G.R. No.

115455 October 30, 1995

ARTURO
M.
TOLENTINO, petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER
OF INTERNAL REVENUE, respondents.
MENDOZA, J.:
The value-added tax (VAT) is levied on the sale, barter or
exchange of goods and properties as well as on the sale or
exchange of services. It is equivalent to 10% of the gross selling
price or gross value in money of goods or properties sold,
bartered or exchanged or of the gross receipts from the sale or
exchange of services. Republic Act No. 7716 seeks to widen the
tax base of the existing VAT system and enhance its
administration by amending the National Internal Revenue
Code.
These are various suits for certiorari and prohibition, challenging
the constitutionality of Republic Act No. 7716 on various
grounds summarized in the resolution of July 6, 1994 of this
Court, as follows:
I. Procedural Issues:
A. Does Republic Act No. 7716 violate Art. VI, 24
of the Constitution?
B. Does it violate Art. VI, 26(2) of the
Constitution?
C. What is the extent of the power of the
Bicameral Conference Committee?
II. Substantive Issues:

A. Does the law violate the following provisions in

the Bill of Rights (Art. III)?
1. 1
2. 4
3. 5
4. 10
B. Does the law violate the following other
provisions of the Constitution?
1. Art. VI, 28(1)
2. Art. VI, 28(3)
These questions will be dealt in the order they are stated above.
As will presently be explained not all of these questions are
judicially cognizable, because not all provisions of the
Constitution are self executing and, therefore, judicially
enforceable. The other departments of the government are
equally charged with the enforcement of the Constitution,
especially the provisions relating to them.
I. PROCEDURAL ISSUES
The contention of petitioners is that in enacting Republic Act No.
7716, or the Expanded Value-Added Tax Law, Congress
violated the Constitution because, although H. No. 11197 had
originated in the House of Representatives, it was not passed
by the Senate but was simply consolidated with the Senate
version (S. No. 1630) in the Conference Committee to produce
the bill which the President signed into law. The following
provisions of the Constitution are cited in support of the
proposition that because Republic Act No. 7716 was passed in

this manner, it did not originate in the House of Representatives

and it has not thereby become a law:

TITLE V, ALL OF THE NATIONAL INTERNAL

REVENUE CODE, AS AMENDED

Art. VI, 24: All appropriation, revenue or tariff

bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall
originate
exclusively
in
the
House
of
Representatives, but the Senate may propose or
concur with amendments.

The bill (H. No. 11197) was considered on second reading

starting November 6, 1993 and, on November 17, 1993, it was
approved by the House of Representatives after third and final
reading.

Id., 26(2): No bill passed by either House shall

become a law unless it has passed three readings
on separate days, and printed copies thereof in its
final form have been distributed to its Members
three days before its passage, except when the
President certifies to the necessity of its immediate
enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no
amendment thereto shall be allowed, and the vote
thereon shall be taken immediately thereafter, and
the yeasand nays entered in the Journal.
It appears that on various dates between July 22, 1992 and
August 31, 1993, several bills 1 were introduced in the House of
Representatives seeking to amend certain provisions of the
National Internal Revenue Code relative to the value-added tax
or VAT. These bills were referred to the House Ways and Means
Committee which recommended for approval a substitute
measure, H. No. 11197, entitled
AN ACT RESTRUCTURING THE VALUE-ADDED
TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE
AND
ENHANCE
ITS
ADMINISTRATION,
AMENDING
FOR
THESE
PURPOSES
SECTIONS 99, 100, 102, 103, 104, 105, 106, 107,
108 AND 110 OF TITLE IV, 112, 115 AND 116 OF
TITLE V, AND 236, 237 AND 238 OF TITLE IX,
AND REPEALING SECTIONS 113 AND 114 OF

It was sent to the Senate on November 23, 1993 and later

referred by that body to its Committee on Ways and Means.
On February 7, 1994, the Senate Committee submitted its
report recommending approval of S. No. 1630, entitled
AN ACT RESTRUCTURING THE VALUE-ADDED
TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE
AND
ENHANCE
ITS
ADMINISTRATION,
AMENDING
FOR
THESE
PURPOSES
SECTIONS 99, 100, 102, 103, 104, 105, 107, 108,
AND 110 OF TITLE IV, 112 OF TITLE V, AND 236,
237, AND 238 OF TITLE IX, AND REPEALING
SECTIONS 113, 114 and 116 OF TITLE V, ALL OF
THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED, AND FOR OTHER PURPOSES
It was stated that the bill was being submitted "in substitution of
Senate Bill No. 1129, taking into consideration P.S. Res. No.
734 and H.B. No. 11197."
On February 8, 1994, the Senate began consideration of the bill
(S. No. 1630). It finished debates on the bill and approved it on
second reading on March 24, 1994. On the same day, it
approved the bill on third reading by the affirmative votes of 13
of its members, with one abstention.
H. No. 11197 and its Senate version (S. No. 1630) were then
referred to a conference committee which, after meeting four
times (April 13, 19, 21 and 25, 1994), recommended that
"House Bill No. 11197, in consolidation with Senate Bill No.

1630, be approved in accordance with the attached copy of the

bill as reconciled and approved by the conferees."
The Conference Committee bill, entitled "AN ACT
RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM,
WIDENING ITS TAX BASE AND ENHANCING ITS
ADMINISTRATION AND FOR THESE PURPOSES AMENDING
AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND
FOR OTHER PURPOSES," was thereafter approved by the
House of Representatives on April 27, 1994 and by the Senate
on May 2, 1994. The enrolled bill was then presented to the
President of the Philippines who, on May 5, 1994, signed it. It
became Republic Act No. 7716. On May 12, 1994, Republic Act
No. 7716 was published in two newspapers of general
circulation and, on May 28, 1994, it took effect, although its
implementation was suspended until June 30, 1994 to allow
time for the registration of business entities. It would have been
enforced on July 1, 1994 but its enforcement was stopped
because the Court, by the vote of 11 to 4 of its members,
granted a temporary restraining order on June 30, 1994.
First. Petitioners' contention is that Republic Act No. 7716 did
not "originate exclusively" in the House of Representatives as
required by Art. VI, 24 of the Constitution, because it is in fact
the result of the consolidation of two distinct bills, H. No. 11197
and S. No. 1630. In this connection, petitioners point out that
although Art. VI, SS 24 was adopted from the American Federal
Constitution, 2 it is notable in two respects: the verb "shall
originate" is qualified in the Philippine Constitution by the word
"exclusively" and the phrase "as on other bills" in the American
version is omitted. This means, according to them, that to be
considered as having originated in the House, Republic Act No.
7716 must retain the essence of H. No. 11197.
This argument will not bear analysis. To begin with, it is not the
law but the revenue bill which is required by the
Constitution to "originate exclusively" in the House of
Representatives. It is important to emphasize this, because a

bill originating in the House may undergo such extensive

changes in the Senate that the result may be a rewriting of the
whole. The possibility of a third version by the conference
committee will be discussed later. At this point, what is important
to note is that, as a result of the Senate action, a distinct bill
may be produced. To insist that a revenue statute and not
only the bill which initiated the legislative process culminating in
the enactment of the law must substantially be the same as
the House bill would be to deny the Senate's power not only to
"concur with amendments" but also to "propose amendments." It
would be to violate the coequality of legislative power of the two
houses of Congress and in fact make the House superior to the
Senate.
The contention that the constitutional design is to limit the
Senate's power in respect of revenue bills in order to
compensate for the grant to the Senate of the treaty-ratifying
power 3 and thereby equalize its powers and those of the House
overlooks the fact that the powers being compared are different.
We are dealing here with the legislative power which under the
Constitution is vested not in any particular chamber but in the
Congress of the Philippines, consisting of "a Senate and a
House of Representatives." 4 The exercise of the treaty-ratifying
power is not the exercise of legislative power. It is the exercise
of a check on the executive power. There is, therefore, no
justification for comparing the legislative powers of the House
and of the Senate on the basis of the possession of such
nonlegislative power by the Senate. The possession of a similar
power by the U.S. Senate 5 has never been thought of as giving
it more legislative powers than the House of Representatives.
In the United States, the validity of a provision ( 37) imposing
an ad valorem tax based on the weight of vessels, which the
U.S. Senate had inserted in the Tariff Act of 1909, was upheld
against the claim that the provision was a revenue bill which
originated in the Senate in contravention of Art. I, 7 of the U.S.
Constitution. 6 Nor is the power to amend limited to adding a
provision or two in a revenue bill emanating from the House.
The U.S. Senate has gone so far as changing the whole of bills

following the enacting clause and substituting its own versions.

In 1883, for example, it struck out everything after the enacting
clause of a tariff bill and wrote in its place its own measure, and
the House subsequently accepted the amendment. The U.S.
Senate likewise added 847 amendments to what later became
the Payne-Aldrich Tariff Act of 1909; it dictated the schedules of
the Tariff Act of 1921; it rewrote an extensive tax revision bill in
the same year and recast most of the tariff bill of 1922. 7 Given,
then, the power of the Senate to propose amendments, the
Senate can propose its own version even with respect to bills
which are required by the Constitution to originate in the House.
It is insisted, however, that S. No. 1630 was passed not in
substitution of H. No. 11197 but of another Senate bill (S. No.
1129) earlier filed and that what the Senate did was merely to
"take [H. No. 11197] into consideration" in enacting S. No. 1630.
There is really no difference between the Senate preserving H.
No. 11197 up to the enacting clause and then writing its own
version following the enacting clause (which, it would seem,
petitioners admit is an amendment by substitution), and, on the
other hand, separately presenting a bill of its own on the same
subject matter. In either case the result are two bills on the
same subject.
Indeed, what the Constitution simply means is that the initiative
for filing revenue, tariff, or tax bills, bills authorizing an increase
of the public debt, private bills and bills of local application must
come from the House of Representatives on the theory that,
elected as they are from the districts, the members of the House
can be expected to be more sensitive to the local needs and
problems. On the other hand, the senators, who are elected at
large, are expected to approach the same problems from the
national perspective. Both views are thereby made to bear on
the enactment of such laws.
Nor does the Constitution prohibit the filing in the Senate of a
substitute bill in anticipation of its receipt of the bill from the
House, so long as action by the Senate as a body is withheld
pending receipt of the House bill. The Court cannot, therefore,

understand the alarm expressed over the fact that on March 1,

1993, eight months before the House passed H. No. 11197, S.
No. 1129 had been filed in the Senate. After all it does not
appear that the Senate ever considered it. It was only after the
Senate had received H. No. 11197 on November 23, 1993 that
the process of legislation in respect of it began with the referral
to the Senate Committee on Ways and Means of H. No. 11197
and the submission by the Committee on February 7, 1994 of S.
No. 1630. For that matter, if the question were simply the priority
in the time of filing of bills, the fact is that it was in the House
that a bill (H. No. 253) to amend the VAT law was first filed on
July 22, 1992. Several other bills had been filed in the House
before S. No. 1129 was filed in the Senate, and H. No. 11197
was only a substitute of those earlier bills.
Second. Enough has been said to show that it was within the
power of the Senate to propose S. No. 1630. We now pass to
the next argument of petitioners that S. No. 1630 did not pass
three readings on separate days as required by the
Constitution 8 because the second and third readings were done
on the same day, March 24, 1994. But this was because on
February 24, 1994 9 and again on March 22, 1994, 10 the
President had certified S. No. 1630 as urgent. The presidential
certification dispensed with the requirement not only of printing
but also that of reading the bill on separate days. The phrase
"except when the President certifies to the necessity of its
immediate enactment, etc." in Art. VI, 26(2) qualifies the two
stated conditions before a bill can become a law: (i) the bill has
passed three readings on separate days and (ii) it has been
printed in its final form and distributed three days before it is
finally approved.
In other words, the "unless" clause must be read in relation to
the "except" clause, because the two are really coordinate
clauses of the same sentence. To construe the "except" clause
as simply dispensing with the second requirement in the
"unless" clause (i.e., printing and distribution three days before
final approval) would not only violate the rules of grammar. It
would also negate the very premise of the "except" clause: the

necessity of securing the immediate enactment of a bill which is

certified in order to meet a public calamity or emergency. For if it
is only the printing that is dispensed with by presidential
certification, the time saved would be so negligible as to be of
any use in insuring immediate enactment. It may well be
doubted whether doing away with the necessity of printing and
distributing copies of the bill three days before the third reading
would insure speedy enactment of a law in the face of an
emergency requiring the calling of a special election for
President and Vice-President. Under the Constitution such a law
is required to be made within seven days of the convening of
Congress in emergency session. 11
That upon the certification of a bill by the President the
requirement of three readings on separate days and of printing
and distribution can be dispensed with is supported by the
weight of legislative practice. For example, the bill defining
the certiorari jurisdiction of this Court which, in consolidation
with the Senate version, became Republic Act No. 5440, was
passed on second and third readings in the House of
Representatives on the same day (May 14, 1968) after the bill
had been certified by the President as urgent. 12
There is, therefore, no merit in the contention that presidential
certification dispenses only with the requirement for the printing
of the bill and its distribution three days before its passage but
not with the requirement of three readings on separate days,
also.
It is nonetheless urged that the certification of the bill in this
case was invalid because there was no emergency, the
condition stated in the certification of a "growing budget deficit"
not being an unusual condition in this country.
It is noteworthy that no member of the Senate saw fit to
controvert the reality of the factual basis of the certification. To
the contrary, by passing S. No. 1630 on second and third
readings on March 24, 1994, the Senate accepted the
President's certification. Should such certification be now

reviewed by this Court, especially when no evidence has been

shown that, because S. No. 1630 was taken up on second and
third readings on the same day, the members of the Senate
were deprived of the time needed for the study of a vital piece of
legislation?
The sufficiency of the factual basis of the suspension of the writ
of habeas corpus or declaration of martial law under Art. VII,
18, or the existence of a national emergency justifying the
delegation of extraordinary powers to the President under Art.
VI, 23(2), is subject to judicial review because basic rights of
individuals may be at hazard. But the factual basis of
presidential certification of bills, which involves doing away with
procedural requirements designed to insure that bills are duly
considered by members of Congress, certainly should elicit a
different standard of review.
Petitioners also invite attention to the fact that the President
certified S. No. 1630 and not H. No. 11197. That is because S.
No. 1630 was what the Senate was considering. When the
matter was before the House, the President likewise certified H.
No. 9210 the pending in the House.
Third. Finally it is contended that the bill which became Republic
Act No. 7716 is the bill which the Conference Committee
prepared by consolidating H. No. 11197 and S. No. 1630. It is
claimed that the Conference Committee report included
provisions not found in either the House bill or the Senate bill
and that these provisions were "surreptitiously" inserted by the
Conference Committee. Much is made of the fact that in the last
two days of its session on April 21 and 25, 1994 the Committee
met behind closed doors. We are not told, however, whether the
provisions were not the result of the give and take that often
mark the proceedings of conference committees.
Nor is there anything unusual or extraordinary about the fact
that the Conference Committee met in executive sessions.
Often the only way to reach agreement on conflicting provisions
is to meet behind closed doors, with only the conferees present.

Otherwise, no compromise is likely to be made. The Court is not

about to take the suggestion of a cabal or sinister motive
attributed to the conferees on the basis solely of their "secret
meetings" on April 21 and 25, 1994, nor read anything into the
incomplete remarks of the members, marked in the transcript of
stenographic notes by ellipses. The incomplete sentences are
probably due to the stenographer's own limitations or to the
incoherence that sometimes characterize conversations. William
Safire noted some such lapses in recorded talks even by recent
past Presidents of the United States.
In any event, in the United States conference committees had
been customarily held in executive sessions with only the
conferees and their staffs in attendance. 13 Only in November
1975 was a new rule adopted requiring open sessions. Even
then a majority of either chamber's conferees may vote in public
to close the meetings. 14
As to the possibility of an entirely new bill emerging out of a
Conference Committee, it has been explained:
Under congressional rules of procedure,
conference committees are not expected to make
any material change in the measure at issue,
either by deleting provisions to which both houses
have already agreed or by inserting new
provisions. But this is a difficult provision to
enforce. Note the problem when one house
amends a proposal originating in either house by
striking out everything following the enacting
clause and substituting provisions which make it
an entirely new bill. The versions are now
altogether different, permitting a conference
committee to draft essentially a new bill. . . . 15
The result is a third version, which is considered an
"amendment in the nature of a substitute," the only requirement
for which being that the third version be germane to the subject
of the House and Senate bills. 16

Indeed, this Court recently held that it is within the power of a

conference committee to include in its report an entirely new
provision that is not found either in the House bill or in the
Senate bill. 17 If the committee can propose an amendment
consisting of one or two provisions, there is no reason why it
cannot propose several provisions, collectively considered as an
"amendment in the nature of a substitute," so long as such
amendment is germane to the subject of the bills before the
committee. After all, its report was not final but needed the
approval of both houses of Congress to become valid as an act
of the legislative department. The charge that in this case the
Conference Committee acted as a third legislative chamber is
thus without any basis. 18
Nonetheless, it is argued that under the respective Rules of the
Senate and the House of Representatives a conference
committee can only act on the differing provisions of a Senate
bill and a House bill, and that contrary to these Rules the
Conference Committee inserted provisions not found in the bills
submitted to it. The following provisions are cited in support of
this contention:
Rules of the Senate
Rule XII:
26. In the event that the Senate does not agree
with the House of Representatives on the
provision
of
any
bill
or
joint
resolution, the differences shall be settled by a
conference committee of both Houses which shall
meet within ten days after their composition.
The President shall designate the members of the
conference committee in accordance with
subparagraph (c), Section 3 of Rule III.
Each Conference Committee Report shall contain
a detailed and sufficiently explicit statement of the

changes in or amendments to the subject

measure, and shall be signed by the conferees.
The consideration of such report shall not be in
order unless the report has been filed with the
Secretary of the Senate and copies thereof have
been distributed to the Members.

To be sure, nothing in the Rules limits a conference committee

to a consideration of conflicting provisions. But Rule XLIV, 112
of the Rules of the Senate is cited to the effect that "If there is
no Rule applicable to a specific case the precedents of the
Legislative Department of the Philippines shall be resorted to,
and as a supplement of these, the Rules contained in
Jefferson's Manual." The following is then quoted from the
Jefferson's Manual:

(Emphasis added)
Rules of the House of Representatives
Rule XIV:
85. Conference Committee Reports. In the
event that the House does not agree with the
Senate on the amendments to any bill or joint
resolution, the differences may be settled by
conference committees of both Chambers.
The consideration of conference committee
reports shall always be in order, except when the
journal is being read, while the roll is being called
or the House is dividing on any question. Each of
the pages of such reports shall be signed by the
conferees. Each report shall contain a detailed,
sufficiently explicit statement of the changes in or
amendments to the subject measure.
The consideration of such report shall not be in
order unless copies thereof are distributed to the
Members: Provided, That in the last fifteen days of
each session period it shall be deemed sufficient
that three copies of the report, signed as above
provided, are deposited in the office of the
Secretary General.
(Emphasis added)

The managers of a conference must confine

themselves to the differences committed to them. .
. and may not include subjects not within
disagreements, even though germane to a
question in issue.
Note that, according to Rule XLIX, 112, in case there is no
specific rule applicable, resort must be to the legislative
practice. The Jefferson's Manual is resorted to only as
supplement. It is common place in Congress that conference
committee reports include new matters which, though germane,
have not been committed to the committee. This practice was
admitted by Senator Raul S. Roco, petitioner in G.R. No.
115543, during the oral argument in these cases. Whatever,
then, may be provided in the Jefferson's Manual must be
considered to have been modified by the legislative practice. If a
change is desired in the practice it must be sought in Congress
since this question is not covered by any constitutional provision
but is only an internal rule of each house. Thus, Art. VI, 16(3)
of the Constitution provides that "Each House may determine
the rules of its proceedings. . . ."
This observation applies to the other contention that the Rules
of the two chambers were likewise disregarded in the
preparation of the Conference Committee Report because the
Report did not contain a "detailed and sufficiently explicit
statement of changes in, or amendments to, the subject
measure." The Report used brackets and capital letters to
indicate the changes. This is a standard practice in bill-drafting.
We cannot say that in using these marks and symbols the

Committee violated the Rules of the Senate and the House.

Moreover, this Court is not the proper forum for the enforcement
of these internal Rules. To the contrary, as we have already
ruled, "parliamentary rules are merely procedural and with their
observance the courts have no concern." 19 Our concern is with
the procedural requirements of the Constitution for the
enactment of laws. As far as these requirements are concerned,
we are satisfied that they have been faithfully observed in these
cases.
Nor is there any reason for requiring that the Committee's
Report in these cases must have undergone three readings in
each of the two houses. If that be the case, there would be no
end to negotiation since each house may seek modifications of
the compromise bill. The nature of the bill, therefore, requires
that it be acted upon by each house on a "take it or leave it"
basis, with the only alternative that if it is not approved by both
houses, another conference committee must be appointed. But
then again the result would still be a compromise measure that
may not be wholly satisfying to both houses.
Art. VI, 26(2) must, therefore, be construed as referring only to
bills introduced for the first time in either house of Congress, not
to the conference committee report. For if the purpose of
requiring three readings is to give members of Congress time to
study bills, it cannot be gainsaid that H. No. 11197 was passed
in the House after three readings; that in the Senate it was
considered on first reading and then referred to a committee of
that body; that although the Senate committee did not report out
the House bill, it submitted a version (S. No. 1630) which it had
prepared by "taking into consideration" the House bill; that for its
part the Conference Committee consolidated the two bills and
prepared a compromise version; that the Conference
Committee Report was thereafter approved by the House and
the Senate, presumably after appropriate study by their
members. We cannot say that, as a matter of fact, the members
of Congress were not fully informed of the provisions of the bill.
The allegation that the Conference Committee usurped the

legislative power of Congress is, in our view, without warrant in

fact and in law.
Fourth. Whatever doubts there may be as to the formal validity
of Republic Act No. 7716 must be resolved in its favor. Our
cases 20 manifest firm adherence to the rule that an enrolled
copy of a bill is conclusive not only of its provisions but also of
its due enactment. Not even claims that a proposed
constitutional amendment was invalid because the requisite
votes for its approval had not been obtained 21 or that certain
provisions of a statute had been "smuggled" in the printing of
the bill 22 have moved or persuaded us to look behind the
proceedings of a coequal branch of the government. There is no
reason now to depart from this rule.
No claim is here made that the "enrolled bill" rule is absolute. In
fact in one case 23 we "went behind" an enrolled bill and
consulted the Journal to determine whether certain provisions of
a statute had been approved by the Senate in view of the fact
that the President of the Senate himself, who had signed the
enrolled bill, admitted a mistake and withdrew his signature, so
that in effect there was no longer an enrolled bill to consider.
But where allegations that the constitutional procedures for the
passage of bills have not been observed have no more basis
than another allegation that the Conference Committee
"surreptitiously" inserted provisions into a bill which it had
prepared, we should decline the invitation to go behind the
enrolled copy of the bill. To disregard the "enrolled bill" rule in
such cases would be to disregard the respect due the other two
departments of our government.
Fifth. An additional attack on the formal validity of Republic Act
No. 7716 is made by the Philippine Airlines, Inc., petitioner in
G.R. No. 11582, namely, that it violates Art. VI, 26(1) which
provides that "Every bill passed by Congress shall embrace only
one subject which shall be expressed in the title thereof." It is
contended that neither H. No. 11197 nor S. No. 1630 provided
for removal of exemption of PAL transactions from the payment

of the VAT and that this was made only in the Conference
Committee bill which became Republic Act No. 7716 without
reflecting this fact in its title.
The title of Republic Act No. 7716 is:
AN ACT RESTRUCTURING THE VALUE- ADDED
TAX (VAT) SYSTEM, WIDENING ITS TAX BASE
AND ENHANCING ITS ADMINISTRATION, AND
FOR THESE PURPOSES AMENDING AND
REPEALING THE RELEVANT PROVISIONS OF
THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED, AND FOR OTHER PURPOSES.
Among the provisions of the NIRC amended is 103, which
originally read:
103. Exempt transactions. The following shall
be exempt from the value-added tax:
(q) Transactions which are exempt under special
laws or international agreements to which the
Philippines is a signatory. Among the transactions
exempted from the VAT were those of PAL
because it was exempted under its franchise (P.D.
No. 1590) from the payment of all "other taxes . . .
now or in the near future," in consideration of the
payment by it either of the corporate income tax or
a franchise tax of 2%.
As a result of its amendment by Republic Act No. 7716, 103 of
the NIRC now provides:
103. Exempt transactions. The following shall
be exempt from the value-added tax:
....

(q) Transactions which are exempt under special

laws, except those granted under Presidential
Decree Nos. 66, 529, 972, 1491, 1590. . . .
The effect of the amendment is to remove the exemption
granted to PAL, as far as the VAT is concerned.
The question is whether this amendment of 103 of the NIRC is
fairly embraced in the title of Republic Act No. 7716, although no
mention is made therein of P.D. No. 1590 as among those which
the statute amends. We think it is, since the title states that the
purpose of the statute is to expand the VAT system, and one
way of doing this is to widen its base by withdrawing some of
the exemptions granted before. To insist that P.D. No. 1590 be
mentioned in the title of the law, in addition to 103 of the
NIRC, in which it is specifically referred to, would be to insist
that the title of a bill should be a complete index of its content.
The constitutional requirement that every bill passed by
Congress shall embrace only one subject which shall be
expressed in its title is intended to prevent surprise upon the
members of Congress and to inform the people of pending
legislation so that, if they wish to, they can be heard regarding it.
If, in the case at bar, petitioner did not know before that its
exemption had been withdrawn, it is not because of any defect
in the title but perhaps for the same reason other statutes,
although published, pass unnoticed until some event somehow
calls attention to their existence. Indeed, the title of Republic Act
No. 7716 is not any more general than the title of PAL's own
franchise under P.D. No. 1590, and yet no mention is made of
its tax exemption. The title of P.D. No. 1590 is:
AN ACT GRANTING A NEW FRANCHISE TO
PHILIPPINE AIRLINES, INC. TO ESTABLISH,
OPERATE, AND MAINTAIN AIR-TRANSPORT
SERVICES
IN
THE
PHILIPPINES
AND
BETWEEN THE PHILIPPINES AND OTHER
COUNTRIES.

The trend in our cases is to construe the constitutional

requirement in such a manner that courts do not unduly interfere
with the enactment of necessary legislation and to consider it
sufficient if the title expresses the general subject of the statute
and all its provisions are germane to the general subject thus
expressed. 24
It is further contended that amendment of petitioner's franchise
may only be made by special law, in view of 24 of P.D. No.
1590 which provides:
This franchise, as amended, or any section or
provision hereof may only be modified, amended,
or repealed expressly by a special law or decree
that shall specifically modify, amend, or repeal this
franchise or any section or provision thereof.
This provision is evidently intended to prevent the amendment
of the franchise by mere implication resulting from the
enactment of a later inconsistent statute, in consideration of the
fact that a franchise is a contract which can be altered only by
consent of the parties. Thus in Manila Railroad Co. v.
Rafferty, 25 it was held that an Act of the U.S. Congress, which
provided for the payment of tax on certain goods and articles
imported into the Philippines, did not amend the franchise of
plaintiff, which exempted it from all taxes except those
mentioned in its franchise. It was held that a special law cannot
be amended by a general law.
In contrast, in the case at bar, Republic Act No. 7716 expressly
amends PAL's franchise (P.D. No. 1590) by specifically
excepting from the grant of exemptions from the VAT PAL's
exemption under P.D. No. 1590. This is within the power of
Congress to do under Art. XII, 11 of the Constitution, which
provides that the grant of a franchise for the operation of a
public utility is subject to amendment, alteration or repeal by
Congress when the common good so requires.
II. SUBSTANTIVE ISSUES

A. Claims of Press Freedom, Freedom of Thought and

Religious Freedom
The Philippine Press Institute (PPI), petitioner in G.R. No.
115544, is a nonprofit organization of newspaper publishers
established for the improvement of journalism in the Philippines.
On the other hand, petitioner in G.R. No. 115781, the Philippine
Bible Society (PBS), is a nonprofit organization engaged in the
printing and distribution of bibles and other religious articles.
Both petitioners claim violations of their rights under 4 and 5
of the Bill of Rights as a result of the enactment of the VAT Law.
The PPI questions the law insofar as it has withdrawn the
exemption previously granted to the press under 103 (f) of the
NIRC. Although the exemption was subsequently restored by
administrative regulation with respect to the circulation income
of newspapers, the PPI presses its claim because of the
possibility that the exemption may still be removed by mere
revocation of the regulation of the Secretary of Finance. On the
other hand, the PBS goes so far as to question the Secretary's
power to grant exemption for two reasons: (1) The Secretary of
Finance has no power to grant tax exemption because this is
vested in Congress and requires for its exercise the vote of a
majority of all its members 26 and (2) the Secretary's duty is to
execute the law.
103 of the NIRC contains a list of transactions exempted from
VAT. Among the transactions previously granted exemption
were:
(f) Printing, publication, importation or sale of
books and any newspaper, magazine, review, or
bulletin which appears at regular intervals with
fixed prices for subscription and sale and which is
devoted principally to the publication of
advertisements.
Republic Act No. 7716 amended 103 by deleting (f) with the
result that print media became subject to the VAT with respect to

all aspects of their operations. Later, however, based on a

memorandum of the Secretary of Justice, respondent Secretary
of Finance issued Revenue Regulations No. 11-94, dated June
27, 1994, exempting the "circulation income of print media
pursuant to 4 Article III of the 1987 Philippine Constitution
guaranteeing against abridgment of freedom of the press,
among others." The exemption of "circulation income" has left
income from advertisements still subject to the VAT.
It is unnecessary to pass upon the contention that the
exemption granted is beyond the authority of the Secretary of
Finance to give, in view of PPI's contention that even with the
exemption of the circulation revenue of print media there is still
an unconstitutional abridgment of press freedom because of the
imposition of the VAT on the gross receipts of newspapers from
advertisements and on their acquisition of paper, ink and
services for publication. Even on the assumption that no
exemption has effectively been granted to print media
transactions, we find no violation of press freedom in these
cases.
To be sure, we are not dealing here with a statute that on its
face operates in the area of press freedom. The PPI's claim is
simply that, as applied to newspapers, the law abridges press
freedom. Even with due recognition of its high estate and its
importance in a democratic society, however, the press is not
immune from general regulation by the State. It has been held:
The publisher of a newspaper has no immunity
from the application of general laws. He has no
special privilege to invade the rights and liberties
of others. He must answer for libel. He may be
punished for contempt of court. . . . Like others, he
must pay equitable and non discriminatory taxes
on his business. . . . 27
The PPI does not dispute this point, either.

