G.R. No.

L-14595 October 11, 1919

GREGORIO SARASOLA, Plaintiff-Appellant, vs. WENCESLAO TRINIDAD, Collector of Internal Revenue of

the Philippine Islands, Defendant-Appellee.

Cohn and Fisher for appellant.

Attorney-General Paredes for appellee.

MALCOLM, J.:

The complaint in this case was filed in the Court of First Instance of Manila for the purpose of having an injunction
issue to restrain the defendant, the Collector of Internal Revenue, from the alleged illegal collection of taxes in the
amount of P11,739.29. The defendant interposed a demurrer to the complaint, based on two grounds, namely: (1) that
the court had no jurisdiction of the subject-matter of the action because of the provisions of section 1578 of the
Administrative Code of 1917; and (2) that the facts stated in the complaint did not entitle the plaintiff to the relief
demanded. The Honorable James A. Ostrand, Judge of First Instance, sustained the demurrer, holding that "In the
opinion of the court, the case is still controlled by the decision of the Supreme Court in the case of Churchill and Tait
vs. Rafferty (32 Phil., 580). The fact that section 1579 of the Administrative Code of 1917 disallows interest on the
internal revenue taxes recovered back is hardly sufficient to vary the rule." It is from the final order dismissing the
complaint, without special finding as to costs, that the plaintiff to this court.chanroblesvirtualawlibrary chanrobles
virtual law library

As will be noted, the judge was induced to take such action be reason of his understanding of the decision of this court
in the case of Churchill and Tait vs. Rafferty ( supra, appeal dismissed in the United States Supreme Court [1918], 248
U.S., 555), in which the plaintiffs likewise endeavor unsuccessfully to have the defendant Collector of Internal
Revenue enjoined from collecting and enforcing against the plaintiffs an internal revenue tax on bill boards. Both
counsel for appellant and appellee herein seem to find comfort in this decision. Instead, however, of devoting our time
to a fine analysis of this decision with the object of ascertaining if it is still controlling, it would seem preferable to
place it to one side for the nonce and to proceed independently thereof to settle the instant
issues.chanroblesvirtualawlibrary chanrobles virtual law library

Appellant's formal specifications of error are epitomized in three points: "1. The statute is a mere expression of the
equity rule and does not close the door of equity where there is no adequate remedy at law; 2. The equitable jurisdiction
to issue writs where the legal remedy is inadequate is crystallized and cannot be abbreviated by local statute; 3. The
legal remedy is grossly inadequate and the injury irreparable and the writ should issue." The Attorney-General, in his
brief for the appellee, says that a resolution of the three errors assigned by appellant depends upon the answer to the
question, "Is the legal provision prohibiting the courts from granting an injunction to retrain the collection of internal
revenue taxes constitutional?" Whether, therefore, we agree with the Attorney-General in his bold assertion relative to
the issue being the constitutionality of sections 1578 and 1579 of the Administrative Code of 1917, or whether we
consider the more subtle argument of the learned counsel for appellant which seems merely to squint at this question, it
is necessary to have before us the pertinent provisions of Philippine law.chanroblesvirtualawlibrary chanrobles virtual
law library

Sections 1578 and 1579 of the Administrative Code of 1917 read as follows:

SEC. 1578. Injunction not available to restrain collection of tax. - No court shall have authority to grant an injunction
to restrain the collection of any internal-revenue tax.chanroblesvirtualawlibrary chanrobles virtual law library

SEC. 1579. Recovery of tax paid under protest. - When the validity of any tax is questioned, or its amount disputed, or
other question raised as to liability therefor, the person against whom or against whose property the same is sought to
be enforced shall pay the tax under instant protest, or upon protest within ten days, and shall thereupon request the
decision of the Collector of Internal Revenue. If the decision of the Collector of Internal Revenue is adverse, or if no
decision is made by him within six months from the date when his decision was requested, the taxpayer may proceed,
at any time within two years after the payment of the tax, to bring an action against the Collector of Internal Revenue
for the recovery without interest of the sum alleged to have been illegally collected, the process to be served upon him,
upon the provincial treasurer, or upon the officer collecting the tax.

These portions of our tax laws, leaving out of notice the two words "without interest," are in no way different from
American tax laws. The antecedents of sections 1578 and 1579 of the existing Administrative Code are the
Administrative Code of 1916, the Internal Revenue Law of 1914 (Act No. 2339), and Internal Revenue Law of 1904
(Act No. 1189). Section 1578 of the Administrative Code and its corresponding sections in previous Philippine Laws,
found its particular inspiration in a similar provision in the Act of Congress of March 2, 1867. (14 Stat. at L., 475; sec.
3224, U.S. Rev. Stat.) Again expressly leaving out of our present consideration the phrase "without interest," a vast
array of interpretative jurisprudence which culminates in the decision in Churchill and Tait vs .Rafferty, supra, would
leave no room for doubt that such legislation is constitutional. The point, however, to keep sharply before us is, that
until the enactment of the Administrative Code of 1917, no law of the Philippine Legislature or Commission had
contained a provision permitting the recovery of taxes "without interest," and no provision essentially the same can be
found in the statutes United States or of the several States.chanroblesvirtualawlibrary chanrobles virtual law library

Before we recur to our precise question, a good background for this decision might well concern the more general
subject of the remedies of the taxpayer. The broad principle is that every taxpayer has a right to a remedy for any actual
wrong he may have suffered in the collection of taxes. Usually a party will find a plain and sufficient remedy for the
injuries complained of, or threatened, in the courts of law; in such instances, equity will not take jurisdiction.
"Presumptively," Judge Cooley says, "the remedy at law is adequate." (Cooley on Taxation, 3d Ed., Vol. 2, pp. 1377,
1412, 1415.) Where, as in the Philippines, the taxpayer is permitted to pay the amount demanded of him under protest
and then maintain an action at law to recover back the whole amount paid or so much of it as was illegally exacted, this
is ordinarily regarded as an adequate remedy. Thus, the Legislature of the State of Tennessee enacted a statute not
greatly different from the Philippine statute, with the exception that the words, "without interest," were not included,
and the United States Supreme Court in discussing the law said: "This remedy is simple and effective. . . . It is a wise
and reasonable precaution for the security of the government. No government could exist that permitted its collection to
be delayed by every litigious man or every embarrassed man, to whom delay was more important than the payment of
costs." (State of Tennessee vs. Sneed [1877], 6 Otto, 69. See also 37 Cyc., 1267, 1268.) Again in the case of Snyder vs.
Marks ([1883], 109 U.S., 185) the sole object of the suit was to restrain the collection of a tax which was assessed
under the United States Internal Revenue Laws. The court said: The remedy of a suit to recover back the tax after it is
paid, is provided by statute, and a suit to restrain its collection is forbidden. The remedy so given is exclusive, and no
other remedy can be substituted for it." chanrobles virtual law library

An exceptional circumstance which serves to take cases out of the general rule comes under the head of irreparable
injury. In a decision of the United States Supreme Court in which this was explained (Dows vs. The City of Chicago
[1871], 11 Wall., 108) it was remarked that there can be no case of equitable cognizance "where there is a plain and
adequate remedy at law. And except where the special circumstances which we have mentioned exist, the party of
whom an illegal tax is collected has ordinarily ample remedy, either by action against the officer making the collection
or the body to whom the tax is paid." Accordingly it was held that since the plaintiff had his action after the tax was
paid "against the officer or the city to recover back the money," a bill in equity to restrain the collection of a tax would
not be sustained. If the ground alleged is alone that the tax was illegal, this is not sufficient for the maintenance of an
injunction. (Dows vs .The City of Chicago, supra; Shelton vs. Platt [1891], 139 U.S., 591, reviewing previous
decisions; Nye Jenks & Co. vs. Town of Washburn [1903], 125 Fed., 817; Churchill and Tait vs. Rafferty, supra,
followed approvingly in Young vs. Rafferty [1916], 33 Phil., 556, 563.) chanrobles virtual law library

While we have these decisions in mind, it might be well to recall that in one way or another, the whole question harks
back to the legality of sections 1578 and 1579 of the Administrative Code. But in addition, according to the averments
of the plaintiff's complaint which are provisionally admitted by the demurrer of the defendant, the plaintiff's claim is,
that he was not engaged in the business of a commission merchant in the city of Manila, and so was not liable to the
payment of a tax as such, and that he is without means of complying with the demand of the defendant under protest or
otherwise. Such, likewise, was one of three grounds which were suggested as giving equitable jurisdiction to the
Supreme Court of the State of Michigan. Regarding it, Judge Cooley said:

The force of the third contention must rest in the fact that enforcing the tax may in some cases compel the suspension
of business, because it is more than the person taxed can afford to pay. But if this consideration is sufficient to justify
the transfer of a controversy from a court of law to a court of equity, then every controversy where money is demanded
may be made the subject of equitable cognizance. To enforce against a dealer a promissory not may in some cases as
effectually break up his business as to collect from him a tax of equal amount. This is not what is known to the law as
irreparable injury. The courts have never recognized the consequences of the mere enforcement of a money demand as
falling within that category. (Youngblood vs. Sexton [1875], 32 Mich., 406.)

No one could very convincingly argue against the force of these leading cases. Not neglecting, therefore, to remember
their importance, the precise and narrower question is suggested - Did the addition of the words "without interest" in
the statute so deprive an aggrieved taxpayer of his adequate remedy at law as to justify judicial interference? In two
recent decisions of this court, interest on judgments for the recovery of taxes was allowed, but without deciding this
precise question. Thus, in Viuda e Hijos de Pedro P. Roxas vs. Rafferty [1918], 37 Phil., 957), it was said that whether
interest could be adjudged a taxpayer against the United States, a State of the American Union, or the Government of
the Philippine Islands, was beside the question. And in Hongkong & Shanghai Banking Corporation vs. Rafferty
[1918], 39 Phil., 145), it was said that whether interest may be recovered under section 1579 of the Administrative
Code, is left for decision when a case arises after the Code became effective. As the point can no longer be evaded, we
shall proceed to resolve it, and in so doing can find no better approach than that to be found in the right to
interest.chanroblesvirtualawlibrary chanrobles virtual law library

It is well settled both on principle and authority that interest is not to be awarded against a sovereign government, as the
United States or a State, unless its consent has been manifested by an Act of its Legislature or by a lawful contract of its
executive officers. If there be doubt upon the subject, that doubt must be resolved in favor of the State. In Gosman's
Case ([1881], L. R. 17 Ch. Div., 771) Sir George Jessel, Master of the Rolls, speaking for the Court of Appeals,
summed up the Law of England in this concise statement: "There is no ground for charging the Crown with interest.
Interest is only payable by statute or by contract." In Attorney-General vs. Cape Fear Navigation Co. ([1843], 37 N.C.,
444) Chief Justice Ruffin laid down as undoubted law that "the State never pays interest unless she expressly engages
to do so." Judge Cooley says that "The recovery (in tax suits) must be limited to the money received. . . . Interest is
recoverable only when expressly allowed by statute." (2 Cooley on Taxation, 3d Ed., p. 1510; Savings and Loan
Society vs. San Francisco [1901], 131 Cal., 356.) In United States vs. Sherman [1878], 98 U.S., 465) the court, in
considering a law relating to suits against revenue officers providing for recovery of the amount payable out of the
treasury, held that the amount recoverable did not include interest upon the judgment. Justice Strong, delivering the
opinion of the court, in part said:

When the obligation arises, it is an obligation to pay the amount recovered; that is, the amount for which judgment has
been given. The act of Congress says not a word about interest. Judgments, it is true, are by the law of South Carolina,
as well as by Federal legislation, declared to bear interest. Such legislation, however, has no application to the
government. And the interest is no part of the amount recovered. It accrues only after the recovery has been had.
Moreover, whenever interest is allowed either by statute or by common law, except in cases where there has been a
contract to pay interest, it is allowed for delay or default of the debtor. But delay or default cannot be attributed to the
government. It is presumed to be always ready to pay what it owes. ( See also U.S. vs .Bayard [1888], 127 U.S., 251;
U.S. vs. North Carolina [1890], 136 U.S., 211 Board of County Commissioners vs. Kaul [1908], 17 L. R. A. [N.S.],
552.)

As this is the main rule, the converse proposition must be equally true, that taxes only draw interest as do sums of
money when expressly authorized. A corollary to the principle is also self-evident, that interest cannot be recovered on
an abatement unless the statute provides for it. (1 Cooley on Taxation, 3d Ed., p. 20; 2 Cooley on Taxation, 3d Ed., p.
1392; City of Lowell vs. County Commissioners of Middlesex [1862], 3 Allen [Mass.], 550.) The only contrary dictum
is to the effect that where an illegal tax has been collected, the citizen who has paid and is obliged to bring suit against
the collector is entitled to interest from the time of the illegal exaction. (Erskine vs. Van Arsdale [1872], 15 Wall., 75;
National Home vs. Parrish [1913], 229 U.S., 494; Matter of O'Berry [1904], 179 N.Y., 285.) The distinction
undoubtedly arises through the fiction that the suit is against the collector and not against the State, although the
judgment is not to be paid by the collector but directly from the treasury.chanroblesvirtualawlibrary chanrobles virtual
law library

It has been urged that since interest is in the nature of damages, it is proper for allowance. While this may be true in the
general run of cases, it is not necessary true when the sovereign power is concerned. The state is not amenable to
judgments for damages or costs without its consent. (Hongkong & Shanghai Banking Corporation vs. Rafferty, supra,
citing numerous decisions.) In Morley vs. Lakeshore & Michigan Southern Railway Co. ([1892], 146 U.S., 162,
followed recently in Missouri & Arkansas Lumber & Mining Co. vs. Greenwood District of Sebastian County,
Arkansas [1919], U.S. Sup. Ct. Adv. Op., April 1, 1919, p .239), the United States Supreme Court had under
consideration a state statute which reduced the rate of interest upon all judgments obtained within the courts of the
state. The court said:

After the cause of action, whether a tort or a broken contract, not itself prescribing interest till payment, shall have been
merged into a judgment, whether interest shall accrue upon the judgment is a matter not of contract between the parties,
but of legislative discretion, which is free, so far as the Constitution of the United States is concerned, to provide for
interest as a penalty or liquidated damages for the nonpayment of the judgment, or not to do so. When such provision is
made by statute, the owner of the judgment is, of course, entitled to the interest so prescribed until payment is received,
or until the State shall, in the exercise of its discretion, declare that such interest shall be changed or cease to accrue.
Should the statutory damages for nonpayment of a judgment be determined by a State, either in whole or in part, the
owner of a judgment will be entitled to receive and have a vested right in the damages which shall have accrued up to
the date of the legislative change; but after that time his rights as to interests as damages are, as when he first obtained
his judgment, just what the legislature chooses to declare. He has no contract whatever on the subject with the
defendant in the judgment, and his right is to receive, and the defendant's obligation is to pay, as damages, just what the
State chooses to prescribe. . . .chanroblesvirtualawlibrary chanrobles virtual law library

If it be true, as we have endeavored to show, that interest allowed for nonpayment of judgments is in the nature of
statutory damages, and if the plaintiff in the present case has received all such damages which accrued while his
judgment remained unpaid, there is no change or withdrawal of remedy. His right was to collect such damages as the
State, in its discretion, provided should be paid by defendant who should fail to promptly pay judgments which should
be entered against them, and such right has not been destroyed or interfered with by legislation. The discretion
exercised by the legislature in prescribing what, if any, damages shall be paid by way of compensation for delay in the
payment of judgments is based on reasons of public policy, and is altogether outside the sphere of private contracts.

Our statute, it will be remembered, not only does not authorize interest but negatives the payment of interest .While,
therefore, coming under the purview of the general principle pertaining to legislative discretion, it also avoids any
trouble to be found in those decisions which allow interest without any express provision on the subject, because the
statute provides that interest shall not be allowed .From whatever direction we look at the subject, therefore, we reach
either the conclusion that the law is valid, or that the plaintiff has not proven such a case of irreparable injury as would
warrant the issuance of the extraordinary writ of injunction.chanroblesvirtualawlibrary chanrobles virtual law library

The reason for what superficially seems to be a harsh ruling goes back to the fundamental conception of the nature of
taxation. It is but a truism to restate that taxation is an attribute of sovereignty. It is the strongest of all the powers of
government. It involves, as Chief Justice Marshall in his historical statement said, the power to destroy. (McCulloch vs.
Maryland [1819], 4 Wheat., 316; Loan Association vs. Topeka [1875], 20 Wall., 655.) "The right of taxation where it
exists," the court said in Austin vs. Aldermen ([1868], 7 Wall., 694), "is necessarily unlimited in its nature. It carriers
with it inherently the power to embarrass and destroy." chanrobles virtual law library

Public policy decrees that, since upon the prompt collection of revenue there depends the very existence of government
itself, whatever determination shall be arrived at by the Legislature should not be interfered with, unless there be a clear
violation of some constitutional inhibition. As said in Dows vs. The City of Chicago, supra, "It is upon taxation that the
several states chiefly rely to obtain the means to carry on their respective governments, and it is of the utmost
importance to all of them that the modes adopted to enforce the taxes levied should be interfered with as little as
possible. Any delay in the proceedings of the officers, upon whom the duty is devolved of collecting the taxes, may
derange the operations of government, and thereby cause serious detriment to the public." Or as said in Snyder vs.
Marks, supra, "The system prescribed by the United States in regard to both customs duties and internal revenue taxes,
of stringent measures, not judicial, to collect them, with appeals to specified tribunals and suits to recover back moneys
illegally exacted, was a system of corrective justice, intended to be complete and enacted under the right belonging to
the Government, to prescribe the conditions on which it would subject itself to the judgment of the courts in the
collection of its revenues." Or as said in Tennesse vs. Sneed, supra, "The Government may fix the conditions upon
which it will consent to litigate the validity of its original taxes." Or as said in a New York case, "The power of taxation
being legislative, all the incidents are within the control of the Legislature." (Genet vs .City of Brooklyn [1885], 99
N.Y., 296.) Or as said by Chief Justice Marshall in McCulloch vs. Maryland, supra, "The people of a state give to their
government a right of taxing themselves and their property, and as the exigencies of the Government cannot be limited,
they prescribe no limit to the exercise of this right, resting confidently on the interest of the legislator and on the
influence of the constituents over their representatives, to guard themselves against its abuse." ( See to the same effect
the Philippine case of De Villata vs. Stanley [1915], 32 Phil., 541; and Churchill and Tait vs. Concepcion [1916], 34
Phil., 969.) chanrobles virtual law library

Applying these well-known principles to the case at bar, it would seem that the legislature has considered that a law
providing for the payment of a tax with a right to bring a suit before a tribunal to recover back the same without interest
is a full and adequate remedy for the aggrieved taxpayer. The disallowance of interest in such case, like the other steps
prescribed as conditional to recovery, has been made one of the conditions which the lawmakers have seen fit to attach
to the remedy provided. As the Legislature in the exercise of its wide discretionary power, has deemed the remedy
provided in section 1579 of the Administrative Code to be an adequate mode of testing the validity of an internal
revenue tax and has willed that such a remedy shall be exclusive, the courts not only owe it to a coordinate branch of
the government to respect the opinion thus announced, but have no right to interfere with the enforcement of such a
law.chanroblesvirtualawlibrary chanrobles virtual law library

The last remaining point touches upon the possibility that section 1579 of the Administrative Code, in conjunction with
the following section, has served to diminish the jurisdiction of the courts and, in pursuance of well-known principles,
is thus invalid. Section 9 of the Philippine Bill and section 26 of the Jones Law, the first the Act of Congress of July 1,
1902, and the second the Act of Congress of August 29, 1916, have provided "That the Supreme Court and the Courts
of First Instance of the Philippine Islands shall possess and exercise jurisdiction as heretofore provided and such
additional jurisdiction as shall hereafter be prescribed by law. . . ." The Supreme Court of the Philippines, in
interpreting these provisions, has reached the conclusion that they had the effect of taking one or more Acts of the
Philippine Commission and Legislature out of the field of ordinary legislation and making of them in effect basic laws.
In other words, it was held that the Legislature could add to but could not diminish the jurisdiction of the courts.
(Barrameda vs .Moir [1913], 25 Phil., 44.) But any argument predicated upon such a proposition must necessarily
assume that the Philippine courts have had the power to restrain by injunction the collection of taxes. And since, with
or without a law, the Philippine courts would not have presumed to issue an injunction to restrain the collection of a
tax, the prohibition expressed in the law has had no other effect than to confirm a universal principle. This was
expressly decided in the case of Churchill and Tait vs. Rafferty, supra, and has since then not been open to
discussion.chanroblesvirtualawlibrary chanrobles virtual law library

To conclude - in answer to the argument made by appellant, we can say that sections 1578 and 1579 of the
Administrative Code establish an adequate remedy at law and that we are not convinced that the enforcement of the tax
will produce irreparable injury, and, in answer to the argument of appellee, that sections 1578 and 1579 of the
Administrative Code of 1917 are valid. The result is, thus, to affirm the final order appealed from. Costs shall be taxed
against the appellant. So ordered.chanroblesvirtualawlibrary chanrobles virtual law library

COMMISSIONER OF INTERNAL REVENUE and COMMISSIONER OF CUSTOMS, Petitioners, v. HON.

APOLINARIO B. SANTOS, in his capacity as Presiding Judge of the Regional Trial Court, Branch 67, Pasig
City; ANTONIO M. MARCO; JEWELRY BY MARCO & CO., INC., and GUILD OF PHILIPPINE
JEWELERS, INC., Respondents.

DECISION

HERMOSISIMA, JR., J.:

Of grave concern to this Court is the judicial pronouncement of the court a quo that certain provisions of the Tariff &
Customs Code and the National Internal Revenue Code are unconstitutional. This provokes the issue: Can the Regional
Trial Courts declare a law inoperative and without force and effect or otherwise unconstitutional? If it can, under what
circumstances?

In this petition, the Commissioner of Internal Revenue and the Commissioner of Customs jointly seek the reversal of
the Decision, 1 dated February 16, 1995, of herein public respondent, Hon. Apolinario B. Santos, Presiding Judge of
Branch 67 of the Regional Trial Court of Pasig City.chanroblesvirtual|awlibrary

The following facts, concisely related in the petition 2 of the Office of the Solicitor General, appear to be
undisputed:jgc:chanrobles.com.ph

"1. Private respondent Guild of Philippine Jewelers, Inc., is an association of Filipino jewelers engaged in the
manufacture of jewelries (sic) and allied undertakings. Among its members are Hans Brumann, Inc., Miladay Jewels,
Inc., Mercelles, Inc., Solid Gold International Traders, Inc., Diagem Trading Corporation, and private respondent
Jewelry by Marco & Co., Inc. Private respondent Antonio M. Marco is the President of the Guild.

2. On August 5, 1988, Felicidad L. Viray, then Regional Director, Region No. 4-A of the Bureau of Internal Revenue,
acting for and in behalf of the Commissioner of Internal Revenue, issued Regional Mission Order No. 109-88 to BIR
officers, led by Eliseo Corcega, to conduct surveillance, monitoring, and inventory of all imported articles of Hans
Brumann, Inc., and place the same under preventive embargo. The duration of the mission was from August 8 to
August 20, 1988 (Exhibit ‘1’; Exhibit ‘A’).

3. On August 17, 1988, pursuant to the aforementioned Mission Order, the BIR officers proceeded to the establishment
of Hans Brumann, Inc., served the Mission Order, and informed the establishment that they were going to make an
inventory of the articles involved to see if the proper taxes thereon have been paid. They then made an inventory of the
articles displayed in the cabinets with the assistance of an employee of the establishment. They listed down the articles,
which list was signed by the assistant employee. They also requested the presentation of proof of necessary payments
for excise tax and value-added tax on said articles (pp. 10-15, TSN, April 12, 1993, Exhibits ‘2’, ‘2-A’, ‘3’, ‘3-A’).
4. The BIR officers requested the establishment not to sell the articles until it can be proven that the necessary taxes
thereon have been paid. Accordingly, Mr. Hans Brumann, the owner of the establishment, signed a receipt for Goods,
Articles, and Things Seized under Authority of the National Internal Revenue Code (dated August 17, 1988),
acknowledging that the articles inventoried have been seized and left in his possession, and promising not to dispose of
the same without authority of the Commissioner of Internal Revenue pending investigation. 3

5. Subsequently, BIR officer Eliseo Corcega submitted to his superiors a report of the inventory conducted and a
computation of the value-added tax and ad valorem tax on the articles for evaluation and disposition. 4

6. Mr. Hans Brumann, the owner of the establishment, never filed a protest with the BIR on the preventive embargo of
the articles. 5

7. On October 17, 1988, Letter of Authority No. 0020596 was issued by Deputy Commissioner Eufracio D. Santos to
BIR officers to examine the books of accounts and other accounting records of Hans Brumann, Inc., for ‘stocktaking
investigation for excise tax purposes for the period January 1, 1988 to present’ (Exhibit ‘C’). In a letter dated October
27, 1988, in connection with the physical count of the inventory (stocks on hand) pursuant to said Letter of Authority,
Hans Brumann, Inc. was requested to prepare and make available to the BIR the documents indicated therein (Exhibit
‘D’).

