G.R. No. 156052             March 7, 2007

SOCIAL JUSTICE SOCIETY (SJS), VLADIMIR ALARIQUE T. CABIGAO, and BONIFACIO S. TUMBOKON,Petitioners, vs.HON. JOSE L. ATIENZA, JR., in his capacity as Mayor of the City of Manila, Respondent.

D E C I S I O N

CORONA, J.:

In this original petition for mandamus,1 petitioners Social Justice Society (SJS), Vladimir Alarique T. Cabigao and Bonifacio S. Tumbokon seek to compel respondent Hon. Jose L. Atienza, Jr., mayor of the City of Manila, to enforce Ordinance No. 8027.

The antecedents are as follows.

On November 20, 2001, the Sangguniang Panlungsod of Manila enacted Ordinance No. 8027.2 Respondent mayor approved the ordinance on November 28, 2001.3 It became effective on December 28, 2001, after its publication.4

Ordinance No. 8027 was enacted pursuant to the police power delegated to local government units, a principle described as the power inherent in a government to enact laws, within constitutional limits, to promote the order, safety, health, morals and general welfare of the society.5 This is evident from Sections 1 and 3 thereof which state:

SECTION 1. For the purpose of promoting sound urban planning and ensuring health, public safety, and general welfare of the residents of Pandacan and Sta. Ana as well as its adjoining areas, the land use of [those] portions of land bounded by the Pasig River in the north, PNR Railroad Track in the east, Beata St. in the south, Palumpong St. in the southwest, and Estero de Pancacan in the west[,] PNR Railroad in the northwest area, Estero de Pandacan in the [n]ortheast, Pasig River in the southeast and Dr. M.L. Carreon in the southwest. The area of Punta, Sta. Ana bounded by the Pasig River, Marcelino Obrero St., Mayo 28 St., and F. Manalo Street, are hereby reclassified from Industrial II to Commercial I.

xxx xxx xxx

SEC. 3. Owners or operators of industries and other businesses, the operation of which are no longer permitted under Section 1 hereof, are hereby given a period of six (6) months from the date of effectivity of this Ordinance within which to cease and desist from the operation of businesses which are hereby in consequence, disallowed.

Ordinance No. 8027 reclassified the area described therein from industrial to commercial and directed the owners and operators of businesses disallowed under Section 1 to cease and desist from operating their businesses within six months from the date of effectivity of the ordinance. Among the businesses situated in the area are the so-called "Pandacan Terminals" of the oil companies Caltex (Philippines), Inc., Petron Corporation and Pilipinas Shell Petroleum Corporation.

However, on June 26, 2002, the City of Manila and the Department of Energy (DOE) entered into a memorandum of understanding (MOU)6 with the oil companies in which they agreed that "the scaling down of the Pandacan Terminals [was] the most viable and practicable option." Under the MOU, the oil companies agreed to perform the following:

Section 1. - Consistent with the objectives stated above, the OIL COMPANIES shall, upon signing of this MOU, undertake a program to scale down the Pandacan Terminals which shall include, among others, the immediate removal/decommissioning process of TWENTY EIGHT (28) tanks starting with the LPG spheres and the commencing of works for the creation of safety buffer and green zones surrounding the Pandacan Terminals. xxx

Section 2. – Consistent with the scale-down program mentioned above, the OIL COMPANIES shall establish joint operations and management, including the operation of common, integrated and/or shared facilities, consistent with international and domestic technical, safety, environmental and economic considerations and standards. Consequently, the joint operations of the OIL COMPANIES in the Pandacan Terminals shall be limited to the common and integrated areas/facilities. A separate agreement covering the commercial and operational terms and conditions of the joint operations, shall be entered into by the OIL COMPANIES.

Section 3. - The development and maintenance of the safety and green buffer zones mentioned therein, which shall be taken from the properties of the OIL COMPANIES and not from the surrounding communities, shall be the sole responsibility of the OIL COMPANIES.

The City of Manila and the DOE, on the other hand, committed to do the following:

Section 1. - The City Mayor shall endorse to the City Council this MOU for its appropriate action with the view of implementing the spirit and intent thereof.

Section 2. - The City Mayor and the DOE shall, consistent with the spirit and intent of this MOU, enable the OIL COMPANIES to continuously operate in compliance with legal requirements, within the limited area resulting from the joint operations and the scale down program.

Section 3. - The DOE and the City Mayor shall monitor the OIL COMPANIES’ compliance with the provisions of this MOU.

Section 4. - The CITY OF MANILA and the national government shall protect the safety buffer and green zones and shall exert all efforts at preventing future occupation or encroachment into these areas by illegal settlers and other unauthorized parties.

The Sangguniang Panlungsod ratified the MOU in Resolution No. 97.7 In the same resolution, the Sangguniandeclared that the MOU was effective only for a period of six months starting July 25, 2002.8 Thereafter, on January 30, 2003, the Sanggunian adopted Resolution No. 139 extending the validity of Resolution No. 97 to April 30, 2003 and authorizing Mayor Atienza to issue special business permits to the oil companies. Resolution No. 13, s. 2003 also called for a reassessment of the ordinance.10

Meanwhile, petitioners filed this original action for mandamus on December 4, 2002 praying that Mayor Atienza be compelled to enforce Ordinance No. 8027 and order the immediate removal of the terminals of the oil companies.11

The issues raised by petitioners are as follows:

1. whether respondent has the mandatory legal duty to enforce Ordinance No. 8027 and order the removal of the Pandacan Terminals, and

2. whether the June 26, 2002 MOU and the resolutions ratifying it can amend or repeal Ordinance No. 8027.12

Petitioners contend that respondent has the mandatory legal duty, under Section 455 (b) (2) of the Local Government Code (RA 7160),13 to enforce Ordinance No. 8027 and order the removal of the Pandacan Terminals of the oil companies. Instead, he has allowed them to stay.

Respondent’s defense is that Ordinance No. 8027 has been superseded by the MOU and the resolutions.14However, he also confusingly argues that the ordinance and MOU are not inconsistent with each other and that the latter has not amended the former. He insists that the ordinance remains valid and in full force and effect and that the MOU did not in any way prevent him from enforcing and implementing it. He maintains that the MOU should be considered as a mere guideline for its full implementation.15

Under Rule 65, Section 316 of the Rules of Court, a petition for mandamus may be filed when any tribunal, corporation, board, officer or person unlawfully neglects the performance of an act which the law specifically enjoins as a duty resulting from an office, trust or station. Mandamus is an extraordinary writ that is employed to compel the performance, when refused, of a ministerial duty that is already imposed on the respondent and

there is no other plain, speedy and adequate remedy in the ordinary course of law. The petitioner should have a well-defined, clear and certain legal right to the performance of the act and it must be the clear and imperative duty of respondent to do the act required to be done.17

Mandamus will not issue to enforce a right, or to compel compliance with a duty, which is questionable or over which a substantial doubt exists. The principal function of the writ of mandamus is to command and to expedite, not to inquire and to adjudicate; thus, it is neither the office nor the aim of the writ to secure a legal right but to implement that which is already established. Unless the right to the relief sought is unclouded, mandamus will not issue.18

To support the assertion that petitioners have a clear legal right to the enforcement of the ordinance, petitioner SJS states that it is a political party registered with the Commission on Elections and has its offices in Manila. It claims to have many members who are residents of Manila. The other petitioners, Cabigao and Tumbokon, are allegedly residents of Manila.

We need not belabor this point. We have ruled in previous cases that when a mandamus proceeding concerns a public right and its object is to compel a public duty, the people who are interested in the execution of the laws are regarded as the real parties in interest and they need not show any specific interest. 19 Besides, as residents of Manila, petitioners have a direct interest in the enforcement of the city’s ordinances. Respondent never questioned the right of petitioners to institute this proceeding.

On the other hand, the Local Government Code imposes upon respondent the duty, as city mayor, to "enforce all laws and ordinances relative to the governance of the city.">20 One of these is Ordinance No. 8027. As the chief executive of the city, he has the duty to enforce Ordinance No. 8027 as long as it has not been repealed by theSanggunian or annulled by the courts.21 He has no other choice. It is his ministerial duty to do so. In Dimaporo v. Mitra, Jr.,22 we stated the reason for this:

These officers cannot refuse to perform their duty on the ground of an alleged invalidity of the statute imposing the duty. The reason for this is obvious. It might seriously hinder the transaction of public business if these officers were to be permitted in all cases to question the constitutionality of statutes and ordinances imposing duties upon them and which have not judicially been declared unconstitutional. Officers of the government from the highest to the lowest are creatures of the law and are bound to obey it.23

The question now is whether the MOU entered into by respondent with the oil companies and the subsequent resolutions passed by the Sanggunian have made the respondent’s duty to enforce Ordinance No. 8027 doubtful, unclear or uncertain. This is also connected to the second issue raised by petitioners, that is, whether the MOU and Resolution Nos. 97, s. 2002 and 13, s. 2003 of the Sanggunian can amend or repeal Ordinance No. 8027.

We need not resolve this issue. Assuming that the terms of the MOU were inconsistent with Ordinance No. 8027, the resolutions which ratified it and made it binding on the City of Manila expressly gave it full force and effect only until April 30, 2003. Thus, at present, there is nothing that legally hinders respondent from enforcing Ordinance No. 8027.24

Ordinance No. 8027 was enacted right after the Philippines, along with the rest of the world, witnessed the horror of the September 11, 2001 attack on the Twin Towers of the World Trade Center in New York City. The objective of the ordinance is to protect the residents of Manila from the catastrophic devastation that will surely occur in case of a terrorist attack25 on the Pandacan Terminals. No reason exists why such a protective measure should be delayed.

WHEREFORE, the petition is hereby GRANTED. Respondent Hon. Jose L. Atienza, Jr., as mayor of the City of Manila, is directed to immediately enforce Ordinance No. 8027.

SO ORDERED.

G.R. No. 170656             August 15, 2007

THE METROPOLITAN MANILA DEVELOPMENT AUTHORITY and BAYANI FERNANDO as Chairman of the Metropolitan Manila Development Authority, petitioners, vs.VIRON TRANSPORTATION CO., INC., respondent.

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

G.R. No. 170657             August 15, 2007

HON. ALBERTO G. ROMULO, Executive Secretary, the METROPOLITAN MANILA DEVELOPMENT AUTHORITY and BAYANI FERNANDO as Chairman of the Metropolitan Manila Development Authority,petitioners, vs.MENCORP TRANSPORTATION SYSTEM, INC., respondent.

D E C I S I O N

CARPIO MORALES, J.:

The following conditions in 1969, as observed by this Court:

Vehicles have increased in number. Traffic congestion has moved from bad to worse, from tolerable to critical. The number of people who use the thoroughfares has multiplied x x x,1

have remained unchecked and have reverberated to this day. Traffic jams continue to clog the streets of Metro Manila, bringing vehicles to a standstill at main road arteries during rush hour traffic and sapping people’s energies and patience in the process.

The present petition for review on certiorari, rooted in the traffic congestion problem, questions the authority of the Metropolitan Manila Development Authority (MMDA) to order the closure of provincial bus terminals along Epifanio de los Santos Avenue (EDSA) and major thoroughfares of Metro Manila.

Specifically challenged are two Orders issued by Judge Silvino T. Pampilo, Jr. of the Regional Trial Court (RTC) of Manila, Branch 26 in Civil Case Nos. 03-105850 and 03-106224.

The first assailed Order of September 8, 2005,2 which resolved a motion for reconsideration filed by herein respondents, declared Executive Order (E.O.) No. 179, hereafter referred to as the E.O., "unconstitutional as it constitutes an unreasonable exercise of police power." The second assailed Order of November 23, 20053 denied petitioners’ motion for reconsideration.

The following facts are not disputed:

President Gloria Macapagal Arroyo issued the E.O. on February 10, 2003, "Providing for the Establishment of Greater Manila Mass Transport System," the pertinent portions of which read:

WHEREAS, Metro Manila continues to be the center of employment opportunities, trade and commerce of the Greater Metro Manila area;

WHEREAS, the traffic situation in Metro Manila has affected the adjacent provinces of Bulacan, Cavite, Laguna, and Rizal, owing to the continued movement of residents and industries to more affordable and economically viable locations in these provinces;

WHEREAS, the Metropolitan Manila Development Authority (MMDA) is tasked to undertake measures to ease traffic congestion in Metro Manila and ensure the convenient and efficient travel of commuters within its jurisdiction;

WHEREAS, a primary cause of traffic congestion in Metro Manila has been the numerous buses plying the streets that impedes [sic] the flow of vehicles and commuters due to the inefficient connectivity of the different transport modes;

WHEREAS, the MMDA has recommended a plan to decongest traffic by eliminating the bus terminals now located along major Metro Manila thoroughfares and providing more convenient access to the mass transport system to the commuting public through the provision of mass transport terminal facilities   that would integrate the existing transport modes, namely the buses, the rail-based systems of the LRT, MRT and PNR and to facilitate and ensure efficient travel through the improved connectivity of the different transport modes;

WHEREAS, the national government must provide the necessary funding requirements to immediately implement and render operational these projects; and extent to MMDA such other assistance as may be warranted to ensure their expeditious prosecution.

NOW, THEREFORE, I, GLORIA MACAPAGAL-ARROYO, President of the Philippines, by virtue of the powers vested in me by law, do hereby order:

Section 1. THE PROJECT. – The project shall be identified as GREATER MANILA TRANSPORT SYSTEM Project.

Section 2. PROJECT OBJECTIVES. – In accordance with the plan proposed by MMDA, the project aims to develop four (4) interim intermodal mass transport terminals to integrate the different transport modes, as well as those that shall hereafter be developed, to serve the commuting public in the northwest, north, east, south, and southwest of Metro Manila. Initially, the project shall concentrate on immediately establishing the mass transport terminals for the north and south Metro Manila commuters as hereinafter described.

