TAX+cases+for+Oral+Exam.docx

8/14/2019 TAX+cases+for+Oral+Exam.docx

1/75

1

THIRD DIVISION

[G.R. No. 166006, March 14, 2008]

PLANTERS PRODUCTS, INC., Petitioner, vs. FERTIPHIL CORPORATION, Respondent.

D E C I S I O N

REYES, R.T., J.:

THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the constitutionality ofstatutes, executive orders, presidential decrees and other issuances. The Constitution vests thatpower not only in the Supreme Court but in all Regional Trial Courts.

The principle is relevant in this petition for review on certiorariof the Decision[1]of the Court ofAppeals (CA) affirming with modification that of the RTC in Makati City,[2]finding petitioner PlantersProducts, Inc. (PPI) liable to private respondent Fertiphil Corporation (Fertiphil) for the levies it paid

under Letter of Instruction (LOI) No. 1465.The Facts

Petitioner PPI and private respondent Fertiphil are private corporations incorporated under Philippinelaws.[3]They are both engaged in the importation and distribution of fertilizers, pesticides andagricultural chemicals.

On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI No.1465 which provided, among others, for the imposition of a capital recovery component (CRC) on thedomestic sale of all grades of fertilizers in the Philippines. [4]The LOI provides:

3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a

capital contribution component of not less than P10 per bag. This capital contribution shall becollected until adequate capital is raised to make PPI viable. Such capital contribution shall beapplied by FPA to all domestic sales of fertilizers in the Philippines. [5](Underscoring supplied)

Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market to theFertilizer and Pesticide Authority (FPA). FPA then remitted the amount collected to the Far East Bankand Trust Company, the depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from July 8, 1985to January 24, 1986.[6]

After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With thereturn of democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No.1465, but PPI refused to accede to the demand. [7]

Fertiphil filed a complaint for collection and damages[8]against FPA and PPI with the RTC in Makati.It questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalidand an unlawful imposition that amounted to a denial of due process of law. [9]Fertiphil alleged thatthe LOI solely favored PPI, a privately owned corporation, which used the proceeds to maintain itsmonopoly of the fertilizer industry.

In its Answer,[10]FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 wasa valid exercise of the police power of the State in ensuring the stability of the fertilizer industry in thecountry. It also averred that Fertiphil did not sustain any damage from the LOI because the burdenimposed by the levy fell on the ultimate consumer, not the seller.

RTC Disposition

On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as follows:WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiffand against the defendant Planters Product, Inc., ordering the latter to pay the former:

1) the sum of P6,698,144.00 with interest at 12% from the time of judicial demand;

2) the sum of P100,000 as attorneys fees;


2/75

2

3) the cost of suit.

SO ORDERED.[11]Ruling that the imposition of the P10 CRC was an exercise of the States inherent power oftaxation, the RTC invalidated the levy for violating the basic principle that taxes can only be levied forpublic purpose, viz.:

It is apparent that the imposition of P10 per fertilizer bag sold in the country by LOI 1465 ispurportedly in the exercise of the power of taxation. It is a settled principle that the power of taxationby the state is plenary. Comprehensive and supreme, the principal check upon its abuse resting inthe responsibility of the members of the legislature to their constituents. However, there are two kindsof limitations on the power of taxation: the inherent limitations and the constitutional limitations.

One of the inherent limitations is that a tax may be levied only for public purposes:The power to tax can be resorted to only for a constitutionally valid public purpose. By the sametoken, taxes may not be levied for purely private purposes, for building up of private fortunes, or forthe redress of private wrongs. They cannot be levied for the improvement of private property, or forthe benefit, and promotion of private enterprises, except where the aid is incident to the public benefit.

It is well-settled principle of constitutional law that no general tax can be levied except for the purposeof raising money which is to be expended for public use. Funds cannot be exacted under the guise oftaxation to promote a purpose that is not of public interest. Without such limitation, the power to taxcould be exercised or employed as an authority to destroy the economy of the people. A tax,however, is not held void on the ground of want of public interest unless the want of such interest isclear. (71 Am. Jur. pp. 371-372)In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the Fertilizer and Pesticide

Authority pursuant to the P10 per bag of fertilizer sold imposition under LOI 1465 which, in turn,remitted the amount to the defendant Planters Products, Inc. thru the latters depository bank, FarEast Bank and Trust Co. Thus, by virtue of LOI 1465 the plaintiff, Fertiphil Corporation, which is aprivate domestic corporation, became poorer by the amount of P6,698,144.00 and the defendant,

Planters Product, Inc., another private domestic corporation, became richer by the amount ofP6,698,144.00.

Tested by the standards of constitutionality as set forth in the afore-quoted jurisprudence, it is quiteevident that LOI 1465 insofar as it imposes the amount of P10 per fertilizer bag sold in the countryand orders that the said amount should go to the defendant Planters Product, Inc. is unlawfulbecause it violates the mandate that a tax can be levied only for a public purpose and not to benefit,aid and promote a private enterprise such as Planters Product, Inc. [12]PPI moved for reconsideration but its motion was denied. [13]PPI then filed a notice of appeal with theRTC but it failed to pay the requisite appeal docket fee. In a separate but related proceeding, thisCourt[14]allowed the appeal of PPI and remanded the case to the CA for proper disposition.

CA Decision

On November 28, 2003, the CA handed down its decision affirming with modification that of the RTC,with the following fallo:IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby AFFIRMED, subject tothe MODIFICATIONthat the award of attorneys fees is hereby DELETED.[15]In affirming the RTC decision, the CA ruled that the lis mota of the complaint for collection was theconstitutionality of LOI No. 1465, thus:The question then is whether it was proper for the trial court to exercise its power to judiciallydetermine the constitutionality of the subject statute in the instant case.

As a rule, where the controversy can be settled on other grounds, the courts will not resolve theconstitutionality of a law (Lim v. Pacquing,240 SCRA 649 [1995]). The policy of the courts is to avoidruling on constitutional questions and to presume that the acts of political departments are valid,absent a clear and unmistakable showing to the contrary.

However, the courts are not precluded from exercising such power when the following requisites areobtaining in a controversy before it: First, there must be before the court an actual case calling for theexercise of judicial review. Second, the question must be ripe for adjudication. Third, the personchallenging the validity of the act must have standing to challenge. Fourth, the question ofconstitutionality must have been raised at the earliest opportunity; and lastly, the issue of


3/75

3

constitutionality must be the very lis mota of the case (Integrated Bar of the Philippines v. Zamora,338 SCRA 81 [2000]).

Indisputably, the present case was primarily instituted for collection and damages. However, aperusal of the complaint also reveals that the instant action is founded on the claim that the levyimposed was an unlawful and unconstitutional special assessment. Consequently, the requisite that

the constitutionality of the law in question be the very lis mota of the case is present, making it properfor the trial court to rule on the constitutionality of LOI 1465. [16]The CA held that even on the assumption that LOI No. 1465 was issued under the police power of thestate, it is still unconstitutional because it did not promote public welfare. The CA explained:In declaring LOI 1465 unconstitutional, the trial court held that the levy imposed under the said lawwas an invalid exercise of the States power of taxation inasmuch as it violated the inherent andconstitutional prescription that taxes be levied only for public purposes. It reasoned out that theamount collected under the levy was remitted to the depository bank of PPI, which the latter used toadvance its private interest.

On the other hand, appellant submits that the subject statutes passage was a valid exercise of

police power. In addition, it disputes the court a quosfindings arguing that the collections underLOI 1465 was for the benefit of Planters Foundation, Incorporated (PFI), a foundation created by lawto hold in trust for millions of farmers, the stock ownership of PPI.

Of the three fundamental powers of the State, the exercise of police power has been characterized asthe most essential, insistent and the least limitable of powers, extending as it does to all the greatpublic needs. It may be exercised as long as the activity or the property sought to be regulated hassome relevance to public welfare (Constitutional Law, by Isagani A. Cruz, p. 38, 1995 Edition).

Vast as the power is, however, it must be exercised within the limits set by the Constitution, whichrequires the concurrence of a lawful subject and a lawful method. Thus, our courts have laid down the

test to determine the validity of a police measure as follows: (1) the interests of the public generally,as distinguished from those of a particular class, requires its exercise; and (2) the means employedare reasonably necessary for the accomplishment of the purpose and not unduly oppressive uponindividuals (National Development Company v. Philippine Veterans Bank,192 SCRA 257 [1990]).

