Family?

Atty. Ong

If Your Honor please, objection again on the materiality. What would


counsel for the respondent prove on this point?

Atty. Garces

Same purpose, Your If Honor to prove that Ayala Securities


corporation is a mere investment or holding company

Atty. Ong

What is the materiality of the case if it is a mere investment company.


In fact, we are here in court to prove the reasonableness or
unreasonableness of the accumulation of profit. I think counsel for the
respondent is trying to harp on presumption; but actually we will not be
delving on presumption but on actual facts proving the reasonableness
of the accumulation based on actual evidence.

Judge Alvarez

In order to determine the reasonableness or unreasonableness, there


must be a basis. witness will have to answer the question.

A. Yes.

xxx xxx xxx

Q. As of September 30, 1955 when the Ayala Securities Corporation


tiled its income tax return, were the officers of the Ayala Securities
Corporation and the Ayala and Company housed in the same building?

A. Yes, sir; they were.

Q. And also are the employees of the Ayala Securities corporation and
the Ayala and Company the same - meaning that the employees of the
Ayala Securities Corporation are also the employees of the Ayala and
Company?

A. At the time, if I remember right, Ayala and Company was the


operating company and the employees were the employees of the Ayala
and Company; (t.s.n., pp. 32-37).

Another witness, Mr. Salvador J. Lorayes the Secretary and head of the Legal Department of the
corporation, also testified that:

Judge Alvarez questions

Q. May we know from you whether Ayala Securities corporation is an


affiliate of Ayala and Company?

A. Yes, Your honor.

Q. Do we understand from you that Ayala and Company is the mother


corporation of this affiliate?

A. That is correct.

Q. And that the policy of Ayala Securities Corporation is practically


governed by the officers or partners of Ayala and company

A. They have a strong influence over the policy of Ayala Securities


Corporation.

Q. So that whatever is decided by the partners of Ayala and Company


for a certain investment or project would also be followed by Ayala
Securities Corporation?
A. If the project is assigned to Ayala Securities Corporation it will be
followed by Ayala Securities Corporation; if to another affiliate, no
(t.s.n., pp. 149-150). ...

Respondent corporation was therefore fully shown to fall under Revenue Regulation No. 2 implementing
the provisions of the income tax law which provides on holding and investment companies that

SEC. 20. Holding and Investment Companies. — A corporation having practically no


activities except holding property, and collecting the income therefrom or investing
therein, shall be considered a holding company within the meaning of section 25.

Petitioner commissioner's plausible alternative contention is that even if the 25% surtax were to be deemed
subject to prescription, computed from the filing of the income tax return in 1955, the intent to evade
payment of the surtax is an inherent quality of the violation and the return filed must necessarily partake of
a false and/or fraudulent character which would make applicable the 10-year prescriptive period provided
in section 332(a) of the Tax Code and since the assessment was made in 1961 (the sixth year), the
assessment was clearly within the 10-year prescriptive period. The Court sees no necessity, however, for
ruling on this point in view of its adherence to the ruling in the earlier raise of United Equipment & Supply
Co., supra, holding that the 25% surtax is not subject to any statutory prescriptive period.

ACCORDINGLY, the Court's decision of April 8, 1976 is set aside and in lieu thereof, judgment is hereby
rendered ordering respondent corporation to pay the assessment in the sum of P758,687.04 as 25% surtax
on its unreasonably accumulated surplus, plus the 5% surcharge and 1% monthly interest thereon, pursuant
to section 51 (e) of the National Internal Revenue Code, as amended by R. A. 2343. With Costs.

Makasiar, Fernandez, Guerrero and De Castro, JJ., concur.

Melencio-Herrera, J., took no part.

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