110609037 taxation-cases-general-principles-by-atty-lavista

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click here for freelancing tutoring sitesG.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

CRUZ, J.:

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal Revenue was made on time and in accordance with law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in engineering, construction and other allied activities, received a letter from the petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which letter was stamp received on the same day in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending protest. 3 A search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action on the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be served. 5 Sixteen days later, on April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as a rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for reconsideration," 9 being "tantamount to an outright denial thereof and makes the said request deemed rejected." 10 But there is a special circumstance in the case at bar that prevents application of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued; indeed, such protest could not be located in the office of the petitioner. It

Rosalito Luyao Reco LLB IIIB 1



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was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was premature and could therefore not be served.

As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had been consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent for actual services rendered. The payment was in the form of promotional fees. These were collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Company.

Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal holding company income 12 but later conformed to the decision of the respondent court rejecting this assertion. 13 In fact, as the said court found, the amount was earned through the joint efforts of the persons among whom it was distributed It has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale, Algue received as agent a commission of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to the aforenamed individuals. 16

There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after examining the evidence, that no distribution of dividends was involved. 18

The petitioner claims that these payments are fictitious because most of the payees are members of the same family in control of Algue. It is argued that no indication was made as to how such payments were made, whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically and in different amounts as each payee's need arose. 19 It should be remembered that this was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was understandable, however, in view of the close relationship among the persons in the family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate Development Co. to the private respondent was P125,000.00. 21 After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was the payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the respondent court is in accord with the following provision of the Tax Code:

SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as deductions —

(a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows: Rosalito Luyao Reco LLB IIIB 2

SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application may be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few stockholders, Practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholdings of the officers of employees, it would seem likely that the salaries are not paid wholly for services rendered, but the excessive payments are a distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.

G.R. No. L-43082 June 18, 1937PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant,

vs.JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.

Pablo Lorenzo and Delfin Joven for plaintiff-appellant.Office of the Solicitor-General Hilado for defendant-appellant.

LAUREL, J.:

On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of Thomas Hanley, deceased, brought this action in the Court of First Instance of Zamboanga against the defendant, Juan Posadas, Jr., then the Collector of Internal Revenue, for the refund of the amount of P2,052.74, paid by the plaintiff as inheritance tax on the estate of the deceased, and for the collection of interst thereon at the rate of 6 per cent per annum, computed from September 15, 1932, the date when the aforesaid tax was [paid under protest. The defendant set up a counterclaim for P1,191.27 alleged to be interest due on the tax in question and which was not included in the original assessment. From the decision of the Court of First Instance of Zamboanga dismissing both the plaintiff's complaint and the defendant's counterclaim, both parties appealed to this court.


It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a will (Exhibit 5) and considerable amount of real and personal properties. On june 14, 1922, proceedings for the probate of his will and the settlement and distribution of his estate were begun in the Court of First Instance of Zamboanga. The will was admitted to probate. Said will provides, among other things, as follows:

4. I direct that any money left by me be given to my nephew Matthew Hanley.

5. I direct that all real estate owned by me at the time of my death be not sold or otherwise disposed of for a period of ten (10) years after my death, and that the same be handled and managed by the executors, and proceeds thereof to be given to my nephew, Matthew Hanley, at Castlemore, Ballaghaderine, County of Rosecommon, Ireland, and that he be directed that the same be used only for the education of my brother's children and their descendants.

6. I direct that ten (10) years after my death my property be given to the above mentioned Matthew Hanley to be disposed of in the way he thinks most advantageous.

x x x x x x x x x

8. I state at this time I have one brother living, named Malachi Hanley, and that my nephew, Matthew Hanley, is a son of my said brother, Malachi Hanley.

The Court of First Instance of Zamboanga considered it proper for the best interests of ther estate to appoint a trustee to administer the real properties which, under the will, were to pass to Matthew Hanley ten years after the two executors named in the will, was, on March 8, 1924, appointed trustee. Moore took his oath of office and gave bond on March 10, 1924. He acted as trustee until February 29, 1932, when he resigned and the plaintiff herein was appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue, alleging that the estate left by the deceased at the time of his death consisted of realty valued at P27,920 and personalty valued at P1,465, and allowing a deduction of P480.81, assessed against the estate an inheritance tax in the amount of P1,434.24 which, together with the penalties for deliquency in payment consisting of a 1 per cent monthly interest from July 1, 1931 to the date of payment and a surcharge of 25 per cent on the tax, amounted to P2,052.74. On March 15, 1932, the defendant filed a motion in the testamentary proceedings pending before the Court of First Instance of Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff herein, be ordered to pay to the Government the said sum of P2,052.74. The motion was granted. On September 15, 1932, the plaintiff paid said amount under protest, notifying the defendant at the same time that unless the amount was promptly refunded suit would be brought for its recovery. The defendant overruled the plaintiff's protest and refused to refund the said amount hausted, plaintiff went to court with the result herein above indicated.

In his appeal, plaintiff contends that the lower court erred:

I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir, Matthew Hanley, from the moment of the death of the former, and that from the time, the latter became the owner thereof.

II. In holding, in effect, that there was deliquency in the payment of inheritance tax due on the estate of said deceased.

III. In holding that the inheritance tax in question be based upon the value of the estate upon the death of the testator, and not, as it should have been held, upon the value thereof at the expiration of the period of ten years after which, according to the testator's will, the property could be and was to be delivered to the instituted heir.

IV. In not allowing as lawful deductions, in the determination of the net amount of the estate subject to said tax, the amounts allowed by the court as compensation to the "trustees" and paid to them from the decedent's estate.

V. In not rendering judgment in favor of the plaintiff and in denying his motion for new trial.

The defendant-appellant contradicts the theories of the plaintiff and assigns the following error besides:

The lower court erred in not ordering the plaintiff to pay to the defendant the sum of P1,191.27, representing part of the interest at the rate of 1 per cent per month from April 10, 1924, to June 30, 1931, which the plaintiff had failed to pay on the inheritance tax assessed by the defendant against the estate of Thomas Hanley.


The following are the principal questions to be decided by this court in this appeal: (a) When does the inheritance tax accrue and when must it be satisfied? (b) Should the inheritance tax be computed on the basis of the value of the estate at the time of the testator's death, or on its value ten years later? (c) In determining the net value of the estate subject to tax, is it proper to deduct the compensation due to trustees? (d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the tax-payer be given retroactive effect? (e) Has there been deliquency in the payment of the inheritance tax? If so, should the additional interest claimed by the defendant in his appeal be paid by the estate? Other points of incidental importance, raised by the parties in their briefs, will be touched upon in the course of this opinion.

(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as amended, of the Administrative Code, imposes the tax upon "every transmission by virtue of inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance,devise, or bequest." The tax therefore is upon transmission or the transfer or devolution of property of a decedent, made effective by his death. (61 C. J., p. 1592.) It is in reality an excise or privilege tax imposed on the right to succeed to, receive, or take property by or under a will or the intestacy law, or deed, grant, or gift to become operative at or after death. Acording to article 657 of the Civil Code, "the rights to the succession of a person are transmitted from the moment of his death." "In other words", said Arellano, C. J., ". . . the heirs succeed immediately to all of the property of the deceased ancestor. The property belongs to the heirs at the moment of the death of the ancestor as completely as if the ancestor had executed and delivered to them a deed for the same before his death." (Bondad vs. Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong & Co., vs. Chio-Taysan, 12 Phil., 13; Lubrico vs. Arbado, 12 Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19 Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti Steamship Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of First Instance of Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts that while article 657 of the Civil Code is applicable to testate as well as intestate succession, it operates only in so far as forced heirs are concerned. But the language of article 657 of the Civil Code is broad and makes no distinction between different classes of heirs. That article does not speak of forced heirs; it does not even use the word "heir". It speaks of the rights of succession and the transmission thereof from the moment of death. The provision of section 625 of the Code of Civil Procedure regarding the authentication and probate of a will as a necessary condition to effect transmission of property does not affect the general rule laid down in article 657 of the Civil Code. The authentication of a will implies its due execution but once probated and allowed the transmission is effective as of the death of the testator in accordance with article 657 of the Civil Code. Whatever may be the time when actual transmission of the inheritance takes place, succession takes place in any event at the moment of the decedent's death. The time when the heirs legally succeed to the inheritance may differ from the time when the heirs actually receive such inheritance. "Poco importa", says Manresa commenting on article 657 of the Civil Code, "que desde el falleimiento del causante, hasta que el heredero o legatario entre en posesion de los bienes de la herencia o del legado, transcurra mucho o poco tiempo, pues la adquisicion ha de retrotraerse al momento de la muerte, y asi lo ordena el articulo 989, que debe considerarse como complemento del presente." (5 Manresa, 305; see also, art. 440, par. 1, Civil Code.) Thomas Hanley having died on May 27, 1922, the inheritance tax accrued as of the date.

From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the obligation to pay the tax arose as of the date. The time for the payment on inheritance tax is clearly fixed by section 1544 of the Revised Administrative Code as amended by Act No. 3031, in relation to section 1543 of the same Code. The two sections follow:

SEC. 1543. Exemption of certain acquisitions and transmissions. — The following shall not be taxed:

(a) The merger of the usufruct in the owner of the naked title.

(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the trustees.

(c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the desire of the predecessor.

In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater than that paid by the first, the former must pay the difference.

SEC. 1544. When tax to be paid. — The tax fixed in this article shall be paid:

(a) In the second and third cases of the next preceding section, before entrance into possession of the property.

(b) In other cases, within the six months subsequent to the death of the predecessor; but if judicial testamentary or intestate proceedings shall be instituted prior to the expiration of said period, the payment shall be made by the executor or administrator before delivering to each beneficiary his share.


If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve per centum per annum shall be added as part of the tax; and to the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the collector, there shall be further added a surcharge of twenty-five per centum.

A certified of all letters testamentary or of admisitration shall be furnished the Collector of Internal Revenue by the Clerk of Court within thirty days after their issuance.

It should be observed in passing that the word "trustee", appearing in subsection (b) of section 1543, should read "fideicommissary" or "cestui que trust". There was an obvious mistake in translation from the Spanish to the English version.

The instant case does fall under subsection (a), but under subsection (b), of section 1544 above-quoted, as there is here no fiduciary heirs, first heirs, legatee or donee. Under the subsection, the tax should have been paid before the delivery of the properties in question to P. J. M. Moore as trustee on March 10, 1924.

(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are concerned, did not and could not legally pass to the instituted heir, Matthew Hanley, until after the expiration of ten years from the death of the testator on May 27, 1922 and, that the inheritance tax should be based on the value of the estate in 1932, or ten years after the testator's death. The plaintiff introduced evidence tending to show that in 1932 the real properties in question had a reasonable value of only P5,787. This amount added to the value of the personal property left by the deceased, which the plaintiff admits is P1,465, would generate an inheritance tax which, excluding deductions, interest and surcharge, would amount only to about P169.52.

If death is the generating source from which the power of the estate to impose inheritance taxes takes its being and if, upon the death of the decedent, succession takes place and the right of the estate to tax vests instantly, the tax should be measured by the vlaue of the estate as it stood at the time of the decedent's death, regardless of any subsequent contingency value of any subsequent increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232; Blakemore and Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs. Moore, 178 U.S., 41; 20 Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The right of the state to an inheritance tax accrues at the moment of death, and hence is ordinarily measured as to any beneficiary by the value at that time of such property as passes to him. Subsequent appreciation or depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.)

Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure (vol. 37, pp. 1574, 1575) that, in the case of contingent remainders, taxation is postponed until the estate vests in possession or the contingency is settled. This rule was formerly followed in New York and has been adopted in Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and Wisconsin. This rule, horever, is by no means entirely satisfactory either to the estate or to those interested in the property (26 R. C. L., p. 231.). Realizing, perhaps, the defects of its anterior system, we find upon examination of cases and authorities that New York has varied and now requires the immediate appraisal of the postponed estate at its clear market value and the payment forthwith of the tax on its out of the corpus of the estate transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber, 86 N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also, Saltoun vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.) California adheres to this new rule (Stats. 1905, sec. 5, p. 343).

But whatever may be the rule in other jurisdictions, we hold that a transmission by inheritance is taxable at the time of the predecessor's death, notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary, and the tax measured by the value of the property transmitted at that time regardless of its appreciation or depreciation.

(c) Certain items are required by law to be deducted from the appraised gross in arriving at the net value of the estate on which the inheritance tax is to be computed (sec. 1539, Revised Administrative Code). In the case at bar, the defendant and the trial court allowed a deduction of only P480.81. This sum represents the expenses and disbursements of the executors until March 10, 1924, among which were their fees and the proven debts of the deceased. The plaintiff contends that the compensation and fees of the trustees, which aggregate P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted under section 1539 of the Revised Administrative Code which provides, in part, as follows: "In order to determine the net sum which must bear the tax, when an inheritance is concerned, there shall be deducted, in case of a resident, . . . the judicial expenses of the testamentary or intestate proceedings, . . . ."

A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs. Saunders, 16 How., 535; 14 Law. ed., 1047). But from this it does not follow that the compensation due him may lawfully be deducted in arriving at the net value of the estate subject to tax. There is no statute in the Philippines which requires trustees' commissions to be deducted in determining the net value of the estate subject to inheritance tax (61 C. J., p. 1705). Furthermore, though a testamentary trust has been created, it does not appear that the testator intended that the duties of his executors and trustees should be separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div., 363; In re Collard's Estate, 161 N. Y. Supp.,


455.) On the contrary, in paragraph 5 of his will, the testator expressed the desire that his real estate be handled and managed by his executors until the expiration of the period of ten years therein provided. Judicial expenses are expenses of administration (61 C. J., p. 1705) but, in State vs. Hennepin County Probate Court (112 N. W., 878; 101 Minn., 485), it was said: ". . . The compensation of a trustee, earned, not in the administration of the estate, but in the management thereof for the benefit of the legatees or devises, does not come properly within the class or reason for exempting administration expenses. . . . Service rendered in that behalf have no reference to closing the estate for the purpose of a distribution thereof to those entitled to it, and are not required or essential to the perfection of the rights of the heirs or legatees. . . . Trusts . . . of the character of that here before the court, are created for the the benefit of those to whom the property ultimately passes, are of voluntary creation, and intended for the preservation of the estate. No sound reason is given to support the contention that such expenses should be taken into consideration in fixing the value of the estate for the purpose of this tax."

(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley under the provisions of section 1544 of the Revised Administrative Code, as amended by section 3 of Act No. 3606. But Act No. 3606 went into effect on January 1, 1930. It, therefore, was not the law in force when the testator died on May 27, 1922. The law at the time was section 1544 above-mentioned, as amended by Act No. 3031, which took effect on March 9, 1922.

It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not foresee and ought not to be required to guess the outcome of pending measures. Of course, a tax statute may be made retroactive in its operation. Liability for taxes under retroactive legislation has been "one of the incidents of social life." (Seattle vs. Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that a tax statute should operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491; Smietanka vs. First Trust & Savings Bank, 257 U. S., 602; Stockdale vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A statute should be considered as prospective in its operation, whether it enacts, amends, or repeals an inheritance tax, unless the language of the statute clearly demands or expresses that it shall have a retroactive effect, . . . ." (61 C. J., P. 1602.) Though the last paragraph of section 5 of Regulations No. 65 of the Department of Finance makes section 3 of Act No. 3606, amending section 1544 of the Revised Administrative Code, applicable to all estates the inheritance taxes due from which have not been paid, Act No. 3606 itself contains no provisions indicating legislative intent to give it retroactive effect. No such effect can begiven the statute by this court.

The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No. 3606 are more favorable to the taxpayer than those of Act No. 3031, that said provisions are penal in nature and, therefore, should operate retroactively in conformity with the provisions of article 22 of the Revised Penal Code. This is the reason why he applied Act No. 3606 instead of Act No. 3031. Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax only, instead of on both the tax and the interest, as provided for in Act No. 3031, and (2) the taxpayer is allowed twenty days from notice and demand by rthe Collector of Internal Revenue within which to pay the tax, instead of ten days only as required by the old law.

Properly speaking, a statute is penal when it imposes punishment for an offense committed against the state which, under the Constitution, the Executive has the power to pardon. In common use, however, this sense has been enlarged to include within the term "penal statutes" all status which command or prohibit certain acts, and establish penalties for their violation, and even those which, without expressly prohibiting certain acts, impose a penalty upon their commission (59 C. J., p. 1110). Revenue laws, generally, which impose taxes collected by the means ordinarily resorted to for the collection of taxes are not classed as penal laws, although there are authorities to the contrary. (See Sutherland, Statutory Construction, 361; Twine Co. vs. Worthington, 141 U. S., 468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25 Nev. 143.) Article 22 of the Revised Penal Code is not applicable to the case at bar, and in the absence of clear legislative intent, we cannot give Act No. 3606 a retroactive effect.

(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the tax may be paid within another given time. As stated by this court, "the mere failure to pay one's tax does not render one delinqent until and unless the entire period has eplased within which the taxpayer is authorized by law to make such payment without being subjected to the payment of penalties for fasilure to pay his taxes within the prescribed period." (U. S. vs. Labadan, 26 Phil., 239.)

The defendant maintains that it was the duty of the executor to pay the inheritance tax before the delivery of the decedent's property to the trustee. Stated otherwise, the defendant contends that delivery to the trustee was delivery to the cestui que trust, the beneficiery in this case, within the meaning of the first paragraph of subsection (b) of section 1544 of the Revised Administrative Code. This contention is well taken and is sustained. The appointment of P. J. M. Moore as trustee was made by the trial court in conformity with the wishes of the testator as expressed in his will. It is true that the word "trust" is not mentioned or used in the will but the intention to create one is clear. No particular or technical words are required to create a testamentary trust (69 C. J., p. 711). The words "trust" and "trustee", though apt for the purpose, are not necessary. In fact, the use of these two words is not conclusive on the question that a trust is created (69 C. J., p. 714). "To create a trust by will the testator must indicate in the will his


intention so to do by using language sufficient to separate the legal from the equitable estate, and with sufficient certainty designate the beneficiaries, their interest in the ttrust, the purpose or object of the trust, and the property or subject matter thereof. Stated otherwise, to constitute a valid testamentary trust there must be a concurrence of three circumstances: (1) Sufficient words to raise a trust; (2) a definite subject; (3) a certain or ascertain object; statutes in some jurisdictions expressly or in effect so providing." (69 C. J., pp. 705,706.) There is no doubt that the testator intended to create a trust. He ordered in his will that certain of his properties be kept together undisposed during a fixed period, for a stated purpose. The probate court certainly exercised sound judgment in appointment a trustee to carry into effect the provisions of the will (see sec. 582, Code of Civil Procedure).

P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him (sec. 582 in relation to sec. 590, Code of Civil Procedure). The mere fact that the estate of the deceased was placed in trust did not remove it from the operation of our inheritance tax laws or exempt it from the payment of the inheritance tax. The corresponding inheritance tax should have been paid on or before March 10, 1924, to escape the penalties of the laws. This is so for the reason already stated that the delivery of the estate to the trustee was in esse delivery of the same estate to the cestui que trust, the beneficiary in this case. A trustee is but an instrument or agent for the cestui que trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore accepted the trust and took possesson of the trust estate he thereby admitted that the estate belonged not to him but to his cestui que trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not acquire any beneficial interest in the estate. He took such legal estate only as the proper execution of the trust required (65 C. J., p. 528) and, his estate ceased upon the fulfillment of the testator's wishes. The estate then vested absolutely in the beneficiary (65 C. J., p. 542).