8. Hans Brumann, Inc., did not produce the documents requested by the BIR. 6

9. Similar Letters of Authority were issued to BIR officers to examine the books of accounts and other accounting
records of Miladay Jewels, Inc., Mercelles, Inc., Solid Gold International Traders, Inc., (Exhibits ‘E’, ‘G’ and ‘N’) and
Diagem Trading Corporation 7 for ‘stocktaking/investigation for excise tax purpose for the period January 1, 1988 to
present.’

10. In the case of Miladay Jewels, Inc. and Mercelles, Inc., there is no account of what actually transpired in the
implementation of the Letters of Authority.

11. In the case of Solid Gold International Traders Corporation, the BIR officers made an inventory of the articles in
the establishment. 8 The same is true with respect to Diagem Traders Corporation. 9

12. On November 29, 1988, private respondents Antonio M. Marco and Jewelry By Marco & Co., Inc. filed with the
Regional Trial Court, National Capital Judicial Region, Pasig City, Metro Manila, a petition for declaratory relief with
writ of preliminary injunction and/or temporary restraining order against herein petitioners and Revenue Regional
Director Felicidad L. Viray (docketed as Civil Case No. 56736) praying that Sections 126, 127(a) and (b) and 150(a) of
the National Internal Revenue Code and Hdg. No. 71.01, 71.02, 71.03, and 71.04, Chapter 71 of the Tariff and Customs
Code of the Philippines be declared unconstitutional and void, and that the Commissioner of Internal Revenue and
Customs be prevented or enjoined from issuing mission orders and other orders of similar nature. . . .

13. On February 9, 1989, herein petitioners filed their answer to the petition. . . .

14. On October 16, 1989, private respondents filed a Motion with Leave to Amend Petition by including as petitioner
the Guild of Philippine Jewelers, Inc., which motion was granted. . . .

15. The case, which was originally assigned to Branch 154, was later reassigned to Branch 67.

16. On February 16, 1995, public respondent rendered a decision, the dispositive portion of which reads:chanrob1es
virtual 1aw library

‘In view of the foregoing reflections, judgment is hereby rendered, as follows:chanrob1es virtual 1aw library

1. Declaring Section 104 of the Tariff and the Customs Code of the Philippines, Hdg. 71.01, 71.02, 71.03, and 71.04,
Chapter 71 as amended by Executive Order No. 470, imposing three to ten (3% to 10%) percent tariff and customs duty
on natural and cultured pearls and precious or semi-precious stones, and Section 150 par. (a) the National Internal
Revenue Code of 1977, as amended, renumbered and rearranged by Executive Order 273, imposing twenty (20%)
percent excise tax on jewelry, pearls and other precious stones, as INOPERATIVE and WITHOUT FORCE and
EFFECT insofar as petitioners are concerned.

2. Enforcement of the same is hereby enjoined. No cost.

SO ORDERED,’"

Section 150 (a) of Executive Order No. 273 reads:jgc:chanrobles.com.ph

"SEC. 150. Non-essential goods. — There shall be levied, assessed and collected a tax equivalent to 20% based on the
wholesale price or the value of importation used by the Bureau of Customs in determining tariff and customs duties; net
of the excise tax and value-added tax, of the following goods:chanrob1es virtual 1aw library

(a) All goods commonly or commercially known as jewelry, whether real or imitation, pearls, precious and semi-
precious stones and imitations thereof; goods made of, or ornamented, mounted and fitted with, precious metals or
imitations thereof or ivory (not including surgical and dental instruments, silver-plated wares, frames or mountings for
spectacles or eyeglasses, and dental gold or gold alloys and other precious metals used in filling, mounting or fitting of
the teeth); opera glasses and lorgnettes. The term ‘precious metals’ shall include platinum, gold, silver, and other
metals of similar or greater value. The term ‘imitations thereof’ shall include platings and alloys of such metals."
chanrobles.com:cralaw:red

Section 150 (a) of Executive Order No. 273, which took effect on January 1, 1988, amended the then Section 163 (a) of
the Tax Code of 1986 which provided that:jgc:chanrobles.com.ph

"SEC. 163. Percentage tax on sales of non-essential articles. — There shall be levied, assessed and collected, once only
on every original sale, barter, exchange or similar transaction for nominal or valuable consideration intended to transfer
ownership of, or title to, the articles herein below enumerated a tax equivalent to 50% of the gross value in money of
the articles so sold, bartered, exchanged or transferred, such tax to be paid by the manufacturer or producer:chanrob1es
virtual 1aw library

(a) All articles commonly or commercially known as jewelry, whether real or imitation, pearls, precious and semi-
precious stones, and imitations thereof, articles made of, or ornamented, mounted or fitted with, precious metals or
imitations thereof or ivory (not including surgical and dental instruments, silver-plated wares, frames or mounting for
spectacles or eyeglasses, and dental gold or gold alloys and other precious metal used in filling, mounting or fitting of
the teeth); opera glasses, and lorgnettes. The term ‘precious metals’ shall include platinum, gold, silver, and other
metals of similar or greater value. The term ‘imitations thereof, shall include platings and alloys of such metals."cralaw
virtua1aw library

Section 163 (a) of the 1986 Tax Code was formerly Section 194(a) of the 1977 Tax Code and Section 184(a) of the Tax
Code, as amended by Presidential Decree No. 69, which took effect on January 1, 1974.

It will be noted that, while under the present law, jewelry is subject to a 20% excise tax in addition to a 10% value-
added tax under the old law, it was subjected to 50% percentage tax. It was even subjected to a 70% percentage tax
under then Section 184(a) of the Tax Code, as amended by P.D. 69.

Section 104, Hdg. Nos. 17.01, 17.02, 17.03 and 17.04 Chapter 71 of the Tariff and Customs Code, as amended by
Executive Order No. 470, dated July 20, 1991, imposes import duty on natural or cultured pearls and precious or semi-
precious stones at the rate of 3% to 10% to be applied in stages from 1991 to 1994 and 30% in 1995.

Prior to the issuance of E.O. 470, the rate of import duty in 1988 was 10% to 50% when the petition was filed in the
court a quo.

In support of their petition before the lower court, the private respondents submitted a position paper purporting to be
an exhaustive study of the tax rates on jewelry prevailing in other Asian countries, in comparison to tax rates levied on
the same in the Philippines. 10

The following issues were thus raised therein

"1. Whether or not the Honorable Court has jurisdiction over the subject matter of the petition.

2. Whether the petition states a cause of action or whether the petition alleges a justiciable controversy between the
parties.

3. Whether Section 150, par. (a) of the NIRC and Section 104, Hdg. 71.01, 71.02, 71.03 and 71.04 of the Tariff and
Customs Code are unconstitutional.

4. Whether the issuance of the Mission Order and Letters of Authority is valid and legal."cralaw virtua1aw library
In the assailed decision, the public respondent held indeed that the Regional Trial Court has jurisdiction to take
cognizance of the petition since "jurisdiction over the nature of the suit is conferred by law and it is determine[d]
through the allegations in the petition," and that the "Court of Tax Appeals has no jurisdiction to declare a statute
unconstitutional much less issue writs of certiorari and prohibition in order to correct acts of respondents allegedly
committed with grave abuse of discretion amounting to lack of jurisdiction."cralaw virtua1aw library

As to the second issue, the public respondent, made the holding that there exists a justiciable controversy between the
parties, agreeing with the statements made in the position paper presented by the private respondents, and considering
these statements to be factual evidence, to wit:jgc:chanrobles.com.ph

"Evidence for the petitioners indeed reveals that government taxation policy treats jewelry, pearls, and other precious
stones and metals as non-essential luxury items and therefore, taxed heavily; that the atmospheric cost of taxation is
killing the local manufacturing jewelry industry because they cannot compete with neighboring and other countries
where importation and manufacturing of jewelry is not taxed heavily, if not at all; that while government incentives and
subsidies exist, local manufacturers cannot avail of the same because officially many of them are unregistered and are
unable to produce the required official documents because they operate underground, outside the tariff and tax
structure; that local jewelry manufacturing is under threat of extinction, otherwise discouraged, while domestic trading
has become more attractive; and as a consequence, neighboring countries, such as: Hongkong, Singapore, Malaysia,
Thailand, and other foreign competitors supplying the Philippine market either through local channels or through the
black market for smuggled goods are the ones who are getting business and making money, while members of the
petitioner Guild of Philippine Jewelers, Inc. are constantly subjected to bureaucratic harassment instead of being given
by the government the necessary support in order to survive and generate revenue for the government, and most of all
fight competitively not only in the domestic market but in the arena of world market where the real contest is.

Considering the allegations of fact in the petition which were duly proven during the trial, the Court holds that the
petition states a cause of action and there exists a justiciable controversy between the parties which would require
determination of constitutionality of the laws imposing excise tax and customs duty on jewelry." 11 (Emphasis ours)

The public respondent, in addressing the third issue, ruled that the laws in question are confiscatory and oppressive.
Again, virtually adopting verbatim the reasons presented by the private respondents in their position paper, the lower
court stated:jgc:chanrobles.com.ph

"The Court finds that indeed government taxation policy trats(sic) hewelry(sic) as non-essential luxury item and
therefore, taxed heavily. Aside from the ten (10%) percent value added tax (VAT), local jewelry manufacturers contend
with the (manufacturing) excise tax of twenty (20%) percent (to be applied in stages) customs duties on imported raw
materials, the highest in the Asia-Pacific region. In contrast, imported gemstones and other precious metals are duty
free in Hongkong, Thailand, Malaysia and Singapore.

The Court elaborates further on the experiences of other countries in their treatment of the jewelry sector.

MALAYSIA

Duties and taxes on imported gemstones and gold and the sales tax on jewelry were abolished in Malaysia in 1984.
They were removed to encourage the development of Malaysia’s jewelry manufacturing industry and to increase
exports of jewelry.

THAILAND

Gems and jewelry are Thailand’s ninth most important export earner. In the past, the industry was overlooked by
successive administrations much to the dismay of those involved in developing trade. Prohibitive import duties and
sales tax on precious gemstones restricted the growht (sic) of the industry, resulting in the most of the business being
unofficial. It was indeed difficult for a government or businessman to promote an industry which did not officially
exist.

Despite these circumstances, Thailand’s Gem business kept growing up in (sic) businessmen began to realize it’s
potential. In 1978, the government quietly removed the severe duties on precious stones, but imposed a sales tax of
3.5%. Little was said or done at that time as the government wanted to see if a free trade in gemstones and jewelry
would increase local manufacturing and exports or if it would mean more foreign made jewelry pouring into Thailand.
However, as time progressed, there were indications that local manufacturing was indeed being encouraged and the
economy was earning more from exports. The government soon removed the 3% sales tax too, putting Thailand at par
with Hongkong and Singapore. In these countries, there are no more import duties and sales tax on gems. (Cited in
pages 6 and 7 of Exhibit ‘M’. The Center for Research and Communication in cooperation with the Guild of Philippine
Jewelers, Inc., June 1986).chanrobles.com : virtual law library

To illustrate, shown hereunder is the Philippine tariff and tax structure on jewelry and other precious and semi-precious
stones compared to other neighboring countries, to wit:chanrob1es virtual 1aw library

Tariff on

imported

Jewelry and

precious (Manufacturing) Sales Tax 10% (VAT)

stones Excise tax

Philippines 3% to 10% 20% 10% VAT

to be applied

in stages

Malaysia None None None

Thailand None None None

Singapore None None None

Hongkong None None None

In this connection, the present tariff and tax structure increases manufacturing costs and renders the local jewelry
manufacturers uncompetitive against other countries even before they start manufacturing and trading. Because of the
prohibitive cast (sic) of taxation, most manufacturers source from black market for smuggled goods, and that while
manufacturers can avail of tax exemption and/or tax credits from the (manufacturing) excise tax, they have no
documents to present when filing this exemption because, as pointed out earlier, most of them source their raw
materials from the black market, and since many of them do not legally exist or operate onofficially (sic), or
underground, again they have no records (receipts) to indicate where and when they will utilize such tax credits. (Cited
in Exhibit ‘M’ — Buencamino Report).

Given these constraints, the local manufacturer has no recourse but to the back door for smuggled goods if only to be
able to compete even ineffectively, or cease manufacturing activities and instead engage in the tradinf (sic) of smuggled
finished jewelry.

Worthy of note is the fact that indeed no evidence was adduced by respondents to disprove the foregoing allegations of
fact. Under the foregoing factual circumstances, the Court finds the questioned statutory provisions confiscatory and
destructive of the proprietary right of the petitioners to engage in business in violation of Section 1, Article III of the
Constitution which states, as follows:chanrob1es virtual 1aw library

‘No person shall be deprived of the life, liberty, or property without due process of law . . .’" 12

Anent the fourth and last issue, the herein public respondent did not find it necessary to rule thereon, since, in his
opinion, "the same has been rendered moot and academic by the aforementioned pronouncement." 13

The petitioners now assail the decision rendered by the public respondent, contending that the latter has no authority to
pass judgment upon the taxation policy of the government. In addition, the petitioners impugn the decision in question
by asserting that there was no showing that the tax laws on jewelry are confiscatory and destructive of private
respondent’s proprietary rights.

We rule in favor of the petitioners.

It is interesting to note that public respondent, in the dispositive portion of his decision, perhaps keeping in mind his
limitations under the law as a trial judge, did not go so far as to declare the laws in question to be unconstitutional.
However, therein he declared the laws to be inoperative and without force and effect insofar as the private respondents
are concerned. But, respondent judge, in the body of his decision, unequivocally but wrongly declared the said
provisions of law to be violative of Section 1, Article III of the Constitution. In fact, in their Supplemental Comment on
the Petition for Review, 14 the private respondents insist that Judge Santos, in his capacity as judge of the Regional
Trial Court, acted within his authority in passing upon the issues, to wit:jgc:chanrobles.com.ph

"A perusal of the appealed decision would undoubtedly disclose that public respondent did not pass judgment on the
soundness or wisdom of the government’s tax policy on jewelry. True, public respondent, in his questioned decision,
observed, inter alia, that indeed government tax policy treats jewelry as non-essential item, and therefore, taxed
heavily; that the present tariff and tax structure increase manufacturing cost and renders the local jewelry manufacturers
uncompetitive against other countries even before they start manufacturing and trading; that many of the local
manufacturers do not legally exist or operate unofficially or underground; and that the manufacturers have no recourse
but to the back door for smuggled goods if only to be able to compete even if ineffectively or cease manufacturing
activities.

BUT, public respondent did not, in any manner, interfere with or encroach upon the prerogative of the legislature to
determine what should be the tax policy on jewelry. On the other hand, the issue raised before, and passed upon by, the
public respondent was whether or not Section 150, paragraph (a) of the National Internal Revenue Code (NIRC) and
Section 104, Hdg. 71.01, 71.02, 71.03 and 71.04 of the Tariff and Customs Code are unconstitutional, or differently
stated, whether or not the questioned statutory provisions affect the constitutional right of private respondents to engage
in business.

It is submitted that public respondent confined himself on this issue which is clearly a judicial question."cralaw
virtua1aw library

We find it incongruous, in the face of the sweeping pronouncements made by Judge Santos in his decision, that private
respondents can still persist in their argument that the former did not overreach the restrictions dictated upon him by
law. There is no doubt in the Court’s mind, despite protestations to the contrary, that respondent judge encroached upon
matters properly falling within the province of legislative functions. In citing as basis for his decision unproven
comparative data pertaining to differences between tax rates of various Asian countries, and concluding that the jewelry
industry in the Philippines suffers as a result, the respondent judge took it upon himself to supplant legislative policy
regarding jewelry taxation. In advocating the abolition of local tax and duty on jewelry simply because other countries
have adopted such policies, the respondent judge overlooked the fact that such matters are not for him to decide. There
are reasons why jewelry, a non-essential item, is taxed as it is in this country, and these reasons, deliberated upon by
our legislature, are beyond the reach of judicial questioning. As held in Macasiano v. National Housing Authority. 15

"The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of the political
departments are valid in the absence of a clear and unmistakable showing to the contrary. To doubt is to sustain. This
presumption is based on the doctrine of separation of powers which enjoins upon each department a becoming respect
for the acts of the other departments. The theory is that as the joint act of Congress and the President of the Philippines,
a law has been carefully studied and determined to be in accordance with the fundamental law before it was finally
enacted." (Emphasis ours)

What we see here is a debate on the WISDOM of the laws in question. This is a matter on which the RTC is not
competent to rule. 16 As Cooley observed: "Debatable questions are for the legislature to decide. The courts do not sit
to resolve the merits of conflicting issues." 17 In Angara v. Electoral Commission, 18 Justice Laurel made it clear that
"the judiciary does not pass upon questions of wisdom, justice or expediency of legislation." And fittingly so, for in the
exercise of judicial power, we are allowed only "to settle actual controversies involving rights which are legally
demandable and enforceable", and may not annul an act of the political departments simply because we feel it is unwise
or impractical. 19 This is not to say that Regional Trial Courts have no power whatsoever to declare a law
unconstitutional. In J.M. Tuason and Co. v. Court of Appeals, 20 we said that ‘[p]lainly the Constitution contemplates
that the inferior courts should have jurisdiction in cases involving constitutionality of any treaty or law, for it speaks of
appellate review of final judgments of inferior courts in cases where such constitutionality happens to be in issue." This
authority of lower courts to decide questions of constitutionality in the first instance was reaffirmed in Ynos v.
Intermediate Court of Appeals. 21 But this authority does not extend to deciding questions which pertain to legislative
policy.

The trial court is not the proper forum for the ventilation of the issues raised by the private respondents. The arguments
they presented focus on the wisdom of the provisions of law which they seek to nullify. Regional Trial Courts can only
look into the validity of a provision, that is, whether or not it has been passed according to the procedures laid down by
law, and thus cannot inquire as to the reasons for its existence. Granting arguendo that the private respondents may
have provided convincing arguments why the jewelry industry in the Philippines should not be taxed at it is, it is to the
legislature that they must resort to for relief, since with the legislature primarily lies the discretion to determine the
nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This Court cannot freely
delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. 22

As succinctly put in Lim v. Pacquing. 23 "Where a controversy may be settled on a platform other than one involving
constitutional adjudication, the court should exercise becoming modesty and avoid the constitutional question." As
judges, we can only interpret and apply the law and, despite our doubts about its wisdom, cannot repeal or amend it.
24chanroblesvirtualawlibrary

The respondents presented an exhaustive study on the tax rates on jewelry levied by different Asian countries. This is
meant to convince us that compared to other countries, the tax rates imposed on said industry in the Philippines is
oppressive and confiscatory. This Court, however, cannot subscribe to the theory that the tax rates of other countries
should be used as a yardstick in determining what may be the proper subjects of taxation in our own country. It should
be pointed out that in imposing the aforementioned taxes and duties, the State, acting through the legislative and
executive branches, is exercising its sovereign prerogative. It is inherent in the power to tax that the State be free to
select the subjects of taxation, and it has been repeatedly held that "inequalities which result from a singling out of one
particular class for taxation, or exemption, infringe no constitutional limitation."25cralaw:red

WHEREFORE, premises considered, the petition is hereby GRANTED, and the Decision in Civil Case No. 56736 is
hereby REVERSED and SET ASIDE. No costs.chanrobles virtuallawlibrary

SO ORDERED.

Padilla, Bellosillo, Vitug and Kapunan, JJ., concur.

[G.R. No. 159796.�April 5, 2005]

GEROCHI vs. DEPT. OF ENERGY

EN BANC

Sirs/Mesdames:

Quoted hereunder, for your information, is a resolution of this Court dated APR 5 2005.

G.R. No. 159796 (Romeo P. Gerochi, Katulong ng Bayan [KB] and Environmentalist Consumers Network, Inc. (ECN)
v. Department of Energy [DOE], Energy Regulatory Commission [ERC], National Power Corporation [NPC], Power
Sector Assets and Liabilities Management Group [PSALM], Strategic Power Utilities Group [SPUG] and Panay
Electric Company, Inc. [PECO].)

Under consideration is the Motion to Require Respondents to Answer Interrogatories filed by the petitioners. They seek
an order to compel the respondents to answer the written interrogatories served upon the latter, to wit:

1.�How much is the total amount of universal charge for missionary electrification has so far been collected?

2.�How much is the universal charge for environmental charge has so far been collected as of this date since
implementation?

3.�Where are the funds presently deposited and who has the custody thereof?

4.�What portion of the collected universal charge has so far been disbursed for any specific purpose or projects and
what are the specific purpose or projects to which they were spent?

Petitioner Romeo P. Gerochi, a taxpayer and a consumer of electricity, and Katulong ng Bayan (KB) and
Environmentalist Consumers Network, Inc. (ECN), both non-stock, non-profit organizations, filed the instant
petition[1]cralaw as an original action to assail the constitutionality of Section 34 of Republic Act No. 9136 and its
implementing rules and regulations. Section 34 reads as follows:

SECTION 34. Universal Charge. - Within one (1) year from the effectivity of this Act, a universal charge to be
determined, fixed and approved by the ERC, shall be imposed on all electricity and end-users for the following
purposes:

(a)����Payment for the stranded debts in excess of the amount assumed by the National Government and stranded
contract costs of NPC and as well as qualified stranded contract costs of distribution utilities resulting from the
restructuring of the industry;

(b)����Missionary electrification;

(c)���� The equalization of the taxes and royalties applied to indigenous or renewable sources of energy vis-�-vis
imported energy fuels;

(d)����An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour (P0.0025/kWh), which
shall accrue to an environmental fund to be used solely for watershed rehabilitation and management. Said fund shall
be managed by NPC under existing arrangements; and

(e)���� A charge to account for all forms of cross-subsidies for a period not exceeding three (3) years.

The universal charge shall be a non-bypassable charge which shall be passed on and collected from all end-users on a
monthly basis by the distribution utilities. Collections by the distribution utilities and the TRANSCO in any given
month shall be remitted to the PSALM Corp. on or before the fifteenth (15th) of the succeeding month, net of any
amount due to the distribution utility. Any end-user or self-generating entity not connected to a distribution utility shall
remit its corresponding universal charge directly to the TRANSCO.

The PSALM Corp., as administrator of the fund, shall create a Special Trust Fund which shall be disbursed only for the
purpose specified herein in an open and transparent manner. All amount collected for the universal charge shall be
distributed to the respective beneficiaries within a reasonable period to be provided by the ERC. (Emphasis supplied)

Rule 18 of the Implementing Rules and Regulations of said law provides:

Within one (1) year from the effectivity of the Act, there shall be a Universal Charge to be determined, fixed and
approved by the ERC that shall be imposed on all electricity end-users, including self-generation entities.

The petitioners assert that the implementation of the universal charge provided for under the aforementioned provisions
"is in all essence and purpose, a tax which is to be collected from all electric end-users and self-generating entities.
Since the power to tax is strictly a legislative function, the unlimited delegation of such power to the ERC, an
administrative agency, is thus, patently unconstitutional."

Petitioners then pray that "Section 34 and related sections of Rep. Act NO. 9136 should be declared unconstitutional,
hence null and void; the universal charge being charged to the consumers be ordered refunded to the consumers; and
the respondents be ordered to stop and refrain from implementing, collecting and charging the universal
charge."[2]cralaw

On 26 January 2004, respondents DOE, ERC and the NPC filed their joint comment [3]cralaw to the petition.

On 16 February 2004, respondent PSALM likewise filed its comment [4]cralaw to the petition.

On 13 July 2004, the petitioners filed their reply[5]cralaw to the comments of the respondents.

In its Resolution[6]cralaw of 03 August 2004, the Court resolved to give due course to the petition; treat the comment as
answer; and require the parties to submit their respective memoranda within thirty (30) days from notice thereof.
Except for PECO, all the parties filed their respective memoranda. [7]cralaw

On 18 January 2004, the petitioners furnished the Court with a copy[8]cralaw of written interrogatories they wished to
propound to the respondents, which the Court duly noted in its Resolution[9]cralaw of 15 February 2005.