It is upon applying this established tests that We sustain the trial courts holding LOI 1465unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the countryis an undertaking imbued with public interest. However, the method by which LOI 1465 sought toachieve this is by no means a measure that will promote the public welfare. The governmentscommitment to support the successful rehabilitation and continued viability of PPI, a privatecorporation, is an unmistakable attempt to mask the subject statutes impartiality. There is no way

to treat the self-interest of a favored entity, like PPI, as identical with the general interest of thecountrys farmers or even the Filipino people in general. Well to stress, substantive due processexacts fairness and equal protection disallows distinction where none is needed. When astatutes public purpose is spoiled by private interest, the use of police power becomes a travestywhich must be struck down for being an arbitrary exercise of government power. To rule in favor ofappellant would contravene the general principle that revenues derived from taxes cannot be used forpurely private purposes or for the exclusive benefit of private individuals. [17]The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for the benefitof Planters Foundation, Inc., a foundation created to hold in trust the stock ownership of PPI. The CAstated:

Appellant next claims that the collections under LOI 1465 was for the benefit of Planters Foundation,

Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers, the stockownership of PFI on the strength of Letter of Undertaking (LOU) issued by then Prime Minister CesarVirata on April 18, 1985 and affirmed by the Secretary of Justice in an Opinion dated October 12,1987, to wit:2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to includein its fertilizer pricing formula a capital recovery component, the proceeds of which will be usedinitially for the purpose of funding the unpaid portion of the outstanding capital stock of Planterspresently held in trust by Planters Foundation, Inc. (Planters Foundation), which unpaid capital isestimated at approximately P206 million (subject to validation by Planters and Planters Foundation)(such unpaid portion of the outstanding capital stock of Planters being hereafter referred to as the


4/75

4

Unpaid Capital), and subsequently for such capital increases as may be required for thecontinuing viability of Planters.

The capital recovery component shall be in the minimum amount of P10 per bag, which will be addedto the price of all domestic sales of fertilizer in the Philippines by any importer and/or fertilizer mothercompany. In this connection, the Republic hereby acknowledges that the advances by Planters to

Planters Foundation which were applied to the payment of the Planters shares now held in trust byPlanters Foundation, have been assigned to, among others, the Creditors. Accordingly, the Republic,through FPA, hereby agrees to deposit the proceeds of the capital recovery component in the specialtrust account designated in the notice dated April 2, 1985, addressed by counsel for the Creditors toPlanters Foundation. Such proceeds shall be deposited by FPA on or before the 15th day of eachmonth.

The capital recovery component shall continue to be charged and collected until payment in full of (a)the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) anycarrying cost accruing from the date hereof on the amounts which may be outstanding from time totime of the Unpaid Capital and/or the Subsidy Receivables and (d) the capital increases contemplated

in paragraph 2 hereof. For the purpose of the foregoing clause (c), the carrying cost shall beat such rate as will represent the full and reasonable cost to Planters of servicing its debts, taking intoaccount both its peso and foreign currency-denominated obligations.(Records, pp. 42-43)

Appellants proposition is open to question, to say the least. The LOU issued by then PrimeMinister Virata taken together with the Justice Secretarys Opinion does not preponderantlydemonstrate that the collections made were held in trust in favor of millions of farmers. Unfortunatelyfor appellant, in the absence of sufficient evidence to establish its claims, this Court is constrained torely on what is explicitly provided in LOI 1465 that one of the primary aims in imposing the levy isto support the successful rehabilitation and continued viability of PPI. [18]PPI moved for reconsideration but its motion was denied. [19]It then filed the present petition with thisCourt.

Issues

Petitioner PPI raises four issues for Our consideration, viz.:I

THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BEDECREED VIA A DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTION AND DAMAGESWHERE THE ISSUE OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTAOF THE CASE.NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR ENTITY WHICH HAS NOSTANDING TO DO SO.

II

LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE FERTILIZERSUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A FOUNDATIONCREATED BY LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCKOWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT TO THE EXERCISE OFTAXATION AND POLICE POWER FOR PUBLIC PURPOSES.

III

THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS REMITTEDTO THE GOVERNMENT, AND BECAME GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE

AND VALIDLY ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS BYVIRTUE OF THE PRINCIPLE OF OPERATIVE FACTPRIOR TO ANY DECLARATION OF

UNCONSTITUTIONALITY OF LOI 1465. IV

THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO APPLICATIONIN THE INSTANT CASE.

[20](Underscoring supplied)

Our Ruling

We shall first tackle the procedural issues of locus standi and the jurisdiction of the RTC to resolveconstitutional issues.


5/75

5

Fert iphi l has locu s standi b ecause i t

suf fered direct injury; doctr ine of

standing is a m ere procedu ral

technical i ty which may be waived.

PPI argues that Fertiphil has no locus standito question the constitutionality of LOI No. 1465 becauseit does not have a personal and substantial interest in the case or will sustain direct injury as a

result of its enforcement.[21]It asserts that Fertiphil did not suffer any damage from the CRC

imposition because incidence of the levy fell on the ultimate consumer or the farmers

themselves, not on the seller fertilizer company.[22]

We cannot agree. The doctrine of locus standior the right of appearance in a court of justice hasbeen adequately discussed by this Court in a catena of cases. Succinctly put, the doctrine requires alitigant to have a material interest in the outcome of a case. In private suits, locus standirequires alitigant to be a real party in interest,which is defined as the party who stands to bebenefited or injured by the judgment in the suit or the party entitled to the avails of the suit.[23]

In public suits, this Court recognizes the difficulty of applying the doctrine especially when plaintiffasserts a public right on behalf of the general public because of conflicting public policy issues. [24]Onone end, there is the right of the ordinary citizen to petition the courts to be freed from unlawfulgovernment intrusion and illegal official action. At the other end, there is the public policy precludingexcessive judicial interference in official acts, which may unnecessarily hinder the delivery of basicpublic services.

In this jurisdiction, We have adopted the direct injury testto determine locus standiin publicsuits. In People v. Vera,[25]it was held that a person who impugns the validity of a statute must havea personal and substantial interest in the case such that he has sustained, or will sustain direct

injury as a result.The direct injury testin public suits is similar to the real party ininterestrule for private suits under Section 2, Rule 3 of the 1997 Rules of Civil Procedure. [26]

Recognizing that a strict application of the direct injurytest may hamper public interest, thisCourt relaxed the requirement in cases of transcendental importanceor with farreaching implications.Being a mere procedural technicality, it has also been held that locusstandimay be waived in the public interest.[27]

Whether or not the complaint for collection is characterized as a private or public suit, Fertiphil haslocus standito file it. Fertiphil suffered a direct injury from the enforcement of LOI No. 1465. It wasrequired, and it did pay, the P10 levy imposed for every bag of fertilizer sold on the domestic market.It may be true that Fertiphil has passed some or all of the levy to the ultimate consumer, but that doesnot disqualify it from attacking the constitutionality of the LOI or from seeking a refund. As seller, itbore the ultimate burden of paying the levy. It faced the possibility of severe sanctions for failure topay the levy. The fact of payment is sufficient injury to Fertiphil.

Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was compelled to factorin its product the levy. The levy certainly rendered the fertilizer products of Fertiphil and otherdomestic sellers much more expensive. The harm to their business consists not only in fewer clientsbecause of the increased price, but also in adopting alternative corporate strategies to meet thedemands of LOI No. 1465. Fertiphil and other fertilizer sellers may have shouldered all or part of thelevy just to be competitive in the market. The harm occasioned on the business of Fertiphil issufficient injury for purposes of locus standi.

Even assuming arguendothat there is no direct injury, We find that the liberal policy consistentlyadopted by this Court on locus standimust apply. The issues raised by Fertiphil are of paramountpublic importance. It involves not only the constitutionality of a tax law but, more importantly, the useof taxes for public purpose. Former President Marcos issued LOI No. 1465 with the intention ofrehabilitating an ailing private company. This is clear from the text of the LOI. PPI is expressly namedin the LOI as the direct beneficiary of the levy. Worse, the levy was made dependent and conditionalupon PPI becoming financially viable. The LOI provided that the capital contribution shall becollected until adequate capital is raised to make PPI viable.


6/75

6

The constitutionality of the levy is already in doubt on a plain reading of the statute. It is Ourconstitutional duty to squarely resolve the issue as the final arbiter of all justiciable controversies. Thedoctrine of standing, being a mere procedural technicality, should be waived, if at all, to adequatelythresh out an important constitutional issue.

RTC may resolve const i tut ion alissues; the const i tut ion al issue was

adequately raised in th e com plaint ; i t

is the l is mota of the case.

PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It asserts thatthe constitutionality of the LOI cannot be collaterally attacked in a complaint for collection. [28]

Alternatively, the resolution of the constitutional issue is not necessary for a determination of thecomplaint for collection.[29]

Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its complaint. It

claims that the constitutionality of LOI No. 1465 is the very lis motaof the case because the trial courtcannot determine its claim without resolving the issue. [30]

It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute, presidentialdecree or an executive order. This is clear from Section 5, Article VIII of the 1987 Constitution, whichprovides:

SECTION 5. The Supreme Court shall have the following powers:x x x x

(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court

may provide, final judgments and orders of lower courts in:(a) All cases in which the constitutionality or validity of any treaty, international or executiveagreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is inquestion. (Underscoring supplied)In Mirasol v. Court of Appeals,[31]this Court recognized the power of the RTC to resolve constitutionalissues, thus:On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to considerthe constitutionality of a statute, presidential decree, or executive order. The Constitution vests thepower of judicial review or the power to declare a law, treaty, international or executive agreement,presidential decree, order, instruction, ordinance, or regulation not only in this Court, but in allRegional Trial Courts.[32]

In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs,[33]

this Courtreiterated:There is no denying that regular courts have jurisdiction over cases involving the validity orconstitutionality of a rule or regulation issued by administrative agencies. Such jurisdiction, however,is not limited to the Court of Appeals or to this Court alone for even the regional trial courts can takecognizance of actions assailing a specific rule or set of rules promulgated by administrative bodies.Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty,international or executive agreement, presidential decree, order, instruction, ordinance, or regulationin the courts, including the regional trial courts. [34]Judicial review of official acts on the ground of unconstitutionality may be sought or availed of throughany of the actions cognizable by courts of justice, not necessarily in a suit for declaratory relief. Such

review may be had in criminal actions, as in People v. Ferrer[35]

involving the constitutionality of thenow defunct Anti-Subversion law, or in ordinary actions, as in Krivenko v. Register of Deeds[36]involving the constitutionality of laws prohibiting aliens from acquiring public lands. The constitutionalissue, however, (a) must be properly raised and presented in the case, and (b) its resolution isnecessary to a determination of the case, i.e., the issue of constitutionality must be the very lis motapresented.[37]

Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly and adequately raisedin the complaint for collection filed with the RTC. The pertinent portions of the complaint allege:


7/75

7

6. The CRC of P10 per bag levied under LOI 1465 on domestic sales of all grades of fertilizer inthe Philippines, is unlawful, unjust, uncalled for, unreasonable, inequitable and oppressivebecause:

x x x x(c) It favors only one private domestic corporation, i.e., defendant PPPI, and imposed at the expenseand disadvantage of the other fertilizer importers/distributors who were themselves in tight business

situation and were then exerting all efforts and maximizing management and marketing skills toremain viable;

x x x x(e) It was a glaring example of crony capitalism, a forced program through which the PPI, havingbeen presumptuously masqueraded as thefertilizer industry itself, was the sole andanointed beneficiary;

7. The CRC was an unlawful; and unconstitutional special assessment and its imposition istantamount to illegal exaction amounting to a denial of due process since the persons ofentities which had to bear the burden of paying the CRC derived no benefit therefrom; that onthe contrary it was used by PPI in trying to regain its former despicable monopoly of thefertilizer industry to the detriment of other distributors and importers. [38](Underscoring

supplied)The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for collection. Fertiphilfiled the complaint to compel PPI to refund the levies paid under the statute on the ground that thelaw imposing the levy is unconstitutional. The thesis is that an unconstitutional law is void. It has nolegal effect. Being void, Fertiphil had no legal obligation to pay the levy. Necessarily, all levies dulypaid pursuant to an unconstitutional law should be refunded under the civil code principle againstunjust enrichment. The refund is a mere consequence of the law being declared unconstitutional. TheRTC surely cannot order PPI to refund Fertiphil if it does not declare the LOI unconstitutional. It is theunconstitutionality of the LOI which triggers the refund. The issue of constitutionality is the very lismotaof the complaint with the RTC.

The P10 levy un der LOI No. 1465 isan exercise of the power of taxat ion.

At any rate, the Court holds that the RTC and the CA did not err in ruling against the constitutionalityof the LOI.

PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of taxation. Itclaims that the LOI was implemented for the purpose of assuring the fertilizer supply and distributionin the country and for benefiting a foundation created by law to hold in trust for millions of farmerstheir stock ownership in PPI.

Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a privatecompany. The levy was imposed to pay the corporate debt of PPI. Fertiphil also argues that, even ifthe LOI is enacted under the police power, it is still unconstitutional because it did not promote thegeneral welfare of the people or public interest.

Police power and the power of taxation are inherent powers of the State. These powers are distinctand have different tests for validity. Police power is the power of the State to enact legislation thatmay interfere with personal liberty or property in order to promote the general welfare, [39]while thepower of taxation is the power to levy taxes to be used for public purpose. The main purpose of policepower is the regulation of a behavior or conduct, while taxation is revenue generation. The lawful

subjectsand lawful meanstests are used to determine the validity of a law enacted

under the police power.[40]

The power of taxation, on the other hand, is circumscribed by inherent andconstitutional limitations.

We agree with the RTC that the imposition of the levy was an exercise by the State of its taxationpower. While it is true that the power of taxation can be used as an implement of police power, [41]theprimary purpose of the levy is revenue generation. If the purpose is primarily revenue, or if revenue is,at least, one of the real and substantial purposes, then the exaction is properly called a tax. [42]

In Philippine Airlines, Inc. v. Edu,[43]it was held that the imposition of a vehicle registration fee is notan exercise by the State of its police power, but of its taxation power, thus:


8/75

8

It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61 of the LandTransportation and Traffic Code that the legislative intent and purpose behind the law requiringowners of vehicles to pay for their registration is mainly to raise funds for the construction andmaintenance of highways and to a much lesser degree, pay for the operating expenses of theadministering agency. x x x Fees may be properly regarded as taxes even though they also serve asan instrument of regulation.

Taxation may be made the implement of the state's police power (Lutz v. Araneta,98 Phil. 148). If thepurpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, thenthe exaction is properly called a tax. Such is the case of motor vehicle registration fees. The sameprovision appears as Section 59(b) in the Land Transportation Code. It is patent therefrom that thelegislators had in mind a regulatory tax as the law refers to the imposition on the registration,operation or ownership of a motor vehicle as a tax or fee.x x x Simply put, if the exactionunder Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be anadditionaltax. Rep. Act 4136 also speaks of other feessuch as the special permitfees for certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec.11). These are not to be understood as taxes because such fees are very minimal to be revenue-

raising. Thus, they are not mentioned by Sec. 59(b) of the Code as taxes like the motor vehicleregistration fee and chauffeurs license fee. Such fees are to go into the expenditures of the LandTransportation Commission as provided for in the last proviso of Sec. 61. [44](Underscoring supplied)The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy, nodoubt, was a big burden on the seller or the ultimate consumer. It increased the price of a bag offertilizer by as much as five percent.[45]A plain reading of the LOI also supports the conclusion thatthe levy was for revenue generation. The LOI expressly provided that the levy was imposed until

adequate capital is raised to make PPI viable.

Taxes are exacted only fo r a pub l ic

pu rpo se. The P10 levy is

unco nst i tut ional because i t was notfor a publ ic p urpos e. The levy was

impo sed to g ive undue benef i t to PPI.

An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a publicpurpose. They cannot be used for purely private purposes or for the exclusive benefit of privatepersons.[46]The reason for this is simple. The power to tax exists for the general welfare; hence,implicit in its power is the limitation that it should be used only for a public purpose. It would be arobbery for the State to tax its citizens and use the funds generated for a private purpose. As an oldUnited States case bluntly put it: To lay with one hand, the power of the government on theproperty of the citizen, and with the other to bestow it upon favored individuals to aid private

enterprises and build up private fortunes, is nonetheless a robbery because it is done under the formsof law and is called taxation.[47]

The term public purposeis not defined. It is an elastic concept that can be hammered to fitmodern standards. Jurisprudence states that public purposeshould be given a broadinterpretation. It does not only pertain to those purposes which are traditionally viewed as essentiallygovernment functions, such as building roads and delivery of basic services, but also includes thosepurposes designed to promote social justice. Thus, public money may now be used for the relocationof illegal settlers, low-cost housing and urban or agrarian reform.

While the categories of what may constitute a public purpose are continually expanding in light of the

expansion of government functions, the inherent requirement that taxes can only be exacted for apublic purpose still stands. Public purpose is the heart of a tax law. When a tax law is only a mask toexact funds from the public when its true intent is to give undue benefit and advantage to a privateenterprise, that law will not satisfy the requirement of public purpose.