Section 3. PROJECT IMPLEMENTING AGENCY. – The Metropolitan Manila Development Authority (MMDA) , is hereby designated as the implementing Agency for the project . For this purpose, MMDA is directed to undertake such infrastructure development work as may be necessary and, thereafter, manage the project until it may be turned-over to more appropriate agencies, if found suitable and convenient. Specifically, MMDA shall have the following functions and responsibilities:

a) Cause the preparation of the Master Plan for the projects, including the designs and costing;

b) Coordinate the use of the land and/or properties needed for the project with the respective agencies and/or entities owning them;

c) Supervise and manage the construction of the necessary structures and facilities;

d) Execute such contracts or agreements as may be necessary, with the appropriate government agencies, entities, and/or private persons, in accordance with existing laws and pertinent regulations, to facilitate the implementation of the project;

e) Accept, manage and disburse such funds as may be necessary for the construction and/or implementation of the projects, in accordance with prevailing accounting and audit polices and practice in government.

f) Enlist the assistance of any national government agency, office or department, including local government units, government-owned or controlled corporations, as may be necessary;

g) Assign or hire the necessary personnel for the above purposes; and

h) Perform such other related functions as may be necessary to enable it to accomplish the objectives and purposes of this Executive Order.4 (Emphasis in the original; underscoring supplied)

As the above-quoted portions of the E.O. noted, the primary cause of traffic congestion in Metro Manila has been the numerous buses plying the streets and the inefficient connectivity of the different transport modes;5 and the MMDA had "recommended a plan to decongest traffic by eliminating the bus terminals now located along major Metro Manila thoroughfares and providing more and convenient access to the mass transport system   to the commuting public through the provision of mass transport terminal facilities"6 which plan is referred to under the E.O. as the Greater Manila Mass Transport System Project (the Project).

The E.O. thus designated the MMDA as the implementing agency for the Project.

Pursuant to the E.O., the Metro Manila Council (MMC), the governing board and policymaking body of the MMDA, issued Resolution No. 03-07 series of 20037 expressing full support of the Project. Recognizing the imperative to integrate the different transport modes via the establishment of common bus parking terminal areas, the MMC cited the need to remove the bus terminals located along major thoroughfares of Metro Manila.8

On February 24, 2003, Viron Transport Co., Inc. (Viron), a domestic corporation engaged in the business of public transportation with a provincial bus operation,9 filed a petition for declaratory relief10 before the RTC11 of Manila.

In its petition which was docketed as Civil Case No. 03-105850, Viron alleged that the MMDA, through Chairman Fernando, was "poised to issue a Circular, Memorandum or Order closing, or tantamount to closing, all provincial bus terminals along EDSA and in the whole of the Metropolis under the pretext of traffic regulation."12 This impending move, it stressed, would mean the closure of its bus terminal in Sampaloc, Manila and two others in Quezon City.

Alleging that the MMDA’s authority does not include the power to direct provincial bus operators to abandon their existing bus terminals to thus deprive them of the use of their property, Viron asked the court to construe the scope, extent and limitation of the power of the MMDA to regulate traffic under R.A. No. 7924, "An Act Creating the Metropolitan Manila Development Authority, Defining its Powers and Functions, Providing Funds Therefor and For Other Purposes."

Viron also asked for a ruling on whether the planned closure of provincial bus terminals would contravene the Public Service Act and related laws which mandate public utilities to provide and maintain their own terminals as a requisite for the privilege of operating as common carriers.13

Mencorp Transportation System, Inc. (Mencorp), another provincial bus operator, later filed a similar petition for declaratory relief14 against Executive Secretary Alberto G. Romulo and MMDA Chairman Fernando.

Mencorp asked the court to declare the E.O. unconstitutional and illegal for transgressing the possessory rights of owners and operators of public land transportation units over their respective terminals.

Averring that MMDA Chairman Fernando had begun to implement a plan to close and eliminate all provincial bus terminals along EDSA and in the whole of the metropolis and to transfer their operations to common bus terminals,15 Mencorp prayed for the issuance of a temporary restraining order (TRO) and/or writ of preliminary injunction to restrain the impending closure of its bus terminals which it was leasing at the corner of EDSA and New York Street in Cubao and at the intersection of Blumentritt, Laon Laan and Halcon Streets in Quezon City. The petition was docketed as Civil Case No. 03-106224 and was raffled to Branch 47 of the RTC of Manila.

Mencorp’s petition was consolidated on June 19, 2003 with Viron’s petition which was raffled to Branch 26 of the RTC, Manila.

Mencorp’s prayer for a TRO and/or writ of injunction was denied as was its application for the issuance of a preliminary injunction.16

In the Pre-Trial Order17 issued by the trial court, the issues were narrowed down to whether 1) the MMDA’s power to regulate traffic in Metro Manila included the power to direct provincial bus operators to abandon and close their duly established and existing bus terminals in order to conduct business in a common terminal; (2) the E.O. is consistent with the Public Service Act and the Constitution; and (3) provincial bus operators would be deprived of their real properties without due process of law should they be required to use the common bus terminals.

Upon the agreement of the parties, they filed their respective position papers in lieu of hearings.

By Decision18 of January 24, 2005, the trial court sustained the constitutionality and legality of the E.O. pursuant to R.A. No. 7924, which empowered the MMDA to administer Metro Manila’s basic services including those of transport and traffic management.

The trial court held that the E.O. was a valid exercise of the police power of the State as it satisfied the two tests of lawful subject matter and lawful means, hence, Viron’s and Mencorp’s property rights must yield to police power.

On the separate motions for reconsideration of Viron and Mencorp, the trial court, by Order of September 8, 2005, reversed its Decision, this time holding that the E.O. was "an unreasonable exercise of police power"; that the authority of the MMDA under Section (5)(e) of R.A. No. 7924 does not include the power to order the closure of Viron’s and Mencorp’s existing bus terminals; and that the E.O. is inconsistent with the provisions of the Public Service Act.

Petitioners’ motion for reconsideration was denied by Resolution of November 23, 2005.

Hence, this petition, which faults the trial court for failing to rule that: (1) the requisites of declaratory relief are not present, there being no justiciable controversy in Civil Case Nos. 03-105850 and 03-106224; and (2) the President has the authority to undertake or cause the implementation of the Project.19

Petitioners contend that there is no justiciable controversy in the cases for declaratory relief as nothing in the body of the E.O. mentions or orders the closure and elimination of bus terminals along the major thoroughfares of Metro Manila. Viron and Mencorp, they argue, failed to produce any letter or communication from the Executive Department apprising them of an immediate plan to close down their bus terminals.

And petitioners maintain that the E.O. is only an administrative directive to government agencies to coordinate with the MMDA and to make available for use government property along EDSA and South Expressway corridors. They add that the only relation created by the E.O. is that between the Chief Executive and the implementing officials, but not between third persons.

The petition fails.

It is true, as respondents have pointed out, that the alleged deficiency of the consolidated petitions to meet the requirement of justiciability was not among the issues defined for resolution in the Pre-Trial Order of January 12, 2004. It is equally true, however, that the question was repeatedly raised by petitioners in their Answer to Viron’s petition,20 their Comment of April 29, 2003 opposing Mencorp’s prayer for the issuance of a TRO,21 and their Position Paper of August 23, 2004.22

In bringing their petitions before the trial court, both respondents pleaded the existence of the essential requisites for their respective petitions for declaratory relief,23 and refuted petitioners’ contention that a justiciable controversy was lacking.24 There can be no denying, therefore, that the issue was raised and discussed by the parties before the trial court.

The following are the essential requisites for a declaratory relief petition: (a) there must be a justiciable controversy; (b) the controversy must be between persons whose interests are adverse; (c) the party seeking declaratory relief must have a legal interest in the controversy; and (d) the issue invoked must be ripe for judicial determination.25

The requirement of the presence of a justiciable controversy is satisfied when an actual controversy or theripening seeds thereof exist between the parties, all of whom are sui juris and before the court, and the declaration sought will help in ending the controversy.26 A question becomes justiciable when it is translated into a claim of right which is actually contested.27

In the present cases, respondents’ resort to court was prompted by the issuance of the E.O. The 4th Whereas clause of the E.O. sets out in clear strokes the MMDA’s plan to "decongest traffic by eliminating the bus terminals now located along major Metro Manila thoroughfares and providing more convenient access to the

mass transport system to the commuting public through the provision of mass transport terminal facilities x x x." (Emphasis supplied)

Section 2 of the E.O. thereafter lays down the immediate establishment of common bus terminals for north- and south-bound commuters. For this purpose, Section 8 directs the Department of Budget and Management to allocate funds of not more than one hundred million pesos (P100,000,000) to cover the cost of the construction of the north and south terminals. And the E.O. was made effective immediately.

The MMDA’s resolve to immediately implement the Project, its denials to the contrary notwithstanding, is also evident from telltale circumstances, foremost of which was the passage by the MMC of Resolution No. 03-07, Series of 2003 expressing its full support of the immediate implementation of the Project.

Notable from the 5th Whereas clause of the MMC Resolution is the plan to "remove the bus terminals located along major thoroughfares of Metro Manila and an urgent need to integrate the different transport modes." The 7th Whereas clause proceeds to mention the establishment of the North and South terminals.

As alleged in Viron’s petition, a diagram of the GMA-MTS North Bus/Rail Terminal had been drawn up, and construction of the terminal is already in progress. The MMDA, in its Answer28 and Position Paper,29 in fact affirmed that the government had begun to implement the Project.

It thus appears that the issue has already transcended the boundaries of what is merely conjectural or anticipatory.lawphil

Under the circumstances, for respondents to wait for the actual issuance by the MMDA of an order for the closure of respondents’ bus terminals would be foolhardy for, by then, the proper action to bring would no longer be for declaratory relief which, under Section 1, Rule 6330 of the Rules of Court, must be brought before there is a breach or violation of rights.

As for petitioners’ contention that the E.O. is a mere administrative issuance which creates no relation with third persons, it does not persuade. Suffice it to stress that to ensure the success of the Project for which the concerned government agencies are directed to coordinate their activities and resources, the existing bus terminals owned, operated or leased by third persons like respondents would have to be eliminated; and respondents would be forced to operate from the common bus terminals.

It cannot be gainsaid that the E.O. would have an adverse effect on respondents. The closure of their bus terminals would mean, among other things, the loss of income from the operation and/or rentals of stalls thereat. Precisely, respondents claim a deprivation of their constitutional right to property without due process of law.

Respondents have thus amply demonstrated a "personal and substantial interest in the case such that [they have] sustained, or will sustain, direct injury as a result of [the E.O.’s] enforcement."31 Consequently, the established rule that the constitutionality of a law or administrative issuance can be challenged by one who will sustain a direct injury as a result of its enforcement has been satisfied by respondents.

On to the merits of the case.

Respondents posit that the MMDA is devoid of authority to order the elimination of their bus terminals under the E.O. which, they argue, is unconstitutional because it violates both the Constitution and the Public Service Act; and that neither is the MMDA clothed with such authority under R.A. No. 7924.

Petitioners submit, however, that the real issue concerns the President’s authority to undertake or to cause the implementation of the Project. They assert that the authority of the President is derived from E.O. No. 125, "Reorganizing the Ministry of Transportation and Communications Defining its Powers and Functions and for Other Purposes," her residual power and/or E.O. No. 292, otherwise known as the Administrative Code of 1987. They add that the E.O. is also a valid exercise of the police power.

E.O. No. 125,32 which former President Corazon Aquino issued in the exercise of legislative powers, reorganized the then Ministry (now Department) of Transportation and Communications. Sections 4, 5, 6 and 22 of E.O. 125, as amended by E.O. 125-A,33 read:

SECTION 4. Mandate. — The Ministry shall be the primary policy, planning, programming, coordinating, implementing, regulating and administrative entity of the Executive Branch   of the government in the promotion, development and regulation of dependable and coordinated networks of transportation   and communication systems as well as in the fast, safe, efficient and reliable postal, transportation and communications services.

To accomplish such mandate, the Ministry shall have the following objectives:

(a) Promote the development of dependable and coordinated networks of transportation and communications systems;

(b) Guide government and private investment in the development of the country’s intermodal transportation and communications systems   in a most practical, expeditious, and orderly fashion for maximum safety, service, and cost effectiveness; (Emphasis and underscoring supplied)

x x x x

SECTION 5. Powers and Functions. — To accomplish its mandate, the Ministry shall have the following powers and functions:

(a) Formulate and recommend national policies and guidelines for the preparation and implementation of integrated and comprehensive transportation and communications systems at the national, regional and local levels;

(b) Establish and administer comprehensive and integrated programs for transportation and communications, and for this purpose, may call on any agency, corporation, or organization, whether public or private, whose development programs include transportation and communications as an integral part thereof, to participate and assist in the preparation and implementation of such program;

(c) Assess, review and provide direction to transportation and communications research and development programs of the government in coordination with other institutions concerned;

(d) Administer all laws, rules and regulations in the field of transportation and communications; (Emphasis and underscoring supplied)

x x x x

SECTION 6. Authority and Responsibility. — The authority and responsibility for the exercise of the mandate of the Ministry and for the discharge of its powers and functions shall be vested in the Minister of Transportation and Communications, hereinafter referred to as the Minister, who shall have supervision and control over the Ministry and shall be appointed by the President. (Emphasis and underscoring supplied)

SECTION 22. Implementing Authority of Minister. — The Minister shall issue such orders, rules, regulations and other issuances as may be necessary to ensure the effective implementation of the provisions of this Executive Order. (Emphasis and underscoring supplied)

It is readily apparent from the abovequoted provisions of E.O. No. 125, as amended, that the President, then possessed of and exercising legislative powers, mandated the DOTC to be the primary policy, planning, programming, coordinating, implementing, regulating and administrative entity to promote, develop and regulate networks of transportation and communications. The grant of authority to the DOTC includes the power toestablish and administer comprehensive and integrated programs for transportation and communications.

As may be seen further, the Minister (now Secretary) of the DOTC is vested with the authority and responsibility to exercise the mandate given to the department. Accordingly, the DOTC Secretary is authorized

to issue such orders, rules, regulations and other issuances as may be necessary to ensure the effective implementation of the law.