What it contends is that by withdrawing the exemption

previously granted to print media transactions involving printing,
publication, importation or sale of newspapers, Republic Act No.
7716 has singled out the press for discriminatory treatment and
that within the class of mass media the law discriminates
against print media by giving broadcast media favor treatment.
We have carefully examined this argument, but we are unable
to find a differential treatment of the press by the law, much less
any censorial motivation for its enactment. If the press is now
required to pay a value-added tax on its transactions, it is not
because it is being singled out, much less targeted, for special
treatment but only because of the removal of the exemption
previously granted to it by law. The withdrawal of exemption is
all that is involved in these cases. Other transactions, likewise
previously granted exemption, have been delisted as part of the
scheme to expand the base and the scope of the VAT system.
The law would perhaps be open to the charge of discriminatory
treatment if the only privilege withdrawn had been that granted
to the press. But that is not the case.
The situation in the case at bar is indeed a far cry from those
cited by the PPI in support of its claim that Republic Act No.
7716 subjects the press to discriminatory taxation. In the cases
cited, the discriminatory purpose was clear either from the
background of the law or from its operation. For example,
in Grosjean v. American Press Co., 28 the law imposed a license
tax equivalent to 2% of the gross receipts derived from
advertisements only on newspapers which had a circulation of
more than 20,000 copies per week. Because the tax was not
based on the volume of advertisement alone but was measured
by the extent of its circulation as well, the law applied only to the
thirteen large newspapers in Louisiana, leaving untaxed four
papers with circulation of only slightly less than 20,000 copies a
week and 120 weekly newspapers which were in serious
competition with the thirteen newspapers in question. It was well
known that the thirteen newspapers had been critical of Senator
Huey Long, and the Long-dominated legislature of Louisiana
respondent by taxing what Long described as the "lying
newspapers" by imposing on them "a tax on lying." The effect of

the tax was to curtail both their revenue and their circulation. As
the U.S. Supreme Court noted, the tax was "a deliberate and
calculated device in the guise of a tax to limit the circulation of
information to which the public is entitled in virtue of the
constitutional guaranties." 29 The case is a classic illustration of
the warning that the power to tax is the power to destroy.
In the other case 30 invoked by the PPI, the press was also
found to have been singled out because everything was exempt
from the "use tax" on ink and paper, except the press.
Minnesota imposed a tax on the sales of goods in that state. To
protect the sales tax, it enacted a complementary tax on the
privilege of "using, storing or consuming in that state tangible
personal property" by eliminating the residents' incentive to get
goods from outside states where the sales tax might be lower.
The Minnesota Star Tribune was exempted from both taxes
from 1967 to 1971. In 1971, however, the state legislature
amended the tax scheme by imposing the "use tax" on the cost
of paper and ink used for publication. The law was held to have
singled out the press because (1) there was no reason for
imposing the "use tax" since the press was exempt from the
sales tax and (2) the "use tax" was laid on an "intermediate
transaction rather than the ultimate retail sale." Minnesota had a
heavy burden of justifying the differential treatment and it failed
to do so. In addition, the U.S. Supreme Court found the law to
be discriminatory because the legislature, by again amending
the law so as to exempt the first $100,000 of paper and ink
used, further narrowed the coverage of the tax so that "only a
handful of publishers pay any tax at all and even fewer pay any
significant amount of tax." 31 The discriminatory purpose was
thus very clear.
More recently, in Arkansas Writers' Project, Inc. v. Ragland, 32 it
was held that a law which taxed general interest magazines but
not newspapers and religious, professional, trade and sports
journals was discriminatory because while the tax did not single
out the press as a whole, it targeted a small group within the
press. What is more, by differentiating on the basis of contents
(i.e., between general interest and special interests such as

religion or sports) the law became "entirely incompatible with the

First Amendment's guarantee of freedom of the press."
These cases come down to this: that unless justified, the
differential treatment of the press creates risks of suppression of
expression. In contrast, in the cases at bar, the statute applies
to a wide range of goods and services. The argument that, by
imposing the VAT only on print media whose gross sales
exceeds P480,000 but not more than P750,000, the law
discriminates 33 is without merit since it has not been shown that
as a result the class subject to tax has been unreasonably
narrowed. The fact is that this limitation does not apply to the
press along but to all sales. Nor is impermissible motive shown
by the fact that print media and broadcast media are treated
differently. The press is taxed on its transactions involving
printing and publication, which are different from the
transactions of broadcast media. There is thus a reasonable
basis for the classification.
The cases canvassed, it must be stressed, eschew any
suggestion that "owners of newspapers are immune from any
forms of ordinary taxation." The license tax in the Grosjean case
was declared invalid because it was "one single in kind, with a
long history of hostile misuse against the freedom of the
press." 34 On the other hand, Minneapolis Star acknowledged
that "The First Amendment does not prohibit all regulation of the
press [and that] the States and the Federal Government can
subject newspapers to generally applicable economic
regulations without creating constitutional problems." 35
What has been said above also disposes of the allegations of
the PBS that the removal of the exemption of printing,
publication or importation of books and religious articles, as well
as their printing and publication, likewise violates freedom of
thought and of conscience. For as the U.S. Supreme Court
unanimously held in Jimmy Swaggart Ministries v. Board of
Equalization, 36 the Free Exercise of Religion Clause does not
prohibit imposing a generally applicable sales and use tax on
the sale of religious materials by a religious organization.

This brings us to the question whether the registration provision

of the law, 37 although of general applicability, nonetheless is
invalid when applied to the press because it lays a prior restraint
on its essential freedom. The case ofAmerican Bible Society v.
City of Manila 38 is cited by both the PBS and the PPI in support
of their contention that the law imposes censorship. There, this
Court held that an ordinance of the City of Manila, which
imposed a license fee on those engaged in the business of
general merchandise, could not be applied to the appellant's
sale of bibles and other religious literature. This Court relied
on Murdock v. Pennsylvania, 39 in which it was held that, as a
license fee is fixed in amount and unrelated to the receipts of
the taxpayer, the license fee, when applied to a religious sect,
was actually being imposed as a condition for the exercise of
the sect's right under the Constitution. For that reason, it was
held, the license fee "restrains in advance those constitutional
liberties of press and religion and inevitably tends to suppress
their exercise." 40
But, in this case, the fee in 107, although a fixed amount
(P1,000), is not imposed for the exercise of a privilege but only
for the purpose of defraying part of the cost of registration. The
registration requirement is a central feature of the VAT system. It
is designed to provide a record of tax credits because any
person who is subject to the payment of the VAT pays an input
tax, even as he collects an output tax on sales made or services
rendered. The registration fee is thus a mere administrative fee,
one not imposed on the exercise of a privilege, much less a
constitutional right.

For the foregoing reasons, we find the attack on Republic Act

No. 7716 on the ground that it offends the free speech, press
and freedom of religion guarantees of the Constitution to be
without merit. For the same reasons, we find the claim of the
Philippine Educational Publishers Association (PEPA) in G.R.
No. 115931 that the increase in the price of books and other
educational materials as a result of the VAT would violate the
constitutional mandate to the government to give priority to
education, science and technology (Art. II, 17) to be
untenable.
B. Claims of Regressivity, Denial of Due Process, Equal
Protection,
and
Impairment
of Contracts
There is basis for passing upon claims that on its face the
statute violates the guarantees of freedom of speech, press and
religion. The possible "chilling effect" which it may have on the
essential freedom of the mind and conscience and the need to
assure that the channels of communication are open and
operating importunately demand the exercise of this Court's
power of review.
There is, however, no justification for passing upon the claims
that the law also violates the rule that taxation must be
progressive and that it denies petitioners' right to due process
and that equal protection of the laws. The reason for this
different treatment has been cogently stated by an eminent
authority on constitutional law thus: "[W]hen freedom of the
mind is imperiled by law, it is freedom that commands a
momentum of respect; when property is imperiled it is the
lawmakers' judgment that commands respect. This dual
standard may not precisely reverse the presumption of
constitutionality in civil liberties cases, but obviously it does set
up a hierarchy of values within the due process clause." 41
Indeed, the absence of threat of immediate harm makes the
need for judicial intervention less evident and underscores the
essential nature of petitioners' attack on the law on the grounds

of regressivity, denial of due process and equal protection and

impairment of contracts as a mere academic discussion of the
merits of the law. For the fact is that there have even been no
notices of assessments issued to petitioners and no
determinations at the administrative levels of their claims so as
to illuminate the actual operation of the law and enable us to
reach sound judgment regarding so fundamental questions as
those raised in these suits.

are exempted. This, according to respondents, removes from

the coverage of the law some 30,000 business establishments.
On the other hand, an occasional paper 43 of the Center for
Research and Communication cities a NEDA study that the VAT
has minimal impact on inflation and income distribution and that
while additional expenditure for the lowest income class is only
P301 or 1.49% a year, that for a family earning P500,000 a year
or more is P8,340 or 2.2%.

Thus, the broad argument against the VAT is that it is regressive

and that it violates the requirement that "The rule of taxation
shall be uniform and equitable [and] Congress shall evolve a
progressive system of taxation." 42Petitioners in G.R. No.
115781 quote from a paper, entitled "VAT Policy Issues:
Structure, Regressivity, Inflation and Exports" by Alan A. Tait of
the International Monetary Fund, that "VAT payment by lowincome households will be a higher proportion of their incomes
(and expenditures) than payments by higher-income
households. That is, the VAT will be regressive." Petitioners
contend that as a result of the uniform 10% VAT, the tax on
consumption goods of those who are in the higher-income
bracket, which before were taxed at a rate higher than 10%, has
been reduced, while basic commodities, which before were
taxed at rates ranging from 3% to 5%, are now taxed at a higher
rate.

Lacking empirical data on which to base any conclusion

regarding these arguments, any discussion whether the VAT is
regressive in the sense that it will hit the "poor" and middleincome group in society harder than it will the "rich," as the
Cooperative Union of the Philippines (CUP) claims in G.R. No.
115873, is largely an academic exercise. On the other hand, the
CUP's contention that Congress' withdrawal of exemption of
producers cooperatives, marketing cooperatives, and service
cooperatives, while maintaining that granted to electric
cooperatives, not only goes against the constitutional policy to
promote cooperatives as instruments of social justice (Art. XII,
15) but also denies such cooperatives the equal protection of
the law is actually a policy argument. The legislature is not
required to adhere to a policy of "all or none" in choosing the
subject of taxation.44

Just as vigorously as it is asserted that the law is regressive, the

opposite claim is pressed by respondents that in fact it
distributes the tax burden to as many goods and services as
possible particularly to those which are within the reach of
higher-income groups, even as the law exempts basic goods
and services. It is thus equitable. The goods and properties
subject to the VAT are those used or consumed by higherincome groups. These include real properties held primarily for
sale to customers or held for lease in the ordinary course of
business, the right or privilege to use industrial, commercial or
scientific equipment, hotels, restaurants and similar places,
tourist buses, and the like. On the other hand, small business
establishments, with annual gross sales of less than P500,000,

Nor is the contention of the Chamber of Real Estate and

Builders Association (CREBA), petitioner in G.R. 115754, that
the VAT will reduce the mark up of its members by as much as
85% to 90% any more concrete. It is a mere allegation. On the
other hand, the claim of the Philippine Press Institute, petitioner
in G.R. No. 115544, that the VAT will drive some of its members
out of circulation because their profits from advertisements will
not be enough to pay for their tax liability, while purporting to be
based on the financial statements of the newspapers in
question, still falls short of the establishment of facts by
evidence so necessary for adjudicating the question whether the
tax is oppressive and confiscatory.

Indeed, regressivity is not a negative standard for courts to

enforce. What Congress is required by the Constitution to do is
to "evolve a progressive system of taxation." This is a directive
to Congress, just like the directive to it to give priority to the
enactment of laws for the enhancement of human dignity and
the reduction of social, economic and political inequalities (Art.
XIII, 1), or for the promotion of the right to "quality education"
(Art. XIV, 1). These provisions are put in the Constitution as
moral incentives to legislation, not as judicially enforceable
rights.
At all events, our 1988 decision in Kapatiran 45 should have laid
to rest the questions now raised against the VAT. There similar
arguments made against the original VAT Law (Executive Order
No. 273) were held to be hypothetical, with no more basis than
newspaper articles which this Court found to be "hearsay and
[without] evidentiary value." As Republic Act No. 7716 merely
expands the base of the VAT system and its coverage as
provided in the original VAT Law, further debate on the
desirability and wisdom of the law should have shifted to
Congress.
Only slightly less abstract but nonetheless hypothetical is the
contention of CREBA that the imposition of the VAT on the sales
and leases of real estate by virtue of contracts entered into prior
to the effectivity of the law would violate the constitutional
provision that "No law impairing the obligation of contracts shall
be passed." It is enough to say that the parties to a contract
cannot, through the exercise of prophetic discernment, fetter the
exercise of the taxing power of the State. For not only are
existing laws read into contracts in order to fix obligations as
between parties, but the reservation of essential attributes of
sovereign power is also read into contracts as a basic postulate
of the legal order. The policy of protecting contracts against
impairment presupposes the maintenance of a government
which retains adequate authority to secure the peace and good
order of society. 46

In truth, the Contract Clause has never been thought as a

limitation on the exercise of the State's power of taxation save
only where a tax exemption has been granted for a valid
consideration. 47 Such is not the case of PAL in G.R. No.
115852, and we do not understand it to make this claim. Rather,
its position, as discussed above, is that the removal of its tax
exemption cannot be made by a general, but only by a specific,
law.
The substantive issues raised in some of the cases are
presented in abstract, hypothetical form because of the lack of a
concrete record. We accept that this Court does not only
adjudicate private cases; that public actions by "nonHohfeldian" 48 or ideological plaintiffs are now cognizable
provided they meet the standing requirement of the Constitution;
that under Art. VIII, 1, 2 the Court has a "special function" of
vindicating constitutional rights. Nonetheless the feeling cannot
be escaped that we do not have before us in these cases a fully
developed factual record that alone can impart to our
adjudication the impact of actuality 49 to insure that decisionmaking is informed and well grounded. Needless to say, we do
not have power to render advisory opinions or even jurisdiction
over petitions for declaratory judgment. In effect we are being
asked to do what the Conference Committee is precisely
accused of having done in these cases to sit as a third
legislative chamber to review legislation.
We are told, however, that the power of judicial review is not so
much power as it is duty imposed on this Court by the
Constitution and that we would be remiss in the performance of
that duty if we decline to look behind the barriers set by the
principle of separation of powers. Art. VIII, 1, 2 is cited in
support of this view:
Judicial power includes the duty of the courts of
justice to settle actual controversies involving
rights which are legally demandable and
enforceable, and 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.
To view the judicial power of review as a duty is nothing new.
Chief Justice Marshall said so in 1803, to justify the assertion of
this power in Marbury v. Madison:
It is emphatically the province and duty of the
judicial department to say what the law is. Those
who apply the rule to particular cases must of
necessity expound and interpret that rule. If two
laws conflict with each other, the courts must
decide on the operation of each. 50
Justice Laurel echoed this justification in 1936 in Angara v.
Electoral Commission:
And when the judiciary mediates to allocate
constitutional boundaries, it does not assert any
superiority over the other departments; it does not
in reality nullify or invalidate an act of the
legislature, but only asserts the solemn and
sacred obligation assigned to it by the Constitution
to determine conflicting claims of authority under
the Constitution and to establish for the parties in
an actual controversy the rights which that
instrument secures and guarantees to them. 51
This conception of the judicial power has been affirmed in
several
cases 52 of this Court following Angara.
It does not add anything, therefore, to invoke this "duty" to justify
this Court's intervention in what is essentially a case that at best
is not ripe for adjudication. That duty must still be performed in

the context of a concrete case or controversy, as Art. VIII, 5(2)

clearly defines our jurisdiction in terms of "cases," and nothing
but "cases." That the other departments of the government may
have committed a grave abuse of discretion is not an
independent ground for exercising our power. Disregard of the
essential limits imposed by the case and controversy
requirement can in the long run only result in undermining our
authority as a court of law. For, as judges, what we are called
upon to render is judgment according to law, not according to
what may appear to be the opinion of the day
In the preceeding pages we have endeavored to discuss, within
limits, the validity of Republic Act No. 7716 in its formal and
substantive aspects as this has been raised in the various cases
before us. To sum up, we hold:
(1) That the procedural requirements of the Constitution have
been complied with by Congress in the enactment of the statute;
(2) That judicial inquiry whether the formal requirements for the
enactment of statutes beyond those prescribed by the
Constitution have been observed is precluded by the
principle of separation of powers;
(3) That the law does not abridge freedom of speech,
expression or the press, nor interfere with the free exercise of
religion, nor deny to any of the parties the right to an education;
and
(4) That, in view of the absence of a factual foundation of
record, claims that the law is regressive, oppressive and
confiscatory and that it violates vested rights protected under
the Contract Clause are prematurely raised and do not justify
the grant of prospective relief by writ of prohibition.
WHEREFORE, the petitions in these cases are DISMISSED.
G.R. No. 81311 June 30, 1988

KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN

NG PILIPINAS, INC., HERMINIGILDO C. DUMLAO,
GERONIMO Q. QUADRA, and MARIO C.
VILLANUEVA, petitioners,
vs.
HON. BIENVENIDO TAN, as Commissioner of Internal
Revenue, respondent.
PADILLA, J.:
These four (4) petitions, which have been consolidated because
of the similarity of the main issues involved therein, seek to
nullify Executive Order No. 273 (EO 273, for short), issued by
the President of the Philippines on 25 July 1987, to take effect
on 1 January 1988, and which amended certain sections of the
National Internal Revenue Code and adopted the value-added
tax (VAT, for short), for being unconstitutional in that its
enactment is not allegedly within the powers of the President;
that the VAT is oppressive, discriminatory, regressive, and
violates the due process and equal protection clauses and other
provisions of the 1987 Constitution.
The Solicitor General prays for the dismissal of the petitions on
the ground that the petitioners have failed to show justification
for the exercise of its judicial powers, viz. (1) the existence of an
appropriate case; (2) an interest, personal and substantial, of
the party raising the constitutional questions; (3) the
constitutional question should be raised at the earliest
opportunity; and (4) the question of constitutionality is directly
and necessarily involved in a justifiable controversy and its
resolution is essential to the protection of the rights of the
parties. According to the Solicitor General, only the third
requisite that the constitutional question should be raised at
the earliest opportunity has been complied with. He also

questions the legal standing of the petitioners who, he contends,

are merely asking for an advisory opinion from the Court, there
being no justiciable controversy for resolution.
Objections to taxpayers' suit for lack of sufficient personality
standing, or interest are, however, in the main procedural
matters. Considering the importance to the public of the cases
at bar, and in keeping with the Court's duty, under the 1987
Constitution, to determine wether or not the other branches of
government have kept themselves within the limits of the
Constitution and the laws and that they have not abused the
discretion given to them, the Court has brushed aside
technicalities of procedure and has taken cognizance of these
petitions.
But, before resolving the issues raised, a brief look into the tax
law in question is in order.
The VAT is a tax levied on a wide range of goods and services.
It is a tax on the value, added by every seller, with aggregate
gross annual sales of articles and/or services, exceeding
P200,00.00, to his purchase of goods and services, unless
exempt. VAT is computed at the rate of 0% or 10% of the gross
selling price of goods or gross receipts realized from the sale of
services.
The VAT is said to have eliminated privilege taxes, multiple
rated sales tax on manufacturers and producers, advance sales
tax, and compensating tax on importations. The framers of EO
273 that it is principally aimed to rationalize the system of taxing
goods and services; simplify tax administration; and make the
tax system more equitable, to enable the country to attain
economic recovery.

The VAT is not entirely new. It was already in force, in a

modified form, before EO 273 was issued. As pointed out by the
Solicitor General, the Philippine sales tax system, prior to the
issuance of EO 273, was essentially a single stage value added
tax system computed under the "cost subtraction method" or
"cost deduction method" and was imposed only on original sale,
barter or exchange of articles by manufacturers, producers, or
importers. Subsequent sales of such articles were not subject to
sales tax. However, with the issuance of PD 1991 on 31
October 1985, a 3% tax was imposed on a second sale, which
was reduced to 1.5% upon the issuance of PD 2006 on 31
December 1985, to take effect 1 January 1986. Reduced sales
taxes were imposed not only on the second sale, but
on every subsequent sale, as well. EO 273 merely increased
the VAT on every sale to 10%, unless zero-rated or exempt.

Article XVIII, sec. 6 of said Constitution, hereafter referred to as

the 1987 Constitution, provides:

Petitioners first contend that EO 273 is unconstitutional on the

Ground that the President had no authority to issue EO 273 on
25 July 1987.

Petitioner Valmonte claims, additionally, that Congress was

really convened on 30 June 1987 (not 27 July 1987). He
contends that the word "convene" is synonymous with "the date
when the elected members of Congress assumed office."

The contention is without merit.

It should be recalled that under Proclamation No. 3, which
decreed a Provisional Constitution, sole legislative authority was
vested upon the President. Art. II, sec. 1 of the Provisional
Constitution states:
Sec. 1. Until a legislature is elected and convened
under a new Constitution, the President shall
continue to exercise legislative powers.
On 15 October 1986, the Constitutional Commission of 1986
adopted a new Constitution for the Republic of the Philippines
which was ratified in a plebiscite conducted on 2 February 1987.

Sec. 6. The incumbent President shall continue to

exercise legislative powers until the first Congress
is convened.
It should be noted that, under both the Provisional and the 1987
Constitutions, the President is vested with legislative powers
until a legislature under a new Constitution is convened. The
first Congress, created and elected under the 1987 Constitution,
was convened on 27 July 1987. Hence, the enactment of EO
273 on 25 July 1987, two (2) days before Congress convened
on 27 July 1987, was within the President's constitutional power
and authority to legislate.

The contention is without merit. The word "convene" which has

been interpreted to mean "to call together, cause to assemble,
or convoke," 1 is clearly different from assumption of office by
the individual members of Congress or their taking the oath of
office. As an example, we call to mind the interim National
Assembly created under the 1973 Constitution, which had not
been "convened" but some members of the body, more
particularly the delegates to the 1971 Constitutional Convention
who had opted to serve therein by voting affirmatively for the
approval of said Constitution, had taken their oath of office.
To uphold the submission of petitioner Valmonte would stretch
the definition of the word "convene" a bit too far. It would also

defeat the purpose of the framers of the 1987 Constitutional and

render meaningless some other provisions of said Constitution.
For example, the provisions of Art. VI, sec. 15, requiring
Congress to conveneonce every year on the fourth Monday of
July for its regular session would be a contrariety, since
Congress would already be deemed to be in session after the
individual members have taken their oath of office. A portion of
the provisions of Art. VII, sec. 10, requiring Congress
to convene for the purpose of enacting a law calling for a special
election to elect a President and Vice-President in case a
vacancy occurs in said offices, would also be a surplusage. The
portion of Art. VII, sec. 11, third paragraph, requiring Congress
to convene, if not in session, to decide a conflict between the
President and the Cabinet as to whether or not the President
and the Cabinet as to whether or not the President can reassume the powers and duties of his office, would also be
redundant. The same is true with the portion of Art. VII, sec. 18,
which requires Congress to convene within twenty-four (24)
hours following the declaration of martial law or the suspension
of the privilage of the writ of habeas corpus.
The 1987 Constitution mentions a specific date when the
President loses her power to legislate. If the framers of said
Constitution had intended to terminate the exercise of legislative
powers by the President at the beginning of the term of office of
the members of Congress, they should have so stated (but did
not) in clear and unequivocal terms. The Court has not power to
re-write the Constitution and give it a meaning different from that
intended.
The Court also finds no merit in the petitioners' claim that EO
273 was issued by the President in grave abuse of discretion
amounting to lack or excess of jurisdiction. "Grave abuse of
discretion" has been defined, as follows:

Grave abuse of discretion" implies such capricious

and whimsical exercise of judgment as is
equivalent to lack of jurisdiction (Abad Santos vs.
Province of Tarlac, 38 Off. Gaz. 834), or, in other
words, where the power is exercised in an
arbitrary or despotic manner by reason of passion
or personal hostility, and it must be so patent and
gross as to amount to an evasion of positive duty
or to a virtual refusal to perform the duty enjoined
or to act at all in contemplation of law. (TaveraLuna, Inc. vs. Nable, 38 Off. Gaz. 62). 2
Petitioners have failed to show that EO 273 was issued
capriciously and whimsically or in an arbitrary or despotic
manner by reason of passion or personal hostility. It appears
that a comprehensive study of the VAT had been extensively
discussed by this framers and other government agencies
involved in its implementation, even under the past
administration. As the Solicitor General correctly sated. "The
signing of E.O. 273 was merely the last stage in the exercise of
her legislative powers. The legislative process started long
before the signing when the data were gathered, proposals
were weighed and the final wordings of the measure were
drafted, revised and finalized. Certainly, it cannot be said that
the President made a jump, so to speak, on the Congress, two
days before it convened." 3
Next, the petitioners claim that EO 273 is oppressive,
discriminatory, unjust and regressive, in violation of the
provisions of Art. VI, sec. 28(1) of the 1987 Constitution, which
states:

Sec. 28 (1) The rule of taxation shall be uniform

and equitable. The Congress shall evolve a
progressive system of taxation.
The petitioners" assertions in this regard are not supported by
facts and circumstances to warrant their conclusions. They have
failed to adequately show that the VAT is oppressive,
discriminatory or unjust. Petitioners merely rely upon newspaper
articles which are actually hearsay and have evidentiary value.
To justify the nullification of a law. there must be a clear and
unequivocal breach of the Constitution, not a doubtful and
argumentative implication. 4
As the Court sees it, EO 273 satisfies all the requirements of a
valid tax. It is uniform. The court, in City of Baguio vs. De
Leon, 5 said:
... In Philippine Trust Company v. Yatco (69 Phil.
420), Justice Laurel, speaking for the Court,
stated: "A tax is considered uniform when it
operates with the same force and effect in every
place where the subject may be found."
There was no occasion in that case to consider
the possible effect on such a constitutional
requirement where there is a classification. The
opportunity came in Eastern Theatrical Co. v.
Alfonso (83 Phil. 852, 862). Thus: "Equality and
uniformity in taxation means that all taxable
articles or kinds of property of the same class shall
be taxed at the same rate. The taxing power has
the authority to make reasonable and natural
classifications for purposes of taxation; . . ." About
two years later, Justice Tuason, speaking for this

Court in Manila Race Horses Trainers Assn. v. de

la Fuente (88 Phil. 60, 65) incorporated the above
excerpt in his opinion and continued; "Taking
everything into account, the differentiation against
which the plaintiffs complain conforms to the
practical dictates of justice and equity and is not
discriminatory within the meaning of the
Constitution."
To satisfy this requirement then, all that is needed
as held in another case decided two years later,
(Uy Matias v. City of Cebu, 93 Phil. 300) is that the
statute or ordinance in question "applies equally to
all persons, firms and corporations placed in
similar situation." This Court is on record as
accepting the view in a leading American case
(Carmichael v. Southern Coal and Coke Co., 301
US 495) that "inequalities which result from a
singling out of one particular class for taxation or
exemption infringe no constitutional limitation."
(Lutz v. Araneta, 98 Phil. 148, 153).
The sales tax adopted in EO 273 is applied similarly on all
goods and services sold to the public, which are not exempt, at
the constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on
sales of goods or services by persons engage in business with
an aggregate gross annual sales exceeding P200,000.00. Small
corner sari-sari stores are consequently exempt from its
application. Likewise exempt from the tax are sales of farm and
marine products, spared as they are from the incidence of the
VAT, are expected to be relatively lower and within the reach of
the general public. 6

The Court likewise finds no merit in the contention of the

petitioner Integrated Customs Brokers Association of the
Philippines that EO 273, more particularly the new Sec. 103 (r)
of the National Internal Revenue Code, unduly discriminates
against customs brokers. The contested provision states:
Sec. 103. Exempt transactions. The following
shall be exempt from the value-added tax:
xxx xxx xxx
(r) Service performed in the exercise of profession
or calling (except customs brokers) subject to the
occupation tax under the Local Tax Code, and
professional services performed by registered
general professional partnerships;
The phrase "except customs brokers" is not meant to
discriminate against customs brokers. It was inserted in Sec.
103(r) to complement the provisions of Sec. 102 of the Code,
which makes the services of customs brokers subject to the
payment of the VAT and to distinguish customs brokers from
other professionals who are subject to the payment of an
occupation tax under the Local Tax Code. Pertinent provisions
of Sec. 102 read:
Sec. 102. Value-added tax on sale of services.
There shall be levied, assessed and collected, a
value-added tax equivalent to 10% percent of
gross receipts derived by any person engaged in
the sale of services. The phrase sale of services"
means the performance of all kinds of services for
others for a fee, remuneration or consideration,
including those performed or rendered by

construction and service contractors; stock, real

estate, commercial, customs and immigration
brokers; lessors of personal property; lessors or
distributors of cinematographic films; persons
engaged in milling, processing, manufacturing or
repacking goods for others; and similar services
regardless of whether or not the performance
thereof call for the exercise or use of the physical
or mental faculties: ...
With the insertion of the clarificatory phrase "except customs
brokers" in Sec. 103(r), a potential conflict between the two
sections, (Secs. 102 and 103), insofar as customs brokers are
concerned, is averted.
At any rate, the distinction of the customs brokers from the other
professionals who are subject to occupation tax under the Local
Tax Code is based upon material differences, in that the
activities of customs brokers (like those of stock, real estate and
immigration brokers) partake more of a business, rather than a
profession and were thus subjected to the percentage tax under
Sec. 174 of the National Internal Revenue Code prior to its
amendment by EO 273. EO 273 abolished the percentage tax
and replaced it with the VAT. If the petitioner Association did not
protest the classification of customs brokers then, the Court
sees no reason why it should protest now.
The Court takes note that EO 273 has been in effect for more
than five (5) months now, so that the fears expressed by the
petitioners that the adoption of the VAT will trigger skyrocketing
of prices of basic commodities and services, as well as mass
actions and demonstrations against the VAT should by now be
evident. The fact that nothing of the sort has happened shows
that the fears and apprehensions of the petitioners appear to be

more imagined than real. It would seem that the VAT is not as
bad as we are made to believe.
In any event, if petitioners seriously believe that the adoption
and continued application of the VAT are prejudicial to the
general welfare or the interests of the majority of the people,
they should seek recourse and relief from the political branches
of the government. The Court, following the time-honored
doctrine of separation of powers, cannot substitute its judgment

for that of the President as to the wisdom, justice and

advisability of the adoption of the VAT. The Court can only look
into and determine whether or not EO 273 was enacted and
made effective as law, in the manner required by, and consistent
with, the Constitution, and to make sure that it was not issued in
grave abuse of discretion amounting to lack or excess of
jurisdiction; and, in this regard, the Court finds no reason to
impede its application or continued implementation.