The purpose of a law is evident from its text or inferable from other secondary sources. Here, Weagree with the RTC and that CA that the levy imposed under LOI No. 1465 was not for a publicpurpose.


9/75

9

First,the LOI expressly provided that the levy be imposed to benefit PPI, a private company. Thepurpose is explicit from Clause 3 of the law, thus:

3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula acapital contribution component of not less than P10 per bag. This capital contribution shall becollected until adequate capital is raised to make PPI viable. Such capital contribution shall beapplied by FPA to all domestic sales of fertilizers in the Philippines. [48](Underscoring supplied)

It is a basic rule of statutory construction that the text of a statute should be given a literal meaning. Inthis case, the text of the LOI is plain that the levy was imposed in order to raise capital for PPI. Theframers of the LOI did not even hide the insidious purpose of the law. They were cavalier enough toname PPI as the ultimate beneficiary of the taxes levied under the LOI. We find it utterly repulsive thata tax law would expressly name a private company as the ultimate beneficiary of the taxes to belevied from the public. This is a clear case of crony capitalism.

Second,the LOI provides that the imposition of the P10 levy was conditional and dependent uponPPI becoming financially viable.This suggests that the levy was actually imposed to benefitPPI. The LOI notably does not fix a maximum amount when PPI is deemed financiallyviable.Worse, the liability of Fertiphil and other domestic sellers of fertilizer to pay the levy is

made indefinite. They are required to continuously pay the levy until adequate capital is raised forPPI.

Third,the RTC and the CA held that the levies paid under the LOI were directly remitted anddeposited by FPA to Far East Bank and Trust Company, the depositary bank of PPI. [49]This provesthat PPI benefited from the LOI. It is also proves that the main purpose of the law was to give unduebenefit and advantage to PPI.

Fourth,the levy was used to pay the corporate debts of PPI. A reading of the Letter ofUnderstanding[50]dated May 18, 1985 signed by then Prime Minister Cesar Virata reveals that PPIwas in deep financial problem because of its huge corporate debts. There were pending petitions for

rehabilitation against PPI before the Securities and Exchange Commission. The governmentguaranteed payment of PPIs debts to its foreign creditors. To fund the payment, PresidentMarcos issued LOI No. 1465. The pertinent portions of the letter of understanding read:

Republic of the PhilippinesOffice of the Prime Minister

Manila

LETTER OF UNDERTAKING

May 18, 1985

TO: THE BANKING AND FINANCIAL INSTITUTIONS LISTED IN ANNEX A HERETO WHICH ARECREDITORS (COLLECTIVELY, THE CREDITORS) OF PLANTERS PRODUCTS, INC.(PLANTERS)

Gentlemen:

This has reference to Planters which is the principal importer and distributor of fertilizer, pesticidesand agricultural chemicals in the Philippines. As regards Planters, the Philippine Governmentconfirms its awareness of the following: (1) that Planters has outstanding obligations in foreigncurrency and/or pesos, to the Creditors, (2) that Planters is currently experiencing financial difficulties,and (3) that there are presently pending with the Securities and Exchange Commission of the

Philippines a petition filed at Planters own behest for the suspension of payment of all itsobligations, and a separate petition filed by Manufacturers Hanover Trust Company, Manila OffshoreBranch for the appointment of a rehabilitation receiver for Planters.

In connection with the foregoing, the Republic of the Philippines (the Republic) confirms thatit considers and continues to consider Planters as a major fertilizer distributor. Accordingly, for and inconsideration of your expressed willingness to consider and participate in the effort to rehabilitatePlanters, the Republic hereby manifests its full and unqualified support of the successful rehabilitationand continuing viability of Planters, and to that end, hereby binds and obligates itself to the creditorsand Planters, as follows:


10/75

10

x x x x

2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in itsfertilizer pricing formula a capital recovery component, the proceeds of which will be used initially forthe purpose of funding the unpaid portion of the outstanding capital stock of Planters presently held in

trust by Planters Foundation, Inc. (Planters Foundation), which unpaid capital is estimatedat approximately P206 million (subject to validation by Planters and Planters Foundation) such unpaidportion of the outstanding capital stock of Planters being hereafter referred to as the UnpaidCapital), and subsequently for such capital increases as may be required for the continuingviability of Planters.

x x x x

The capital recovery component shall continue to be charged and collected until payment in full of (a)the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) anycarrying cost accruing from the date hereof on the amounts which may be outstanding from time to

time of the Unpaid Capital and/or the Subsidy Receivables, and (d) the capital increasescontemplated in paragraph 2 hereof. For the purpose of the foregoing clause (c), the carrying

costshall be at such rate as will represent the full and reasonable cost to Planters of servicing itsdebts, taking into account both its peso and foreign currency-denominated obligations.

REPUBLIC OF THE PHILIPPINESBy:

(signed)CESAR E. A. VIRATA

Prime Minister and Minister of Finance[51]It is clear from the Letter of Understanding that the levy was imposed precisely to pay the corporate

debts of PPI. We cannot agree with PPI that the levy was imposed to ensure the stability of thefertilizer industry in the country. The letter of understanding and the plain text of the LOI clearlyindicate that the levy was exacted for the benefit of a private corporation.

All told, the RTC and the CA did not err in holding that the levy imposed under LOI No. 1465 was notfor a public purpose. LOI No. 1465 failed to comply with the public purpose requirement for tax laws.

The LOI is st i l l unc onst i tut ion al even

i f enacted u nder the po l ice power; i t

did not prom ote publ ic interest.

Even if We consider LOI No. 1695 enacted under the police power of the State, it would still be invalidfor failing to comply with the test of lawful subjectsand lawful means.Jurisprudence states the test as follows: (1) the interest of the public generally, as distinguished fromthose of particular class, requires its exercise; and (2) the means employed are reasonably necessaryfor the accomplishment of the purpose and not unduly oppressive upon individuals. [52]

For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote publicinterest. The law was enacted to give undue advantage to a private corporation. We quote withapproval the CA ratiocination on this point, thus:It is upon applying this established tests that We sustain the trial courts holding LOI 1465unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the country

is an undertaking imbued with public interest. However, the method by which LOI 1465 sought toachieve this is by no means a measure that will promote the public welfare. The governmentscommitment to support the successful rehabilitation and continued viability of PPI, a privatecorporation, is an unmistakable attempt to mask the subject statutes impartiality. There is no wayto treat the self-interest of a favored entity, like PPI, as identical with the general interest of thecountrys farmers or even the Filipino people in general.Well to stress, substantive due processexacts fairness and equal protection disallows distinction where none is needed. When astatutes public purpose is spoiled by private interest, the use of police power becomes a travestywhich must be struck down for being an arbitrary exercise of government power. To rule in favor of


11/75

11

appellant would contravene the general principle that revenues derived from taxes cannot be used forpurely private purposes or for the exclusive benefit of private individuals. (Underscoring supplied)The general rule is that an

unco nst i tut ional law is void; the

doctr ine o f op erat ive fact is inappl icable.

PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared unconstitutional.It banks on the doctrine of operative fact, which provides that an unconstitutional law has an effectbefore being declared unconstitutional. PPI wants to retain the levies paid under LOI No. 1465 even ifit is subsequently declared to be unconstitutional.

We cannot agree. It is settled that no question, issue or argument will be entertained on appeal,unless it has been raised in the court a quo.[53]PPI did not raise the applicability of the doctrine ofoperative fact with the RTC and the CA. It cannot belatedly raise the issue with Us in order toextricate itself from the dire effects of an unconstitutional law.

At any rate, We find the doctrine inapplicable. The general rule is that an unconstitutional law is void.

It produces no rights, imposes no duties and affords no protection. It has no legal effect. It is, in legalcontemplation, inoperative as if it has not been passed. [54]Being void, Fertiphil is not required to paythe levy. All levies paid should be refunded in accordance with the general civil code principle againstunjust enrichment. The general rule is supported by Article 7 of the Civil Code, which provides:

ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance shall notbe excused by disuse or custom or practice to the contrary.