Since, under the law, the DOTC is authorized to establish and administer programs and projects for transportation, it follows that the President may exercise the same power and authority to order the implementation of the Project, which admittedly is one for transportation.

Such authority springs from the President’s power of control over all executive departments as well as the obligation for the faithful execution of the laws under Article VII, Section 17 of the Constitution which provides:

SECTION 17. The President shall have control of all the executive departments, bureaus and offices. He shall ensure that the laws be faithfully executed.

This constitutional provision is echoed in Section 1, Book III of the Administrative Code of 1987. Notably, Section 38, Chapter 37, Book IV of the same Code defines the President’s power of supervision and control over the executive departments, viz:

SECTION 38. Definition of Administrative Relationships. — Unless otherwise expressly stated in the Code or in other laws defining the special relationships of particular agencies, administrative relationships shall be categorized and defined as follows:

(1) Supervision and Control. — Supervision and control shall include authority to act   directly whenever a specific function is entrusted by law or regulation to a subordinate ; direct the performance of duty; restrain the commission of acts; review, approve, reverse or modify acts and decisions of subordinate officials or units; determine priorities in the execution of plans and programs. Unless a different meaning is explicitly provided in the specific law governing the relationship of particular agencies the word "control" shall encompass supervision and control as defined in this paragraph. x x x (Emphasis and underscoring supplied)

Thus, whenever a specific function is entrusted by law or regulation to a subordinate, the President may act directly or merely direct the performance of a duty.34

Respecting the President’s authority to order the implementation of the Project in the exercise of the police power of the State, suffice it to stress that the powers vested in the DOTC Secretary to establish and administer comprehensive and integrated programs for transportation and communications and to issue orders, rules and regulations to implement such mandate (which, as previously discussed, may also be exercised by the President) have been so delegated for the good and welfare of the people. Hence, these powers partake of the nature of police power.

Police power is the plenary power vested in the legislature to make, ordain, and establish wholesome and reasonable laws, statutes and ordinances, not repugnant to the Constitution, for the good and welfare of the people.35 This power to prescribe regulations to promote the health, morals, education, good order or safety, and general welfare of the people flows from the recognition that salus populi est suprema lex ─ the welfare of the people is the supreme law.

While police power rests primarily with the legislature, such power may be delegated, as it is in fact increasingly being delegated.36 By virtue of a valid delegation, the power may be exercised by the President and administrative boards37 as well as by the lawmaking bodies of municipal corporations or local governments under an express delegation by the Local Government Code of 1991.38

The authority of the President to order the implementation of the Project notwithstanding, the designation of the MMDA as the implementing agency for the Project may not be sustained. It is ultra vires, there being no legal basis therefor.

It bears stressing that under the provisions of E.O. No. 125, as amended, it is the DOTC, and not the MMDA, which is authorized to establish and implement a project such as the one subject of the cases at bar. Thus, the President, although authorized to establish or cause the implementation of the Project, must exercise the authority through the instrumentality of the DOTC which, by law, is the primary implementing and administrative entity in the promotion, development and regulation of networks of transportation, and the one so authorized to establish and implement a project such as the Project in question.

By designating the MMDA as the implementing agency of the Project, the President clearly overstepped the limits of the authority conferred by law, rendering E.O. No. 179 ultra vires.

In another vein, the validity of the designation of MMDA flies in the absence of a specific grant of authority to it under R.A. No. 7924.

To recall, R.A. No. 7924 declared the Metropolitan Manila area39 as a "special development and administrative region" and placed the administration of "metro-wide" basic services affecting the region under the MMDA.

Section 2 of R.A. No. 7924 specifically authorizes the MMDA to perform "planning, monitoring and coordinative functions, and in the process exercise regulatory and supervisory authority over the delivery of metro-wide services," including transport and traffic management.40 Section 5 of the same law enumerates the powers and functions of the MMDA as follows:

(a) Formulate, coordinate and regulate the implementation of medium and long-term plans and programs for the delivery of metro-wide services, land use and physical development within Metropolitan Manila, consistent with national development objectives and priorities;

(b) Prepare, coordinate and regulate the implementation of medium-term investment programs for metro-wide services which shall indicate sources and uses of funds for priority programs and projects, and which shall include the packaging of projects and presentation to funding institutions;

(c) Undertake and manage on its own metro-wide programs and projects for the delivery of specific services under its jurisdiction, subject to the approval of the Council. For this purpose, MMDA can create appropriate project management offices;

(d) Coordinate and monitor the implementation of such plans, programs and projects in Metro Manila; identify bottlenecks and adopt solutions to problems of implementation;

(e) The MMDA shall set the policies concerning traffic in Metro Manila, and shall coordinate and regulate the implementation of all programs and projects concerning traffic management, specifically pertaining to enforcement, engineering and education .   Upon request, it shall be extended assistance and cooperation, including but not limited to, assignment of personnel, by all other government agencies and offices concerned;

(f) Install and administer a single ticketing system, fix, impose and collect fines and penalties for all kinds of violations of traffic rules and regulations ,  whether moving or non-moving in nature, and confiscate and suspend or revoke drivers’ licenses in the enforcement of such traffic laws and regulations, the provisions of RA 4136 and PD 1605 to the contrary notwithstanding. For this purpose, the Authority shall impose all traffic laws and regulations in Metro Manila, through its traffic operation center, and may deputize members of the PNP, traffic enforcers of local government units, duly licensed security guards, or members of non-governmental organizations to whom may be delegated certain authority, subject to such conditions and requirements as the Authority may impose; and

(g) Perform other related functions required to achieve the objectives of the MMDA, including the undertaking of delivery of basic services to the local government units, when deemed necessary subject to prior coordination with and consent of the local government unit concerned." (Emphasis and underscoring supplied)

The scope of the function of MMDA as an administrative, coordinating and policy-setting body has been settled inMetropolitan Manila Development Authority (MMDA) v. Bel-Air Village Association, Inc.41 In that case, the Court stressed:

Clearly, the scope of the MMDA’s function is limited to the delivery of the seven (7) basic services. One of these is transport and traffic management which includes the formulation and monitoring of policies, standards and projects to rationalize the existing transport operations, infrastructure requirements, the use of thoroughfares and promotion of the safe movement of persons and goods. It also covers the mass transport system and the institution of a system of road regulation, the

administration of all traffic enforcement operations, traffic engineering services and traffic education programs, including the institution of a single ticketing system in Metro Manila for traffic violations. Under this service, the MMDA is expressly authorized to "to set the policies concerning traffic" and "coordinate and regulate the implementation of all traffic management programs." In addition, the MMDA may install and administer a single ticketing system," fix, impose and collect fines and penalties for all traffic violations.

It will be noted that the powers of the MMDA are limited to the following acts: formulation, coordination, regulation, implementation, preparation, management, monitoring, setting of policies, installation of a system and administration. There is no syllable in R.A. No. 7924 that grants the MMDA police power, let alone legislative power. Even the Metro Manila Council has not been delegated any legislative power. Unlike the legislative bodies of the local government units, there is no provision in R.A. No. 7924 that empowers the MMDA or its Council   to ‘enact ordinances, approve resolutions and appropriate funds for the general welfare’ of the inhabitants of Metro Manila. The MMDA is, as termed in the charter itself, a ‘development authority.’ It is an agency created for the purpose of laying down policies   and coordinating with the various national government agencies, people’s organizations, non-governmental organizations and the private sector for the efficient and expeditious delivery of basic services in the vast metropolitan area. All its functions are administrative in nature and these are actually summed up in the charter itself, viz:

‘SECTION 2. Creation of the Metropolitan Manila Development Authority. — . . .

The MMDA shall perform planning, monitoring and coordinative functions, and in the process exercise regulatory and supervisory authority   over the delivery of metro-wide services within Metro Manila, without diminution of the autonomy of the local government units concerning purely local matters.’42 (Emphasis and underscoring supplied)

In light of the administrative nature of its powers and functions, the MMDA is devoid of authority to implement the Project as envisioned by the E.O; hence, it could not have been validly designated by the President to undertake the Project. It follows that the MMDA cannot validly order the elimination of respondents’ terminals.

Even the MMDA’s claimed authority under the police power must necessarily fail in consonance with the above-quoted ruling in MMDA v. Bel-Air Village Association, Inc. and this Court’s subsequent ruling in Metropolitan Manila Development Authority v. Garin43 that the MMDA is not vested with police power.

Even assuming arguendo that police power was delegated to the MMDA, its exercise of such power does not satisfy the two tests of a valid police power measure, viz: (1) the interest of the public generally, as distinguished from that of a particular class, requires its exercise; and (2) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals.44 Stated differently, the police power legislation must be firmly grounded on public interest and welfare and a reasonable relation must exist between the purposes and the means.

As early as Calalang v. Williams,45 this Court recognized that traffic congestion is a public, not merely a private, concern. The Court therein held that public welfare underlies the contested statute authorizing the Director of Public Works to promulgate rules and regulations to regulate and control traffic on national roads.

Likewise, in Luque v. Villegas,46 this Court emphasized that public welfare lies at the bottom of any regulatory measure designed "to relieve congestion of traffic, which is, to say the least, a menace to public safety." 47 As such, measures calculated to promote the safety and convenience of the people using the thoroughfares by the regulation of vehicular traffic present a proper subject for the exercise of police power.

Notably, the parties herein concede that traffic congestion is a public concern that needs to be addressed immediately. Indeed, the E.O. was issued due to the felt need to address the worsening traffic congestion in Metro Manila which, the MMDA so determined, is caused by the increasing volume of buses plying the major thoroughfares and the inefficient connectivity of existing transport systems. It is thus beyond cavil that the motivating force behind the issuance of the E.O. is the interest of the public in general.

Are the means employed appropriate and reasonably necessary for the accomplishment of the purpose. Are they not duly oppressive?

With the avowed objective of decongesting traffic in Metro Manila, the E.O. seeks to "eliminate[e] the bus terminals now located along major Metro Manila thoroughfares and provid[e] more convenient access to the mass transport system to the commuting public through the provision of mass transport terminal facilities x x x."48 Common carriers with terminals along the major thoroughfares of Metro Manila would thus be compelled to close down their existing bus terminals and use the MMDA-designated common parking areas.

In Lucena Grand Central Terminal, Inc. v. JAC Liner, Inc.,49 two city ordinances were passed by the Sangguniang Panlungsod of Lucena, directing public utility vehicles to unload and load passengers at the Lucena Grand Central Terminal, which was given the exclusive franchise to operate a single common terminal. Declaring that no other terminals shall be situated, constructed, maintained or established inside or within the city of Lucena, thesanggunian declared as inoperable all temporary terminals therein.

The ordinances were challenged before this Court for being unconstitutional on the ground that, inter alia, the measures constituted an invalid exercise of police power, an undue taking of private property, and a violation of the constitutional prohibition against monopolies.

Citing De la Cruz v. Paras50 and Lupangco v. Court of Appeals,51 this Court held that the assailed ordinances were characterized by overbreadth, as they went beyond what was reasonably necessary to solve the traffic problem in the city. And it found that the compulsory use of the Lucena Grand Terminal was unduly oppressive because it would subject its users to fees, rentals and charges.

The true role of Constitutional Law is to effect an equilibrium between authority and liberty so that rights are exercised within the framework of the law and the laws are enacted with due deference to rights.

A due deference to the rights of the individual thus requires a more careful formulation of solutions to societal problems.

From the memorandum filed before this Court by petitioner, it is gathered that the Sangguniang Panlungsod had identified the cause of traffic congestion to be the indiscriminate loading and unloading of passengers by buses on the streets of the city proper, hence, the conclusion that the terminals contributed to the proliferation of buses obstructing traffic on the city streets.

Bus terminals per se do not, however, impede or help impede the flow of traffic. How   the outright proscription against the existence of all terminals, apart from that franchised to petitioner, can be considered as reasonably necessary to solve the traffic problem, this Court has not been enlightened. If terminals lack adequate space such that bus drivers are compelled to load and unload passengers on the streets instead of inside the terminals, then reasonable specifications for the size of terminals could be instituted, with permits to operate the same denied those which are unable to meet the specifications.

In the subject ordinances, however, the scope of the proscription against the maintenance of terminals is so broad   that even entities which might be able to provide facilities better than the franchised terminal are barred from operating at all. (Emphasis and underscoring supplied)

As in Lucena, this Court fails to see how the prohibition against the existence of respondents’ terminals can be considered a reasonable necessity to ease traffic congestion in the metropolis. On the contrary, the elimination of respondents’ bus terminals brings forth the distinct possibility and the equally harrowing reality of traffic congestion in the common parking areas, a case of transference from one site to another.

Less intrusive measures such as curbing the proliferation of "colorum" buses, vans and taxis entering Metro Manila and using the streets for parking and passenger pick-up points, as respondents suggest, might even be more effective in easing the traffic situation. So would the strict enforcement of traffic rules and the removal of obstructions from major thoroughfares.

As to the alleged confiscatory character of the E.O., it need only to be stated that respondents’ certificates of public convenience confer no property right, and are mere licenses or privileges.52 As such, these must yield to legislation safeguarding the interest of the people.

Even then, for reasons which bear reiteration, the MMDA cannot order the closure of respondents’ terminals not only because no authority to implement the Project has been granted nor legislative or police power been delegated to it, but also because the elimination of the terminals does not satisfy the standards of a valid police power measure.

Finally, an order for the closure of respondents’ terminals is not in line with the provisions of the Public Service Act.

Paragraph (a), Section 13 of Chapter II of the Public Service Act (now Section 5 of Executive Order No. 202, creating the Land Transportation Franchising and Regulatory Board or LFTRB) vested the Public Service Commission (PSC, now the LTFRB) with "x x x jurisdiction, supervision and control over all public services and their franchises, equipment and other properties x x x."

Consonant with such grant of authority, the PSC was empowered to "impose such conditions as to construction, equipment, maintenance, service, or operation as the public interests and convenience may reasonably require"53 in approving any franchise or privilege.