The Court resolves to deny the petitioners' Motion to Require Respondents to Answer Interrogatories for lack of merit.

Although the field of inquiry that maybe covered by depositions or interrogatories is as broad as when the interrogated
party is called as witness to testify orally at trial, the inquiry must only extend to what is relevant and material to the
issue subject of the suit as provided for in Section 5 of Rule 25 of the 1997 Rules on Civil Procedure, as amended,
which reads:

SEC. 5. Scope and use of interrogatories. - Interrogatories may relate to any matters that can be inquired into under
section 2 [10]cralaw of Rule 23, ...

In the case at bar, the written interrogatories served by the petitioners on the respondents deal with ancillary matters
which, although may be inquired into through proper modes of discovery provided in the Rules, are not directly related
to the main issue, i.e., the constitutionality of Section 34 and other related sections of Rep. Act No. 9316. The written
interrogatories sent to the respondents are for the purpose of finding out the total amount of universal charge already
collected. Undoubtedly, the factual answers to the queries do not in any way help the Court in resolving the questions
of whether or not the universal charge provided for by Rep. Act. No. 9136 is a tax and whether or not there is any
undue delegation to the ERC by the legislature of such power to tax with respect to the determination and collection of
the universal charge. Hence, the written interrogatories are not in order.

Nonetheless, the court admonishes the respondents for ignoring the written interrogatories. The rules on discovery are
intended to enable a party to obtain knowledge of material facts within the knowledge of the adverse party. If the party
to whom the interrogatories is directed would wish not to answer the questions it should avail of the appropriate steps
to resist the request. Under the Rules,[11]cralaw opposition to written interrogatories may be filed. But, instead of
opposing the written interrogatories, respondents simply ignored the pleading. Such posture undermined the rules on
modes of discovery and may even constitute an affront on the dignity of the Court.

WHEREFORE, the Motion to Require Respondents to Answer Interrogatories filed by the petitioners is DENIED for
lack of merit

G.R. No. 11572 September 22, 1916

FRANCIS A. CHURCHILL and STEWART TAIT, ET AL, plaintiffs-appellants,

vs.

VENANCIO CONCEPCION, as Acting Collector of Internal Revenue, defendant-appellee.

Aitken and De Selms for appellants.

Attorney-General Avanceña for appellee.

TRENT,J.:

Section 100 of Act No. 2339, passed February 27, 1914, effective July 1, 1914, imposed an annual

tax of P4 per square meter upon "electric signs, billboards, and spaces used for posting or displaying

temporary signs, and all signs displayed on premises not occupied by buildings." This section was
subsequently amended by Act No. 2432, effective January 1, 1915, by reducing the tax on such

signs, billboards, etc., to P2 per square meter or fraction thereof. Section 26 of Act No. 2432 was in

turn amended by Act No. 2445, but this amendment does not in any way affect the questions

involved in the case under consideration. The taxes imposed by Act No. 2432, as amended, were

ratified by the Congress of the United States on March 4, 1915. The ratifying clause reads as

follows:

The internal-revenue taxes imposed by the Philippine Legislature under the law enacted by

that body on December twenty-third, nineteen hundred and fourteen (Act No. 2432), as

amended by the law enacted by it on January sixteenth, nineteen hundred and fifteen (Act

No. 2445), are hereby legalized and ratified, and the collection of all such taxes heretofore or

hereafter is hereby legalized, ratified and confirmed as fully to all intents and purposes as if

the same had by prior Act of Congress been specifically authorized and directed.

Francis A. Churchill and Stewart Tait, copartners doing business under the firm name and style of

the Mercantile Advertising Agency, owners of a sign or billboard containing an area of 52 square

meters constructed on private property in the city of Manila and exposed to public view, were taxes

thereon P104. The tax was paid under protest and the plaintiffs having exhausted all their

administrative remedies instituted the present action under section 140 of Act No. 2339 against the

Collector of Internal Revenue to recover back the amount thus paid. From a judgment dismissing the

complaint upon the merits, with costs, the plaintiffs appealed.

It is now urged that the trial court erred:

(1) In not holding that the tax as imposed by virtue of Act No. 2339, as amended by Act No.

2432, as amended by Act No. 2445, constitutes deprivation of property without

compensation or due process of law, because it is confiscatory and unjustly discriminatory

and (2) in not holding that the said tax is void for lack of uniformity, because it is not graded

according to value; because the classification on which it is based on any reasonable

ground; and furthermore, because it constitutes double taxation.

We will first inquire whether the tax in question is confiscatory as to the business of the plaintiff Upon
this point the lower court, in accepting the testimony of the plaintiff, Churchill, to the effect that "the

billboard in question cost P300 to construct, that its annual gross earning power is P268, and that

the annual tax is P104," found "that for a five years' period the gross income from the billboard
would

be P1,340, and that the expenditures for original construction and taxes would amount to P820,

leaving a balance of P520," held that "unless the tax equals or exceeds the gross income, the court

would hardly be justified in declaring the tax confiscatory." These findings of fact and conclusions of

law are attacked upon the ground that the court failed to take into-consideration the pertinent facts

that the annual depreciation of the billboard is 20 per cent; that at the end of five years the capital of

P300 would be completely lost; that the plaintiffs are entitled to receive a reasonable rate of interest

on this capital; and that there should be charged against the billboard its proportion of the overhead

charges such as labor, management, maintenance, rental of office premises, rental or purchase of

ground space for board, repair, paints, oils, etc., resulting in an actual loss per year on the business,

instead of an apparent profit of P520 for five years, or P44 for one year. If these contentions rested

upon a sound basis it might be said that the tax is, in a sense, confiscatory; but they do not, as we

will attempt to show from the evidence of record.

The plaintiff Churchill testified in part as follows:

Q. In your opinion, Mr. Churchill, state what you would think of the rates that are

charged by you for advertising purposes in connection with this board; could they be raised?

A. No.

Q. Why? —

A. The business wouldn't allow it; the business wouldn't afford it; and otherwise it

would mean bankruptcy to try to increase it.

Q. Who couldn't afford it? Explain it fully Mr. Churchill? —

A. The merchants couldn't afford to pay more. On cross-examination:

Q. It is a fact, it is not, Mr. Churchill, that since the passage of Act No. 2339 you have

never made any attempt to raise the advertising rates? —

A. It would be impossible to raise them.

Q. My question is: You have never made any attempt to raise them? —

A. We have talked it over with the merchants and talked over the price on the event of

a tax being put at a reasonable amount, about putting up some increase.

Q. But you have never made an actual attempt to increase your rates? —

A. I would consider that an actual attempt.

Q. You have never fixed the rate higher than it is now? —

A. No; no.

It was agreed that Tait, the other plaintiff, would testify to the same effect. The parties, plaintiffs and

defendant, further agreed "that a number of persons have voluntarily and without protest paid the

taxes imposed by section 100 of Act No. 2339, as amended by Act No. 2432, and in turn amended

by Act No. 2445."

It will thus be seen that the contention that the rates charged for advertising cannot be raised is

purely hypothetical, based entirely upon the opinion of the plaintiffs, unsupported by actual test, and

that the plaintiffs themselves admit that a number of other persons have voluntarily and without

protest paid the tax herein complained of. Under these circumstances, can it be held as a matter of

fact that the tax is confiscatory or that, as a matter of law, the tax is unconstitutional? Is the exercise

of the taxing power of the Legislature dependent upon and restricted by the opinion of two interested

witnesses? There can be but one answer to these questions, especially in view of the fact that

others are paying the tax and presumably making a reasonable profit from their business.

InChicago and Grand Trunk Railway Co. vs. Wellman (143 U. S., 339), a question similar to the one

now under consideration was raised and decided by the Supreme Court of the United States. The

principal contention made in that case was that an Act of the Legislature of Michigan fixing the

amount per mile to be charged by railways for the transportation of a passenger was
unconstitutional, on the ground that the rate so fixed was confiscatory. It was agreed in the pleadings

that the total earnings and income of the company from all sources for a given year were less than

the expenses for the same period. In addition to this agreed statement of facts, two witnesses were

called, one the traffic manager and the other the treasurer of the company. Their testimony was to

the effect that in view of the competition prevailing at Chicago for through business, it was

impossible to increase the freight rates then charged by the company because it would throw the

volume of business into the hands of competing roads. In overruling the contention of the company

that the act in question was unconstitutional on the ground that the rate fixed thereby was

confiscatory, the court said:

Surely, before the courts are called upon to adjudge an act of the legislature fixing the

maximum passenger rates for railroad companies to be unconstitutional, on the ground that

its enforcement would prevent the stockholders from receiving any dividends on their

investments, or the bondholders any interest on their loans, they should be fully advised as

to what is done with the receipts and earnings of the company; for if so advised, it might

clearly appear that a prudent and honest management would, within the rates prescribed,

secure to the bondholders their interest, and to the stockholders reasonable dividends. While

the protection of vested rights of property is a supreme duty of the courts, it has not come to

this, that the legislative power rests subservient to the discretion of any railroad corporation

which may, by exorbitant and unreasonable salaries, or in some other improper way, transfer

its earnings into what it is pleased to call `operating expenses.'

It is further alleged that the tax in question is unconstitutional because "the law herein complained of

was enacted for the sole purpose of destroying billboards and advertising business depending on

the use of signs or billboards." If it be conceded that the Legislature has the power to impose a tax

upon signs, signboards, and billboards, then "the judicial cannot prescribed to the legislative

department of the Government limitation upon the exercise of its acknowledge powers." (Veazie

Bank vs. Fenno, 8 Wall., 533, 548.) That the Philippine Legislature has the power to impose such

taxes, we think there can be no serious doubt, because "the power to impose taxes is one so
unlimited in force and so searching in extent, that the courts scarcely venture to declare that it is

subject to any restrictions whatever, except such as rest in the discretion of the authority which

exercises it. It reaches to every trade or occupation; to every object of industry, use, or enjoyment; to

every species of possession; and it imposes a burden which, in case of failure to discharge it, may

be followed by seizure and sale or confiscation of property. No attribute of sovereignty is more

pervading, and at no point does the power of the government affect more constantly and intimately

all the relations of life than through the exactions made under it." (Cooley's Constitutional Limitations,

6th Edition, p. 587.)

InMcCray vs. U.S. (195 U.S., 27), the court, in ruling adversely to the contention that a federal tax

on oleomargarine artificially colored was void because the real purpose of Congress was not to raise

revenue but to tax out of existence a substance not harmful of itself and one which might be lawfully

manufactured and sold, said:

Whilst, as a result of our written constitution, it is axiomatic that the judicial department of the

government is charged with the solemn duty of enforcing the Constitution, and therefore, in

cases property presented, of determining whether a given manifestation of authority has

exceeded the power conferred by that instrument, no instance is afforded from the

foundation of the government where an act which was within a power conferred, was

declared to be repugnant to the Constitution, because it appeared to the judicial mind that

the particular exertion of constitutional power was either unwise or unjust. To announce such

a principle would amount to declaring that, in our constitutional system, the judiciary was not

only charged with the duty of upholding the Constitution, but also with the responsibility of

correcting every possible abuse arising from the exercise by the other departments of their

conceded authority. So to hold would be to overthrow the entire distinction between the

legislative, judicial, and executive departments of the government, upon which our system is

founded, and would be a mere act of judicial usurpation.

If a case were presented where the abuse of the taxing power of the local legislature was to extreme
as to make it plain to the judicial mind that the power had been exercised for the sole purpose of

destroying rights which could not be rightfully destroyed consistently with the principles of freedom

and justice upon which the Philippine Government rests, then it would be the duty of the courts to

say that such an arbitrary act was not merely an abuse of the power, but was the exercise of an

authority not conferred. (McCray vs. U.S.,supra.) But the instant case is not one of that character,

for the reason that the tax herein complained of falls far short of being confiscatory. Consequently, it

cannot be held that the Legislature has gone beyond the power conferred upon it by the Philippine

Bill in so far as the amount of the tax is concerned.

Is the tax void for lack of uniformity or because it is not graded according to value or constitutes

double taxation, or because the classification upon which it is based is mere arbitrary selection and

not based on any reasonable grounds? The only limitation, in so far as these questions are

concerned, placed upon the Philippine Legislature in the exercise of its taxing power is that found in

section 5 of the Philippine Bill, wherein it is declared "that the rule of taxation in said Islands shall be

uniform."

Uniformity in taxation — says Black on Constitutional Law, page 292 — means that all

taxable articles or kinds of property, of the same class, shall be taxed at the same rate. It

does not mean that lands, chattels, securities, incomes, occupations, franchises, privileges,

necessities, and luxuries, shall all be assessed at the same rate. Different articles may be

taxed at different amounts, provided the rate is uniform on the same class everywhere, with

all people, and at all times.

A tax is uniform when it operates with the same force and effect in every place where the subject of

it is found (State Railroad Tax Cases, 92 U.S., 575.) The words "uniform throughout the United

States," as required of a tax by the Constitution, do not signify an intrinsic, but simply a geographical,

uniformity, and such uniformity is therefore the only uniformity which is prescribed by the

Constitution. (Patton vs. Brady, 184 U.S., 608; 46 L. Ed., 713.) A tax is uniform, within the

constitutional requirement, when it operates with the same force and effect in every place where the

subject of it is found. (Edye vs. Robertson, 112 U.S., 580; 28 L. Ed., 798.) "Uniformity," as applied to
the constitutional provision that all taxes shall be uniform, means that all property belonging to the

same class shall be taxed alike. (Adams vs. Mississippi State Bank, 23 South, 395, citing Mississippi

Mills vs Cook, 56 Miss., 40.) The statute under consideration imposes a tax of P2 per square meter

or fraction thereof upon every electric sign, bill-board, etc., wherever found in the Philippine Islands.

Or in other words, "the rule of taxation" upon such signs is uniform throughout the Islands. The rule,

which we have just quoted from the Philippine Bill, does not require taxes to be graded according to

the value of the subject or subjects upon which they are imposed, especially those levied as

privilege or occupation taxes. We can hardly see wherein the tax in question constitutes double

taxation. The fact that the land upon which the billboards are located is taxed at so much per unit

and the billboards at so much per square meter does not constitute "double taxation." Double

taxation, within the true meaning of that expression, does not necessarily affect its validity. (1 Cooley

on Taxation, 3d ed., 389.) And again, it is not for the judiciary to say that the classification upon

which the tax is based "is mere arbitrary selection and not based upon any reasonable grounds."

The Legislature selected signs and billboards as a subject for taxation and it must be presumed that

it, in so doing, acted with a full knowledge of the situation.

For the foregoing reasons, the judgment appealed from is affirmed, with costs against the

appellants. So ordered.

COMMISSIONER OF INTERNAL REVENUE, G.R. No. 163835

Petitioner,
Present:

- versus - CARPIO, J.,

BRION, Acting Chairperson,

ABAD,
EASTERN TELECOMMUNICATIONS VILLARAMA, JR., and
PHILIPPINES, INC.,
MENDOZA, JJ.
Respondent.

Promulgated:

July 7, 2010
x-----------------------------------------------------------------------------------------x

DECISION

BRION, J.:

Through a petition for review on certiorari,1[1] petitioner Commissioner of Internal Revenue (CIR) seeks to
set aside the decision dated October 1, 20032[2] and the resolution dated May 26, 20043[3] of the Court of Appeals
(CA) in CA G.R. SP No. 61157. The assailed CA rulings affirmed the decision dated July 17, 20004[4] of the Court of
Tax Appeals (CTA) in CTA Case No. 5551, partially granting respondent Eastern Telecommunications Philippines,
Inc.s (Easterns) claim for refund of unapplied input tax from its purchase and importation of capital goods.

THE FACTUAL ANTECEDENTS

Eastern is a domestic corporation granted by Congress with a telecommunications franchise under Republic
Act (RA) No. 7617 on June 25, 1992. Under its franchise, Eastern is allowed to install, operate, and maintain
telecommunications system throughout the Philippines.
 From July 1, 1995 to December 31, 1996, Eastern purchased various imported equipment, machineries, and
spare parts necessary in carrying out its business activities. The importations were subjected to a 10% value-added tax
(VAT) by the Bureau of Customs, which was duly paid by Eastern.

On September 19, 1997, Eastern filed with the CIR a written application for refund or credit of
unapplied input taxes it paid on the imported equipment during the taxable years 1995 and 1996 amounting to
P22,013,134.00. In claiming for the tax refund, Eastern principally relied on Sec. 10 of RA No. 7617, which allows
Eastern to pay 3% of its gross receipts in lieu of all taxes on this franchise or earnings thereof.5[5] In the alternative,
Eastern cited Section 106(B) of the National Internal Revenue Code of 19776[6] (Tax Code) which authorizes a VAT-
registered taxpayer to claim for the issuance of a tax credit certificate or a tax refund of input taxes paid on capital goods
imported or purchased locally to the extent that such input taxes7[7] have not been applied against its output taxes.8[8]

To toll the running of the two-year prescriptive period under the same provision, Eastern filed an appeal with
the CTA on September 25, 1997 without waiting for the CIRs decision on its application for refund. The CIR filed an
Answer to Easterns appeal in which it raised the following special and affirmative defenses:

6. [Easterns] claim for refund/tax credit is pending administrative investigation;

xxxx

8. [Easterns] exempting clause under its legislative franchise x x x should be understood or

interpreted as written, meaning, the 3% franchise tax shall be collected as substitute for any
internal revenue taxes x x x imposed on its franchise or gross receipts/earnings thereof x x x;

9. The [VAT] on importation under Section 101 of the [1977] Tax Code is neither a tax on
franchise nor on gross receipts or earnings thereof. It is a tax on the privilege of importing
goods whether or not the taxpayer is engaged in business, and regardless of whether the
imported goods are intended for sale, barter or exchange;

10. The VAT under Section 101(A) of the Tax Code x x x replaced the advance sales tax and
compensating tax x x x. Accordingly, the 3% franchise tax did not substitute the 10% [VAT]
on [Easterns] importation of equipment, machineries and spare parts for the use of its
telecommunication system;

11. Tax refunds are in the nature of tax exemptions. As such, they are regarded in derogation of
sovereign authority and to be construed in strictissimi juris against the person or entity
claiming the exemption. The burden is upon him who claims the exemption in his favour and
he must be able to justify his claim by the clearest grant of organic or statute law and cannot
be permitted to exist upon vague implication x x x;

12. Taxes paid and collected are presumed to have been made in accordance with the laws and
regulations; and
 13. It is incumbent upon the taxpayer to establish its right to the refund and failure to sustain the
burden is fatal to the claim for refund.9[9]
Ruling in favor of Eastern, the CTA found that Eastern has a valid claim for the refund/credit of the
unapplied input taxes, not on the basis of the in lieu of all taxes provision of its legislative franchise,10[10] but rather,
on Section 106(B) of the Tax Code, which states:

SECTION 106. Refunds or tax credits of input tax.

xxxx

(b) Capital goods. - A VAT-registered person may apply for the issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally purchased, to the
extent that such input taxes have not been applied against output taxes. The application may be
made only within two (2) years after the close of the taxable quarter when the importation or
purchase was made.11[11] [Emphases supplied.]
The CTA ruled that Eastern had satisfactorily shown that it was entitled to the claimed refund/credit as all the elements
of the above provision were present: (1) Eastern was a VAT-registered entity which paid 10% input taxes on its
importations of capital equipment; (2) this input VAT remained unapplied as of the first quarter of 1997; and (3) Eastern
seasonably filed its application for refund/credit within the two-year period stated in the law. However, the CTA noted
that Eastern was able to substantiate only P21,487,702.00 of its claimed amount of P22,013,134.00. The difference
represented input taxes that were allegedly paid but were not supported by the corresponding receipts, as found by an
independent auditor. Moreover, it excluded P5,360,634.00 in input taxes on imported equipment for the year 1995, even
when these were properly documented as they were already booked by Eastern as part of the cost. Once input tax
becomes part of the cost of capital equipment, it necessarily forms part of depreciation. Thus, to grant the refund of the
1995 creditable input tax amounts to twice giving Eastern the tax benefit. Thus, in its July 17, 2000 decision, the CTA
granted in part Easterns appeal by declaring it entitled to a tax refund of P16,229,100.00, representing unapplied input
taxes on imported capital goods for the taxable year 1996.12[12]

The CIR filed, on August 3, 2000, a motion for reconsideration13[13] of the CTAs decision. About a month
and a half later, it filed a supplemental motion for reconsideration dated September 15, 2000.14[14] The CTA denied
the CIRs motion for reconsideration in its resolution dated September 20, 2000.15[15] The CIR then elevated the case to
the CA through a petition for review under Rule 43 of the Rules of Court. The CA affirmed the CTA ruling through
its decision dated October 1, 200316[16] and its resolution dated May 26, 2004, 17[17] denying the motion for
reconsideration. Hence, the present petition.

THE PETITIONERS ARGUMENTS

The CIR takes exception to the CAs ruling that Eastern is entitled to the full amount of unapplied input taxes
paid for its purchase of imported capital goods that were substantiated by the corresponding receipts and invoices. The
CIR posits that, applying Section 104(A) of the Tax Code on apportionment of tax credits, Eastern is entitled to a tax
refund of only P8,814,790.15, instead of the P16,229,100.00 adjudged by the CTA and the CA. Section 104(A) of the
Tax Code states:

SEC. 104. Tax Credits.

(a) Creditable Input tax. -
xxxx

A VAT-registered person who is also engaged in transactions not subject

to the value-added tax shall be allowed input tax credit as follows:

(A) Total input tax which can be directly attributed to

transactions subject to value-added tax; and

(B) A ratable portion of any input tax which cannot be directly

attributed to either activity.18[18] [Emphases supplied.]

To be entitled to a tax refund of the full amount of P16,229,100.00, the CIR asserts that Eastern must prove
that (a) it was engaged in purely VAT taxable transactions and (b) the unapplied input taxes it claims as refund were
directly attributable to transactions subject to VAT. The VAT returns of Eastern for the 1st, 2nd, 3rd, and 4th quarters
of 1996, however, showed that it earned income from both transactions subject to VAT and transactions exempt
from VAT;19[19] the returns reported income earned from taxable sales, zero-rated sales, and exempt sales in the
following amounts:

1996 Taxable Sales Zero-Rated Sales Exempt Sales

1stQuarter 820,673.70 --- ---
2nd Quarter 3,361,618.59 225,088,899.07 140,111,655.85
3rd Quarter 2,607,168.96 169,821,537.80 187,712,657.16
4th Quarter 1,134,942.71 162,530,947.40 147,717,028.53
TOTAL 7,924,403.96 557,441,384.27 475,541,341.54
Total Amount of Sales 1,040,907,129.77
The taxable sales and zero-rated sales are considered transactions subject to VAT,20[20] while exempt sales refer to
transactions not subject to VAT.

Since the VAT returns clearly reflected income from exempt sales, the CIR asserts that this constitutes as an
admission on Easterns part that it engaged in transactions not subject to VAT. Hence, the proportionate allocation of the
tax credit to VAT and non-VAT transactions provided in Section 104(A) of the Tax Code should apply. Eastern is then
entitled to only P8,814,790.15 as the ratable portion of the tax credit, computed in the following manner:

Taxable Sales + Zero-rated Sales x Input Tax as found

= Refundable input tax
Total Sales by the CTA

7,924,403.96 + 557,445,384.97
x 16,229,100.00 = P8,814,790.15
1,040,907,129.77

THE RESPONDENTS ARGUMENTS

Eastern objects to the arguments raised in the petition, alleging that these have not been raised in the Answer
filed by the CIR before the CTA. In fact, the CIR only raised the applicability of Section 104(A) of the Tax Code in
his supplemental motion for reconsideration of the CTAs ruling which, notably, was filed a month and a half after
the original motion was filed, and thus beyond the 15-day reglementary period.21[21] Accordingly, the applicability of
Section 104(A) was never validly presented as an issue before the CTA; this, Eastern presumes, is the reason why it
was not discussed in the CTAs resolution denying the motion for reconsideration. Eastern claims that for the CIR to
raise such an issue now would constitute a violation of its right to due process; following settled rules of procedure and
fair play, the CIR should not be allowed at the appeal level to change his theory of the case.

Moreover, in raising the question of whether Eastern was in fact engaged in transactions not subject to VAT
and whether the unapplied input taxes can be directly attributable to transactions subject to VAT, Eastern posits that the
CIR is effectively raising factual questions that cannot be the subject of an appeal by certiorari before the Court.