EN BANC
Abakada Guro v. Ermita

DECISION
AUSTRIA-MARTINEZ, J.:

The expenses of government, having for

their object the interest of all, should be borne by
everyone, and the more man enjoys the
advantages of society, the more he ought to hold
himself honored in contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate
fiscal allocation for education, increased emoluments for health
workers, and wider coverage for full value-added tax benefits
these are the reasons why Republic Act No. 9337 (R.A. No.
9337)[1] was enacted. Reasons, the wisdom of which, the Court

even with its extensive constitutional power of review, cannot

probe. The petitioners in these cases, however, question not
only the wisdom of the law, but also perceived constitutional
infirmities in its passage.

(ii) National government deficit as a

percentage of GDP of the previous year exceeds
one and one-half percent (1 %).

Every law enjoys in its favor the presumption of

constitutionality. Their arguments notwithstanding, petitioners
failed to justify their call for the invalidity of the law. Hence, R.A.
No. 9337 is not unconstitutional.

Petitioners argue that the law is unconstitutional, as it

constitutes abandonment by Congress of its exclusive authority
to fix the rate of taxes under Article VI, Section 28(2) of the 1987
Philippine Constitution.

G.R. No. 168056

RESPONDENTS COMMENT

Before R.A. No. 9337 took effect, petitioners ABAKADA

GURO Party List, et al., filed a petition for prohibition on May 27,
2005. They question the constitutionality of Sections 4, 5 and 6
of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the National Internal Revenue Code (NIRC).
Section 4 imposes a 10% VAT on sale of goods and properties,
Section 5 imposes a 10% VAT on importation of goods, and
Section 6 imposes a 10% VAT on sale of services and use or
lease of properties. These questioned provisions contain a
uniform proviso authorizing
the
President,
upon
recommendation of the Secretary of Finance, to raise the VAT
rate to 12%, effective January 1, 2006, after any of the following
conditions have been satisfied, to wit:

The Office of the Solicitor General (OSG) filed a

Comment in behalf of respondents. Preliminarily, respondents
contend that R.A. No. 9337 enjoys the presumption of
constitutionality and petitioners failed to cast doubt on its
validity.

. . . That the President, upon the

recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of
value-added tax to twelve percent (12%), after any
of the following conditions has been satisfied:
(i) Value-added tax collection as a
percentage of Gross Domestic Product (GDP) of
the previous year exceeds two and four-fifth
percent (2 4/5%); or

Relying on the case of Tolentino vs. Secretary of

Finance, 235 SCRA
630 (1994), respondents argue that the procedural issues raised
by petitioners, i.e., legality of the bicameral proceedings,
exclusive origination of revenue measures and the power of the
Senate concomitant thereto, have already been settled. With
regard to the issue of undue delegation of legislative power to
the President, respondents contend that the law is complete and
leaves no discretion to the President but to increase the rate to
12% once any of the two conditions provided therein arise.
Respondents also refute petitioners argument that the
increase to 12%, as well as the 70% limitation on the creditable
input tax, the 60-month amortization on the purchase or
importation of capital goods exceeding P1,000,000.00, and the
5% final withholding tax by government agencies, is arbitrary,
oppressive, and confiscatory, and that it violates the
constitutional principle on progressive taxation, among others.
Finally, respondents manifest that R.A. No. 9337 is the
anchor of the governments fiscal reform agenda. A reform in the

value-added system of taxation is the core revenue measure

that will tilt the balance towards a sustainable macroeconomic
environment necessary for economic growth.

The VAT is a tax on spending or consumption. It is levied

on the sale, barter, exchange or lease of goods or properties
and services.[8] Being an indirect tax on expenditure, the seller of
goods or services may pass on the amount of tax paid to the
buyer,[9] with the seller acting merely as a tax collector.[10] The
burden of VAT is intended to fall on the immediate buyers and
ultimately, the end-consumers.

ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates
following provisions of the Constitution:

the confusion and inevitably, litigation, breeds from a fallacious

notion of its nature.

the

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

In contrast, a direct tax is a tax for which a taxpayer is

directly liable on the transaction or business it engages in,
without transferring the burden to someone else. [11]Examples
are individual and corporate income taxes, transfer taxes, and
residence taxes.[12]

SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108 of the NIRC,
violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending
Sections 110(A)(2) and 110(B) of the NIRC; and
Section 12 of R.A. No. 9337, amending Section
114(C) of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
RULING OF THE COURT
As a prelude, the Court deems it apt to restate the
general principles and concepts of value-added tax (VAT), as

In the Philippines, the value-added system of sales

taxation has long been in existence, albeit in a different mode.
Prior to 1978, the system was a single-stage tax computed
under the cost deduction method and was payable only by the
original sellers. The single-stage system was subsequently
modified, and a mixture of the cost deduction method and tax
credit method was used to determine the value-added tax
payable.[13] Under the tax credit method, an entity can credit
against or subtract from the VAT charged on its sales or outputs
the VAT paid on its purchases, inputs and imports. [14]
It was only in 1987, when President Corazon C. Aquino
issued Executive Order No. 273, that the VAT system was
rationalized by imposing a multi-stage tax rate of 0% or 10% on
all sales using the tax credit method. [15]
E.O. No. 273 was followed by R.A. No. 7716 or the
Expanded VAT Law,[16] R.A. No. 8241 or the Improved VAT Law,
[17]
R.A. No. 8424 or the Tax Reform Act of 1997, [18] and finally,
the presently beleaguered R.A. No. 9337, also referred to by
respondents as the VAT Reform Act.

The Court will now discuss the issues in logical

sequence.
PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the
Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
A. The Bicameral
Committee

as unerringly elucidated by Justice Story, [i]f the power did not

exist, it would be utterly impracticable to transact the
business of the nation, either at all, or at least with decency,
deliberation, and order.[19] Thus, Article VI, Section 16 (3) of
the Constitution provides that each House may determine the
rules of its proceedings. Pursuant to this inherent constitutional
power to promulgate and implement its own rules of procedure,
the respective rules of each house of Congress provided for the
creation of a Bicameral Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of
House of Representatives provides as follows:

Conference

Petitioners Escudero, et al., and Pimentel, et al., allege

that the Bicameral Conference Committee exceeded its
authority by:
1) Inserting the stand-by authority in favor of the
President in Sections 4, 5, and 6 of R.A. No. 9337;
2) Deleting entirely the no pass-on provisions
found in both the House and Senate bills;
3) Inserting the provision imposing a 70% limit on
the amount of input tax to be credited against the
output tax; and
4) Including the amendments introduced only by
Senate Bill No. 1950 regarding other kinds of
taxes in addition to the value-added tax.
Petitioners now beseech the Court to define the powers
of the Bicameral Conference Committee.
It should be borne in mind that the power of internal
regulation and discipline are intrinsic in any legislative body for,

Sec. 88. Conference Committee. In the

event that the House does not agree with the
Senate on the amendment to any bill or joint
resolution, the differences may be settled by the
conference committees of both chambers.
In resolving the differences with the Senate,
the House panel shall, as much as possible,
adhere to and support the House Bill. If the
differences with the Senate are so substantial that
they materially impair the House Bill, the panel
shall report such fact to the House for the latters
appropriate action.
Sec. 89. Conference Committee Reports. . .
. Each report shall contain a detailed, sufficiently
explicit statement of the changes in or
amendments to the subject measure.
The Chairman of the House panel may be
interpellated on the Conference Committee Report
prior to the voting thereon. The House shall vote
on the Conference Committee Report in the same
manner and procedure as it votes on a bill on third
and final reading.

Rule XII, Section 35 of the Rules of the Senate states:

Sec. 35. In the event that the Senate does
not agree with the House of Representatives on
the provision of any bill or joint resolution, the
differences shall be settled by a conference
committee of both Houses which shall meet within
ten (10) days after their composition. The
President shall designate the members of the
Senate Panel in the conference committee with
the approval of the Senate.
Each Conference Committee Report shall
contain a detailed and sufficiently explicit
statement of the changes in, or amendments to
the subject measure, and shall be signed by a
majority of the members of each House panel,
voting separately.
A comparative presentation of the
conflicting House and Senate provisions and a
reconciled version thereof with the explanatory
statement of the conference committee shall be
attached to the report.
The creation of such conference committee was
apparently in response to a problem, not addressed by any
constitutional provision, where the two houses of Congress find
themselves in disagreement over changes or amendments
introduced by the other house in a legislative bill. Given that one
of the most basic powers of the legislative branch is to formulate
and implement its own rules of proceedings and to discipline its
members, may the Court then delve into the details of how
Congress complies with its internal rules or how it conducts its
business of passing legislation? Note that in the present
petitions, the issue is not whether provisions of the rules of both
houses creating the bicameral conference committee are
unconstitutional, but whether the bicameral conference

committee has strictly complied with the rules of both

houses, thereby remaining within the jurisdiction conferred
upon it by Congress.
In the recent case of Farias vs. The Executive Secretary,
the Court En Banc, unanimously reiterated and emphasized
its adherence to the enrolled bill doctrine, thus, declining therein
petitioners plea for the Court to go behind the enrolled copy of
the bill. Assailed in said case was Congresss creation of two
sets of bicameral conference committees, the lack of records of
said committees proceedings, the alleged violation of said
committees of the rules of both houses, and the disappearance
or deletion of one of the provisions in the compromise bill
submitted by the bicameral conference committee. It was
argued that such irregularities in the passage of the law nullified
R.A. No. 9006, or the Fair Election Act.
[20]

Striking down such argument, the Court held thus:

Under the enrolled bill doctrine, the signing
of a bill by the Speaker of the House and the
Senate President and the certification of the
Secretaries of both Houses of Congress that it
was passed are conclusive of its due enactment. A
review of cases reveals the Courts consistent
adherence to the rule. The Court finds no reason
to deviate from the salutary rule in this case
where the irregularities alleged by the
petitioners mostly involved the internal rules
of Congress, e.g., creation of the 2nd or
3rd Bicameral Conference Committee by the
House. This Court is not the proper forum for
the enforcement of these internal rules of
Congress,
whether
House
or
Senate.
Parliamentary rules are merely procedural and
with their observance the courts have no
concern. Whatever doubts there may be as to
the formal validity of Rep. Act No. 9006 must

be resolved in its favor. The Court reiterates its

ruling in Arroyo vs. De Venecia, viz.:
But the cases, both here and abroad, in varying
forms of expression, all deny to the courts the
power to inquire into allegations that, in
enacting a law, a House of Congress failed to
comply with its own rules, in the absence of
showing that there was a violation of a
constitutional provision or the rights of private
individuals. InOsmena v. Pendatun, it was held:
At any rate, courts have declared that the rules
adopted by deliberative bodies are subject to
revocation, modification or waiver at the pleasure
of the body adopting them. And it has been said
that Parliamentary rules are merely procedural,
and with their observance, the courts have no
concern. They may be waived or disregarded
by the legislative body. Consequently, mere
failure to conform to parliamentary usage will
not invalidate the action (taken by a
deliberative body) when the requisite number
of members have agreed to a particular
measure.[21] (Emphasis supplied)
The foregoing declaration is exactly in point with the
present cases, where petitioners allege irregularities committed
by the conference committee in introducing changes or deleting
provisions in the House and Senate bills. Akin to
the Farias case,[22] the present petitions also raise an issue
regarding the actions taken by the conference committee on
matters regarding Congress compliance with its own internal
rules. As stated earlier, one of the most basic and inherent
power of the legislature is the power to formulate rules for its
proceedings and the discipline of its members. Congress is the
best judge of how it should conduct its own business
expeditiously and in the most orderly manner. It is also the sole

concern of Congress to instill discipline among the members of

its conference committee if it believes that said members
violated any of its rules of proceedings. Even the expanded
jurisdiction of this Court cannot apply to questions regarding
only the internal operation of Congress, thus, the Court is wont
to deny a review of the internal proceedings of a co-equal
branch of government.
Moreover, as far back as 1994 or more than ten years
ago, in the case of Tolentino vs. Secretary of Finance, [23] the
Court already made the pronouncement that [i]f a change is
desired in the practice [of the Bicameral Conference
Committee] it must be sought in Congress since this
question is not covered by any constitutional provision but
is only an internal rule of each house. [24] To date, Congress
has not seen it fit to make such changes adverted to by the
Court. It seems, therefore, that Congress finds the practices of
the bicameral conference committee to be very useful for
purposes of prompt and efficient legislative action.
Nevertheless, just to put minds at ease that no blatant
irregularities tainted the proceedings of the bicameral
conference committees, the Court deems it necessary to dwell
on the issue. The Court observes that there was a necessity for
a conference committee because a comparison of the
provisions of House Bill Nos. 3555 and 3705 on one hand, and
Senate Bill No. 1950 on the other, reveals that there were
indeed disagreements. As pointed out in the petitions, said
disagreements were as follows:
House Bill No.
3555

House Bill
No.3705

Senate Bill No.

1950

With regard to Stand-By Authority in favor of

President

Provides
for
12% VAT on
every sale of
goods
or
properties
(amending
Sec. 106 of
NIRC);
12%
VAT
on
importation of
goods
(amending
Sec. 107 of
NIRC);
and
12% VAT on
sale of services
and use or
lease
of
properties
(amending
Sec. 108 of
NIRC)

Provides for 12%

VAT in general on
sales of goods or
properties
and
reduced rates for
sale of certain
locally
manufactured
goods
and
petroleum
products and raw
materials to be
used
in
the
manufacture
thereof (amending
Sec.
106
of
NIRC); 12% VAT
on importation of
goods
and
reduced rates for
certain imported
products including
petroleum
products
(amending Sec.
107 of NIRC); and
12% VAT on sale
of services and
use or lease of
properties and a
reduced rate for
certain services
including power
generation
(amending Sec.
108 of NIRC)

Provides for a
single rate of 10%
VAT on sale of
goods
or
properties
(amending
Sec.
106 of NIRC), 10%
VAT on sale of
services including
sale of electricity
by
generation
companies,
transmission and
distribution
companies,
and
use or lease of
properties
(amending
Sec.
108 of NIRC)

With regard to the no pass-on provision

No
similar
provision

Provides that the

VAT imposed on
power generation
and on the sale of
petroleum
products shall be
absorbed
by
generation
companies
or
sellers,
respectively, and
shall
not
be
passed on to
consumers

Provides that the

VAT imposed on
sales of electricity
by
generation
companies
and
services
of
transmission
companies
and
distribution
companies,
as
well as those of
franchise grantees
of electric utilities
shall not apply to
residential
end-users.
VAT
shall be absorbed
by
generation,
transmission, and
distribution
companies.
With regard to 70% limit on input tax credit

Provides that
the input tax
credit
for
capital goods
on which a VAT
has been paid
shall be equally
distributed over
5 years or the
depreciable life
of such capital
goods;
the

No
provision

similar

Provides that the

input tax credit for
capital goods on
which a VAT has
been paid shall be
equally distributed
over 5 years or the
depreciable life of
such
capital
goods; the input
tax
credit
for
goods
and

input tax credit

for goods and
services other
than
capital
goods shall not
exceed 5% of
the
total
amount of such
goods
and
services; and
for
persons
engaged
in
retail trading of
goods,
the
allowable input
tax credit shall
not
exceed
11% of the total
amount
of
goods
purchased.

services
other
than capital goods
shall not exceed
90% of the output
VAT.

There being differences and/or disagreements on the

foregoing provisions of the House and Senate bills, the
Bicameral Conference Committee was mandated by the rules of
both houses of Congress to act on the same by settling said
differences and/or disagreements. The Bicameral Conference
Committee acted on the disagreeing provisions by making the
following changes:

With regard to amendments to be made to NIRC

provisions regarding income and excise taxes
No similar
provision

The disagreements between the provisions in the House

bills and the Senate bill were with regard to (1) what rate of VAT
is to be imposed; (2) whether only the VAT imposed on
electricity generation, transmission and distribution companies
should not be passed on to consumers, as proposed in the
Senate bill, or both the VAT imposed on electricity generation,
transmission and distribution companies and the VAT imposed
on sale of petroleum products should not be passed on to
consumers, as proposed in the House bill; (3) in what manner
input tax credits should be limited; (4) and whether the NIRC
provisions on corporate income taxes, percentage, franchise
and excise taxes should be amended.

No
provision

similar

Provided
for
amendments
to
several
NIRC
provisions
regarding
corporate income,
percentage,
franchise
and
excise taxes

1. With regard to the disagreement on the rate of VAT to

be imposed, it would appear from the Conference Committee
Report that the Bicameral Conference Committee tried to bridge
the gap in the difference between the 10% VAT rate proposed
by the Senate, and the various rates with 12% as the highest
VAT rate proposed by the House, by striking a compromise
whereby the present 10% VAT rate would be retained until
certain conditions arise, i.e., the value-added tax collection as a
percentage of gross domestic product (GDP) of the previous
year exceeds 2 4/5%, or National Government deficit as a
percentage of GDP of the previous year exceeds 1%, when the
President, upon recommendation of the Secretary of Finance
shall raise the rate of VAT to 12% effective January 1, 2006.
2. With regard to the disagreement on whether only the
VAT imposed on electricity generation, transmission and
distribution companies should not be passed on to consumers

or whether both the VAT imposed on electricity generation,

transmission and distribution companies and the VAT imposed
on sale of petroleum products may be passed on to consumers,
the Bicameral Conference Committee chose to settle such
disagreement by altogether deleting from its Report any no
pass-on provision.
3. With regard to the disagreement on whether input tax
credits should be limited or not, the Bicameral Conference
Committee decided to adopt the position of the House by putting
a limitation on the amount of input tax that may be credited
against the output tax, although it crafted its own language as to
the amount of the limitation on input tax credits and the manner
of computing the same by providing thus:
(A) Creditable Input Tax. . . .
...
Provided, The input tax on goods
purchased or imported in a calendar
month for use in trade or business
for which deduction for depreciation
is allowed under this Code, shall be
spread evenly over the month of
acquisition and the fifty-nine (59)
succeeding months if the aggregate
acquisition cost for such goods,
excluding the VAT component
thereof, exceeds one million Pesos
(P1,000,000.00):
PROVIDED,
however, that if the estimated useful
life of the capital good is less than
five (5) years, as used for
depreciation purposes, then the input
VAT shall be spread over such
shorter period: . . .

(B) Excess Output or Input Tax. If at

the end of any taxable quarter the
output tax exceeds the input tax, the
excess shall be paid by the VATregistered person. If the input tax
exceeds the output tax, the excess
shall be carried over to the
succeeding quarter or quarters:
PROVIDED that the input tax
inclusive of input VAT carried over
from the previous quarter that may
be credited in every quarter shall not
exceed seventy percent (70%) of the
output
VAT:
PROVIDED,
HOWEVER, THAT any input tax
attributable to zero-rated sales by a
VAT-registered person may at his
option be refunded or credited
against other internal revenue
taxes, . . .
4. With regard to the amendments to other provisions of
the NIRC on corporate income tax, franchise, percentage and
excise taxes, the conference committee decided to include such
amendments and basically adopted the provisions found in
Senate Bill No. 1950, with some changes as to the rate of the
tax to be imposed.
Under the provisions of both the Rules of the House of
Representatives and Senate Rules, the Bicameral Conference
Committee is mandated to settle the differences between the
disagreeing provisions in the House bill and the Senate bill. The
term settle is synonymous to reconcile and harmonize. [25] To
reconcile or harmonize disagreeing provisions, the Bicameral
Conference Committee may then (a) adopt the specific
provisions of either the House bill or Senate bill, (b) decide that

neither provisions in the House bill or the provisions in the

Senate bill would
be carried into the final form of the bill, and/or (c) try to arrive at
a compromise between the disagreeing provisions.
In the present case, the changes introduced by the
Bicameral Conference Committee on disagreeing provisions
were meant only to reconcile and harmonize the disagreeing
provisions for it did not inject any idea or intent that is wholly
foreign to the subject embraced by the original provisions.
The so-called stand-by authority in favor of the President,
whereby the rate of 10% VAT wanted by the Senate is retained
until such time that certain conditions arise when the 12% VAT
wanted by the House shall be imposed, appears to be a
compromise to try to bridge the difference in the rate of VAT
proposed by the two houses of Congress. Nevertheless, such
compromise is still totally within the subject of what rate of VAT
should be imposed on taxpayers.
The no pass-on provision was deleted altogether. In the
transcripts of the proceedings of the Bicameral Conference
Committee held on May 10, 2005, Sen. Ralph Recto, Chairman
of the Senate Panel, explained the reason for deleting the no
pass-on provision in this wise:
. . . the thinking was just to keep the VAT
law or the VAT bill simple. And we were thinking
that no sector should be a beneficiary of legislative
grace, neither should any sector be discriminated
on. The VAT is an indirect tax. It is a pass on-tax.
And lets keep it plain and simple. Lets not confuse
the bill and put a no pass-on provision. Two-thirds
of the world have a VAT system and in this twothirds of the globe, I have yet to see a VAT with a
no pass-though provision. So, the thinking of the
Senate is basically simple, lets keep the VAT
simple.[26](Emphasis supplied)

Rep. Teodoro Locsin further made the manifestation that

the no pass-on provision never really enjoyed the support of
either House.[27]
With regard to the amount of input tax to be credited
against output tax, the Bicameral Conference Committee came
to a compromise on the percentage rate of the limitation or cap
on such input tax credit, but again, the change introduced by the
Bicameral Conference Committee was totally within the intent of
both houses to put a cap on input tax that may be credited
against the output tax. From the inception of the subject
revenue bill in the House of Representatives, one of the major
objectives was to plug a glaring loophole in the tax policy and
administration by creating vital restrictions on the claiming of
input VAT tax credits . . . and [b]y introducing limitations on the
claiming of tax credit, we are capping a major leakage that has
placed our collection efforts at an apparent disadvantage. [28]
As to the amendments to NIRC provisions on taxes other
than the value-added tax proposed in Senate Bill No. 1950,
since said provisions were among those referred to it, the
conference committee had to act on the same and it basically
adopted the version of the Senate.
Thus, all the changes or modifications made by the
Bicameral Conference Committee were germane to subjects of
the provisions referred
to it for reconciliation. Such being the case, the Court does not
see any grave abuse of discretion amounting to lack or excess
of jurisdiction committed by the Bicameral Conference
Committee. In the earlier cases of Philippine Judges
Association vs. Prado[29] and Tolentino vs. Secretary of Finance,
[30]
the Court recognized the long-standing legislative practice of
giving said conference committee ample latitude for
compromising differences between the Senate and the House.
Thus, in the Tolentino case, it was held that:
. . . it is within the power of a conference
committee to include in its report an entirely new

provision that is not found either in the House bill

or in the Senate bill. If the committee can propose
an amendment consisting of one or two
provisions, there is no reason why it cannot
propose several provisions, collectively considered
as an amendment in the nature of a substitute, so
long as such amendment is germane to the
subject of the bills before the committee. After all,
its report was not final but needed the approval of
both houses of Congress to become valid as an
act of the legislative department. The charge that
in this case the Conference Committee acted
as a third legislative chamber is thus without
any basis.[31] (Emphasis supplied)
B. R.A. No. 9337 Does Not Violate
Article VI, Section 26(2) of the
Constitution on the NoAmendment Rule
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall
become a law unless it has passed three readings
on separate days, and printed copies thereof in its
final form have been distributed to its Members
three days before its passage, except when the
President certifies to the necessity of its immediate
enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no
amendment thereto shall be allowed, and the vote
thereon shall be taken immediately thereafter, and
the yeas and nays entered in the Journal.
Petitioners argument that the practice where a bicameral
conference committee is allowed to add or delete provisions in
the House bill and the Senate bill after these had passed three
readings is in effect a circumvention of the no amendment rule
(Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince
the Court to deviate from its ruling in the Tolentino case that:

Nor is there any reason for requiring that

the Committees Report in these cases must have
undergone three readings in each of the two
houses. If that be the case, there would be no end
to negotiation since each house may seek
modification of the compromise bill. . . .
Art. VI. 26 (2) must, therefore, be
construed as referring only to bills introduced
for the first time in either house of Congress,
not to the conference committee report. [32]
(Emphasis supplied)
The Court reiterates here that the no-amendment rule
refers only to the procedure to be followed by each house
of Congress with regard to bills initiated in each of said
respective houses, before said bill is transmitted to the
other house for its concurrence or amendment. Verily, to
construe said provision in a way as to proscribe any further
changes to a bill after one house has voted on it would lead to
absurdity as this would mean that the other house of Congress
would be deprived of its constitutional power to amend or
introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the
Constitution cannot be taken to mean that the introduction by
the Bicameral Conference Committee of amendments and
modifications to disagreeing provisions in bills that have been
acted upon by both houses of Congress is prohibited.
C. R.A. No. 9337 Does Not Violate
Article VI, Section 24 of the
Constitution on Exclusive
Origination of Revenue Bills
Coming to the issue of the validity of the amendments
made regarding the NIRC provisions on corporate income taxes

and percentage, excise taxes. Petitioners refer to the following

provisions, to wit:
Section
27

Rates of Income Tax

on
Domestic
Corporation

28(A)(1)