The highest considerations of public policy also justify the conclusion we have reached. Were we to hold that the payment of the tax could be postponed or delayed by the creation of a trust of the type at hand, the result would be plainly disastrous. Testators may provide, as Thomas Hanley has provided, that their estates be not delivered to their beneficiaries until after the lapse of a certain period of time. In the case at bar, the period is ten years. In other cases, the trust may last for fifty years, or for a longer period which does not offend the rule against petuities. The collection of the tax would then be left to the will of a private individual. The mere suggestion of this result is a sufficient warning against the accpetance of the essential to the very exeistence of government. (Dobbins vs. Erie Country, 16 Pet., 435; 10 Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County vs. Oregon, 7 Wall., 71; 19 Law. ed., 101; Union Refrigerator Transit Co. vs. Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150; Charles River Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to, a citizen by the government but upon the necessity of money for the support of the state (Dobbins vs. Erie Country, supra). For this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him can be pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.) While courts will not enlarge, by construction, the government's power of taxation (Bromley vs. McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they also will not place upon tax laws so loose a construction as to permit evasions on merely fanciful and insubstantial distictions. (U. S. vs. Watts, 1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed. Cas. No. 16,690, followed in Froelich & Kuttner vs. Collector of Customs, 18 Phil., 461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21 Phil., 300; Muñoz & Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When proper, a tax statute should be construed to avoid the possibilities of tax evasion. Construed this way, the statute, without resulting in injustice to the taxpayer, becomes fair to the government.

That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no court is allowed to grant injunction to restrain the collection of any internal revenue tax ( sec. 1578, Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of Lim Co Chui vs. Posadas (47 Phil., 461), this court had occassion to demonstrate trenchment adherence to this policy of the law. It held that "the fact that on account of riots directed against the Chinese on October 18, 19, and 20, 1924, they were prevented from praying their internal revenue taxes on time and by mutual agreement closed their homes and stores and remained therein, does not authorize the Collector of Internal Revenue to extend the time prescribed for the payment of the taxes or to accept them without the additional penalty of twenty five per cent." (Syllabus, No. 3.)

". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the modes adopted to enforce the taxes levied should be interfered with as little as possible. Any delay in the proceedings of the officers, upon whom the duty is developed of collecting the taxes, may derange the operations of government, and thereby, cause serious detriment to the public." (Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs. Rafferty, 32 Phil., 580.)

It results that the estate which plaintiff represents has been delinquent in the payment of inheritance tax and, therefore, liable for the payment of interest and surcharge provided by law in such cases.

The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. The interest due should be computed from that date and it is error on the part of the defendant to compute it one month later. The provisions cases is mandatory (see and cf. Lim Co Chui vs. Posadas, supra), and


neither the Collector of Internal Revenuen or this court may remit or decrease such interest, no matter how heavily it may burden the taxpayer.

To the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the Collector of Internal Revenue, a surcharge of twenty-five per centum should be added (sec. 1544, subsec. (b), par. 2, Revised Administrative Code). Demand was made by the Deputy Collector of Internal Revenue upon Moore in a communiction dated October 16, 1931 (Exhibit 29). The date fixed for the payment of the tax and interest was November 30, 1931. November 30 being an official holiday, the tenth day fell on December 1, 1931. As the tax and interest due were not paid on that date, the estate became liable for the payment of the surcharge.

In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the plaintiff in his brief.

We shall now compute the tax, together with the interest and surcharge due from the estate of Thomas Hanley inaccordance with the conclusions we have reached.

At the time of his death, the deceased left real properties valued at P27,920 and personal properties worth P1,465, or a total of P29,385. Deducting from this amount the sum of P480.81, representing allowable deductions under secftion 1539 of the Revised Administrative Code, we have P28,904.19 as the net value of the estate subject to inheritance tax.

The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code, should be imposed at the rate of one per centum upon the first ten thousand pesos and two per centum upon the amount by which the share exceed thirty thousand pesos, plus an additional two hundred per centum. One per centum of ten thousand pesos is P100. Two per centum of P18,904.19 is P378.08. Adding to these two sums an additional two hundred per centum, or P965.16, we have as primary tax, correctly computed by the defendant, the sum of P1,434.24.

To the primary tax thus computed should be added the sums collectible under section 1544 of the Revised Administrative Code. First should be added P1,465.31 which stands for interest at the rate of twelve per centum per annum from March 10, 1924, the date of delinquency, to September 15, 1932, the date of payment under protest, a period covering 8 years, 6 months and 5 days. To the tax and interest thus computed should be added the sum of P724.88, representing a surhcarge of 25 per cent on both the tax and interest, and also P10, the compromise sum fixed by the defendant (Exh. 29), giving a grand total of P3,634.43.

As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is legally due from the estate. This last sum is P390.42 more than the amount demanded by the defendant in his counterclaim. But, as we cannot give the defendant more than what he claims, we must hold that the plaintiff is liable only in the sum of P1,191.27 the amount stated in the counterclaim.

The judgment of the lower court is accordingly modified, with costs against the plaintiff in both instances. So ordered.

G.R. No. 158540. August 3, 2005SOUTHERN CROSS CEMENT CORPORATION, Petitioners,

vs.CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, THE SECRETARY OF THE

DEPARTMENT OF TRADE AND INDUSTRY, THE SECRETARY OF THE DEPARTMENT OF FINANCE and THE COMMISSIONER OF THE BUREAU OF CUSTOMS, Respondent.

R E S O L U T I O N

TINGA, J.:

Cement is hardly an exciting subject for litigation. Still, the parties in this case have done their best to put up a spirited advocacy of their respective positions, throwing in everything including the proverbial kitchen sink. At present, the burden of passion, if not proof, has shifted to public respondents Department of Trade and Industry (DTI) and private respondent Philippine Cement Manufacturers Corporation (Philcemcor),1 who now seek reconsideration of our Decision dated 8 July 2004 (Decision), which granted the petition of petitioner Southern Cross Cement Corporation (Southern Cross).

This case, of course, is ultimately not just about cement. For respondents, it is about love of country and the future of the domestic industry in the face of foreign competition. For this Court, it is about elementary statutory construction, constitutional limitations on the executive power to impose tariffs and similar measures, and obedience to the law. Just as much was asserted in the Decision, and the same holds true with this present Resolution.


An extensive narration of facts can be found in the Decision.2 As can well be recalled, the case centers on the interpretation of provisions of Republic Act No. 8800, the Safeguard Measures Act ("SMA"), which was one of the laws enacted by Congress soon after the Philippines ratified the General Agreement on Tariff and Trade (GATT) and the World Trade Organization (WTO) Agreement.3 The SMA provides the structure and mechanics for the imposition of emergency measures, including tariffs, to protect domestic industries and producers from increased imports which inflict or could inflict serious injury on them.4

A brief summary as to how the present petition came to be filed by Southern Cross. Philcemcor, an association of at least eighteen (18) domestic cement manufacturers filed with the DTI a petition seeking the imposition of safeguard measures on gray Portland cement,5 in accordance with the SMA. After the DTI issued a provisional safeguard measure,6 the application was referred to the Tariff Commission for a formal investigation pursuant to Section 9 of the SMA and its Implementing Rules and Regulations, in order to determine whether or not to impose a definitive safeguard measure on imports of gray Portland cement. The Tariff Commission held public hearings and conducted its own investigation, then on 13 March 2002, issued its Formal Investigation Report ("Report"). The Report determined as follows:

The elements of serious injury and imminent threat of serious injury not having been established, it is hereby recommended that no definitive general safeguard measure be imposed on the importation of gray Portland cement.7

The DTI sought the opinion of the Secretary of Justice whether it could still impose a definitive safeguard measure notwithstanding the negative finding of the Tariff Commission. After the Secretary of Justice opined that the DTI could not do so under the SMA,8 the DTI Secretary then promulgated a Decision9 wherein he expressed the DTI’s disagreement with the conclusions of the Tariff Commission, but at the same time, ultimately denying Philcemcor’s application for safeguard measures on the ground that the he was bound to do so in light of the Tariff Commission’s negative findings.10

Philcemcor challenged this Decision of the DTI Secretary by filing with the Court of Appeals a Petition for Certiorari, Prohibition and Mandamus11 seeking to set aside the DTI Decision, as well as the Tariff Commission’s Report. It prayed that the Court of Appeals direct the DTI Secretary to disregard the Report and to render judgment independently of the Report. Philcemcor argued that the DTI Secretary, vested as he is under the law with the power of review, is not bound to adopt the recommendations of the Tariff Commission; and, that the Report is void, as it is predicated on a flawed framework, inconsistent inferences and erroneous methodology.12

The Court of Appeals Twelfth Division, in a Decision13 penned by Court of Appeals Associate Justice Elvi John Asuncion,14 partially granted Philcemcor’s petition. The appellate court ruled that it had jurisdiction over the petition for certiorari since it alleged grave abuse of discretion. While it refused to annul the findings of the Tariff Commission,15 it also held that the DTI Secretary was not bound by the factual findings of the Tariff Commission since such findings are merely recommendatory and they fall within the ambit of the Secretary’s discretionary review. It determined that the legislative intent is to grant the DTI Secretary the power to make a final decision on the Tariff Commission’s recommendation.16

On 23 June 2003, Southern Cross filed the present petition, arguing that the Court of Appeals has no jurisdiction over Philcemcor’s petition, as the proper remedy is a petition for review with the CTA conformably with the SMA, and; that the factual findings of the Tariff Commission on the existence or non-existence of conditions warranting the imposition of general safeguard measures are binding upon the DTI Secretary.

Despite the fact that the Court of Appeals’ Decision had not yet become final, its binding force was cited by the DTI Secretary when he issued a new Decision on 25 June 2003, wherein he ruled that that in light of the appellate court’s Decision, there was no longer any legal impediment to his deciding Philcemcor’s application for definitive safeguard measures.17 He made a determination that, contrary to the findings of the Tariff Commission, the local cement industry had suffered serious injury as a result of the import surges.18 Accordingly, he imposed a definitive safeguard measure on the importation of gray Portland cement, in the form of a definitive safeguard duty in the amount of P20.60/40 kg. bag for three years on imported gray Portland Cement.19

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

On 1 August 2003, Southern Cross filed with the CTA a Petition for Review, assailing the DTI Secretary’s 25 June 2003 Decision which imposed the definite safeguard measure. Yet Southern Cross did not promptly inform this Court about this filing. The first time the Court would learn about this Petition with the CTA was when Southern Cross mentioned such fact in a pleading dated 11 August 2003 and filed the next day with this Court.20


Philcemcor argued before this Court that Southern Cross had deliberately and willfully resorted to forum-shopping; that the CTA, being a special court of limited jurisdiction, could only review the ruling of the DTI Secretary when a safeguard measure is imposed; and that the factual findings of the Tariff Commission are not binding on the DTI Secretary.21

After giving due course to Southern Cross’s Petition, the Court called the case for oral argument on 18 February 2004.22 At the oral argument, attended by the counsel for Philcemcor and Southern Cross and the Office of the Solicitor General, the Court simplified the issues in this wise: (i) whether the Decision of the DTI Secretary is appealable to the CTA or the Court of Appeals; (ii) assuming that the Court of Appeals has jurisdiction, whether its Decision is in accordance with law; and, whether a Temporary Restraining Order is warranted.23

After the parties had filed their respective memoranda, the Court’s Second Division, to which the case had been assigned, promulgated its Decision granting Southern Cross’s Petition.24The Decision was unanimous, without any separate or concurring opinion.

The Court ruled that the Court of Appeals had no jurisdiction over Philcemcor’s Petition, the proper remedy under Section 29 of the SMA being a petition for review with the CTA; and that the Court of Appeals erred in ruling that the DTI Secretary was not bound by the negative determination of the Tariff Commission and could therefore impose the general safeguard measures, since Section 5 of the SMA precisely required that the Tariff Commission make a positive final determination before the DTI Secretary could impose these measures. Anent the argument that Southern Cross had committed forum-shopping, the Court concluded that there was no evident malicious intent to subvert procedural rules so as to match the standard under Section 5, Rule 7 of the Rules of Court of willful and deliberate forum shopping. Accordingly, the Decision of the Court of Appeals dated 5 June 2003 was declared null and void.

The Court likewise found it necessary to nullify the Decision of the DTI Secretary dated 25 June 2003, rendered after the filing of this present Petition. This Decision by the DTI Secretary had cited the obligatory force of the null and void Court of Appeals’ Decision, notwithstanding the fact that the decision of the appellate court was not yet final and executory. Considering that the decision of the Court of Appeals was a nullity to begin with, the inescapable conclusion was that the new decision of the DTI Secretary, prescinding as it did from the imprimatur of the decision of the Court of Appeals, was a nullity as well.

After the Decision was reported in the media, there was a flurry of newspaper articles citing alleged negative reactions to the ruling by the counsel for Philcemcor, the DTI Secretary, and others.25 Both respondents promptly filed their respective motions for reconsideration.

On 21 September 2004, the Court En Banc resolved, upon motion of respondents, to accept the petition and resolve the Motions for Reconsideration.26 The case was then reheard27 on oral argument on 1 March 2005. During the hearing, the Court elicited from the parties their arguments on the two central issues as discussed in the assailed Decision, pertaining to the jurisdictional aspect and to the substantive aspect of whether the DTI Secretary may impose a general safeguard measure despite a negative determination by the Tariff Commission. The Court chose not to hear argumentation on the peripheral issue of forum-shopping,28 although this question shall be tackled herein shortly. Another point of concern emerged during oral arguments on the exercise of quasi-judicial powers by the Tariff Commission, and the parties were required by the Court to discuss in their respective memoranda whether the Tariff Commission could validly exercise quasi-judicial powers in the exercise of its mandate under the SMA.

The Court has likewise been notified that subsequent to the rendition of the Court’s Decision, Philcemcor filed a Petition for Extension of the Safeguard Measure with the DTI, which has been referred to the Tariff Commission.29 In an Urgent Motion dated 21 December 2004, Southern Cross prayed that Philcemcor, the DTI, the Bureau of Customs, and the Tariff Commission be directed to "cease and desist from taking any and all actions pursuant to or under the null and void CA Decision and DTI Decision, including proceedings to extend the safeguard measure.30 In a Manifestation and Motion dated 23 June 2004, the Tariff Commission informed the Court that since no prohibitory injunction or order of such nature had been issued by any court against the Tariff Commission, the Commission proceeded to complete its investigation on the petition for extension, pursuant to Section 9 of the SMA, but opted to defer transmittal of its report to the DTI Secretary pending "guidance" from this Court on the propriety of such a step considering this pending Motion for Reconsideration. In a Resolution dated 5 July 2005, the Court directed the parties to maintain the status quo effective of even date, and until further orders from this Court. The denial of the pending motions for reconsideration will obviously render the pending petition for extension academic.

I. Jurisdiction of the Court of Tax Appeals

Under Section 29 of the SMA

The first core issue resolved in the assailed Decision was whether the Court of Appeals had jurisdiction over the special civil action for certiorari filed by Philcemcor assailing the 5 April 2002 Decision of the DTI Secretary. The general jurisdiction of the Court of Appeals over special civil actions for certiorari is beyond


doubt. The Constitution itself assures that judicial review avails to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government. At the same time, the special civil action of certiorari is available only when there is no plain, speedy and adequate remedy in the ordinary course of law.31 Philcemcor’s recourse of special civil action before the Court of Appeals to challenge the Decision of the DTI Secretary not to impose the general safeguard measures is not based on the SMA, but on the general rule on certiorari. Thus, the Court proceeded to inquire whether indeed there was no other plain, speedy and adequate remedy in the ordinary course of law that would warrant the allowance of Philcemcor’s special civil action.

The answer hinged on the proper interpretation of Section 29 of the SMA, which reads:

Section 29. Judicial Review. – Any interested party who is adversely affected by the ruling of the Secretary in connection with the imposition of a safeguard measure may file with the CTA, a petition for review of such ruling within thirty (30) days from receipt thereof. Provided, however, that the filing of such petition for review shall not in any way stop, suspend or otherwise toll the imposition or collection of the appropriate tariff duties or the adoption of other appropriate safeguard measures, as the case may be.

The petition for review shall comply with the same requirements and shall follow the same rules of procedure and shall be subject to the same disposition as in appeals in connection with adverse rulings on tax matters to the Court of Appeals.32 (Emphasis supplied)

The matter is crucial for if the CTA properly had jurisdiction over the petition challenging the DTI Secretary’s ruling not to impose a safeguard measure, then the special civil action of certiorari resorted to instead by Philcemcor would not avail, owing to the existence of a plain, speedy and adequate remedy in the ordinary course of law.33 The Court of Appeals, in asserting that it had jurisdiction, merely cited the general rule on certiorari jurisdiction without bothering to refer to, or possibly even study, the import of Section 29. In contrast, this Court duly considered the meaning and ramifications of Section 29, concluding that it provided for a plain, speedy and adequate remedy that Philcemcor could have resorted to instead of filing the special civil action before the Court of Appeals.

Philcemcor still holds on to its hypothesis that the petition for review allowed under Section 29 lies only if the DTI Secretary’s ruling imposes a safeguard measure. If, on the other hand, the DTI Secretary’s ruling is not to impose a safeguard measure, judicial review under Section 29 could not be resorted to since the provision refers to rulings "in connection with the imposition" of the safeguard measure, as opposed to the non-imposition. Since the Decision dated 5 April 2002 resolved against imposing a safeguard measure, Philcemcor claims that the proper remedial recourse is a petition for certiorari with the Court of Appeals.

Interestingly, Republic Act No. 9282, promulgated on 30 March 2004, expressly vests unto the CTA jurisdiction over "[d]ecisions of the Secretary of Trade and Industry, in case of nonagricultural product, commodity or article . . . involving . . . safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose said duties."34 It is clear that any future attempts to advance the literalist position of the respondents would consequently fail. However, since Republic Act No. 9282 has no retroactive effect, this Court had to decide whether Section 29 vests jurisdiction on the CTA over rulings of the DTI Secretary not to impose a safeguard measure. And the Court, in its assailed Decision, ruled that the CTA is endowed with such jurisdiction.

Both respondents reiterate their fundamentalist reading that Section 29 authorizes the petition for review before the CTA only when the DTI Secretary decides to impose a safeguard measure, but not when he decides not to. In doing so, they fail to address what the Court earlier pointed out would be the absurd consequences if their interpretation is followed to its logical end. But in affirming, as the Court now does, its previous holding that the CTA has jurisdiction over petitions for review questioning the non-imposition of safeguard measures by the DTI Secretary, the Court relies on the plain reading that Section 29 explicitly vests jurisdiction over such petitions on the CTA.

Under Section 29, there are three requisites to enable the CTA to acquire jurisdiction over the petition for review contemplated therein: (i) there must be a ruling by the DTI Secretary; (ii) the petition must be filed by an interested party adversely affected by the ruling; and (iii) such ruling must be "in connection with the imposition of a safeguard measure." Obviously, there are differences between "a ruling for the imposition of a safeguard measure," and one issued "in connection with the imposition of a safeguard measure." The first adverts to a singular type of ruling, namely one that imposes a safeguard measure. The second does not contemplate only one kind of ruling, but a myriad of rulings issued "in connection with the imposition of a safeguard measure."

Respondents argue that the Court has given an expansive interpretation to Section 29, contrary to the established rule requiring strict construction against the existence of jurisdiction in specialized courts.35 But it is the express provision of Section 29, and not this Court, that mandates CTA jurisdiction to be broad enough to encompass more than just a ruling imposing the safeguard measure.


The key phrase remains "in connection with." It has connotations that are obvious even to the layman. A ruling issued "in connection with" the imposition of a safeguard measure would be one that bears some relation to the imposition of a safeguard measure. Obviously, a ruling imposing a safeguard measure is covered by the phrase "in connection with," but such ruling is by no means exclusive. Rulings which modify, suspend or terminate a safeguard measure are necessarily in connection with the imposition of a safeguard measure. So does a ruling allowing for a provisional safeguard measure. So too, a ruling by the DTI Secretary refusing to refer the application for a safeguard measure to the Tariff Commission. It is clear that there is an entire subset of rulings that the DTI Secretary may issue in connection with the imposition of a safeguard measure, including those that are provisional, interlocutory, or dispositive in character.36 By the same token, a ruling not to impose a safeguard measure is also issued in connection with the imposition of a safeguard measure.