Even if the CIRs arguments were considered, Eastern insists that the petition should nevertheless be denied
since the CA found that there was no evidence in the claim that it was engaged in non-VAT transactions. The CA has
ruled that:

The following requirements must be present before [Section 104(A)] of the [1977 Tax
Code] can be applied, to wit:

1. The person claiming the creditable input tax must be VAT-registered;

2. Such person is engaged in a transaction subject to VAT;
 3. The person is also engaged in other transactions not subject to VAT; and
4. The ratable portion of any input tax cannot be directly attributed to either activity.

In the case at bar, the third and fourth requisites are not extant. It is undisputed that
[Eastern] is VAT-registered and the importation of [Easterns] telecommunications equipment,
machinery, spare parts, fiber optic cables, and the like, as found by the CTA, is a transaction
subject to VAT. However, there is no evidence on record that would evidently show that
respondent is also engaged in other transactions that are not subject to VAT. [Emphasis
supplied.]22[22]

Given the parties arguments, the issue for resolution is whether the rule in Section 104(A) of the Tax Code
on the apportionment of tax credits can be applied in appreciating Easterns claim for tax refund, considering that
the matter was raised by the CIR only when he sought reconsideration of the CTA ruling?

THE COURTS RULING

We find the CIRs petition meritorious.

The Rules of Court prohibits raising new issues on

appeal; the question of the applicability of Section 104(A)
of the Tax Code was already raised but the tax court did
not rule on it

Section 15, Rule 44 of the Rules of Court embodies the rule against raising new issues on appeal:

SEC. 15. Questions that may be raised on appeal. Whether or not the appellant has filed
a motion for new trial in the court below, he may include in his assignment of errors any question
of law or fact that has been raised in the court below and which is within the issues framed by the
parties.

The general rule is that appeals can only raise questions of law or fact that (a) were raised in the court below,
and (b) are within the issues framed by the parties therein.23[23] An issue which was neither averred in the pleadings
nor raised during trial in the court below cannot be raised for the first time on appeal.24[24] The rule was made for the
benefit of the adverse party and the trial court as well. Raising new issues at the appeal level is offensive to the basic
rules of fair play and justice and is violative of a partys constitutional right to due process of law. Moreover, the trial
court should be given a meaningful opportunity to consider and pass upon all the issues, and to avoid or correct any
alleged errors before those issues or errors become the basis for an appeal.25[25]
 Eastern posits that since the CIR raised the applicability of Section 104(A) of the Tax Code only in his
supplemental motion for reconsideration of the CTA decision (which was even belatedly filed), the issue was not
properly and timely raised and, hence, could not be considered by the CTA. By raising the issue in his appeal before the
CA, the CIR has violated the above-cited procedural rule.
Contrary to Easterns claim, we find that the CIR has previously questioned the nature of Easterns transactions
insofar as they affected the claim for tax refund in his motion for reconsideration of the CTA decision, although it did
not specifically refer to Section 104(A) of the Tax Code. We quote relevant portions of the motion:

[W]e maintain that [Easterns] claims are not creditable input taxes under [Section 104(A) of the
Tax Code]. What the law contemplates as creditable input taxes are only those paid on purchases of
goods and services specifically enumerated under [Section 104 (A)] and that such input tax must
have been paid by a VAT[-]registered person/entity in the course of trade or business. It must be
noted that [Eastern] failed to prove that such purchases were used in their VAT[-]taxable
business. [Easterns pieces of] evidence are not purchases of capital goods and do not fall under the
enumeration x x x.

It is significant to point out here that refund of input taxes on capital goods shall be allowed
only to the extent that such capital goods are used in VAT[-]taxable business. x x x a perusal
of the evidence submitted before [the CTA] does not show that the alleged capital goods were
used in VAT[-]taxable business of [Eastern] x x x. [Emphases supplied.]26[26]

In raising these matters in his motion for reconsideration, the CIR put forward the applicability of Section
104(A) because, essentially, the applicability of the provision boils down to the question of whether the purchased
capital goods which a taxpayer paid input taxes were also used in a VAT-taxable business, i.e., transactions that were
subject to VAT, in order for them to be refundable/creditable. Once proved that the taxpayer used the purchased capital
goods in a both VAT taxable and non-VAT taxable business, the proportional allocation of tax credits stated in the law
necessarily applies. This rule is also embodied in Section 4.106-1 of Revenue Regulation No. 7-95, entitled
Consolidated Value-Added Tax Regulations, which states:

SEC. 4.106-1. Refunds or tax credits of input tax. x x x x

(b) Capital Goods. Only a VAT-registered person may apply for issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally purchased. The refund
shall be allowed to the extent that such input taxes have not been applied against output taxes. The
application should be made within two (2) years after the close of the taxable quarter when the
importation or purchase was made.

Refund of input taxes on capital goods shall be allowed only to the extent that such
capital goods are used in VAT taxable business. If it is also used in exempt operations, the
input tax refundable shall only be the ratable portion corresponding to the taxable
operations. [Emphasis supplied.]
That the CTA failed to rule on this question when it resolved the CIRs motion for reconsideration should not be taken
against the CIR. It was the CTA which committed an error when it failed to avail of that meaningful opportunity to
avoid or correct any alleged errors before those errors become the basis for an appeal.27[27]

Exceptions to the general rule; Easterns VAT returns

reporting income from exempt sales are matters of record
that the tax court should have considered

The rule against raising new issues on appeal is not without exceptions; it is a procedural rule that the Court
may relax when compelling reasons so warrant or when justice requires it. What constitutes good and sufficient cause
that would merit suspension of the rules is discretionary upon the courts.28[28] Former Senator Vicente Francisco, a
noted authority in procedural law, cites an instance when the appellate court may take up an issue for the first time:

The appellate court may, in the interest of justice, properly take into consideration in
deciding the case matters of record having some bearing on the issue submitted which the
parties failed to raise or the lower court ignored, although they have not been specifically
raised as issues by the pleadings. This is in consonance with the liberal spirit that pervades the
Rules of Court, and the modern trend of procedure which accord the courts broad discretionary
power, consistent with the orderly administration of justice, in the decision of cases brought before
them.29[29] [Emphasis supplied.]

As applied in the present case, even without the CIR raising the applicability of Section 104(A), the CTA
should have considered it since all four of Easterns VAT returns corresponding to each taxable quarter of 1996 clearly
stated that it earned income from exempt sales, i.e., non-VAT taxable sales. Easterns quarterly VAT returns are
matters of record. In fact, Eastern included them in its formal offer of evidence before the CTA to prove that [it is]
engaged in VAT taxable, VAT exempt, and VAT zero-rated sales. By declaring income from exempt sales, Eastern
effectively admitted that it engaged in transactions not subject to VAT. In VAT-exempt sales, the taxpayer/seller
shall not bill any output tax on his sales to his customers and, corollarily, is not allowed any credit or refund of
the input taxes he paid on his purchases.30[30] This non-crediting of input taxes in exempt transactions is the
underlying reason why the Tax Code adopted the rule on apportionment of tax credits under Section 104(A) whenever a
VAT-registered taxpayer engages in both VAT taxable and non-VAT taxable sales. In the face of these disclosures by
Eastern, we thus find the CAs the conclusion that there is no evidence on record that would evidently show that
[Eastern] is also engaged in other transactions that are not subject to VAT to be questionable.31[31]

Also, we disagree with the CAs declaration that:

 The mere fact that [Easterns] Quarterly VAT Returns confirm that [Easterns]
transactions involved zero-rated sales and exempt sales do not sufficiently establish that the
same were derived from [Easterns] transactions that are not subject to VAT. On the contrary,
the transactions from which [Easterns] sales were derived are subject to VAT but are either
zero[-]rated (0%) or otherwise exempted for falling within the transactions enumerated in
[Section 102(B) or Section 103] of the Tax Code.32[32] [Emphasis supplied.]

Section 103 of the Tax Code33[33] is an enumeration of transactions exempt from VAT. Explaining the relation
between exempt transactions in Section 103 and claims for tax refunds, the Court declared in CIR v. Toshiba Equipment
(Phils.), Inc. that:

Section 103 x x x of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to
VAT-exempt transactions. These are transactions exempted from VAT by special laws or
international agreements to which the Philippines is a signatory. Since such transactions are not
subject to VAT, the sellers cannot pass on any output VAT to the purchasers of goods, properties,
or services, and they may not claim tax credit/refund of the input VAT they had paid
thereon.34[34]

The mere declaration of exempt sales in the VAT returns, whether based on Section 103 of the Tax Code or some other
special law, should have prompted the CA to apply Section 104(A) of the Tax Code to Easterns claim. It was thus
erroneous for the appellate court to rule that the declaration of exempt sales in Easterns VAT return, which may
correspond to exempt transactions under Section 103, does not indicate that Eastern was also involved in non-VAT
transactions.

Exception to general rule; taxpayer claiming refund has

the duty to prove entitlement thereto

Another exemption from the rule against raising new issues on appeal is when the question involves matters
of public importance.35[35]

The power of taxation is an inherent attribute of sovereignty; the government chiefly relies on taxation to
obtain the means to carry on its operations. Taxes are essential to its very existence;36[36] hence, the dictum that taxes
are the lifeblood of the government. For this reason, the right of taxation cannot easily be surrendered; statutes granting
tax exemptions are considered as a derogation of the sovereign authority and are strictly construed against the person or
entity claiming the exemption. Claims for tax refunds, when based on statutes granting tax exemption or tax refund,
partake of the nature of an exemption; thus, the rule of strict interpretation against the taxpayer-claimant similarly
applies.37[37]

The taxpayer is charged with the heavy burden of proving that he has complied with and satisfied all the
statutory and administrative requirements to be entitled to the tax refund. This burden cannot be offset by the non-
observance of procedural technicalities by the governments tax agents when the non-observance of the remedial
measure addressing it does not in any manner prejudice the taxpayers due process rights, as in the present case.

Eastern cannot validly claim to have been taken by surprise by the CIRs arguments on the relevance of
Section 104(A) of the Tax Code, considering that the arguments were based on the reported exempt sales in the VAT
returns that Eastern itself prepared and formally offered as evidence. Even if we were to consider the CIRs act as a lapse
in the observance of procedural rules, such lapse does not work to entitle Eastern to a tax refund when the established
and uncontested facts have shown otherwise. Lapses in the literal observance of a rule of procedure may be overlooked
when they have not prejudiced the adverse party and especially when they are more consistent with upholding settled
principles in taxation.

WHEREFORE, we GRANT the petitioners petition for review on certiorari, and REVERSE the decision
of the Court of Appeals in CA G.R. SP No. 61157, promulgated on October 1, 2003, as well as its resolution of May
26, 2004. We order the REMAND of the case to the Court of Tax Appeals to determine the proportionate amount of
tax credit that respondent is entitled to, consistent with our ruling above. Costs against the respondent.

SO ORDERED.

G.R. No. 166494 - CARLOS SUPERDRUG CORP., doing business under the name and style "Carlos Superdrug," ELSIE
M. CANO, doing business under the name and style "Advance Drug," Dr. SIMPLICIO L. YAP, JR., doing business under
the name and style "City Pharmacy," MELVIN S. DELA SERNA, doing business under the name and style "Botica dela
Serna," and LEYTE SERV-WELL CORP., doing business under the name and style "Leyte Serv-Well Drugstore" v.
DEPARTMENT OF SOCIAL WELFARE and DEVELOPMENT (DSWD), DEPARTMENT OF HEALTH (DOH),
DEPARTMENT OF FINANCE (DOF), DEPARTMENT OF JUSTICE (DOJ), and DEPARTMENT OF INTERIOR and
LOCAL GOVERNMENT (DILG)

EN BANC
 [G.R. NO. 166494 � : June 29, 2007]

CARLOS SUPERDRUG CORP., doing business under the name and style "Carlos Superdrug," ELSIE M. CANO,
doing business under the name and style "Advance Drug," Dr. SIMPLICIO L. YAP, JR., doing business under the
name and style "City Pharmacy," MELVIN S. DELA SERNA, doing business under the name and style "Botica
dela Serna," and LEYTE SERV-WELL CORP., doing business under the name and style "Leyte Serv-Well
Drugstore," Petitioners, v. DEPARTMENT OF SOCIAL WELFARE and DEVELOPMENT (DSWD),
DEPARTMENT OF HEALTH (DOH), DEPARTMENT OF FINANCE (DOF), DEPARTMENT OF JUSTICE
(DOJ), and DEPARTMENT OF INTERIOR and LOCAL GOVERNMENT (DILG), Respondents.

DECISION

AZCUNA, J.:

This is a petition1 for Prohibition with Prayer for Preliminary Injunction assailing the constitutionality of Section 4(a) of
Republic Act (R.A.) No. 9257,2 otherwise known as the "Expanded Senior Citizens Act of 2003."

Petitioners are domestic corporations and proprietors operating drugstores in the Philippines.

Public respondents, on the other hand, include the Department of Social Welfare and Development (DSWD), the
Department of Health (DOH), the Department of Finance (DOF), the Department of Justice (DOJ), and the Department of
Interior and Local Government (DILG) which have been specifically tasked to monitor the drugstores' compliance with the
law; promulgate the implementing rules and regulations for the effective implementation of the law; and prosecute and
revoke the licenses of erring drugstore establishments.

The antecedents are as follows:

On February 26, 2004, R.A. No. 9257, amending R.A. No. 7432, 3 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;

...

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. 4

On May 28, 2004, the DSWD approved and adopted the Implementing Rules and Regulations of R.A. No. 9257, Rule VI,
Article 8 of which states:

Article 8. Tax Deduction of Establishments. - The establishment may claim the discounts granted under Rule V, Section 4 -
Discounts for Establishments;5 Section 9, Medical and Dental Services in Private Facilities[,] 6 and Sections 107 and 118 -
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).9
On July 10, 2004, in reference to the query of the Drug Stores Association of the Philippines (DSAP) concerning the
meaning of a tax deduction under the Expanded Senior Citizens Act, the DOF, through Director IV Ma. Lourdes B.
Recente, clarified as follows:

1) The difference between the Tax Credit (under the Old Senior Citizens Act) and Tax Deduction (under the Expanded
Senior Citizens Act).

1.1. The provision of Section 4 of R.A. No. 7432 (the old Senior Citizens Act) grants twenty percent (20%) discount from
all establishments relative to the utilization of transportation services, hotels and similar lodging establishment, restaurants
and recreation centers and purchase of medicines anywhere in the country, the costs of which may be claimed by the
private establishments concerned as tax credit.

Effectively, a tax credit is a peso-for-peso deduction from a taxpayer's tax liability due to the government of the amount of
discounts such establishment has granted to a senior citizen. The establishment recovers the full amount of discount given
to a senior citizen and hence, the government shoulders 100% of the discounts granted.

It must be noted, however, that conceptually, a tax credit scheme under the Philippine tax system, necessitates that prior
payments of taxes have been made and the taxpayer is attempting to recover this tax payment from his/her income tax due.
The tax credit scheme under R.A. No. 7432 is, therefore, inapplicable since no tax payments have previously occurred.

1.2. The provision under R.A. No. 9257, on the other hand, provides that the establishment concerned may claim the
discounts under Section 4(a), (f), (g) and (h) as tax deduction from gross income, based on the net cost of goods sold or
services rendered.

Under this scheme, the establishment concerned is allowed to deduct from gross income, in computing for its tax liability,
the amount of discounts granted to senior citizens. Effectively, the government loses in terms of foregone revenues an
amount equivalent to the marginal tax rate the said establishment is liable to pay the government. This will be an amount
equivalent to 32% of the twenty percent (20%) discounts so granted. The establishment shoulders the remaining portion of
the granted discounts.

It may be necessary to note that while the burden on [the] government is slightly diminished in terms of its percentage share
on the discounts granted to senior citizens, the number of potential establishments that may claim tax deductions, have
however, been broadened. Aside from the establishments that may claim tax credits under the old law, more establishments
were added under the new law such as: establishments providing medical and dental services, diagnostic and laboratory
services, including professional fees of attending doctors in all private hospitals and medical facilities, operators of
domestic air and sea transport services, public railways and skyways and bus transport services.

A simple illustration might help amplify the points discussed above, as follows:

Tax Deduction Tax Credit

Gross Sales x x x x x x x x x x x x

Less : Cost of goods sold x x x x x x x x x x

Net Sales x x x x x x x x x x x x

Less: Operating Expenses:

Tax Deduction on Discounts x x x x - -

Other deductions: x x x x x x x x

Net Taxable Income x x x x x x x x x x

Tax Due x x x x x x

Less: Tax Credit - - ______x x

Net Tax Due - - x x

As shown above, 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.10

Meanwhile, on October 1, 2004, Administrative Order (A.O.) No. 171 or the Policies and Guidelines to Implement the
Relevant Provisions of Republic Act 9257, otherwise known as the "Expanded Senior Citizens Act of 2003"11 was issued by
the DOH, providing the grant of twenty percent (20%) discount in the purchase of unbranded generic medicines from all
establishments dispensing medicines for the exclusive use of the senior citizens.

On November 12, 2004, the DOH issued Administrative Order No 177 12 amending A.O. No. 171. Under A.O. No. 177, the
twenty percent discount shall not be limited to the purchase of unbranded generic medicines only, but shall extend to both
prescription and non-prescription medicines whether branded or generic. Thus, it stated that "[t]he grant of twenty percent
(20%) discount shall be provided in the purchase of medicines from all establishments dispensing medicines for the
exclusive use of the senior citizens."

Petitioners assail the constitutionality of Section 4(a) of the Expanded Senior Citizens Act based on the following
grounds:13

1) The law is confiscatory because it infringes Art. III, Sec. 9 of the Constitution which provides that private property shall
not be taken for public use without just compensation;

2) It violates the equal protection clause (Art. III, Sec. 1) enshrined in our Constitution which states that "no person shall be
deprived of life, liberty or property without due process of law, nor shall any person be denied of the equal protection of the
laws;" andcralawlibrary

3) The 20% discount on medicines violates the constitutional guarantee in Article XIII, Section 11 that makes "essential
goods, health and other social services available to all people at affordable cost."14

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
law15 to reduce the income prior to the application of the tax rate to compute the amount of tax which is due. 16 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.17 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.18

A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet the definition
of just compensation.19

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.20

The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself. Thus, the Act provides:

SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:

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

...

(f) To recognize the important role of the private sector in the improvement of the welfare of senior citizens and to
actively seek their partnership.21

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.22 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."23 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."24

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. 25

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. 26

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.27

In treating the discount as a tax deduction, petitioners insist that they will incur losses because, referring to the DOF
Opinion, for every P1.00 senior citizen discount that petitioners would give, P0.68 will be shouldered by them as only
P0.32 will be refunded by the government by way of a tax deduction.

To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive maintenance drug Norvasc as an example.
According to the latter, it acquires Norvasc from the distributors at P37.57 per tablet, and retails it at P39.60 (or at a margin
of 5%). If it grants a 20% discount to senior citizens or an amount equivalent to P7.92, then it would have to sell Norvasc at
P31.68 which translates to a loss from capital of P5.89 per tablet. Even if the government will allow a tax deduction, only
P2.53 per tablet will be refunded and not the full amount of the discount which is P7.92. In short, only 32% of the 20%
discount will be reimbursed to the drugstores.28

Petitioners' computation is flawed. For purposes of reimbursement, the law states that the cost of the discount shall be
deducted from gross income,29 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 a reminder that the right to property can be relinquished upon the command of the
State for the promotion of public good.30

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. 31

WHEREFORE, the petition is DISMISSED for lack of merit.

No costs.

SO ORDERED.

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

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and as judicial co-
guardians of JOSE ROXAS, petitioners,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

Leido, Andrada, Perez and Associates for petitioners.

Office of the Solicitor General for respondents.

BENGZON, J.P., J.:

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

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

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

(3) Shares of stocks in different corporations.

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

AGRICULTURAL LANDS

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

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

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

RESIDENTIAL HOUSE

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

ASSESSMENTS

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

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

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

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

The following deductions were disallowed:

ROXAS Y CIA.:

1953
Tickets for Banquet in honor of
P 40.00
S. Osmeña

Gifts of San Miguel beer 28.00

Contributions to —

Philippine Air Force Chapel 100.00

Manila Police Trust Fund 150.00

Philippines Herald's fund for Manila's neediest families 100.00

1955
Contributions to Contribution to
Our Lady of Fatima Chapel, FEU 50.00

ANTONIO ROXAS:

1953
Contributions to —

Pasay City Firemen Christmas Fund 25.00

Pasay City Police Dept. X'mas fund 50.00

1955
Contributions to —

Baguio City Police Christmas fund 25.00

Pasay City Firemen Christmas fund 25.00

 Pasay City Police Christmas fund 50.00

EDUARDO ROXAS:

1953
Contributions to —

Hijas de Jesus' Retiro de Manresa 450.00

Philippines Herald's fund for Manila's neediest families 100.00

1955
Contributions to Philippines
Herald's fund for Manila's
neediest families 120.00

JOSE ROXAS:

1955
Contributions to Philippines
Herald's fund for Manila's
neediest families 120.00

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

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

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

The issues:

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

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

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

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

4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer a ella en el futuro,
alquilandoles por los plazos y demas condiciones, estime convenientes y vendiendo aquellas que a juicio de sus
gerentes no deben conservarse;
The above-quoted purpose notwithstanding, the proposition of the Commissioner of Internal Revenue cannot be
favorably accepted by Us in this isolated transaction with its peculiar circumstances in spite of the fact that there were
hundreds of vendees. Although they paid for their respective holdings in installment for a period of ten years, it would
nevertheless not make the vendor Roxas y Cia. a real estate dealer during the ten-year amortization period.

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

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

In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34 of
the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the sale thereof is capital gain,
taxable only to the extent of 50%.

DISALLOWED DEDUCTIONS

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

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

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

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

Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima chapel at the Far
Eastern University on the ground that the said university gives dividends to its stockholders. Located within the
premises of the university, the chapel in question has not been shown to belong to the Catholic Church or any religious
organization. On the other hand, the lower court found that it belongs to the Far Eastern University, contributions to
which are not deductible under Section 30(h) of the Tax Code for the reason that the net income of said university
injures to the benefit of its stockholders. The disallowance should be sustained.

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

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

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

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

ANTONIO ROXAS

Net income per return P315,476.59

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

Less amount declared 146,135.46

Amount understated P 7,113.69

Contributions disallowed 115.00

P 7,228.69

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

partnership but allowed to partners 7,042.02 186.67

Net income per review P315,663.26

Less: Exemptions 4,200.00

Net taxable income P311,463.26

Tax due 154,169.00

Tax paid 154,060.00

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

EDUARDO ROXAS

P
Net income per return
304,166.92

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

Less profits declared 146,052.58

Amount understated P 7,196.57

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

partnership but allowed to partners 7,042.02 155.55

Net income per review P304,322.47

Less: Exemptions 4,800.00

Net taxable income P299,592.47

Tax Due P147,250.00

Tax paid 147,159.00

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

JOSE ROXAS

Net income per return P222,681.76

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

Less amount reported 146,135.46

Amount understated 7,113.69

Less 1/3 share of contributions disallowed from partnership but allowed as

deductions to partners 7,042.02 71.67
 Net income per review P222,753.43

Less: Exemption 1,800.00

Net income subject to tax P220,953.43

Tax due P102,763.00

Tax paid 102,714.00

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

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

Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and Fernando, JJ., concur.
Zaldivar, J., took no part.
Concepcion, C.J., is on leave.

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner, v. THE HON.
EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF FINANCE
JUANITA D. AMATONG, and THE HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO
PARAYNO, JR., Respondents.