Tax
on
Resident
Foreign Corporation

28(B)(1)

Inter-corporate
Dividends

34(B)(1)

Inter-corporate
Dividends

116

Tax
on
Persons
Exempt from VAT

117

Percentage Tax on
domestic carriers and
keepers of Garage

119

Tax on franchises

121

Tax on banks and

Non-Bank
Financial
Intermediaries

148

Excise
Tax
on
manufactured oils and
other fuels

151

Excise Tax on mineral

products

236

Registration
requirements

237

Issuance of receipts or
sales or commercial
invoices

288

Disposition

of

Incremental Revenue

Petitioners claim that the amendments to these

provisions of the NIRC did not at all originate from the House.
They aver that House Bill No. 3555 proposed amendments only
regarding Sections 106, 107, 108, 110 and 114 of the NIRC,
while House Bill No. 3705 proposed amendments only to
Sections 106, 107,108, 109, 110 and 111 of the NIRC; thus, the
other sections of the NIRC which the Senate amended but
which amendments were not found in the House bills are not
intended to be amended by the House of Representatives.
Hence, they argue that since the proposed amendments did not
originate from the House, such amendments are a violation of
Article VI, Section 24 of the Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff
bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall
originate
exclusively
in
the
House
of
Representatives but the Senate may propose or
concur with amendments.
In the present cases, petitioners admit that it was indeed
House Bill Nos. 3555 and 3705 that initiated the move for
amending provisions of the NIRC dealing mainly with the valueadded tax. Upon transmittal of said House bills to the Senate,
the Senate came out with Senate Bill No. 1950 proposing
amendments not only to NIRC provisions on the value-added
tax but also amendments to NIRC provisions on other kinds of
taxes. Is the introduction by the Senate of provisions not dealing
directly with the value- added tax, which is the only kind of tax
being amended in the House bills, still within the purview of the

constitutional provision authorizing the Senate to propose or

concur with amendments to a revenue bill that originated from
the House?
The foregoing question had been squarely answered in
the Tolentino case, wherein the Court held, thus:
. . . To begin with, it is not the law but the
revenue bill which is required by the Constitution
to originate exclusively in the House of
Representatives. It is important to emphasize this,
because a bill originating in the House may
undergo such extensive changes in the Senate
that the result may be a rewriting of the whole. . . .
At this point, what is important to note is that, as a
result of the Senate action, a distinct bill may be
produced. To insist that a revenue statute and
not only the bill which initiated the legislative
process culminating in the enactment of the
law must substantially be the same as the
House bill would be to deny the Senates power
not only to concur with amendments but also
to propose amendments. It would be to violate
the coequality of legislative power of the two
houses of Congress and in fact make the House
superior to the Senate.
Given, then, the power of the Senate to
propose amendments, the Senate can propose
its own version even with respect to bills
which are required by the Constitution to
originate in the House.
...
Indeed, what the Constitution simply means
is that the initiative for filing revenue, tariff or tax
bills, bills authorizing an increase of the public
debt, private bills and bills of local application must

come from the House of Representatives on the

theory that, elected as they are from the
districts, the members of the House can be
expected to be more sensitive to the local
needs and problems. On the other hand, the
senators, who are elected at large, are
expected to approach the same problems from
the national perspective. Both views are
thereby made to bear on the enactment of
such laws.[33] (Emphasis supplied)
Since there is no question that the revenue bill
exclusively originated in the House of Representatives, the
Senate was acting within its constitutional power to introduce
amendments to the House bill when it included provisions in
Senate Bill No. 1950 amending corporate income taxes,
percentage, excise and franchise taxes. Verily, Article VI,
Section 24 of the Constitution does not contain any prohibition
or limitation on the extent of the amendments that may be
introduced by the Senate to the House revenue bill.
Furthermore, the amendments introduced by the Senate
to the NIRC provisions that had not been touched in the House
bills are still in furtherance of the intent of the House in initiating
the subject revenue bills. The Explanatory Note of House Bill
No. 1468, the very first House bill introduced on the floor, which
was later substituted by House Bill No. 3555, stated:
One of the challenges faced by the present
administration is the urgent and daunting task of
solving the countrys serious financial problems. To
do this, government expenditures must be strictly
monitored and controlled and revenues must be
significantly increased. This may be easier said
than done, but our fiscal authorities are still
optimistic the government will be operating on a
balanced budget by the year 2009. In fact, several
measures that will result to significant expenditure

savings
have
been
identified
by
the
administration. It is supported with a credible
package of revenue measures that include
measures to improve tax administration and
control the leakages in revenues from income
taxes and the value-added tax (VAT). (Emphasis
supplied)

the consumer, i.e., by distributing the burden across all sectors

instead of putting it entirely on the shoulders of the consumers.
The sponsorship speech of Sen. Ralph Recto on why the
provisions on income tax on corporation were included is worth
quoting:

Rep. Eric D. Singson, in his sponsorship speech for

House Bill No. 3555, declared that:

All in all, the proposal of the Senate

Committee on Ways and Means will raise P64.3
billion in additional revenues annually even while
by mitigating prices of power, services and
petroleum products.

In the budget message of our President in

the year 2005, she reiterated that we all
acknowledged that on top of our agenda must be
the restoration of the health of our fiscal system.

However, not all of this will be wrung out of

VAT. In fact, only P48.7 billion amount is from the
VAT on twelve goods and services. The rest of the
tab P10.5 billion- will be picked by corporations.

In order to considerably lower the

consolidated public sector deficit and eventually
achieve a balanced budget by the year 2009, we
need to seize windows of opportunities which
might seem poignant in the beginning, but in
the long run prove effective and beneficial to
the overall status of our economy. One such
opportunity is a review of existing tax rates,
evaluating the relevance given our present
conditions.[34] (Emphasis supplied)

What we therefore prescribe is a burden

sharing between corporate Philippines and the
consumer. Why should the latter bear all the pain?
Why should the fiscal salvation be only on the
burden of the consumer?

Notably therefore, the main purpose of the bills

emanating from the House of Representatives is to bring in
sizeable revenues for the government to supplement our
countrys serious financial problems, and improve tax
administration and control of the leakages in revenues from
income taxes and value-added taxes. As these house bills were
transmitted to the Senate, the latter, approaching the measures
from the point of national perspective, can introduce
amendments within the purposes of those bills. It can provide
for ways that would soften the impact of the VAT measure on

The corporate worlds equity is in form of the

increase in the corporate income tax from 32 to 35
percent, but up to 2008 only. This will raise P10.5
billion a year. After that, the rate will slide back, not
to its old rate of 32 percent, but two notches lower,
to 30 percent.
Clearly, we are telling those with the
capacity to pay, corporations, to bear with this
emergency provision that will be in effect for 1,200
days, while we put our fiscal house in order. This
fiscal medicine will have an expiry date.
For their assistance, a reward of tax
reduction awaits them. We intend to keep the
length of their sacrifice brief. We would like to

assure them that not because there is a light at the

end of the tunnel, this government will keep on
making the tunnel long.
The responsibility will not rest solely on the
weary shoulders of the small man. Big business
will be there to share the burden.[35]
As the Court has said, the Senate can propose
amendments and in fact, the amendments made on provisions
in the tax on income of corporations are germane to the purpose
of the house bills which is to raise revenues for the government.
Likewise, the Court finds the sections referring to other
percentage and excise taxes germane to the reforms to the VAT
system, as these sections would cushion the effects of VAT on
consumers. Considering that certain goods and services which
were subject to percentage tax and excise tax would no longer
be VAT-exempt, the consumer would be burdened more as they
would be paying the VAT in addition to these taxes. Thus, there
is a need to amend these sections to soften the impact of VAT.
Again, in his sponsorship speech, Sen. Recto said:
However, for power plants that run on oil,
we will reduce to zero the present excise tax on
bunker fuel, to lessen the effect of a VAT on this
product.
For electric utilities like Meralco, we will
wipe out the franchise tax in exchange for a VAT.
And in the case of petroleum, while we will
levy the VAT on oil products, so as not to destroy
the VAT chain, we will however bring down the
excise tax on socially sensitive products such as
diesel, bunker, fuel and kerosene.

What do all these exercises point to? These

are not contortions of giving to the left hand what
was taken from the right. Rather, these sprang
from our concern of softening the impact of VAT,
so that the people can cushion the blow of higher
prices they will have to pay as a result of VAT.[36]
The other sections amended by the Senate pertained to
matters of tax administration which are necessary for the
implementation of the changes in the VAT system.
To reiterate, the sections introduced by the Senate are
germane to the subject matter and purposes of the house bills,
which is to supplement our countrys fiscal deficit, among others.
Thus, the Senate acted within its power to propose those
amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108 of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A. No Undue Delegation of
Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel,
Jr., et al., and Escudero, et al. contend in common that Sections
4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and
108, respectively, of the NIRC giving the President the stand-by
authority to raise the VAT rate from 10% to 12% when a certain
condition is met, constitutes undue delegation of the legislative
power to tax.

The assailed provisions read as follows:

SEC. 4. Sec. 106 of the same Code, as
amended, is hereby further amended to read as
follows:
SEC. 106. Value-Added Tax on Sale of
Goods or Properties.
(A) Rate and Base of Tax. There
shall be levied, assessed and
collected on every sale, barter or
exchange of goods or properties, a
value-added tax equivalent to ten
percent (10%) of the gross selling
price or gross value in money of the
goods or properties sold, bartered or
exchanged, such tax to be paid by
the seller or transferor: provided,
that the President, upon the
recommendation of the Secretary
of
Finance,
shall,
effective
January 1, 2006, raise the rate of
value-added tax to twelve percent
(12%), after any of the following
conditions has been satisfied.
(i)

value-added
tax
collection as a percentage
of Gross Domestic Product
(GDP) of the previous year
exceeds two and four-fifth
percent (2 4/5%) or

(ii) national government deficit as

a percentage of GDP of the
previous year exceeds one
and one-half percent (1 %).

SEC. 5. Section 107 of the same Code, as

amended, is hereby further amended to read as
follows:
SEC. 107. Value-Added Tax on Importation
of Goods.
(A) In General. There shall be levied,
assessed and collected on every
importation of goods a value-added
tax equivalent to ten percent (10%)
based on the total value used by the
Bureau of Customs in determining
tariff and customs duties, plus
customs duties, excise taxes, if any,
and other charges, such tax to be
paid by the importer prior to the
release of such goods from customs
custody: Provided, That where the
customs duties are determined on
the basis of the quantity or volume of
the goods, the value-added tax shall
be based on the landed cost plus
excise taxes, if any: provided,
further, that the President, upon
the
recommendation of the
Secretary of Finance, shall,
effective January 1, 2006, raise the
rate of value-added tax to twelve
percent (12%) after any of the
following conditions has been
satisfied.
(i) value-added tax collection as a
percentage
of
Gross
Domestic Product (GDP) of
the previous year exceeds
two and four-fifth percent (2
4/5%) or

(ii) national government deficit as

a percentage of GDP of the
previous year exceeds one
and one-half percent (1 %).
SEC. 6. Section 108 of the same Code, as
amended, is hereby further amended to read as
follows:
SEC. 108. Value-added Tax on Sale
of Services and Use or Lease of
Properties
(A) Rate and Base of Tax. There
shall be levied, assessed and
collected,
a
value-added
tax
equivalent to ten percent (10%) of
gross receipts derived from the sale
or exchange of services: provided,
that the President, upon the
recommendation of the Secretary
of
Finance,
shall,
effective
January 1, 2006, raise the rate of
value-added tax to twelve percent
(12%), after any of the following
conditions has been satisfied.
(i) value-added tax collection as a
percentage
of
Gross
Domestic Product (GDP) of
the previous year exceeds
two and four-fifth percent (2
4/5%) or
(ii) national government deficit as
a percentage of GDP of the
previous year exceeds one

and one-half percent

%). (Emphasis supplied)

(1

Petitioners allege that the grant of the stand-by

authority to the President to increase the VAT rate is a virtual
abdication by Congress of its exclusive power to tax because
such delegation is not within the purview of Section 28 (2),
Article VI of the Constitution, which provides:
The Congress may, by law, authorize the
President to fix within specified limits, and 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.
They argue that the VAT is a tax levied on the sale, barter
or exchange of goods and properties as well as on the sale or
exchange of services, which cannot be included within the
purview of tariffs under the exempted delegation as the latter
refers to customs duties, tolls or tribute payable upon
merchandise to the government and usually imposed on goods
or merchandise imported or exported.
Petitioners ABAKADA GURO Party List, et al., further
contend that delegating to the President the legislative power to
tax is contrary to republicanism. They insist that accountability,
responsibility and transparency should dictate the actions of
Congress and they should not pass to the President the
decision to impose taxes. They also argue that the law also
effectively nullified the Presidents power of control, which
includes the authority to set aside and nullify the acts of her
subordinates like the Secretary of Finance, by mandating the
fixing of the tax rate by the President upon the recommendation
of the Secretary of Finance.
A brief discourse on the principle of non-delegation of
powers is instructive.

The principle of separation of powers ordains that each of

the three great branches of government has exclusive
cognizance of and is supreme in matters falling within its own
constitutionally allocated sphere.[37] A logical corollary to the
doctrine of separation of powers is the principle of nondelegation of powers, as expressed in the Latin
maxim: potestas delegata non delegari potest which means
what has been delegated, cannot be delegated. [38] This doctrine
is based on the ethical principle that such as delegated power
constitutes not only a right but a duty to be performed by the
delegate through the instrumentality of his own judgment and
not through the intervening mind of another.[39]
With respect to the Legislature, Section 1 of Article VI of
the Constitution provides that the Legislative power shall be
vested in the Congress of the Philippines which shall consist of
a Senate and a House of Representatives. The powers which
Congress is prohibited from delegating are those which are
strictly, or inherently and exclusively, legislative. Purely
legislative power, which can never be delegated, has been
described as the authority to make a complete law complete
as to the time when it shall take effect and as to whom it
shall be applicable and to determine the expediency of its
enactment.[40] Thus, the rule is that in order that a court may be
justified in holding a statute unconstitutional as a delegation of
legislative power, it must appear that the power involved is
purely legislative in nature that is, one appertaining exclusively
to the legislative department. It is the nature of the power, and
not the liability of its use or the manner of its exercise, which
determines the validity of its delegation.
Nonetheless, the general rule barring delegation of
legislative powers is subject to the following recognized
limitations or exceptions:
(1) Delegation of tariff powers to the President
under Section 28 (2) of Article VI of the
Constitution;

(2) Delegation of emergency powers to the

President under Section 23 (2) of Article VI
of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a
showing that the delegation itself is valid. It is valid only if the
law (a) is complete in itself, setting forth therein the policy to be
executed, carried out, or implemented by the delegate; [41] and
(b) fixes a standard the limits of which are sufficiently
determinate and determinable to which the delegate must
conform in the performance of his functions. [42] A sufficient
standard is one which defines legislative policy, marks its limits,
maps out its boundaries and specifies the public agency to
apply it. It indicates the circumstances under which the
legislative command is to be effected. [43] Both tests are intended
to prevent a total transference of legislative authority to the
delegate, who is not allowed to step into the shoes of the
legislature and exercise a power essentially legislative. [44]
In People vs. Vera,[45] the Court, through eminent Justice
Jose P. Laurel, expounded on the concept and extent of
delegation of power in this wise:
In testing whether a statute constitutes an
undue delegation of legislative power or not, it is
usual to inquire whether the statute was complete
in all its terms and provisions when it left the
hands of the legislature so that nothing was left to
the judgment of any other appointee or delegate of
the legislature.
The true distinction, says Judge Ranney,
is between the delegation of power to make the
law, which necessarily involves a discretion as

to what it shall be, and conferring an authority

or discretion as to its execution, to be
exercised under and in pursuance of the law.
The first cannot be done; to the latter no valid
objection can be made.
It is contended, however, that a legislative
act may be made to the effect as law after it leaves
the hands of the legislature. It is true that laws
may be made effective on certain contingencies,
as by proclamation of the executive or the
adoption by the people of a particular community.
In Wayman vs. Southard, the Supreme Court of
the United States ruled that the legislature may
delegate a power not legislative which it may itself
rightfully exercise. The power to ascertain facts
is such a power which may be delegated.
There is nothing essentially legislative in
ascertaining the existence of facts or
conditions as the basis of the taking into effect
of a law. That is a mental process common to
all
branches
of
the
government.
Notwithstanding the apparent tendency, however,
to relax the rule prohibiting delegation of legislative
authority on account of the complexity arising from
social and economic forces at work in this modern
industrial age, the orthodox pronouncement of
Judge Cooley in his work on Constitutional
Limitations finds restatement in Prof. Willoughby's
treatise on the Constitution of the United States in
the following language speaking of declaration of
legislative power to administrative agencies: The
principle which permits the legislature to
provide that the administrative agent may
determine when the circumstances are such as
require the application of a law is defended
upon the ground that at the time this authority
is granted, the rule of public policy, which is
the essence of the legislative act, is

determined by the legislature. In other words,

the legislature, as it is its duty to do,
determines that, under given circumstances,
certain executive or administrative action is to
be taken, and that, under other circumstances,
different or no action at all is to be taken. What
is thus left to the administrative official is not
the legislative determination of what public
policy demands, but simply the ascertainment
of what the facts of the case require to be done
according to the terms of the law by which he
is governed. The efficiency of an Act as a
declaration of legislative will must, of course,
come from Congress, but the ascertainment of
the contingency upon which the Act shall take
effect may be left to such agencies as it may
designate. The legislature, then, may provide
that a law shall take effect upon the happening
of future specified contingencies leaving to
some other person or body the power to
determine when the specified contingency has
arisen. (Emphasis supplied).[46]
In Edu vs. Ericta,[47] the Court reiterated:
What cannot be delegated is the authority
under the Constitution to make laws and to alter
and repeal them; the test is the completeness of
the statute in all its terms and provisions when it
leaves the hands of the legislature. To determine
whether or not there is an undue delegation of
legislative power, the inquiry must be directed to
the scope and definiteness of the measure
enacted. The legislative does not abdicate its
functions when it describes what job must be
done, who is to do it, and what is the scope of
his authority. For a complex economy, that may
be the only way in which the legislative process

can go forward. A distinction has rightfully been

made between delegation of power to make the
laws which necessarily involves a discretion
as to what it shall be, which constitutionally
may not be done, and delegation of authority
or discretion as to its execution to be
exercised under and in pursuance of the law,
to which no valid objection can be made. The
Constitution is thus not to be regarded as denying
the legislature the necessary resources of
flexibility and practicability. (Emphasis supplied).[48]

facts and circumstances impossible for Congress itself properly

to investigate.[52]

Clearly, the legislature may delegate to executive officers

or bodies the power to determine certain facts or conditions, or
the happening of contingencies, on which the operation of a
statute is, by its terms, made to depend, but the legislature must
prescribe sufficient standards, policies or limitations on their
authority.[49] While the power to tax cannot be delegated to
executive agencies, details as to the enforcement and
administration of an exercise of such power may be left to them,
including the power to determine the existence of facts on which
its operation depends.[50]

(i) Value-added tax collection

as a percentage of Gross Domestic
Product (GDP) of the previous year
exceeds two and four-fifth percent (2
4/5%); or

The rationale for this is that the preliminary ascertainment

of facts as basis for the enactment of legislation is not of itself a
legislative function, but is simply ancillary to legislation. Thus,
the
duty
of
correlating
information
and
making
recommendations is the kind of subsidiary activity which the
legislature may perform through its members, or which it may
delegate to others to perform. Intelligent legislation on the
complicated problems of modern society is impossible in the
absence of accurate information on the part of the legislators,
and any reasonable method of securing such information is
proper.[51] The Constitution as a continuously operative charter
of government does not require that Congress find for itself
every fact upon which it desires to base legislative action or that
it make for itself detailed determinations which it has declared to
be prerequisite to application of legislative policy to particular

In the present case, the challenged section of R.A. No.

9337 is the common proviso in Sections 4, 5 and 6 which reads
as follows:
That
the
President,
upon
the
recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of
value-added tax to twelve percent (12%), after any
of the following conditions has been satisfied:

(ii)
National
government
deficit as a percentage of GDP of the
previous year exceeds one and onehalf percent (1 %).
The case before the Court is not a delegation of
legislative power. It is simply a delegation of ascertainment of
facts upon which enforcement and administration of the
increase rate under the law is contingent. The legislature has
made the operation of the 12% rate effective January 1, 2006,
contingent upon a specified fact or condition. It leaves the entire
operation or non-operation of the 12% rate upon factual matters
outside of the control of the executive.
No discretion would be exercised by the President.
Highlighting the absence of discretion is the fact that the
word shall is used in the common proviso. The use of the
word shall connotes a mandatory order. Its use in a statute
denotes an imperative obligation and is inconsistent with the

idea of discretion.[53] Where the law is clear and unambiguous, it

must be taken to mean exactly what it says, and courts have no
choice but to see to it that the mandate is obeyed. [54]
Thus, it is the ministerial duty of the President to
immediately impose the 12% rate upon the existence of any of
the conditions specified by Congress. This is a duty which
cannot be evaded by the President. Inasmuch as the law
specifically uses the word shall, the exercise of discretion by the
President does not come into play. It is a clear directive to
impose the 12% VAT rate when the specified conditions are
present. The time of taking into effect of the 12% VAT rate is
based on the happening of a certain specified contingency, or
upon the ascertainment of certain facts or conditions by a
person or body other than the legislature itself.
The Court finds no merit to the contention of
petitioners ABAKADA GURO Party List, et al. that the law
effectively nullified the Presidents power of control over the
Secretary of Finance by mandating the fixing of the tax rate by
the President upon the recommendation of the Secretary of
Finance. The Court cannot also subscribe to the position of
petitioners Pimentel, et al. that the word shall should be
interpreted to mean may in view of the phrase upon the
recommendation of the Secretary of Finance. Neither does the
Court find persuasive the submission of petitioners Escudero, et
al. that any recommendation by the Secretary of Finance can
easily be brushed aside by the President since the former is a
mere alter ego of the latter.
When one speaks of the Secretary of Finance as the
alter ego of the President, it simply means that as head of the
Department of Finance he is the assistant and agent of the
Chief Executive. The multifarious executive and administrative
functions of the Chief Executive are performed by and through
the executive departments, and the acts of the secretaries of
such departments, such as the Department of Finance,
performed and promulgated in the regular course of business,
are, unless disapproved or reprobated by the Chief Executive,

presumptively the acts of the Chief Executive. The Secretary of

Finance, as such, occupies a political position and holds office
in an advisory capacity, and, in the language of Thomas
Jefferson, "should be of the President's bosom confidence" and,
in the language of Attorney-General Cushing, is subject to the
direction of the President."[55]
In the present case, in making his recommendation to the
President on the existence of either of the two conditions, the
Secretary of Finance is not acting as the alter ego of the
President or even her subordinate. In such instance, he is not
subject to the power of control and direction of the President. He
is acting as the agent of the legislative department, to determine
and declare the event upon which its expressed will is to take
effect.[56] The Secretary of Finance becomes the means or tool
by which legislative policy is determined and implemented,
considering that he possesses all the facilities to gather data
and information and has a much broader perspective to properly
evaluate them. His function is to gather and collate statistical
data and other pertinent information and verify if any of the two
conditions laid out by Congress is present. His personality in
such instance is in reality but a projection of that of
Congress. Thus, being the agent of Congress and not of the
President, the President cannot alter or modify or nullify, or set
aside the findings of the Secretary of Finance and to substitute
the judgment of the former for that of the latter.
Congress simply granted the Secretary of Finance the
authority to ascertain the existence of a fact, namely, whether by
December 31, 2005, the value-added tax collection as a
percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%) or the national
government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1%). If either of these two
instances has occurred, the Secretary of Finance, by legislative
mandate, must submit such information to the President. Then
the 12% VAT rate must be imposed by the President
effective January 1, 2006. There is no undue delegation of
legislative power but only of the discretion as to the

execution of a law. This is constitutionally permissible.

[57]
Congress does not abdicate its functions or unduly delegate
power when it describes what job must be done, who must do it,
and what is the scope of his authority; in our complex economy
that is frequently the only way in which the legislative process
can go forward.[58]
As to the argument of petitioners ABAKADA GURO Party
List, et al. that delegating to the President the legislative power
to tax is contrary to the principle of republicanism, the same
deserves scant consideration. Congress did not delegate the
power to tax but the mere implementation of the law. The intent
and will to increase the VAT rate to 12% came from Congress
and the task of the President is to simply execute the legislative
policy. That Congress chose to do so in such a manner is not
within the province of the Court to inquire into, its task being to
interpret the law.[59]
The insinuation by petitioners Pimentel, et al. that the President
has ample powers to cause, influence or create the conditions
to bring about either or both the conditions precedent does not
deserve any merit as this argument is highly speculative. The
Court does not rule on allegations which are manifestly
conjectural, as these may not exist at all.The Court deals with
facts, not fancies; on realities, not appearances. When the Court
acts on appearances instead of realities, justice and law will be
short-lived.
B. The 12% Increase VAT Rate
Does Not Impose an Unfair
and Unnecessary Additional
Tax Burden
Under the common provisos of Sections 4, 5 and 6 of
R.A. No. 9337, if any of the two conditions set forth therein are
satisfied, the President shall increase the VAT rate to 12%. The
provisions of the law are clear. It does not provide for a return to
the 10% rate nor does it empower the President to so revert if,
after the rate is increased to 12%, the VAT collection goes below

the 24/5 of the GDP of the previous year or that the national
government deficit as a percentage of GDP of the previous year
does not exceed 1%.
Therefore, no statutory construction or interpretation is
needed. Neither can conditions or limitations be introduced
where none is provided for. Rewriting the law is a forbidden
ground that only Congress may tread upon. [60]
Thus, in the absence of any provision providing for a
return to the 10% rate, which in this case the Court finds none,
petitioners argument is, at best, purely speculative. There is no
basis for petitioners fear of a fluctuating VAT rate because the
law itself does not provide that the rate should go back to 10% if
the conditions provided in Sections 4, 5 and 6 are no longer
present. The rule is that where the provision of the law is clear
and unambiguous, so that there is no occasion for the court's
seeking the legislative intent, the law must be taken as it is,
devoid of judicial addition or subtraction.[61]
Petitioners also contend that the increase in the VAT rate,
which was allegedly an incentive to the President to raise the
VAT collection to at least 2 4/5 of the GDP of the previous year,
should be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT
collection is not the only condition. There is another
condition, i.e., the national government deficit as a percentage
of GDP of the previous year exceeds one and one-half percent
(1 %).
Respondents explained the philosophy behind these
alternative conditions:
1.

VAT/GDP Ratio > 2.8%

The condition set for increasing VAT rate to

12% have economic or fiscal meaning. If VAT/GDP
is less than 2.8%, it means that government has

weak or no capability of implementing the VAT or

that VAT is not effective in the function of the tax
collection. Therefore, there is no value to increase
it to 12% because such action will also be
ineffectual.
2.

Natl Govt Deficit/GDP >1.5%

The condition set for increasing VAT when

deficit/GDP is 1.5% or less means the fiscal
condition of government has reached a relatively
sound position or is towards the direction of a
balanced budget position. Therefore, there is no
need to increase the VAT rate since the fiscal
house is in a relatively healthy position. Otherwise
stated, if the ratio is more than 1.5%, there is
indeed a need to increase the VAT rate.[62]
That the first condition amounts to an incentive to the
President to increase the VAT collection does not render it
unconstitutional so long as there is a public purpose for which
the law was passed, which in this case, is mainly to raise
revenue. In fact, fiscal adequacy dictated the need for a raise in
revenue.
The principle of fiscal adequacy as a characteristic of a
sound tax system was originally stated by Adam Smith in
his Canons of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to
take out and to keep out of the pockets of
the people as little as possible over and
above what it brings into the public treasury
of the state.[63]
It simply means that sources of revenues must be
adequate to meet government expenditures and their variations.
[64]

The dire need for revenue cannot be ignored. Our

country is in a quagmire of financial woe. During the Bicameral
Conference Committee hearing, then Finance Secretary
Purisima bluntly depicted the countrys gloomy state of economic
affairs, thus:
First, let me explain the position that
the Philippines finds itself in right now. We are in a
position where 90 percent of our revenue is used
for debt service. So, for every peso of revenue that
we currently raise, 90 goes to debt service. Thats
interest plus amortization of our debt. So clearly,
this is not a sustainable situation. Thats the first
fact.
The second fact is that our debt to GDP
level is way out of line compared to other peer
countries that borrow money from that
international financial markets. Our debt to GDP is
approximately equal to our GDP. Again, that shows
you that this is not a sustainable situation.
The third thing that Id like to point out is the
environment that we are presently operating in is
not as benign as what it used to be the past five
years.
What do I mean by that?
In the past five years, weve been lucky
because we were operating in a period of basically
global growth and low interest rates. The past few
months, we have seen an inching up, in fact, a
rapid increase in the interest rates in the leading
economies of the world. And, therefore, our ability
to borrow at reasonable prices is going to be
challenged. In fact, ultimately, the question is our
ability to access the financial markets.