In arriving at the proper interpretation of "in connection with," the Court referred to the U.S. Supreme Court cases of Shaw v. Delta Air Lines, Inc.37 and New York State Blue Cross Plans v. Travelers Ins.38 Both cases considered the interpretation of the phrase "relates to" as used in a federal statute, the Employee Retirement Security Act of 1974. Respondents criticize the citations on the premise that the cases are not binding in our jurisdiction and do not involve safeguard measures. The criticisms are off-tangent considering that our ruling did not call for the application of the Employee Retirement Security Act of 1974 in the Philippine milieu. The American cases are not relied upon as precedents, but as guides of interpretation. Certainly, if there are applicable local precedents pertaining to the interpretation of the phrase "in connection with," then these certainly would have some binding force. But none avail, and neither do the respondents demonstrate a countervailing holding in Philippine jurisprudence.

Yet we should consider the claim that an "expansive interpretation" was favored in Shaw because the law in question was an employee’s benefit law that had to be given an interpretation favorable to its intended beneficiaries.39 In the next breath, Philcemcor notes that the U.S. Supreme Court itself was alarmed by the expansive interpretation in Shaw and thus in Blue Cross, the Shaw ruling was reversed and a more restrictive interpretation was applied based on congressional intent.40

Respondents would like to make it appear that the Court acted rashly in applying a discarded precedent in Shaw, a non-binding foreign precedent nonetheless. But the Court did make the following observation in its Decision pertaining to Blue Cross:

Now, let us determine the maximum scope and reach of the phrase "in connection with" as used in Section 29 of the SMA. A literalist reading or linguistic survey may not satisfy. Even the U.S. Supreme Court in New York State Blue Cross Plans v. Travelers Ins.41 conceded that the phrases "relate to" or "in connection with" may be extended to the farthest stretch of indeterminacy for, universally, relations or connections are infinite and stop nowhere.42 Thus, in the case the U.S. High Court, examining the same phrase of the same provision of law involved in Shaw, resorted to looking at the statute and its objectives as the alternative to an "uncritical literalism." A similar inquiry into the other provisions of the SMA is in order to determine the scope of review accorded therein to the CTA.43

In the next four paragraphs of the Decision, encompassing four pages, the Court proceeded to inquire into the SMA and its objectives as a means to determine the scope of rulings to be deemed as "in connection with the imposition of a safeguard measure." Certainly, this Court did not resort to the broadest interpretation possible of the phrase "in connection with," but instead sought to bring it into the context of the scope and objectives of the SMA. The ultimate conclusion of the Court was that the phrase includes all rulings of the DTI Secretary which arise from the time an application or motu proprio initiation for the imposition of a safeguard measure is taken.44 This conclusion was derived from the observation that the imposition of a general safeguard measure is a process, initiated motu proprio or through application, which undergoes several stages upon which the DTI Secretary is obliged or may be called upon to issue a ruling.

It should be emphasized again that by utilizing the phrase "in connection with," it is the SMA that expressly vests jurisdiction on the CTA over petitions questioning the non-imposition by the DTI Secretary of safeguard measures. The Court is simply asserting, as it should, the clear intent of the legislature in enacting the SMA. Without "in connection with" or a synonymous phrase, the Court would be compelled to favor the respondents’ position that only rulings imposing safeguard measures may be elevated on appeal to the CTA. But considering that the statute does make use of the phrase, there is little sense in delving into alternate scenarios.

Respondents fail to convincingly address the absurd consequences pointed out by the Decision had their proposed interpretation been adopted. Indeed, suffocated beneath the respondents’ legalistic tinsel is the elemental question¾what sense is there in vesting jurisdiction on the CTA over a decision to impose a safeguard measure, but not on one choosing not to impose. Of course, it is not for the Court to inquire into the wisdom of legislative acts, hence the rule that jurisdiction must be expressly vested and not presumed. Yet ultimately, respondents muddle the issue by making it appear that the Decision has uniquely expanded the jurisdictional rules. For the respondents, the proper statutory interpretation of the crucial phrase "in connection with" is to pretend that the phrase did not exist at all in the statute. The Court, in


taking the effort to examine the meaning and extent of the phrase, is merely giving breath to the legislative will.

The Court likewise stated that the respondents’ position calls for split jurisdiction, which is judicially abhorred. In rebuttal, the public respondents cite Sections 2313 and 2402 of the Tariff and Customs Code (TCC), which allegedly provide for a splitting of jurisdiction of the CTA. According to public respondents, under Section 2313 of the TCC, a decision of the Commissioner of Customs affirming a decision of the Collector of Customs adverse to the government is elevated for review to the Secretary of Finance. However, under Section 2402 of the TCC, a ruling of the Commissioner of the Bureau of Customs against a taxpayer must be appealed to the Court of Tax Appeals, and not to the Secretary of Finance.

Strictly speaking, the review by the Secretary of Finance of the decision of the Commissioner of Customs is not judicial review, since the Secretary of Finance holds an executive and not a judicial office. The contrast is apparent with the situation in this case, wherein the interpretation favored by the respondents calls for the exercise of judicial review by two different courts over essentially the same question¾whether the DTI Secretary should impose general safeguard measures. Moreover, as petitioner points out, the executive department cannot appeal against itself. The Collector of Customs, the Commissioner of Customs and the Secretary of Finance are all part of the executive branch. If the Collector of Customs rules against the government, the executive cannot very well bring suit in courts against itself. On the other hand, if a private person is aggrieved by the decision of the Collector of Customs, he can have proper recourse before the courts, which now would be called upon to exercise judicial review over the action of the executive branch.

More fundamentally, the situation involving split review of the decision of the Collector of Customs under the TCC is not apropos to the case at bar. The TCC in that instance is quite explicit on the divergent reviewing body or official depending on which party prevailed at the Collector of Customs’ level. On the other hand, there is no such explicit expression of bifurcated appeals in Section 29 of the SMA.

Public respondents likewise cite Fabian v. Ombudsman45 as another instance wherein the Court purportedly allowed split jurisdiction. It is argued that the Court, in ruling that it was the Court of Appeals which possessed appellate authority to review decisions of the Ombudsman in administrative cases while the Court retaining appellate jurisdiction of decisions of the Ombudsman in non-administrative cases, effectively sanctioned split jurisdiction between the Court and the Court of Appeals.46

Nonetheless, this argument is successfully undercut by Southern Cross, which points out the essential differences in the power exercised by the Ombudsman in administrative cases and non-administrative cases relating to criminal complaints. In the former, the Ombudsman may impose an administrative penalty, while in acting upon a criminal complaint what the Ombudsman undertakes is a preliminary investigation. Clearly, the capacity in which the Ombudsman takes on in deciding an administrative complaint is wholly different from that in conducting a preliminary investigation. In contrast, in ruling upon a safeguard measure, the DTI Secretary acts in one and the same role. The variance between an order granting or denying an application for a safeguard measure is polar though emanating from the same equator, and does not arise from the distinct character of the putative actions involved.

Philcemcor imputes intelligent design behind the alleged intent of Congress to limit CTA review only to impositions of the general safeguard measures. It claims that there is a necessary tax implication in case of an imposition of a tariff where the CTA’s expertise is necessary, but there is no such tax implication, hence no need for the assumption of jurisdiction by a specialized agency, when the ruling rejects the imposition of a safeguard measure. But of course, whether the ruling under review calls for the imposition or non-imposition of the safeguard measure, the common question for resolution still is whether or not the tariff should be imposed — an issue definitely fraught with a tax dimension. The determination of the question will call upon the same kind of expertise that a specialized body as the CTA presumably possesses.

In response to the Court’s observation that the setup proposed by respondents was novel, unusual, cumbersome and unwise, public respondents invoke the maxim that courts should not be concerned with the wisdom and efficacy of legislation.47 But this prescinds from the bogus claim that the CTA may not exercise judicial review over a decision not to impose a safeguard measure, a prohibition that finds no statutory support. It is likewise settled in statutory construction that an interpretation that would cause inconvenience and absurdity is not favored. Respondents do not address the particular illogic that the Court pointed out would ensue if their position on judicial review were adopted. According to the respondents, while a ruling by the DTI Secretary imposing a safeguard measure may be elevated on review to the CTA and assailed on the ground of errors in fact and in law, a ruling denying the imposition of safeguard measures may be assailed only on the ground that the DTI Secretary committed grave abuse of discretion. As stressed in the Decision, "[c]ertiorari is a remedy narrow in its scope and inflexible in its character. It is not a general utility tool in the legal workshop."48

It is incorrect to say that the Decision bars any effective remedy should the Tariff Commission act or conclude erroneously in making its determination whether the factual conditions exist which necessitate the imposition of the general safeguard measure. If the Tariff Commission makes a negative final determination, the DTI Secretary, bound as he is by this negative determination, has to render a decision


denying the application for safeguard measures citing the Tariff Commission’s findings as basis. Necessarily then, such negative determination of the Tariff Commission being an integral part of the DTI Secretary’s ruling would be open for review before the CTA, which again is especially qualified by reason of its expertise to examine the findings of the Tariff Commission. Moreover, considering that the Tariff Commission is an instrumentality of the government, its actions (as opposed to those undertaken by the DTI Secretary under the SMA) are not beyond the pale of certiorari jurisdiction. Unfortunately for Philcemcor, it hinged its cause on the claim that the DTI Secretary’s actions may be annulled on certiorari, notwithstanding the explicit grant of judicial review over that cabinet member’s actions under the SMA to the CTA.

Finally on this point, Philcemcor argues that assuming this Court’s interpretation of Section 29 is correct, such ruling should not be given retroactive effect, otherwise, a gross violation of the right to due process would be had. This erroneously presumes that it was this Court, and not Congress, which vested jurisdiction on the CTA over rulings of non-imposition rendered by the DTI Secretary. We have repeatedly stressed that Section 29 expressly confers CTA jurisdiction over rulings in connection with the imposition of the safeguard measure, and the reassertion of this point in the Decision was a matter of emphasis, not of contrivance. The due process protection does not shield those who remain purposely blind to the express rules that ensure the sporting play of procedural law.

Besides, respondents’ claim would also apply every time this Court is compelled to settle a novel question of law, or to reverse precedent. In such cases, there would always be litigants whose causes of action might be vitiated by the application of newly formulated judicial doctrines. Adopting their claim would unwisely force this Court to treat its dispositions in unprecedented, sometimes landmark decisions not as resolutions to the live cases or controversies, but as legal doctrine applicable only to future litigations.

II. Positive Final Determination

By the Tariff Commission an

Indispensable Requisite to the

Imposition of General Safeguard Measures

The second core ruling in the Decision was that contrary to the holding of the Court of Appeals, the DTI Secretary was barred from imposing a general safeguard measure absent a positive final determination rendered by the Tariff Commission. The fundamental premise rooted in this ruling is based on the acknowledgment that the required positive final determination of the Tariff Commission exists as a properly enacted constitutional limitation imposed on the delegation of the legislative power to impose tariffs and imposts to the President under Section 28(2), Article VI of the Constitution.

Congressional Limitations Pursuant

To Constitutional Authority on the

Delegated Power to Impose

Safeguard Measures

The safeguard measures imposable under the SMA generally involve duties on imported products, tariff rate quotas, or quantitative restrictions on the importation of a product into the country. Concerning as they do the foreign importation of products into the Philippines, these safeguard measures fall within the ambit of Section 28(2), Article VI of the Constitution, which states:

The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.49

The Court acknowledges the basic postulates ingrained in the provision, and, hence, governing in this case. They are:

(1) It is Congress which authorizes the President to impose tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts. Thus, the authority cannot come from the Finance Department, the National Economic Development Authority, or the World Trade Organization, no matter how insistent or persistent these bodies may be.

(2) The authorization granted to the President must be embodied in a law. Hence, the justification cannot be supplied simply by inherent executive powers. It cannot arise from administrative or executive orders promulgated by the executive branch or from the wisdom or whim of the President.


(3) The authorization to the President can be exercised only within the specified limits set in the law and is further subject to limitations and restrictions which Congress may impose. Consequently, if Congress specifies that the tariff rates should not exceed a given amount, the President cannot impose a tariff rate that exceeds such amount. If Congress stipulates that no duties may be imposed on the importation of corn, the President cannot impose duties on corn, no matter how actively the local corn producers lobby the President. Even the most picayune of limits or restrictions imposed by Congress must be observed by the President.

There is one fundamental principle that animates these constitutional postulates. These impositions under Section 28(2), Article VI fall within the realm of the power of taxation, a power which is within the sole province of the legislature under the Constitution.

Without Section 28(2), Article VI, the executive branch has no authority to impose tariffs and other similar tax levies involving the importation of foreign goods. Assuming that Section 28(2) Article VI did not exist, the enactment of the SMA by Congress would be voided on the ground that it would constitute an undue delegation of the legislative power to tax. The constitutional provision shields such delegation from constitutional infirmity, and should be recognized as an exceptional grant of legislative power to the President, rather than the affirmation of an inherent executive power.

This being the case, the qualifiers mandated by the Constitution on this presidential authority attain primordial consideration. First, there must be a law, such as the SMA. Second, there must be specified limits, a detail which would be filled in by the law. And further, Congress is further empowered to impose limitations and restrictions on this presidential authority. On this last power, the provision does not provide for specified conditions, such as that the limitations and restrictions must conform to prior statutes, internationally accepted practices, accepted jurisprudence, or the considered opinion of members of the executive branch.

The Court recognizes that the authority delegated to the President under Section 28(2), Article VI may be exercised, in accordance with legislative sanction, by the alter egos of the President, such as department secretaries. Indeed, for purposes of the President’s exercise of power to impose tariffs under Article VI, Section 28(2), it is generally the Secretary of Finance who acts as alter ego of the President. The SMA provides an exceptional instance wherein it is the DTI or Agriculture Secretary who is tasked by Congress, in their capacities as alter egos of the President, to impose such measures. Certainly, the DTI Secretary has no inherent power, even as alter ego of the President, to levy tariffs and imports.

Concurrently, the tasking of the Tariff Commission under the SMA should be likewise construed within the same context as part and parcel of the legislative delegation of its inherent power to impose tariffs and imposts to the executive branch, subject to limitations and restrictions. In that regard, both the Tariff Commission and the DTI Secretary may be regarded as agents of Congress within their limited respective spheres, as ordained in the SMA, in the implementation of the said law which significantly draws its strength from the plenary legislative power of taxation. Indeed, even the President may be considered as an agent of Congress for the purpose of imposing safeguard measures. It is Congress, not the President, which possesses inherent powers to impose tariffs and imposts. Without legislative authorization through statute, the President has no power, authority or right to impose such safeguard measures because taxation is inherently legislative, not executive.

When Congress tasks the President or his/her alter egos to impose safeguard measures under the delineated conditions, the President or the alter egos may be properly deemed as agents of Congress to perform an act that inherently belongs as a matter of right to the legislature. It is basic agency law that the agent may not act beyond the specifically delegated powers or disregard the restrictions imposed by the principal. In short, Congress may establish the procedural framework under which such safeguard measures may be imposed, and assign the various offices in the government bureaucracy respective tasks pursuant to the imposition of such measures, the task assignment including the factual determination of whether the necessary conditions exists to warrant such impositions. Under the SMA, Congress assigned the DTI Secretary and the Tariff Commission their respective functions50 in the legislature’s scheme of things.

There is only one viable ground for challenging the legality of the limitations and restrictions imposed by Congress under Section 28(2) Article VI, and that is such limitations and restrictions are themselves violative of the Constitution. Thus, no matter how distasteful or noxious these limitations and restrictions may seem, the Court has no choice but to uphold their validity unless their constitutional infirmity can be demonstrated.

What are these limitations and restrictions that are material to the present case? The entire SMA provides for a limited framework under which the President, through the DTI and Agriculture Secretaries, may impose safeguard measures in the form of tariffs and similar imposts. The limitation most relevant to this case is contained in Section 5 of the SMA, captioned "Conditions for the Application of General Safeguard Measures," and stating:


The Secretary shall apply a general safeguard measure upon a positive final determination of the [Tariff] Commission that a product is being imported into the country in increased quantities, whether absolute or relative to the domestic production, as to be a substantial cause of serious injury or threat thereof to the domestic industry; however, in the case of non-agricultural products, the Secretary shall first establish that the application of such safeguard measures will be in the public interest.51

Positive Final Determination

By Tariff Commission Plainly

Required by Section 5 of SMA

There is no question that Section 5 of the SMA operates as a limitation validly imposed by Congress on the presidential52 authority under the SMA to impose tariffs and imposts. That the positive final determination operates as an indispensable requisite to the imposition of the safeguard measure, and that it is the Tariff Commission which makes such determination, are legal propositions plainly expressed in Section 5 for the easy comprehension for everyone but respondents.

Philcemcor attributes this Court’s conclusion on the indispensability of the positive final determination to flawed syllogism in that we read the proposition "if A then B" as if it stated "if A, and only A, then B."53 Translated in practical terms, our conclusion, according to Philcemcor, would have only been justified had Section 5 read "shall apply a general safeguard measure upon, and only upon, a positive final determination of the Tariff Commission."

Statutes are not designed for the easy comprehension of the five-year old child. Certainly, general propositions laid down in statutes need not be expressly qualified by clauses denoting exclusivity in order that they gain efficacy. Indeed, applying this argument, the President would, under the Constitution, be authorized to declare martial law despite the absence of the invasion, rebellion or public safety requirement just because the first paragraph of Section 18, Article VII fails to state the magic word "only."54

But let us for the nonce pursue Philcemcor’s logic further. It claims that since Section 5 does not allegedly limit the circumstances upon which the DTI Secretary may impose general safeguard measures, it is a worthy pursuit to determine whether the entire context of the SMA, as discerned by all the other familiar indicators of legislative intent supplied by norms of statutory interpretation, would justify safeguard measures absent a positive final determination by the Tariff Commission.

The first line of attack employed is on Section 5 itself, it allegedly not being as clear as it sounds. It is advanced that Section 5 does not relate to the legal ability of either the Tariff Commission or the DTI Secretary to bind or foreclose review and reversal by one or the other. Such relationship should instead be governed by domestic administrative law and remedial law. Philcemcor thus would like to cast the proposition in this manner: Does it run contrary to our legal order to assert, as the Court did in its Decision, that a body of relative junior competence as the Tariff Commission can bind an administrative superior and cabinet officer, the DTI Secretary? It is easy to see why Philcemcor would like to divorce this DTI Secretary-Tariff Commission interaction from the confines of the SMA. Shorn of context, the notion would seem radical and unjustifiable that the lowly Tariff Commission can bind the hands and feet of the DTI Secretary.

It can be surmised at once that respondents’ preferred interpretation is based not on the express language of the SMA, but from implications derived in a roundabout manner. Certainly, no provision in the SMA expressly authorizes the DTI Secretary to impose a general safeguard measure despite the absence of a positive final recommendation of the Tariff Commission. On the other hand, Section 5 expressly states that the DTI Secretary "shall apply a general safeguard measure upon a positive final determination of the [Tariff] Commission." The causal connection in Section 5 between the imposition by the DTI Secretary of the general safeguard measure and the positive final determination of the Tariff Commission is patent, and even respondents do not dispute such connection.

As stated earlier, the Court in its Decision found Section 5 to be clear, plain and free from ambiguity so as to render unnecessary resort to the congressional records to ascertain legislative intent. Yet respondents, on the dubitable premise that Section 5 is not as express as it seems, again latch on to the record of legislative deliberations in asserting that there was no legislative intent to bar the DTI Secretary from imposing the general safeguard measure anyway despite the absence of a positive final determination by the Tariff Commission.