DECISION

CORONA, J.:

In this original petition for certiorari and mandamus,1cЃa petitioner Chamber of Real Estate and Builders Associations,
Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 8424 2cЃa and the revenue regulations
(RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision and those involving creditable
withholding taxes.3cЃa

Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former Executive
Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then Commissioner of Internal
Revenue Guillermo Parayno, Jr. as respondents.chanroblesvirtua|awlibary

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and
creditable withholding tax (CWT) on sales of real properties classified as ordinary assets.chanroblesvirtua|awlibary

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. Petitioner
argues that the MCIT violates the due process clause because it levies income tax even if there is no realized
gain.chanroblesvirtua|awlibary

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section
4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on the sale
of real properties categorized as ordinary assets. Petitioner contends that these revenue regulations are contrary to law
for two reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital assets and second,
respondent Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price
or fair market value of the real properties classified as ordinary assets.chanroblesvirtua|awlibary

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process clause
because, like the MCIT, the government collects income tax even when the net income has not yet been determined.
They contravene the equal protection clause as well because the CWT is being levied upon real estate enterprises but
not on other business enterprises, more particularly those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;

(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and

(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets under
RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

Overview of the Assailed Provisions

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2% of its
gross income when such MCIT is greater than the normal corporate income tax imposed under Section 27(A). 4cЃa If
the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT over
the normal tax shall be carried forward and credited against the normal income tax for the three immediately
succeeding taxable years. Section 27(E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

cralaw(1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year, as
defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation commenced its business operations, when the minimum
income tax is greater than the tax computed under Subsection (A) of this Section for the taxable
year.chanroblesvirtua|awlibary

(2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3)
immediately succeeding taxable years.chanroblesvirtua|awlibary

(3) Relief from the [MCIT] under certain conditions. The Secretary of Finance is hereby authorized to suspend the
imposition of the [MCIT] on any corporation which suffers losses on account of prolonged labor dispute, or because of
force majeure, or because of legitimate business reverses.chanroblesvirtua|awlibary

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the
necessary rules and regulations that shall define the terms and conditions under which he may suspend the imposition
of the [MCIT] in a meritorious case.chanroblesvirtua|awlibary

(4) Gross Income Defined. For purposes of applying the [MCIT] provided under Subsection (E) hereof, the term gross
income shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold"
shall include all business expenses directly incurred to produce the merchandise to bring them to their present location
and use.

cralawFor trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods sold, plus
import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while
the goods are in transit.chanroblesvirtua|awlibary
For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of finished
goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other
costs incurred to bring the raw materials to the factory or warehouse.chanroblesvirtua|awlibary

In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales returns,
allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses necessarily
incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of
personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in
providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, that in
the case of banks, "cost of services" shall include interest expense.chanroblesvirtua|awlibary

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the Commissioner of
Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).5cЃa The pertinent portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations.chanroblesvirtua|awlibary

(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year (whether
calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic
corporation beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation
commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative
taxable income or whenever the amount of minimum corporate income tax is greater than the normal income tax due
from such corporation.chanroblesvirtua|awlibary

For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed under Sec.
27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000 and thereafter.

xxx xxx xxx

(2) Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal income tax as computed under Sec.
27(A) of the Code shall be carried forward on an annual basis and credited against the normal income tax for the three
(3) immediately succeeding taxable years.

xxx xxx xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated RR 2-98
implementing certain provisions of RA 8424 involving the withholding of taxes. 6cЃa Under Section 2.57.2(J) of RR
No. 2-98, income payments from the sale, exchange or transfer of real property, other than capital assets, by persons
residing in the Philippines and habitually engaged in the real estate business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange
or transfer of. Real property, other than capital assets, sold by an individual, corporation, estate, trust, trust fund or
pension fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following
schedule

cralawThose which are exempt from a withholding tax at Exempt

source as prescribed in Sec. 2.57.5 of these regulations.

cralawWith a selling price of five hundred thousand pesos 1.5%

(P500,000.00) or less.
cralawWith a selling price of more than five hundred thousand 3.0%
pesos (P500,000.00) but not more than two million pesos
(P2,000,000.00).

cralawWith selling price of more than two million pesos 5.0%

(P2,000,000.00)

xxx xxx xxx

Gross selling price shall mean the consideration stated in the sales document or the fair market value determined in
accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of
the property received in exchange, as determined in the Income Tax Regulations shall be
used.chanroblesvirtua|awlibary

Where the consideration or part thereof is payable on installment, no withholding tax is required to be made on the
periodic installment payments where the buyer is an individual not engaged in trade or business. In such a case, the
applicable rate of tax based on the entire consideration shall be withheld on the last installment or installments to be
paid to the seller.chanroblesvirtua|awlibary

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be deducted and
withheld by the buyer on every installment.chanroblesvirtua|awlibary

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange
or transfer of real property classified as ordinary asset. - A [CWT] based on the gross selling price/total amount of
consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is higher,
paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed
upon the withholding agent,/buyer, in accordance with the following schedule:

cralawWhere the seller/transferor is exempt from [CWT] in accordance with Sec. 2.57.5 of these Exempt
regulations.
cralawUpon the following values of real property, where the seller/transferor is habitually engaged in
the real estate business.
cralawWith a selling price of Five Hundred Thousand Pesos (P500,000.00) or less. 1.5%
cralawWith a selling price of more than Five Hundred Thousand Pesos (P500,000.00) but not more 3.0%
than Two Million Pesos (P2,000,000.00).
cralawWith a selling price of more than two Million Pesos (P2,000,000.00). 5.0%

xxx xxx xxx

Gross selling price shall remain the consideration stated in the sales document or the fair market value determined in
accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of
the property received in exchange shall be considered as the consideration.

xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall apply:
(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not exceed 25% of the
selling price), the tax shall be deducted and withheld by the buyer on every installment.chanroblesvirtua|awlibary

(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment plan" (that is,
payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the tax based on the gross
selling price or fair market value of the property, whichever is higher, on the first installment.chanroblesvirtua|awlibary

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT] due on the
sale, transfer or exchange of real property other than capital asset has been fully paid. (Underlined amendments in the
original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or exchange subject
to the CWT will not be recorded by the Registry of Deeds until the CIR has certified that such transfers and
conveyances have been reported and the taxes thereof have been duly paid: 7cЃa

Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or land and building/improvement
thereon arising from sales, barters, or exchanges subject to the creditable expanded withholding tax shall not be
recorded by the Register of Deeds unless the [CIR] or his duly authorized representative has certified that such transfers
and conveyances have been reported and the expanded withholding tax, inclusive of the documentary stamp tax, due
thereon have been fully paid xxxx.chanroblesvirtua|awlibary

On February 11, 2003, RR No. 7-20038cЃa was promulgated, providing for the guidelines in determining whether a
particular real property is a capital or an ordinary asset for purposes of imposing the MCIT, among others. The
pertinent portions thereof state:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived from sale,
exchange, or other disposition of real properties shall, unless otherwise exempt, be subject to applicable taxes imposed
under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets;

a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens engaged in
trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT]
(expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or current fair market value
as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary
income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

xxx xxx xxx

(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building
treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be
subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may
become subject to the [MCIT] under Sec. 27(E) of the Code, whichever is applicable.

xxx xxx xxx

We shall now tackle the issues raised.

Existence of a Justiciable Controversy

Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied: (1) there
must be an actual case calling for the exercise of judicial review; (2) the question before the court must be ripe for
adjudication; (3) the person challenging the validity of the act must have standing to do so; (4) the question of
constitutionality must have been raised at the earliest opportunity and (5) the issue of constitutionality must be the very
lis mota of the case.9cЃa

Respondents aver that the first three requisites are absent in this case. According to them, there is no actual case calling
for the exercise of judicial power and it is not yet ripe for adjudication because

petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by the BIR for
the payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege that its members have shut
down their businesses as a result of the payment of the MCIT or CWT. Petitioner has raised concerns in mere abstract
and hypothetical form without any actual, specific and concrete instances cited that the assailed law and revenue
regulations have actually and adversely affected it. Lacking empirical data on which to base any conclusion, any
discussion on the constitutionality of the MCIT or CWT on sales of real property is essentially an academic
exercise.chanroblesvirtua|awlibary

Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating abstract issues.
Otherwise, adjudication would be no different from the giving of advisory opinion that does not really settle legal
issues.10cЃa

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims which is
susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or dispute. 11cЃa On the
other hand, a question is considered ripe for adjudication when the act being challenged has a direct adverse effect on
the individual challenging it.12cЃa

Contrary to respondents assertion, we do not have to wait until petitioners members have shut down their operations as
a result of the MCIT or CWT. The assailed provisions are already being implemented. As we stated in Didipio Earth-
Savers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:13cЃa

By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said to have ripened
into a judicial controversy even without any other overt act. Indeed, even a singular violation of the Constitution and/or
the law is enough to awaken judicial duty.14cЃa

If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such question
once and for all.chanroblesvirtua|awlibary

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the Philippines. Petitioners did not
allege that [it] itself is in the real estate business. It did not allege any material interest or any wrong that it may suffer
from the enforcement of [the assailed provisions].15cЃa

Legal standing or locus standi is a partys personal and substantial interest in a case such that it has sustained or will
sustain direct injury as a result of the governmental act being challenged. 16cЃa In Holy Spirit Homeowners Association,
Inc. v. Defensor,17cЃa we held that the association had legal standing because its members stood to be injured by the
enforcement of the assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that the individual
members of petitioner association are residents of the NGC. As such they are covered and stand to be either benefited
or injured by the enforcement of the IRR, particularly as regards the selection process of beneficiaries and lot allocation
to qualified beneficiaries. Thus, petitioner association may assail those provisions in the IRR which it believes to be
unfavorable to the rights of its members. xxx Certainly, petitioner and its members have sustained direct injury arising
from the enforcement of the IRR in that they have been disqualified and eliminated from the selection process. 18cЃa

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements of an
actual case, ripeness or legal standing when paramount public interest is involved. 19cЃa The questioned MCIT and
CWT affect not only petitioners but practically all domestic corporate taxpayers in our country. The transcendental
importance of the issues raised and their overreaching significance to society make it proper for us to take cognizance
of this petition.20cЃa

Concept and Rationale of the MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation system. It
came about as a result of the perceived inadequacy of the self-assessment system in capturing the true income of
corporations.21cЃa It was devised as a relatively simple and effective revenue-raising instrument compared to the
normal income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some
minimum contribution to the support of the public sector. The congressional deliberations on this are illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting constantly a loss
in their operations to avoid the payment of taxes, and thus avoid sharing in the cost of government. In this regard, the
Tax Reform Act introduces for the first time a new concept called the [MCIT] so as to minimize tax evasion, tax
avoidance, tax manipulation in the country and for administrative convenience. This will go a long way in ensuring that
corporations will pay their just share in supporting our public life and our economic advancement. 22cЃa

Domestic corporations owe their corporate existence and their privilege to do business to the government. They also
benefit from the efforts of the government to improve the financial market and to ensure a favorable business climate. It
is therefore fair for the government to require them to make a reasonable contribution to the public
expenses.chanroblesvirtua|awlibary

Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report minimal or
negative net income resulting in minimal or zero income taxes year in and year out, through under-declaration of
income or over-deduction of expenses otherwise called tax shelters.23cЃa

Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the [MCIT].
Because from experience too, you have corporations which have been losing year in and year out and paid no tax. So, if
the corporation has been losing for the past five years to ten years, then that corporation has no business to be in
business. It is dead. Why continue if you are losing year in and year out? So, we have this provision to avoid this type
of tax shelters, Your Honor.24cЃa

The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after operations of a
corporation or consistent reports of minimal net income render its financial statements and its tax payments suspect.
For sure, certain tax avoidance schemes resorted to by corporations are allowed in our jurisdiction. The MCIT serves to
put a cap on such tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes
achieved through sophisticated and artful manipulations of deductions and other stratagems. Since the tax base was
broader, the tax rate was lowered.chanroblesvirtua|awlibary

To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures,
the imposition of the MCIT commences only on the fourth taxable year immediately following the year in which the
corporation commenced its operations.25cЃa This grace period allows a new business to stabilize first and make its
ventures viable before it is subjected to the MCIT.26cЃa

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax which shall be
credited against the normal income tax for the three immediately succeeding years. 27cЃa

Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to
suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and
legitimate business reverses.28cЃa

Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries already had
their own system of minimum corporate income taxation. Our lawmakers noted that most developing countries,
particularly Latin American and Asian countries, have the same form of safeguards as we do. As pointed out during the
committee hearings:
Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for underdeclaration
of gross receipts have this same form of safeguards.chanroblesvirtua|awlibary

In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half a percent (0.5%) of gross
assessable income. In Korea a 25% of taxable income before deductions and exemptions. Of course the different
countries have different basis for that minimum income tax.chanroblesvirtua|awlibary

The other thing youll notice is the preponderance of Latin American countries that employed this method. Okay, those
are additional Latin American countries.29cЃa

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their own versions of
the MCIT.30cЃa

MCIT Is Not Violative of Due Process

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive,
arbitrary and confiscatory which amounts to deprivation of property without due process of law. It explains that gross
income as defined under said provision only considers the cost of goods sold and other direct expenses; other major
expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were
not taken into account.31cЃa Thus, pegging the tax base of the MCIT to a corporations gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not "realized gain." 32cЃa

We disagree.chanroblesvirtua|awlibary

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The exercise of
taxing power derives its source from the very existence of the State whose social contract with its citizens obliges it to
promote public interest and the common good.33cЃa

Taxation is an inherent attribute of sovereignty.34cЃa It is a power that is purely legislative.35cЃa Essentially, this means
that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate),
coverage (subjects) and situs (place) of taxation.36cЃa It has the authority to prescribe a certain tax at a specific rate for
a particular public purpose on persons or things within its jurisdiction. In other words, the legislature wields the power
to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or
what) it shall be imposed and where it shall be imposed.chanroblesvirtua|awlibary

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so
that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the
tax) to its constituency who are to pay it.37cЃa Nevertheless, it is circumscribed by constitutional limitations. At the
same time, like any other statute, tax legislation carries a presumption of constitutionality.chanroblesvirtua|awlibary

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or
property without due process of law." In Sison, Jr. v. Ancheta, et al.,38cЃa we held that the due process clause may
properly be invoked to invalidate, in appropriate cases, a revenue measure39cЃa when it amounts to a confiscation of
property.40cЃa But in the same case, we also explained that we will not strike down a revenue measure as
unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness by the
taxpayer.41cЃa There must be a factual foundation to such an unconstitutional taint. 42cЃa This merely adheres to the
authoritative doctrine that, where the due process clause is invoked, considering that it is not a fixed rule but rather a
broad standard, there is a need for proof of such persuasive character. 43cЃa

Petitioner is correct in saying that income is distinct from capital. 44cЃa Income means all the wealth which flows into
the taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct point in time while
income denotes a flow of wealth during a definite period of time. 45cЃa Income is gain derived and severed from
capital.46cЃa For income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation. 47cЃa

cralawCertainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other
words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on
capital.chanroblesvirtua|awlibary

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of
its goods, i.e., the cost of goods48cЃa and other direct expenses from gross sales. Clearly, the capital is not being
taxed.chanroblesvirtua|awlibary

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only
if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a
corporation, pegging the rate at a very much reduced 2% and uses as the base the corporations gross
income.chanroblesvirtua|awlibary

Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at
the same time reducing the applicable tax rate.49cЃa

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in many
jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or constitutional, unless it
interferes with interstate commerce or violates the requirement as to uniformity of taxation. 50cЃa

The United States has a similar alternative minimum tax (AMT) system which is generally characterized by a lower tax
rate but a broader tax base.51cЃa Since our income tax laws are of American origin, interpretations by American courts
of our parallel tax laws have persuasive effect on the interpretation of these laws. 52cЃa Although our MCIT is not
exactly the same as the AMT, the policy behind them and the procedure of their implementation are comparable. On
the question of the AMTs constitutionality, the United States Court of Appeals for the Ninth Circuit stated in Okin v.
Commissioner:53cЃa

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system growing from large
numbers of taxpayers with large incomes who were yet paying no taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a rational means of
obtaining a broad-based tax, and therefore is constitutional.54cЃa

The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a minimum
amount of taxes was a legitimate governmental end to which the AMT bore a reasonable relation.55cЃa

American courts have also emphasized that Congress has the power to condition, limit or deny deductions from gross
income in order to arrive at the net that it chooses to tax.56cЃa This is because deductions are a matter of legislative
grace.57cЃa

Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of the MCIT,
taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.chanroblesvirtua|awlibary

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor does it
present empirical data to show that the implementation of the MCIT resulted in the confiscation of their
property.chanroblesvirtua|awlibary

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and
confiscatory. The Court cannot strike down a law as unconstitutional simply because of its yokes.58cЃa Taxation is
necessarily burdensome because, by its nature, it adversely affects property rights. 59cЃa The party alleging the laws
unconstitutionality has the burden to demonstrate the supposed violations in understandable terms. 60cЃa

RR 9-98 Merely Clarifies Section 27(E) of RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is being
imposed and collected even when there is actually a loss, or a zero or negative taxable income:

Sec. 2.27(E) [MCIT] on Domestic Corporations.chanroblesvirtua|awlibary

(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such corporation has zero or negative taxable
income or whenever the amount of [MCIT] is greater than the normal income tax due from such corporation.
(Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable income,
merely defines the coverage of Section 27(E). This means that even if a corporation incurs a net loss in its business
operations or reports zero income after deducting its expenses, it is still subject to an MCIT of 2% of its gross income.
This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount of the net
income. But the law also states that the MCIT is to be paid only if it is greater than the normal net income. Obviously,
it may well be the case that the MCIT would be less than the net income of the corporation which posts a zero or
negative taxable income.chanroblesvirtua|awlibary

We now proceed to the issues involving the CWT.chanroblesvirtua|awlibary

The withholding tax system is a procedure through which taxes (including income taxes) are collected.61cЃa Under
Section 57 of RA 8424, the types of income subject to withholding tax are divided into three categories: (a)
withholding of final tax on certain incomes; (b) withholding of creditable tax at source and (c) tax-free covenant bonds.
Petitioner is concerned with the second category (CWT) and maintains that the revenue regulations on the collection of
CWT on sale of real estate categorized as ordinary assets are unconstitutional.chanroblesvirtua|awlibary

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends that
Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated "with grave
abuse of discretion amounting to lack of jurisdiction" and "patently in contravention of law" 62cЃa because they ignore
such distinctions. Petitioners conclusion is based on the following premises: (a) the revenue regulations use gross
selling price (GSP) or fair market value (FMV) of the real estate as basis for determining the income tax for the sale of
real estate classified as ordinary assets and (b) they mandate the collection of income tax on a per transaction basis, i.e.,
upon consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net income at the
end of the taxable period.63cЃa

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents cannot
disregard the distinctions set by the legislators as regards the tax base, modes of collection and payment of taxes on
income from the sale of capital and ordinary assets.chanroblesvirtua|awlibary

Petitioners arguments have no merit.

Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property Considered as
Ordinary Assets

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary rules and
regulations for the effective enforcement of the provisions of the law. Such authority is subject to the limitation that the
rules and regulations must not override, but must remain consistent and in harmony with, the law they seek to apply
and implement.64cЃa It is well-settled that an administrative agency cannot amend an act of Congress. 65cЃa

We have long recognized that the method of withholding tax at source is a procedure of collecting income tax which is
sanctioned by our tax laws.66cЃa The withholding tax system was devised for three primary reasons: first, to provide
the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income
tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to
improve the governments cash flow.67cЃa This results in administrative savings, prompt and efficient collection of
taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated
means and remedies.68cЃa
Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any person,
national or juridical, residing in the Philippines. Such authority is derived from Section 57(B) of RA 8424 which
provides:

SEC. 57. Withholding of Tax at Source.

xxx xxx xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR], require the
withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by
payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-
two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable
year.chanroblesvirtua|awlibary

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the
Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed on the
income payable and the tax is creditable against the income tax liability of the taxpayer for the taxable year.

Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the Real Estate
Business

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business income tax from
net income to GSP or FMV of the property sold.chanroblesvirtua|awlibary

Petitioner is wrong.chanroblesvirtua|awlibary

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible tax
obligation. 69cЃa They are installments on the annual tax which may be due at the end of the taxable year. 70cЃa

Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets remains to be
the entitys net income imposed under Section 24 (resident individuals) or Section 27 (domestic corporations) in relation
to Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT is to be deducted from the net income
tax payable by the taxpayer at the end of the taxable year.71cЃa Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003
reiterate that the tax base for the sale of real property classified as ordinary assets remains to be the net taxable income:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived from sale,
exchange, or other disposition of real properties shall unless otherwise exempt, be subject to applicable taxes imposed
under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets;

xxx xxx xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens engaged in
trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT]
(expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current [FMV] as determined in
accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income tax
imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations.chanroblesvirtua|awlibary

The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building
treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be
subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may
become subject to the [MCIT] under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes withheld (by
the withholding agent/buyer) against its tax due. If the tax due is greater than the tax withheld, then the taxpayer shall
pay the difference. If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to a
refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income.chanroblesvirtua|awlibary

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality and
convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax does not know, nor is he
privy to, how much the taxpayer/seller will have as its net income at the end of the taxable year. Instead, said
withholding agents knowledge and privity are limited only to the particular transaction in which he is a party. In such a
case, his basis can only be the GSP or FMV as these are the only factors reasonably known or knowable by him in
connection with the performance of his duties as a withholding agent.

No Blurring of Distinctions Between Ordinary Assets and Capital Assets

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as ordinary
assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to
be realized from the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at source.72cЃa

The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets are not
treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are distinguished as follows:

FWT CWT

cralawa) The amount of income tax withheld by the withholding agent cralawa) Taxes withheld on certain income payments are inten
is constituted as a full and final payment of the income tax due from the equal or at least approximate the tax due of the payee on said
payee on the said income.

cralawb)The liability for payment of the tax rests primarily on the payor cralawb) Payee of income is required to report the income and
as a withholding agent. the difference between the tax withheld and the tax due on the
The payee also has the right to ask for a refund if the tax withh
more than the tax due.

cralawc) The payee is not required to file an income tax return for the cralawc) The income recipient is still required to file an incom
particular income.73cЃa return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as
amended.74cЃa

cralawAs previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the
sale of ordinary assets. The inherent and substantial differences between FWT and CWT disprove petitioners
contention that ordinary assets are being lumped together with, and treated similarly as, capital assets in contravention
of the pertinent provisions of RA 8424.chanroblesvirtua|awlibary
Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the provisions
of RA 8424 on the manner and time of filing of the return, payment and assessment of income tax involving ordinary
assets.75cЃa

The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way as capital
gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The withholding
agent/buyers act of collecting the tax at the time of the transaction by withholding the tax due from the income payable
is the essence of the withholding tax method of tax collection.

No Rule that Only Passive

Incomes Can Be Subject to CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or creditable. According
to petitioner, the whole of Section 57 governs the withholding of income tax on passive income. The enumeration in
Section 57(A) refers to passive income being subjected to FWT. It follows that Section 57(B) on CWT should also be
limited to passive income:

SEC. 57. Withholding of Tax at Source.

cralaw(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the [Secretary] may
promulgate, upon the recommendation of the [CIR], requiring the filing of income tax return by certain income payees,
the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C),
25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c),
28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified
items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the
same conditions as provided in Section 58 of this Code.chanroblesvirtua|awlibary

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR], require
the withholding of a tax on the items of income payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not
more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for
the taxable year. (Emphasis supplied)

This line of reasoning is non sequitur.chanroblesvirtua|awlibary

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates these as passive
income. The BIR defines passive income by stating what it is not:

if the income is generated in the active pursuit and performance of the corporations primary purposes, the same is not
passive income76cЃa

It is income generated by the taxpayers assets. These assets can be in the form of real properties that return rental
income, shares of stock in a corporation that earn dividends or interest income received from
savings.chanroblesvirtua|awlibary

On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to natural or
juridical persons, residing in the Philippines." There is no requirement that this income be passive income. If that were
the intent of Congress, it could have easily said so.chanroblesvirtua|awlibary

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to CWT. The
former covers the kinds of passive income enumerated therein and the latter encompasses any income other than those
listed in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in the same
way.chanroblesvirtua|awlibary

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section 57(B). RR
2-98 merely implements the law by specifying what income is subject to CWT. It has been held that, where a statute
does not require any particular procedure to be followed by an administrative agency, the agency may adopt any
reasonable method to carry out its functions.77cЃa Similarly, considering that the law uses the general term "income,"
the Secretary and CIR may specify the kinds of income the rules will apply to based on what is feasible. In addition,
administrative rules and regulations ordinarily deserve to be given weight and respect by the courts 78cЃa in view of the
rule-making authority given to those who formulate them and their specific expertise in their respective fields.