When the President made her speech in

July last year, the environment was not as bad as
it is now, at least based on the forecast of most
financial institutions. So, we were assuming that
raising 80 billion would put us in a position where
we can then convince them to improve our ability
to borrow at lower rates. But conditions have
changed on us because the interest rates have
gone up. In fact, just within this room, we tried to
access the market for a billion dollars because for
this year alone, the Philippines will have to borrow
4 billion dollars. Of that amount, we have
borrowed 1.5 billion. We issued last January a 25year bond at 9.7 percent cost. We were trying to
access last week and the market was not as
favorable and up to now we have not accessed
and we might pull back because the conditions are
not very good.
So given this situation, we at the
Department of Finance believe that we really need
to front-end our deficit reduction. Because it is
deficit that is causing the increase of the debt and
we are in what we call a debt spiral. The more
debt you have, the more deficit you have because
interest and debt service eats and eats more of
your revenue. We need to get out of this debt
spiral. And the only way, I think, we can get out of
this debt spiral is really have a front-end
adjustment in our revenue base.[65]

. . . policy matters are not the concern of

the Court. Government policy is within the
exclusive dominion of the political branches of the
government. It is not for this Court to look into the
wisdom or propriety of legislative determination.
Indeed, whether an enactment is wise or unwise,
whether it is based on sound economic theory,
whether it is the best means to achieve the
desired results, whether, in short, the legislative
discretion within its prescribed limits should be
exercised in a particular manner are matters for
the judgment of the legislature, and the serious
conflict of opinions does not suffice to bring them
within the range of judicial cognizance.[66]
In the same vein, the Court in this case will not dawdle on
the purpose of Congress or the executive policy, given that it is
not for the judiciary to "pass upon questions of wisdom, justice
or expediency of legislation.[67]
II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)
(2) and 110(B) of the NIRC; and Section 12 of R.A. No. 9337,
amending Section 114(C) of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses

The image portrayed is chilling. Congress passed the law

hoping for rescue from an inevitable catastrophe. Whether the
law is indeed sufficient to answer the states economic dilemma
is not for the Court to judge. In the Farias case, the Court
refused to consider the various arguments raised therein that
dwelt on the wisdom of Section 14 of R.A. No. 9006 (The Fair
Election Act), pronouncing that:

Petitioners Association of Pilipinas Shell Dealers, Inc., et

al. argue that Section 8 of R.A. No. 9337, amending Sections
110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending
Section 114 (C) of the NIRC are arbitrary, oppressive, excessive
and confiscatory. Their argument is premised on the

constitutional right against deprivation of life, liberty of property

without due process of law, as embodied in Article III, Section 1
of the Constitution.
Petitioners also contend that these provisions violate the
constitutional guarantee of equal protection of the law.
The doctrine is that where the due process and equal
protection clauses are invoked, considering that they are not
fixed rules but rather broad standards, there is a need for proof
of such persuasive character as would lead to such a
conclusion. Absent such a showing, the presumption of validity
must prevail.[68]
Section 8 of R.A. No. 9337, amending Section 110(B) of
the NIRC imposes a limitation on the amount of input tax that
may be credited against the output tax. It states, in part:
[P]rovided, that the input tax inclusive of the input VAT carried
over from the previous quarter that may be credited in every
quarter shall not exceed seventy percent (70%) of the output
VAT:
Input Tax is defined under Section 110(A) of the NIRC, as
amended, as the value-added tax due from or paid by a VATregistered person on the importation of goods or local purchase
of good and services, including lease or use of property, in the
course of trade or business, from a VAT-registered person,
and Output Tax is the value-added taxdue on the sale or lease
of taxable goods or properties or services by any person
registered or required to register under the law.
Petitioners claim that the contested sections impose
limitations on the amount of input tax that may be claimed. In
effect, a portion of the input tax that has already been paid
cannot now be credited against the output tax.
Petitioners argument is not absolute. It assumes that the
input tax exceeds 70% of the output tax, and therefore, the input
tax in excess of 70% remains uncredited. However, to the extent

that the input tax is less than 70% of the output tax, then 100%
of such input tax is still creditable.
More importantly, the excess input tax, if any, is retained
in a businesss books of accounts and remains creditable in the
succeeding quarter/s. This is explicitly allowed by Section
110(B), which provides that if the input tax exceeds the output
tax, the excess shall be carried over to the succeeding quarter
or quarters. In addition, Section 112(B) allows a VAT-registered
person to apply for the issuance of a tax credit certificate or
refund for any unused input taxes, to the extent that such input
taxes have not been applied against the output taxes. Such
unused input tax may be used in payment of his other internal
revenue taxes.
The non-application of the unutilized input tax in a given
quarter is not ad infinitum, as petitioners exaggeratedly contend.
Their analysis of the effect of the 70% limitation is incomplete
and one-sided. It ends at the net effect that there will be
unapplied/unutilized inputs VAT for a given quarter. It does not
proceed further to the fact that such unapplied/unutilized input
tax may be credited in the subsequent periods as allowed by the
carry-over provision of Section 110(B) or that it may later on be
refunded through a tax credit certificate under Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia failed
to comprehend the operation of the 70% limitation on the input
tax. According to petitioner, the limitation on the creditable input
tax in effect allows VAT-registered establishments to retain a
portion of the taxes they collect, which violates the principle that
tax collection and revenue should be for public purposes and
expenditures
As earlier stated, the input tax is the tax paid by a person,
passed on to him by the seller, when he buys goods. Output tax
meanwhile is the tax due to the person when he sells goods. In
computing the VAT payable, three possible scenarios may arise:

First, if at the end of a taxable quarter the output taxes

charged by the seller are equal to the input taxes that he paid
and passed on by the suppliers, then no payment is required;
Second, when the output taxes exceed the input taxes,
the person shall be liable for the excess, which has to be paid to
the Bureau of Internal Revenue (BIR);[69] and
Third, if the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or
quarters. Should the input taxes result from zero-rated or
effectively zero-rated transactions, any excess over the output
taxes shall instead be refunded to the taxpayer or credited
against other internal revenue taxes, at the taxpayers option. [70]
Section 8 of R.A. No. 9337 however, imposed a 70%
limitation on the input tax. Thus, a person can credit his input
tax only up to the extent of 70% of the output tax. In laymans
term, the value-added taxes that a person/taxpayer paid and
passed on to him by a seller can only be credited up to 70% of
the value-added taxes that is due to him on a taxable
transaction. There is no retention of any tax collection because
the person/taxpayer has already previously paid the input tax to
a seller, and the seller will subsequently remit such input tax to
the BIR. The party directly liable for the payment of the tax is the
seller.[71] What only needs to be done is for the person/taxpayer
to apply or credit these input taxes, as evidenced by receipts,
against his output taxes.
CONCLUSION
It has been said that taxes are the lifeblood of the
government. In this case, it is just an enema, a first-aid measure
to resuscitate an economy in distress. The Court is neither blind
nor is it turning a deaf ear on the plight of the masses. But it
does not have the panacea for the malady that the law seeks to

remedy. As in other cases, the Court cannot strike down a law

as unconstitutional simply because of its yokes.
Let us not be overly influenced by the plea
that for every wrong there is a remedy, and that
the judiciary should stand ready to afford relief.
There are undoubtedly many wrongs the
judicature may not correct, for instance, those
involving political questions. . . .
Let us likewise disabuse our minds from the
notion that the judiciary is the repository of
remedies for all political or social ills; We should
not forget that the Constitution has judiciously
allocated the powers of government to three
distinct and separate compartments; and that
judicial interpretation has tended to the
preservation of the independence of the three, and
a zealous regard of the prerogatives of each,
knowing full well that one is not the guardian of the
others and that, for official wrong-doing, each may
be brought to account, either by impeachment,
trial or by the ballot box.[100]
The words of the Court in Vera vs. Avelino[101] holds true
then, as it still holds true now. All things considered, there is
no raison d'tre for the unconstitutionality of R.A. No. 9337.
WHEREFORE, Republic Act No. 9337 not being
unconstitutional, the petitions in G.R. Nos. 168056, 168207,
168461, 168463, and 168730, are hereby DISMISSED.
There being no constitutional impediment to the full
enforcement and implementation of R.A. No. 9337, the
temporary restraining order issued by the Court on July 1, 2005
is LIFTED upon finality of herein decision.

exemption from the income tax under Section 4 of Republic Act

909 1because same covers only gold mines, the provision of
which reads:

G.R. No. L-26911 January 27, 1981

ATLAS CONSOLIDATED MINING & DEVELOPMENT
CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DE CASTRO, J.:
This tax case (CTA No. 1312) arose from the 1957 and 1958
deficiency income tax assessments made by the Commissioner
of Internal Revenue, hereinafter referred to as Commissioner,
where the Atlas Consolidated Mining and Development
Corporation, hereinafter referred to as Atlas, was assessed
P546,295.16 for 1957 and P215,493.96 for 1958 deficiency
income taxes.
Atlas is a corporation engaged in the mining industry registered
under the laws of the Philippines. On August 20, 1962, the
Commissioner assessed against Atlas the sum of P546,295.16
and P215,493.96 or a total of P761,789.12 as deficiency income
taxes for the years 1957 and 1958. For the year 1957, it was the
opinion of the Commissioner that Atlas is not entitled to

New mines, and old mines which resume

operation, when certified to as such by the
Secretary of Agriculture and Natural Resources
upon the recommendation of the Director of
Mines, shall be exempt from the payment of
income tax during the first three (3) years of actual
commercial production. Provided that, any such
mine and/or mines making a complete return of its
capital investment at any time within the said
period, shall pay income tax from that year.
For the year 1958, the assessment of deficiency income tax of
P761,789.12 covers the disallowance of items claimed by Atlas
as deductible from gross income.
On October 9, 1962, Atlas protested the assessment asking for
its reconsideration and cancellation. 2 Acting on the protest, the
Commissioner conducted a reinvestigation of the case.
On October 25, 1962, the Secretary of Finance ruled that the
exemption provided in Republic Act 909 embraces all new
mines and old mines whether gold or other
minerals. 3 Accordingly, the Commissioner recomputed Atlas
deficiency income tax liabilities in the light of the ruling of the
Secretary of Finance. On June 9, 1964, the Commissioner
issued a revised assessment entirely eliminating the
assessment of P546,295.16 for the year 1957. The assessment
for 1958 was reduced from P215,493.96 to P39,646.82 from
which Atlas appealed to the Court of Tax Appeals, assailing the

disallowance of the following items claimed as deductible from

its gross income for 1958:

Suit and litigation

expenses................................................ 6,666.65

Transfer agent's
fee.........................................................P59,477.42

Total.........................................................................
.......... P32,189.79

Stockholders relation service

fee....................................25,523.14

As the exemption of petitioner from the payment of

corporate income tax under Section 4, Republic
Act 909, was good only up to the Ist quarter of
1958 ending on March 31 of the same year, only
three-fourth (3/4) of the net taxable income of
petitioner is subject to income tax, computed as
follows:

U.S. stock listing

expenses..................................................8,326.70
Suit
expenses.................................................................
.........6,666.65
Provision for contingencies.....................................
.........60,000.00
Total...................................................
.................P159,993.91

1958
Total net income for
1958.................................P1,968,898.27
Net income corresponding to
taxable period April 1 to

After hearing, the Court of Tax Appeals rendered a decision on

October 25, 1966 allowing the above mentioned disallowed
items, except the items denominated by Atlas as stockholders
relation service fee and suit expenses. 4Pertinent portions of the
decision of the Court of Tax Appeals read as follows:
Under the facts, circumstances and applicable law
in this case, the unallowable deduction from
petitioner's gross income in 1958 amounted to
P32,189.79.
Stockholders relation service
fee.................................... P25,523.14

Dec. 31, 1958, 3/4 of

P1,968,898.27.........................................................
.1,476,673.70
Add: 3/4 of promotion fees
of
P25,523.14..............................................................
P19,142.35
Litigation

expenses.................................................................
........6, 666.65
Net income per
decision..........................................11, 02,4 2.70
Tax due
thereon.........................................................412,69
5.00
Less: Amount already
assessed .............................405,468.00
DEFICIENCY INCOME TAX
DUE............................P7,227.00
Add: 1/2 % monthly interest
from 6-20-59 to 6-20-62
(18%)....................................P1,300.89
TOTAL AMOUNT DUE &
COLLECTIBLE............P8,526.22
From the Court of Tax Appeals' decision of October 25, 1966,
both parties appealed to this Court by way of two (2) separate
petitions for review docketed as G. R. No. L-26911 (Atlas,
petitioner) and G. R. No. L-29924 (Commissioner, petitioner).
G. R. No. L-26911Atlas appealed only that portion of the
Court of Tax Appeals' decision disallowing the deduction from
gross income of the so-called stockholders relation service fee
amounting to P25,523.14, making a lone assignment of error
that

THE COURT OF TAX APPEALS ERRED IN ITS

CONCLUSION THAT THE EXPENSE IN THE
AMOUNT OF P25,523.14 PAID BY PETITIONER
IN 1958 AS ANNUAL PUBLIC RELATIONS
EXPENSES WAS INCURRED FOR
ACQUISITION OF ADDITIONAL CAPITAL, THE
SAME NOT BEING SUPPORTED BY THE
EVIDENCE.
It is the contention of Atlas that the amount of P25,523.14 paid
in 1958 as annual public relations expenses is a deductible
expense from gross income under Section 30 (a) (1) of the
National Internal Revenue Code. Atlas claimed that it was paid
for services of a public relations firm, P.K Macker & Co., a
reputable public relations consultant in New York City, U.S.A.,
hence, an ordinary and necessary business expense in order to
compete with other corporations also interested in the
investment market in the United States. 5 It is the stand of Atlas
that information given out to the public in general and to the
stockholder in particular by the P.K MacKer & Co. concerning
the operation of the Atlas was aimed at creating a favorable
image and goodwill to gain or maintain their patronage.
The decisive question, therefore, in this particular appeal taken
by Atlas to this Court is whether or not the expenses paid for the
services rendered by a public relations firm P.K MacKer & Co.
labelled as stockholders relation service fee is an allowable
deduction as business expense under Section 30 (a) (1) of the
National Internal Revenue Code.
The principle is recognized that when a taxpayer claims a
deduction, he must point to some specific provision of the
statute in which that deduction is authorized and must be able to
prove that he is entitled to the deduction which the law allows.

As previously adverted to, the law allowing expenses as

deduction from gross income for purposes of the income tax is
Section 30 (a) (1) of the National Internal Revenue which allows
a deduction of "all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business." An item of expenditure, in order to be deductible
under this section of the statute, must fall squarely within its
language.
We come, then, to the statutory test of deductibility where it is
axiomatic that to be deductible as a business expense, three
conditions are imposed, namely: (1) the expense must be
ordinary and necessary, (2) it must be paid or incurred within the
taxable year, and (3) it must be paid or incurred in carrying in a
trade or business. 6 In addition, not only must the taxpayer meet
the business test, he must substantially prove by evidence or
records the deductions claimed under the law, otherwise, the
same will be disallowed. The mere allegation of the taxpayer
that an item of expense is ordinary and necessary does not
justify its deduction. 7
While it is true that there is a number of decisions in the United
States delving on the interpretation of the terms "ordinary and
necessary" as used in the federal tax laws, no adequate or
satisfactory definition of those terms is possible. Similarly, this
Court has never attempted to define with precision the terms
"ordinary and necessary." There are however, certain guiding
principles worthy of serious consideration in the proper
adjudication of conflicting claims. Ordinarily, an expense will be
considered "necessary" where the expenditure is appropriate
and helpful in the development of the taxpayer's business. 8 It is
"ordinary" when it connotes a payment which is normal in
relation to the business of the taxpayer and the surrounding
circumstances. 9 The term "ordinary" does not require that the

payments be habitual or normal in the sense that the same

taxpayer will have to make them often; the payment may be
unique or non-recurring to the particular taxpayer affected. 10
There is thus no hard and fast rule on the matter. The right to a
deduction depends in each case on the particular facts and the
relation of the payment to the type of business in which the
taxpayer is engaged. The intention of the taxpayer often may be
the controlling fact in making the determination. 11 Assuming that
the expenditure is ordinary and necessary in the operation of
the taxpayer's business, the answer to the question as to
whether the expenditure is an allowable deduction as a
business expense must be determined from the nature of the
expenditure itself, which in turn depends on the extent and
permanency of the work accomplished by the expenditure. 12
It appears that on December 27, 1957, Atlas increased its
capital stock from P15,000,000 to P18,325,000. 13 It was
claimed by Atlas that its shares of stock worth P3,325,000 were
sold in the United States because of the services rendered by
the public relations firm, P. K. Macker & Company. The Court of
Tax Appeals ruled that the information about Atlas given out and
played up in the mass communication media resulted in full
subscription of the additional shares issued by Atlas;
consequently, the questioned item, stockholders relation service
fee, was in effect spent for the acquisition of additional capital,
ergo, a capital expenditure.
We sustain the ruling of the tax court that the expenditure of
P25,523.14 paid to P.K. Macker & Co. as compensation for
services carrying on the selling campaign in an effort to sell
Atlas' additional capital stock of P3,325,000 is not an ordinary
expense in line with the decision of U.S. Board of Tax Appeals in
the case ofHarrisburg Hospital Inc. vs. Commissioner of Internal

Revenue. 14 Accordingly, as found by the Court of Tax Appeals,

the said expense is not deductible from Atlas gross income in
1958 because expenses relating to recapitalization and
reorganization of the corporation (Missouri-Kansas Pipe Line
vs. Commissioner of Internal Revenue, 148 F. (2d),
460;Skenandos Rayon Corp. vs. Commissioner of Internal
Revenue, 122 F. (2d) 268, Cert. denied 314 U.S. 6961), the cost
of obtaining stock subscription (Simons Co., 8 BTA 631),
promotion expenses (Beneficial Industrial Loan Corp. vs.
Handy, 92 F. (2d) 74), and commission or fees paid for the sale
of stock reorganization (Protective Finance Corp., 23 BTA 308)
are capital expenditures.

G. R. No. L-26924-In his petition for review, the Commissioner

of Internal Revenue assigned as errors the following:

That the expense in question was incurred to create a favorable

image of the corporation in order to gain or maintain the public's
and its stockholders' patronage, does not make it deductible as
business expense. As held in the case of Welch vs.
Helvering, 15 efforts to establish reputation are akin to acquisition
of capital assets and, therefore, expenses related thereto are
not business expense but capital expenditures.

THE COURT OF TAX APPEALS ERRED IN

ALLOWING THE DEDUCTION FROM GROSS
INCOME OF LISTING EXPENSES ALLEGEDLY
INCURRED BY RESPONDENT;

We do not agree with the contention of Atlas that the conclusion

of the Court of Tax Appeals in holding that the expense of
P25,523.14 was incurred for acquisition of additional capital is
not supported by the evidence. The burden of proof that the
expenses incurred are ordinary and necessary is on the
taxpayer 16 and does not rest upon the Government. To avail of
the claimed deduction under Section 30(a) (1) of the National
Internal Revenue Code, it is incumbent upon the taxpayer to
adduce substantial evidence to establish a reasonably
proximate relation petition between the expenses to the ordinary
conduct of the business of the taxpayer. A logical link or nexus
between the expense and the taxpayer's business must be
established by the taxpayer.

I
THE COURT OF TAX APPEALS ERRED IN
ALLOWING THE DEDUCTION FROM GROSS
INCOME OF THE SO- CALLED TRANSFER
AGENT'S FEES ALLEGEDLY PAID BY
RESPONDENT;
II

III
THE COURT OF TAX APPEALS ERRED IN
HOLDING THAT THE AMOUNT OF P60,000
REPRESENTED BY RESPONDENT AS
"PROVISION FOR CONTINGENCIES" WAS
ADDED BACK BY RESPONDENT TO ITS
GROSS INCOME IN COMPUTING THE INCOME
TAX DUE FROM IT FOR 1958;
IV
THE COURT OF TAX APPEALS ERRED IN
DISALLOWING ONLY THE AMOUNT OF
P6,666.65 AS SUIT EXPENSES, THE CORRECT
AMOUNT THAT SHOULD HAVE BEEN
DISALLOWED BEING P17,499.98.

It is well to note that only in the Court of Tax Appeals did the
Commissioner raise for the first time (in his memorandum) the
question of whether or not the business expenses deducted
from Atlas gross income in 1958 may be allowed in the absence
of proof of payments. 17 Before this Court, the Commissioner
reiterated the same as ground against deductibility when he
claimed that the Court of Tax Appeals erred in allowing the
deduction of transfer agent's fee and stock listing fee from gross
income in the absence of proof of payment thereof.
The Commissioner contended that under Section 30 (a) (1) of
the National Internal Revenue Code, it is a requirement for an
expense to be deductible from gross income that it must have
been "paid or incurred during the year" for which it is claimed;
that in the absence of convincing and satisfactory evidence of
payment, the deduction from gross income for the year 1958
income tax return cannot be sustained; and that the best
evidence to prove payment, if at all any has been made, would
be the vouchers or receipts issued therefor which ATLAS failed
to present.
Atlas admitted that it failed to adduce evidence of payment of
the deduction claimed in its 1958 income tax return, but explains
the failure with the allegation that the Commissioner did not
raise that question of fact in his pleadings, or even in the report
of the investigating examiner and/or letters of demand and
assessment notices of ATLAS which gave rise to its appeal to
the Court of Tax Appeal. 18 It was emphasized by Atlas that it
went to trial and finally submitted this case for decision on the
assumption that inasmuch as the fact of payment was never
raised as a vital issue by the Commissioner in his answer to the
petition for review in the Court of Tax Appeal, the issues is
limited only to pure question of lawwhether or not the
expenses deducted by petitioner from its gross income for 1958

are sanctioned by Section 30 (a) (1) of the National Internal

Revenue Code.
On this issue of whether or not the Commissioner can raise the
fact of payment for the first time on appeal in its memorandum
in the Court of Tax Appeal, we fully agree with the ruling of the
tax court that the Commissioner on appeal cannot be allowed to
adopt a theory distinct and different from that he has previously
pursued, as shown by the BIR records and the answer to the
amended petition for review. 19 As this Court said in the case of
Commissioner of Customs vs. Valencia 20 such change in the
nature of the case may not be made on appeal, specially when
the purpose of the latter is to seek a review of the action taken
by an administrative body, forming part of a coordinate branch
of the Government, such as the Executive department. In the
case at bar, the Court of Tax Appeal found that the fact of
payment of the claimed deduction from gross income was never
controverted by the Commissioner even during the initial stages
of routinary administrative scrutiny conducted by BIR
examiners. 21 Specifically, in his answer to the amended petition
for review in the Court of Tax Appeal, the Commissioner did not
deny the fact of payment, merely contesting the legitimacy of
the deduction on the ground that same was not ordinary and
necessary business expenses. 22
As consistently ruled by this Court, the findings of facts by the
Court of Tax Appeal will not be reviewed in the absence of
showing of gross error or abuse. 23 We, therefore, hold that it
was too late for the Commissioner to raise the issue of fact of
payment for the first time in his memorandum in the Court of Tax
Appeals and in this instant appeal to the Supreme Court. If
raised earlier, the matter ought to have been seriously delved
into by the Court of Tax Appeals. On this ground, we are of the
opinion that under all the attendant circumstances of the case,

substantial justice would be served if the Commissioner be held

as precluded from now attempting to raise an issue to disallow
deduction of the item in question at this stage. Failure to assert
a question within a reasonable time warrants a presumption that
the party entitled to assert it either has abandoned or declined
to assert it.
On the second assignment of error, aside from alleging lack of
proof of payment of the expense deducted, the Commissioner
contended that such expense should be disallowed for not being
ordinary and necessary and not incurred in trade or business,
as required under Section 30 (a) (1) of the National Internal
Revenue Code. He asserted that said fees were therefore
incurred not for the production of income but for the acquisition
petition of capital in view of the definition that an expense is
deemed to be incurred in trade or business if it was incurred for
the production of income, or in the expectation of producing
income for the business. In support of his contention, the
Commissioner cited the ruling in Dome Mines, Ltd vs.
Commisioner of Internal Revenue 24 involving the same issue as
in the case at bar where the U.S. Board of Tax Appeal ruled that
expenses for listing capital stock in the stock exchange are not
ordinary and necessary expenses incurred in carrying on the
taxpayer's business which was gold mining and selling, which
business is strikingly similar to Atlas.
On the other hand, the Court of Tax Appeal relied on the ruling
in the case of Chesapeake Corporation of Virginia vs.
Commissioner of Internal Revenue 25 where the Tax Court
allowed the deduction of stock exchange fee in dispute, which is
an annually recurring cost for the annual maintenance of the
listing.

We find the Chesapeake decision controlling with the facts and

circumstances of the instant case. In Dome Mines, Ltd case the
stock listing fee was disallowed as a deduction not only because
the expenditure did not meet the statutory test but also because
the same was paid only once, and the benefit acquired thereby
continued indefinitely, whereas, in the Chesapeake Corporation
case, fee paid to the stock exchange was annual and recurring.
In the instant case, we deal with the stock listing fee paid
annually to a stock exchange for the privilege of having its stock
listed. It must be noted that the Court of Tax Appeal rejected
the Dome Mines case because it involves a payment made only
once, hence, it was held therein that the single payment made
to the stock exchange was a capital expenditure, as
distinguished from the instant case, where payments were
made annually. For this reason, we hold that said listing fee is
an ordinary and necessary business expense
On the third assignment of error, the Commissioner con- tended
that the Court of Tax Appeal erred when it held that the amount
of P60,000 as "provisions for contingencies" was in effect added
back to Atlas income.
On this issue, this Court has consistently ruled in several cases
adverted to earlier, that in the absence of grave abuse of
discretion or error on the part of the tax court its findings of facts
may not be disturbed by the Supreme Court. 26 It is not within
the province of this Court to resolve whether or not the P60,000
representing "provision for contingencies" was in fact added to
or deducted from the taxable income. As ruled by the Court of
Tax Appeals, the said amount was in effect added to Atlas
taxable income. 27 The same being factual in nature and
supported by substantial evidence, such findings should not be
disturbed in this appeal.

Finally, in its fourth assignment of error, the Commissioner

contended that the CTA erred in disallowing only the amount of
P6,666.65 as suit expenses instead of P17,499.98.
It appears that petitioner deducted from its 1958 gross income
the amount of P23,333.30 as attorney's fees and litigation
expenses in the defense of title to the Toledo Mining properties
purchased by Atlas from Mindanao Lode Mines Inc. in Civil
Case No. 30566 of the Court of First Instance of Manila for
annulment of the sale of said mining properties. On the ground
that the litigation expense was a capital expenditure under
Section 121 of the Revenue Regulation No. 2, the investigating
revenue examiner recommended the disallowance of
P13,333.30. The Commissioner, however, reduced this amount
of P6,666.65 which latter amount was affirmed by the
respondent Court of Tax Appeals on appeal.
There is no question that, as held by the Court of Tax Appeals,
the litigation expenses under consideration were incurred in
defense of Atlas title to its mining properties. In line with the
decision of the U.S. Tax Court in the case of Safety Tube Corp.
vs. Commissioner of Internal Revenue, 28 it is well settled that
litigation expenses incurred in defense or protection of title are
capital in nature and not deductible. Likewise, it was ruled by
the U.S. Tax Court that expenditures in defense of title of
property constitute a part of the cost of the property, and are not
deductible as expense.29
Surprisingly, however, the investigating revenue examiner
recommended a partial disallowance of P13,333.30 instead of
the entire amount of P23,333.30, which, upon review, was
further reduced by the Commissioner of Internal Revenue.
Whether it was due to mistake, negligence or omission of the
officials concerned, the arithmetical error committed herein

should not prejudice the Government. This Court will pass upon
this particular question since there is a clear error committed by
officials concerned in the computation of the deductible amount.
As held in the case of Vera vs. Fernandez, 30 this Court
emphatically said that taxes are the lifeblood of the Government
and their prompt and certain availability are imperious need.
Upon taxation depends the Government's ability to serve the
people for whose benefit taxes are collected. To safeguard such
interest, neglect or omission of government officials entrusted
with the collection of taxes should not be allowed to bring harm
or detriment to the people, in the same manner as private
persons may be made to suffer individually on account of his
own negligence, the presumption being that they take good care
of their personal affair. This should not hold true to government
officials with respect to matters not of their own personal
concern. This is the philosophy behind the government's
exception, as a general rule, from the operation of the principle
of estoppel. 31
WHEREFORE, judgment appealed from is hereby affirmed with
modification that the amount of P17,499.98 (3/4 of P23,333.00)
representing suit expenses be disallowed as deduction instead
of P6,666.65 only. With this amount as part of the net income,
the corresponding income tax shall be paid thereon, with
interest of 6% per annum from June 20, 1959 to June 20,1962.
SO ORDERED.