Let us take the bait for a moment, and examine respondents’ commonly cited portion of the legislative record. One would presume, given the intense advocacy for the efficacy of these citations, that they contain a "smoking gun" ¾ express declarations from the legislators that the DTI Secretary may impose a general safeguard measure even if the Tariff Commission refuses to render a positive final determination. Such "smoking gun," if it exists, would characterize our Decision as disingenuous for ignoring such contrary expression of intent from the legislators who enacted the SMA. But as with many things, the anticipation is more dramatic than the truth.


The excerpts cited by respondents are derived from the interpellation of the late Congressman Marcial Punzalan Jr., by then (and still is) Congressman Simeon Datumanong.55 Nowhere in these records is the view expressed that the DTI Secretary may impose the general safeguard measures if the Tariff Commission issues a negative final determination or otherwise is unable to make a positive final determination. Instead, respondents hitch on the observations of Congressman Punzalan Jr., that "the results of the [Tariff] Commission’s findings . . . is subsequently submitted to [the DTI Secretary] for the [DTI Secretary] to impose or not to impose;" and that "the [DTI Secretary] here is…who would make the final decision on the recommendation that is made by a more technical body [such as the Tariff Commission]."56

There is nothing in the remarks of Congressman Punzalan which contradict our Decision. His observations fall in accord with the respective roles of the Tariff Commission and the DTI Secretary under the SMA. Under the SMA, it is the Tariff Commission that conducts an investigation as to whether the conditions exist to warrant the imposition of the safeguard measures. These conditions are enumerated in Section 5, namely; that a product is being imported into the country in increased quantities, whether absolute or relative to the domestic production, as to be a substantial cause of serious injury or threat thereof to the domestic industry. After the investigation of the Tariff Commission, it submits a report to the DTI Secretary which states, among others, whether the above-stated conditions for the imposition of the general safeguard measures exist. Upon a positive final determination that these conditions are present, the Tariff Commission then is mandated to recommend what appropriate safeguard measures should be undertaken by the DTI Secretary. Section 13 of the SMA gives five (5) specific options on the type of safeguard measures the Tariff Commission recommends to the DTI Secretary.

At the same time, nothing in the SMA obliges the DTI Secretary to adopt the recommendations made by the Tariff Commission. In fact, the SMA requires that the DTI Secretary establish that the application of such safeguard measures is in the public interest, notwithstanding the Tariff Commission’s recommendation on the appropriate safeguard measure upon its positive final determination. Thus, even if the Tariff Commission makes a positive final determination, the DTI Secretary may opt not to impose a general safeguard measure, or choose a different type of safeguard measure other than that recommended by the Tariff Commission.

Congressman Punzalan was cited as saying that the DTI Secretary makes the decision "to impose or not to impose," which is correct since the DTI Secretary may choose not to impose a safeguard measure in spite of a positive final determination by the Tariff Commission. Congressman Punzalan also correctly stated that it is the DTI Secretary who makes the final decision "on the recommendation that is made [by the Tariff Commission]," since the DTI Secretary may choose to impose a general safeguard measure different from that recommended by the Tariff Commission or not to impose a safeguard measure at all. Nowhere in these cited deliberations was Congressman Punzalan, or any other member of Congress for that matter, quoted as saying that the DTI Secretary may ignore a negative determination by the Tariff Commission as to the existence of the conditions warranting the imposition of general safeguard measures, and thereafter proceed to impose these measures nonetheless. It is too late in the day to ascertain from the late Congressman Punzalan himself whether he had made these remarks in order to assure the other legislators that the DTI Secretary may impose the general safeguard measures notwithstanding a negative determination by the Tariff Commission. But certainly, the language of Section 5 is more resolutory to that question than the recorded remarks of Congressman Punzalan.

Respondents employed considerable effort to becloud Section 5 with undeserved ambiguity in order that a proper resort to the legislative deliberations may be had. Yet assuming that Section 5 deserves to be clarified through an inquiry into the legislative record, the excerpts cited by the respondents are far more ambiguous than the language of the assailed provision regarding the key question of whether the DTI Secretary may impose safeguard measures in the face of a negative determination by the Tariff Commission. Moreover, even Southern Cross counters with its own excerpts of the legislative record in support of their own view.57

It will not be difficult, especially as to heavily-debated legislation, for two sides with contrapuntal interpretations of a statute to highlight their respective citations from the legislative debate in support of their particular views.58 A futile exercise of second-guessing is happily avoided if the meaning of the statute is clear on its face. It is evident from the text of Section 5 that there must be a positive final determination by the Tariff Commission that a product is being imported into the country in increased quantities (whether absolute or relative to domestic production), as to be a substantial cause of serious injury or threat to the domestic industry. Any disputation to the contrary is, at best, the product of wishful thinking.

For the same reason that Section 5 is explicit as regards the essentiality of a positive final determination by the Tariff Commission, there is no need to refer to the Implementing Rules of the SMA to ascertain a contrary intent. If there is indeed a provision in the Implementing Rules that allows the DTI Secretary to impose a general safeguard measure even without the positive final determination by the Tariff Commission, said rule is void as it cannot supplant the express language of the legislature. Respondents essentially rehash their previous arguments on this point, and there is no reason to consider them anew. The Decision made it clear that nothing in Rule 13.2 of the Implementing Rules, even though captioned "Final Determination by the Secretary," authorizes the DTI Secretary to impose a general safeguard


measure in the absence of a positive final determination by the Tariff Commission.59 Similarly, the "Rules and Regulations to Govern the Conduct of Investigation by the Tariff Commission Pursuant to Republic Act No. 8800" now cited by the respondent does not contain any provision that the DTI Secretary may impose the general safeguard measures in the absence of a positive final determination by the Tariff Commission.

Section 13 of the SMA further bolsters the interpretation as argued by Southern Cross and upheld by the Decision. The first paragraph thereof states that "[u]pon its positive determination, the [Tariff] Commission shall recommend to the Secretary an appropriate definitive measure…", clearly referring to the Tariff Commission as the entity that makes the positive determination. On the other hand, the penultimate paragraph of the same provision states that "[i]n the event of a negative final determination", the DTI Secretary is to immediately issue through the Secretary of Finance, a written instruction to the Commissioner of Customs authorizing the return of the cash bonds previously collected as a provisional safeguard measure. Since the first paragraph of the same provision states that it is the Tariff Commission which makes the positive determination, it necessarily follows that it, and not the DTI Secretary, makes the negative final determination as referred to in the penultimate paragraph of Section 13.60

The Separate Opinion considers as highly persuasive of former Tariff Commission Chairman Abon, who stated that the Commission’s findings are merely recommendatory.61 Again, the considered opinion of Chairman Abon is of no operative effect if the statute plainly states otherwise, and Section 5 bluntly does require a positive final determination by the Tariff Commission before the DTI Secretary may impose a general safeguard measure.62Certainly, the Court cannot give controlling effect to the statements of any public officer in serious denial of his duties if the law otherwise imposes the duty on the public office or officer.

Nonetheless, if we are to render persuasive effect on the considered opinion of the members of the Executive Branch, it bears noting that the Secretary of the Department of Justice rendered an Opinion wherein he concluded that the DTI Secretary could not impose a general safeguard measure if the Tariff Commission made a negative final determination.63 Unlike Chairman Abon’s impromptu remarks made during a hearing, the DOJ Opinion was rendered only after a thorough study of the question after referral to it by the DTI. The DOJ Secretary is the alter ego of the President with a stated mandate as the head of the principal law agency of the government.64 As the DOJ Secretary has no denominated role in the SMA, he was able to render his Opinion from the vantage of judicious distance. Should not his Opinion, studied and direct to the point as it is, carry greater weight than the spontaneous remarks of the Tariff Commission’s Chairman which do not even expressly disavow the binding power of the Commission’s positive final determination?

III. DTI Secretary has No Power of Review

Over Final Determination of the Tariff Commission

We should reemphasize that it is only because of the SMA, a legislative enactment, that the executive branch has the power to impose safeguard measures. At the same time, by constitutional fiat, the exercise of such power is subjected to the limitations and restrictions similarly enforced by the SMA. In examining the relationship of the DTI and the Tariff Commission as established in the SMA, it is essential to acknowledge and consider these predicates.

It is necessary to clarify the paradigm established by the SMA and affirmed by the Constitution under which the Tariff Commission and the DTI operate, especially in light of the suggestions that the Court’s rulings on the functions of quasi-judicial power find application in this case. Perhaps the reflexive application of the quasi-judicial doctrine in this case, rooted as it is in jurisprudence, might allow for some convenience in ruling, yet doing so ultimately betrays ignorance of the fundamental power of Congress to reorganize the administrative structure of governance in ways it sees fit.

The Separate Opinion operates from wholly different premises which are incomplete. Its main stance, similar to that of respondents, is that the DTI Secretary, acting as alter ego of the President, may modify and alter the findings of the Tariff Commission, including the latter’s negative final determination by substituting it with his own negative final determination to pave the way for his imposition of a safeguard measure.65 Fatally, this conclusion is arrived at without considering the fundamental constitutional precept under Section 28(2), Article VI, on the ability of Congress to impose restrictions and limitations in its delegation to the President to impose tariffs and imposts, as well as the express condition of Section 5 of the SMA requiring a positive final determination of the Tariff Commission.

Absent Section 5 of the SMA, the President has no inherent, constitutional, or statutory power to impose a general safeguard measure. Tellingly, the Separate Opinion does not directly confront the inevitable question as to how the DTI Secretary may get away with imposing a general safeguard measure absent a positive final determination from the Tariff Commission without violating Section 5 of the SMA, which along with Section 13 of the same law, stands as the only direct legal authority for the DTI Secretary to impose such measures. This is a constitutionally guaranteed limitation of the highest order, considering that the presidential authority exercised under the SMA is inherently legislative.


Nonetheless, the Separate Opinion brings to fore the issue of whether the DTI Secretary, acting either as alter ego of the President or in his capacity as head of an executive department, may review, modify or otherwise alter the final determination of the Tariff Commission under the SMA. The succeeding discussion shall focus on that question.

Preliminarily, we should note that none of the parties question the designation of the DTI or Agriculture secretaries under the SMA as the imposing authorities of the safeguard measures, even though Section 28(2) Article VI states that it is the President to whom the power to impose tariffs and imposts may be delegated by Congress. The validity of such designation under the SMA should not be in doubt. We recognize that the authorization made by Congress in the SMA to the DTI and Agriculture Secretaries was made in contemplation of their capacities as alter egos of the President.

Indeed, in Marc Donnelly & Associates v. Agregado66 the Court upheld the validity of a Cabinet resolution fixing the schedule of royalty rates on metal exports and providing for their collection even though Congress, under Commonwealth Act No. 728, had specifically empowered the President and not any other official of the executive branch, to regulate and curtail the export of metals. In so ruling, the Court held that the members of the Cabinet were acting as alter egos of the President.67 In this case, Congress itself authorized the DTI Secretary as alter ego of the President to impose the safeguard measures. If the Court was previously willing to uphold the alter ego’s tariff authority despite the absence of explicit legislative grant of such authority on the alter ego, all the more reason now when Congress itself expressly authorized the alter ego to exercise these powers to impose safeguard measures.

Notwithstanding, Congress in enacting the SMA and prescribing the roles to be played therein by the Tariff Commission and the DTI Secretary did not envision that the President, or his/her alter ego, could exercise supervisory powers over the Tariff Commission. If truly Congress intended to allow the traditional "alter ego" principle to come to fore in the peculiar setup established by the SMA, it would have assigned the role now played by the DTI Secretary under the law instead to the NEDA. The Tariff Commission is an attached agency of the National Economic Development Authority,68 which in turn is the independent planning agency of the government.69

The Tariff Commission does not fall under the administrative supervision of the DTI.70 On the other hand, the administrative relationship between the NEDA and the Tariff Commission is established not only by the Administrative Code, but similarly affirmed by the Tariff and Customs Code.

Justice Florentino Feliciano, in his ponencia in Garcia v. Executive Secretary71, acknowledged the interplay between the NEDA and the Tariff Commission under the Tariff and Customs Code when he cited the relevant provisions of that law evidencing such setup. Indeed, under Section 104 of the Tariff and Customs Code, the rates of duty fixed therein are subject to periodic investigation by the Tariff Commission and may be revised by the President upon recommendation of the NEDA.72 Moreover, under Section 401 of the same law, it is upon periodic investigations by the Tariff Commission and recommendation of the NEDA that the President may cause a gradual reduction of protection levels granted under the law.73

At the same time, under the Tariff and Customs Code, no similar role or influence is allocated to the DTI in the matter of imposing tariff duties. In fact, the long-standing tradition has been for the Tariff Commission and the DTI to proceed independently in the exercise of their respective functions. Only very recently have our statutes directed any significant interplay between the Tariff Commission and the DTI, with the enactment in 1999 of Republic Act No. 8751 on the imposition of countervailing duties and Republic Act No. 8752 on the imposition of anti-dumping duties, and of course the promulgation a year later of the SMA. In all these three laws, the Tariff Commission is tasked, upon referral of the matter by the DTI, to determine whether the factual conditions exist to warrant the imposition by the DTI of a countervailing duty, an anti-dumping duty, or a general safeguard measure, respectively. In all three laws, the determination by the Tariff Commission that these required factual conditions exist is necessary before the DTI Secretary may impose the corresponding duty or safeguard measure. And in all three laws, there is no express provision authorizing the DTI Secretary to reverse the factual determination of the Tariff Commission.74

In fact, the SMA indubitably establishes that the Tariff Commission is no mere flunky of the DTI Secretary when it mandates that the positive final recommendation of the former be indispensable to the latter’s imposition of a general safeguard measure. What the law indicates instead is a relationship of interdependence between two bodies independent of each other under the Administrative Code and the SMA alike. Indeed, even the ability of the DTI Secretary to disregard the Tariff Commission’s recommendations as to the particular safeguard measures to be imposed evinces the independence from each other of these two bodies. This is properly so for two reasons – the DTI and the Tariff Commission are independent of each other under the Administrative Code; and impropriety is avoided in cases wherein the DTI itself is the one seeking the imposition of the general safeguard measures, pursuant to Section 6 of the SMA.

Thus, in ascertaining the appropriate legal milieu governing the relationship between the DTI and the Tariff Commission, it is imperative to apply foremost, if not exclusively, the provisions of the SMA. The argument that the usual rules on administrative control and supervision apply between the Tariff Commission and


the DTI as regards safeguard measures is severely undercut by the plain fact that there is no long-standing tradition of administrative interplay between these two entities.

Within the administrative apparatus, the Tariff Commission appears to be a lower rank relative to the DTI. But does this necessarily mean that the DTI has the intrinsic right, absent statutory authority, to reverse the findings of the Tariff Commission? To insist that it does, one would have to concede for instance that, applying the same doctrinal guide, the Secretary of the Department of Science and Technology (DOST) has the right to reverse the rulings of the Civil Aeronautics Board (CAB) or the issuances of the Philippine Coconut Authority (PCA). As with the Tariff Commission-DTI, there is no statutory authority granting the DOST Secretary the right to overrule the CAB or the PCA, such right presumably arising only from the position of subordinacy of these bodies to the DOST. To insist on such a right would be to invite department secretaries to interfere in the exercise of functions by administrative agencies, even in areas wherein such secretaries are bereft of specialized competencies.

The Separate Opinion notes that notwithstanding above, the Secretary of Department of Transportation and Communication may review the findings of the CAB, the Agriculture Secretary may review those of the PCA, and that the Secretary of the Department of Environment and Natural Resources may pass upon decisions of the Mines and Geosciences Board.75 These three officers may be alter egos of the President, yet their authority to review is limited to those agencies or bureaus which are, pursuant to statutes such as the Administrative Code of 1987, under the administrative control and supervision of their respective departments. Thus, under the express provision of the Administrative Code expressly provides that the CAB is an attached agency of the DOTC76, and that the PCA is an attached agency of the Department of Agriculture.77 The same law establishes the Mines and Geo-Sciences Bureau as one of the Sectoral Staff Bureaus78 that forms part of the organizational structure of the DENR.79

As repeatedly stated, the Tariff Commission does not fall under the administrative control of the DTI, but under the NEDA, pursuant to the Administrative Code. The reliance made by the Separate Opinion to those three examples are thus misplaced.

Nonetheless, the Separate Opinion asserts that the SMA created a functional relationship between the Tariff Commission and the DTI Secretary, sufficient to allow the DTI Secretary to exercise alter ego powers to reverse the determination of the Tariff Commission. Again, considering that the power to impose tariffs in the first place is not inherent in the President but arises only from congressional grant, we should affirm the congressional prerogative to impose limitations and restrictions on such powers which do not normally belong to the executive in the first place. Nowhere in the SMA does it state that the DTI Secretary may impose general safeguard measures without a positive final determination by the Tariff Commission, or that the DTI Secretary may reverse or even review the factual determination made by the Tariff Commission.

Congress in enacting the SMA and prescribing the roles to be played therein by the Tariff Commission and the DTI Secretary did not envision that the President, or his/her alter ego could exercise supervisory powers over the Tariff Commission. If truly Congress intended to allow the traditional alter ego principle to come to fore in the peculiar setup established by the SMA, it would have assigned the role now played by the DTI Secretary under the law instead to the NEDA, the body to which the Tariff Commission is attached under the Administrative Code.

The Court has no issue with upholding administrative control and supervision exercised by the head of an executive department, but only over those subordinate offices that are attached to the department, or which are, under statute, relegated under its supervision and control. To declare that a department secretary, even if acting as alter ego of the President, may exercise such control or supervision over all executive offices below cabinet rank would lead to absurd results such as those adverted to above. As applied to this case, there is no legal justification for the DTI Secretary to exercise control, supervision, review or amendatory powers over the Tariff Commission and its positive final determination. In passing, we note that there is, admittedly, a feasible mode by which administrative review of the Tariff Commission’s final determination could be had, but it is not the procedure adopted by respondents and now suggested for affirmation. This mode shall be discussed in a forthcoming section.

The Separate Opinion asserts that the President, or his/her alter ego cannot be made a mere rubber stamp of the Tariff Commission since Section 17, Article VII of the Constitution denominates the Chief Executive exercises control over all executive departments, bureaus and offices.80 But let us be clear that such "executive control" is not absolute. The definition of the structure of the executive branch of government, and the corresponding degrees of administrative control and supervision, is not the exclusive preserve of the executive. It may be effectively be limited by the Constitution, by law, or by judicial decisions.

The Separate Opinion cites the respected constitutional law authority Fr. Joaquin Bernas, in support of the proposition that such plenary power of executive control of the President cannot be restricted by a mere statute passed by Congress. However, the cited passage from Fr. Bernas actually states, "Since the Constitution has given the President the power of control, with all its awesome implications, it is the Constitution alone which can curtail such power."81 Does the President have such tariff powers under the Constitution in the first place which may be curtailed by the executive power of control? At the risk of redundancy, we quote Section 28(2), Article VI: "The Congress may, by law, authorize the President to fix


within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government." Clearly the power to impose tariffs belongs to Congress and not to the President.

It is within reason to assume the framers of the Constitution deemed it too onerous to spell out all the possible limitations and restrictions on this presidential authority to impose tariffs. Hence, the Constitution especially allowed Congress itself to prescribe such limitations and restrictions itself, a prudent move considering that such authority inherently belongs to Congress and not the President. Since Congress has no power to amend the Constitution, it should be taken to mean that such limitations and restrictions should be provided "by mere statute". Then again, even the presidential authority to impose tariffs arises only "by mere statute." Indeed, this presidential privilege is both contingent in nature and legislative in origin. These characteristics, when weighed against the aspect of executive control and supervision, cannot militate against Congress’s exercise of its inherent power to tax.