No Deprivation of Property Without Due Process

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives its
members of their property without due process of law because, in their line of business, gain is never assured by mere
receipt of the selling price. As a result, the government is collecting tax from net income not yet gained or
earned.chanroblesvirtua|awlibary

Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of the
taxable year. The seller will be able to claim a tax refund if its net income is less than the taxes withheld. Nothing is
taken that is not due so there is no confiscation of property repugnant to the constitutional guarantee of due process.
More importantly, the due process requirement applies to the power to tax. 79cЃa The CWT does not impose new taxes
nor does it increase taxes.80cЃa It relates entirely to the method and time of payment.chanroblesvirtua|awlibary

Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers have to wait
years and may even resort to litigation before they are granted a refund.81cЃa This argument is misleading. The
practical problems encountered in claiming a tax refund do not affect the constitutionality and validity of the CWT as a
method of collecting the tax.chanroblesvirtua|awlibary

Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay labor wages,
materials, cost of money and other expenses which can then save the entity from having to obtain loans entailing
considerable interest expense. Petitioner also lists the expenses and pitfalls of the trade which add to the burden of the
realty industry: huge investments and borrowings; long gestation period; sudden and unpredictable interest rate surges;
continually spiraling development/construction costs; heavy taxes and prohibitive "up-front" regulatory fees from at
least 20 government agencies.82cЃa

Petitioners lamentations will not support its attack on the constitutionality of the CWT. Petitioners complaints are
essentially matters of policy best addressed to the executive and legislative branches of the government. Besides, the
CWT is applied only on the amounts actually received or receivable by the real estate entity. Sales on installment are
taxed on a per-installment basis.83cЃa Petitioners desire to utilize for its operational and capital expenses money
earmarked for the payment of taxes may be a practical business option but it is not a fundamental right which can be
demanded from the court or from the government.

No Violation of Equal Protection

Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is being
levied only on real estate enterprises. Specifically, petitioner points out that manufacturing enterprises are not similarly
imposed a CWT on their sales, even if their manner of doing business is not much different from that of a real estate
enterprise. Like a manufacturing concern, a real estate business is involved in a continuous process of production and it
incurs costs and expenditures on a regular basis. The only difference is that "goods" produced by the real estate
business are house and lot units.84cЃa

Again, we disagree.chanroblesvirtua|awlibary

The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the
same protection of laws which is enjoyed by other persons or other classes in the same place and in like
circumstances."85cЃa Stated differently, all persons belonging to the same class shall be taxed alike. It follows that the
guaranty of the equal protection of the laws is not violated by legislation based on a reasonable classification.
Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose of the law; (3) not be
limited to existing conditions only and (4) apply equally to all members of the same class. 86cЃa

The taxing power has the authority to make reasonable classifications for purposes of taxation.87cЃa Inequalities which
result from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation.88cЃa
The real estate industry is, by itself, a class and can be validly treated differently from other business
enterprises.chanroblesvirtua|awlibary

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that
what distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the
CWT, is not their production processes but the prices of their goods sold and the number of transactions involved. The
income from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome
for the parties to comply with the withholding tax scheme.chanroblesvirtua|awlibary

On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand
customers every month involving both minimal and substantial amounts. To require the customers of manufacturing
enterprises, at present, to withhold the taxes on each of their transactions with their tens or hundreds of suppliers may
result in an inefficient and unmanageable system of taxation and may well defeat the purpose of the withholding tax
system.chanroblesvirtua|awlibary

Petitioner counters that there are other businesses wherein expensive items are also sold infrequently, e.g. heavy
equipment, jewelry, furniture, appliance and other capital goods yet these are not similarly subjected to the CWT.89cЃa
As already discussed, the Secretary may adopt any reasonable method to carry out its functions. 90cЃa Under Section
57(B), it may choose what to subject to CWT.chanroblesvirtua|awlibary

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is not accurate. The sales of
manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are also subject to CWT for
their transactions with said 5,000 corporations.91cЃa

Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not effect the
regisration of any document transferring real property unless a certification is issued by the CIR that the withholding
tax has been paid. Petitioner proffers hardly any reason to strike down this rule except to rely on its contention that the
CWT is unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost exactly the same
wording as Section 58(E) of RA 8424 and is unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source.chanroblesvirtua|awlibary

(E) Registration with Register of Deeds. - No registration of any document transferring real property shall be
effected by the Register of Deeds unless the [CIR] or his duly authorized representative has certified that such
transfer has been reported, and the capital gains or [CWT], if any, has been paid: xxxx any violation of this
provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code. (Emphasis
supplied)

Conclusion

The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to understand is the
income tax."92cЃa When a party questions the constitutionality of an income tax measure, it has to contend not only
with Einsteins observation but also with the vast and well-established jurisprudence in support of the plenary powers of
Congress to impose taxes. Petitioner has miserably failed to discharge its burden of convincing the Court that the
imposition of MCIT and CWT is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.

Costs against petitioner.

SO ORDERED.

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

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and as judicial co-
guardians of JOSE ROXAS, petitioners,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

Leido, Andrada, Perez and Associates for petitioners.

Office of the Solicitor General for respondents.

BENGZON, J.P., J.:

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

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

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

(3) Shares of stocks in different corporations.

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

AGRICULTURAL LANDS

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

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

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

RESIDENTIAL HOUSE

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

ASSESSMENTS

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

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

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

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

The following deductions were disallowed:

ROXAS Y CIA.:

1953
Tickets for Banquet in honor of
P 40.00
S. Osmeña

Gifts of San Miguel beer 28.00

Contributions to —

Philippine Air Force Chapel 100.00

Manila Police Trust Fund 150.00

Philippines Herald's fund for Manila's neediest families 100.00

1955
Contributions to Contribution to
Our Lady of Fatima Chapel, FEU 50.00

ANTONIO ROXAS:

1953
Contributions to —

Pasay City Firemen Christmas Fund 25.00

Pasay City Police Dept. X'mas fund 50.00

1955
Contributions to —

Baguio City Police Christmas fund 25.00

Pasay City Firemen Christmas fund 25.00

 Pasay City Police Christmas fund 50.00

EDUARDO ROXAS:

1953
Contributions to —

Hijas de Jesus' Retiro de Manresa 450.00

Philippines Herald's fund for Manila's neediest families 100.00

1955
Contributions to Philippines
Herald's fund for Manila's
neediest families 120.00

JOSE ROXAS:

1955
Contributions to Philippines
Herald's fund for Manila's
neediest families 120.00

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

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

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

The issues:

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

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

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

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

4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer a ella en el futuro,
alquilandoles por los plazos y demas condiciones, estime convenientes y vendiendo aquellas que a juicio de sus
gerentes no deben conservarse;
The above-quoted purpose notwithstanding, the proposition of the Commissioner of Internal Revenue cannot be
favorably accepted by Us in this isolated transaction with its peculiar circumstances in spite of the fact that there were
hundreds of vendees. Although they paid for their respective holdings in installment for a period of ten years, it would
nevertheless not make the vendor Roxas y Cia. a real estate dealer during the ten-year amortization period.

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

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

In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34 of
the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the sale thereof is capital gain,
taxable only to the extent of 50%.

DISALLOWED DEDUCTIONS

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

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

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

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

Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima chapel at the Far
Eastern University on the ground that the said university gives dividends to its stockholders. Located within the
premises of the university, the chapel in question has not been shown to belong to the Catholic Church or any religious
organization. On the other hand, the lower court found that it belongs to the Far Eastern University, contributions to
which are not deductible under Section 30(h) of the Tax Code for the reason that the net income of said university
injures to the benefit of its stockholders. The disallowance should be sustained.

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

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

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

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

ANTONIO ROXAS

Net income per return P315,476.59

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

Less amount declared 146,135.46

Amount understated P 7,113.69

Contributions disallowed 115.00

P 7,228.69

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

partnership but allowed to partners 7,042.02 186.67

Net income per review P315,663.26

Less: Exemptions 4,200.00

Net taxable income P311,463.26

Tax due 154,169.00

Tax paid 154,060.00

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

EDUARDO ROXAS

P
Net income per return
304,166.92

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

Less profits declared 146,052.58

Amount understated P 7,196.57

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

partnership but allowed to partners 7,042.02 155.55

Net income per review P304,322.47

Less: Exemptions 4,800.00

Net taxable income P299,592.47

Tax Due P147,250.00

Tax paid 147,159.00

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

JOSE ROXAS

Net income per return P222,681.76

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

Less amount reported 146,135.46

Amount understated 7,113.69

Less 1/3 share of contributions disallowed from partnership but allowed as

deductions to partners 7,042.02 71.67
 Net income per review P222,753.43

Less: Exemption 1,800.00

Net income subject to tax P220,953.43

Tax due P102,763.00

Tax paid 102,714.00

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

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

G.R. No. L-75697

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

Nelson Y. Ng for petitioner.

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

MELENCIO-HERRERA, J.:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4. There is undue delegation of power and authority;

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

6. There is over regulation of the video industry as if it were a nuisance, which it is not.
We shall consider the foregoing objections in seriatim.

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

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

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

xxx xxx xxx

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

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

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

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

The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to
favor one industry over another. 11
It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that
"inequities which result from a singling out of one particular class for taxation or exemption infringe no constitutional
limitation". 12 Taxation has been made the implement of the state's police power.13

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

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

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

4. Neither can it be successfully argued that the DECREE contains an undue delegation of legislative power. The grant
in Section 11 of the DECREE of authority to the BOARD to "solicit the direct assistance of other agencies and units of
the government and deputize, for a fixed and limited period, the heads or personnel of such agencies and units to
perform enforcement functions for the Board" is not a delegation of the power to legislate but merely a conferment of
authority or discretion as to its execution, enforcement, and implementation. "The true distinction is between the
delegation of power to make the law, which necessarily involves a discretion as to what it shall be, and conferring
authority or discretion as to its execution to be exercised under and in pursuance of the law. The first cannot be done; to
the latter, no valid objection can be made." 14 Besides, in the very language of the decree, the authority of the BOARD
to solicit such assistance is for a "fixed and limited period" with the deputized agencies concerned being "subject to the
direction and control of the BOARD." That the grant of such authority might be the source of graft and corruption
would not stigmatize the DECREE as unconstitutional. Should the eventuality occur, the aggrieved parties will not be
without adequate remedy in law.

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

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

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

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

... it is now well settled that "there is no constitutional objection to the passage of a law providing that the presumption
of innocence may be overcome by a contrary presumption founded upon the experience of human conduct, and
enacting what evidence shall be sufficient to overcome such presumption of innocence" (People vs. Mingoa 92 Phil.
856 [1953] at 858-59, citing 1 COOLEY, A TREATISE ON THE CONSTITUTIONAL LIMITATIONS, 639-641).
And the "legislature may enact that when certain facts have been proved that they shall be prima facie evidence of the
existence of the guilt of the accused and shift the burden of proof provided there be a rational connection between the
facts proved and the ultimate facts presumed so that the inference of the one from proof of the others is not
unreasonable and arbitrary because of lack of connection between the two in common experience". 16
Applied to the challenged provision, there is no question that there is a rational connection between the fact proved,
which is non-registration, and the ultimate fact presumed which is violation of the DECREE, besides the fact that the
prima facie presumption of violation of the DECREE attaches only after a forty-five-day period counted from its
effectivity and is, therefore, neither retrospective in character.

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

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

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

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

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

WHEREFORE, the instant Petition is hereby dismissed.

No costs.

SO ORDERED.

Coconut Oil Refiners Assoc v Torres

This is a Petition for Prohibition and Injunction seeking to enjoin and prohibit the Executive Branch, through the public
respondents Ruben Torres in his capacity as Executive Secretary, the Bases Conversion Development Authority
(BCDA), the Clark Development Corporation (CDC) and the Subic Bay Metropolitan Authority (SBMA), from
allowing, and the private respondents from continuing with, the operation of tax and duty-free shops located at the
Subic Special Economic Zone (SSEZ) and the Clark Special Economic Zone (CSEZ), and to declare the following
issuances as unconstitutional, illegal, and void:

1. Section 5 of Executive Order No. 80,[1] dated April 3, 1993, regarding the CSEZ.

2. Executive Order No. 97-A, dated June 19, 1993, pertaining to the SSEZ.

3. Section 4 of BCDA Board Resolution No. 93-05-034,[2] dated May 18, 1993, pertaining to the CSEZ.

Petitioners contend that the aforecited issuances are unconstitutional and void as they constitute executive lawmaking,
and that they are contrary to Republic Act No. 7227[3] and in violation of the Constitution, particularly Section 1,
Article III (equal protection clause), Section 19, Article XII (prohibition of unfair competition and combinations in
restraint of trade), and Section 12, Article XII (preferential use of Filipino labor, domestic materials and locally
produced goods).

The facts are as follows:

On March 13, 1992, Republic Act No. 7227 was enacted, providing for, among other things, the sound and balanced
conversion of the Clark and Subic military reservations and their extensions into alternative productive uses in the form
of special economic zones in order to promote the economic and social development of Central Luzon in particular and
the country in general. Among the salient provisions are as follows:

SECTION 12. Subic Special Economic Zone.

...

The abovementioned zone shall be subject to the following policies:

(a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent provisions of
the Local Government Code, the Subic Special Economic Zone shall be developed into a self-sustaining, industrial,
commercial, financial and investment center to generate employment opportunities in and around the zone and to
attract and promote productive foreign investments;

(b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow
or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as
provide incentives such as tax and duty-free importations of raw materials, capital and equipment. However,
exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the
Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant
tax laws of the Philippines;[4]

(c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national,
shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross
income earned by all businesses and enterprises within the Subic Special Ecoomic Zone shall be remitted to the
National Government, one percent (1%) each to the local government units affected by the declaration of the zone in
proportion to their population area, and other factors. In addition, there is hereby established a development fund of one
percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to
be utilized for the development of municipalities outside the City of Olangapo and the Municipality of Subic, and other
municipalities contiguous to the base areas.

...

SECTION 15. Clark and Other Special Economic Zones. Subject to the concurrence by resolution of the local
government units directly affected, the President is hereby authorized to create by executive proclamation a Special
Economic Zone covering the lands occupied by the Clark military reservations and its contiguous extensions as
embraced, covered and defined by the 1947 Military Bases Agreement between the Philippines and the United States of
America, as amended, located within the territorial jurisdiction of Angeles City, Municipalities of Mabalacat and Porac,
Province of Pampanga and the Municipality of Capas, Province of Tarlac, in accordance with the policies as herein
provided insofar as applicable to the Clark military reservations.

The governing body of the Clark Special Economic Zone shall likewise be established by executive proclamation with
such powers and functions exercised by the Export Processing Zone Authority pursuant to Presidential Decree No. 66
as amended.

The policies to govern and regulate the Clark Special Economic Zone shall be determined upon consultation with the
inhabitants of the local government units directly affected which shall be conducted within six (6) months upon
approval of this Act.

Similarly, subject to the concurrence by resolution of the local government units directly affected, the President shall
create other Special Economic Zones, in the base areas of Wallace Air Station in San Fernando, La Union (excluding
areas designated for communications, advance warning and radar requirements of the Philippine Air Force to be
determined by the Conversion Authority) and Camp John Hay in the City of Baguio.

Upon recommendation of the Conversion Authority, the President is likewise authorized to create Special Economic
Zones covering the Municipalities of Morong, Hermosa, Dinalupihan, Castillejos and San Marcelino.

On April 3, 1993, President Fidel V. Ramos issued Executive Order No. 80, which declared, among others, that Clark
shall have all the applicable incentives granted to the Subic Special Economic and Free Port Zone under Republic Act
No. 7227. The pertinent provision assailed therein is as follows:

SECTION 5. Investments Climate in the CSEZ. Pursuant to Section 5(m) and Section 15 of RA 7227, the BCDA shall
promulgate all necessary policies, rules and regulations governing the CSEZ, including investment incentives, in
consultation with the local government units and pertinent government departments for implementation by the CDC.

Among others, the CSEZ shall have all the applicable incentives in the Subic Special Economic and Free Port Zone
under RA 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investments Code
of 1987, the Foreign Investments Act of 1991 and new investments laws which may hereinafter be enacted.

The CSEZ Main Zone covering the Clark Air Base proper shall have all the aforecited investment incentives, while the
CSEZ Sub-Zone covering the rest of the CSEZ shall have limited incentives. The full incentives in the Clark SEZ Main
Zone and the limited incentives in the Clark SEZ Sub-Zone shall be determined by the BCDA.

Pursuant to the directive under Executive Order No. 80, the BCDA passed Board Resolution No. 93-05-034 on May 18,
1993, allowing the tax and duty-free sale at retail of consumer goods imported via Clark for consumption outside the
CSEZ. The assailed provisions of said resolution read, as follows:

Section 4. SPECIFIC INCENTIVES IN THE CSEZ MAIN ZONE. The CSEZ-registered enterprises/businesses shall
be entitled to all the incentives available under R.A. No. 7227, E.O. No. 226 and R.A. No. 7042 which shall include,
but not limited to, the following:

I. As in Subic Economic and Free Port Zone:

A. Customs:

...

4. Tax and duty-free purchase and consumption of goods/articles (duty free shopping) within the
CSEZ Main Zone.

5. For individuals, duty-free consumer goods may be brought out of the CSEZ Main Zone into the
Philippine Customs territory but not to exceed US$200.00 per month per CDC-registered
person, similar to the limits imposed in the Subic SEZ. This privilege shall be enjoyed only
once a month. Any excess shall be levied taxes and duties by the Bureau of Customs.

On June 10, 1993, the President issued Executive Order No. 97, Clarifying the Tax and Duty Free Incentive Within the
Subic Special Economic Zone Pursuant to R.A. No. 7227. Said issuance in part states, thus:

SECTION 1. On Import Taxes and Duties Tax and duty-free importations shall apply only to raw materials, capital
goods and equipment brought in by business enterprises into the SSEZ. Except for these items, importations of other
goods into the SSEZ, whether by business enterprises or resident individuals, are subject to taxes and duties under
relevant Philippine laws.

The exportation or removal of tax and duty-free goods from the territory of the SSEZ to other parts of the Philippine
territory shall be subject to duties and taxes under relevant Philippine laws.
Nine days after, on June 19, 1993, Executive Order No. 97-A was issued, Further Clarifying the Tax and Duty-Free
Privilege Within the Subic Special Economic and Free Port Zone. The relevant provisions read, as follows:

SECTION 1. The following guidelines shall govern the tax and duty-free privilege within the Secured Area of the
Subic Special Economic and Free Port Zone:

1.1 The Secured Area consisting of the presently fenced-in former Subic Naval Base shall be the only completely tax
and duty-free area in the SSEFPZ. Business enterprises and individuals (Filipinos and foreigners) residing within the
Secured Area are free to import raw materials, capital goods, equipment, and consumer items tax and duty-free.
Consumption items, however, must be consumed within the Secured Area. Removal of raw materials, capital goods,
equipment and consumer items out of the Secured Area for sale to non-SSEFPZ registered enterprises shall be subject
to the usual taxes and duties, except as may be provided herein.

1.2. Residents of the SSEFPZ living outside the Secured Area can enter the Secured Area and consume any quantity of
consumption items in hotels and restaurants within the Secured Area. However, these residents can purchase and bring
out of the Secured Area to other parts of the Philippine territory consumer items worth not exceeding US$100 per
month per person. Only residents age 15 and over are entitled to this privilege.

1.3. Filipinos not residing within the SSEFPZ can enter the Secured Area and consume any quantity of consumption
items in hotels and restaurants within the Secured Area. However, they can purchase and bring out [of] the Secured
Area to other parts of the Philippine territory consumer items worth not exceeding US$200 per year per person. Only
Filipinos age 15 and over are entitled to this privilege.

Petitioners assail the $100 monthly and $200 yearly tax-free shopping privileges granted by the aforecited provisions
respectively to SSEZ residents living outside the Secured Area of the SSEZ and to Filipinos aged 15 and over residing
outside the SSEZ.

On February 23, 1998, petitioners thus filed the instant petition, seeking the declaration of nullity of the assailed
issuances on the following grounds:

I.

EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4 OF BCDA
BOARD RESOLUTION NO. 93-05-034 ARE NULL AND VOID [FOR] BEING AN EXERCISE OF EXECUTIVE
LAWMAKING.

II.

EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4 OF BCDA
BOARD RESOLUTION NO. 93-05-034 ARE UNCONSTITUTIONAL FOR BEING VIOLATIVE OF THE EQUAL
PROTECTION CLAUSE AND THE PROHIBITION AGAINST UNFAIR COMPETITION AND PRACTICES IN
RESTRAINT OF TRADE.

III.

EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4 OF BCDA
BOARD RESOLUTION NO. 93-05-034 ARE NULL AND VOID [FOR] BEING VIOLATIVE OF REPUBLIC ACT
NO. 7227.

IV.

THE CONTINUED IMPLEMENTATION OF THE CHALLENGED ISSUANCES IF NOT RESTRAINED WILL

CONTINUE TO CAUSE PETITIONERS TO SUFFER GRAVE AND IRREPARABLE INJURY.[5]

In their Comments, respondents point out procedural issues, alleging lack of petitioners legal standing, the
unreasonable delay in the filing of the petition, laches, and the propriety of the remedy of prohibition.
Anent the claim on lack of legal standing, respondents argue that petitioners, being mere suppliers of the local retailers
operating outside the special economic zones, do not stand to suffer direct injury in the enforcement of the issuances
being assailed herein. Assuming this is true, this Court has nevertheless held that in cases of paramount importance
where serious constitutional questions are involved, the standing requirements may be relaxed and a suit may be
allowed to prosper even where there is no direct injury to the party claiming the right of judicial review.[6]

In the same vein, with respect to the other alleged procedural flaws, even assuming the existence of such defects, this
Court, in the exercise of its discretion, brushes aside these technicalities and takes cognizance of the petition
considering the importance to the public of the present case and in keeping with the duty to determine whether the other
branches of the government have kept themselves within the limits of the Constitution.[7]

Now, on the constitutional arguments raised:

As this Court enters upon the task of passing on the validity of an act of a co-equal and coordinate branch of the
Government, it bears emphasis that deeply ingrained in our jurisprudence is the time-honored principle that a statute is
presumed to be valid.[8] This presumption is rooted in the doctrine of separation of powers which enjoins upon the
three coordinate departments of the Government a becoming courtesy for each others acts.[9] Hence, to doubt is to
sustain. The theory is that before the act was done or the law was enacted, earnest studies were made by Congress, or
the President, or both, to insure that the Constitution would not be breached.[10] This Court, however, may declare a
law, or portions thereof, unconstitutional where a petitioner has shown a clear and unequivocal breach of the
Constitution, not merely a doubtful or argumentative one.[11] In other words, before a statute or a portion thereof may
be declared unconstitutional, it must be shown that the statute or issuance violates the Constitution clearly, palpably
and plainly, and in such a manner as to leave no doubt or hesitation in the mind of the Court.[12]

The Issue on Executive Legislation

Petitioners claim that the assailed issuances (Executive Order No. 97-A; Section 5 of Executive Order No. 80; and
Section 4 of BCDA Board Resolution No. 93-05-034) constitute executive legislation, in violation of the rule on
separation of powers. Petitioners argue that the Executive Department, by allowing through the questioned issuances
the setting up of tax and duty-free shops and the removal of consumer goods and items from the zones without payment
of corresponding duties and taxes, arbitrarily provided additional exemptions to the limitations imposed by Republic
Act No. 7227, which limitations petitioners identify as follows:

(1) [Republic Act No. 7227] allowed only tax and duty-free importation of raw materials, capital and equipment.

(2) It provides that any exportation or removal of goods from the territory of the Subic Special Economic Zone to
other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and
Tariff Code and other relevant tax laws of the Philippines.

Anent the first alleged limitation, petitioners contend that the wording of Republic Act No. 7227 clearly limits the grant
of tax incentives to the importation of raw materials, capital and equipment only. Hence, they claim that the assailed
issuances constitute executive legislation for invalidly granting tax incentives in the importation of consumer goods
such as those being sold in the duty-free shops, in violation of the letter and intent of Republic Act No. 7227.

A careful reading of Section 12 of Republic Act No. 7227, which pertains to the SSEZ, would show that it does not
restrict the duty-free importation only to raw materials, capital and equipment. Section 12 of the cited law is partly
reproduced, as follows:

SECTION 12. Subic Special Economic Zone.

...