Trade and Industry and consultant of the Toll Regulatory Board

(TRB) in the past administration.

RENATO V. DIAZ and G.R. No. 193007

AURORA MA. F. TIMBOL,

THE SECRETARY OF FINANCE

and THE COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
ABAD, J.:
May toll fees collected by tollway operators be subjected to
value- added tax?
The Facts and the Case

Petitioners allege that the BIR attempted during the

administration of President Gloria Macapagal-Arroyo to impose
VAT on toll fees. The imposition was deferred, however, in view
of the consistent opposition of Diaz and other sectors to such
move. But, upon President Benigno C. Aquino IIIs assumption of
office in 2010, the BIR revived the idea and would impose the
challenged tax on toll fees beginning August 16, 2010 unless
judicially enjoined.
Petitioners hold the view that Congress did not, when it
enacted the NIRC, intend to include toll fees within the meaning
of sale of services that are subject to VAT; that a toll fee is a
users tax, not a sale of services; that to impose VAT on toll fees
would amount to a tax on public service; and that, since VAT
was never factored into the formula for computing toll fees, its
imposition would violate the non-impairment clause of the
constitution.

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol

(petitioners) filed this petition for declaratory relief [1] assailing the
validity of the impending imposition of value-added tax (VAT) by
the Bureau of Internal Revenue (BIR) on the collections of
tollway operators.

On August 13, 2010 the Court issued a temporary

restraining order (TRO), enjoining the implementation of the
VAT. The Court required the government, represented by
respondents Cesar V. Purisima, Secretary of the Department of
Finance, and Kim S. Jacinto-Henares, Commissioner of Internal
Revenue, to comment on the petition within 10 days from notice.
[2]
Later, the Court issued another resolution treating the petition
as one for prohibition.[3]

Petitioners claim that, since the VAT would result in

increased toll fees, they have an interest as regular users of
tollways in stopping the BIR action. Additionally, Diaz claims that
he sponsored the approval of Republic Act 7716 (the 1994
Expanded VAT Law or EVAT Law) and Republic Act 8424 (the
1997 National Internal Revenue Code or the NIRC) at the
House of Representatives. Timbol, on the other hand, claims
that she served as Assistant Secretary of the Department of

On August 23, 2010 the Office of the Solicitor General filed the
governments comment.[4] The government avers that the NIRC
imposes VAT on all kinds of services of franchise grantees,
including tollway operations, except where the law provides
otherwise; that the Court should seek the meaning and intent of
the law from the words used in the statute; and that the
imposition of VAT on tollway operations has been the subject as
early as 2003 of several BIR rulings and circulars. [5]

The government also argues that petitioners have no

right to invoke the non-impairment of contracts clause since
they clearly have no personal interest in existing toll operating
agreements (TOAs) between the government and tollway
operators. At any rate, the non-impairment clause cannot limit
the States sovereign taxing power which is generally read into
contracts.
Finally, the government contends that the non-inclusion of VAT
in the parametric formula for computing toll rates cannot exempt
tollway operators from VAT. In any event, it cannot be claimed
that the rights of tollway operators to a reasonable rate of return
will be impaired by the VAT since this is imposed on top of the
toll rate. Further, the imposition of VAT on toll fees would have
very minimal effect on motorists using the tollways.
In their reply[6] to the governments comment, petitioners
point out that tollway operators cannot be regarded as franchise
grantees under the NIRC since they do not hold legislative
franchises. Further, the BIR intends to collect the VAT by
rounding off the toll rate and putting any excess collection in an
escrow account. But this would be illegal since only the
Congress can modify VAT rates and authorize its
disbursement. Finally, BIR Revenue Memorandum Circular 632010 (BIR RMC 63-2010), which directs toll companies to
record an accumulated input VAT of zero balance in their books
as of August 16, 2010, contravenes Section 111 of the NIRC
which grants entities that first become liable to VAT a transitional
input tax credit of 2% on beginning inventory. For this reason,
the VAT on toll fees cannot be implemented.
The Issues Presented

The case also presents two substantive issues:

1. Whether or not the government is unlawfully
expanding VAT coverage by including tollway operators and

tollway operations in the terms franchise grantees and sale of

services under Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway
operators a) amounts to a tax on tax and not a tax on services;
b) will impair the tollway operators right to a reasonable return of
investment under their TOAs; and c) is not administratively
feasible and cannot be implemented.

The Courts Rulings

B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the
NIRC, as amended. VAT is levied, assessed, and collected,
according to Section 108, on the gross receipts derived from the
sale or exchange of services as well as from the use or lease of
properties. The third paragraph of Section 108 defines sale or
exchange of services as follows:

The phrase sale or exchange of services

means the performance of all kinds of services
in the Philippines for others for a fee,
remuneration or consideration, including those
performed or rendered by construction and
service contractors; stock, real estate,
commercial,
customs
and
immigration
brokers; lessors of property, whether personal
or real; warehousing services; lessors or
distributors of cinematographic films; persons
engaged in milling, processing, manufacturing
or repacking goods for others; proprietors,
operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts;
proprietors or operators of restaurants,
refreshment parlors, cafes and other eating
places, including clubs and caterers; dealers

in securities; lending investors; transportation

contractors on their transport of goods or
cargoes, including persons who transport
goods or cargoes for hire and other domestic
common carriers by land relative to their
transport of goods or cargoes; common
carriers by air and sea relative to their
transport of passengers, goods or cargoes
from one place in the Philippines to another
place in the Philippines; sales of electricity by
generation companies, transmission, and
distribution companies; services of franchise
grantees of electric utilities, telephone and
telegraph, radio and television broadcasting
and all other franchise grantees except those
under Section 119 of this Code and non-life
insurance companies (except their crop
insurances),
including
surety,
fidelity,
indemnity and bonding companies; and similar
services regardless of whether or not the
performance thereof calls for the exercise or
use
of
the
physical
or
mental
faculties. (Underscoring supplied)

Now, do tollway operators render services for a

fee? Presidential Decree (P.D.) 1112 or the Toll Operation
Decree establishes the legal basis for the services that tollway
operators render. Essentially, tollway operators construct,
maintain, and operate expressways, also called tollways, at the
operators expense. Tollways serve as alternatives to regular
public highways that meander through populated areas and
branch out to local roads. Traffic in the regular public highways
is for this reason slow-moving. In consideration for constructing
tollways at their expense, the operators are allowed to collect
government-approved fees from motorists using the tollways
until such operators could fully recover their expenses and earn
reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee
is in effect for the latters use of the tollway facilities over which
the operator enjoys private proprietary rights [12]that its contract
and the law recognize. In this sense, the tollway operator is no
different from the following service providers under Section 108
who allow others to use their properties or facilities for a fee:

1. Lessors of property, whether personal or

real;

It is plain from the above that the law imposes VAT on all
kinds of services rendered in the Philippines for a fee, including
those specified in the list. The enumeration of affected services
is not exclusive.[11] By qualifying services with the words all
kinds, Congress has given the term services an allencompassing meaning. The listing of specific services are
intended to illustrate how pervasive and broad is the VATs reach
rather than establish concrete limits to its application. Thus,
every activity that can be imagined as a form of service
rendered for a fee should be deemed included unless some
provision of law especially excludes it.

2. Warehousing service operators;

3. Lessors
or
cinematographic films;

distributors

of

4. Proprietors, operators or keepers of

hotels, motels, resthouses, pension houses, inns,
resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their
transport of goods or cargoes, including persons
who transport goods or cargoes for hire and other

domestic common carriers by land relative to their

transport of goods or cargoes; and
7. Common carriers by air and sea relative
to their transport of passengers, goods or cargoes
from one place in the Philippines to another place
in thePhilippines.
It does not help petitioners cause that Section 108
subjects to VAT all kinds of services rendered for a fee
regardless of whether or not the performance thereof calls for
the exercise or use of the physical or mental faculties. This
means that services to be subject to VAT need not fall under the
traditional concept of services, the personal or professional
kinds that require the use of human knowledge and skills.
And not only do tollway operators come under the broad term all
kinds of services, they also come under the specific class
described in Section 108 as all other franchise grantees who are
subject to VAT, except those under Section 119 of this Code.
Tollway operators are franchise grantees and they do not
belong to exceptions (the low-income radio and/or television
broadcasting companies with gross annual incomes of less
than P10 million and gas and water utilities) that Section
119[13] spares from the payment of VAT. The word franchise
broadly covers government grants of a special right to do an act
or series of acts of public concern.[14]
Petitioners of course contend that tollway operators
cannot be considered franchise grantees under Section 108
since they do not hold legislative franchises. But nothing in
Section 108 indicates that the franchise grantees it speaks of
are those who hold legislative franchises. Petitioners give no
reason, and the Court cannot surmise any, for making a
distinction between franchises granted by Congress and
franchises granted by some other government agency. The
latter, properly constituted, may grant franchises. Indeed,
franchises conferred or granted by local authorities, as agents of
the state, constitute as much a legislative franchise as though

the grant had been made by Congress itself. [15] The term
franchise has been broadly construed as referring, not only to
authorizations that Congress directly issues in the form of a
special law, but also to those granted by administrative agencies
to which the power to grant franchises has been delegated by
Congress.[16]
Tollway operators are, owing to the nature and object of
their business, franchise grantees. The construction, operation,
and maintenance of toll facilities on public improvements are
activities of public consequence that necessarily require a
special grant of authority from the state. Indeed, Congress
granted special franchise for the operation of tollways to the
Philippine National Construction Company, the former tollway
concessionaire
for
the
North
and
South
Luzon
Expressways. Apart from Congress, tollway franchises may also
be granted by the TRB, pursuant to the exercise of its delegated
powers under P.D. 1112.[17] The franchise in this case is
evidenced by a Toll Operation Certificate.[18]

Petitioners contend that the public nature of the services

rendered by tollway operators excludes such services from the
term sale of services under Section 108 of the Code.But, again,
nothing in Section 108 supports this contention. The reverse is
true. In specifically including by way of example electric utilities,
telephone, telegraph, and broadcasting companies in its list of
VAT-covered businesses, Section 108 opens other companies
rendering public service for a fee to the imposition of
VAT. Businesses of a public nature such as public utilities and
the collection of tolls or charges for its use or service is a
franchise.[19]
It would of course be another matter if Congress enacts a
law imposing a users tax, collectible from motorists, for the
construction and maintenance of certain roadways.The tax in
such a case goes directly to the government for the
replenishment of resources it spends for the roadways. This is
not the case here. What the government seeks to tax here are

fees collected from tollways that are constructed, maintained,

and operated by private tollway operators at their own expense
under the build, operate, and transfer scheme that the
government has adopted for expressways. [26] Except for a
fraction given to the government, the toll fees essentially end up
as earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of
the tollways, are not taxes in any sense. A tax is imposed under
the taxing power of the government principally for the purpose
of raising revenues to fund public expenditures.[27] Toll fees, on
the other hand, are collected by private tollway operators as
reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well
as to assure them a reasonable margin of income. Although toll
fees are charged for the use of public facilities, therefore, they
are not government exactions that can be properly treated as a
tax. Taxes may be imposed only by the government under its
sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute of
ownership.[28]
Parenthetically, VAT on tollway operations cannot be deemed a
tax on tax due to the nature of VAT as an indirect tax. In indirect
taxation, a distinction is made between the liability for the tax
and burden of the tax. The seller who is liable for the VAT may
shift or pass on the amount of VAT it paid on goods, properties
or services to the buyer. In such a case, what is transferred is
not the sellers liability but merely the burden of the VAT.[29]
Thus, the seller remains directly and legally liable for
payment of the VAT, but the buyer bears its burden since the
amount of VAT paid by the former is added to the selling price.
Once shifted, the VAT ceases to be a tax[30] and simply becomes
part of the cost that the buyer must pay in order to purchase the
good, property or service.
Consequently, VAT on tollway operations is not really a
tax on the tollway user, but on the tollway operator. Under
Section 105 of the Code, [31] VAT is imposed on any person who,

in the course of trade or business, sells or renders services for a

fee. In other words, the seller of services, who in this case is the
tollway operator, is the person liable for VAT. The latter merely
shifts the burden of VAT to the tollway user as part of the toll
fees.
For this reason, VAT on tollway operations cannot be a
tax on tax even if toll fees were deemed as a users tax. VAT is
assessed against the tollway operators gross receipts and not
necessarily on the toll fees. Although the tollway operator may
shift the VAT burden to the tollway user, it will not make the
latter directly liable for the VAT. The shifted VAT burden simply
becomes part of the toll fees that one has to pay in order to use
the tollways.[32]
Conclusion
In fine, the Commissioner of Internal Revenue did not
usurp legislative prerogative or expand the VAT laws coverage
when she sought to impose VAT on tollway operations. Section
108(A) of the Code clearly states that services of all other
franchise grantees are subject to VAT, except as may be
provided under Section 119 of the Code.Tollway operators are
not among the franchise grantees subject to franchise tax under
the latter provision. Neither are their services among the VATexempt transactions under Section 109 of the Code.

If the legislative intent was to exempt tollway operations

from VAT, as petitioners so strongly allege, then it would have
been well for the law to clearly say so. Tax exemptions must be
justified by clear statutory grant and based on language in the
law too plain to be mistaken.[37] But as the law is written, no such
exemption obtains for tollway operators. The Court is thus dutybound to simply apply the law as it is found.

Lastly, the grant of tax exemption is a matter of legislative

policy that is within the exclusive prerogative of Congress. The

Courts role is to merely uphold this legislative policy, as

reflected first and foremost in the language of the tax
statute. Thus, any unwarranted burden that may be perceived to
result from enforcing such policy must be properly referred to
Congress. The Court has no discretion on the matter but simply
applies the law.
The VAT on franchise grantees has been in the statute
books since 1994 when R.A. 7716 or the Expanded ValueAdded Tax law was passed. It is only now, however, that the
executive has earnestly pursued the VAT imposition against
tollway operators. The executive exercises exclusive discretion
in matters pertaining to the implementation and execution of tax
laws. Consequently, the executive is more properly suited to
deal with the immediate and practical consequences of the VAT
imposition.

WHEREFORE,
the
Court DENIES respondents
Secretary of Finance and Commissioner of Internal Revenues
motion for reconsideration of its August 24, 2010
resolution, DISMISSES the petitioners Renato V. Diaz and
Aurora Ma. F. Timbols petition for lack of merit, and SETS
ASIDE the Courts temporary restraining order dated August 13,
2010.

- versus -

Respondents SM Prime Holdings, Inc. (SM Prime) and First

Asia Realty Development Corporation (First Asia) are domestic
corporations duly organized and existing under the laws of the
Republic of the Philippines. Both are engaged in the business of
operating cinema houses, among others.[7]
CTA Case No. 7079
On September 26, 2003, the Bureau of Internal Revenue
(BIR) sent SM Prime a Preliminary Assessment Notice (PAN) for
value added tax (VAT) deficiency on cinema ticket sales in the
amount of P119,276,047.40 for taxable year 2000.[8] In response, SM
Prime filed a letter-protest dated December 15, 2003.[9]
On December 12, 2003, the BIR sent SM Prime a Formal
Letter of Demand for the alleged VAT deficiency, which the latter
protested in a letter dated January 14, 2004.[10]
On September 6, 2004, the BIR denied the protest filed by
SM Prime and ordered it to pay the VAT deficiency for taxable year
2000 in the amount of P124,035,874.12.[11]
On October 15, 2004, SM Prime filed a Petition for Review
before the CTA docketed as CTA Case No. 7079.[12]

SECOND DIVISION
COMMISSIONER OF INTERNAL
REVENUE,
Petitioner,

SM PRIME HOLDINGS, INC.

and FIRST ASIA REALTY
DEVELOPMENT CORPORATION,
Respondents.
DEL CASTILLO, J.:

G.R. No. 183505

Simply put, the issue in this case is whether the gross receipts
derived by operators or proprietors of cinema/ theater houses from
admission tickets are subject to VAT.
Petitioners Arguments

Petitioner argues that the enumeration of services subject to

VAT in Section 108 of the NIRC is not exhaustive because it covers
all sales of services unless exempted by law. He claims that the CTA
erred in applying the rules on statutory construction and in using
extrinsic aids in interpreting Section 108 because the provision is
clear and unambiguous. Thus, he maintains that the exhibition of
movies by cinema operators or proprietors to the paying public, being
a sale of service, is subject to VAT.
Respondents Arguments
Respondents, on the other hand, argue that a plain reading
of Section 108 of the NIRC of 1997 shows that the gross receipts of
proprietors or operators of cinemas/theaters derived from public
admission are not among the services subject to VAT. Respondents
insist that gross receipts from cinema/theater admission tickets were
never intended to be subject to any tax imposed by the national
government. According to them, the absence of gross receipts from
cinema/theater admission tickets from the list of services which are
subject to the national amusement tax under Section 125 of the
NIRC of 1997 reinforces this legislative intent. Respondents also
highlight the fact that RMC No. 28-2001 on which the deficiency
assessments were based is an unpublished administrative ruling.
Our Ruling
The petition is bereft of merit.
The enumeration of
services subject to VAT
under Section 108 of the
NIRC is not exhaustive
Section 108 of the NIRC of the 1997 reads:
SEC. 108. Value-added Tax on Sale of Services and
Use or Lease of Properties.

(A) Rate and Base of Tax. There shall be levied,

assessed and collected, a value-added tax equivalent
to ten percent (10%) of gross receipts derived from the
sale or exchange of services, including the use or
lease of properties.
The phrase sale or exchange of services means the
performance of all kinds of services in the Philippines
for
others
for
a
fee,
remuneration
or
consideration, including those performed or rendered
by construction and service contractors; stock, real
estate, commercial, customs and immigration brokers;
lessors of property, whether personal or real;
warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling,
processing, manufacturing or repacking goods for
others; proprietors, operators or keepers of hotels,
motels, rest houses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment
parlors, cafes and other eating places, including clubs
and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods
or cargoes, including persons who transport goods or
cargoes for hire and other domestic common carriers
by land, air and water relative to their transport of
goods or cargoes; services of franchise grantees of
telephone and telegraph, radio and television
broadcasting and all other franchise grantees except
those under Section 119 of this Code; services of
banks, non-bank financial intermediaries and finance
companies; and non-life insurance companies (except
their crop insurances), including surety, fidelity,
indemnity and bonding companies; and similar
services regardless of whether or not the
performance thereof calls for the exercise or use of the
physical or mental faculties. The phrase sale or
exchange of services shall likewise include:

(1) The lease or the use of or the right or privilege to

use any copyright, patent, design or model, plan,
secret formula or process, goodwill, trademark, trade
brand or other like property or right;
xxxx
(7) The lease of motion picture films, films, tapes
and discs; and
(8) The lease or the use of or the right to use radio,
television, satellite transmission and cable television
time.
x x x x (Emphasis supplied)
A cursory reading of the foregoing provision clearly shows that the
enumeration of the sale or exchange of services subject to VAT is not
exhaustive. The words, including, similar services, and shall likewise
include, indicate that the enumeration is by way of example only.[39]
Among those included in the enumeration is the lease of
motion picture films, films, tapes and discs. This, however, is not the
same as the showing or exhibition of motion pictures or films. As
pointed out by the CTA En Banc:
Exhibition in Blacks Law Dictionary is defined as To
show or display. x x x To produce anything in public so
that it may be taken into possession (6th ed., p. 573).
While the word lease is defined as a contract by which
one owning such property grants to another the right to
possess, use and enjoy it on specified period of time in
exchange for periodic payment of a stipulated price,
referred to as rent (Blacks Law Dictionary, 6th ed., p.
889). x x x[40]
Since the activity of showing motion pictures, films or movies
by cinema/ theater operators or proprietors is not included in the
enumeration, it is incumbent upon the court to the determine whether

such activity falls under the phrase similar services. The intent of the
legislature must therefore be ascertained.
The legislature never
intended operators
or
proprietors
of
cinema/theater houses
to be covered by VAT
Under the NIRC of 1939,[41] the national government imposed
amusement tax on proprietors, lessees, or operators of theaters,
cinematographs, concert halls, circuses, boxing exhibitions, and other
places of amusement, including cockpits, race tracks, and cabaret.
[42]
In the case of theaters or cinematographs, the taxes were first
deducted, withheld, and paid by the proprietors, lessees, or operators
of such theaters or cinematographs before the gross receipts were
divided between the proprietors, lessees, or operators of the theaters
or cinematographs and the distributors of the cinematographic
films. Section 11[43] of the Local Tax Code,[44] however, amended this
provision by transferring the power to impose amusement tax[45] on
admission from theaters, cinematographs, concert halls, circuses and
other places of amusements exclusively to the local
government. Thus, when the NIRC of 1977[46] was enacted, the
national government imposed amusement tax only on proprietors,
lessees or operators of cabarets, day and night clubs, Jai-Alai and
race tracks.[47]
On January 1, 1988, the VAT Law[48] was promulgated. It
amended certain provisions of the NIRC of 1977 by imposing a multistage VAT to replace the tax on original and subsequent sales tax
and percentage tax on certain services. It imposed VAT on sales of
services under Section 102 thereof, which provides:
SECTION 102. Value-added tax on sale of
services. (a) Rate and base of tax. There shall be
levied, assessed and collected, a value-added tax
equivalent to 10% percent of gross receipts derived by
any person engaged in the sale of services. The

phrase sale of services means the performance of all

kinds of services for others for a fee, remuneration or
consideration, including those performed or rendered
by construction and service contractors; stock, real
estate, commercial, customs and immigration brokers;
lessors of personal property; lessors or distributors
of cinematographic films; persons engaged in
milling, processing, manufacturing or repacking goods
for others; and similar services regardless of whether
or not the performance thereof calls for the exercise or
use of the physical or mental faculties: Provided That
the following services performed in the Philippines by
VAT-registered persons shall be subject to 0%:

receipts (including the amount intended to cover the

tax or the tax billed erroneously) by 1/11. (Emphasis
supplied)
Persons subject to amusement tax under the NIRC of 1977, as
amended, however, were exempted from the coverage of VAT.[49]

(1) Processing manufacturing or repacking

goods for other persons doing business outside
the Philippines which goods are subsequently
exported, x x x

Under the Local Tax Code (P.D. 231, as

amended), the jurisdiction to levy amusement tax on
gross receipts arising from admission to places of
amusement has been transferred to the local
governments to the exclusion of the national
government.

xxxx
Gross receipts means the total amount of
money or its equivalent representing the contract
price, compensation or service fee, including the
amount charged for materials supplied with the
services and deposits or advance payments actually
or constructively received during the taxable quarter
for the service performed or to be performed for
another person, excluding value-added tax.
(b) Determination of the tax. (1) Tax billed as a
separate item in the invoice. If the tax is billed as a
separate item in the invoice, the tax shall be based on
the gross receipts, excluding the tax.
(2) Tax not billed separately or is billed
erroneously in the invoice. If the tax is not billed
separately or is billed erroneously in the invoice, the
tax shall be determined by multiplying the gross

On February 19, 1988, then Commissioner Bienvenido A.

Tan, Jr. issued RMC 8-88, which clarified that the power to impose
amusement tax on gross receipts derived from admission tickets was
exclusive with the local government units and that only the gross
receipts of amusement places derived from sources other than from
admission tickets were subject to amusement tax under the NIRC of
1977, as amended. Pertinent portions of RMC 8-88 read:

xxxx
Since the promulgation of the Local Tax Code
which took effect on June 28, 1973 none of the
amendatory laws which amended the National Internal
Revenue Code, including the value added tax law
under Executive Order No. 273, has amended the
provisions of Section 11 of the Local Tax Code.
Accordingly, the sole jurisdiction for collection of
amusement tax on admission receipts in places of
amusement rests exclusively on the local government,
to the exclusion of the national government. Since the
Bureau of Internal Revenue is an agency of the
national government, then it follows that it has no legal
mandate to levy amusement tax on admission receipts
in the said places of amusement.
Considering the foregoing legal background,
the provisions under Section 123 of the National

Internal Revenue Code as renumbered by Executive

Order No. 273 (Sec. 228, old NIRC) pertaining to
amusement taxes on places of amusement shall be
implemented in accordance with BIR RULING,
dated December 4, 1973 and BIR RULING NO. 23186 dated November 5, 1986 to wit:
x x x Accordingly, only the gross receipts of
the amusement places derived from sources other
than from admission tickets shall be subject to x x
x amusement tax prescribed under Section 228 of
the Tax Code, as amended (now Section 123, NIRC,
as amended by E.O. 273). The tax on gross
receipts derived from admission tickets shall be
levied and collected by the city government
pursuant to Section 23 of Presidential Decree No.
231, as amended x x x or by the provincial
government, pursuant to Section 11 of P.D. 231,
otherwise
known
as
the
Local
Tax
Code. (Emphasis supplied)
On October 10, 1991, the LGC of 1991 was passed into
law. The local government retained the power to impose amusement
tax on proprietors, lessees, or operators of theaters, cinemas, concert
halls, circuses, boxing stadia, and other places of amusement at a
rate of not more than thirty percent (30%) of the gross receipts from
admission fees under Section 140 thereof.[50] In the case of theaters
or cinemas, the tax shall first be deducted and withheld by their
proprietors, lessees, or operators and paid to the local government
before the gross receipts are divided between said proprietors,
lessees, or operators and the distributors of the cinematographic
films. However, the provision in the Local Tax Code expressly
excluding the national government from collecting tax from the
proprietors, lessees, or operators of theaters, cinematographs,
concert halls, circuses and other places of amusements was no
longer included.
In 1994, RA 7716 restructured the VAT system by widening its
tax base and enhancing its administration. Three years later, RA

7716 was amended by RA 8241. Shortly thereafter, the NIRC of

1997[51] was signed into law. Several amendments[52] were made to
expand the coverage of VAT. However, none pertain to
cinema/theater operators or proprietors. At present, only lessors or
distributors of cinematographic films are subject to VAT. While
persons subject to amusement tax[53] under the NIRC of 1997 are
exempt from the coverage of VAT.[54]
Based on the foregoing, the following facts can be
established:
(1)

Historically, the activity of showing

motion pictures, films or movies by
cinema/theater operators or proprietors has
always been considered as a form of
entertainment subject to amusement tax.

(2)

Prior to the Local Tax Code, all forms of

amusement tax were imposed by the national
government.

(3)

When the Local Tax Code was enacted,

amusement tax on admission tickets from
theaters, cinematographs, concert halls, circuses
and other places of amusements were
transferred to the local government.

(4)

Under the NIRC of 1977, the national

government imposed amusement tax only on
proprietors, lessees or operators of cabarets, day
and night clubs, Jai-Alai and race tracks.

(5)

The VAT law was enacted to replace the

tax on original and subsequent sales tax and
percentage tax on certain services.
When the VAT law was implemented, it
exempted persons subject to amusement tax
under the NIRC from the coverage of VAT.

(6)

(7)

When the Local Tax Code was repealed

by the LGC of 1991, the local government
continued to impose amusement tax on
admission tickets from theaters, cinematographs,
concert halls, circuses and other places of
amusements.

(8)

Amendments to the VAT law have been

consistent in exempting persons subject to
amusement tax under the NIRC from the
coverage of VAT.

(9)

Only lessors or distributors of

cinematographic films are included in the
coverage of VAT.

These reveal the legislative intent not to impose VAT on

persons already covered by the amusement tax. This holds true even
in the case of cinema/theater operators taxed under the LGC of 1991
precisely because the VAT law was intended to replace the
percentage tax on certain services. The mere fact that they are taxed
by the local government unit and not by the national government is
immaterial. The Local Tax Code, in transferring the power to tax
gross receipts derived by cinema/theater operators or proprietor from
admission tickets to the local government, did not intend to treat
cinema/theater houses as a separate class. No distinction must,
therefore, be made between the places of amusement taxed by the
national government and those taxed by the local government.
To hold otherwise would impose an unreasonable burden on
cinema/theater houses operators or proprietors, who would be
paying an additional 10%[55] VAT on top of the 30% amusement tax
imposed by Section 140 of the LGC of 1991, or a total of 40%
tax. Such imposition would result in injustice, as persons taxed under
the NIRC of 1997 would be in a better position than those taxed
under the LGC of 1991. We need not belabor that a literal application
of a law must be rejected if it will operate unjustly or lead to absurd
results.[56] Thus, we are convinced that the legislature never intended
to include cinema/theater operators or proprietors in the coverage of
VAT.