Further, Section 16 (g) and (h) of the Public Service Act54 provided that the Commission shall have the power, upon proper notice and hearing in accordance with the rules and provisions of this Act, subject to the limitations and exceptions mentioned and saving provisions to the contrary:

(g) To compel any public service to furnish safe, adequate, and proper service   as regards the manner of furnishing the same as well as the maintenance of the necessary material and equipment.

(h) To require any public service to establish, construct, maintain, and operate any reasonable extension of its existing facilities, where in the judgment of said Commission, such extension is reasonable and practicable and will furnish sufficient business to justify the construction and maintenance of the same and when the financial condition of the said public service reasonably warrants the original expenditure required in making and operating such extension.(Emphasis and underscoring supplied)

The establishment, as well as the maintenance of vehicle parking areas or passenger terminals, is generally considered a necessary service to be provided by provincial bus operators like respondents, hence, the investments they have poured into the acquisition or lease of suitable terminal sites. Eliminating the terminals would thus run counter to the provisions of the Public Service Act.

This Court commiserates with the MMDA for the roadblocks thrown in the way of its efforts at solving the pestering problem of traffic congestion in Metro Manila. These efforts are commendable, to say the least, in the face of the abominable traffic situation of our roads day in and day out. This Court can only interpret, not change, the law, however. It needs only to be reiterated that it is the DOTC ─ as the primary policy, planning, programming, coordinating, implementing, regulating and administrative entity to promote, develop and regulate networks of transportation and communications ─ which has the power to establish and administer a transportation project like the Project subject of the case at bar.

No matter how noble the intentions of the MMDA may be then, any plan, strategy or project which it is not authorized to implement cannot pass muster.

WHEREFORE, the Petition is, in light of the foregoing disquisition, DENIED. E.O. No. 179 is declared NULL and VOID for being ultra vires.

SO ORDERED

FIRST DIVISION  ST. LUKE’S MEDICAL CENTER EMPLOYEE’S ASSOCIATION-AFW (SLMCEA-AFW) AND MARIBEL S. SANTOS,

    G.R. No. 162053  

Petitioners,  Present:

 PUNO, C.J., Chairperson,SANDOVAL-GUTIERREZ,CORONA,AZCUNA, andGARCIA, JJ.

-versus-   NATIONAL LABOR RELATIONS COMMISSION (NLRC) AND ST. LUKE’S MEDICAL CENTER, INC.,Respondents.

  

Promulgated: 

March 7, 2007x-----------------------------------------------------------------------------------------x DECISION AZCUNA, J.:           Challenged in this petition for review on certiorari is the Decision[1] of the Court of Appeals (CA) dated January 29, 2004 in CA-G.R. SP No. 75732 affirming the decision[2] dated August 23, 2002 rendered by the National Labor Relations Commission (NLRC) in NLRC CA No. 026225-00.           The antecedent facts are as follows:  

Petitioner Maribel S. Santos was hired as X-Ray Technician in the Radiology department of private respondent St. Luke’s Medical Center, Inc. (SLMC) on October 13, 1984. She is a graduate of Associate in Radiologic Technology from The Family Clinic Incorporated School of Radiologic Technology.

 On April 22, 1992, Congress passed and enacted Republic Act No. 7431 known as the

“Radiologic Technology Act of 1992.” Said law requires that no person shall practice or offer to practice as a radiology and/or x-ray technologist in the Philippines without having obtained the proper certificate of registration from the Board of Radiologic Technology.

 On September 12, 1995, the Assistant Executive Director-Ancillary Services and HR

Director of private respondent SLMC issued a final notice to all practitioners of Radiologic Technology to comply with the requirement of Republic Act No. 7431 by December 31, 1995; otherwise, the unlicensed employee will be transferred to an area which does not require a license to practice if a slot is available.

 On March 4, 1997, the Director of the Institute of Radiology issued a final notice to

petitioner Maribel S. Santos requiring the latter to comply with Republic Act. No. 7431 by taking and passing the forthcoming examination scheduled in June 1997; otherwise, private respondent SLMC may be compelled to retire her from employment should there be no other position available where she may be absorbed.

 On May 14, 1997, the Director of the Institute of Radiology, AED-Division of Ancillary

Services issued a memorandum to petitioner Maribel S. Santos directing the latter to submit her PRC Registration form/Examination Permit per Memorandum dated March 4, 1997.

 On March 13, 1998, the Director of the Institute of Radiology issued another

memorandum to petitioner Maribel S. Santos advising her that only a license can assure her of her continued employment at the Institute of Radiology of the private respondent SLMC and that the latter is giving her the last chance to take and pass the forthcoming board examination scheduled in June 1998; otherwise, private respondent SLMC shall be constrained to take action which may include her separation from employment.

 

On November 23, 1998, the Director of the Institute of Radiology issued a notice to petitioner Maribel S. Santos informing the latter that the management of private respondent SLMC has approved her retirement in lieu of separation pay.

 On November 26, 1998, the Personnel Manager of private respondent SLMC issued a

“Notice of Separation from the Company” to petitioner Maribel S. Santos effective December 30, 1998 in view of the latter’s refusal to accept private respondent SLMC’s offer for early retirement. The notice also states that while said private respondent exerted its efforts to transfer petitioner Maribel S. Santos to other position/s, her qualifications do not fit with any of the present vacant positions in the hospital.

 In a letter dated December 18, 1998, a certain Jack C. Lappay, President of the Philippine

Association of Radiologic Technologists, Inc., wrote Ms. Judith Betita, Personnel Manager of private respondent SLMC, requesting the latter to give “due consideration” to the organization’s three (3) regular members of his organization (petitioner Maribel S. Santos included) “for not passing yet the Board of Examination for X-ray Technology,” “by giving them an assignment in any department of your hospital awaiting their chance to pass the future Board Exam.”

 On January 6, 1999, the Personnel Manager of private respondent SLMC again issued a

“Notice of Separation from the Company” to petitioner Maribel S. Santos effective February 5, 1999 after the latter failed to present/ submit her appeal for rechecking to the Professional Regulation Commission (PRC) of the recent board examination which she took and failed.

 On March 2, 1999, petitioner Maribel S. Santos filed a complaint against private

respondent SLMC for illegal dismissal and non-payment of salaries, allowances and other monetary benefits. She likewise prayed for the award of moral and exemplary damages plus attorney’s fees.

 In the meantime, petitioner Alliance of Filipino Workers (AFW), through its President and

Legal Counsel, in a letter dated September 22, 1999 addressed to Ms. Rita Marasigan, Human Resources Director of private respondent SLMC, requested the latter to accommodate petitioner Maribel S. Santos and assign her to the vacant position of CSS Aide in the hospital arising from the death of an employee more than two (2) months earlier.

 In a letter dated September 24, 1999, Ms. Rita Marasigan replied thus: Gentlemen:           Thank you for your letter of September 22, 1999 formally requesting to fill up the vacant regular position of a CSS Aide in Ms. Maribel Santos’ behalf. The position is indeed vacant. Please refer to our Recruitment Policy for particulars especially on minimum requirements of the job and the need to meet said requirements, as well as other pre-employment requirements, in order to be considered for the vacant position. As a matter of fact, Ms. Santos is welcome to apply for any vacant position on the condition that she possesses the necessary qualifications. As to the consensus referred to in your letter, may I correct you that the agreement is, regardless of the vacant position Ms. Santos decides to apply, she must go through the usual application procedures. The formal letter, I am afraid, will not suffice for purposes of recruitment processing. As you know, the managers requesting to fill any vacancy has a say on the matter and correctly so. The manager’s inputs are necessarily factored into the standard recruitment procedures. Hence, the need to undergo the prescribed steps. Indeed we have gone through the mechanics to accommodate Ms. Santos’ transfer while she was employed with SLMC given the prescribed period. She was given 30 days from issuance of the notice of termination to look for appropriate openings which incidentally she wittingly declined to utilize. She did this knowing fully well that the consequences would be that her application beyond the 30-day period or after the effective date of her termination from SLMC would be

considered a re-application with loss of seniority and shall be subjected to the pertinent application procedures. Needless to mention, one of the 3 X-ray Technologists in similar circumstances as Ms. Santos at the time successfully managed to get herself transferred to E.R. because she opted to apply for the appropriate vacant position and qualified for it within the prescribed 30-day period. The other X-ray Technologist, on the other hand, as you may recall, was eventually terminated not just for his failure to comply with the licensure requirement of the law but for cause (refusal to serve a customer). Why Ms. Santos opted to file a complaint before the Labor Courts and not to avail of the opportunity given her, or assuming she was not qualified for any vacant position even if she tried to look for one within the prescribed period, I simply cannot understand why she also refused the separation pay offered by Management in an amount beyond the minimum required by law only to re-apply at SLMC, which option would be available to her anyway even (if she) chose to accept the separation pay! Well, here’s hoping that our Union can timely influence our employees to choose their options well as it has in the past. (Signed)RITA MARASIGAN

 Subsequently, in a letter dated December 27, 1999, Ms. Judith Betita, Personnel Manager

of private respondent SLMC wrote Mr. Angelito Calderon, President of petitioner union as follows: Dear Mr. Calderon: This is with regard to the case of Ms. Maribel Santos. Please recall that last Oct. 8, 1999, Ms. Rita Marasigan, HR Director, discussed with you and Mr. Greg Del Prado the terms regarding the re-hiring of Ms. Maribel Santos. Ms. Marasigan offered Ms. Santos the position of Secretary at the Dietary Department. In that meeting, Ms. Santos replied that she would think about the offer. To date, we still have no definite reply from her. Again, during the conference held on Dec. 14, 1999, Atty. Martir promised to talk to Ms. Santos, and inform us of her reply by Dec. 21, 1999.  Again we failed to hear her reply through him. Please be informed that said position is in need of immediate staffing. The Dietary Department has already been experiencing serious backlog of work due to the said vacancy. Please note that more than 2 months has passed since Ms. Marasigan offered this compromise. Management cannot afford to wait for her decision while the operation of the said department suffers from vacancy. Therefore, Management is giving Ms. Santos until the end of this month to give her decision. If we fail to hear from her or from you as her representatives by that time, we will consider it as a waiver and we will be forced to offer the position to other applicants so as not to jeopardize the Dietary Department’s operation. For your immediate action. (Signed)JUDITH BETITAPersonnel Manager           

            On September 5, 2000, the Labor Arbiter came out with a Decision ordering private respondent SLMC to pay petitioner Maribel S. Santos the amount of One Hundred Fifteen Thousand Five Hundred Pesos (P115,500.00) representing her separation pay. All other claims of petitioner were dismissed for lack of merit. 

            Dissatisfied, petitioner Maribel S. Santos perfected an appeal with the public respondent NLRC.             On August 23, 2002, public respondent NLRC promulgated its Decision affirming the Decision of the Labor Arbiter. It likewise denied the Motion for Reconsideration filed by petitioners in its Resolution promulgated on December 27, 2002.  Petitioner thereafter filed a petition for certiorari with the CA which, as previously mentioned, affirmed

the decision of the NLRC. Hence, this petition raising the following issues:  I.                   Whether the CA overlooked certain material facts and circumstances on petitioners’

legal claim in relation to the complaint for illegal dismissal. II.                Whether the CA committed grave abuse of discretion and erred in not resolving with

clarity the issues on the merit of petitioner’s constitutional right of security of tenure.[3]

 For its part, private respondent St. Luke’s Medical Center, Inc. (SLMC) argues in its comment [4] that: 1)

the petition should be dismissed for failure of petitioners to file a motion for reconsideration; 2) the CA did not commit grave abuse of discretion in upholding the NLRC and the Labor Arbiter’s ruling that petitioner was legally dismissed; 3) petitioner was legally and validly terminated in accordance with Republic Act Nos. 4226 and 7431; 4) private respondent’s decision to terminate petitioner Santos was made in good faith and was not the result of unfair discrimination; and 5) petitioner Santos’ non-transfer to another position in the SLMC was a valid exercise of management prerogative.         

The petition lacks merit. Generally, the Court has always accorded respect and finality to the findings of fact of the CA

particularly if they coincide with those of the Labor Arbiter and the NLRC and are supported by substantial evidence.[5] True this rule admits of certain exceptions as, for example, when the judgment is based on a misapprehension of facts, or the findings of fact are not supported by the evidence on record[6] or are so glaringly erroneous as to constitute grave abuse of discretion.[7] None of these exceptions, however, has been convincingly shown by petitioners to apply in the present case. Hence, the Court sees no reason to disturb such findings of fact of the CA.

 Ultimately, the issue raised by the parties boils down to whether petitioner Santos was illegally

dismissed by private respondent SLMC on the basis of her inability to secure a certificate of registration from the Board of Radiologic Technology.

 The requirement for a certificate of registration is set forth under R.A. No. 7431[8] thus:

 Sec. 15.  Requirement for the Practice of Radiologic Technology and X-ray Technology. —

Unless exempt from the examinations under Sections 16 and 17 hereof, no person shall practice or offer to practice as a radiologic and/or x-ray technologist in the Philippines without having obtained the proper certificate of registration from the Board.  It is significant to note that petitioners expressly concede that the sole cause for petitioner Santos’

separation from work is her failure to pass the board licensure exam for X-ray technicians, a precondition for obtaining the certificate of registration from the Board. It is argued, though, that petitioner Santos’ failure to comply with the certification requirement did not constitute just cause for termination as it violated her constitutional right to security of tenure. This contention is untenable.