When the courts declare a law to be inconsistent with the Constitution, the former shall be void andthe latter shall govern.The doctrine of operative fact, as an exception to the general rule, only applies as a matter of equityand fair play.[55]It nullifies the effects of an unconstitutional law by recognizing that the existence of a

statute prior to a determination of unconstitutionality is an operative fact and may have consequenceswhich cannot always be ignored. The past cannot always be erased by a new judicial declaration. [56]

The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden onthose who have relied on the invalid law. Thus, it was applied to a criminal case when a declaration ofunconstitutionality would put the accused in double jeopardy [57]or would put in limbo the acts done bya municipality in reliance upon a law creating it. [58]

Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid by Fertiphil underLOI No. 1465. It unduly benefited from the levy. It was proven during the trial that the levies paid wereremitted and deposited to its bank account. Quite the reverse, it would be inequitable and unjust not

to order a refund. To do so would unjustly enrich PPI at the expense of Fertiphil. Article 22 of the CivilCode explicitly provides that every person who, through an act of performance by another comesinto possession of something at the expense of the latter without just or legal ground shall return thesame to him.We cannot allow PPI to profit from an unconstitutional law. Justice and equitydictate that PPI must refund the amounts paid by Fertiphil.

WHEREFORE,the petition is DENIED.The Court of Appeals Decision dated November 28, 2003 isAFFIRMED.

SO ORDERED.

Ynares-Santiago, (Chairperson), Austria-Martinez, Chico-Nazario,and Nachura, JJ.,concur.


12/75

12

SECOND DIVISION

PETRON CORPORATION, G.R. No. 158881Petitioner,

Present:

- versus - QUISUMBING, J.,Chairperson,

CARPIO MORALES,TINGA,

MAYOR TOBIAS M. TIANGCO, VELASCO, JR, andand MUNICIPAL TREASURER BRION, JJ.

MANUEL T. ENRIQUEZ of theMUNICIPALITY OF NAVOTAS,METRO MANILA,

Respondents.Promulgated:

April 16, 2008

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

D E C I S I O N

TINGA, J.:

The novel but important issue before us is whether a local government unit is empoweredunder the Local Government Code (the LGC) to impose business taxes on persons or entitiesengaged in the sale of petroleum products.

I.

The present Petition for Review on Certiorari under Rule 45 filed by petitioner PetronCorporation (Petron) directly assails the Decision of the Regional Trial Court (RTC) of Malabon,Branch 74, which dismissed petitioners complaint for cancellation of assessment made by the thenmunicipality (now City) of Navotas (Navotas) for deficiency taxes, and ordering the payment ofP10,204,916.17 pesos in business taxes to Navotas. As the issues raised are pure questions of law,we need not dwell on the facts at length.

Petron maintains a depot or bulk plant at the Navotas Fishport Complex in Navotas. Through

that depot, it has engaged in the selling of diesel fuels to vessels used in commercial fishing in andaround Manila Bay.1[1]On 1 March 2002, Petron received a letter from the office of Navotas Mayor,respondent Toby Tiangco, wherein the corporation was assessed taxes relative to the figurescovering sale of diesel declared by your Navotas Terminal from 1997 to 2001.

2[2]The stated total


13/75

13

amount due was P6,259,087.62, a figure derived from the gross sales of the depot during the years inquestion. The computation sheets3[3]that were attached to the letter made reference to Ordinance 92-03, or the New Navotas Revenue Code (Navotas Revenue Code), though such enactment was notcited in the letter itself.

Petron duly filed with Navotas a letter-protest to the notice of assessment pursuant to Section195 of the Code. It argued that it was exempt from local business taxes in view of Art. 232(h) of theImplementing Rules (IRR) of the Code, as well as a ruling of the Bureau of Local GovernmentFinance of the Department of Finance dated 31 July 1995, the latter stating that sales of petroleumfuels are not subject to local taxation. The letter-protest was denied by the Navotas MunicipalTreasurer, respondent Manuel T. Enriquez, in a letter dated 8 May 2002. 4[4]This was followed by aletter from the Mayor dated 15 May 2002, captioned Final Demand to Pay, requiring that Petron paythe assessed amount within five (5) days from receipt thereof, with a threat of closure of Petronsoperations within Navotas should there be no payment.5[5] Petron, through counsel, replied to theMayor by another letter posing objections to the threat of closure. The Mayor did not respond to thislast letter.6[6]

Thus, on 20 May 2002, Petron filed with the Malabon RTC a Complaint for Cancellation ofAssessment for Deficiency Taxes with Prayer for the Issuance of a Temporary Restraining Order(TRO) and/or Preliminary Injunction. The quested TRO was not issued by the Malabon RTC uponmanifestation of respondents that they would not proceed with the closure of Petrons Navotas bulkplant until after the RTC shall have decided the case on the merits. 7[7]However, while the case waspending decision, respondents refused to issue a business permit to Petron, thus prompting Petron tofile a Supplemental Complaint with Prayer for Preliminary Mandatory Injunction againstrespondents.8[8]

On 5 May 2003, the Malabon RTC rendered its Decision dismissing Petrons complaint and

ordering the payment of the assessed amount.9[9]

Eleven days later, Petron received a Closure Orderfrom the Mayor, directing Petron to cease and desist from operating the bulk plant. Petron sought a


14/75

14

TRO from the Malabon RTC, but this was denied.10[10]Petron also filed a motion for reconsideration ofthe order of denial, but this was likewise denied.11[11]

On 4 August 2003, this Court issued a TRO, enjoining the respondents from closing PetronsNavotas bulk plant or otherwise interfering in its operations.12[12]

II.

As earlier stated, Petron has opted to assail the RTC Decision directly before this Court sincethe matter at hand involves pure questions of law, a characterization conceded by the RTC Decisionitself. Particularly, the controversy hinges on the correct interpretation of Section 133(h) of the LGC,and the applicability of Article 232 (h) of the IRR.

Section 133(h) of the LGC reads as follows:

Sec. 133. Common Limitations on the Taxing Powers of Local GovernmentUnits. - Unless otherwise provided herein, the exercise of the taxing powers of

provinces, cities, municipalities, and Barangays shall not extend to the levy of thefollowing:

xxx

(h) Excise taxes on articles enumerated under the National Internal RevenueCode, as amended, and taxes, fees or charges on petroleum products;

Evidently, Section 133 prescribes the limitations on the capacity of local government units toexercise their taxing powers otherwise granted to them under the LGC. Apparently, paragraph (h) ofthe Section mentions two kinds of taxes which cannot be imposed by local government units, namely:

excise taxes on articles enumerated under the National Internal Revenue Code [(NIRC)], asamended; and taxes, fees or charges on petroleum products.

The power of a municipality to impose business taxes is provided for in Section 143 of theLGC. Under the provision, a municipality is authorized to impose business taxes on a whole host ofbusiness activities. Suffice it to say, unless there is another provision of law which states otherwise,Section 143, broad in scope as it is, would undoubtedly cover the business of selling diesel fuels, orany other petroleum product for that matter.

Nonetheless, Article 232 of the IRR defines with more particularity the capacity of amunicipality to impose taxes on businesses. The enumeration that follows is generally a positive listof businesses which may be subjected to business taxes, and paragraph (h) of Article 232 does allowthe imposition of local business taxes [o]n any business not otherwise specified in the precedingparagraphs which the sanggunian concerned may deem proper to tax, but subject to this importantqualification, thus:


15/75

15

xxx provided further, that in line with existing national policy, any businessengaged in the production, manufacture, refining, distribution or sale of oil, gasoline andother petroleum products shall not be subject to any local tax imposed on this article.

Notably, the Malabon RTC declared Art. 232(h) of the IRR void because the Code purportedly

does not contain a provision prohibiting the imposition of business taxes on petroleum products. 13[13]This submission warrants close examination as well.

With all the relevant provisions of law laid out, we address the core issues submitted byPetron, namely: first, is the challenged tax on sale of the diesel fuels an excise tax on an articleenumerated under the NIRC, thusly prohibited under Section 133(h) of the Code?; second, is thechallenged tax prohibited by Section 133(h) under theproviso, taxes, fees or charges on petroleumproducts? and; third, does Art. 232(h) of the IRR similarly prohibit the imposition of the challengedtax?

III

As earlier observed, Section 133(h) provides two kinds of taxes which cannot be imposed bylocal government units: excise taxes on articles enumerated under the NIRC, as amended; andtaxes, fees or charges on petroleum products. There is no doubt that among the excise taxes onarticles enumerated under the NIRC are those levied on petroleum products, per Section 148 of theNIRC.

We first consider Petrons argument that the business taxes on its sale of diesel fuelspartakes of an excise tax, which if true, could invalidate the challenged tax solely on the basis of thephrase excise taxes on articles enumerated under the [NIRC]. To support this argument, it citesCordero v. Conda,14[14]Allied Thread Co. Inc. v. City Mayor of Manila,15[15]and Iloilo Bottlers, Inc. v.