The bare fact is that the administrative superstructure, for all its unwieldiness, is mere putty in the hands of Congress. The functions and mandates of the particular executive departments and bureaus are not created by the President, but by the legislative branch through the Administrative Code. 82 The President is the administrative head of the executive department, as such obliged to see that every government office is managed and maintained properly by the persons in charge of it in accordance with pertinent laws and regulations, and empowered to promulgate rules and issuances that would ensure a more efficient management of the executive branch, for so long as such issuances are not contrary to law.83 Yet the legislature has the concurrent power to reclassify or redefine the executive bureaucracy, including the relationship between various administrative agencies, bureaus and departments, and ultimately, even the power to abolish executive departments and their components, hamstrung only by constitutional limitations. The DTI itself can be abolished with ease by Congress through deleting Title X, Book IV of the Administrative Code. The Tariff Commission can similarly be abolished through legislative enactment. 84

At the same time, Congress can enact additional tasks or responsibilities on either the Tariff Commission or the DTI Secretary, such as their respective roles on the imposition of general safeguard measures under the SMA. In doing so, the same Congress, which has the putative authority to abolish the Tariff Commission or the DTI, is similarly empowered to alter or expand its functions through modalities which do not align with established norms in the bureaucratic structure. The Court is bound to recognize the legislative prerogative to prescribe such modalities, no matter how atypical they may be, in affirmation of the legislative power to restructure the executive branch of government.

There are further limitations on the "executive control" adverted to by the Separate Opinion. The President, in the exercise of executive control, cannot order a subordinate to disobey a final decision of this Court or any court’s. If the subordinate chooses to disobey, invoking sole allegiance to the President, the judicial processes can be utilized to compel obeisance. Indeed, when public officers of the executive department take their oath of office, they swear allegiance and obedience not to the President, but to the Constitution and the laws of the land. The invocation of executive control must yield when under its subsumption includes an act that violates the law.

The Separate Opinion concedes that the exercise of executive control and supervision by the President is bound by the Constitution and law.85 Still, just three sentences after asserting that the exercise of executive control must be within the bounds of the Constitution and law, the Separate Opinion asserts, "the control power of the Chief Executive emanates from the Constitution; no act of Congress may validly curtail it."86 Laws are acts of Congress, hence valid confusion arises whether the Separate Opinion truly believes the first proposition that executive control is bound by law. This is a quagmire for the Separate Opinion to resolve for itself

The Separate Opinion unduly considers executive control as the ne plus ultra constitutional standard which must govern in this case. But while the President may generally have the power to control, modify or set aside the actions of a subordinate, such powers may be constricted by the Constitution, the legislature, and the judiciary. This is one of the essences of the check-and-balance system in our tri-partite constitutional democracy. Not one head of a branch of government may operate as a Caesar within his/her particular fiefdom.

Assuming there is a conflict between the specific limitation in Section 28 (2), Article VI of the Constitution and the general executive power of control and supervision, the former prevails in the specific instance of safeguard measures such as tariffs and imposts, and would thus serve to qualify the general grant to the President of the power to exercise control and supervision over his/her subalterns.

Thus, if the Congress enacted the law so that the DTI Secretary is "bound" by the Tariff Commission in the sense the former cannot impose general safeguard measures absent a final positive determination from the latter the Court is obliged to respect such legislative prerogative, no matter how such arrangement deviates from traditional norms as may have been enshrined in jurisprudence. The only ground under which such legislative determination as expressed in statute may be successfully challenged is if such


legislation contravenes the Constitution. No such argument is posed by the respondents, who do not challenge the validity or constitutionality of the SMA.

Given these premises, it is utterly reckless to examine the interrelationship between the Tariff Commission and the DTI Secretary beyond the context of the SMA, applying instead traditional precepts on administrative control, review and supervision. For that reason, the Decision deemed inapplicable respondents’ previous citations of Cariño v. Commissioner on Human Rights and Lamb v. Phipps, since the executive power adverted to in those cases had not been limited by constitutional restrictions such as those imposed under Section 28(2), Article VI.87

A similar observation can be made on the case of Sharp International Marketing v. Court of Appeals,88 now cited by Philcemcor, wherein the Court asserted that the Land Bank of the Philippines was required to exercise independent judgment and not merely rubber-stamp deeds of sale entered into by the Department of Agrarian Reform in connection with the agrarian reform program. Philcemcor attempts to demonstrate that the DTI Secretary, as with the Land Bank of the Philippines, is required to exercise independent discretion and is not expected to just merely accede to DAR-approved compensation packages. Yet again, such grant of independent discretion is expressly called for by statute, particularly Section 18 of Rep. Act No. 6657 which specifically requires the joint concurrence of "the landowner and the DAR and the [Land Bank of the Philippines]" on the amount of compensation. Such power of review by the Land Bank is a consequence of clear statutory language, as is our holding in the Decision that Section 5 explicitly requires a positive final determination by the Tariff Commission before a general safeguard measure may be imposed. Moreover, such limitations under the SMA are coated by the constitutional authority of Section 28(2), Article VI of the Constitution.

Nonetheless, is this administrative setup, as envisioned by Congress and enshrined into the SMA, truly noxious to existing legal standards? The Decision acknowledged the internal logic of the statutory framework, considering that the DTI cannot exercise review powers over an agency such as the Tariff Commission which is not within its administrative jurisdiction; that the mechanism employed establishes a measure of check and balance involving two government offices with different specializations; and that safeguard measures are the exception rather than the rule, pursuant to our treaty obligations.89

We see no reason to deviate from these observations, and indeed can add similarly oriented comments. Corollary to the legislative power to decree policies through legislation is the ability of the legislature to provide for means in the statute itself to ensure that the said policy is strictly implemented by the body or office tasked so tasked with the duty. As earlier stated, our treaty obligations dissuade the State for now from implementing default protectionist trade measures such as tariffs, and allow the same only under specified conditions.90The conditions enumerated under the GATT Agreement on Safeguards for the application of safeguard measures by a member country are the same as the requisites laid down in Section 5 of the SMA.91 To insulate the factual determination from political pressure, and to assure that it be conducted by an entity especially qualified by reason of its general functions to undertake such investigation, Congress deemed it necessary to delegate to the Tariff Commission the function of ascertaining whether or not the those factual conditions exist to warrant the atypical imposition of safeguard measures. After all, the Tariff Commission retains a degree of relative independence by virtue of its attachment to the National Economic Development Authority, "an independent planning agency of the government,"92 and also owing to its vaunted expertise and specialization.

The matter of imposing a safeguard measure almost always involves not just one industry, but the national interest as it encompasses other industries as well. Yet in all candor, any decision to impose a safeguard measure is susceptible to all sorts of external pressures, especially if the domestic industry concerned is well-organized. Unwarranted impositions of safeguard measures may similarly be detrimental to the national interest. Congress could not be blamed if it desired to insulate the investigatory process by assigning it to a body with a putative degree of independence and traditional expertise in ascertaining factual conditions. Affected industries would have cause to lobby for or against the safeguard measures. The decision-maker is in the unenviable position of having to bend an ear to listen to all concerned voices, including those which may speak softly but carry a big stick. Had the law mandated that the decision be made on the sole discretion of an executive officer, such as the DTI Secretary, it would be markedly easier for safeguard measures to be imposed or withheld based solely on political considerations and not on the factual conditions that are supposed to predicate the decision.

Reference of the binding positive final determination to the Tariff Commission is of course, not a fail-safe means to ensure a bias-free determination. But at least the legislated involvement of the Commission in the process assures some measure of measure of check and balance involving two different governmental agencies with disparate specializations. There is no legal or constitutional demand for such a setup, but its wisdom as policy should be acknowledged. As prescribed by Congress, both the Tariff Commission and the DTI Secretary operate within limited frameworks, under which nobody acquires an undue advantage over the other.

We recognize that Congress deemed it necessary to insulate the process in requiring that the factual determination to be made by an ostensibly independent body of specialized competence, the Tariff Commission. This prescribed framework, constitutionally sanctioned, is intended to prevent the baseless, whimsical, or consideration-induced imposition of safeguard measures. It removes from the DTI Secretary


jurisdiction over a matter beyond his putative specialized aptitude, the compilation and analysis of picayune facts and determination of their limited causal relations, and instead vests in the Secretary the broad choice on a matter within his unquestionable competence, the selection of what particular safeguard measure would assist the duly beleaguered local industry yet at the same time conform to national trade policy. Indeed, the SMA recognizes, and places primary importance on the DTI Secretary’s mandate to formulate trade policy, in his capacity as the President’s alter ego on trade, industry and investment-related matters.

At the same time, the statutory limitations on this authorized power of the DTI Secretary must prevail since the Constitution itself demands the enforceability of those limitations and restrictions as imposed by Congress. Policy wisdom will not save a law from infirmity if the statutory provisions violate the Constitution. But since the Constitution itself provides that the President shall be constrained by the limits and restrictions imposed by Congress and since these limits and restrictions are so clear and categorical, then the Court has no choice but to uphold the reins.

Even assuming that this prescribed setup made little sense, or seemed "uncommonly silly,"93 the Court is bound by propriety not to dispute the wisdom of the legislature as long as its acts do not violate the Constitution. Since there is no convincing demonstration that the SMA contravenes the Constitution, the Court is wont to respect the administrative regimen propounded by the law, even if it allots the Tariff Commission a higher degree of puissance than normally expected. It is for this reason that the traditional conceptions of administrative review or quasi-judicial power cannot control in this case.

Indeed, to apply the latter concept would cause the Court to fall into a linguistic trap owing to the multi-faceted denotations the term "quasi-judicial" has come to acquire.

Under the SMA, the Tariff Commission undertakes formal hearings,94 receives and evaluates testimony and evidence by interested parties,95 and renders a decision is rendered on the basis of the evidence presented, in the form of the final determination. The final determination requires a conclusion whether the importation of the product under consideration is causing serious injury or threat to a domestic industry producing like products or directly competitive products, while evaluating all relevant factors having a bearing on the situation of the domestic industry.96 This process aligns conformably with definition provided by Black’s Law Dictionary of "quasi-judicial" as the "action, discretion, etc., of public administrative officers or bodies, who are required to investigate facts, or ascertain the existence of facts, hold hearings, weigh evidence, and draw conclusions from them, as a basis for their official action, and to exercise discretion of a judicial nature."97

However, the Tariff Commission is not empowered to hear actual cases or controversies lodged directly before it by private parties. It does not have the power to issue writs of injunction or enforcement of its determination. These considerations militate against a finding of quasi-judicial powers attributable to the Tariff Commission, considering the pronouncement that "quasi-judicial adjudication would mean a determination of rights privileges and duties resulting in a decision or order which applies to a specific situation."98

Indeed, a declaration that the Tariff Commission possesses quasi-judicial powers, even if ascertained for the limited purpose of exercising its functions under the SMA, may have the unfortunate effect of expanding the Commission’s powers beyond that contemplated by law. After all, the Tariff Commission is by convention, a fact-finding body, and its role under the SMA, burdened as it is with factual determination, is but a mere continuance of this tradition. However, Congress through the SMA offers a significant deviation from this traditional role by tying the decision by the DTI Secretary to impose a safeguard measure to the required positive factual determination by the Tariff Commission. Congress is not bound by past traditions, or even by the jurisprudence of this Court, in enacting legislation it may deem as suited for the times. The sole benchmark for judicial substitution of congressional wisdom is constitutional transgression, a standard which the respondents do not even attempt to match.

Respondents’ Suggested Interpretation

Of the SMA Transgresses Fair Play

Respondents have belabored the argument that the Decision’s interpretation of the SMA, particularly of the role of the Tariff Commission vis-à-vis the DTI Secretary, is noxious to traditional notions of administrative control and supervision. But in doing so, they have failed to acknowledge the congressional prerogative to redefine administrative relationships, a license which falls within the plenary province of Congress under our representative system of democracy. Moreover, respondents’ own suggested interpretation falls wayward of expectations of practical fair play.

Adopting respondents’ suggestion that the DTI Secretary may disregard the factual findings of the Tariff Commission and investigatory process that preceded it, it would seem that the elaborate procedure undertaken by the Commission under the SMA, with all the attendant guarantees of due process, is but an inutile spectacle. As Justice Garcia noted during the oral arguments, why would the DTI Secretary bother with the Tariff Commission and instead conduct the investigation himself.99


Certainly, nothing in the SMA authorizes the DTI Secretary, after making the preliminary determination, to personally oversee the investigation, hear out the interested parties, or receive evidence.100 In fact, the SMA does not even require the Tariff Commission, which is tasked with the custody of the submitted evidence,101 to turn over to the DTI Secretary such evidence it had evaluated in order to make its factual determination.102 Clearly, as Congress tasked it to be, it is the Tariff Commission and not the DTI Secretary which acquires the necessary intimate acquaintance with the factual conditions and evidence necessary for the imposition of the general safeguard measure. Why then favor an interpretation of the SMA that leaves the findings of the Tariff Commission bereft of operative effect and makes them subservient to the wishes of the DTI Secretary, a personage with lesser working familiarity with the relevant factual milieu? In fact, the bare theory of the respondents would effectively allow the DTI Secretary to adopt, under the subterfuge of his "discretion", the factual determination of a private investigative group hired by the industry concerned, and reject the investigative findings of the Tariff Commission as mandated by the SMA. It would be highly irregular to substitute what the law clearly provides for a dubious setup of no statutory basis that would be readily susceptible to rank chicanery.

Moreover, the SMA guarantees the right of all concerned parties to be heard, an elemental requirement of due process, by the Tariff Commission in the context of its investigation. The DTI Secretary is not similarly empowered or tasked to hear out the concerns of other interested parties, and if he/she does so, it arises purely out of volition and not compulsion under law.

Indeed, in this case, it is essential that the position of other than that of the local cement industry should be given due consideration, cement being an indispensable need for the operation of other industries such as housing and construction. While the general safeguard measures may operate to the better interests of the domestic cement industries, its deprivation of cheaper cement imports may similarly work to the detriment of these other domestic industries and correspondingly, the national interest. Notably, the Tariff Commission in this case heard the views on the application of representatives of other allied industries such as the housing, construction, and cement-bag industries, and other interested parties such as consumer groups and foreign governments.103 It is only before the Tariff Commission that their views had been heard, and this is because it is only the Tariff Commission which is empowered to hear their positions. Since due process requires a judicious consideration of all relevant factors, the Tariff Commission, which is in a better position to hear these parties than the DTI Secretary, is similarly more capable to render a determination conformably with the due process requirements than the DTI Secretary.

In a similar vein, Southern Cross aptly notes that in instances when it is the DTI Secretary who initiates motu proprio the application for the safeguard measure pursuant to Section 6 of the SMA, respondents’ suggested interpretation would result in the awkward situation wherein the DTI Secretary would rule upon his own application after it had been evaluated by the Tariff Commission. Pertinently cited is our ruling in Corona v. Court of Appeals104 that "no man can be at once a litigant and judge."105 Certainly, this anomalous situation is avoided if it is the Tariff Commission which is tasked with arriving at the final determination whether the conditions exist to warrant the general safeguard measures. This is the setup provided for by the express provisions of the SMA, and the problem would arise only if we adopt the interpretation urged upon by respondents.

The Possibility for Administrative Review

Of the Tariff Commission’s Determination

The Court has been emphatic that a positive final determination from the Tariff Commission is required in order that the DTI Secretary may impose a general safeguard measure, and that the DTI Secretary has no power to exercise control and supervision over the Tariff Commission and its final determination. These conclusions are the necessary consequences of the applicable provisions of the Constitution, the SMA, and laws such as the Administrative Code. However, the law is silent though on whether this positive final determination may otherwise be subjected to administrative review.

There is no evident legislative intent by the authors of the SMA to provide for a procedure of administrative review. If ever there is a procedure for administrative review over the final determination of the Tariff Commission, such procedure must be done in a manner that does not contravene or disregard legislative prerogatives as expressed in the SMA or the Administrative Code, or fundamental constitutional limitations.

In order that such procedure of administrative review would not contravene the law and the constitutional scheme provided by Section 28(2), Article VI, it is essential to assert that the positive final determination by the Tariff Commission is indispensable as a requisite for the imposition of a general safeguard measure. The submissions of private respondents and the Separate Opinion cannot be sustained insofar as they hold that the DTI Secretary can peremptorily ignore or disregard the determinations made by the Tariff Commission. However, if the mode of administrative review were in such a manner that the administrative superior of the Tariff Commission were to modify or alter its determination, then such "reversal" may still be valid within the confines of Section 5 of the SMA, for technically it is still the Tariff Commission’s determination, administratively revised as it may be, that would serve as the basis for the DTI Secretary’s action.


However, and fatally for the present petitions, such administrative review cannot be conducted by the DTI Secretary. Even if conceding that the Tariff Commission’s findings may be administratively reviewed, the DTI Secretary has no authority to review or modify the same. We have been emphatic on the reasons — such as that there is no traditional or statutory basis placing the Commission under the control and supervision of the DTI; that to allow such would contravene due process, especially if the DTI itself were to apply for the safeguard measures motu proprio. To hold otherwise would destroy the administrative hierarchy, contravene constitutional due process, and disregard the limitations or restrictions provided in the SMA.

Instead, assuming administrative review were available, it is the NEDA that may conduct such review following the principles of administrative law, and the NEDA’s decision in turn is reviewable by the Office of the President. The decision of the Office of the President then effectively substitutes as the determination of the Tariff Commission, which now forms the basis of the DTI Secretary’s decision, which now would be ripe for judicial review by the CTA under Section 29 of the SMA. This is the only way that administrative review of the Tariff Commission’s determination may be sustained without violating the SMA and its constitutional restrictions and limitations, as well as administrative law.

In bare theory, the NEDA may review, alter or modify the Tariff Commission’s final determination, the Commission being an attached agency of the NEDA. Admittedly, there is nothing in the SMA or any other statute that would prevent the NEDA to exercise such administrative review, and successively, for the President to exercise in turn review over the NEDA’s decision.

Nonetheless, in acknowledging this possibility, the Court, without denigrating the bare principle that administrative officers may exercise control and supervision over the acts of the bodies under its jurisdiction, realizes that this comes at the expense of a speedy resolution to an application for a safeguard measure, an application dependent on fluctuating factual conditions. The further delay would foster uncertainty and insecurity within the industry concerned, as well as with all other allied industries, which in turn may lead to some measure of economic damage. Delay is certain, since judicial review authorized by law and not administrative review would have the final say. The fact that the SMA did not expressly prohibit administrative review of the final determination of the Tariff Commission does not negate the supreme advantages of engendering exclusive judicial review over questions arising from the imposition of a general safeguard measure.

In any event, even if we conceded the possibility of administrative review of the Tariff Commission’s final determination by the NEDA, such would not deny merit to the present petition. It does not change the fact that the Court of Appeals erred in ruling that the DTI Secretary was not bound by the negative final determination of the Tariff Commission, or that the DTI Secretary acted without jurisdiction when he imposed general safeguard measures despite the absence of the statutory positive final determination of the Commission.

IV. Court’s Interpretation of SMA

In Harmony with Other

Constitutional Provisions

In response to our citation of Section 28(2), Article VI, respondents elevate two arguments grounded in constitutional law. One is based on another constitutional provision, Section 12, Article XIII, which mandates that "[t]he State shall promote the preferential use of Filipino labor, domestic materials and locally produced goods and adopt measures that help make them competitive." By no means does this provision dictate that the Court favor the domestic industry in all competing claims that it may bring before this Court. If it were so, judicial proceedings in this country would be rendered a mockery, resolved as they would be, on the basis of the personalities of the litigants and not their legal positions.

Moreover, the duty imposed on by Section 12, Article XIII falls primarily with Congress, which in that regard enacted the SMA, a law designed to protect domestic industries from the possible ill-effects of our accession to the global trade order. Inconveniently perhaps for respondents, the SMA also happens to provide for a procedure under which such protective measures may be enacted. The Court cannot just impose what it deems as the spirit of the law without giving due regard to its letter.