 While the right of workers to security of tenure is guaranteed by the Constitution, its exercise may be

reasonably regulated pursuant to the police power of the State to safeguard health, morals, peace, education, order, safety, and the general welfare of the people. Consequently, persons who desire to engage in the learned professions requiring scientific or technical knowledge may be required to take an examination as a prerequisite to engaging in their chosen careers.[9] The most concrete example of this would be in the field of medicine, the practice of which in all its branches has been closely regulated by the State. It has long been

recognized that the regulation of this field is a reasonable method of protecting the health and safety of the public to protect the public from the potentially deadly effects of incompetence and ignorance among those who would practice medicine.[10] The same rationale applies in the regulation of the practice of radiologic and x-ray technology. The clear and unmistakable intention of the legislature in prescribing guidelines for persons seeking to practice in this field is embodied in Section 2 of the law:

         Sec. 2. Statement of Policy. — It is the policy of the State to upgrade the practice of

radiologic technology in the Philippines for the purpose of protecting the public from the hazards posed by radiation as well as to ensure safe and proper diagnosis, treatment and research through the application of machines and/or equipment using radiation.[11]

  In this regard, the Court quotes with approval the disquisition of public respondent NLRC in its decision

dated August 23, 2002: 

 The enactment of R.A. (Nos.) 7431 and 4226 are recognized as an exercise of the State’s

inherent police power. It should be noted that the police power embraces the power to prescribe regulations to promote the health, morals, educations, good order, safety or general welfare of the people. The state is justified in prescribing the specific requirements for x-ray technicians and/or any other professions connected with the health and safety of its citizens. Respondent-appellee being engaged in the hospital and health care business, is a proper subject of the cited law; thus, having in mind the legal requirements of these laws, the latter cannot close its eyes and [let] complainant-appellant’s private interest override public interest. 

          Indeed, complainant-appellant cannot insist on her “sterling work performance without any derogatory record” to make her qualify as an x-ray technician in the absence of a proper certificate of Registration from the Board of Radiologic Technology which can only be obtained by passing the required examination. The law is clear that the Certificate of Registration cannot be substituted by any other requirement to allow a person to practice as a Radiologic Technologist and/or X-ray Technologist (Technician).[12]

  No malice or ill-will can be imputed upon private respondent as the separation of petitioner Santos was

undertaken by it conformably to an existing statute. It is undeniable that her continued employment without the required Board certification exposed the hospital to possible sanctions and even to a revocation of its license to operate. Certainly, private respondent could not be expected to retain petitioner Santos despite the inimical threat posed by the latter to its business. This notwithstanding, the records bear out the fact that petitioner Santos was given ample opportunity to qualify for the position and was sufficiently warned that her failure to do so would result in her separation from work in the event there were no other vacant positions to which she could be transferred. Despite these warnings, petitioner Santos was still unable to comply and pass the required exam. To reiterate, the requirement for Board certification was set by statute. Justice, fairness and due process demand that an employer should not be penalized for situations where it had no participation or control.[13]

 It would be unreasonable to compel private respondent to wait until its license is cancelled and it is

materially injured before removing the cause of the impending evil. Neither can the courts step in to force private respondent to reassign or transfer petitionerSantos under these circumstances. Petitioner Santos is not in the position to demand that she be given a different work assignment when what necessitated her transfer in the first place was her own fault or failing. The prerogative to determine the place or station where an employee is best qualified to serve the interests of the company on the basis of the his or her qualifications, training and performance belongs solely to the employer.[14]  The Labor Code and its implementing Rules do not vest in the Labor Arbiters nor in the different Divisions of the NLRC (nor in the courts) managerial authority.[15]

 While our laws endeavor to give life to the constitutional policy on social justice and the protection of

labor, it does not mean that every labor dispute will be decided in favor of the workers. The law also recognizes that management has rights which are also entitled to respect and enforcement in the interest of fair play.[16] Labor laws, to be sure, do not authorize interference with the employer's judgment in the conduct of the latter’s business. Private respondent is free to determine, using its own discretion and business judgment, all elements of employment, "from hiring to firing" except in cases of unlawful discrimination or those which may be provided by law.  None of these exceptions is present in the instant case. 

 The fact that another employee, who likewise failed to pass the required exam, was allowed by private

respondent to apply for and transfer to another position with the hospital does not constitute unlawful discrimination. This was a valid exercise of management prerogative, petitioners not having alleged nor proven that the reassigned employee did not qualify for the position where she was transferred. In the past, the Court has ruled that an objection founded on the ground that one has better credentials over the appointee is frowned upon so long as the latter possesses the minimum qualifications for the position.[17]  Furthermore, the records  show that Ms. Santos did not even seriously apply for another position in the company.

  WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioners.

 

SO ORDERED.

EN BANC CARLOS SUPERDRUG CORP.,                G.R. No. 166494doing business under the nameand style “Carlos Superdrug,”                    Present:ELSIE M. CANO, doing businessunder the name and style “Advance                         PUNO, C.J.,Drug,” Dr. SIMPLICIO L. YAP, JR.,                             QUISUMBING,*

doing business under the name and                         YNARES-SANTIAGO,style “City Pharmacy,” MELVIN S.                     SANDOVAL-GUTIERREZ,**

DELA SERNA, doing business under                    CARPIO,the name and style “Botica dela Serna,”                AUSTRIA-MARTINEZ,and LEYTE SERV-WELL CORP.,                        CORONA,doing business under the name and                         CARPIO MORALES,style “Leyte Serv-Well Drugstore,”                        AZCUNA,                             Petitioners,                               TINGA,                                                                             CHICO-NAZARIO,                - versus -                                               GARCIA,                                                                            VELASCO, JR., andDEPARTMENT OF SOCIAL                               NACHURA, JJ.WELFARE and DEVELOPMENT(DSWD), DEPARTMENT OF                     Promulgated:HEALTH (DOH), DEPARTMENTOF FINANCE (DOF), DEPARTMENT                 June 29, 2007OF JUSTICE (DOJ), andDEPARTMENT OF INTERIOR andLOCAL GOVERNMENT (DILG),                                                                                           Respondents.                                                                                    x ---------------------------------------------------------------------------------------- x DECISION  AZCUNA, J.:           

This is a petition[1] 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 10[7] and 11[8] – 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;” and

 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 law[15] 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.

EN BANC CHAMBER OF REAL                                       G.R. No. 160756ESTATE AND BUILDERS’ASSOCIATIONS, INC.,                                 Petitioner,                        Present:                                                                  

PUNO, C.J.,                           CARPIO,

                                                                             CORONA,CARPIO MORALES,

                                                                   VELASCO, JR.,                                                                   NACHURA,          -  v e r s u s  -                                    LEONARDO-DE CASTRO,

                                                          BRION,                                                          PERALTA,

BERSAMIN,                                                                    DEL CASTILLO,                                                                    ABAD,                                                                             VILLARAMA, JR.,                                                                   PEREZ and                                                                   MENDOZA, JJ. THE HON. EXECUTIVE                       SECRETARY ALBERTO ROMULO,THE HON. ACTING SECRETARY OFFINANCE JUANITA D. AMATONG,and THE HON. COMMISSIONER OFINTERNAL REVENUE GUILLERMOPARAYNO, JR.,

Respondents.                 Promulgated: March 9, 2010

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

D E C I S I O N

 CORONA, J.:

  

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

 

          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.           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. 

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.            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.           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).[4] 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. - 

(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.

 (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.

 (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.

 

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.

 (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.

 For 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.

 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.

 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.

  

          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). [5] The pertinent portions thereof read:

 Sec. 2.27(E)  [MCIT] on Domestic Corporations. –  

(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.

  

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. [6]  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 –

                         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.             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.             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.

            

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:

 Where   the   seller/transferor is exempt  

Those which are exempt from a withholding tax at source as prescribed in Sec. 2.57.5 of these regulations.

   

Exempt With a selling price of five hundred thousand pesos (P500,000.00) or less.

  

 1.5%

 With a selling price of more than five hundred thousand pesos (P500,000.00) but not more than two million pesos (P2,000,000.00).

   

  3.0%

 With selling price of more than two million pesos (P2,000,000.00)                                               

  

 5.0% 

from [CWT] in accordance with Sec. 2.57.5 of these regulations.            

 Exempt

 Upon the following values of real property, where the seller/transferor is habitually engaged in the real estate business.

 

 With a selling price of Five Hundred Thousand Pesos (P500,000.00) or less.                  

  

1.5%        

 With a selling price of more than Five Hundred Thousand Pesos (P500,000.00) but not more than Two Million Pesos (P2,000,000.00).

    

3.0% With 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. (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.

 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:[7]

             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. 

           On February 11, 2003, RR No. 7-2003[8] 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.[9]

 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. 

            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.[10]

 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.[11]  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.[12]

 Contrary to respondents’ assertion, we do not have to wait until petitioner’s 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:[13]  

 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.[14]

 If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such question once and for all.           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].[15]

 Legal standing or locus standi is a party’s 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. [16]  In Holy Spirit Homeowners Association, Inc. v. Defensor,[17]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.[18]

            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. [19]  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.[20]           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.[21] 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.[22]

 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.

 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.[23]

 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.[24]  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. 

           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.[25]  This grace period allows a new business to stabilize first and make its ventures viable before it is subjected to the MCIT.[26]

 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.[27]          

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.[28]          

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.             In the case of Thailand, half a percent (0.5%), there’s 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.             The other thing you’ll notice is the preponderance of Latin American countries that employed this method.  Okay, those are additional Latin American countries.[29]

  

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

 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.[31]  Thus, pegging the tax base of the MCIT to a corporation’s gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not “realized gain.”[32]            We disagree. 

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.[33]

 Taxation is an inherent attribute of sovereignty.[34]  It is a power that is purely legislative.[35]  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.[36]  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.           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. [37]  Nevertheless, it is circumscribed by constitutional limitations.  At the same time, like any other statute, tax legislation carries a presumption of constitutionality. 

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.,[38] we held that the due process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure[39] when it amounts to a confiscation of property.[40]  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.[41] There must be a factual foundation to such an unconstitutional taint.[42] 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.[43]  

Petitioner is correct in saying that income is distinct from capital. [44]  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. [45]  Income is gain derived and severed from capital.[46]  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.[47]   

Certainly, 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.         

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 goods[48] and other direct expenses from gross sales.  Clearly, the capital is not being taxed.

           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 corporation’s gross income.           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.[49]

 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.[50]

  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.[51]  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.[52]  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 AMT’s constitutionality, the United States Court of Appeals for the Ninth Circuit stated in Okin v. Commissioner:[53]

 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.[54]

  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.[55]

                   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.[56]  This is because deductions are a matter of legislative grace.[57]

 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.         

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.         

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.[58] Taxation is necessarily burdensome because, by its nature, it adversely affects property rights. [59] The party alleging the law’s unconstitutionality has the burden to demonstrate the supposed violations in understandable terms.[60]     RR 9-98 MERELY CLARIFIESSECTION 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. — 

(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.  

We now proceed to the issues involving the CWT.  

The withholding tax system is a procedure through which taxes (including income taxes) are collected.[61] 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. 

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”[62] because they ignore such distinctions.  Petitioner’s 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.[63]  

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.         

Petitioner’s 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. [64] It is well-settled that an administrative agency cannot amend an act of Congress.[65]  

           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.[66]  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 government’s cash flow. [67]  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.[68]

         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.

  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.         

Petitioner is wrong. 

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

         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 entity’s 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.[71]  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. 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.         

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 agent’s 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.[72]          

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 CWTa)  The amount of   income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income.

 

a) Taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income.

b)The liability for     payment of the tax rests primarily on the payor as a withholding agent.        

b) Payee of income is required to report the income and/or pay the difference between the tax withheld and the tax due on the income.  The payee also has the right to ask for a refund if the tax withheld is more than the tax due.

 c)  The payee is not required to file an income tax return for the particular income.[73] 

 c) The income recipient is still required to file an income tax return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as amended.[74]

           As 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 petitioner’s contention that ordinary assets are being lumped together with, and treated similarly as, capital assets in contravention of the pertinent provisions of RA 8424. 

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.[75]

         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/buyer’s 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   PASSIVEINCOMES 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. — (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. (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. 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 corporation’s

primary purposes, the same is not passive income…[76]

 It is income generated by the taxpayer’s 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. 

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.

           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.

 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. [77]  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[78] in view of the rule-making authority given to those who formulate them and their specific expertise in their respective fields.   NO DEPRIVATION OF PROPERTYWITHOUT     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. 

                     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.[79] The CWT does not impose new taxes nor does it increase taxes. [80]  It relates entirely to the method and time of payment.  

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. [81] 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.          

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.[82]

         Petitioner’s lamentations will not support its attack on the constitutionality of the CWT.  Petitioner’s

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.[83]Petitioner’s 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.[84]

 Again, we disagree.

 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.”[85]  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.[86]

           The taxing power has the authority to make reasonable classifications for purposes of taxation.[87]  Inequalities which result from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation.[88]  The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises.           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.           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.                   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.[89]  As already discussed, the Secretary may adopt any reasonable method to carry out its functions.[90]  Under Section 57(B), it may choose what to subject to CWT.                         A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s 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.[91]

   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. –             (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.”[92]  When a party questions the constitutionality of an income tax measure, it has to contend not only with Einstein’s 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.

SECOND DIVISION 

COMMISSIONER OF INTERNAL REVENUE,                          Petitioner,                  - versus -   PETRON CORPORATION,                          Respondent.           

G. R. No. 185568 Present: CARPIO, J., Chairperson,

  BRION,PEREZ,SERENO, andREYES, JJ. Promulgated: March 21, 2012

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

D E C I S I O N SERENO, J.: 

          This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure filed by the Commissioner of Internal Revenue (CIR) assailing the Decision[1] dated 03 December 2008 of the Court of Tax Appeals En Banc (CTA En Banc) in CTA EB No. 311. The assailed Decision reversed and set aside the Decision[2] dated 04 May 2007 of the Court of Tax Appeals Second Division (CTA Second Division) in CTA Case No. 6423, which ordered respondent Petron Corporation (Petron) to pay deficiency excise taxes for the taxable years 1995 to 1998, together with surcharges and delinquency interests imposed thereon.    