City of Iloilo,16[16]

as having explained that an excise tax is a tax upon the performance, carrying on,or the exercise of an activity.17[17] Respondents, on the other hand, argue that what the provisionprohibits is the imposition of excise taxes on petroleum products, but not the imposition of businesstaxes on the same. They cite Philippine Petroleum Corporation v. Municipality of Pililia,18[18]where theCourt had noted, [a] tax on business is distinct from a tax on the article itself.

19[19]


16/75

16

Petrons argument is fraught with far-reaching implications, for if it were sustained, it wouldmean that local government units are barred from imposing business taxes on any of the articlessubject to excise taxes under the NIRC. These would include alcohol products,20[20] tobaccoproducts,21[21]mineral products22[22]automobiles,23[23]and such non-essential goods as jewelry, goodsmade of precious metals, perfumes, and yachts and other vessels intended for pleasure or

sports.24[24]

Admittedly, the proffered definition of an excise tax as a tax upon the performance, carryingon, or exercise of some right, privilege, activity, calling or occupation derives from the compendium

American Jurisprudence, popularly referred to as Am Jur,,25[25] and has been cited in previousdecisions of this Court, including those cited by Petron itself. Such a definition would not havebeen


17/75

17

inconsistent with previous incarnations of our Tax Code, such as the NIRC of 1939,26[26]as amended,or the NIRC of 197727[27]because in those laws the term excise tax was not used at all. In contrast,the nomenclature used in those prior laws in referring to taxes imposed on specific articles wasspecific tax.

28[28]Yet beginning with the National Internal Revenue Code of 1986, as amended, theterm excise taxes was used and defined as applicable to goods manufactured or produced in the

Philippines and to things imported.29[29]This definition was carried over into the present NIRC of1997.30[30] Further, these two latest codes categorize two different kinds of excise taxes: specifictax which is imposed and based on weight or volume capacity or any other physical unit ofmeasurement; and ad valorem tax which is imposed and based on the selling price or otherspecified value of the goods. In other words, the meaning of excise tax has undergone atransformation, morphing from the Am Jur definition to its current signification which is a tax oncertain specified goods or articles.


18/75

18

The change in perspective brought forth by the use of the term excise tax in a differentconnotation was not lost on the departed author Jose Nolledo as he accorded divergent treatments inhis 1973 and 1994 commentaries on our tax laws. Writing in 1973, and essentially alluding to the AmJur definition of excise tax, Nolledo observed:

Are specific taxes, taxes on property or excise taxes

In the case of Meralco v. Trinidad ([G.R.] 16738, 1925) it was held that specifictaxes are property taxes, a ruling which seems to be erroneous. Specific taxes are trulyexcise taxes for the fact that the value of the property taxed is taken into account will notchange the nature of the tax. It is correct to say that specific taxes are taxes on theprivilege to import, manufacture and remove from storage certain articles specified bylaw.31[31]

In contrast, after the tax code was amended to classify specific taxes as a subset of excisetaxes, Nolledo, in his 1994 commentaries, wrote:

1. Excise taxes, as used in the Tax Code, refers to taxes applicable to certainspecified goods or articles manufactured or produced in the Philippines for domesticsale or consumption or for any other disposition and to things imported into thePhilippines. They are either specificor ad valorem.

2. Nature of excise taxes.They are imposed directly on certain specified goods.(infra) They are, therefore, taxes on property. (see Medina vs. City of Baguio, 91 Phil.854.)


19/75

19

A tax is not excise where it does not subject directly the produce or goods to taxbut indirectly as an incident to, or in connection with, the business to be taxed.32[32]

In their 2004 commentaries, De Leon and De Leon restate the Am Jurdefinition of excise tax,and observe that the term is synonymous with privilege tax and [both terms] are often used

interchangeably.33[33]

At the same time, they offer a caveat that [e]xcise tax, as [defined byAm Jur],is not to be confused with excise tax imposed [by the NIRC] on certain specified articlesmanufactured or produced in, or imported into, the Philippines, for domestic sale or consumption orfor any other disposition.34[34]

It is evident thatAm Juraside, the current definition of an excise tax is that of a tax levied on aspecific article, rather than one upon the performance, carrying on, or the exercise of an activity.This current definition was already in place when the Code was enacted in 1991, and we can onlypresume that it was what the Congress had intended as it specified that local government units couldnot impose excise taxes on articles enumerated under the [NIRC]. This prohibition must pertain tothe same kind of excise taxes as imposed by the NIRC, and not those p reviously defined excise

taxes which were not integrated or denominated as such in our present tax law.

It is quite apparent, therefore, that our current body of taxation law does not explicitlyaccommodate the traditional definition of excise tax offered by Petron. In fact, absent any statutoryadoption of the traditional definition, it may be said that starting in 1986 excise taxes in this jurisdictionrefer exclusively to specific or ad valoremtaxes imposed under the NIRC. At the very least, it is thisconcept of excise tax which we can reasonably assume that Congress had in mind and actuallyadopted when it crafted the Code. The palpable absurdity that ensues should the alternativeinterpretation prevail all but strengthens this position.

Thus, Petrons argument concerning excise taxes is founded not on what the NIRC or the

Code actually provides, but on a non-statutory definition sourced from a legal paradigm that is nolonger applicable in this jurisdiction. That such definition was referred to again in our 1998 decision inProvince of Bulacan v. Court of Appeals35[35] is ultimately of little consequence, and so is Petronsreliance on such ruling. The Court therein had correctly nullified, on the basis of Section 133(h) of theCode, a province-imposed tax of 10% of the fair market value in the locality per cubic meter ofordinary stones, sand, gravel, earth and other quarry resources xxx extracted from public lands,because it noted that under Section 151 of the NIRC, all nonmetallic minerals and quarry resourceswere assessed with excise taxes of two percent (2%) based on the actual market value of the grossoutput thereof at the time of removal, in case of those locally extracted or produced.

36[36]Additionally,the Court also observed that the case had emanated from an attempt to impose the said tax onquarry resources from private lands, despite the clear language of the tax ordinance limiting the tax


20/75

20

to such resources extracted from public lands.37[37]On that score alone, the case could have beencorrectly decided.

It is true that the Court had additionally reasoned in Province of Bulacanthat [t]he tax imposedby the Province of Bulacan is an excise tax, being a tax upon the performance, carrying on, orexercise of an activity. As earlier noted, such definition of excise tax however was not explicitly

carried over into the NIRC and was even superseded beginning with the 1986 amendments thereto.To insist on utilizing this definition simply because it had been reiterated in Province of Bulacan,unnecessary as such reiteration may have been to the resolution of that case, would have theunfortunate effect of infusing life into a concept that is diametrically inconsistent with the present stateof the law.

We thus can assert with clear comfort that excise taxes, as imposed under the NIRC, do notpertain to the performance, carrying on, or exercise of an activity, at least not to the extent ofequating excise with business taxes.

IV.

We next consider whether the clause taxes, fees or charges on petroleum products inSection 133(h) precludes local government units from imposing business taxes based on the sale ofpetroleum products.

The power of a municipality to impose business taxes derives from Section 143 of the Codethat specifically enumerates several types of business on which it may impose taxes, includingmanufacturers, wholesalers, distributors, dealers of any article of commerce of whatever nature;38[38]

those engaged in the export or commerce of essential commodities;39[39]

retailers;40[40]

contractorsand other independent contractors;41[41]banks and financial institutions;42[42]and peddlers engaged inthe sale of any merchandise or article of commerce.43[43] This obviously broad power is furthersupplemented by paragraph (h) of Section 143 which authorizes the sanggunianto impose taxes on


21/75

21

any other businesses not otherwise specified under Section 143 which the sanggunian concernedmay deem proper to tax.44[44]

This ability of local government units to impose business or other local taxes is ultimatelyrooted in the 1987 Constitution. Section 5, Article X assures that [e]ach local government unit shallhave the power to create its own sources of revenues and to levy taxes, fees and charges, though

the power is subject to such guidelines and limitations as the Congress may provide. There is nodoubt that following the 1987 Constitution and the Code, the fiscal autonomy of local governmentunits has received greater affirmation than ever. Previous decisions that have been skeptical of theviability, if not the wisdom of reposing fiscal autonomy to local government units have fallen by thewayside.