The abovementioned zone shall be subject to the following policies:

...
 (b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring
free flow or movement of goods and capital within, into and exported out of the Subic Special Economic
Zone, as well as provide incentives such as tax and duty-free importations of raw materials, capital and
equipment. However, exportation or removal of goods from the territory of the Subic Special Economic
Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the
Customs and Tariff Code and other relevant tax laws of the Philippines.[13]

While it is true that Section 12 (b) of Republic Act No. 7227 mentions only raw materials, capital and equipment, this
does not necessarily mean that the tax and duty-free buying privilege is limited to these types of articles to the
exclusion of consumer goods. It must be remembered that in construing statutes, the proper course is to start out and
follow the true intent of the Legislature and to adopt that sense which harmonizes best with the context and promotes in
the fullest manner the policy and objects of the Legislature.[14]

In the present case, there appears to be no logic in following the narrow interpretation petitioners urge. To limit the tax-
free importation privilege of enterprises located inside the special economic zone only to raw materials, capital and
equipment clearly runs counter to the intention of the Legislature to create a free port where the free flow of goods or
capital within, into, and out of the zones is insured.

The phrase tax and duty-free importations of raw materials, capital and equipment was merely cited as an example of
incentives that may be given to entities operating within the zone. Public respondent SBMA correctly argued that the
maxim expressio unius est exclusio alterius, on which petitioners impliedly rely to support their restrictive
interpretation, does not apply when words are mentioned by way of example.[15] It is obvious from the wording of
Republic Act No. 7227, particularly the use of the phrase such as, that the enumeration only meant to illustrate
incentives that the SSEZ is authorized to grant, in line with its being a free port zone.

Furthermore, said legal maxim should be applied only as a means of discovering legislative intent which is not
otherwise manifest, and should not be permitted to defeat the plainly indicated purpose of the Legislature.[16]

The records of the Senate containing the discussion of the concept of special economic zone in Section 12 (a) of
Republic Act No. 7227 show the legislative intent that consumer goods entering the SSEZ which satisfy the needs of
the zone and are consumed there are not subject to duties and taxes in accordance with Philippine laws, thus:

Senator Guingona. . . . The concept of Special Economic Zone is one that really includes the concept of a free port,
but it is broader. While a free port is necessarily included in the Special Economic Zone, the reverse is not true that a
free port would include a special economic zone.

Special Economic Zone, Mr. President, would include not only the incoming and outgoing of vessels, duty-free and
tax-free, but it would involve also tourism, servicing, financing and all the appurtenances of an investment center. So,
that is the concept, Mr. President. It is broader. It includes the free port concept and would cater to the greater needs of
Olangapo City, Subic Bay and the surrounding municipalities.

Senator Enrile. May I know then if a factory located within the jurisdiction of Morong, Bataan that was originally a
part of the Subic Naval reservation, be entitled to a free port treatment or just a special economic zone treatment?

Senator Guingona. As far as the goods required for manufacture is concerned, Mr. President, it would have privileges
of duty-free and tax-free. But in addition, the Special Economic Zone could embrace the needs of tourism, could
embrace the needs of servicing, could embrace the needs of financing and other investment aspects.

Senator Enrile. When a hotel is constructed, Mr. President, in this geographical unit which we call a special economic
zone, will the goods entering to be consumed by the customers or guests of the hotel be subject to duties?

Senator Guingona. That is the concept that we are crafting, Mr. President.

Senator Enrile. No. I am asking whether those goods will be duty-free, because it is constructed within a free port.

Senator Guingona. For as long as it services the needs of the Special Economic Zone, yes.
Senator Enrile. For as long as the goods remain within the zone, whether we call it an economic zone or a free port,
for as long as we say in this law that all goods entering this particular territory will be duty-free and tax-free, for as
long as they remain there, consumed there or reexported or destroyed in that place, then they are not subject to the
duties and taxes in accordance with the laws of the Philippines?

Senator Guingona. Yes.[17]

Petitioners rely on Committee Report No. 1206 submitted by the Ad Hoc Oversight Committee on Bases Conversion
on June 26, 1995. Petitioners put emphasis on the reports finding that the setting up of duty-free stores never figured in
the minds of the authors of Republic Act No. 7227 in attracting foreign investors to the former military baselands. They
maintain that said law aimed to attract manufacturing and service enterprises that will employ the dislocated former
military base workers, but not investors who would buy consumer goods from duty-free stores.

The Court is not persuaded. Indeed, it is well-established that opinions expressed in the debates and proceedings of the
Legislature, steps taken in the enactment of a law, or the history of the passage of the law through the Legislature, may
be resorted to as aids in the interpretation of a statute with a doubtful meaning.[18] Petitioners posture, however,
overlooks the fact that the 1995 Committee Report they are referring to came into being well after the enactment of
Republic Act No. 7227 in 1993. Hence, as pointed out by respondent Executive Secretary Torres, the aforementioned
report cannot be said to form part of Republic Act No. 7227s legislative history.

Section 12 of Republic Act No. 7227, provides in part, thus:

SEC. 12. Subic Special Economic Zone. -- . . .

The abovementioned zone shall be subject to the following policies:

(a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent provisions of
the Local Government Code, the Subic Special Economic Zone shall be developed into a self-sustaining, industrial,
commercial, financial and investment center to generate employment opportunities in and around the zone and to
attract and promote productive foreign investments. [19]

The aforecited policy was mentioned as a basis for the issuance of Executive Order No. 97-A, thus:

WHEREAS, Republic Act No. 7227 provides that within the framework and subject to the mandate and limitations of
the Constitution and the pertinent provisions of the Local Government Code, the Subic Special Economic and Free Port
Zone (SSEFPZ) shall be developed into a self-sustaining industrial, commercial, financial and investment center to
generate employment opportunities in and around the zone and to attract and promote productive foreign investments;
and

WHEREAS, a special tax and duty-free privilege within a Secured Area in the SSEFPZ subject, to existing laws has
been determined necessary to attract local and foreign visitors to the zone.

Executive Order No. 97-A provides guidelines to govern the tax and duty-free privileges within the Secured Area of the
Subic Special Economic and Free Port Zone. Paragraph 1.6 thereof states that (t)he sale of tax and duty-free consumer
items in the Secured Area shall only be allowed in duly authorized duty-free shops.

The Court finds that the setting up of such commercial establishments which are the only ones duly authorized to sell
consumer items tax and duty-free is still well within the policy enunciated in Section 12 of Republic Act No. 7227 that
. . .the Subic Special Economic Zone shall be developed into a self-sustaining, industrial, commercial, financial
and investment center to generate employment opportunities in and around the zone and to attract and promote
productive foreign investments. (Emphasis supplied.)

However, the Court reiterates that the second sentences of paragraphs 1.2 and 1.3 of Executive Order No. 97-A,
allowing tax and duty-free removal of goods to certain individuals, even in a limited amount, from the Secured Area of
the SSEZ, are null and void for being contrary to Section 12 of Republic Act No. 7227. Said Section clearly
provides that exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts
of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other
relevant tax laws of the Philippines.
On the other hand, insofar as the CSEZ is concerned, the case for an invalid exercise of executive legislation is tenable.

In John Hay Peoples Alternative Coalition, et al. v. Victor Lim, et al.,[20] this Court resolved an issue, very much like
the one herein, concerning the legality of the tax exemption benefits given to the John Hay Economic Zone under
Presidential Proclamation No. 420, Series of 1994, CREATING AND DESIGNATING A PORTION OF THE AREA
COVERED BY THE FORMER CAMP JOHN AS THE JOHN HAY SPECIAL ECONOMIC ZONE PURSUANT TO
REPUBLIC ACT NO. 7227.

In that case, among the arguments raised was that the granting of tax exemptions to John Hay was an invalid and illegal
exercise by the President of the powers granted only to the Legislature. Petitioners therein argued that Republic Act No.
7227 expressly granted tax exemption only to Subic and not to the other economic zones yet to be established. Thus,
the grant of tax exemption to John Hay by Presidential Proclamation contravenes the constitutional mandate that [n]o
law granting any tax exemption shall be passed without the concurrence of a majority of all the members of
Congress.[21]

This Court sustained the argument and ruled that the incentives under Republic Act No. 7227 are exclusive only to the
SSEZ. The President, therefore, had no authority to extend their application to John Hay. To quote from the Decision:

More importantly, the nature of most of the assailed privileges is one of tax exemption. It is the legislature, unless
limited by a provision of a state constitution, that has full power to exempt any person or corporation or class of
property from taxation, its power to exempt being as broad as its power to tax. Other than Congress, the Constitution
may itself provide for specific tax exemptions, or local governments may pass ordinances on exemption only from local
taxes.

The challenged grant of tax exemption would circumvent the Constitutions imposition that a law granting any tax
exemption must have the concurrence of a majority of all the members of Congress. In the same vein, the other kinds of
privileges extended to the John Hay SEZ are by tradition and usage for Congress to legislate upon.

Contrary to public respondents suggestions, the claimed statutory exemption of the John Hay SEZ from taxation should
be manifest and unmistakable from the language of the law on which it is based; it must be expressly granted in a
statute stated in a language too clear to be mistaken. Tax exemption cannot be implied as it must be categorically and
unmistakably expressed.

If it were the intent of the legislature to grant to John Hay SEZ the same tax exemption and incentives given to the
Subic SEZ, it would have so expressly provided in R.A. No. 7227.[22]

In the present case, while Section 12 of Republic Act No. 7227 expressly provides for the grant of incentives to the
SSEZ, it fails to make any similar grant in favor of other economic zones, including the CSEZ. Tax and duty-free
incentives being in the nature of tax exemptions, the basis thereof should be categorically and unmistakably expressed
from the language of the statute. Consequently, in the absence of any express grant of tax and duty-free privileges to
the CSEZ in Republic Act No. 7227, there would be no legal basis to uphold the questioned portions of two issuances:
Section 5 of Executive Order No. 80 and Section 4 of BCDA Board Resolution No. 93-05-034, which both pertain to
the CSEZ.

Petitioners also contend that the questioned issuances constitute executive legislation for allowing the removal of
consumer goods and items from the zones without payment of corresponding duties and taxes in violation of Republic
Act No. 7227 as Section 12 thereof provides for the taxation of goods that are exported or removed from the SSEZ to
other parts of the Philippine territory.

On September 26, 1997, Executive Order No. 444 was issued, curtailing the duty-free shopping privileges in the SSEZ
and the CSEZ to prevent abuse of duty-free privilege and to protect local industries from unfair competition. The
pertinent provisions of said issuance state, as follows:

SECTION 3. Special Shopping Privileges Granted During the Year-round Centennial Anniversary Celebration in 1998.
Upon effectivity of this Order and up to the Centennial Year 1998, in addition to the permanent residents, locators and
employees of the fenced-in areas of the Subic Special Economic and Freeport Zone and the Clark Special Economic
Zone who are allowed unlimited duty free purchases, provided these are consumed within said fenced-in areas of the
Zones, the residents of the municipalities adjacent to Subic and Clark as respectively provided in R.A. 7227 (1992) and
 E.O. 97-A s. 1993 shall continue to be allowed One Hundred US Dollars (US$100) monthly shopping privilege until 31
December 1998. Domestic tourists visiting Subic and Clark shall be allowed a shopping privilege of US$25 for
consumable goods which shall be consumed only in the fenced-in area during their visit therein.

SECTION 4. Grant of Duty Free Shopping Privileges Limited Only To Individuals Allowed by Law. Starting 1 January
1999, only the following persons shall continue to be eligible to shop in duty free shops/outlets with their
corresponding purchase limits:

a. Tourists and Filipinos traveling to or returning from foreign destinations under E.O. 97-A s. 1993 One Thousand US
Dollars (US$1,000) but not to exceed Ten Thousand US Dollars (US$10,000) in any given year;

b. Overseas Filipino Workers (OFWs) and Balikbayans defined under R.A. 6768 dated 3 November 1989 Two Thousand US
Dollars (US$2,000);

c. Residents, eighteen (18) years old and above, of the fenced-in areas of the freeports under R.A. 7227 (1992) and E.O. 97-A
s. 1993 Unlimited purchase as long as these are for consumption within these freeports.

The term "Residents" mentioned in item c above shall refer to individuals who, by virtue of domicile or employment,
reside on permanent basis within the freeport area. The term excludes (1) non-residents who have entered into short- or
long-term property lease inside the freeport, (2) outsiders engaged in doing business within the freeport, and (3)
members of private clubs (e.g., yacht and golf clubs) based or located within the freeport. In this regard, duty free
privileges granted to any of the above individuals (e.g., unlimited shopping privilege, tax-free importation of cars, etc.)
are hereby revoked.[23]

A perusal of the above provisions indicates that effective January 1, 1999, the grant of duty-free shopping privileges to
domestic tourists and to residents living adjacent to SSEZ and the CSEZ had been revoked. Residents of the fenced-in
area of the free port are still allowed unlimited purchase of consumer goods, as long as these are for consumption
within these freeports. Hence, the only individuals allowed by law to shop in the duty-free outlets and remove
consumer goods out of the free ports tax-free are tourists and Filipinos traveling to or returning from foreign
destinations, and Overseas Filipino Workers and Balikbayans as defined under Republic Act No. 6768.[24]

Subsequently, on October 20, 2000, Executive Order No. 303 was issued, amending Executive Order No. 444. Pursuant
to the limited duration of the privileges granted under the preceding issuance, Section 2 of Executive Order No. 303
declared that [a]ll special shopping privileges as granted under Section 3 of Executive Order 444, s. 1997, are hereby
deemed terminated. The grant of duty free shopping privileges shall be restricted to qualified individuals as provided by
law.

It bears noting at this point that the shopping privileges currently being enjoyed by Overseas Filipino Workers,
Balikbayans, and tourists traveling to and from foreign destinations, draw authority not from the issuances being
assailed herein, but from Executive Order No. 46[25] and Republic Act No. 6768, both enacted prior to the
promulgation of Republic Act No. 7227.

From the foregoing, it appears that petitioners objection to the allowance of tax-free removal of goods from the special
economic zones as previously authorized by the questioned issuances has become moot and academic.

In any event, Republic Act No. 7227, specifically Section 12 (b) thereof, clearly provides that exportation or removal of
goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be
subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines.

Thus, the removal of goods from the SSEZ to other parts of the Philippine territory without payment of said customs
duties and taxes is not authorized by the Act. Consequently, the following italicized provisions found in the second
sentences of paragraphs 1.2 and 1.3, Section 1 of Executive Order No. 97-A are null and void:

1.2 Residents of the SSEFPZ living outside the Secured Area can enter and consume any quantity of
consumption items in hotels and restaurants within the Secured Area. However, these residents can
purchase and bring out of the Secured Area to other parts of the Philippine territory consumer items worth
not exceeding US $100 per month per person. Only residents age 15 and over are entitled to this privilege.
 1.3 Filipinos not residing within the SSEFPZ can enter the Secured Area and consume any quantity of
consumption items in hotels and restaurants within the Secured Area. However, they can purchase and
bring out of the Secured Area to other parts of the Philippine territory consumer items worth not exceeding
US $200 per year per person. Only Filipinos age 15 and over are entitled to this privilege.[26]

A similar provision found in paragraph 5, Section 4(A) of BCDA Board Resolution No. 93-05-034 is also null and
void. Said Resolution applied the incentives given to the SSEZ under Republic Act No. 7227 to the CSEZ, which, as
aforestated, is without legal basis.

Having concluded earlier that the CSEZ is excluded from the tax and duty-free incentives provided under Republic Act
No. 7227, this Court will resolve the remaining arguments only with regard to the operations of the SSEZ. Thus, the
assailed issuance that will be discussed is solely Executive Order No. 97-A, since it is the only one among the three
questioned issuances which pertains to the SSEZ.

Equal Protection of the Laws

Petitioners argue that the assailed issuance (Executive Order No. 97-A) is violative of their right to equal protection of
the laws, as enshrined in Section 1, Article III of the Constitution. To support this argument, they assert that private
respondents operating inside the SSEZ are not different from the retail establishments located outside, the products sold
being essentially the same. The only distinction, they claim, lies in the products variety and source, and the fact that
private respondents import their items tax-free, to the prejudice of the retailers and manufacturers located outside the
zone.

Petitioners contention cannot be sustained. It is an established principle of constitutional law that the guaranty of the
equal protection of the laws is not violated by a legislation based on a reasonable classification.[27] Classification, to
be valid, must (1) rest on substantial distinction, (2) be germane to the purpose of the law, (3) not be limited to existing
conditions only, and (4) apply equally to all members of the same class.[28]

Applying the foregoing test to the present case, this Court finds no violation of the right to equal protection of the laws.
First, contrary to petitioners claim, substantial distinctions lie between the establishments inside and outside the zone,
justifying the difference in their treatment. In Tiu v. Court of Appeals,[29] the constitutionality of Executive Order No.
97-A was challenged for being violative of the equal protection clause. In that case, petitioners claimed that Executive
Order No. 97-A was discriminatory in confining the application of Republic Act No. 7227 within a secured area of the
SSEZ, to the exclusion of those outside but are, nevertheless, still within the economic zone.

Upholding the constitutionality of Executive Order No. 97-A, this Court therein found substantial differences between
the retailers inside and outside the secured area, thereby justifying a valid and reasonable classification:

Certainly, there are substantial differences between the big investors who are being lured to establish and operate their
industries in the so-called secured area and the present business operators outside the area. On the one hand, we are
talking of billion-peso investments and thousands of new jobs. On the other hand, definitely none of such magnitude. In
the first, the economic impact will be national; in the second, only local. Even more important, at this time the business
activities outside the secured area are not likely to have any impact in achieving the purpose of the law, which is to turn
the former military base to productive use for the benefit of the Philippine economy. There is, then, hardly any
reasonable basis to extend to them the benefits and incentives accorded in R.A. 7227. Additionally, as the Court of
Appeals pointed out, it will be easier to manage and monitor the activities within the secured area, which is already
fenced off, to prevent fraudulent importation of merchandise or smuggling.

It is well-settled that the equal-protection guarantee does not require territorial uniformity of laws. As long as there are
actual and material differences between territories, there is no violation of the constitutional clause. And of course,
anyone, including the petitioners, possessing the requisite investment capital can always avail of the same benefits by
channeling his or her resources or business operations into the fenced-off free port zone.[30]

The Court in Tiu found real and substantial distinctions between residents within the secured area and those living
within the economic zone but outside the fenced-off area. Similarly, real and substantial differences exist between the
establishments herein involved. A significant distinction between the two groups is that enterprises outside the zones
maintain their businesses within Philippine customs territory, while private respondents and the other duly-registered
zone enterprises operate within the so-called separate customs territory. To grant the same tax incentives given to
enterprises within the zones to businesses operating outside the zones, as petitioners insist, would clearly defeat the
statutes intent to carve a territory out of the military reservations in Subic Bay where free flow of goods and capital is
maintained.

The classification is germane to the purpose of Republic Act No. 7227. As held in Tiu, the real concern of Republic Act
No. 7227 is to convert the lands formerly occupied by the US military bases into economic or industrial areas. In
furtherance of such objective, Congress deemed it necessary to extend economic incentives to the establishments within
the zone to attract and encourage foreign and local investors. This is the very rationale behind Republic Act No. 7227
and other similar special economic zone laws which grant a complete package of tax incentives and other benefits.

The classification, moreover, is not limited to the existing conditions when the law was promulgated, but to future
conditions as well, inasmuch as the law envisioned the former military reservation to ultimately develop into a self-
sustaining investment center.

And, lastly, the classification applies equally to all retailers found within the secured area. As ruled in Tiu, the
individuals and businesses within the secured area, being in like circumstances or contributing directly to the
achievement of the end purpose of the law, are not categorized further. They are all similarly treated, both in privileges
granted and in obligations required.

With all the four requisites for a reasonable classification present, there is no ground to invalidate Executive Order No.
97-A for being violative of the equal protection clause.

Prohibition against Unfair Competition

and Practices in Restraint of Trade

Petitioners next argue that the grant of special tax exemptions and privileges gave the private respondents undue
advantage over local enterprises which do not operate inside the SSEZ, thereby creating unfair competition in violation
of the constitutional prohibition against unfair competition and practices in restraint of trade.

The argument is without merit. Just how the assailed issuance is violative of the prohibition against unfair competition
and practices in restraint of trade is not clearly explained in the petition. Republic Act No. 7227, and consequently
Executive Order No. 97-A, cannot be said to be distinctively arbitrary against the welfare of businesses outside the
zones. The mere fact that incentives and privileges are granted to certain enterprises to the exclusion of others does not
render the issuance unconstitutional for espousing unfair competition. Said constitutional prohibition cannot hinder the
Legislature from using tax incentives as a tool to pursue its policies.

Suffice it to say that Congress had justifiable reasons in granting incentives to the private respondents, in accordance
with Republic Act No. 7227s policy of developing the SSEZ into a self-sustaining entity that will generate employment
and attract foreign and local investment. If petitioners had wanted to avoid any alleged unfavorable consequences on
their profits, they should upgrade their standards of quality so as to effectively compete in the market. In the alternative,
if petitioners really wanted the preferential treatment accorded to the private respondents, they could have opted to
register with SSEZ in order to operate within the special economic zone.

Preferential Use of Filipino Labor, Domestic Materials

and Locally Produced Goods

Lastly, petitioners claim that the questioned issuance (Executive Order No. 97-A) openly violated the State policy of
promoting the preferential use of Filipino labor, domestic materials and locally produced goods and adopting measures
to help make them competitive.

Again, the argument lacks merit. This Court notes that petitioners failed to substantiate their sweeping conclusion that
the issuance has violated the State policy of giving preference to Filipino goods and labor. The mere fact that said
issuance authorizes the importation and trade of foreign goods does not suffice to declare it unconstitutional on this
ground.

Petitioners cite Manila Prince Hotel v. GSIS[31] which, however, does not apply. That case dealt with the policy
enunciated under the second paragraph of Section 10, Article XII of the Constitution,[32] applicable to the grant of
rights, privileges, and concessions covering the national economy and patrimony, which is different from the policy
invoked in this petition, specifically that of giving preference to Filipino materials and labor found under Section 12 of
the same Article of the Constitution. (Emphasis supplied).

In Taada v. Angara,[33] this Court elaborated on the meaning of Section 12, Article XII of the Constitution in this
wise:

[W]hile the Constitution indeed mandates a bias in favor of Filipino goods, services, labor and enterprises, at the same
time, it recognizes the need for business exchange with the rest of the world on the bases of equality and reciprocity
and limits protection of Filipino enterprises only against foreign competition and trade practices that are unfair. In other
words, the Constitution did not intend to pursue an isolationist policy. It did not shut out foreign investments, goods
and services in the development of the Philippine economy. While the Constitution does not encourage the unlimited
entry of foreign goods, services and investments into the country, it does not prohibit them either. In fact, it allows an
exchange on the basis of equality and reciprocity, frowning only on foreign competition that is unfair.[34]

This Court notes that the Executive Department, with its subsequent issuance of Executive Order Nos. 444 and 303, has
provided certain measures to prevent unfair competition. In particular, Executive Order Nos. 444 and 303 have
restricted the special shopping privileges to certain individuals.[35] Executive Order No. 303 has limited the range of
items that may be sold in the duty-free outlets,[36] and imposed sanctions to curb abuses of duty-free privileges.[37]
With these measures, this Court finds no reason to strike down Executive Order No. 97-A for allegedly being
prejudicial to Filipino labor, domestic materials and locally produced goods.

WHEREFORE, the petition is PARTLY GRANTED. Section 5 of Executive Order No. 80 and Section 4 of BCDA
Board Resolution No. 93-05-034 are hereby declared NULL and VOID and are accordingly declared of no legal force
and effect. Respondents are hereby enjoined from implementing the aforesaid void provisions. All portions of
Executive Order No. 97-A are valid and effective, except the second sentences in paragraphs 1.2 and 1.3 of said
Executive Order, which are hereby declared INVALID.

No costs.

SO ORDERED.

G.R. No. 75713 October 2, 1989

PHILIPPINE COCONUT PRODUCERS FEDERATION, INC., (COCOFED), MARIA CLARA L.

LOBREGAT, BIENVENIDO A. MARQUEZ, SR., MANUEL J. LASERNA, JR., DOMINGO P.

ESPINA, CELESTINO B. SABATE, JOSE A. GOMEZ, EDUARDO U. ESCUETA, MANUEL V.

DEL ROSARIO, SULPICIO G. GRANADA, INAKI R. MENDEZONA, JOSE R. ELEAZER, JR.,

JOSE REYNALDO V. MORENTE, ELADIO I. CHATTO, COCONUT INVESTMENT COMPANY,

INC., SERGIO R. RIGODON, SPOUSES MANUEL AND CONCEPCION UTZURRUM,

represented by MANUEL M. UTZURRUM, JR., MAXIMO M. PEREZ, RAUL ANTONIO Z.