Respondent Petron is a corporation engaged in the production of petroleum products and is a Board of Investment (BOI) – registered enterprise in accordance with the provisions of  the Omnibus Investments Code of 1987 (E.O. 226) under Certificate of Registration Nos. 89-1037 and D95-136.[3]  

 The Facts           The CTA En Banc in CTA EB Case No. 311 adopted the findings of fact by the CTA Second Division in CTA Case No. 6423. Considering that there are no factual issues in this case, we likewise adopt the findings of fact by the CTA En Banc, as follows:

          As culled from the records and as agreed upon by the parties in their Joint Stipulation of Facts and Issues, these are the facts of the case.   

During the period covering the taxable years 1995 to 1998, petitioner (herein respondent Petron) had been an assignee of several Tax Credit Certificates (TCCs) from various BOI-registered entities for which petitioner utilized in the payment of its excise tax liabilities for the taxable years 1995 to 1998. The transfers and assignments of the said TCCs were approved by the Department of Finance’s One Stop Shop Inter-Agency Tax Credit and Duty Drawback

Center (DOF Center), composed of representatives from the appropriate government agencies, namely, the Department of Finance (DOF), the Board of Investments (BOI), the Bureau of Customs (BOC) and the Bureau of Internal Revenue (BIR).      

            Taking ground on a BOI letter issued on 15 May 1998 which states that ‘hydraulic oil, penetrating oil, diesel fuels and industrial gases are classified as supplies and considered the suppliers thereof as qualified transferees of tax credit,’ petitioner acknowledged and accepted the transfers of the TCCs from the various BOI-registered entities.

            Petitioner’s acceptance and use of the TCCs as payment of its excise tax liabilities for the taxable years 1995 to 1998, had been continuously approved by the DOF as well as the BIR’s Collection Program Division through its surrender and subsequent issuance by the Assistant Commissioner of the Collection Service of the BIR of the Tax Debit Memos (TDMs).             On January 30, 2002, respondent [herein petitioner CIR] issued the assailed Assessment against petitioner for deficiency excise taxes for the taxable years 1995 to 1998, in the total amount of ₱739,003,036.32, inclusive of surcharges and interests, based on the ground that the TCCs utilized by petitioner in its payment of excise taxes have been cancelled by the DOF for having been fraudulently issued and transferred, pursuant to its EXCOM Resolution No. 03-05-99. Thus, petitioner, through letters dated August 31, 1999 and September 1, 1999, was required by the DOF Center to submit copies of its sales invoices and delivery receipts showing the consummation of the sale transaction to certain TCC transferors.             Instead of submitting the documents required by the respondent, on February 27, 2002, petitioner filed its protest letter to the ‘Assessment’ on the grounds, among others, that: 

a.             The BIR did not comply with the requirements of Revenue Regulations 12-99 in issuing the “assessment” letter dated January 30, 2002, hence, the assessment made against it is void;

 b.            The assignment/transfer of the TCCs to petitioner by the TCC holders

was submitted to, examined and approved by the concerned government agencies which processed the assignment in accordance with law and revenue regulations;

 c.             There is no basis for the imposition of the 50% surcharge in the

amount of ₱159,460,900.00 and interest penalties in the amount of ₱260,620,335.32 against it;

 d.            Some of the items included in the ‘assessment’ are already pending

litigation and are subject of the case entitled ‘Commissioner of Internal Revenue vs. Petron Corporation,’ C.A. GR SP No. 55330 (CTA Case No. 5657) and hence, should no longer be included in the ‘assessment’; and

 e.             The assessment and collection of alleged excise tax deficiencies

sought to be collected by the BIR against petitioner through the January 30, 2002 letter are already barred by prescription under Section 203 of the National Internal Revenue Code.

 On 27 March 2002, respondent, through Assistant Commissioner Edwin R. Abella served a

Warrant of Distraint and/or Levy on petitioner to enforce payment of the ₱739,003,036.32 tax deficiencies.

 Respondent allegedly served the Warrant of Distraint and/or Levy against petitioner

without first acting on its letter-protest. Thus, construing the Warrant of Distraint and/or Levy as the final adverse decision of the BIR on its protest of the assessment, petitioner filed the instant petition before this Honorable Court [referring to the CTA Second Division] on April 2, 2002.

 On April 30, 2002, respondent filed his Answer, raising the following as his Special

Affirmative Defenses:         

6. In a post-audit conducted by the One-Stop Inter-Agency Tax Credit and Duty Drawback Center (Center) of the Department of Finance (DOF), pursuant to the

Center’s Excom Resolution No. 03-05-99, it was found that TCCs issued to Alliance Thread Co., Inc., Allstar Spinning, Inc., Diamond Knitting Corp., Fiber Technology Corp., Filstar Textile Industrial Corp., FLB International Fiber Corp., Jantex Philippines, Inc., Jibtex Industrial Corp., Master Colour System Corp. and Spintex International, Inc. were fraudulently obtained and were fraudulently transferred to petitioner. As a result of said findings, the TCCs and the Tax Debit Memos (TDMs) issued by the Center to petitioner against said TCCs were cancelled by the DOF;

 7. Prior to the cancellation of the aforesaid TCCs and TDMs, petitioner had

utilized the same in the payment of its excise tax liabilities. With such cancellation, the TCCs and TDMs have no value in money or money’s worth and, therefore, the excise taxes for which they were used as payment are now deemed unpaid;

 8. The cancellation by the DOF of the aforesaid TCCs and TDMs has the

presumption of regularity upon which respondent may validly rely; 9. Petitioner was informed by the DOF of the post-audit conducted on the TCCs

and was given the opportunity to submit documents showing that the TCCs were transferred to it in payment of petroleum products allegedly delivered by it to the TCC transferors upon which the TCC transfers were approved, with the admonition that failure to submit the required documents would result in the cancellation of the transfers. Petitioner was also informed of the cancellation of the TCCs and TDMs and the reason for their cancellation;

 10. Since petitioner is deemed not to have paid its excise tax liabilities, a pre-

assessment notice is not required under Section 228 of the Tax Code; 11. The letter dated January 20, 2002 (should be January 30, 2002), demanding

payment of petitioner’s excise tax liabilities explicitly states the basis for said demand, i.e., the cancellation of the TCCs and TDMs;

 12. The government is never estopped from collecting legitimate taxes due to

the error committed by its agents (Visayas Cebu Terminal Inc., vs. Commissioner of Internal Revenue, 13 SCRA 257; Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue, 102 SCRA 246). The acceptance by the Bureau of Internal Revenue of the TCCs fraudulently obtained and fraudulently transferred to petitioner as payment of its excise tax liabilities turned out to be a mistake after the post-audit was conducted. Hence, said payments were void and the excise taxes may be validly collected from petitioner.      

 13. As found in the post-audit, petitioner and the TCC transferors committed

fraud in the transfer of the TCCs when they made appear (sic) that the transfers were in consideration for the delivery of petroleum products by petitioner to the TCCs transferors, for which reason said transfers were approved by the Center, when in fact there were no such deliveries;

 14. Petitioner used the TCCs fraudulently obtained and fraudulently transferred

in the payment of excise taxes declared in its excise tax returns with intent to evade tax to the extent of the value represented by the TCCs, thereby rendering the returns fraudulent;  

 15. Since petitioner wilfully filed fraudulent returns, it is liable for the 50%

surcharge and 20% annual interest imposed under Sections 248 and 249 of the Tax Code;

 16. Since petitioner wilfully filed fraudulent returns with intent to evade tax, the

prescriptive period to collect the tax is ten (10) years from the discovery of the fraud pursuant to Section 222 of the Tax Code; and

 17. The case pending in the Court of Appeals (CA-G.R. Sp. No. 55330 [CTA Case

No. 5657]), and the case at bar have distinct causes of action. The former involves the invalid transfers of the TCCs to petitioner on the theory that it is not a qualified

transferee thereof, while the latter involves the fraudulent procurement of said TCCs and the fraudulent transfers thereof to petitioner.

 However, on November 12, 2002, respondent filed a Manifestation informing this Court that

on May 29, 2002, it had reduced the amount of deficiency excise taxes to ₱720,923,224.74 as a result of its verification that some of the TCCs which formed part of the original “Assessment” were already included in a case previously filed with this Court. In effect, the amount of deficiency excise taxes is recomputed as follows:

 Transferor Basic Tax Surcharge Interest TotalAlliance Thread Co. Inc.  ₱    12,078,823.0

0₱       6,039,411.50 ₱     16,147,293.21 ₱    34,265,527.21

Allstar Spinning, Inc.      37,265,310.00       18,632,655.00       49,781,486.95    105,679,451.95Diamond  Knitting Corporation      36,764,587.0

0      18,382,293.50       49,264,758.35    104,411,638.85

Fiber Technology Corp.      25,300,911.00

      12,650,455.50       34,295,655.90      72,247,022.40

Filstar Textile Corp.      40,767,783.00

      20,383,891.50       54,802,550.16    115,954,224.66

FLB International Fiber Corp.      25,934,695.00

      12,967,347.50       34,977,257.14      73,879,299.64

Jantex Philippines, Inc.      12,036,192.00

        6,018,096.00       15,812,547.24      33,866,835.24

Jibtex Industrial Corp.      15,506,302.00

        7,753,151.00       20,610,319.52      43,869,772.52

Master Colour system Corp.      33,333,536.00

      16,666,768.00    

      44,822,167.06      94,822,471.06

Spintex International Inc.      14,912,408.00

        7,456,204.00        19,558,368.71      41,926,980.71

                                          Total

₱ 253,900,547.00

₱   126,950,273.50

₱    340,072,404.24

₱  720,923,224.74

                                           During the pendency of the case, but after respondent had already submitted his Formal Offer of Evidence for this Court’s consideration, he filed an ‘Urgent Motion to Reopen Case’ on August 24, 2004 on the ground that additional evidence consisting of documents presented to the Center in support of the TCC transferor’s claims for tax credit as well as document supporting the applications for approval of the transfer of the TCCs to petitioner, must be presented to prove the fraudulent issuance and transfer of the subject TCCs. Respondent submits that it is imperative on his part to do so considering that, without necessarily admitting that the evidence presented in the case of Pilipinas Shell Petroleum Corporation vs. Commissioner of Internal Revenue, to prove fraud is not clear and convincing, he may suffer the same fate that had befallen upon therein respondent when this Court held, among others, that ‘there is no clear and convincing evidence that the Tax Credit Certificates (TCCs) transferred to Shell (for brevity) and used by it in the payment of excise taxes, were fraudulently issued to the TCC transferors and were fraudulently transferred to Shell.’             An ‘Opposition to Urgent Motion to Reopen Case’ was filed by petitioner on September 3, 2004 contending that to sustain respondent’s motion would ‘smack of procedural disorder and spawn a reversion of the proceedings. While litigation is not a game of technicalities, it is a truism that every case must be presented in accordance with the prescribed procedure to insure an orderly administration of justice.’             On October 4, 2004, this Court resolved to grant respondent’s Motion and allowed respondent to present additional evidence in support of his arguments, but deferred the resolution of respondent’s original Formal Offer of Evidence until after the respondent has terminated his presentation of evidence. Subsequent to this Court’s Resolution, respondent then filed on October 20, 2004, a Request for the Issuance of Subpoena Duces Tecum to the Executive Director of the Center or his duly authorized representative, and on October 21, 2004, a Subpoena Ad Testificandum to Ms. Elizabeth R. Cruz, also of the Center. 

            Petitioner filed a ‘Motion for Reconsideration (Re: Resolution dated October 4, 2004)’ on October 27, 2004, with respondent filing his ‘Opposition’ on November 4, 2004, and petitioner subsequently filing its ‘Reply to Opposition’ on December 20, 2004. Petitioner’s motion was denied by this Court in a Resolution dated February 28, 2005 for lack of merit.             On March 18, 2005, petitioner filed an ‘Urgent Motion to Revert Case to the First Division’ with respondent’s ‘Manifestation’ filed on April 6, 2005 stating that ‘the question of which Division of this Honorable Court shall hear the instant case is an internal matter which is better left to the sound discretion of this Honorable Court without interference by a party litigant’. On April 28, 2005, this Court denied the Motion of petitioner for lack of merit.                 On November 7, 2005, the Court finally resolved respondent’s ‘Formal Offer of Evidence’ filed on May 7, 2004 and ‘Supplemental Formal Offer of Evidence’ filed on August 25, 2005. On November 22, 2005, respondent filed a ‘Motion for Partial Reconsideration’ of the Court’s Resolution to admit Exhibits 31 and 31-A on the ground that he already submitted and offered certified true copies of said exhibits, which the Court granted in its Resolution on January 19, 2006.             However, on February 10, 2006, respondent filed a ‘Motion to Amend Formal Offer of Evidence’ praying that he be allowed to amend his formal offer since some exhibits although attached thereto were inadvertently not mentioned in the Formal Offer of Evidence. Petitioner’s ‘Opposition’ was filed on March 14, 2006. This Court granted respondent’s motion in the Resolution dated April 24, 2006 and considering that the parties already filed their respective Memoranda, this case was then considered submitted for decision.             On May 16, 2006, however, respondent filed an ‘Omnibus Motion’ praying that this Court take judicial notice of the fact that the TCCs issued by the Center, including the TCCs in this instant case, contained the standard ‘Liability Clause’ and that the case be consolidated with CTA Case No. 6136, on the ground that both cases involve the same parties and common questions of law or fact. An ‘Opposition/Comment on Omnibus Motion’ was filed by petitioner on June 26, 2006, and ‘Reply to Opposition/Comment’ was filed by respondent on July 17, 2006.             In a Resolution promulgated on September 1, 2006, this Court granted respondent’s motion only insofar as taking judicial notice of the fact that each of the dorsal side of the TCCs contains the subject ‘liability clause’, but denied respondent’s motion to consolidate considering that C.T.A. Case No. 6136 was already submitted for decision on April 24, 2006.[4]

  

The Ruling of the Court of Tax Appeals–Second Division(CTA Case No. 6423) 

            On 04 May 2007, the CTA Second Division promulgated a Decision in CTA Case No. 6423, the dispositive portion of which reads: 

            WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED for lack of merit. Accordingly, petitioner isORDERED TO PAY the respondent the reduced amount of SIX HUNDRED MILLION SEVEN HUNDRED SIXTY NINE THOUSAND THREE HUNDRED FIFTY THREE AND 95/100 PESOS (P600,769,353.95), representing petitioner’s deficiency excise taxes for the taxable years 1995 to 1998, recomputed as follows:

 Transferor Basic Tax 25% Surcharge 20% Interest TotalAlliance Thread Co. Inc.  ₱    12,078,823.0

0 ₱       3,019,705.75 ₱     13,456,077.6

8₱    28,554,606.43

Allstar Spinning, Inc.      37,265,310.00         9,316,327.50       41,484,572.46      88,066,209.96Diamond  Knitting Corporation

     36,764,587.00         9,191,146.75       41,053,965.29      87,009,699.04

Fiber Technology Corp.      25,300,911.00         6,325,227.75       28,579,713.25      60,205,852.00Filstar Textile Corp.      40,767,783.00       10,191,945.75       45,668,791.80      96,628,520.55FLB International Fiber Corp.      25,934,695.00         6,483,673.75       29,147,714.28      61,566,083.03

Jantex Philippines, Inc.      12,036,192.00         3,009,048.00       13,177,122.70      28,222,362.70Jibtex Industrial Corp.      15,506,302.00         3,876,575.50     

       17,175,266.27      36,558,143.77

Master Colour system Corp.      33,333,536.00         8,333,384.00           37,351,805.88      79,018,725.88Spintex International Inc.      14,912,408.00         3,728,102.00       16,298,640.59      34,939,150.59                                        Total

₱  253,900,547.00

₱      63,475,136.75

₱   283,393,670.20

₱  600,769,353.95

 In addition, petitioner is ORDERED TO PAY the respondent TWENTY FIVE PERCENT

(25%) LATE PAYMENT SURCHARGE AND TWENTY PERCENT (20%) DELIQUENCY INTEREST per annum on the amount of SIX HUNDRED MILLION SEVEN HUNDRED SIXTY NINE THOUSAND THREE HUNDRED FIFTY THREE & 95/100 PESOS (₱600,769,353.95), computed from June 27, 2002 until the amount is fully paid.

 SO ORDERED.[5]

 

          The CTA Second Division held Petron liable for deficiency excise taxes on the ground that the cancellation by the DOF of the TCCs previously issued to and utilized by respondent to settle its tax liabilities had the effect of nonpayment of the latter’s excise taxes. These taxes corresponded to the value of the TCCs Petron used for payment. The CTA Second Division ruled that payment can only occur if the instrument used to discharge an obligation represents its stated value.[6] It further ruled that Petron’s acceptance of the TCCs was considered a contract entered into by respondent with the CIR and subject to post-audit, [7] which was considered a suspensive condition governed by Article 1181 of the Civil Code.[8]   

Further, the CTA Second Division found that the circumstances pertaining to the issuance of the subject TCCs and their transfer to Petron “brim with fraud.”[9] Hence, the said court concluded that since the TCCs used by Petron were found to be spurious, respondent was deemed to have not paid its excise taxes and ought to be liable to the CIR in the amount of ₱600,769,353.95 plus 25% interests and 20% surcharges.[10]

 Petron filed a Motion for Reconsideration[11] of the Decision of the CTA Second Division, which denied

the motion in a Resolution dated 14 August 2007.[12] The court reiterated its conclusion that the TCCs utilized by Petron to pay the latter’s excise tax liabilities did not result in payment after these TCCs were found to be fraudulent in the post-audit by the DOF. The CTA Second Division also affirmed its ruling that Petron was liable for a 25%  late payment surcharge and 20% surcharges under Section 248[13] of the National Internal Revenue Code (NIRC) of 1997.[14]     

 Aggrieved, Petron appealed the Decision to the CTA En Banc through a Petition for Review, which was

docketed as CTA EB No. 311. In its Petition, Petron alleged that the Second Division erred in holding respondent liable to pay the amount of ₱600,769,353.95 in deficiency excise taxes with penalties and interests covering the taxable years 1995-1998. Petron prayed that the said Decision be reversed and set aside, and that CIR be enjoined from collecting the contested excise tax deficiency assessment.[15]

 The CTA En Banc summed up into one issue the grounds relied upon by Petron in its Petition for

Review, as follows: 

Whether or not the Second Division erred in holding petitioner liable for the amount of ₱600,769,353.95 as deficiency excise taxes for the years 1995-1998, including surcharges and interest, plus 25% surcharge and 20% delinquency interest per annum from June 27, 2002 until the amount is fully paid.[16]         

 The Ruling of the Court of Tax Appeals En Banc(CTA EB Case No. 311)

 On 03 December 2008, the CTA En Banc promulgated a Decision, which reversed and set aside the CTA

Second Division on 04 May 2007. The former absolved Petron from any deficiency excise tax liability for taxable years 1995 to 1998. Its ruling in favor of Petron was anchored on this Court’s pronouncements in Pilipinas Shell Petroleum Corp. v. Commissioner of Internal Revenue(Shell),[17] which found that the factual background and legal issues therein were similar to those in the present case.

 

In resolving the issues, the CTA En Banc adopted the main points in Shell, which it quoted at length as basis for deciding the appeal in favor of  Petron. The gist of the main points of Shell cited by the said court is as follows:

 a) The issued TCCs are immediately valid and effective and are not subject to a post-audit as a

suspensive condition[18]

b) A TCC is subject only to the following conditions:i) Post-audit in the event of a computational discrepancyii) A reduction for any outstanding account with the BIR and/or BOCiii) A revalidation of the TCC if not utilized within one year from issuance or date of

utilization[19]           c) A transferee of a TCC should only be a BOI-registered firm under the Implementing Rules and

Regulations of Executive Order (E.O.) No. 226.[20]

d) The liability clause in the TCCs provides only for the solidary liability of the transferee relative to its transfer in the event it is a party to the fraud.[21]

e) A transferee can rely on the Center’s approval of the TCCs’ transfer and subsequent acceptance as payment of the transferee’s excise tax liability.[22]

f) A TCC cannot be cancelled by the Center, as it was already cancelled after the transferee had applied it as payment for the latter’s excise tax liabilities.[23]

             The CTA En Banc also found that Petron had no participation in or knowledge of the fraudulent issuance

and transfer of the subject TCCs. In fact, the parties made a joint stipulation on this matter in CTA Case No. 6423 before the CTA Second Division.[24]

 In resolving the issue of whether the government is estopped from collecting taxes due to the fault of its

agents, the CTA En Banc quoted Shell as follows: 

While we agree with respondent that the State in the performance of government function is not estopped by the neglect or omission of its agents, and nowhere is this truer than in the field of taxation, yet this principle cannot be applied to work injustice against an innocent party.[25](Emphasis supplied.)         

 

            Finally, the CTA En Banc ruled that Petron was considered an innocent transferee of the subject TCCs and may not be prejudiced by a re-assessment of excise tax liabilities that respondent has already settled, when due, with the use of the TCCs.[26]Petron is thus considered to have not fraudulently filed its excise tax returns. Consequently, the assessment issued by the CIR against it had no legal basis. [27] The dispositive portion of the assailed 03 December 2008 Decision of the CTA En Banc reads: 

WHEREFORE, the instant petition for Review is hereby GRANTED. Accordingly, the May 4, 2007 Decision and August 14, 2007 Resolution of the CTA Second Division in CTA Case No. 6423 entitled, “Petron Corporation, petitioner vs. Commissioner of Internal Revenue, respondent”, are hereby REVERSED and SET ASIDE. In addition, the demand and collection of the deficiency excise taxes of PETRON in the amount of ₱600,769,353.95 excluding penalties and interest covering the taxable years 1995 to 1998 are hereby CANCELLED and SET ASIDE, and respondent-Commissioner of Internal Revenue is hereby ENJOINED from collecting the said amount from PETRON.

 SO ORDERED.[28]     

              The CIR moved for the reconsideration of the CTA En Banc Decision, but the motion was denied in a Resolution dated 14 August 2007.[29]

  The Issues              The CIR appealed the Decision of the CTA En Banc by filing a Petition for Review on Certiorari under Rule 45 of the Rules of Court.[30] Petitioner assails the Decision by raising the following issues: 

THE COURT OF TAX APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING THAT RESPONDENT PETRON IS NOT LIABLE FOR ITS EXCISE TAX LIABILITIES FROM 1995 TO

1998. 

 ARGUMENTS I THE CTA EN BANC ERRED IN FINDING THAT RESPONDENT PETRON WAS NOT SHOWN TO HAVE PARTICIPATED IN THE FRAUDULENT ACTS. THE FINDING OF THE CTA SECOND DIVISION THAT THE TAX CREDIT CERTIFICATES WERE FRAUDULENTLY TRANSFERRED BY THE TRANSFEROR-COMPANIES TO RESPONDENT IS SUPPORTED BY SUBSTANTIAL EVIDENCE. RESPONDENT WAS INVOLVED IN THE PERPETRATION OF FRAUD IN THE TCCS’ TRANSFER AND UTILIZATION. II RESPONDENT CANNOT VALIDLY CLAIM THE RIGHT OF INNOCENT TRANSFEREE FOR VALUE. AS ASSIGNEE/TRANSFEREE OF THE TCCS, RESPONDENT MERELY SUCCEEDED TO THE RIGHTS OF THE TCC ASSIGNORS/TRANSFERORS. ACCORDINGLY, IF THE TCCS ASSIGNED TO RESPONDENT WERE VOID, IT DID NOT ACQUIRE ANY VALID TITLE OVER THE TCCS. III THE GOVERNMENT IS NOT ESTOPPED FROM COLLECTING TAXES DUE TO THE MISTAKES OF ITS AGENTS. IV RESPONDENT IS LIABLE FOR 25% SURCHARGE AND 20% INTEREST PER ANNUM PURSUANT TO THE PROVISIONS OF SECTIONS 248 AND 249 OF THE NIRC. MOREOVER, SINCE RESPONDENT’S RETURNS WERE FALSE, THE ASSESSMENT PRESCRIBES IN TEN (10) YEARS FROM THE DISCOVERY OF THE FALSITY THEREOF PURSUANT TO SECTION 22 OF THE SAME CODE.[31]

                                   

The Court’s Ruling           We DENY the CIR’s Petition for lack of merit.           Article 21 of E.O. 226 defines a tax credit as follows:

          ARTICLE 21. “Tax credit” shall mean any of the credits against taxes and/or duties equal to those actually paid or would have been paid to evidence which a tax credit certificate shall be issued by the Secretary of Finance or his representative, or the Board, if so delegated by the Secretary of Finance. The tax credit certificates including those issued by the Board pursuant to laws repealed by this Code but without in any way diminishing the scope of negotiability under their laws of issue are transferable under such conditions as may be determined by the Board after consultation with the Department of Finance. The tax credit certificate shall be used to pay taxes, duties, charges and fees due to the National Government; Provided, That the tax credits issued under this Code shall not form part of the gross income of the grantee/transferee for income tax purposes under Section 29 of the National Internal Revenue Code and are therefore not taxable: Provided, further, That such tax credits shall be valid only for a period of ten (10) years from date of issuance.

 

          Under Article 39 (j) of the Omnibus Investment Code of 1987,[32] tax credits are granted to entities registered with the Bureau of Investment (BOI) and are given for taxes and duties paid on raw materials used for the manufacture of their export products.           A TCC is defined under Section 1 of  Revenue Regulation (RR) No. 5-2000, issued by the BIR on 15 August 2000, as follows:

 

B.        Tax Credit Certificate — means a certification, duly issued to the taxpayer named therein, by the Commissioner or his duly authorized representative, reduced in a BIR Accountable Form in accordance with the prescribed formalities, acknowledging that the grantee-taxpayer named therein is legally entitled a tax credit, the money value of which may be used in payment or in satisfaction of any of his internal revenue tax liability (except those excluded), or may be converted as a cash refund, or may otherwise be disposed of in the manner and in accordance with the limitations, if any, as may be prescribed by the provisions of these Regulations.

 

RR 5-2000 prescribes the regulations governing the manner of issuance of  TCCs and the conditions for their use, revalidation and transfer. Under the said regulation, a TCC may be used by the grantee or its assignee in the payment of its direct internal revenue tax liability. [33] It may be transferred in favor of an assignee subject to the following conditions: 1) the TCC transfer must be with prior approval of the Commissioner or the duly authorized representative; 2) the transfer of a TCC should be limited to one transfer only; and 3) the transferee shall strictly use the TCC for the payment of the assignee’s direct internal revenue tax liability and shall not be convertible to cash.[34] A TCC is valid only for 10 years subject to the following rules: (1) it must be utilized within five (5) years from the date of issue; and (2) it must be revalidated thereafter or be otherwise considered invalid.[35]

 The processing of a TCC is entrusted to a specialized agency called the “One-Stop-Shop Inter-Agency

Tax Credit and Duty Drawback Center” (“Center”), created on 07 February 1992 under Administrative Order (A.O.) No. 226. Its purpose is to expedite the processing and approval of tax credits and duty drawbacks.[36] The Center is composed of a representative from the DOF as its chairperson; and the members thereof are representatives of the Bureau of Investment (BOI), Bureau of Customs (BOC) and Bureau of Internal Revenue (BIR), who are tasked to process the TCC and approve its application as payment of an assignee’s tax liability.[37]

 A TCC may be assigned through a Deed of Assignment, which the assignee submits to the Center for its

approval. Upon approval of the deed, the Center will issue a DOF Tax Debit Memo (DOF-TDM), [38] which will be utilized by the assignee to pay the latter’s tax liabilities for a specified period. Upon surrender of the TCC and the DOF-TDM, the corresponding Authority to Accept Payment of Excise Taxes (ATAPET) will be issued by the BIR Collection Program Division and will be submitted to the issuing office of the BIR for acceptance by the Assistant Commissioner of Collection Service. This act of the BIR signifies its acceptance of the TCC as payment of the assignee’s excise taxes.