Respondents cite our declaration in City Government ofSan Pablo v. Reyes45[45]that followingthe 1987 Constitution the rule thenceforth in interpreting statutory provisions on municipal fiscalpowers, doubts will have to be resolved in favor of municipal corporations. 46[46]Such policy is alsoechoed in Section 5(a) of the Code, which states that [a]ny provision on a power of a localgovernment unit shall be liberally interpreted in its favor, and in case of doubt, any question thereon

shall be resolved in favor of devolution of powers and of the lower local government unit. Butsomewhat conversely, Section 5(b) then proceeds to assert that [i]n case of doubt, any tax ordinanceor revenue measure shall be construed strictly against the local government unit enacting it, andliberally in favor of the taxpayer.47[47] And this latter qualification has to be respected as aconstitutionally authorized limitation which Congress has seen fit to provide. Evidently, local fiscalautonomy should not necessarily translate into abject deference to the power of local governmentunits to impose taxes.

Congress has the constitutional authority to impose limitations on the power to tax of localgovernment units, and Section 133 of the Code is one such limitation. Indeed, the provision is theexplicit statutory impediment to the enjoyment of absolute taxing power by local government units,

not to mention the reality that such power is a delegated power. To cite one example, under Section133(g), local government units are disallowed from levying business taxes on business enterprisescertified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and (4) fouryears, respectively from the date of registration.

Section 133(h) states that local government units shall not extend to the levy of xxx taxes,fees or charges on petroleum products. Respondents assert that the phrase taxes, fees or chargeson petroleum products pertains to the imposition of direct or excise taxes on petroleum products, andnot business taxes. If the phrase actually pertains to excise taxes, then it would be an exercise inutter redundancy, since the preceding phrase already prohibits the imposition of excise taxes onarticles already subject to such taxes under the NIRC, such as petroleum products. There would be

no sense on the part of the legislature to twice emphasize in the same sentence that excise taxes onpetroleum products are beyond the pale of local government taxation.


22/75

22

It appears that this argument of respondents was fashioned on the basis of the pronouncementof the Court in Philippine Petroleum Corporation v. Municipality of Pililla, thus:48[48]

xxx [W]hile Section 2 of P.D. 436 prohibits the imposition of local taxes on petroleumproducts, said decree did not amend Sections 19 and 19 (a) of P.D. 231 as amended byP.D. 426, wherein the municipality is granted the right to levy taxes on business of

manufacturers, importers, producers of any article of commerce of whatever kind ornature. A tax on business is distinct from a tax on the article itself. Thus, if theimposition of tax on business of manufacturers, etc. in petroleum products contravenesa declared national policy, it should have been expressly stated in P.D. No. 436.

The dicta that [a] tax on a business is distinct from a tax on the article itself might at firstblush somehow lend support to respondents position, yet that dicta has not since been reprised bythis Court. It is likewise worth observing that Pililladid involve a tax ordinance that imposed businesstaxes on an enterprise engaged in the manufacture and storage of petroleum products.

Significantly, the legal milieu governing Pilillais vastly different from that existing at bar, to the

extent that the earlier case could not be presently controlling.

At the time the taxes sought to be collected in Pilillawere imposed, there was no national lawin place similar to Section 133(h) of the Code that barred local taxes, fees or charges on petroleumproducts. There were circulars to that effect issued by the Finance Department, yet the Court couldnot validate such issuances since under the tax laws then in place no exemptions were giventomanufacturers, wholesalers, retailers, or dealers in petroleum products.49[49]In fact, the Court tellingly

observed that if the imposition of tax on business of manufacturers, etc. in petroleum productscontravenes a declared national policy, it should have been expressly stated in P.D. No. 436.

50[50]Such expression conspiciously missing in P.D. No. 436 is now found in Section 133(h).

In view of the difference in statutory paradigm between this case and Pililla, the latter case isseverely diminished as applicable precedent at bar. The Court then was correct in observing that amere administrative circular could not prohibit a local tax that is not otherwise barred under a nationalstatute, yet in this case that conflict is not present since the Code explicitly prohibits the imposition ofseveral classes of local taxes, including those on petroleum products. The final and only straw Pilillaprovides that respondents can still grasp at is the bare statement that [a] tax on a business is distinctfrom a tax on the article itself,51[51] a sentence which could have been omitted from that decision

without any effect.

We can concede that a tax on a business is distinct from a tax on the article itself, or for thatmatter, that a business tax is distinct from an excise tax. However, such distinction is immaterialinsofar as the latter part of Section 133(h) is concerned, for the phrase taxes, fees or charges on


23/75

23

petroleum products does not qualify the kind of taxes, fees or charges that could withstand theabsolute prohibition imposed by the provision. It would have been a different matter had Congress, incrafting Section 133(h), barred excise taxes or direct taxes, or any category of taxes only, for thenit would be understood that only such specified taxes on petroleum products could not be imposedunder the prohibition. The absence of such a qualification leads to the conclusion that all sorts oftaxes on petroleum products, including business taxes, are prohibited by Section 133(h). Where the

law does not distinguish, we should not distinguish.

The language of Section 133(h) makes plain that the prohibition with respect to petroleumproducts extends not only to excise taxes thereon, but all taxes, fees and charges. The earlierreference in paragraph (h) to excise taxes comprehends a wider range of subjects of taxation: allarticles already covered by excise taxation under the NIRC, such as alcohol products, tobaccoproducts, mineral products, automobiles, and such non-essential goods as jewelry, goods made ofprecious metals, perfumes, and yachts and other vessels intended for pleasure or sports. In contrast,the later reference to taxes, fees and charges pertains only to one class of articles of the manysubjects of excise taxes, specifically, petroleum products. While local government units areauthorized to burden all such other class of goods with taxes, fees and charges, excepting excise

taxes, a specific prohibition is imposed barring the levying of any other type of taxes with respect topetroleum products.

V.

We no longer need to dwell on the arguments centering on Article 232 of the IRR. As earlierstated, the provision explicitly stipulates that in line with existing national policy, any businessengaged in the production, manufacture, refining, distribution or sale of oil, gasoline and otherpetroleum products shall not be subject to any local tax imposed on this article [on business taxes].The RTC went as far as to declare Article 232 as invalid on the premise that the prohibition was notsimilarly warranted under the Code.

Assuming that the Code does not, in fact, prohibit the imposition of business taxes onpetroleum products, we would agree that the IRR could not impose such a prohibition. With our rulingthat Section 133(h) does indeed prohibit the imposition of local business taxes on petroleumproducts, however, the RTC declaration that Article 232 was invalid is, in turn, itself invalid. Evenabsent Article 232, local government units cannot impose business taxes on petroleum products. Ifanything, Article 232 merely reiterates what the Code itself already provides, with the additionalexplanation that such prohibition was in line with existing national policy.

VI.

We have said all that need be said for the resolution of this case, but there is one more line ofargument raised by respondents that deserves a remark. Respondents argue, assuming... that theOversight Committee [that drafted the IRR] can legislate, that the existing national policy referred toin Article 232 had been superseded by Republic Act No. 8180, or the Oil Deregulation Law. Boileddown to its essence, the argument is that since the oil industry is presently deregulated the basis forexempting petroleum products from business taxes no longer exists.

Of course, the starting premise for this argument, that the IRR can establish a tax or anexemption, is false and has been flatly rejected by this Court before.52[52]The Code itself does not

connect its prohibition on taxation of petroleum products with any existing or future national oil policy,so the change in such national policy with the regime of oil deregulation is ultimately of no moment.Still, we can divine the reasoning behind singling out petroleum products, among all othercommodities, as beyond the power of local government units to levy local taxes.


24/75

24

Why the special concern over petroleum products? The answer is quite evident to all sentientpersons. In this age where unfortunately dependence on petroleum as fuel has yet no equally feasiblealternative, the cost of petroleum products, though fully controlled by private enterprise, remains anarea of public concern. To be blunt about it, there is an inevitable link between the fluctuation of oilprices and the prices of every other commodity. The reality, indeed, is oil is a political commodity.Such fact has received recognition from this Court. [O]il [is] a commodity whose supply and price

affect the ebb and flow of the lifeblood of the nation. Its shortage of supply or a slight, upward spiralin its price shakes our economic foundation. Studies show that the areas most impacted by themovement of oil are food manufacture, land transport, trade, electricity and water.

53[53] [T]heupswing and downswing of our economy materially depend on the oscillation of oil.54[54]Fluctuations in the supply and price of oil products have a dramatic effect on economic developmentand public welfare.

55[55]

It can be reasonably presumed that if municipalities, cities and provinces were authorized toimpose business taxes on manufacturers and retailers of petroleum products, the resulting losses tothese enterprises would be passed on to the consumers, triggering the chain of increases thatnormally accompany the increase in oil prices. No similarly massive trigger effect would ensue upon

the imposition of business taxes on other commodities, including those already subject to excisetaxation under the NIRC.