In like-minded manner, the Separate Opinion loosely states that the purpose of the SMA is to protect or safeguard local industries from increased importation of foreign products.106 This inaccurately leaves the impression that the SMA ipso facto unravels a protective cloak that shelters all local industries and producers, no matter the conditions. Indeed, our country has knowingly chosen to accede to the world trade regime, as expressed in the GATT and WTO Agreements, despite the understanding that local industries might suffer ill-effects, especially with the easier entry of competing foreign products. At the same time, these international agreements were designed to constrict protectionist trade policies by its member-countries. Hence, the median, as expressed by the SMA, does allow for the application of protectionist measures such as tariffs, but only after an elaborate process of investigation that ensures factual basis and indispensable need for such measures. More accurately, the purpose of the SMA is to


provide a process for the protection or safeguarding of domestic industries that have duly established that there is substantial injury or threat thereof directly caused by the increased imports. In short, domestic industries are not entitled to safeguard measures as a matter of right or influence.

Respondents also make the astounding argument that the imposition of general safeguard measures should not be seen as a taxation measure, but instead as an exercise of police power. The vain hope of respondents in divorcing the safeguard measures from the concept of taxation is to exclude from consideration Section 28(2), Article VI of the Constitution.

This argument can be debunked at length, but it deserves little attention. The motivation behind many taxation measures is the implementation of police power goals. Progressive income taxes alleviate the margin between rich and poor; the so-called "sin taxes" on alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of these potentially harmful products. Taxation is distinguishable from police power as to the means employed to implement these public good goals. Those doctrines that are unique to taxation arose from peculiar considerations such as those especially punitive effects of taxation,107 and the belief that taxes are the lifeblood of the state.108 These considerations necessitated the evolution of taxation as a distinct legal concept from police power. Yet at the same time, it has been recognized that taxation may be made the implement of the state’s police power.109

Even assuming that the SMA should be construed exclusively as a police power measure, the Court recognizes that police power is lodged primarily in the national legislature, though it may also be exercised by the executive branch by virtue of a valid delegation of legislative power.110 Considering these premises, it is clear that police power, however "illimitable" in theory, is still exercised within the confines of implementing legislation. To declare otherwise is to sanction rule by whim instead of rule of law. The Congress, in enacting the SMA, has delegated the power to impose general safeguard measures to the executive branch, but at the same time subjected such imposition to limitations, such as the requirement of a positive final determination by the Tariff Commission under Section 5. For the executive branch to ignore these boundaries imposed by Congress is to set up an ignoble clash between the two co-equal branches of government. Considering that the exercise of police power emanates from legislative authority, there is little question that the prerogative of the legislative branch shall prevail in such a clash.

V. Assailed Decision Consistent

With Ruling in Tañada v. Angara

Public respondents allege that the Decision is contrary to our holding in Tañada v. Angara,111 since the Court noted therein that the GATT itself provides built-in protection from unfair foreign competition and trade practices, which according to the public respondents, was a reason "why the Honorable [Court] ruled the way it did." On the other hand, the Decision "eliminates safeguard measures as a mode of defense."

This is balderdash, as with any and all claims that the Decision allows foreign industries to ride roughshod over our domestic enterprises. The Decision does not prohibit the imposition of general safeguard measures to protect domestic industries in need of protection. All it affirms is that the positive final determination of the Tariff Commission is first required before the general safeguard measures are imposed and implemented, a neutral proposition that gives no regard to the nationalities of the parties involved. A positive determination by the Tariff Commission is hardly the elusive Shangri-la of administrative law. If a particular industry finds it difficult to obtain a positive final determination from the Tariff Commission, it may be simply because the industry is still sufficiently competitive even in the face of foreign competition. These safeguard measures are designed to ensure salvation, not avarice.

Respondents well have the right to drape themselves in the colors of the flag. Yet these postures hardly advance legal claims, or nationalism for that matter. The fineries of the costume pageant are no better measure of patriotism than simple obedience to the laws of the Fatherland. And even assuming that respondents are motivated by genuine patriotic impulses, it must be remembered that under the setup provided by the SMA, it is the facts, and not impulse, that determine whether the protective safeguard measures should be imposed. As once orated, facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence.112

It is our goal as judges to enforce the law, and not what we might deem as correct economic policy. Towards this end, we should not construe the SMA to unduly favor or disfavor domestic industries, simply because the law itself provides for a mechanism by virtue of which the claims of these industries are thoroughly evaluated before they are favored or disfavored. What we must do is to simply uphold what the law says. Section 5 says that the DTI Secretary shall impose the general safeguard measures upon the positive final determination of the Tariff Commission. Nothing in the whereas clauses or the invisible ink provisions of the SMA can magically delete the words "positive final determination" and "Tariff Commission" from Section 5.

VI. On Forum-Shopping


We remain convinced that there was no willful and deliberate forum-shopping in this case by Southern Cross. The causes of action that animate this present petition for review and the petition for review with the CTA are distinct from each other, even though they relate to similar factual antecedents. Yet it also appears that contrary to the undertaking signed by the President of Southern Cross, Hironobu Ryu, to inform this Court of any similar action or proceeding pending before any court, tribunal or agency within five (5) days from knowledge thereof, Southern Cross informed this Court only on 12 August 2003 of the petition it had filed with the CTA eleven days earlier. An appropriate sanction is warranted for such failure, but not the dismissal of the petition.

VII. Effects of Court’s Resolution

Philcemcor argues that the granting of Southern Cross’s Petition should not necessarily lead to the voiding of the Decision of the DTI Secretary dated 5 August 2003 imposing the general safeguard measures. For Philcemcor, the availability of appeal to the CTA as an available and adequate remedy would have made the Court of Appeals’ Decision merely erroneous or irregular, but not void. Moreover, the said Decision merely required the DTI Secretary to render a decision, which could have very well been a decision not to impose a safeguard measure; thus, it could not be said that the annulled decision resulted from the judgment of the Court of Appeals.

The Court of Appeals’ Decision was annulled precisely because the appellate court did not have the power to rule on the petition in the first place. Jurisdiction is necessarily the power to decide a case, and a court which does not have the power to adjudicate a case is one that is bereft of jurisdiction. We find no reason to disturb our earlier finding that the Court of Appeals’ Decision is null and void.

At the same time, the Court in its Decision paid particular heed to the peculiarities attaching to the 5 August 2003 Decision of the DTI Secretary. In the DTI Secretary’s Decision, he expressly stated that as a result of the Court of Appeals’ Decision, "there is no legal impediment for the Secretary to decide on the application." Yet the truth remained that there was a legal impediment, namely, that the decision of the appellate court was not yet final and executory. Moreover, it was declared null and void, and since the DTI Secretary expressly denominated the Court of Appeals’ Decision as his basis for deciding to impose the safeguard measures, the latter decision must be voided as well. Otherwise put, without the Court of Appeals’ Decision, the DTI Secretary’s Decision of 5 August 2003 would not have been rendered as well.

Accordingly, the Court reaffirms as a nullity the DTI Secretary’s Decision dated 5 August 2003. As a necessary consequence, no further action can be taken on Philcemcor’s Petition for Extension of the Safeguard Measure. Obviously, if the imposition of the general safeguard measure is void as we declared it to be, any extension thereof should likewise be fruitless. The proper remedy instead is to file a new application for the imposition of safeguard measures, subject to the conditions prescribed by the SMA. Should this step be eventually availed of, it is only hoped that the parties involved would content themselves in observing the proper procedure, instead of making a mockery of the rule of law.

WHEREFORE, respondents’ Motions for Reconsideration are DENIED WITH FINALITY.

Respondent DTI Secretary is hereby ENJOINED from taking any further action on the pending Petition for Extension of the Safeguard Measure.

Hironobu Ryu, President of petitioner Southern Cross Cement Corporation, and Angara Abello Concepcion Regala & Cruz, counsel petitioner, are hereby given FIVE (5) days from receipt of this Resolution to EXPLAIN why they should not be meted disciplinary sanction for failing to timely inform the Court of the filing of Southern Cross’s Petition for Review with the Court of Tax Appeals, as adverted to earlier in this Resolution.

G.R. No. 152675 April 28, 2004BATANGAS POWER CORPORATION, petitioner,

vs.BATANGAS CITY and NATIONAL POWER CORPORATION, respondents.

x - - - - - - - - - - - - - - - - - - - - xG.R. No. 152771 April 28, 2004

NATIONAL POWER CORPORATION, petitioner, vs.

HON. RICARDO R. ROSARIO, in his capacity as Presiding Judge, RTC, Br. 66, Makati City; BATANGAS CITY GOVERNMENT; ATTY. TEODULFO DEGUITO, in his capacity as Chief Legal

Officer, Batangas City; and BENJAMIN PARGAS, in his capacity as City Treasurer, Batangas City, respondents.

DECISION

PUNO, J.:


Before us are two (2) consolidated petitions for review under Rule 45 of the Rules of Civil Procedure, seeking to set aside the rulings of the Regional Trial Court of Makati in its February 27, 2002 Decision in Civil Case No. 00-205.

The facts show that in the early 1990’s, the country suffered from a crippling power crisis. Power outages lasted 8-12 hours daily and power generation was badly needed. Addressing the problem, the government, through the National Power Corporation (NPC), sought to attract investors in power plant operations by providing them with incentives, one of which was through the NPC’s assumption of payment of their taxes in the Build Operate and Transfer (BOT) Agreement.

On June 29, 1992, Enron Power Development Corporation (Enron) and petitioner NPC entered into a Fast Track BOT Project. Enron agreed to supply a power station to NPC and transfer its plant to the latter after ten (10) years of operation. Section 11.02 of the BOT Agreement provided that NPC shall be responsible for the payment of all taxes that may be imposed on the power station, except income taxes and permit fees. Subsequently, Enron assigned its obligation under the BOT Agreement to petitioner Batangas Power Corporation (BPC).

On September 13, 1992, BPC registered itself with the Board of Investments (BOI) as a pioneer enterprise. On September 23, 1992, the BOI issued a certificate of registration1 to BPC as a pioneer enterprise entitled to a tax holiday for a period of six (6) years. The construction of the power station in respondent Batangas City was then completed. BPC operated the station.

On October 12, 1998, Batangas City (the city, for brevity), thru its legal officer Teodulfo A. Deguito, sent a letter to BPC demanding payment of business taxes and penalties, commencing from the year 1994 as provided under Ordinance XI or the 1992 Batangas City Tax Code.2 BPC refused to pay, citing its tax-exempt status as a pioneer enterprise for six (6) years under Section 133 (g) of the Local Government Code (LGC).3

On April 15, 1999, city treasurer Benjamin S. Pargas modified the city’s tax claim4 and demanded payment of business taxes from BPC only for the years 1998-1999. He acknowledged that BPC enjoyed a 6-year tax holiday as a pioneer industry but its tax exemption period expired on September 22, 1998, six (6) years after its registration with the BOI on September 23, 1992. The city treasurer held that thereafter BPC became liable to pay its business taxes.

BPC still refused to pay the tax. It insisted that its 6-year tax holiday commenced from the date of its commercial operation on July 16, 1993, not from the date of its BOI registration in September 1992.5 It furnished the city with a BOI letter6 wherein BOI designated July 16, 1993 as the start of BPC’s income tax holiday as BPC was not able to immediately operate due to force majeure. BPC claimed that the local tax holiday is concurrent with the income tax holiday. In the alternative, BPC asserted that the city should collect the tax from the NPC as the latter assumed responsibility for its payment under their BOT Agreement.

The matter was not put to rest. The city legal officer insisted7 that BPC’s tax holiday has already expired, while the city argued that it directed its tax claim to BPC as it is the entity doing business in the city and hence liable to pay the taxes. The city alleged that it was not privy to NPC’s assumption of BPC’s tax payment under their BOT Agreement as the only parties thereto were NPC and BPC.

BPC adamantly refused to pay the tax claims and reiterated its position.8 The city was likewise unyielding on its stand.9 On August 26, 1999, the NPC intervened.10 While admitting assumption of BPC’s tax obligations under their BOT Agreement, NPC refused to pay BPC’s business tax as it allegedly constituted an indirect tax on NPC which is a tax-exempt corporation under its Charter.11

In view of the deadlock, BPC filed a petition for declaratory relief12 with the Makati Regional Trial Court (RTC) against Batangas City and NPC, praying for a ruling that it was not bound to pay the business taxes imposed on it by the city. It alleged that under the BOT Agreement, NPC is responsible for the payment of such taxes but as NPC is exempt from taxes, both the BPC and NPC are not liable for its payment. NPC and Batangas City filed their respective answers.

On February 23, 2000, while the case was still pending, the city refused to issue a permit to BPC for the operation of its business unless it paid the assessed business taxes amounting to close to P29M.

In view of this supervening event, BPC, whose principal office is in Makati City, filed a supplemental petition13 with the Makati RTC to convert its original petition into an action for injunction to enjoin the city from withholding the issuance of its business permit and closing its power plant. The city opposed on the grounds of lack of jurisdiction and lack of cause of action.14 The Supplemental Petition was nonetheless admitted by the Makati RTC.

On February 27, 2002, the Makati RTC dismissed the petition for injunction. It held that: (1) BPC is liable to pay business taxes to the city; (2) NPC’s tax exemption was withdrawn with the passage of R.A. No. 7160 (The Local Government Code); and, (3) the 6-year tax holiday granted to pioneer business enterprises


starts on the date of registration with the BOI as provided in Section 133 (g) of R.A. No. 7160, and not on the date of its actual business operations.15

BPC and NPC filed with this Court a petition for review on certiorari16 assailing the Makati RTC decision. The petitions were consolidated as they impugn the same decision, involve the same parties and raise related issues.17

In G.R. No. 152771, the NPC contends:

I

RESPONDENT COURT ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT ARBITRARILY AND CAPRICIOUSLY RULED THAT PETITIONER NPC HAS LOST ITS TAX EXEMPTION PRIVILEGE BECAUSE SECTION 193 OF R.A. 7160 (LOCAL GOVERNMENT CODE) HAS WITHDRAWN SUCH PRIVILEGE DESPITE THE SETTLED JURISPRUDENCE THAT THE ENACTMENT OF A LEGISLATION, WHICH IS A GENERAL LAW, CANNOT REPEAL A SPECIAL LAW AND THAT SECTION 13 OF R.A. 6395 (NPC LAW) WAS NOT SPECIFICALLY MENTIONED IN THE REPEALING CLAUSE IN SECTION 534 OF R.A. 7160, AMONG OTHERS.

II

RESPONDENT COURT ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT ARBITRARILY AND CAPRICIOUSLY OMITTED THE CLEAR PROVISION OF SECTION 133, PARAGRAPH (O) OF R.A. 7160 WHICH EXEMPTS "NATIONAL GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES" FROM THE IMPOSITION OF "TAXES, FEES OR CHARGES OF ANY KIND."

III

RESPONDENT COURT ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT ERRONEOUSLY AND CAPRICIOUSLY ADMITTED BPC’s SUPPLEMENTAL PETITION FOR INJUNCTION NOTWITHSTANDING THAT IT HAD NO JURISDICTION OVER THE PARTY (CITY GOVERNMENT OF BATANGAS) SOUGHT TO BE ENJOINED.

In G.R. No. 152675, BPC also contends that the trial court erred: 1) in holding it liable for payment of business taxes even if it is undisputed that NPC has already assumed payment thereof; and, 2) in ruling that BPC’s 6-year tax holiday commenced on the date of its registration with the BOI as a pioneer enterprise.

The issues for resolution are:

1. whether BPC’s 6-year tax holiday commenced on the date of its BOI registration as a pioneer enterprise or on the date of its actual commercial operation as certified by the BOI;

2. whether the trial court had jurisdiction over the petition for injunction against Batangas City; and,

3. whether NPC’s tax exemption privileges under its Charter were withdrawn by Section 193 of the Local Government Code (LGC).

We find no merit in the petition.

On the first issue, petitioners BPC and NPC contend that contrary to the impugned decision, BPC’s 6-year tax holiday should commence on the date of its actual commercial operations as certified to by the BOI, not on the date of its BOI registration.

We disagree. Sec. 133 (g) of the LGC, which proscribes local government units (LGUs) from levying taxes on BOI-certified pioneer enterprises for a period of six years from the date of registration, applies specifically to taxes imposed by the local government, like the business tax imposed by Batangas City on BPC in the case at bar. Reliance of BPC on the provision of Executive Order No. 226,18 specifically Section 1, Article 39, Title III, is clearly misplaced as the six-year tax holiday provided therein which commences from the date of commercial operation refers to income taxes imposed by the national government on BOI-registered pioneer firms. Clearly, it is the provision of the Local Government Code that should apply to the tax claim of Batangas City against the BPC. The 6-year tax exemption of BPC should thus commence from the date of BPC’s registration with the BOI on July 16, 1993 and end on July 15, 1999.

Anent the second issue, the records disclose that petitioner NPC did not oppose BPC’s conversion of the petition for declaratory relief to a petition for injunction or raise the issue of the alleged lack of jurisdiction of the Makati RTC over the petition for injunction before said court. Hence, NPC is estopped from raising said issue before us. The fundamental rule is that a party cannot be allowed to participate in a judicial


proceeding, submit the case for decision, accept the judgment only if it is favorable to him but attack the jurisdiction of the court when it is adverse.19

Finally, on the third issue, petitioners insist that NPC’s exemption from all taxes under its Charter had not been repealed by the LGC. They argue that NPC’s Charter is a special law which cannot be impliedly repealed by a general and later legislation like the LGC. They likewise anchor their claim of tax-exemption on Section 133 (o) of the LGC which exempts government instrumentalities, such as the NPC, from taxes imposed by local government units (LGUs), citing in support thereof the case of Basco v. PAGCOR.20

We find no merit in these contentions. The effect of the LGC on the tax exemption privileges of the NPC has already been extensively discussed and settled in the recent case of National Power Corporation v. City of Cabanatuan.21 In said case, this Court recognized the removal of the blanket exclusion of government instrumentalities from local taxation as one of the most significant provisions of the 1991 LGC. Specifically, we stressed that Section 193 of the LGC,22 an express and general repeal of all statutes granting exemptions from local taxes, withdrew the sweeping tax privileges previously enjoyed by the NPC under its Charter. We explained the rationale for this provision, thus:

In recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives. Taxation assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution, viz:

Section 5.- Each Local Government unit shall have the power to create its own sources of revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the Local Governments.

This paradigm shift results from the realization that genuine development can be achieved only by strengthening local autonomy and promoting decentralization of governance. For a long time, the country’s highly centralized government structure has bred a culture of dependence among local government leaders upon the national leadership. It has also "dampened the spirit of initiative, innovation and imaginative resilience in matters of local development on the part of local government leaders. The only way to shatter this culture of dependence is to give the LGUs a wider role in the delivery of basic services, and confer them sufficient powers to generate their own sources for the purpose. To achieve this goal, x x x the 1987 Constitution mandates Congress to enact a local government code that will, consistent with the basic policy of local autonomy, set the guidelines and limitations to this grant of taxing powers x x x."

To recall, prior to the enactment of the x x x Local Government Code x x x, various measures have been enacted to promote local autonomy. x x x Despite these initiatives, however, the shackles of dependence on the national government remained. Local government units were faced with the same problems that hamper their capabilities to participate effectively in the national development efforts, among which are: (a) inadequate tax base, (b) lack of fiscal control over external sources of income, (c) limited authority to prioritize and approve development projects, (d) heavy dependence on external sources of income, and (e) limited supervisory control over personnel of national line agencies.

Considered as the most revolutionary piece of legislation on local autonomy, the LGC effectively deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes which were prohibited by previous laws x x x.

Neither can the NPC successfully rely on the Basco case23 as this was decided prior to the effectivity of the LGC, when there was still no law empowering local government units to tax instrumentalities of the national government.

Consequently, when NPC assumed the tax liabilities of the BPC under their 1992 BOT Agreement, the LGC which removed NPC’s tax exemption privileges had already been in effect for six (6) months. Thus, while BPC remains to be the entity doing business in said city, it is the NPC that is ultimately liable to pay said taxes under the provisions of both the 1992 BOT Agreement and the 1991 Local Government Code.