UNSON, JUSTO C. RUBI, RODOLFO Z. SALVACION, PAZ F. ABILA, JESUS 0. SALVAN,

TEODORICO R. RANERA, CRISPULO M. PIONILLA, ROSARIO P. MERTO, ISABEL R.

ALVAREZ, GREGORIO L. ANTENOR, EDILBERTO CONTRERAS, REYNALDO R. LADLAD,

VENANCIO R. PINON, LUIS A. NEGRE, ANASTACIO S. NIERE, FRANCISCO R. BINABAY,

JAMITO A. DAPULA, ROSENDO M. ABARRENTOS, RAUL M. ALEGRE, AGUSTIN C. IBAL,

ROGELIO A. DELA CRUZ, GREGORIO V. MERCADO, and All other coconut farmers

similarly situated, petitioners,

vs.

PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, HON. JOVITO R. SALONGA,

HON. RAMON DIAZ, HON. RAUL DAZA, HON. MARY CONCEPCION BAUTISTA and HON.

QUINTIN DOROMAL, respondents, THE PHILIPPINE COCONUT AUTHORITY, intervenor.

Jose D. Valmores, Reynaldo A. Ruiz, Manuel J. Laserna, Jr. and Ramon C. Malinao for

petitioners.

Agcaoili and Associates for movant.

NARVASA, J.:

The petition for certiorari and prohibition with preliminary injunction at bar seeks the annulment of

the sequestration and other orders issued by the Presidential Commission on Good Government

PCGG)1 against petitioner Philippine Coconut Producers Federation, Inc. (COCOFED) and

various other industrial and commercial enterprises set up ostensibly for purposes concerned with

the development of the coconut industry and the welfare of those involved in or served by it. These

agencies or enterprises were organized and financed with revenues derived from coconut levies

imposed under a succession of laws of the late dictatorship and are alleged to have been

thereafter used as conduits to perpetrate "the most stupendous malversation of public funds in

the annals of our history," as the PCGG puts it, 2 with deposed President Ferdinand Marcos and

his cronies as the suspected authors and chief beneficiaries of the resulting "coconut industry

monopoly.

The action is denominated a class suit of the COCOFED, a private national association of coconut

producers which by legal mandate receives allocations from the coconut levy funds to finance its

operating expenses and projects; the Coconut Investment Company (CIC), the first government

corporation created to administer the coconut levy funds (as will later be explained in some detail);
and individual petitioners Maria Clara Lobregat and some 37 other persons, all claiming to be

either coconut farmers, coconut workers or stockholders of the sequestered companies, bringing

suit for themselves and in representation of "the more than one million coconut farmers who are

similarly situated" upon a claim of private interest in the sequestered assets and properties.

The COCONUT LEVY FUNDS:

The sequestration of the corporations and the other acts complained of were undertaken by the

PCGG preparatory to the filing of suit in the Sandiganbayan against Marcos and his associates

for the illicit conversion of the coconut levy funds, purportedly channeled through the COCOFED

and the other sequestered businesses, into private pelf. These funds fall into four general

classes, viz.: (a) the Coconut Investment Fund created under R.A. 6260 (effective June 19, 1971);

(b) the Coconut Consumers Stabilization Fund created under PD 276 (effective August 20, 1973);

(c) the Coconut Industry Development Fund created under PD 582 (effective November 14,1974);

and (d) the Coconut Industry Stabilization Fund created under P.D. 1841 (effective October 2,

1981).

The Coconut Investment Fund (CIF):

The Coconut Investment Fund, or CIF, was put up in 1971 by R.A. 6260 which declared it to be

the national policy to accelerate the development of the coconut industry through the provision of

adequate medium and long term financing for capital investment in the industry.3 A levy of P 0.55

was imposed on the first domestic sale of every 100 kilograms of copra or equivalent coconut

product,4

fifty centavos (P 0. 50) of which accrued to the CIF. The Philippine Coconut

Administration (or PHILCOA), 5

received three centavos (P 0.03)6 of the five remaining, and the

balance was placed "at the disposition of the recognized national association of coconut

producers with the largest x x membership"7

- which association was declared by PHILCOA 8

to

be petitioner COCOFED.

The CIF was to be used exclusively to pay for the Philippine Government's subscription to the

capital stock 9 of the Coconut Investment Company (CIC), a corporation with a capitalization of P

100,000,000.00 created by the statute to administer the Fund, as has already been stated, and

to invest its capital in financing "agricultural, industrial or other productive (coconut) enterprises"

qualified under the terms of the statute to apply for loans with the CIC.10 The State was to initially

subscribe to CIC's capital stock "for and on behalf of the coconut farmers," to whom such shares

were supposed to be transferred "upon full payment (with the collections on the levy) of the

authorized capital stock x x or upon termination of a ten-year period from the start of the collection

of the levy x x, whichever comes first."11 The scheme, in short, called for the use of the CIF-funds

collected mainly from coconut farmers-to pay for the CIC shares of stock to be subscribed by the

Government and held by it until the levy was lifted, whereupon the Government was to "convert"

the receipts issued to the farmers (as evidence of payment of the levy) "into shares of stock"-this

time in the farmers' names in the new, private corporation to be formed by them at such time,

conformably with the provisions of the law. 12

The levy imposed by R.A. 6260 was collected from 1972 to 1982.

The Coconut Consumers Stabilization Fund (CCSF)

P.D. 276 established a second fund on August 20,1973, barely a year after the creation of the

CIF. The decree imposed a "Stabilization Fund Levy" of fifteen pesos (P 15.00) on the first sale

of every 100 kilograms of copra resecada or equivalent product.13 The revenues were to be

credited to the Coconut Stabilization Fund (CCSF)14Which was to be used to subsidize the sale

of coconut-based products at prices set by the Price Control Council, in order to stabilize the price

of edible oil and other coconut oil-based products for the benefit of consumers 15 The levy was to
be collected for only one year.16 The CCSF however became a permanent fund under PD 414.17

The Coconut Industry Development Fund (CIDF):

On November 14, 1974, PD 582 was promulgated setting up yet another "permanent fund ... (this

time to) finance the establishment, operation and maintenance of a hybrid coconut seednut farm

... (and the implementation of) a nationwide coconut replanting program" "using precocious high-

yielding hybrid seednuts x x to (be) distribute(d), ... free, to coconut farmers." 18 The fund was

denominated the Coconut Industry Development Fund, or the CIDF. Its initial capital of P100

million was to be paid from the CCSF, and in addition to this, the PCA was directed to thereafter

remit to the fund "an amount equal to at least twenty centavos (PO.20) per kilogram of copra

resecada or its equivalent out of its current collections of the coconut consumers stabilization

levy." 19 The CIDF was assured of continued contribution from the permanent levy in the same

amount deemed to be "automatically imposed" in the event of the lifting of the Stabilization Fund

Levy.20

The Coconut Industry Investment Fund (CIIF)

The various laws relating to the coconut industry were codified in 1976; promulgated on October

21 of that year was PD 961 or the "Coconut Industry Code," which later came to be known as the

"Revised Coconut Industry Code" upon its amendment by PD 1468, effective June 11, 1978. The

Code provided for the continued enforcement of the Stabilization Fund Levy imposed by PD 276

and for the use of the CCSF and the CIDF for substantially the same purposes specified by the

enactments ordaining their creation.

A new provision was however inserted in the Code, authorizing the use of the balance of the CIDF

not needed to finance the replanting program and other authorized projects, for the acquisition of

"shares of stock in corporations organized for the purpose of engaging in the establishment and

operation of industries, .. commercial activities and other allied business undertakings relating to
coconut and other palm oil indust(ries)."21 From this fund thus created, the Coconut Industry

Investment Fund or the CIIF, were purchased the shares of stock in what have come to be known

as the "CIIF companies the sequestered corporations into which said CIIF (Coconut Industry

Investment Fund) was heavily invested after its creation.

The Coconut Industry Stabilization Fund (CISF): (Formerly CCSF)

The collection of the CCSF and the CIDF was suspended for a time in virtue of PD

1699.22 However, on October 2, 1981, PD 1841 was issued reviving the levies and renaming the

CCSF the Coconut Industry Stabilization Fund, or the CISF, to which accrued the new collections.

The impost was in the amount of P50.00 for every 100 kilos of copra resecada or equivalent

product delivered to exporters and other copra users. The funds collected were to be apportioned

among the CIDF,23 the COCOFED,24 the PCA,25 and the "bank acquired for the benefit of the

coconut farmers under PD 755" referring to the United Coconut Planters Bank or the UCPB.26

The AGENCIES INVOLVED:

As may be observed, three agencies played key roles in the collection, management, investment

and use of the coconut levy funds: (a) the Philippine Coconut Authority (PCA), formerly the

Philippine Coconut Administration or the PHILCOA; (b) the COCOFED; and (c) the UCPB.

Charged with the duty to "receive and administer the funds provided by law,"27 the Philippine

Coconut Authority or the PCA was created on June 30, 1973 by P.D. 232 to replace and assume

the functions of (1) the Philippine Coconut Administration or PHILCOA (which had been

established in 1954), (2) the Coconut Coordinating Council (CCC), and (3) the Philippine Coconut

Research Institute(PHILCORIN). By virtue of the Decree, the PCA took over the collection of the

CIF Levy under RA 6260 in 1973, while subsequent statutes, to wit, PD 276 (in relation to PD

414), PD 582, and PD 1841, empowered it specifically to manage the CCSF, the CIDF, and the

CISF, from the time of their creation. Under the laws just mentioned, the PCA, as the government

arm that "formulate(s) x x (the) general program of development for the coconut x x and palm oil

indust(ries)" 28 is allotted a share in the funds kept in its trust. Its governing board is composed of
members coming from the public and private sectors, among them representatives of

COCOFED.29

The Philippine Coconut Producers Federation, Inc. or the COCOFED, as the private national

association of coconut producers certified in 1971 by the PHILCOA as having the largest

membership among such producers,30 receives substantial portions of the coconut funds to

finance its operating expenses and socio-economic projects. R.A. 6260 entrusted it with the task

of maintaining "continuing liaison with the different sectors of the industry, the government and its

own mass base." 31 Its president sits on the governing board of the PCA and on the Philippine

Coconut Consumers Stabilization Committee, the agency assisting the PCA in the administration

of the CCSF. It is also represented in the Board of Directors of the CIC and of two (2) CIIF

companies COCOMARK (the COCOFED Marketing Corporation) and COCOLIFE (the United

Coconut Planters' Life Insurance Co.).

The United Coconut Planters Bank (or the UCPB) is a commercial bank acquired "for the benefit

of the coconut farmers" 32 with the use of the Coconut Consumers Stabilization Fund (CCSF) in

virtue of P.D. 755, promulgated on July 29,1975. The Decree authorized the Bank to provide the

intended beneficiaries with "readily available credit facilities at preferential rates." 33 It also

authorized the distribution of the Bank's shares of stock, free, to the coconut farmers; and some

1,405,366 purported recipients have been listed as UCPB stockholders as of April 10, 1986.34

The UCPB was thereafter empowered by PD 1468 to "(make) investments for the benefit of the

coconut farmers"35using that part of the CIDF referred to as the CIIF. Thus were organized the

"CIIF companies" subject of the sequestration orders herein assailed.36 As in the case of the

shares of stock in the UCPB, the law provided for the "equitable distribution" to the coconut

farmers, free, of the investments made in the CIIF companies.37 Among the corporations in which

the UCPB has come to have substantial shareholdings are the COCOFED Marketing Corporation

(COCOMARK), United Coconut Planters' Life Insurance (COCOLIFE) GRANEX, ILICOCO,

Southern Island Oil Mill, Legaspi Oil of Davao City and of Cagayan de Oro City, Anchor Insurance

Brokerage, Inc., Southern Luzon Coconut Oil Mills, and San Pablo Oil Manufacturing Co., Inc.
Some of these corporations in turn acquired UCPB shares of stock as well as shareholdings in

the San Miguel Corporation.

The SEQUESTRATION PROCEEDINGS:

On March 19, 1986, the Presidential Commission on Good Government (PCGG) sequestered

CIIF companies GRANEX, ILICOCO, Southern Island Oil Mill, Legaspi Oil of Davao City, and

Legaspi Oil of Cagayan de Oro City. Also sequestered shortly thereafter, on April 21, 1986, were

Anchor Insurance Brokerage, Inc., Southern Luzon Coconut Oil Mills and the San Pablo Oil

Manufacturing Co., Inc. Shares of stock in the UCPB registered in the names of these and other

CIIF companies, and later those issued to 1,405,366 purported coconut farmers-stockholders

were likewise sequestered, as were the 33.1 million shares of stock held by fourteen (14) CIIF

companies in the San Miguel Corporation.

Next placed under sequestration on July 8,1986 was the COCOFED. Its bank accounts as well

as those of CIIF companies COCOLIFE and COCOMARK, of COCOFED president Maria Clara

Lobregat, and of COCOFED directors Inaki Mendezona and Eladio Chatto, were frozen. On May

30, 1988, PCGG appointed a 15-man Board of Directors for COCOFED, replacing the

incumbents. Management teams for the CIC and COCOMARK were deputized the day after,

relieving Maria Clara Lobregat and Manuel Agcaoili as president and vice-president, respectively,

of both corporations, and Vicente Valmores as corporate secretary of the CIC. Various other

orders pertaining to the CIC, the CIIF companies, COCOFED, and the UCPB were also

afterwards issued and implemented, with a view to conserving their assets pending the

government's investigation into the suspected plunder of the coconut levy funds by former

President Ferdinand Marcos and his associates and cronies.

PETITIONERS' SUBMITTALS

The instant petition was filed on September 3, 1986 to assail the foregoing directives and acts.

The petitioners posit that:

1) the PCGG has no jurisdiction over the sequestered properties as the

powersconferred upon it by Executive Orders Numbered 1, 2 and 14 extend only

to ill-gotten wealth of "former President Ferdinand E. Marcos and/or his wife,

Imelda Romualdez Marcos" or "their close relatives, subordinates, business

associates, dummies, agents, or nominees," 38 and not to the private properties of

the coconut farmers and the petitioners, who do not fall under any of the classes

of persons specified under the Orders;

2) the sequestered properties are not ill-gotten wealth of the petitioners whose

ownership of the shares of stock in the COCOFED, the CIIF companies, and the

UCPB resulted from lawful disbursements of the coconut levy fund; and

3) the sequestration of the petitioners' private properties is a gross abuse of

prosecutorial discretion on the part of PCGG and, corollarily, rendered

enforcement of E.O.'s 1, 2 and 14 as against them unconstitutional and violative

of the Bill of Rights.

PCA INTERVENTION

A petition-in-intervention presented by the PCA was admitted by the Court by Resolution dated

May 24, 1988.

THE PCGG POSITION

The Solicitor General, for the PCGG, submits that the funds collected from the coconut levy are

public funds which no amount of pronouncements to the contrary-by decree or any other

presidential issuance can convert into private money; that in the light of the report of the

Commission on Audit of its examination of the funds made after the unceremonious deposal of

President Marcos, to the effect that the funds were misappropriated and squandered by the latter,

his cronies and the leaders of the coconut industry, it is the duty of PCGG to recover the same

and, pending recovery proceedings, to make use of its power of sequestration and other remedies

conferred by Executive Orders 1, 2 and 14. In his view, the so-called "more than one million
coconut farmers" do not own the coconut levy funds or the assets acquired therewith.

1. The question of the validity of PCGG sequestration and freeze orders as

provisional measures to collect and conserve the assets believed to be ill-gotten

wealth has been laid to rest in BASECO vs. PCGG (150 SCRA 181) where this

Court held that such orders are not confiscatory but only preservative in character,

not designed to effect a confiscation of, but only to conserve properties believed

to be ill-gotten wealth of the ex-president, his family and associates, and to prevent

their concealment, dissipation, or transfer, pending the determination of their true

ownership.

Nor may it be gainsaid that pending the institution of the suits for the recovery of

such ill-gotten wealth as the evidence at hand may reveal, there is an obvious and

imperative need for preliminary provisional measures to prevent the concealment,

disappearance, destruction, dissipation, or loss of the assets and properties

subject of the suits, or to restrain or foil acts that may render moot and academic,

or effectively hamper, delay, or negate efforts to recover the same.

xxx

To answer this need, the law has prescribed three (3) provisional remedies. These

are: (1) sequestration; (2) freeze orders; and (3) provisional takeover. (at p. 208)

The PCGG exercised the powers conferred upon it by Executive Orders Numbered 1, 2 and 14

on the basis of evidence in its possession which it deemed sufficient to show, prima facie, that

former President Marcos, Mr. Eduardo Cojuangco, Jr., the COCOFED and its national leaders,

collaborated with each other to perpetrate the "systematic plunder" of the funds generated by the

coconut levy. That preliminary determination finds support in the documents and evidence relative

thereto. Reports, for example, from the Commission on Audit (COA) which audited the funds after

the February 1986 Revolution tend to show that:

(1) of the funds allocated to COCOFED, some P20 million were delivered to Mrs.

Imelda R. Marcos for the Imelda Romualdez Marcos Scholarship Program of which

no accounting has been made;

(2) COCOFED purchased an aircraft at a total cost of P 11,849,071.29;

(3) a COCOFED disbursement of P 23 million for the account of the Census

Committee which undertook the survey of coconut farmers to determine other

farmers entitled to the unissued shares of UCPB, was under-reimbursed by P

3,584,826.36;

(4) cash advances in hundreds of thousands of pesos granted by COCOMARK to

COCOFED officials Jose Reynaldo Morente, Inaki Mendezona, Bienvenido

Marquez and Maria Clara Lobregat were unliquidated;

(5) COCOMARK made disbursements for cash advances for travel and

transportation expenses to its directors who are also directors of COCOFED

without supporting documents.

The investigation by the PCGG of the funds supposed to havebeen invested in the UCPB on

behalf of the coconut farmers, also reveal that UCPB shares appearing in the UCPB books as

issued to 1,405,366 coconut farmers are not in fact owned by the said persons because a large

number of them sold their stock to national and local officials of COCOFED at the latter's initiative;

and documents found in Malacanang in the wake of the February 1986 people's revolution tend

to show that Eduardo Cojuangco, Jr., apart from owning his own shares in UCPB, also "fronted"

for the shares of Mr. Marcos in that bank.

As to the coconut levy funds invested in the CIIF companies for the benefit of coconut farmers,

COA findings adverted to by the PCGG disclose that said funds were invested in companies most

of which were or became vehicles to effectuate their misuse. The United Coconut Oil Mills, Inc.

(UNICOM), a CIIF funded company, for example, appears to have spent millions of pesos to
acquire non-operating and unprofitable coconut oil mills owned by persons close to the Marcoses

that P840 million of the CIDF were siphoned off to Agricultural Investors, Inc., a corporation owned

and controlled by Eduardo Cojuangco, Jr., which has a paid-up capital of only P100,000; and that

P41.9 million worth of seednuts equivalent to 24.48% of the total purchases of UCPB using CIDF

from 1979 to 1982 had not been accounted for. Reports were also cited showing that only 75.52%

of the total seednuts purchased had been distributed to the participants of the replanting program.

The PCGG also claims to have in its possession evidence of other instances of misuse or

misappropriation of the coconut levy funds attributable to the petitioners.

The petitioners deny the PCGG's postulations and assertions.

It is of course not for this Court to pass upon the factual issues thus raised. That function pertains

to the Sandiganbayan in the first instance. For purposes of this proceeding, all that the Court

needs to determine is whether or not there is prima facie justification for the sequestration ordered

by the PCGG. The Court is satisfied that there is. The cited incidents, given the public character

of the coconut levy funds, place petitioners COCOFED and its leaders and officials, at least prima

facie, squarely within the purview of Executive Orders Nos. 1, 2 and 14, as construed and applied

in BASECO, to wit:

1. that ill-gotten properties (were) amassed by the leaders and supporters of the

previous regime;

a. more particularly, that (i)ll-gotten wealth was accumulated by former President

Ferdinand E. Marcos, his immediate family, relatives, subordinates and close

associates, x x located in the Philippines or abroad, x x (and) business enterprises

and entities (came to be) owned or controlled by them, during x x (the Marcos)

administration, directly or through nominees, by taking undue advantage of their

public office and using their powers, authority, influence, connections or

relationships
b. otherwise stated, that 'there are assets and properties purportedly pertaining to

former President Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez

Marcos, their close relatives, subordinates, business associates, dummies, agents

or nominees which had been or were acquired by them directly or indirectly,

through or as a result of the improper or illegal use of funds or properties owned

by the Government of the Philippines or any of its branches, instrumentalities,

enterprises, banks or financial institutions, or by taking undue advantage of their

office, authority, influence, connections or relationship, resulting in their unjust

enrichment and causing grave damage and prejudice to the Filipino people and

the Republic of the Philippines';

c. that 'said assets and properties are in the form of bank accounts, deposits, trust

accounts, shares of stocks, buildings, shopping centers, condominiums,

mansions, residences, estates, and other kinds of real and personal properties in

the Philippines and in various countries of the world' ...39

2. The petitioners' claim that the assets acquired with the coconut levy funds are

privately owned by the coconut farmers is founded on certain provisions of law, to

wit:

Sec. 7. Incorporation as a private entity under Act Numbered One Thousand Four

Hundred Fifty-Nine, as amended. -Upon full payment of the authorized capital

stock, as evidenced by receipts issued for levies paid, or upon termination of a ten-

year period from the start of the collection of the levy as provided in Section eight

hereof, whichever comes first, the shares of stock held by the Philippine

Government for and in behalf of the coconut farmers shall be transferred, in

accordance with such rules, regulations and procedures as the Company shall

prescribe and promulgate, to and in the name of the coconut farmers who shall
then incorporate as a private entity under Act Numbered One Thousand Four

Hundred Fifty-Nine, as amended.... (Sec. 7, Republic Act 6260)

and

The Coconut Consumers Stabilization Fund and the Coconut Industry

Development Fund as well as all disbursements of said Funds for the benefit of

the coconut farmers x x shall not be construed or interpreted .. as special and/or

fiduciary funds, or as part of the general funds of the national government within

the contemplation of P.D. 711; nor as subsidy, donation, levy government funded

investment, or government share within the contemplation of PD 898, the intention

being that said fund and the disbursements thereof as herein authorized for the

benefit of the coconut farmers shall be owned by them in their private capacities

.... (Section 5, Article III, P.D. 1468)

The proposition is open to question, to say the least. Indeed, the Solicitor General suggests quite

strongly that the laws operating or purporting to convert the coconut levy funds into private funds,

are a transgression of the basic limitations for the licit exercise of the state's taxing and police

powers, and that certain provisions of said laws are merely clever strategems to keep away

government audit in order to facilitate misappropriation of the funds in question.

The utilization and proper management of the coconut levy funds, raised as they were by the

State's police and taxing powers, are certainly the concern of the Government. It cannot be denied

that it was the welfare of the entire nation that provided the prime moving factor for the imposition

of the levy. It cannot be denied that the coconut industry is one of the major industries supporting

the national economy. It is, therefore, the State's concern to make it a strong and secure source

not only of the livelihood of a significant segment of the population but also of export earnings the
sustained growth of which is one of the imperatives of economic stability. The coconut levy funds

are clearly affected with public interest. Until it is demonstrated satisfactorily that they have

legitimately become private funds, they must prima facie and by reason of the circumstances in

which they were raised and accumulated be accounted subject to the measures prescribed in

E.O. Nos. 1, 2, and 14 to prevent their concealment, dissipation, etc., which measures include

the sequestration and other orders of the PCGG complained of.

3. The incidents concerning the voting of the sequestered shares, the COCOFED

elections, and the replacement of directors, being matters incidental to the

sequestration, should be addressed to the Sandiganbayan in accordance with the

doctrine laid down in PCGG vs. Pena, 159 SCRA 556, reiterated in G.R. No.

74910, Andres Soriano III vs. Hon. Manuel Yuzon; G.R. No. 75075, Eduardo

Cojuangco, Jr. vs. Securities and Exchange Commission; G.R. No. 75094, Clifton

Ganay vs. Presidential Commission on Good Government; G.R. No. 76397, Board

of Directors of San Miguel Corporation vs. Securities and Exchange Commission;

G.R. No. 79459, Eduardo Cojuangco, Jr. vs. Hon. Pedro N. Laggui; G.R. No.

79520, Neptunia Corporation, Ltd. vs. Presidential Commission on Good

Government, August 10, 1988.

In view of the foregoing, the petition and the petition-in-intervention are hereby DISMISSED.

Costs against petitioners.

SO ORDERED.