On this point, it is apropos to quote the case of Roxas v. Court of Tax

Appeals,[57] to wit:
The power of taxation is sometimes called also
the power to destroy. Therefore, it should be exercised
with caution to minimize injury to the proprietary rights
of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the hen that lays the
golden egg. And, in order to maintain the general
public's trust and confidence in the Government this
power must be used justly and not treacherously.
The repeal of the Local
Tax Code by the LGC of
1991 is not a legal basis
for the imposition of VAT
Petitioner, in issuing the assessment notices for deficiency
VAT against respondents, ratiocinated that:
Basically, it was acknowledged that a
cinema/theater operator was then subject to
amusement tax under Section 260 of Commonwealth
Act No. 466, otherwise known as the National Internal
Revenue Code of 1939, computed on the amount paid
for admission. With the enactment of the Local Tax
Code under Presidential Decree (PD) No. 231, dated
June 28, 1973, the power of imposing taxes on gross
receipts from admission of persons to cinema/theater
and other places of amusement had, thereafter, been
transferred to the provincial government, to the
exclusion of the national or municipal government
(Sections 11 & 13, Local Tax Code). However, the said
provision containing the exclusive power of the
provincial government to impose amusement tax, had
also been repealed and/or deleted by Republic Act

(RA) No. 7160, otherwise known as the Local

Government Code of 1991, enacted into law on
October 10, 1991. Accordingly, the enactment of RA
No. 7160, thus, eliminating the statutory
prohibition on the national government to impose
business tax on gross receipts from admission of
persons to places of amusement, led the way to
the valid imposition of the VAT pursuant to
Section 102 (now Section 108) of the old Tax Code,
as amended by the Expanded VAT Law (RA No.
7716) and which was implemented beginning
January 1, 1996.[58] (Emphasis supplied)
We disagree.
The repeal of the Local Tax Code by the LGC of 1991 is not a
legal basis for the imposition of VAT on the gross receipts of
cinema/theater operators or proprietors derived from admission
tickets. The removal of the prohibition under the Local Tax Code did
not grant nor restore to the national government the power to impose
amusement tax on cinema/theater operators or proprietors. Neither
did it expand the coverage of VAT. Since the imposition of a tax is a
burden on the taxpayer, it cannot be presumed nor can it be
extended by implication. A law will not be construed as imposing a
tax unless it does so clearly, expressly, and unambiguously.[59] As it is,
the power to impose amusement tax on cinema/theater operators or
proprietors remains with the local government.
Revenue Memorandum
Circular No. 28-2001 is
invalid

supplant, or modify the law, but must remain consistent and in

harmony with, the law they seek to apply and implement.[60]
In view of the foregoing, there is no need to discuss whether
RMC No. 28-2001 complied with the procedural due process for tax
issuances as prescribed under RMC No. 20-86.
Rule on tax exemption
does not apply
Moreover, contrary to the view of petitioner, respondents need
not prove their entitlement to an exemption from the coverage of
VAT. The rule that tax exemptions should be construed strictly
against the taxpayer presupposes that the taxpayer is clearly subject
to the tax being levied against him.[61] The reason is obvious: it is both
illogical and impractical to determine who are exempted without first
determining who are covered by the provision. [62] Thus, unless a
statute imposes a tax clearly, expressly and unambiguously, what
applies is the equally well-settled rule that the imposition of a tax
cannot be presumed.[63] In fact, in case of doubt, tax laws must be
construed strictly against the government and in favor of the
taxpayer.[64]
WHEREFORE, the Petition is hereby DENIED. The assailed
April 30, 2008 Decision of the Court of Tax Appeals En Banc holding
that gross receipts derived by respondents from admission tickets in
showing motion pictures, films or movies are not subject to valueadded tax under Section 108 of the National Internal Revenue Code
of 1997, as amended, and its June 24, 2008 Resolution denying the
motion for reconsideration are AFFIRMED.
SO ORDERED.

Considering that there is no provision of law imposing VAT on

the gross receipts of cinema/theater operators or proprietors derived
from admission tickets, RMC No. 28-2001 which imposes VAT on the
gross receipts from admission to cinema houses must be struck
down. We cannot overemphasize that RMCs must not override,

September 30, 2002 in the total amount of P3,891,123.82 with

the petitioner Commissioner of Internal Revenue (CIR), through
the Department of Finance (DOF) One-Stop Shop Inter-Agency
Tax Credit and Duty Drawback Center.6
Proceedings before the Second Division of the CTA
On even date, respondent filed a Petition for Review 7 with the
CTA for the refund/credit of the same input VAT. The case was
docketed as CTA Case No. 7065 and was raffled to the Second
Division of the CTA.

G.R. No. 184823

October 6, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
AICHI FORGING COMPANY OF ASIA, INC., Respondent.
DECISION

In the Petition for Review, respondent alleged that for the period
July 1, 2002 to September 30, 2002, it generated and recorded
zero-rated sales in the amount of P131,791,399.00,8 which was
paid pursuant to Section 106(A) (2) (a) (1), (2) and (3) of the
National Internal Revenue Code of 1997 (NIRC);9 that for the
said period, it incurred and paid input VAT amounting
to P3,912,088.14 from purchases and importation attributable to
its zero-rated sales;10and that in its application for refund/credit
filed with the DOF One-Stop Shop Inter-Agency Tax Credit and
Duty Drawback Center, it only claimed the amount
of P3,891,123.82.11

DEL CASTILLO, J.:

Factual Antecedents
Respondent Aichi Forging Company of Asia, Inc., a corporation
duly organized and existing under the laws of the Republic of
the Philippines, is engaged in the manufacturing, producing, and
processing of steel and its by-products. 3 It is registered with the
Bureau of Internal Revenue (BIR) as a Value-Added Tax (VAT)
entity4 and its products, "close impression die steel forgings"
and "tool and dies," are registered with the Board of
Investments (BOI) as a pioneer status.5
On September 30, 2004, respondent filed a claim for
refund/credit of input VAT for the period July 1, 2002 to

Issue
Hence, the present recourse where petitioner interposes the
issue of whether respondents judicial and administrative claims
for tax refund/credit were filed within the two-year prescriptive
period provided in Sections 112(A) and 229 of the NIRC. 24
Petitioners Arguments
Petitioner maintains that respondents administrative and judicial
claims for tax refund/credit were filed in violation of Sections
112(A) and 229 of the NIRC.25 He posits that pursuant to Article
13 of the Civil Code,26 since the year 2004 was a leap year, the
filing of the claim for tax refund/credit on September 30, 2004

was beyond the two-year period, which expired on September

29, 2004.27
Petitioner further argues that the CTA En Banc erred in applying
Section 114(A) of the NIRC in determining the start of the twoyear period as the said provision pertains to the compliance
requirements in the payment of VAT.28 He asserts that it is
Section 112, paragraph (A), of the same Code that should apply
because it specifically provides for the period within which a
claim for tax refund/ credit should be made.29
Petitioner likewise puts in issue the fact that the administrative
claim with the BIR and the judicial claim with the CTA were filed
on the same day.30 He opines that the simultaneous filing of the
administrative and the judicial claims contravenes Section 229
of the NIRC, which requires the prior filing of an administrative
claim.31 He insists that such procedural requirement is based on
the doctrine of exhaustion of administrative remedies and the
fact that the CTA is an appellate body exercising judicial review
over administrative actions of the CIR.32
Respondents Arguments
For its part, respondent claims that it is entitled to a refund/credit
of its unutilized input VAT for the period July 1, 2002 to
September 30, 2002 as a matter of right because it has
substantially complied with all the requirements provided by
law.33 Respondent likewise defends the CTA En Banc in
applying Section 114(A) of the NIRC in computing the
prescriptive period for the claim for tax refund/credit.
Respondent believes that Section 112(A) of the NIRC must be
read together with Section 114(A) of the same Code. 34
As to the alleged simultaneous filing of its administrative and
judicial claims, respondent contends that it first filed an
administrative claim with the One-Stop Shop Inter-Agency Tax
Credit and Duty Drawback Center of the DOF before it filed a
judicial claim with the CTA.35 To prove this, respondent points
out that its Claimant Information Sheet No. 49702 36 and BIR

Form No. 1914 for the third quarter of 2002, 37 which were filed
with the DOF, were attached as Annexes "M" and "N,"
respectively, to the Petition for Review filed with the
CTA.38 Respondent further contends that the non-observance of
the 120-day period given to the CIR to act on the claim for tax
refund/credit in Section 112(D) is not fatal because what is
important is that both claims are filed within the two-year
prescriptive period.39 In support thereof, respondent cites
Commissioner of Internal Revenue v. Victorias Milling Co.,
Inc.40 where it was ruled that "[i]f, however, the [CIR] takes time
in deciding the claim, and the period of two years is about to
end, the suit or proceeding must be started in the [CTA] before
the end of the two-year period without awaiting the decision of
the [CIR]."41 Lastly, respondent argues that even if the period
had already lapsed, it may be suspended for reasons of equity
considering that it is not a jurisdictional requirement. 42
Our Ruling
The petition has merit.
Unutilized input VAT must be claimed within two years after the
close of the taxable quarter when the sales were made
In computing the two-year prescriptive period for claiming a
refund/credit of unutilized input VAT, the Second Division of the
CTA applied Section 112(A) of the NIRC, which states:
SEC. 112. Refunds or Tax Credits of Input Tax.
(A) Zero-rated or Effectively Zero-rated Sales Any VATregistered person, whose sales are zero-rated or effectively
zero-rated may, within two (2) years after the close of the
taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input
tax due or paid attributable to such sales, except transitional
input tax, to the extent that such input tax has not been applied
against output tax: Provided, however, That in the case of zerorated sales under Section 106(A)(2)(a)(1), (2) and (B) and

Section 108 (B)(1) and (2), the acceptable foreign currency

exchange proceeds thereof had been duly accounted for in
accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP): Provided, further, That where the taxpayer is
engaged in zero-rated or effectively zero-rated sale and also in
taxable or exempt sale of goods or properties or services, and
the amount of creditable input tax due or paid cannot be directly
and entirely attributed to any one of the transactions, it shall be
allocated proportionately on the basis of the volume of sales.
(Emphasis supplied.)
The CTA En Banc, on the other hand, took into consideration
Sections 114 and 229 of the NIRC, which read:
SEC. 114. Return and Payment of Value-Added Tax.
(A) In General. Every person liable to pay the value-added tax
imposed under this Title shall file a quarterly return of the
amount of his gross sales or receipts within twenty-five (25)
days following the close of each taxable quarter prescribed for
each taxpayer: Provided, however, That VAT-registered persons
shall pay the value-added tax on a monthly basis.
Any person, whose registration has been cancelled in
accordance with Section 236, shall file a return and pay the tax
due thereon within twenty-five (25) days from the date of
cancellation of registration: Provided, That only one
consolidated return shall be filed by the taxpayer for his principal
place of business or head office and all branches.
xxxx
SEC. 229. Recovery of tax erroneously or illegally collected.
No suit or proceeding shall be maintained in any court for the
recovery of any national internal revenue tax hereafter alleged
to have been erroneously or illegally assessed or collected, or of
any penalty claimed to have been collected without authority, or
of any sum alleged to have been excessively or in any manner

wrongfully collected, until a claim for refund or credit has been

duly filed with the Commissioner; but such suit or proceeding
may be maintained, whether or not such tax, penalty or sum has
been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the
expiration of two (2) years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise
after payment: Provided, however, That the Commissioner may,
even without written claim therefor, refund or credit any tax,
where on the face of the return upon which payment was made,
such payment appears clearly to have been erroneously paid.
(Emphasis supplied.)
Hence, the CTA En Banc ruled that the reckoning of the twoyear period for filing a claim for refund/credit of unutilized input
VAT should start from the date of payment of tax and not from
the close of the taxable quarter when the sales were made. 43
The pivotal question of when to reckon the running of the twoyear prescriptive period, however, has already been resolved in
Commissioner of Internal Revenue v. Mirant Pagbilao
Corporation,44 where we ruled that Section 112(A) of the NIRC is
the applicable provision in determining the start of the two-year
period for claiming a refund/credit of unutilized input VAT, and
that Sections 204(C) and 229 of the NIRC are inapplicable as
"both provisions apply only to instances of erroneous payment
or illegal collection of internal revenue taxes." 45 We explained
that:
The above proviso [Section 112 (A) of the NIRC] clearly
provides in no uncertain terms that unutilized input VAT
payments not otherwise used for any internal revenue tax
due the taxpayer must be claimed within two years
reckoned from the close of the taxable quarter when the
relevant sales were made pertaining to the input VAT
regardless of whether said tax was paid or not. As the CA
aptly puts it, albeit it erroneously applied the aforequoted Sec.
112 (A), "[P]rescriptive period commences from the close of the

taxable quarter when the sales were made and not from the
time the input VAT was paid nor from the time the official receipt
was issued." Thus, when a zero-rated VAT taxpayer pays its
input VAT a year after the pertinent transaction, said taxpayer
only has a year to file a claim for refund or tax credit of the
unutilized creditable input VAT. The reckoning frame would
always be the end of the quarter when the pertinent sales or
transaction was made, regardless when the input VAT was paid.
Be that as it may, and given that the last creditable input VAT
due for the period covering the progress billing of September 6,
1996 is the third quarter of 1996 ending on September 30, 1996,
any claim for unutilized creditable input VAT refund or tax credit
for said quarter prescribed two years after September 30, 1996
or, to be precise, on September 30, 1998. Consequently, MPCs
claim for refund or tax credit filed on December 10, 1999 had
already prescribed.
Reckoning for prescriptive period under
Secs. 204(C) and 229 of the NIRC inapplicable
To be sure, MPC cannot avail itself of the provisions of either
Sec. 204(C) or 229 of the NIRC which, for the purpose of
refund, prescribes a different starting point for the two-year
prescriptive limit for the filing of a claim therefor. Secs. 204(C)
and 229 respectively provide:
Sec. 204. Authority of the Commissioner to Compromise, Abate
and Refund or Credit Taxes. The Commissioner may
xxxx
(c) Credit or refund taxes erroneously or illegally received or
penalties imposed without authority, refund the value of internal
revenue stamps when they are returned in good condition by
the purchaser, and, in his discretion, redeem or change unused
stamps that have been rendered unfit for use and refund their
value upon proof of destruction. No credit or refund of taxes or
penalties shall be allowed unless the taxpayer files in writing
with the Commissioner a claim for credit or refund within two (2)

years after the payment of the tax or penalty: Provided,

however, That a return filed showing an overpayment shall be
considered as a written claim for credit or refund.
xxxx
Sec. 229. Recovery of Tax Erroneously or Illegally Collected.
No suit or proceeding shall be maintained in any court for the
recovery of any national internal revenue tax hereafter alleged
to have been erroneously or illegally assessed or collected, or of
any penalty claimed to have been collected without authority, of
any sum alleged to have been excessively or in any manner
wrongfully collected without authority, or of any sum alleged to
have been excessively or in any manner wrongfully collected,
until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under
protest or duress.
In any case, no such suit or proceeding shall be filed after the
expiration of two (2) years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise
after payment: Provided, however, That the Commissioner may,
even without a written claim therefor, refund or credit any tax,
where on the face of the return upon which payment was made,
such payment appears clearly to have been erroneously paid.
Notably, the above provisions also set a two-year prescriptive
period, reckoned from date of payment of the tax or penalty, for
the filing of a claim of refund or tax credit. Notably too, both
provisions apply only to instances of erroneous payment or
illegal collection of internal revenue taxes.
MPCs creditable input VAT not erroneously paid
For perspective, under Sec. 105 of the NIRC, creditable input
VAT is an indirect tax which can be shifted or passed on to the
buyer, transferee, or lessee of the goods, properties, or services
of the taxpayer. The fact that the subsequent sale or transaction

involves a wholly-tax exempt client, resulting in a zero-rated or

effectively zero-rated transaction, does not, standing alone,
deprive the taxpayer of its right to a refund for any unutilized
creditable input VAT, albeit the erroneous, illegal, or wrongful
payment angle does not enter the equation.
xxxx
Considering the foregoing discussion, it is clear that Sec. 112
(A) of the NIRC, providing a two-year prescriptive period
reckoned from the close of the taxable quarter when the
relevant sales or transactions were made pertaining to the
creditable input VAT, applies to the instant case, and not to
the other actions which refer to erroneous payment of
taxes.46 (Emphasis supplied.)
In view of the foregoing, we find that the CTA En
Banc erroneously applied Sections 114(A) and 229 of the NIRC
in computing the two-year prescriptive period for claiming
refund/credit of unutilized input VAT. To be clear, Section 112 of
the NIRC is the pertinent provision for the refund/credit of input
VAT. Thus, the two-year period should be reckoned from the
close of the taxable quarter when the sales were made.
The administrative claim was timely filed
Bearing this in mind, we shall now proceed to determine
whether the administrative claim was timely filed.
Relying on Article 13 of the Civil Code,47 which provides that a
year is equivalent to 365 days, and taking into account the fact
that the year 2004 was a leap year, petitioner submits that the
two-year period to file a claim for tax refund/ credit for the period
July 1, 2002 to September 30, 2002 expired on September 29,
2004.48
We do not agree.

In Commissioner of Internal Revenue v. Primetown Property

Group, Inc.,49 we said that as between the Civil Code, which
provides that a year is equivalent to 365 days, and the
Administrative Code of 1987, which states that a year is
composed of 12 calendar months, it is the latter that must
prevail following the legal maxim, Lex posteriori derogat
priori.50 Thus:
Both Article 13 of the Civil Code and Section 31, Chapter VIII,
Book I of the Administrative Code of 1987 deal with the same
subject matter the computation of legal periods. Under the
Civil Code, a year is equivalent to 365 days whether it be a
regular year or a leap year. Under the Administrative Code of
1987, however, a year is composed of 12 calendar months.
Needless to state, under the Administrative Code of 1987, the
number of days is irrelevant.
There obviously exists a manifest incompatibility in the manner
of computing legal periods under the Civil Code and the
Administrative Code of 1987. For this reason, we hold that
Section 31, Chapter VIII, Book I of the Administrative Code of
1987, being the more recent law, governs the computation of
legal periods. Lex posteriori derogat priori.
Applying Section 31, Chapter VIII, Book I of the Administrative
Code of 1987 to this case, the two-year prescriptive period
(reckoned from the time respondent filed its final adjusted return
on April 14, 1998) consisted of 24 calendar months, computed
as follows:
Year 1 1st calendar April 15, 1998 to May 14, 1998
month
2nd calendar month May 15, 1998 to June 14, 1998
3rd calendar month June 15, 1998 to July 14, 1998
4th calendar month July 15, 1998 to August 14, 1998

5th calendar month August 15, 1998 to September 14, 19

Applying this to the present case, the two-year period to file a

6th calendar month September 15, 1998 to October 14, 1998
claim for tax refund/credit for the period July 1, 2002 to
7th calendar month October 15, 1998 to November 14, 1998
September 30, 2002 expired on September 30, 2004. Hence,
8th calendar month November 15, 1998 to December 14,respondents administrative claim was timely filed.
1998

The filing of the judicial claim was premature

9th calendar month December 15, 1998 to January 14, 1999
However, notwithstanding the timely filing of the administrative
10th calendar month January 15, 1999 to February 14, 1999
claim, we are constrained to deny respondents claim for tax
11th calendar month February 15, 1999 to March 14, 1999refund/credit for having been filed in violation of Section 112(D)
of the NIRC, which provides that:
12th calendar month March 15, 1999 to April 14, 1999
Year 2 13th calendar April 15, 1999 to May 14, 1999
month
14th calendar month May 15, 1999 to June 14, 1999

SEC. 112. Refunds or Tax Credits of Input Tax.

xxxx

(D) Period within which Refund or Tax Credit of Input Taxes shall
be Made. In proper cases, the Commissioner shall grant a
July 15, 1999 to August 14, 1999 refund or issue the tax credit certificate for creditable input taxes
within one hundred twenty (120) days from the date of
August 15, 1999 to September 14, 1999
submission of complete documents in support of the application
September 15, 1999 to October 14, filed in accordance with Subsections (A) and (B) hereof.
1999
In case of full or partial denial of the claim for tax refund or tax
October 15, 1999 to November 14, 1999
credit, or the failure on the part of the Commissioner to act on
November 15, 1999 to December 14,the application within the period prescribed above, the taxpayer
1999
affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one
December 15, 1999 to January 14, 2000
hundred twenty day-period, appeal the decision or the unacted
January 15, 2000 to February 14, 2000
claim with the Court of Tax Appeals. (Emphasis supplied.)

15th calendar month June 15, 1999 to July 14, 1999

16th calendar month
17th calendar month
18th calendar month
19th calendar month
20th calendar month
21st calendar month
22nd calendar month

23rd calendar month February 15, 2000 to March 14, 2000

Section 112(D) of the NIRC clearly provides that the CIR has
24th calendar month March 15, 2000 to April 14, 2000
"120 days, from the date of the submission of the complete
documents in support of the application [for tax refund/credit],"
within which to grant or deny the claim. In case of full or partial
We therefore hold that respondent's petition (filed on April 14,
denial by the CIR, the taxpayers recourse is to file an appeal
2000) was filed on the last day of the 24th calendar month from
before the CTA within 30 days from receipt of the decision of the
the day respondent filed its final adjusted return. Hence, it was
51
CIR. However, if after the 120-day period the CIR fails to act on
filed within the reglementary period.

the application for tax refund/credit, the remedy of the taxpayer

is to appeal the inaction of the CIR to CTA within 30 days.

then, the 120-day period is crucial in filing an appeal with the

CTA.

In this case, the administrative and the judicial claims were

simultaneously filed on September 30, 2004. Obviously,
respondent did not wait for the decision of the CIR or the lapse
of the 120-day period. For this reason, we find the filing of the
judicial claim with the CTA premature.

With regard to Commissioner of Internal Revenue v. Victorias

Milling, Co., Inc.53 relied upon by respondent, we find the same
inapplicable as the tax provision involved in that case is Section
306, now Section 229 of the NIRC. And as already discussed,
Section 229 does not apply to refunds/credits of input VAT, such
as the instant case.

Respondents assertion that the non-observance of the 120-day

period is not fatal to the filing of a judicial claim as long as both
the administrative and the judicial claims are filed within the twoyear prescriptive period52 has no legal basis.
There is nothing in Section 112 of the NIRC to support
respondents view. Subsection (A) of the said provision states
that "any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two years after the close of the
taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input
tax due or paid attributable to such sales." The phrase "within
two (2) years x x x apply for the issuance of a tax credit
certificate or refund" refers to applications for refund/credit filed
with the CIR and not to appeals made to the CTA. This is
apparent in the first paragraph of subsection (D) of the same
provision, which states that the CIR has "120 days from the
submission of complete documents in support of the application
filed in accordance with Subsections (A) and (B)" within which to
decide on the claim.
In fact, applying the two-year period to judicial claims would
render nugatory Section 112(D) of the NIRC, which already
provides for a specific period within which a taxpayer should
appeal the decision or inaction of the CIR. The second
paragraph of Section 112(D) of the NIRC envisions two
scenarios: (1) when a decision is issued by the CIR before the
lapse of the 120-day period; and (2) when no decision is made
after the 120-day period. In both instances, the taxpayer has 30
days within which to file an appeal with the CTA. As we see it

In fine, the premature filing of respondents claim for

refund/credit of input VAT before the CTA warrants a dismissal
inasmuch as no jurisdiction was acquired by the CTA.
WHEREFORE, the Petition is hereby GRANTED. The assailed
July 30, 2008 Decision and the October 6, 2008 Resolution of
the Court of Tax Appeals are hereby REVERSED and SET
ASIDE. The Court of Tax Appeals Second Division is
DIRECTED to dismiss CTA Case No. 7065 for having been
prematurely filed.

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SAN ROQUE POWER CORPORATION, Respondent.
CARPIO, J.:
The Cases
G.R. No. 187485
CIR v. San Roque Power Corporation
The Facts

The CTA EBs narration of the pertinent facts is as follows:

[CIR] is the duly appointed Commissioner of Internal Revenue,
empowered, among others, to act upon and approve claims for
refund or tax credit, with office at the Bureau of Internal
Revenue ("BIR") National Office Building, Diliman, Quezon City.
[San Roque] is a domestic corporation duly organized and
existing under and by virtue of the laws of the Philippines with
principal office at Barangay San Roque, San Manuel,
Pangasinan. It was incorporated in October 1997 to design,
construct, erect, assemble, own, commission and operate
power-generating plants and related facilities pursuant to and
under contract with the Government of the Republic of the
Philippines, or any subdivision, instrumentality or agency
thereof, or any governmentowned or controlled corporation, or
other entity engaged in the development, supply, or distribution
of energy.
As a seller of services, [San Roque] is duly registered with the
BIR with TIN/VAT No. 005-017-501. It is likewise registered with
the Board of Investments ("BOI") on a preferred pioneer status,
to engage in the design, construction, erection, assembly, as
well as to own, commission, and operate electric powergenerating plants and related activities, for which it was issued
Certificate of Registration No. 97-356 on February 11, 1998.

the completion date of the Power Station, NPC will take and pay
for all electricity available from the Power Station.
On the construction and development of the San Roque MultiPurpose Project which comprises of the dam, spillway and
power plant, [San Roque] allegedly incurred, excess input VAT
in the amount of 559,709,337.54 for taxable year 2001 which it
declared in its Quarterly VAT Returns filed for the same year.
[San Roque] duly filed with the BIR separate claims for refund,
in the total amount of 559,709,337.54, representing unutilized
input taxes as declared in its VAT returns for taxable year 2001.
However, on March 28, 2003, [San Roque] filed amended
Quarterly VAT Returns for the year 2001 since it increased its
unutilized input VAT to the amount of 560,200,283.14.
Consequently, [San Roque] filed with the BIR on even date,
separate amended claims for refund in the aggregate amount of
560,200,283.14.
[CIRs] inaction on the subject claims led to the filing by [San
Roque] of the Petition for Review with the Court [of Tax Appeals]
in Division on April 10, 2003.
Trial of the case ensued and on July 20, 2005, the case was
submitted for decision.15
The Court of Tax Appeals Ruling: Division

On October 11, 1997, [San Roque] entered into a Power

Purchase Agreement ("PPA") with the National Power
Corporation ("NPC") to develop hydro-potential of the Lower
Agno River and generate additional power and energy for the
Luzon Power Grid, by building the San Roque Multi-Purpose
Project located in San Manuel, Pangasinan. The PPA provides,
among others, that [San Roque] shall be responsible for the
design, construction, installation, completion, testing and
commissioning of the Power Station and shall operate and
maintain the same, subject to NPC instructions. During the
cooperation period of twenty-five (25) years commencing from

The CTA Second Division initially denied San Roques claim. In

its Decision16 dated 8 March 2006, it cited the following as bases
for the denial of San Roques claim: lack of recorded zero-rated
or effectively zero-rated sales; failure to submit documents
specifically identifying the purchased goods/services related to
the claimed input VAT which were included in its Property, Plant
and Equipment account; and failure to prove that the related
construction costs were capitalized in its books of account and
subjected to depreciation.

The CTA Second Division required San Roque to show that it

complied with the following requirements of Section 112(B) of
Republic Act No. 8424 (RA 8424)17 to be entitled to a tax refund
or credit of input VAT attributable to capital goods imported or
locally purchased: (1) it is a VAT-registered entity; (2) its input
taxes claimed were paid on capital goods duly supported by
VAT invoices and/or official receipts; (3) it did not offset or apply
the claimed input VAT payments on capital goods against any
output VAT liability; and (4) its claim for refund was filed within
the two-year prescriptive period both in the administrative and
judicial levels.

on July 10, 2001, October 10, 2001, February 21, 2002, and
May 9, 2002 for the first, second, third, and fourth quarters of
2001, respectively, (Exhibits "EE, FF, GG, and HH") and
subsequently filed amended claims for all quarters on March 28,
2003 (Exhibits "II, JJ, KK, and LL"). Moreover, the Petition for
Review was filed on April 10, 2003. Counting from the
respective dates when [San Roque] originally filed its VAT
returns for the first, second, third and fourth quarters of 2001,
the administrative claims for refund (original and amended) and
the Petition for Review fall within the two-year prescriptive
period.18

The CTA Second Division found that San Roque complied with
the first, third, and fourth requirements, thus:

San Roque filed a Motion for New Trial and/or Reconsideration

on 7 April 2006. In its 29 November 2007 Amended
Decision,19 the CTA Second Division found legal basis to
partially grant San Roques claim. The CTA Second Division
ordered the Commissioner to refund or issue a tax credit in
favor of San Roque in the amount of 483,797,599.65, which
represents San Roques unutilized input VAT on its purchases of
capital goods and services for the taxable year 2001. The CTA
based the adjustment in the amount on the findings of the
independent certified public accountant. The following reasons
were cited for the disallowed claims: erroneous computation;
failure to ascertain whether the related purchases are in the
nature of capital goods; and the purchases pertain to capital
goods. Moreover, the reduction of claims was based on the
following: the difference between San Roques claim and that
appearing on its books; the official receipts covering the claimed
input VAT on purchases of local services are not within the
period of the claim; and the amount of VAT cannot be
determined from the submitted official receipts and invoices.
The CTA Second Division denied San Roques claim for refund
or tax credit of its unutilized input VAT attributable to its zerorated or effectively zero-rated sales because San Roque had no
record of such sales for the four quarters of 2001.