IN VIEW WHEREOF, the petitions are DISMISSED. No costs.

G.R. No. 159647 April 15, 2005COMMISSIONER OF INTERNAL REVENUE, Petitioners,

vs.CENTRAL LUZON DRUG CORPORATION, Respondent.

D E C I S I O NRosalito Luyao Reco LLB IIIB 31

PANGANIBAN, J.:

The 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax deduction from the gross income or gross sale of the establishment concerned. A tax credit is used by a private establishment only after the tax has been computed; a tax deduction, before the tax is computed. RA 7432 unconditionally grants a tax credit to all covered entities. Thus, the provisions of the revenue regulation that withdraw or modify such grant are void. Basic is the rule that administrative regulations cannot amend or revoke the law.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set aside the August 29, 2002 Decision2 and the August 11, 2003 Resolution3 of the Court of Appeals (CA) in CA-GR SP No. 67439. The assailed Decision reads as follows:

"WHEREFORE, premises considered, the Resolution appealed from is AFFIRMED in toto. No costs."4

The assailed Resolution denied petitioner’s Motion for Reconsideration.

The Facts

The CA narrated the antecedent facts as follows:

"Respondent is a domestic corporation primarily engaged in retailing of medicines and other pharmaceutical products. In 1996, it operated six (6) drugstores under the business name and style ‘Mercury Drug.’

"From January to December 1996, respondent granted twenty (20%) percent sales discount to qualified senior citizens on their purchases of medicines pursuant to Republic Act No. [R.A.] 7432 and its Implementing Rules and Regulations. For the said period, the amount allegedly representing the 20% sales discount granted by respondent to qualified senior citizens totaled P904,769.00.

"On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996 declaring therein that it incurred net losses from its operations.

"On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in the amount of P904,769.00 allegedly arising from the 20% sales discount granted by respondent to qualified senior citizens in compliance with [R.A.] 7432. Unable to obtain affirmative response from petitioner, respondent elevated its claim to the Court of Tax Appeals [(CTA or Tax Court)] via a Petition for Review.

"On February 12, 2001, the Tax Court rendered a Decision5 dismissing respondent’s Petition for lack of merit. In said decision, the [CTA] justified its ruling with the following ratiocination:

‘x x x, if no tax has been paid to the government, erroneously or illegally, or if no amount is due and collectible from the taxpayer, tax refund or tax credit is unavailing. Moreover, whether the recovery of the tax is made by means of a claim for refund or tax credit, before recovery is allowed[,] it must be first established that there was an actual collection and receipt by the government of the tax sought to be recovered. x x x.

‘x x x x x x x x x

‘Prescinding from the above, it could logically be deduced that tax credit is premised on the existence of tax liability on the part of taxpayer. In other words, if there is no tax liability, tax credit is not available.’

"Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed resolution,6 granted respondent’s motion for reconsideration and ordered herein petitioner to issue a Tax Credit Certificate in favor of respondent citing the decision of the then Special Fourth Division of [the CA] in CA G.R. SP No. 60057 entitled ‘Central [Luzon] Drug Corporation vs. Commissioner of Internal Revenue’ promulgated on May 31, 2001, to wit:

‘However, Sec. 229 clearly does not apply in the instant case because the tax sought to be refunded or credited by petitioner was not erroneously paid or illegally collected. We take exception to the CTA’s sweeping but unfounded statement that ‘both tax refund and tax credit are modes of recovering taxes which are either erroneously or illegally paid to the government.’ Tax refunds or credits do not exclusively pertain to illegally collected or erroneously paid taxes as they may be other circumstances where a refund is warranted. The tax refund provided under Section 229 deals exclusively with illegally collected or erroneously paid taxes but there are other possible situations, such as the refund of excess estimated corporate quarterly income tax paid, or that of excess input tax paid by a VAT-registered person, or that of excise tax paid on goods locally produced or manufactured but actually exported. The standards and


mechanics for the grant of a refund or credit under these situations are different from that under Sec. 229. Sec. 4[.a)] of R.A. 7432, is yet another instance of a tax credit and it does not in any way refer to illegally collected or erroneously paid taxes, x x x.’"7

Ruling of the Court of Appeals

The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner to issue a tax credit certificate in favor of respondent in the reduced amount of P903,038.39. It reasoned that Republic Act No. (RA) 7432 required neither a tax liability nor a payment of taxes by private establishments prior to the availment of a tax credit. Moreover, such credit is not tantamount to an unintended benefit from the law, but rather a just compensation for the taking of private property for public use.

Hence this Petition.8

The Issues

Petitioner raises the following issues for our consideration:

"Whether the Court of Appeals erred in holding that respondent may claim the 20% sales discount as a tax credit instead of as a deduction from gross income or gross sales.

"Whether the Court of Appeals erred in holding that respondent is entitled to a refund."9

These two issues may be summed up in only one: whether respondent, despite incurring a net loss, may still claim the 20 percent sales discount as a tax credit.

The Court’s Ruling

The Petition is not meritorious.

Sole Issue:

Claim of 20 Percent Sales Discount

as Tax Credit Despite Net Loss

Section 4a) of RA 743210 grants to senior citizens the privilege of obtaining a 20 percent discount on their purchase of medicine from any private establishment in the country.11 The latter may then claim the cost of the discount as a tax credit.12 But can such credit be claimed, even though an establishment operates at a loss?

We answer in the affirmative.

Tax Credit versus

Tax Deduction

Although the term is not specifically defined in our Tax Code,13 tax credit generally refers to an amount that is "subtracted directly from one’s total tax liability."14 It is an "allowance against the tax itself"15 or "a deduction from what is owed"16 by a taxpayer to the government. Examples of tax credits are withheld taxes, payments of estimated tax, and investment tax credits.17

Tax credit should be understood in relation to other tax concepts. One of these is tax deduction -- defined as a subtraction "from income for tax purposes,"18 or an amount that is "allowed by law to reduce income prior to [the] application of the tax rate to compute the amount of tax which is due."19 An example of a tax deduction is any of the allowable deductions enumerated in Section 3420 of the Tax Code.

A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, including -- whenever applicable -- the income tax that is determined after applying the corresponding tax rates to taxable income.21 A tax deduction, on the other, reduces the income that is subject to tax22 in order to arrive at taxable income.23 To think of the former as the latter is to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax has been computed; a tax deduction, before.

Tax Liability Required

for Tax Credit


Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the tax credit can be applied. Without that liability, any tax credit application will be useless. There will be no reason for deducting the latter when there is, to begin with, no existing obligation to the government. However, as will be presented shortly, the existence of a tax credit or its grant by law is not the same as the availment or use of such credit. While the grant is mandatory, the availment or use is not.

If a net loss is reported by, and no other taxes are currently due from, a business establishment, there will obviously be no tax liability against which any tax credit can be applied.24 For the establishment to choose the immediate availment of a tax credit will be premature and impracticable. Nevertheless, the irrefutable fact remains that, under RA 7432, Congress has granted without conditions a tax credit benefit to all covered establishments.

Although this tax credit benefit is available, it need not be used by losing ventures, since there is no tax liability that calls for its application. Neither can it be reduced to nil by the quick yet callow stroke of an administrative pen, simply because no reduction of taxes can instantly be effected. By its nature, the tax credit may still be deducted from a future, not a present, tax liability, without which it does not have any use. In the meantime, it need not move. But it breathes.

Prior Tax Payments Not

Required for Tax Credit

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed. The Tax Code is in fact replete with provisions granting or allowing tax credits, even though no taxes have been previously paid.

For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to certain limitations -- for estate taxes paid to a foreign country. Also found in Section 101(C) is a similar provision for donor’s taxes -- again when paid to a foreign country -- in computing for the donor’s tax due. The tax credits in both instances allude to the prior payment of taxes, even if not made to our government.

Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions -- whether or not subject to the VAT -- is also allowed a tax credit that includes a ratable portion of any input tax not directly attributable to either activity. This input tax may either be the VAT on the purchase or importation of goods or services that is merely due from -- not necessarily paid by -- such VAT-registered person in the course of trade or business; or the transitional input tax determined in accordance with Section 111(A). The latter type may in fact be an amount equivalent to only eight percent of the value of a VAT-registered person’s beginning inventory of goods, materials and supplies, when such amount -- as computed -- is higher than the actual VAT paid on the said items.25 Clearly from this provision, the tax credit refers to an input tax that is either due only or given a value by mere comparison with the VAT actually paid -- then later prorated. No tax is actually paid prior to the availment of such credit.

In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed. For the purchase of primary agricultural products used as inputs -- either in the processing of sardines, mackerel and milk, or in the manufacture of refined sugar and cooking oil -- and for the contract price of public work contracts entered into with the government, again, no prior tax payments are needed for the use of the tax credit.

More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may, under Section 112(A), apply for the issuance of a tax credit certificate for the amount of creditable input taxes merely due -- again not necessarily paid to -- the government and attributable to such sales, to the extent that the input taxes have not been applied against output taxes.26 Where a taxpayer is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the amount of creditable input taxes due that are not directly and entirely attributable to any one of these transactions shall be proportionately allocated on the basis of the volume of sales. Indeed, in availing of such tax credit for VAT purposes, this provision -- as well as the one earlier mentioned -- shows that the prior payment of taxes is not a requisite.

It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax credit allowed, even though no prior tax payments are not required. Specifically, in this provision, the imposition of a final withholding tax rate on cash and/or property dividends received by a nonresident foreign corporation from a domestic corporation is subjected to the condition that a foreign tax credit will be given by the domiciliary country in an amount equivalent to taxes that are merely deemed paid.27 Although true, this provision actually refers to the tax credit as a condition only for the imposition of a lower tax rate, not as a deduction from the corresponding tax liability. Besides, it is not our government but the domiciliary country that credits against the income tax payable to the latter by the foreign corporation, the tax to be foregone or spared.28


In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits, against the income tax imposable under Title II, the amount of income taxes merely incurred -- not necessarily paid -- by a domestic corporation during a taxable year in any foreign country. Moreover, Section 34(C)(5) provides that for such taxes incurred but not paid, a tax credit may be allowed, subject to the condition precedent that the taxpayer shall simply give a bond with sureties satisfactory to and approved by petitioner, in such sum as may be required; and further conditioned upon payment by the taxpayer of any tax found due, upon petitioner’s redetermination of it.

In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special laws that grant or allow tax credits, even though no prior tax payments have been made.

Under the treaties in which the tax credit method is used as a relief to avoid double taxation, income that is taxed in the state of source is also taxable in the state of residence, but the tax paid in the former is merely allowed as a credit against the tax levied in the latter.29 Apparently, payment is made to the state of source, not the state of residence. No tax, therefore, has been previously paid to the latter.

Under special laws that particularly affect businesses, there can also be tax credit incentives. To illustrate, the incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as amended by Batas Pambansa Blg. (BP) 391, include tax credits equivalent to either five percent of the net value earned, or five or ten percent of the net local content of exports.30 In order to avail of such credits under the said law and still achieve its objectives, no prior tax payments are necessary.

From all the foregoing instances, it is evident that prior tax payments are not indispensable to the availment of a tax credit. Thus, the CA correctly held that the availment under RA 7432 did not require prior tax payments by private establishments concerned.31 However, we do not agree with its finding32 that the carry-over of tax credits under the said special law to succeeding taxable periods, and even their application against internal revenue taxes, did not necessitate the existence of a tax liability.

The examples above show that a tax liability is certainly important in the availment or use, not the existence or grant, of a tax credit. Regarding this matter, a private establishment reporting a net loss in its financial statements is no different from another that presents a net income. Both are entitled to the tax credit provided for under RA 7432, since the law itself accords that unconditional benefit. However, for the losing establishment to immediately apply such credit, where no tax is due, will be an improvident usance.

Sections 2.i and 4 of Revenue

Regulations No. 2-94 Erroneous

RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they grant.33 In turn, the Implementing Rules and Regulations, issued pursuant thereto, provide the procedures for its availment.34 To deny such credit, despite the plain mandate of the law and the regulations carrying out that mandate, is indefensible.

First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing the 20 percent discount that "shall be deducted by the said establishments from their gross income for income tax purposes and from their gross sales for value-added tax or other percentage tax purposes."35 In ordinary business language, the tax credit represents the amount of such discount. However, the manner by which the discount shall be credited against taxes has not been clarified by the revenue regulations.

By ordinary acceptation, a discount is an "abatement or reduction made from the gross amount or value of anything."36 To be more precise, it is in business parlance "a deduction or lowering of an amount of money;"37 or "a reduction from the full amount or value of something, especially a price."38 In business there are many kinds of discount, the most common of which is that affecting the income statement39 or financial report upon which the income tax is based.

Business Discounts

Deducted from Gross Sales

A cash discount, for example, is one granted by business establishments to credit customers for their prompt payment.40 It is a "reduction in price offered to the purchaser if payment is made within a shorter period of time than the maximum time specified."41 Also referred to as a sales discount on the part of the seller and a purchase discount on the part of the buyer, it may be expressed in such terms as "5/10, n/30."42

A quantity discount, however, is a "reduction in price allowed for purchases made in large quantities, justified by savings in packaging, shipping, and handling."43 It is also called a volume or bulk discount.44


A "percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by wholesalers to retailers"45 is known as a trade discount. No entry for it need be made in the manual or computerized books of accounts, since the purchase or sale is already valued at the net price actually charged the buyer.46 The purpose for the discount is to encourage trading or increase sales, and the prices at which the purchased goods may be resold are also suggested.47 Even a chain discount -- a series of discounts from one list price -- is recorded at net.48

Finally, akin to a trade discount is a functional discount. It is "a supplier’s price discount given to a purchaser based on the [latter’s] role in the [former’s] distribution system."49 This role usually involves warehousing or advertising.

Based on this discussion, we find that the nature of a sales discount is peculiar. Applying generally accepted accounting principles (GAAP) in the country, this type of discount is reflected in the income statement50 as a line item deducted -- along with returns, allowances, rebates and other similar expenses -- from gross sales to arrive at net sales.51 This type of presentation is resorted to, because the accounts receivable and sales figures that arise from sales discounts, -- as well as from quantity, volume or bulk discounts -- are recorded in the manual and computerized books of accounts and reflected in the financial statements at the gross amounts of the invoices.52 This manner of recording credit sales -- known as the gross method -- is most widely used, because it is simple, more convenient to apply than the net method, and produces no material errors over time.53

However, under the net method used in recording trade, chain or functional discounts, only the net amounts of the invoices -- after the discounts have been deducted -- are recorded in the books of accounts54 and reflected in the financial statements. A separate line item cannot be shown,55 because the transactions themselves involving both accounts receivable and sales have already been entered into, net of the said discounts.

The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to amounts whose sum -- along with sales returns, allowances and cost of goods sold56 -- is deducted from gross sales to come up with the gross income, profit or margin57 derived from business.58 In another provision therein, sales discounts that are granted and indicated in the invoices at the time of sale -- and that do not depend upon the happening of any future event -- may be excluded from the gross sales within the same quarter they were given.59 While determinative only of the VAT, the latter provision also appears as a suitable reference point for income tax purposes already embraced in the former. After all, these two provisions affirm that sales discounts are amounts that are always deductible from gross sales.

Reason for the Senior Citizen Discount:

The Law, Not Prompt Payment

A distinguishing feature of the implementing rules of RA 7432 is the private establishment’s outright deduction of the discount from the invoice price of the medicine sold to the senior citizen.60 It is, therefore, expected that for each retail sale made under this law, the discount period lasts no more than a day, because such discount is given -- and the net amount thereof collected -- immediately upon perfection of the sale.61 Although prompt payment is made for an arm’s-length transaction by the senior citizen, the real and compelling reason for the private establishment giving the discount is that the law itself makes it mandatory.

What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any of the above discounts in particular. Prompt payment is not the reason for (although a necessary consequence of) such grant. To be sure, the privilege enjoyed by the senior citizen must be equivalent to the tax credit benefit enjoyed by the private establishment granting the discount. Yet, under the revenue regulations promulgated by our tax authorities, this benefit has been erroneously likened and confined to a sales discount.

To a senior citizen, the monetary effect of the privilege may be the same as that resulting from a sales discount. However, to a private establishment, the effect is different from a simple reduction in price that results from such discount. In other words, the tax credit benefit is not the same as a sales discount. To repeat from our earlier discourse, this benefit cannot and should not be treated as a tax deduction.

To stress, the effect of a sales discount on the income statement and income tax return of an establishment covered by RA 7432 is different from that resulting from the availment or use of its tax credit benefit. While the former is a deduction before, the latter is a deduction after, the income tax is computed. As mentioned earlier, a discount is not necessarily a sales discount, and a tax credit for a simple discount privilege should not be automatically treated like a sales discount. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to distinguish.

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount deductible from gross income for income tax purposes, or from gross sales for VAT or other percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales discount. This contrived


definition is improper, considering that the latter has to be deducted from gross sales in order to compute the gross income in the income statement and cannot be deducted again, even for purposes of computing the income tax.

When the law says that the cost of the discount may be claimed as a tax credit, it means that the amount -- when claimed -- shall be treated as a reduction from any tax liability, plain and simple. The option to avail of the tax credit benefit depends upon the existence of a tax liability, but to limit the benefit to a sales discount -- which is not even identical to the discount privilege that is granted by law -- does not define it at all and serves no useful purpose. The definition must, therefore, be stricken down.

Laws Not Amended

by Regulations

Second, the law cannot be amended by a mere regulation. In fact, a regulation that "operates to create a rule out of harmony with the statute is a mere nullity";62 it cannot prevail.

It is a cardinal rule that courts "will and should respect the contemporaneous construction placed upon a statute by the executive officers whose duty it is to enforce it x x x."63 In the scheme of judicial tax administration, the need for certainty and predictability in the implementation of tax laws is crucial.64 Our tax authorities fill in the details that "Congress may not have the opportunity or competence to provide."65 The regulations these authorities issue are relied upon by taxpayers, who are certain that these will be followed by the courts.66 Courts, however, will not uphold these authorities’ interpretations when clearly absurd, erroneous or improper.

In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA 7432 provides. Their interpretation has muddled up the intent of Congress in granting a mere discount privilege, not a sales discount. The administrative agency issuing these regulations may not enlarge, alter or restrict the provisions of the law it administers; it cannot engraft additional requirements not contemplated by the legislature.67

In case of conflict, the law must prevail.68 A "regulation adopted pursuant to law is law."69 Conversely, a regulation or any portion thereof not adopted pursuant to law is no law and has neither the force nor the effect of law.70

Availment of Tax

Credit Voluntary

Third, the word may in the text of the statute71 implies that the availability of the tax credit benefit is neither unrestricted nor mandatory.72 There is no absolute right conferred upon respondent, or any similar taxpayer, to avail itself of the tax credit remedy whenever it chooses; "neither does it impose a duty on the part of the government to sit back and allow an important facet of tax collection to be at the sole control and discretion of the taxpayer."73 For the tax authorities to compel respondent to deduct the 20 percent discount from either its gross income or its gross sales74 is, therefore, not only to make an imposition without basis in law, but also to blatantly contravene the law itself.

What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not imperative. Respondent is given two options -- either to claim or not to claim the cost of the discounts as a tax credit. In fact, it may even ignore the credit and simply consider the gesture as an act of beneficence, an expression of its social conscience.

Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax credit can easily be applied. If there is none, the credit cannot be used and will just have to be carried over and revalidated75 accordingly. If, however, the business continues to operate at a loss and no other taxes are due, thus compelling it to close shop, the credit can never be applied and will be lost altogether.