 Thus, it is apparent that a TCC undergoes a stringent process of verification by various specialized

government agencies before it is accepted as payment of an assignee’s tax liability. 

In the case at bar, the CIR disputes the ruling of the CTA En Banc, which found Petron to have had no participation in the fraudulent procurement and transfer of the TCCs. Petitioner believes that there was substantial evidence to support its allegation of a fraudulent transfer of the TCCs to Petron. [39] The CIR further contends that respondent was not a qualified transferee of the TCCs, because the latter did not supply petroleum products to the companies that were the assignors of the subject TCCs.[40]   

  The CIR bases its contentions on the DOF’s post-audit findings stating that, for the periods covering

1995 to 1998, Petron did not deliver fuel and other petroleum products to the companies (the transferor companies) that had assigned the subject TCCs to respondent. Petitioner further alleges that the findings indicate that the transferor companies could not have had such a high volume of export sales declared to the Center and made the basis for the issuance of the TCCs assigned to Petron.[41] Thus, the CIR impugns the CTA En Banc ruling that respondent was a transferee in good faith and for value of the subject TCCs.[42] 

 Not finding merit in the CIR’s contention, we affirm the ruling of the CTA En Banc finding that Petron is

a transferee in good faith and for value of the subject TCCs. From the records, we observe that the CIR had no allegation that there was a deviation from the

process for the approval of the TCCs, which Petron used as payment to settle its excise tax liabilities for the years 1995 to 1998.

 

The CIR quotes the CTA Second Division and urges us to affirm the latter’s Decision, which found Petron to have participated in the fraudulent issuance and transfer of the TCCs. However, any merit in the position of petitioner on this issue is negated by the Joint Stipulation it entered into with Petron in the proceedings before the said Division. As correctly noted by the CTA En Banc, herein parties jointly stipulated before the Second Division in CTA Case No. 6423 as follows:

 13. That petitioner (Petron) did not participate in the procurement and issuance of

the TCCs, which TCCs were transferred to Petron and later utilized by Petron in payment of its excise taxes.[43]   

 This stipulation of fact by the CIR amounts to an admission and, having been made by the parties in a

stipulation of facts at pretrial, is treated as a judicial admission. Under Section 4, Rule 129 of the Rules of Court, a judicial admission requires no proof.[44] The Court cannot lightly set it aside, especially when the opposing party relies upon it and accordingly dispenses with further proof of the fact already admitted. The exception provided in Rule 129, Section 4 is that an admission may be contradicted only by a showing that it was made through a palpable mistake, or that no such admission was made. In this case, however, exception to the rule does not exist.

 We agree with the pronouncement of the CTA En Banc that Petron has not been shown or proven to

have participated in the alleged fraudulent acts involved in the transfer and utilization of the subject TCCs. Petron had the right to rely on the joint stipulation that absolved it from any participation in the alleged fraud pertaining to the issuance and procurement of the subject TCCs. The joint stipulation made by the parties consequently obviated the opportunity of the CIR to present evidence on this matter, as no proof is required for an admission made by a party in the course of the proceedings. [45] Thus, the CIR cannot now be allowed to change its stand and renege on that admission.

 Moreover, a close examination of  the arguments proffered by the CIR in their Petition calls for a

reevaluation of the sufficiency of evidence in the case. The CIR seeks to persuade this Court to believe that there is substantial evidence to prove that Petron committed a misrepresentation, because the petroleum products were delivered not to the transferor but to other companies.[46] Thus, the TCCs assigned by the transferor companies to Petron were fraudulent. Clearly, a recalibration of the sufficiency of evidence presented by the CIR is needed for a different conclusion to be reached.

 The fundamental rule is that the scope of our judicial review under Rule 45 of the Rules of Court is

confined only to errors of law and does not extend to questions of fact.[47] It is basic that where it is the sufficiency of evidence that is being questioned, there is a question of fact.[48] Evidently, the CIR does not point out any specific provision of law that was wrongly interpreted by the CTA En Banc in the latter’s assailed Decision. Petitioner anchors it contention on the alleged existence of the sufficiency of evidence it had proffered to prove that Petron was involved in the perpetration of fraud in the transfer and utilization of the subject TCCs, an allegation that the CTA En Banc failed to consider. We have consistently held that it is not the function of this Court to analyze or weigh the evidence all over again, unless there is a showing that the findings of the lower court are totally devoid of support or are glaringly erroneous as to constitute palpable error or grave abuse of discretion.[49] Such an exception does not obtain in the circumstances of this case.

 The CIR claims that Petron was not an innocent transferee for value, because the TCCs assigned to

respondent were void. Petitioner based its allegations on the post-audit report of the DOF, which declared that the subject TCCs were obtained through fraud and, thus, had no monetary value. [50] The CIR adds that the TCCs were subject to a post-audit by the Center to complete the payment of the excise tax liability to which they were applied. Petitioner further contends that the Liability Clause of the TCCs makes the transferee or assignee solidarily liable with the original grantee for any fraudulent act pertinent to their procurement and transfer. The CIR assails the contrary ruling of the CTA En Banc, which confined the solidary liability only to the original grantee of the TCCs. Thus, petitioner believes that the correct interpretation of the Liability Clause in the TCCs makes Petron and the transferor companies or the original grantee solidarily liable for any fraudulent act or violation of the pertinent laws relating to the transfers of the TCCs. [51]   

 We are not persuaded by the CIR’s position on this matter. The Liability Clause of the TCCs reads:

Both the TRANSFEROR and the TRANSFEREE shall be jointly and severally liable for any fraudulent act or violation of the pertinent laws, rules and regulations relating to the transfer of this TAX CREDIT CERTIFICATE.

 

The scope of this solidary liability, as stated in the TCCs, was clarified by this Court in Shell, as follows:The above clause to our mind clearly provides only for the solidary liability relative to the

transfer of the TCCs from the original grantee to a transferee. There is nothing in the above clause that provides for the liability of the transferee in the event that the validity of the TCC issued to the original grantee by the Center is impugned or where the TCC is declared to have been fraudulently procured by the said original grantee. Thus, the solidary liability, if any, applies only to the sale of the TCC to the transferee by the original grantee. Any fraud or breach of law or rule relating to the issuance of the TCC by the Center to the transferor or the original grantee is the latter's responsibility and liability. The transferee in good faith and for value may not be unjustly prejudiced by the fraud committed by the claimant or transferor in the procurement or issuance of the TCC from the Center. It is not only unjust but well-nigh violative of the constitutional right not to be deprived of one's property without due process of law. Thus, a re-assessment of tax liabilities previously paid through TCCs by a transferee in good faith and for value is utterly confiscatory, more so when surcharges and interests are likewise assessed. 

 A transferee in good faith and for value of a TCC who has relied on the Center's

representation of the genuineness and validity of the TCC transferred to it may not be legally required to pay again the tax covered by the TCC which has been belatedly declared null and void, that is, after the TCCs have been fully utilized through settlement of internal revenue tax liabilities. Conversely, when the transferee is party to the fraud as when it did not obtain the TCC for value or was a party to or has knowledge of its fraudulent issuance, said transferee is liable for the taxes and for the fraud committed as provided for by law.[52] (Emphasis supplied.)

       

We also find that the post-audit report, on which the CIR based its allegations, does not have the effect of a suspensive condition that would determine the validity of the TCCs.

 We held in Petron v. CIR (Petron),[53] which is on all fours with the instant case, that TCCs are valid and

effective from their issuance and are not subject to a post-audit as a suspensive condition for their validity. Our ruling in Petron finds guidance from our earlier ruling in Shell, which categorically states that a TCC is valid and effective upon its issuance and is not subject to a post-audit. The implication on the instant case of the said earlier ruling is that Petron has the right to rely on the validity and effectivity of the TCCs that were assigned to it. In finally determining their effectivity in the settlement of respondent’s excise tax liabilities, the validity of those TCCs should not depend on the results of the DOF’s post-audit findings. We held thus in Petron:

As correctly pointed out by Petron, however, the issue about the immediate validity of TCCs and the use thereof in payment of tax liabilities and duties are not matters of first impression for this Court. Taking into consideration the definition and nature of tax credits and TCCs, this Court's Second Division definitively ruled in the aforesaid Pilipinas Shell case that the post audit is not a suspensive condition for the validity of TCCs, thus:

Art. 1181 tells us that the condition is suspensive when the acquisition of rights or demandability of the obligation must await the occurrence of the condition. However, Art. 1181 does not apply to the present case since the parties did NOT agree to a suspensive condition. Rather, specific laws, rules, and regulations govern the subject TCCs, not the general provisions of the Civil Code. Among the applicable laws that cover the TCCs are EO 226 or the Omnibus Investments Code, Letter of Instructions No. 1355, EO 765, RP-US Military Agreement, Sec. 106 (c) of the Tariff and Customs Code, Sec. 106 of the NIRC, BIR Revenue Regulations (RRs), and others. Nowhere in the aforementioned laws does the post-audit become necessary for the validity or effectivity of the TCCs. Nowhere in the aforementioned laws is it provided that a TCC is issued subject to a suspensive condition.   

           xxx                    xxx                    xxx

. . . (T)he TCCs are immediately valid and effective after their issuance. As aptly pointed out in the dissent of Justice Lovell Bautista in CTA EB No. 64, this is clear from the Guidelines and instructions found at the back of each TCC, which provide:

1.         This Tax Credit Certificate (TCC) shall entitle the grantee to apply the tax credit against taxes and duties until the amount is fully utilized, in accordance with the pertinent tax and customs laws, rules and regulations.

           xxx                    xxx                    xxx

4.         To acknowledge application of payment, the One-Stop-Shop Tax Credit Center shall issue the corresponding Tax Debit Memo (TDM) to the grantee.

The authorized Revenue Officer/Customs Collector to which payment/utilization was made shall accomplish the Application of Tax Credit at the back of the certificate and affix his signature on the column provided."   

        The foregoing guidelines cannot be clearer on the validity and effectivity of the TCC to pay or settle tax liabilities of the grantee or transferee, as they do not make the effectivity and validity of the TCC dependent on the outcome of a post-audit. In fact, if we are to sustain the appellate tax court, it would be absurd to make the effectivity of the payment of a TCC dependent on a post-audit since there is no contemplation of the situation wherein there is no post-audit. Does the payment made become effective if no post-audit is conducted? Or does the so-called suspensive condition still apply as no law, rule, or regulation specifies a period when a post-audit should or could be conducted with a prescriptive period? Clearly, a tax payment through a TCC cannot be both effective when made and dependent on a future event for its effectivity. Our system of laws and procedures abhors ambiguity.

 Moreover, if the TCCs are considered to be subject to post-audit as a suspensive condition,

the very purpose of the TCC would be defeated as there would be no guarantee that the TCC would be honored by the government as payment for taxes. No investor would take the risk of utilizing TCCs if these were subject to a post-audit that may invalidate them, without prescribed grounds or limits as to the exercise of said post-audit.  

 The inescapable conclusion is that the TCCs are not subject to post-audit as a suspensive

condition, and are thus valid and effective from their issuance.[54]

       

            In addition, Shell and Petron recognized an exception that holds the transferee/assignee liable if proven to have been a party to the fraud or to have had knowledge of the fraudulent issuance of the subject TCCs. As earlier mentioned, the parties entered into a joint stipulation of facts stating that Petron did not participate in the procurement or issuance of those TCCs. Thus, we affirm the CTA En Banc’s ruling that respondent was an innocent transferee for value thereof.           On the issue of estoppel, petitioner contends that the TCCs, which the Center had continually approved as payment for respondent’s excise tax liabilities, were subsequently found to be void. Thus, the CIR insists that the government is not estopped from collecting from Petron the excise tax liabilities that had accrued to the latter as a result of the voidance of these TCCs. Petitioner argues that the State should not be prejudiced by the neglect or omission of government employees entrusted with the collection of taxes.[55]                 

We are not persuaded by the CIR’s argument. We recognize the well-entrenched principle that estoppel does not apply to the government, especially

on matters of taxation. Taxes are the nation’s lifeblood through which government agencies continue to operate and with which the State discharges its functions for the welfare of its constituents.[56] As an exception, however, this general rule cannot be applied if it would work injustice against an innocent party.[57]

 Petron, in this case, was not proven to have had any participation in or knowledge of  the CIR’s

allegation of  the fraudulent transfer and utilization of  the subject TCCs. Respondent’s status as a transferee in good faith and for value of these TCCs has been established and even stipulated upon by petitioner.[58] Respondent was thereby provided ample protection from the adverse findings subsequently made by the Center.[59] Given the circumstances, the CIR’s invocation of the non-applicability of estoppel in this case is misplaced.

  On the final issue it raised, the CIR contends that a 25% surcharge and a 20% interest per annum

must be imposed upon Petron for respondent’s excise tax liabilities as mandated under Sections 248 and 249 of the National Internal Revenue Code (NIRC).[60]Petitioner considers the tax returns filed by respondent for the years 1995 to 1998 as fraudulent on the basis of the post-audit finding that the TCCs were void. It argues that the prescriptive period within which to lawfully assess Petron for its tax liabilities has not prescribed under

Section 222 (a)[61] of the Tax Code. The CIR explains that respondent’s assessment on 30 January 2002 of respondent’s deficiency excise tax for the years 1995 to 1998 was well within the ten-year prescription period.[62]   

 In the light of the main ruling in this case, we affirm the CTA En Banc Decision finding Petron to be an

innocent transferee for value of the subject TCCs. Consequently, the Tax Returns it filed for the years 1995 to 1998 are not considered fraudulent. Hence, the CIR had no legal basis to assess the excise taxes or any penalty surcharge or interest thereon, as respondent had already paid the appropriate excise taxes using the subject TCCs.

WHEREFORE, the CIR’s Petition is DENIED for lack of merit. The CTA En Banc Decision dated 03 December 2008 in CTA EB No. 311 is hereby AFFIRMED in toto. No pronouncement as to costs.     

   SO ORDERED.