It may very well be that the policy of deregulation, which was not yet in effect at the time of theenactment of the Local Government Code, has changed the complexion of the issue, for unlikebefore, oil companies are free at will to increase oil prices, thus mitigating the similarly arbitraryconsequences that could develop if petroleum products were subject to local taxes. Still, it cannot bedenied that subjecting petroleum products to business taxes apart from the taxes already imposed by

Congress in this age of deregulation would lead to the same result had they been so taxed during theera of oil regulationthe increase of oil prices. We do not discount the authority of Congress to enactmeasures that facilitate the increase in oil prices; witness the Oil Deregulation Law and the mostrecent Expanded VAT Law. Yet these hard choices are presumably made by Congress with theexpectation that the negative effects of increased oil prices are offset by the other economic benefitspromised by those new laws (i.e., a more vibrant oil industry; increased government revenue).

The Court defers to the other branches of government in the formulation of oil policy, but whenthe choices are made through legislation, the Court expects that the choices are deliberate,considering that the stakes are virtually all-in. Herein, respondents may be bolstered by theconstitutional and statutory policy favoring local fiscal autonomy, but it would be utter indolence to

reflexively affirm such policy when the inevitable effect is an increase in oil prices. Any prudentadjudication should fully ascertain the mandate of local government units to impose taxes onpetroleum products, and such mandate should be cast in so specific terms as to leave no dispute asto the legislative intendment to extend such power in the name of local autonomy. What we havefound instead, from the plain letter of the law is an explicit disinclination on the part of the legislatureto impart that particular taxing power to local government units.

While Section 133(h) does not generally bar the imposition of business taxes on articlesburdened by excise taxes under the NIRC, it specifically prohibits local government units from


25/75

25

extending the levy of any kind of taxes, fees or charges on petroleum products. Accordingly, thesubject tax assessment is ultra vires and void.

WHEREFORE, the Petition is GRANTED. The Decision of the Regional Trial Court ofMalabon City in Civil Case No. 3380-MN is REVERSED and SET ASIDE and the subjectassessment for

deficiency taxes on petitioner is ordered CANCELLED. The Temporary Restraining Order dated 4August 2003 is hereby made PERMANENT. No pronouncement as to costs.

SO ORDERED.

DANTE O. TINGAAssociate Justice

WE CONCUR:

LEONARDO A. QUISUMBING

Associate JusticeChairperson

CONCHITA CARPIO MORALES PRESBITERO J. VELASCO, JR.Associate Justice Associate Justice

ARTURO D. BRIONAssociate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation beforethe case was assigned to the writer of the opinion of the Courts Division.

LEONARDO A. QUISUMBINGAssociate Justice

Chairperson, Second Division


26/75

26

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division ChairpersonsAttestation, it is hereby certified that the conclusions in the above Decision had been reached inconsultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNOChief Justice

PHILIPPINE JURISPRUDENCE - FULL TEXTThe Lawphil Project - Arellano Law FoundationG.R. No. 169836 July 31, 2007PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY vs.COURT OF APPEALS, ET AL.

Republic of the PhilippinesSUPREME COURT

ManilaTHIRD DIVISION


27/75

27

G.R. No. 169836 July 31, 2007PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY, petitioner,vs.COURT OF APPEALS, OFFICE OF THE PRESIDENT, DEPARTMENT OF FINANCE andthe CITY OF ILOILO,respondents.

D E C I S I O NYNARES-SANTIAGO, J .:Assailed in this petition for review is the June 21, 2005 Decision1of the Court of Appeals inCA-G.R. SP No. 81228, which held that petitioner Philippine Fisheries Development

Authority (hereafter referred to as Authority) is liable to pay real property taxes on the landand buildings of the Iloilo Fishing Port Complex (IFPC) which are owned by the Republic ofthe Philippines but operated and governed by the Authority.The facts are not disputed.On August 11, 1976, then President Ferdinand E. Marcos issued Presidential Decree No.977 (PD 977) creating the Authority and placing it under the direct control and supervisionof the Secretary of Natural Resources. On February 8, 1982, Executive Order No. 772 (EO772) was issued amending PD 977, and renaming the Authority as the now "Philippine

Fisheries Development Authority," and attaching said agency to the Ministry of NaturalResources. Upon the effectivity of the Administrative Code (EO 292), the Authority becamean attached agency of the Department of Agriculture.2Meanwhile, beginning October 31, 1981, the then Ministry of Public Works and Highwaysreclaimed from the sea a 21-hectare parcel of land in Barangay Tanza, Iloilo City, andconstructed thereon the IFPC, consisting of breakwater, a landing quay, a refrigerationbuilding, a market hall, a municipal shed, an administration building, a water and fuel oilsupply system and other port related facilities and machineries. Upon its completion, theMinistry of Public Works and Highways turned over IFPC to the Authority, pursuant toSection 11 of PD 977, which places fishing port complexes and related facilities under thegovernance and operation of the Authority. Notwithstanding said turn over, title to the land

and buildings of the IFPC remained with the Republic.The Authority thereafter leased portions of IFPC to private firms and individuals engaged infishing related businesses.Sometime in May 1988, the City of Iloilo assessed the entireIFPC for real property taxes.The assessment remained unpaid until the alleged total tax delinquency of the Authority forthe fiscal years 1988 and 1989 amounted to P5,057,349.67, inclusive of penalties andinterests. To satisfy the tax delinquency, the City of Iloilo scheduled on August 30, 1990,the sale at public auction of the IFPC.The Authority filed an injunction case with the Regional Trial Court. At the pre-trial, theparties agreed to avail of administrative proceedings, i.e., for the Authority to file a claim fortax exemption with the Iloilo City Assessors Office. The latter,however, denied the claim

for exemption, hence, the Authority elevated the case to the Department of Finance (DOF).In its letter-decision3dated March 6, 1992, the DOF ruled that the Authority is liable to payreal property taxes to the City of Iloilo because it enjoys the beneficial use of the IFPC. TheDOF added, however, that in satisfying the amount of the unpaid real property taxes, theproperty that is owned by the Authority shall be auctioned, and not the IFPC, which is aproperty of the Republic.4The Authority filed a petition before the Office of the President but it was dismissed.5It alsodenied the motion for reconsideration filed by the Authority.6On petition with the Court of Appeals, the latter affirmed the decision of the Office of thePresident. It opined, however, that the IFPC may be sold at public auction to satisfy the taxdelinquency of the Authority.7The dispositive portion thereof, reads:

WHEREFORE, premises considered, the instant Petition for Review is DENIED, andaccordingly the June 30, 2003 Decision and December 3, 2003 Order of the Officeof the President are hereby AFFIRMED.SO ORDERED.8

Hence, this petition.The issues are as follows: Is the Authority liable to pay real property tax to the City of Iloilo?If the answer is in the affirmative, may the IFPC be sold at public auction to satisfy the taxdelinquency?To resolve said issues, the Court has to determine (1) whether the Authority is agovernment owned or controlled corporation (GOCC) or an instrumentality of the national
http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt1http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt1http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt2http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt2http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt2http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt3http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt3http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt4http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt4http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt4http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt5http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt5http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt5http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt6http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt6http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt6http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt7http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt7http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt7http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt8http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt8http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt8http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt8http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt7http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt6http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt5http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt4http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt3http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt2http://www.lawphil.net/judjuris/juri2007/jul2007/gr_169836_2007.html#fnt1


28/75

28

government; and (2) whether the IFPC is a property of public dominion.The Court rules that the Authority is not a GOCC but an instrumentality of the nationalgovernment which is generally exempt from payment of real property tax. However, saidexemption does not apply to the portions of the IFPC which the Authority leased to privateentities. With respect to these properties, the Authority is liable to pay real property tax.Nonetheless, the IFPC, being a property of public dominion cannot be sold at public

auction to satisfy the tax delinquency.In Manila International Airport Authority (MIAA) v. Court of Appeals,9the Court made adistinction between a GOCC and an instrumentality. Thus:

Section 2(13) of the Introductory Provisions of the Administrative Code of 1987defines a government-owned or controlled corporation as follows:

SEC. 2. General Terms Defined.x x x(13) Government-owned or controlled corporationrefers to any agencyorganized as a stock or non-stock corporation, vested with functionsrelating to public needs whether governmental or proprietary in nature, andowned by the Government directly or through its instrumentalities eitherwholly, or, where applicable as in the case of stock corporat

Documents

TAX+cases+for+Oral+Exam.docx