In other words, it is the existence or the lack of a tax liability that determines whether the cost of the discounts can be used as a tax credit. RA 7432 does not give respondent the unfettered right to avail itself of the credit whenever it pleases. Neither does it allow our tax administrators to expand or contract the legislative mandate. "The ‘plain meaning rule’ or verba legis in statutory construction is thus applicable x x x. Where the words of a statute are clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation."76

Tax Credit Benefit


Deemed Just Compensation

Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent domain. Be it stressed that the privilege enjoyed by senior citizens does not come directly from the State, but rather from the private establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as their just compensation for private property taken by the State for public use.77

The concept of public use is no longer confined to the traditional notion of use by the public, but held synonymous with public interest, public benefit, public welfare, and public convenience.78 The discount privilege to which our senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit.

As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just compensation. This term refers not only to the issuance of a tax credit certificate indicating the correct amount of the discounts given, but also to the promptness in its release. Equivalent to the payment of property taken by the State, such issuance -- when not done within a reasonable time from the grant of the discounts -- cannot be considered as just compensation. In effect, respondent is made to suffer the consequences of being immediately deprived of its revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with the reduction in its revenues.79

Besides, the taxation power can also be used as an implement for the exercise of the power of eminent domain.80 Tax measures are but "enforced contributions exacted on pain of penal sanctions"81 and "clearly imposed for a public purpose."82 In recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth.83

While it is a declared commitment under Section 1 of RA 7432, social justice "cannot be invoked to trample on the rights of property owners who under our Constitution and laws are also entitled to protection. The social justice consecrated in our [C]onstitution [is] not intended to take away rights from a person and give them to another who is not entitled thereto."84 For this reason, a just compensation for income that is taken away from respondent becomes necessary. It is in the tax credit that our legislators find support to realize social justice, and no administrative body can alter that fact.

To put it differently, a private establishment that merely breaks even85 -- without the discounts yet -- will surely start to incur losses because of such discounts. The same effect is expected if its mark-up is less than 20 percent, and if all its sales come from retail purchases by senior citizens. Aside from the observation we have already raised earlier, it will also be grossly unfair to an establishment if the discounts will be treated merely as deductions from either its gross income or its gross sales. Operating at a loss through no fault of its own, it will realize that the tax credit limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will be put in a better position if they avail themselves of tax credits denied those that are losing, because no taxes are due from the latter.

Grant of Tax Credit

Intended by the Legislature

Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the community as a whole and to establish a program beneficial to them.86 These objectives are consonant with the constitutional policy of making "health x x x services available to all the people at affordable cost"87 and of giving "priority for the needs of the x x x elderly."88 Sections 2.i and 4 of RR 2-94, however, contradict these constitutional policies and statutory objectives.

Furthermore, Congress has allowed all private establishments a simple tax credit, not a deduction. In fact, no cash outlay is required from the government for the availment or use of such credit. The deliberations on February 5, 1992 of the Bicameral Conference Committee Meeting on Social Justice, which finalized RA 7432, disclose the true intent of our legislators to treat the sales discounts as a tax credit, rather than as a deduction from gross income. We quote from those deliberations as follows:

"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions from taxable income. I think we incorporated there a provision na - on the responsibility of the private hospitals and drugstores, hindi ba?

SEN. ANGARA. Oo.

THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here about the deductions from taxable income of that private hospitals, di ba ganon 'yan?


MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government and public institutions, so, puwede na po nating hindi isama yung mga less deductions ng taxable income.

THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung isiningit natin?

MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the microphone).

SEN. ANGARA. Hindi pa, hindi pa.

THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?

SEN. ANGARA. Oo. You want to insert that?

THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.

SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount, provided that, the private hospitals can claim the expense as a tax credit.

REP. AQUINO. Yah could be allowed as deductions in the perpetrations of (inaudible) income.

SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?

REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments na covered.

THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.

REP. AQUINO. Ano ba yung establishments na covered?

SEN. ANGARA. Restaurant lodging houses, recreation centers.

REP. AQUINO. All establishments covered siguro?

SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung ganon. Can we go back to Section 4 ha?

REP. AQUINO. Oho.

SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20% discount from all establishments et cetera, et cetera, provided that said establishments - provided that private establishments may claim the cost as a tax credit. Ganon ba 'yon?

REP. AQUINO. Yah.

SEN. ANGARA. Dahil kung government, they don't need to claim it.

THE CHAIRMAN. (Rep. Unico). Tax credit.

SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.

REP. AQUINO Okay.

SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".89

Special Law

Over General Law

Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -- a general law. "x x x [T]he rule is that on a specific matter the special law shall prevail over the general law, which shall be resorted to only to supply deficiencies in the former."90 In addition, "[w]here there are two statutes, the earlier special and the later general -- the terms of the general broad enough to include the matter provided for in the special -- the fact that one is special and the other is general creates a presumption that the special is to be considered as remaining an exception to the general,91 one as a general law of the land, the other as the law of a particular case."92 "It is a canon of statutory construction that a later statute, general in its terms and not expressly repealing a prior special statute, will ordinarily not affect the special provisions of such earlier statute."93


RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to, the Tax Code -- a later law. When the former states that a tax credit may be claimed, then the requirement of prior tax payments under certain provisions of the latter, as discussed above, cannot be made to apply. Neither can the instances of or references to a tax deduction under the Tax Code94 be made to restrict RA 7432. No provision of any revenue regulation can supplant or modify the acts of Congress.

WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the Court of Appeals AFFIRMED. No pronouncement as to costs.

G.R. No. 160193 March 3, 2008M.E. HOLDING CORPORATION, petitioner,

vs.THE HON. COURT OF APPEALS, COURT OF TAX APPEALS, and THE COMMISSIONER OF INTERNAL

REVENUE, respondents.

D E C I S I O N

VELASCO, JR., J.:

This case involves Republic Act No. (RA) 7432, otherwise known as An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for Other Purposes,passed onApril 23, 1992. It granted, among others, a 20% sales discount on purchases of medicines by qualified senior citizens.

On April 15, 1996, petitioner M.E. Holding Corporation (M.E.) filed its 1995 Corporate Annual Income Tax Return, claiming the 20% sales discount it granted to qualified senior citizens. M.E. treated the discount as deductions from its gross income purportedly in accordance with Revenue Regulation No. (RR) 2-94, Section 2(i) of the Bureau of Internal Revenue (BIR) issued on August 23, 1993. Sec. 2(i) states:

Section 2. DEFINITIONS. – For purposes of these regulations:

x x x x

i. Tax Credit – refers to the amount representing the 20% discount granted to a qualified senior citizen by all establishments relative to their utilization of transportation services, hotels and similar lodging establishments, restaurants, drugstores, recreation centers, theaters, cinema houses, concert halls, circuses, carnivals and other similar places of culture, leisure and amusement, which discount shall be deducted by the said establishments from their gross income for income tax purposes and from their gross sales for value-added tax or other percentage tax purposes. (Emphasis supplied.)

The deductions M.E. claimed amounted to PhP 603,424. However, it filed the return under protest, arguing that the discount to senior citizens should be treated as tax credit under Sec. 4(a) of RA 7432, and not as mere deductions from M.E.'s gross income as provided under RR 2-94.

Sec. 4(a) of RA 7432 states:

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

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

Subsequently, on December 27, 1996, M.E. sent BIR a letter-claim dated December 6, 1996,1 stating that it overpaid its income tax owing to the BIR's erroneous interpretation of Sec. 4(a) of RA 7432.

Due to the inaction of the BIR, and to toll the running of the two-year prescriptive period in filing a claim for refund, M.E. filed an appeal before the Court of Tax Appeals (CTA), reiterating its position that the sales discount should be treated as tax credit, and that RR 2-94, particularly Section 2(i), was without effect for being inconsistent with RA 7432.

On April 25, 2000, the CTA rendered a Decision2 in favor of M.E., the fallo of which reads:

WHEREFORE, in view of the foregoing, petitioner's claim for refund is hereby partially GRANTED. Respondent is hereby ORDERED to REFUND in favor of petitioner the amount of P122,195.74, representing overpaid income tax [for] the year 1995.

SO ORDERED.Rosalito Luyao Reco LLB IIIB 40

The CTA ruled that the 20% sales discount granted to qualified senior citizens should be treated as tax credit and not as item deduction from the gross income or sales, pointing out that Sec. 4(a) of RA 7432 was unequivocal on this point. The CTA held that Sec. 2(i) of RR 2-94 contravenes the clear proviso of RA 7432 prescribing that the 20% sales discount should be claimed as tax credit. Further, it ruled that RA 7432 is a law that necessarily prevails over an administrative issuance such as RR 2-94.

Unfortunately, what appears to be the victory of M.E. before the CTA was watered down by the tax court's declaration that, while the independent auditor M.E. hired found the amount PhP 603,923.46 as having been granted as sales discount to qualified senior citizens, M.E. failed to properly support the claimed discount with corresponding cash slips. Thus, the CTA reduced M.E.'s claim for PhP 603,923.46 sales discount to PhP 362,574.57 after the CTA disallowed PhP 241,348.89 unsupported claims, and consequently lowered the refundable amount to PhP 122,195.74.

On May 24, 2000, M.E. filed a Motion for Reconsideration, therein attributing its failure to submit and offer certain documents, specifically the cash slips, to the inadvertence of its independent auditor who failed to transmit the documents to M.E.'s counsel. It also argued that the tax credit should be based on the actual discount and not on the acquisition cost of the medicines.

On July 11, 2000, the CTA denied M.E.'s motion for reconsideration which contained a prayer to present additional evidence consisting of duplicate copies of the cash slips allegedly not submitted to M.E. by its independent auditor.3 In refuting M.E.'s contention that the tax credit should be based on the actual discount and not on the acquisition cost of the medicines, the CTA applied the Court of Appeals (CA) ruling in CIR v. Elmas Drug Corporation,4 where the term "cost of the discount" was interpreted to mean only the direct acquisition cost, excluding administrative and other incremental costs.

Aggrieved, M.E. went to the CA on a petition for review docketed as CA-G.R. SP No. 60134. On July 1, 2003, the CA rendered its Decision,5 dismissing the petition.

Even as it laid the entire blame on M.E. for its failure to present its additional evidence, the CA pointed out that forgotten evidence is not newly discovered evidence which can be presented to the appellate tax court, even after it had already rendered its decision. Likewise, the CA interpreted, as did the CTA, the term "cost" to mean only the direct acquisition cost, adding that to interpret the word "cost" to include "all administrative and incremental costs to sales to senior citizens" would open the floodgates for drugstores to pad the costs of the sales with such broad, undefined, and varied administrative and incremental costs such that the government would ultimately bear the escalated costs of the sales. And citing Commissioner of Internal Revenue v. Tokyo Shipping Co., Ltd., the CA held that claims for refund, being in the nature of a claim for exemption, should be construed in strictissimi juris against the taxpayer.6

The CA denied petitioner's Motion for Reconsideration on September 24, 2003.7

Hence, the instant petition for review, anchored essentially on the same issues raised before the CA, as follows:

I.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND HAS DEVIATED FROM APPLICABLE LAWS AND JURISPRUDENCE IN NOT APPRECIATING OTHER COMPETENT EVIDENCE PROVING THE AMOUNT OF DISCOUNTS GRANTED TO SENIOR CITIZENS AND MERELY RELYING SOLELY ON THE CASH SLIPS.

II.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND HAS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR IN EXCESS OF JURISDICTION IN AFFIRMING THE COURT OF TAX APPEALS' DENIAL OF PETITIONER'S MOTION TO ORDER AND SUBMIT AS DOCUMENTARY [EVIDENCE] THE CASH SLIPS WHICH THE INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT INADVERTENTLY DID NOT TURN OVER TO THE PETITIONER'S COUNSEL.

III.

WHETHER OR NOT THE TERM "COST" UNDER PARAGRAPH (A) SECTION 4 OF REPUBLIC ACT 7432 IS EQUIVALENT ONLY TO ACQUISITION COST.8

Our Ruling

The petition is partly meritorious.

The 20% sales discount to senior citizens may be claimed by an establishment owner as tax credit. RA 7432, the applicable law, is unequivocal on this. The implementing RR 2-94 that considers such discount as


mere deductions to the taxpayer's gross income or gross sales clearly clashes with the clear language of RA 7432, the law sought to be implemented. We need not delve on the nullity of the implementing rule all over again as we have already put this issue at rest in a string of cases.9

Now, we will discuss the remaining issues in seriatim.

On the first issue, M.E. faults the CA for merely relying on the cash slips as basis for determining the total 20% sales discount given to senior citizens. To M.E., there are other competent pieces of evidence available to prove the same point, such as the Special Record Book required by the Bureau of Food and Drugs10 and the Special Record Book required under RR 2-94. According to M.E., these special record books containing, as it were, the same information embodied in the cash slips were submitted to the CTA during M.E.'s formal offer of evidence. Moreover, M.E. avers that the CA ought to have considered the special record books since their authenticity and the veracity of their contents were corroborated by the store supervisor, Amelita Gonzales, and Rene Amby Reyes, its independent auditor.

M.E. fails to persuade. The determination of the exact amount M.E. claims as the 20% sales discount it granted to the senior citizens calls for an evaluation of factual matters. The unyielding rule is that the findings of fact of the trial court, particularly when affirmed by the CA, are binding upon this Court,11 save when the lower courts had overlooked, misunderstood, or misinterpreted certain facts or circumstances of weight, which, if properly considered, would affect the result of the case and warrant a reversal of the decision. The instant case does not fall under the exception; hence, we do not find any justification to review all over again the evidence presented before the CTA, and the factual conclusions deduced therefrom.

Lest it be overlooked, the Rules of Court is of suppletory application in quasi-judicial proceedings. Be this as it may, the CTA was correct in disallowing and not considering the belatedly-submitted cash slips to be part of the 20% sales discount for M.E.'s taxable year 1995. This is as it should be in the light of Sec. 34 of Rule 132 prescribing that no evidence shall be considered unless formally offered with a statement of the purpose why it is being offered. In addition, the rule is that the best evidence under the circumstance must be adduced to prove the allegations in a complaint, petition, or protest. Only when the best evidence cannot be submitted may secondary evidence be considered. But, in the instant case, the disallowed cash slips, the best evidence at that time, were not part of M.E.'s offer of evidence. While it may be true that the authenticated special record books yield the same data found in the cash slips, they cannot plausibly be considered by the courts a quo and made to corroborate pieces of evidence that have, in the first place, been disallowed. Recall also that M.E. offered the disallowed cash slips as evidence only after the CTA had rendered its assailed decision. Thus, we cannot accept the excuse of inadvertence of the independent auditor as excusable negligence. As aptly put by the CA, the belatedly-submitted cash slips do not constitute newly-found evidence that may be submitted as basis for a new trial or reconsideration of the decision.

We reiterate at this juncture that claims for tax refund/credit, as in the instant case, are in the nature of claims for exemption. Accordingly, the law relied upon is not only construed in strictissimi juris against the taxpayer, but also the proofs presented entitling a taxpayer to an exemption are strictissimi scrutinized.

On the second issue, M.E. strongly asserts that the CA gravely abused its discretion in denying M.E. the opportunity to submit the disallowed cash slips despite the independent auditor's admission, via an Affidavit,12 of guilt for inadvertence. M.E.'s counsel explains that he relied on the independent auditor's representation that all the cash slips were turned over. Besides, M.E. asserts that the independent auditor, being an officer of the court, having been commissioned by the CTA, is presumed to have done his duty in a regular manner, and, therefore, his negligence should not be taken against M.E.

We do not agree with M.E. Grave abuse of discretion connotes capricious, whimsical, arbitrary, or despotic exercise of jurisdiction. The CA surely cannot be guilty of gravely abusing its discretion when it refused to consider, in lieu of the unsubmitted additional cash slips, the special record books which are only secondary evidence. The cash slips were the best evidence. Also, the CA noted that the belatedly-offered cash slips were presented only after the CTA had rendered its decision. All these factors argue against the notion that the CA had, in sustaining the CTA, whimsically and capriciously exercised its discretion.

On the third and last issue, M.E. contends that it is entitled, as a matter of law, to claim as tax credit the full amount of the sales discount granted to senior citizens.

M.E.'s contention is correct. In Bicolandia Drug Corporation (formerly Elmas Drug Corporation) v. Commissioner of Internal Revenue, we interpreted the term "cost" found in Sec. 4(a) of RA 7432 as referring to the amount of the 20% discount extended by a private establishment to senior citizens in their purchase of medicines.13 There we categorically said that it is the Government that should fully shoulder the cost of the sales discount granted to senior citizens. Thus, we reversed and set aside the CA's Decision in CA-G.R. SP No. 49946, which construed the same word "cost" to mean the theoretical acquisition cost of the medicines purchased by qualified senior citizens. Accordingly, M.E. is entitled to a tax credit equivalent to the actual 20% sales discount it granted to qualified senior citizens.


With the disallowance of PhP 241,348.89 for being unsupported, and the net amount of PhP 362,574.57 for the actual 20% sales discount granted to qualified senior citizens properly allowed by the CTA and fully appreciated as tax credit, the amount due as tax credit in favor of M.E. is PhP 151,201.71, computed as follows:

Net Sales PhP 94,724,284.00

Add: 20% Discount to Senior Citizens(Per Petitioner's Summary) 603,923.46

Gross Sales PhP 95,328,207.46

Less: Cost of SalesMerchandise Inventory, beg.

PhP 9,519,210.00

Add Purchases 87,288,988.00

Total Goods available for Sale

PhP 96,808,198.00

Less: Merchandise Inventory, End

PhP 9,469.349.00 PhP 87,338,849.00

Gross Income PhP 7,989,358.46

Less: Operating Expenses 17,006,032.00

Net Operating Income /(Loss) (PhP 9,016,673.54)

Add: Miscellaneous Income 43,489,663.00

Net Income PhP 34,472,989.46

Less: Interest Income Subject to Final Tax 22,242,227.00

Net Taxable Income PhP 12,230,762.46

Tax Due (PhP 12,230,762.46 x 35%) PhP 4,280,766.86

Less: 1) Tax Credit (20% Discount with supporting

documents) PhP 362,574.57

2) Income Tax Payment for the Year 4,069,394.00

Total PhP 4,431,968.57

AMOUNT OF TAX CREDIT PhP 151,201.71

Parenthetically, we note that M.E. originally prayed for a tax refund for its tax overpayment for CY 1995. The CTA and the CA granted the desired refund, albeit at a lower amount due to their interpretation, erroneous as it turned out to be, of the term "cost." However, we cannot agree with the courts a quo on what M.E. is entitled to. RA 7432 expressly provides that the sales discount may be claimed as tax credit, not as tax refund.

It ought to be noted, however, that on February 26, 2004, RA 9257, or The Expanded Senior Citizens Act of 2003, amending RA 7432, was signed into law, ushering in, upon its effectivity on March 21, 2004, a new tax treatment for sales discount purchases of qualified senior citizens of medicines. Sec. 4(a) of RA 9257 provides:

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, x x x;

x x x xRosalito Luyao Reco LLB IIIB 43

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. (Emphasis supplied.)

Conformably, starting taxable year 2004, the 20% sales discount granted by establishments to qualified senior citizens is to be treated as tax deduction, no longer as tax credit.14

IN VIEW OF THE FOREGOING, this petition is PARTLY GRANTED. The CA's Decision dated July 1, 2003 and its Resolution of September 24, 2003 in CA-G.R. SP No. 60134, affirming the Decision of the CTA dated April 25, 2000 in CTA Case No. 5604, are AFFIRMED with MODIFICATIONS insofar as the amount and mode of payment of M.E.'s claim are concerned. As modified, the fallo of the April 25, 2000 Decision of the CTA shall read:

WHEREFORE, in view of the foregoing, petitioner M.E.'s claim for refund is hereby PARTIALLY GRANTED in the form of a tax credit. Respondent Commissioner of Internal Revenue is ORDERED to issue a tax credit certificate in favor of M.E. in the amount of PhP 151,201.71.

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