The fact that [San Roque] is a VAT registered entity is admitted

(par. 4, Facts Admitted, Joint Stipulation of Facts, Records, p.
157). It was also established that the instant claim of
560,200,823.14 is already net of the 11,509.09 output tax
declared by [San Roque] in its amended VAT return for the first
quarter of 2001. Moreover, the entire amount of
560,200,823.14 was deducted by [San Roque] from the total
available input tax reflected in its amended VAT returns for the
last two quarters of 2001 and first two quarters of 2002 (Exhibits
M-6, O-6, OO-1 & QQ-1). This means that the claimed input
taxes of 560,200,823.14 did not form part of the excess input
taxes of 83,692,257.83, as of the second quarter of 2002 that
was to be carried-over to the succeeding quarters. Further, [San
Roques] claim for refund/tax credit certificate of excess input
VAT was filed within the two-year prescriptive period reckoned
from the dates of filing of the corresponding quarterly VAT
returns.
For the first, second, third, and fourth quarters of 2001, [San
Roque] filed its VAT returns on April 25, 2001, July 25, 2001,
October 23, 2001 and January 24, 2002, respectively (Exhibits
"H, J, L, and N"). These returns were all subsequently amended
on March 28, 2003 (Exhibits "I, K, M, and O"). On the other
hand, [San Roque] originally filed its separate claims for refund

The dispositive portion of the CTA Second Divisions 29

November 2007 Amended Decision reads:

WHEREFORE, [San Roques] "Motion for New Trial and/or

Reconsideration" is hereby PARTIALLY GRANTED and this
Courts Decision promulgated on March 8, 2006 in the instant
case is hereby MODIFIED.
Accordingly, [the CIR] is hereby ORDERED to REFUND or in
the alternative, to ISSUE A TAX CREDIT CERTIFICATE in favor
of [San Roque] in the reduced amount of Four Hundred Eighty
Three Million Seven Hundred Ninety Seven Thousand Five
Hundred Ninety Nine Pesos and Sixty Five Centavos
(483,797,599.65) representing unutilized input VAT on
purchases of capital goods and services for the taxable year
2001.
SO ORDERED.20
The Commissioner filed a Motion for Partial Reconsideration on
20 December 2007. The CTA Second Division issued a
Resolution dated 11 July 2008 which denied the CIRs motion
for lack of merit.
The Court of Tax Appeals Ruling: En Banc
The Commissioner filed a Petition for Review before the CTA EB
praying for the denial of San Roques claim for refund or tax
credit in its entirety as well as for the setting aside of the 29
November 2007 Amended Decision and the 11 July 2008
Resolution in CTA Case No. 6647.
The CTA EB dismissed the CIRs petition for review and
affirmed the challenged decision and resolution.
The CTA EB cited Commissioner of Internal Revenue v. Toledo
Power, Inc.21 and Revenue Memorandum Circular No. 4903,22 as its bases for ruling that San Roques judicial claim was
not prematurely filed. The pertinent portions of the Decision
state:

More importantly, the Court En Banc has squarely and

exhaustively ruled on this issue in this wise:
It is true that Section 112(D) of the abovementioned
provision applies to the present case. However, what the
petitioner failed to consider is Section 112(A) of the same
provision. The respondent is also covered by the two (2) year
prescriptive period. We have repeatedly held that the claim for
refund with the BIR and the subsequent appeal to the Court of
Tax Appeals must be filed within the two-year period.
Accordingly, the Supreme Court held in the case of Atlas
Consolidated Mining and Development Corporation vs.
Commissioner of Internal Revenue that the two-year
prescriptive period for filing a claim for input tax is reckoned
from the date of the filing of the quarterly VAT return and
payment of the tax due. If the said period is about to expire
but the BIR has not yet acted on the application for refund,
the taxpayer may interpose a petition for review with this
Court within the two year period.
In the case of Gibbs vs. Collector, the Supreme Court held that
if, however, the Collector (now Commissioner) takes time in
deciding the claim, and the period of two years is about to end,
the suit or proceeding must be started in the Court of Tax
Appeals before the end of the two-year period without awaiting
the decision of the Collector.
Furthermore, in the case of Commissioner of Customs and
Commissioner of Internal Revenue vs. The Honorable Court of
Tax Appeals and Planters Products, Inc., the Supreme Court
held that the taxpayer need not wait indefinitely for a
decision or ruling which may or may not be forthcoming
and which he has no legal right to expect. It is disheartening
enough to a taxpayer to keep him waiting for an indefinite period
of time for a ruling or decision of the Collector (now
Commissioner) of Internal Revenue on his claim for refund. It
would make matters more exasperating for the taxpayer if we
were to close the doors of the courts of justice for such a relief

until after the Collector (now Commissioner) of Internal

Revenue, would have, at his personal convenience, given his go
signal.
This Court ruled in several cases that once the petition is filed,
the Court has already acquired jurisdiction over the claims and
the Court is not bound to wait indefinitely for no reason for
whatever action respondent (herein petitioner) may take. At
stake are claims for refund and unlike disputed
assessments, no decision of respondent (herein petitioner)
is required before one can go to this Court. (Emphasis
supplied and citations omitted)
Lastly, it is apparent from the following provisions of Revenue
Memorandum Circular No. 49-03 dated August 18, 2003, that
[the CIR] knows that claims for VAT refund or tax credit filed with
the Court [of Tax Appeals] can proceed simultaneously with the
ones filed with the BIR and that taxpayers need not wait for the
lapse of the subject 120-day period, to wit:
In response to [the] request of selected taxpayers for adoption
of procedures in handling refund cases that are aligned to the
statutory requirements that refund cases should be elevated to
the Court of Tax Appeals before the lapse of the period
prescribed by law, certain provisions of RMC No. 42-2003 are
hereby amended and new provisions are added thereto.
In consonance therewith, the following amendments are being
introduced to RMC No. 42-2003, to wit:
I.) A-17 of Revenue Memorandum Circular No. 42-2003 is
hereby revised to read as follows:
In cases where the taxpayer has filed a "Petition for
Review" with the Court of Tax Appeals involving a claim for
refund/TCC that is pending at the administrative agency
(Bureau of Internal Revenue or OSS-DOF), the
administrative agency and the tax court may act on the
case separately. While the case is pending in the tax court and

at the same time is still under process by the administrative

agency, the litigation lawyer of the BIR, upon receipt of the
summons from the tax court, shall request from the head of the
investigating/processing office for the docket containing certified
true copies of all the documents pertinent to the claim. The
docket shall be presented to the court as evidence for the BIR in
its defense on the tax credit/refund case filed by the taxpayer. In
the meantime, the investigating/processing office of the
administrative agency shall continue processing the refund/TCC
case until such time that a final decision has been reached by
either the CTA or the administrative agency.
If the CTA is able to release its decision ahead of the
evaluation of the administrative agency, the latter shall
cease from processing the claim. On the other hand, if the
administrative agency is able to process the claim of the
taxpayer ahead of the CTA and the taxpayer is amenable to the
findings thereof, the concerned taxpayer must file a motion to
withdraw the claim with the CTA.23 (Emphasis supplied)
G.R. No. 187485
CIR v. San Roque Power Corporation
The Commissioner raised the following grounds in the Petition
for Review:
I. The Court of Tax Appeals En Banc erred in holding that
[San Roques] claim for refund was not prematurely filed.
II. The Court of Tax Appeals En Banc erred in affirming
the amended decision of the Court of Tax Appeals
(Second Division) granting [San Roques] claim for refund
of alleged unutilized input VAT on its purchases of capital
goods and services for the taxable year 2001 in the
amount of P483,797,599.65. 40
I. Application of the 120+30 Day Periods
a. G.R. No. 187485 - CIR v. San Roque Power Corporation

On 10 April 2003, a mere 13 days after it filed its amended

administrative claim with the Commissioner on 28 March 2003,
San Roque filed a Petition for Review with the CTA docketed as
CTA Case No. 6647. From this we gather two crucial facts: first,
San Roque did not wait for the 120-day period to lapse before
filing its judicial claim;second, San Roque filed its judicial claim
more than four (4) years before the Atlas45 doctrine, which was
promulgated by the Court on 8 June 2007.
Clearly, San Roque failed to comply with the 120-day waiting
period, the time expressly given by law to the Commissioner to
decide whether to grant or deny San Roques application for tax
refund or credit. It is indisputable that compliance with the 120day waiting period is mandatory and jurisdictional. The
waiting period, originally fixed at 60 days only, was part of the
provisions of the first VAT law, Executive Order No. 273, which
took effect on 1 January 1988. The waiting period was extended
to 120 days effective 1 January 1998 under RA 8424 or the Tax
Reform Act of 1997. Thus, the waiting period has been in our
statute books for more than fifteen (15) years before San
Roque filed its judicial claim.
Failure to comply with the 120-day waiting period violates a
mandatory provision of law. It violates the doctrine of exhaustion
of administrative remedies and renders the petition premature
and thus without a cause of action, with the effect that the CTA
does not acquire jurisdiction over the taxpayers petition.
Philippine jurisprudence is replete with cases upholding and
reiterating these doctrinal principles. 46
The charter of the CTA expressly provides that its jurisdiction is
to review on appeal "decisions of the Commissioner of Internal
Revenue in cases involving x x x refunds of internal revenue
taxes."47 When a taxpayer prematurely files a judicial claim for
tax refund or credit with the CTA without waiting for the decision
of the Commissioner, there is no "decision" of the Commissioner
to review and thus the CTA as a court of special jurisdiction has
no jurisdiction over the appeal. The charter of the CTA also
expressly provides that if the Commissioner fails to decide

within "a specific period" required by law, such "inaction shall

be deemed a denial"48 of the application for tax refund or credit.
It is the Commissioners decision, or inaction "deemed a denial,"
that the taxpayer can take to the CTA for review. Without a
decision or an "inaction x x x deemed a denial" of the
Commissioner, the CTA has no jurisdiction over a petition for
review.49
San Roques failure to comply with the 120day mandatory period renders its petition for review with the
CTA void. Article 5 of the Civil Code provides, "Acts executed
against provisions of mandatory or prohibitory laws shall be
void, except when the law itself authorizes their validity." San
Roques void petition for review cannot be legitimized by the
CTA or this Court because Article 5 of the Civil Code states that
such void petition cannot be legitimized "except when the law
itself authorizes [its] validity." There is no law authorizing the
petitions validity.
It is hornbook doctrine that a person committing a void act
contrary to a mandatory provision of law cannot claim or acquire
any right from his void act. A right cannot spring in favor of a
person from his own void or illegal act. This doctrine is repeated
in Article 2254 of the Civil Code, which states, "No vested or
acquired right can arise from acts or omissions which are
against the law or which infringe upon the rights of others." 50 For
violating a mandatory provision of law in filing its petition with
the CTA, San Roque cannot claim any right arising from such
void petition. Thus, San Roques petition with the CTA is a mere
scrap of paper.
This Court cannot brush aside the grave issue of the mandatory
and jurisdictional nature of the 120-day period just because the
Commissioner merely asserts that the case was prematurely
filed with the CTA and does not question the entitlement of San
Roque to the refund. The mere fact that a taxpayer has
undisputed excess input VAT, or that the tax was admittedly
illegally, erroneously or excessively collected from him, does not
entitle him as a matter of right to a tax refund or credit. Strict

compliance with the mandatory and jurisdictional conditions

prescribed by law to claim such tax refund or credit is essential
and necessary for such claim to prosper. Well-settled is the
rule that tax refunds or credits, just like tax exemptions, are
strictly construed against the taxpayer.51 The burden is on
the taxpayer to show that he has strictly complied with the
conditions for the grant of the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional
conditions mandated by law simply because the Commissioner
chose not to contest the numerical correctness of the claim for
tax refund or credit of the taxpayer. Non-compliance with
mandatory periods, non-observance of prescriptive periods, and
non-adherence to exhaustion of administrative remedies bar a
taxpayers claim for tax refund or credit, whether or not the
Commissioner questions the numerical correctness of the claim
of the taxpayer. This Court should not establish the precedent
that non-compliance with mandatory and jurisdictional
conditions can be excused if the claim is otherwise meritorious,
particularly in claims for tax refunds or credit. Such precedent
will render meaningless compliance with mandatory and
jurisdictional requirements, for then every tax refund case will
have to be decided on the numerical correctness of the amounts
claimed, regardless of non-compliance with mandatory and
jurisdictional conditions.
San Roque cannot also claim being misled, misguided or
confused by the Atlas doctrine because San Roque filed its
petition for review with the CTA more than four years
before Atlas was promulgated. The Atlasdoctrine did not exist
at the time San Roque failed to comply with the 120- day period.
Thus, San Roque cannot invoke the Atlas doctrine as an excuse
for its failure to wait for the 120-day period to lapse. In any
event, the Atlasdoctrine merely stated that the two-year
prescriptive period should be counted from the date of payment
of the output VAT, not from the close of the taxable quarter when
the sales involving the input VAT were
made. TheAtlas doctrine does not interpret, expressly or
impliedly, the 120+3052 day periods.

In fact, Section 106(b) and (e) of the Tax Code of 1977 as

amended, which was the law cited by the Court in Atlasas the
applicable provision of the law did not yet provide for the 30-day
period for the taxpayer to appeal to the CTA from the decision or
inaction of the Commissioner.53 Thus, the Atlas doctrine
cannot be invoked by anyone to disregard compliance with
the 30-day mandatory and jurisdictional period. Also, the
difference between the Atlas doctrine on one hand, and
the Mirant54 doctrine on the other hand, is a mere 20 days.
TheAtlas doctrine counts the two-year prescriptive period from
the date of payment of the output VAT, which means within 20
days after the close of the taxable quarter. The output VAT at
that time must be paid at the time of filing of the quarterly tax
returns, which were to be filed "within 20 days following the end
of each quarter."
Thus, in Atlas, the three tax refund claims listed below were
deemed timely filed because the administrative claims filed with
the Commissioner, and the petitions for review filed with the
CTA, were all filed within two years from the date of payment of
the output VAT, following Section 229:
Date of Filing
Return
& Payment of
Tax

Date of Filing
Administrative
Claim

Date of Filing
Petition With
CTA

2nd Quarter,
20 July 1990
1990
Close of Quarter
30 June 1990

21 August 1990

20 July 1992

3rd Quarter,
18 October
1990
1990
Close of Quarter
30 September
1990

21 November
1990

9 October
1992

Period Covered

4th Quarter,
20 January
1990
1991
Close of Quarter
31 December
1990

19 February 1991 14 January

1993

Atlas paid the output VAT at the time it filed the quarterly tax
returns on the 20th, 18th, and 20th day after the close of the
taxable quarter. Had the twoyear prescriptive period been
counted from the "close of the taxable quarter" as expressly
stated in the law, the tax refund claims of Atlas would have
already prescribed. In contrast, the Mirant doctrine counts the
two-year prescriptive period from the "close of the taxable
quarter when the sales were made" as expressly stated in the
law, which means the last day of the taxable quarter. The 20day difference55 between the Atlas doctrine and the
later Mirant doctrine is not material to San Roques claim
for tax refund.
Whether the Atlas doctrine or the Mirant doctrine is applied to
San Roque is immaterial because what is at issue in the present
case is San Roques non-compliance with the 120-day
mandatory and jurisdictional period, which is counted from the
date it filed its administrative claim with the Commissioner. The
120-day period may extend beyond the two-year prescriptive
period, as long as the administrative claim is filed within the twoyear prescriptive period. However, San Roques fatal mistake is
that it did not wait for the Commissioner to decide within the
120-day period, a mandatory period whether the Atlas or
the Mirant doctrine is applied.
At the time San Roque filed its petition for review with the CTA,
the 120+30 day mandatory periods were already in the law.
Section 112(C)56 expressly grants the Commissioner 120 days
within which to decide the taxpayers claim. The law is clear,
plain, and unequivocal: "x x x the Commissioner shall grant a
refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of

submission of complete documents." Following the verba

legis doctrine, this law must be applied exactly as worded since
it is clear, plain, and unequivocal. The taxpayer cannot simply
file a petition with the CTA without waiting for the
Commissioners decision within the 120-day mandatory and
jurisdictional period. The CTA will have no jurisdiction because
there will be no "decision" or "deemed a denial" decision of the
Commissioner for the CTA to review. In San Roques case, it
filed its petition with the CTA a mere 13 days after it filed its
administrative claim with the Commissioner. Indisputably, San
Roque knowingly violated the mandatory 120-day period, and it
cannot blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a 30-day
period to appeal to the CTA the decision or inaction of the
Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from
the receipt of the decision denying the claim or after the
expiration of the one hundred twenty day-period, appeal the
decision or the unacted claim with the Court of Tax Appeals.
(Emphasis supplied)
This law is clear, plain, and unequivocal. Following the wellsettled verba legis doctrine, this law should be applied exactly
as worded since it is clear, plain, and unequivocal. As this law
states, the taxpayer may, if he wishes, appeal the decision of
the Commissioner to the CTA within 30 days from receipt of the
Commissioners decision, or if the Commissioner does not act
on the taxpayers claim within the 120-day period, the taxpayer
may appeal to the CTA within 30 days from the expiration of the
120-day period.
IV. Effectivity and Scope of
the Atlas , Mirant and Aichi Doctrines
The Atlas doctrine, which held that claims for refund or credit of
input VAT must comply with the two-year prescriptive period
under Section 229, should be effective only from its

promulgation on 8 June 2007 until its abandonment on 12

September 2008 in Mirant. The Atlas doctrine was limited to
the reckoning of the two-year prescriptive period from the date
of payment of the output VAT. Prior to the Atlas doctrine, the
two-year prescriptive period for claiming refund or credit of input
VAT should be governed by Section 112(A) following theverba
legis rule. The Mirant ruling, which abandoned
the Atlas doctrine, adopted the verba legis rule, thus applying
Section 112(A) in computing the two-year prescriptive period in
claiming refund or credit of input VAT.
The Atlas doctrine has no relevance to the 120+30 day periods
under Section 112(C) because the application of the 120+30
day periods was not in issue in Atlas. The application of the
120+30 day periods was first raised inAichi, which adopted
the verba legis rule in holding that the 120+30 day periods are
mandatory and jurisdictional. The language of Section 112(C) is
plain, clear, and unambiguous. When Section 112(C) states that
"the Commissioner shall grant a refund or issue the tax credit
within one hundred twenty (120) days from the date of
submission of complete documents," the law clearly gives the
Commissioner 120 days within which to decide the taxpayers
claim. Resort to the courts prior to the expiration of the 120-day
period is a patent violation of the doctrine of exhaustion of
administrative remedies, a ground for dismissing the judicial suit
due to prematurity. Philippine jurisprudence is awash with cases
affirming and reiterating the doctrine of exhaustion of
administrative remedies.65 Such doctrine is basic and
elementary.
When Section 112(C) states that "the taxpayer affected may,
within thirty (30) days from receipt of the decision denying the
claim or after the expiration of the one hundred twenty-day
period, appeal the decision or the unacted claim with the Court
of Tax Appeals," the law does not make the 120+30 day periods
optional just because the law uses the word "may." The word
"may" simply means that the taxpayer may or may not
appeal the decision of the Commissioner within 30 days from
receipt of the decision, or within 30 days from the expiration of

the 120-day period. Certainly, by no stretch of the imagination

can the word "may" be construed as making the 120+30 day
periods optional, allowing the taxpayer to file a judicial claim one
day after filing the administrative claim with the Commissioner.
The old rule66 that the taxpayer may file the judicial claim,
without waiting for the Commissioners decision if the two-year
prescriptive period is about to expire, cannot apply because that
rule was adopted before the enactment of the 30-day
period. The 30-day period was adopted precisely to do away
with the old rule, so that under the VAT System the taxpayer
will always have 30 days to file the judicial claim even if the
Commissioner acts only on the 120th day, or does not act
at all during the 120-day period. With the 30-day period
always available to the taxpayer, the taxpayer can no longer file
a judicial claim for refund or credit of input VAT without waiting
for the Commissioner to decide until the expiration of the 120day period.
To repeat, a claim for tax refund or credit, like a claim for tax
exemption, is construed strictly against the taxpayer. One of the
conditions for a judicial claim of refund or credit under the VAT
System is compliance with the 120+30 day mandatory and
jurisdictional periods. Thus, strict compliance with the 120+30
day periods is necessary for such a claim to prosper, whether
before, during, or after the effectivity of the Atlas doctrine,
except for the period from the issuance of BIR Ruling No. DA489-03 on 10 December 2003 to 6 October 2010 when
the Aichi doctrine was adopted, which again reinstated the
120+30 day periods as mandatory and jurisdictional.
V. Revenue Memorandum Circular No. 49-03 (RMC 49-03)
dated 15 April 2003
There is nothing in RMC 49-03 that states, expressly or
impliedly, that the taxpayer need not wait for the 120-day period
to expire before filing a judicial claim with the CTA. RMC 49-03
merely authorizes the BIR to continue processing the
administrative claim even after the taxpayer has filed its judicial

claim, without saying that the taxpayer can file its judicial claim
before the expiration of the 120-day period. RMC 49-03 states:
"In cases where the taxpayer has filed a Petition for Review
with the Court of Tax Appeals involving a claim for refund/TCC
that is pending at the administrative agency (either the Bureau
of Internal Revenue or the One- Stop Shop Inter-Agency Tax
Credit and Duty Drawback Center of the Department of
Finance), the administrative agency and the court may act on
the case separately." Thus, if the taxpayer files its judicial claim
before the expiration of the 120-day period, the BIR will
nevertheless continue to act on the administrative claim
because such premature filing cannot divest the Commissioner
of his statutory power and jurisdiction to decide the
administrative claim within the 120-day period.
On the other hand, if the taxpayer files its judicial claim after the
120- day period, the Commissioner can still continue to evaluate
the administrative claim. There is nothing new in this because
even after the expiration of the 120-day period, the
Commissioner should still evaluate internally the administrative
claim for purposes of opposing the taxpayers judicial claim, or
even for purposes of determining if the BIR should actually
concede to the taxpayers judicial claim. The internal
administrative evaluation of the taxpayers claim
must necessarilycontinue to enable the BIR to oppose
intelligently the judicial claim or, if the facts and the law warrant
otherwise, for the BIR to concede to the judicial claim, resulting
in the termination of the judicial proceedings.
What is important, as far as the present cases are
concerned, is that the mere filing by a taxpayer of a judicial
claim with the CTA before the expiration of the 120-day
period cannot operate to divest the Commissioner of his
jurisdiction to decide an administrative claim within the
120-day mandatory period,unless the Commissioner has
clearly given cause for equitable estoppel to apply as
expressly recognized in Section 246 of the Tax Code.67
VI. BIR Ruling No. DA-489-03 dated 10 December 2003

BIR Ruling No. DA-489-03 does provide a valid claim for

equitable estoppel under Section 246 of the Tax Code. BIR
Ruling No. DA-489-03 expressly states that the "taxpayerclaimant need not wait for the lapse of the 120-day period
before it could seek judicial relief with the CTA by way of
Petition for Review." Prior to this ruling, the BIR held, as
shown by its position in the Court of Appeals,68 that the
expiration of the 120-day period is mandatory and jurisdictional
before a judicial claim can be filed.
There is no dispute that the 120-day period is mandatory and
jurisdictional, and that the CTA does not acquire jurisdiction over
a judicial claim that is filed before the expiration of the 120-day
period. There are, however, two exceptions to this rule. The first
exception is if the Commissioner, through a specific ruling,
misleads a particular taxpayer to prematurely file a judicial claim
with the CTA. Such specific ruling is applicable only to such
particular taxpayer. The second exception is where the
Commissioner, through a general interpretative rule issued
under Section 4 of the Tax Code, misleads all taxpayers into
filing prematurely judicial claims with the CTA. In these cases,
the Commissioner cannot be allowed to later on question the
CTAs assumption of jurisdiction over such claim since equitable
estoppel has set in as expressly authorized under Section 246
of the Tax Code.
Section 4 of the Tax Code, a new provision introduced by RA
8424, expressly grants to the Commissioner the power to
interpret tax laws, thus:
Sec. 4. Power of the Commissioner To Interpret Tax Laws and
To Decide Tax Cases. The power to interpret the provisions
of this Code and other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject to review by
the Secretary of Finance.
The power to decide disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under this Code or

other laws or portions thereof administered by the Bureau of

Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.
Since the Commissioner has exclusive and original
jurisdiction to interpret tax laws, taxpayers acting in good
faith should not be made to suffer for adhering to general
interpretative rules of the Commissioner interpreting tax laws,
should such interpretation later turn out to be erroneous and be
reversed by the Commissioner or this Court. Indeed, Section
246 of the Tax Code expressly provides that a reversal of a BIR
regulation or ruling cannot adversely prejudice a taxpayer who
in good faith relied on the BIR regulation or ruling prior to its
reversal. Section 246 provides as follows:
Sec. 246. Non-Retroactivity of Rulings. Any revocation,
modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding
Sections or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if
the revocation, modification or reversal will be prejudicial
to the taxpayers, except in the following cases:
(a) Where the taxpayer deliberately misstates or omits
material facts from his return or any document required of
him by the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau
of Internal Revenue are materially different from the facts
on which the ruling is based; or
(c) Where the taxpayer acted in bad faith. (Emphasis
supplied)
Thus, a general interpretative rule issued by the Commissioner
may be relied upon by taxpayers from the time the rule is issued
up to its reversal by the Commissioner or this Court. Section
246 is not limited to a reversal only by the Commissioner
because this Section expressly states, "Any revocation,

modification or reversal" without specifying who made the

revocation, modification or reversal. Hence, a reversal by this
Court is covered under Section 246.
Taxpayers should not be prejudiced by an erroneous
interpretation by the Commissioner, particularly on a difficult
question of law. The abandonment of the Atlas doctrine
by Mirant and Aichi69 is proof that the reckoning of the
prescriptive periods for input VAT tax refund or credit is a difficult
question of law. The abandonment of the Atlasdoctrine did not
result in Atlas, or other taxpayers similarly situated, being made
to return the tax refund or credit they received or could have
received under Atlas prior to its abandonment. This Court is
applying Mirant and Aichiprospectively. Absent fraud, bad faith
or misrepresentation, the reversal by this Court of a general
interpretative rule issued by the Commissioner, like the reversal
of a specific BIR ruling under Section 246, should also apply
prospectively. As held by this Court in CIR v. Philippine Health
Care Providers, Inc.:70
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, this
Court held that under Section 246 of the 1997 Tax Code, the
Commissioner of Internal Revenue is precluded from
adopting a position contrary to one previously taken where
injustice would result to the taxpayer. Hence, where an
assessment for deficiency withholding income taxes was made,
three years after a new BIR Circular reversed a previous one
upon which the taxpayer had relied upon, such an assessment
was prejudicial to the taxpayer. To rule otherwise, opined the
Court, would be contrary to the tenets of good faith, equity, and
fair play.
This Court has consistently reaffirmed its ruling in ABS-CBN
Broadcasting Corp.1wphi1 in the later cases ofCommissioner
of Internal Revenue v. Borroughs, Ltd., Commissioner of
Internal Revenue v. Mega Gen. Mdsg. Corp., Commissioner of
Internal Revenue v. Telefunken Semiconductor (Phils.) Inc.,
and Commissioner of Internal Revenue v. Court of Appeals. The
rule is that the BIR rulings have no retroactive effect where

a grossly unfair deal would result to the prejudice of the

taxpayer, as in this case.
More recently, in Commissioner of Internal Revenue v. Benguet
Corporation, wherein the taxpayer was entitled to tax refunds or
credits based on the BIRs own issuances but later was
suddenly saddled with deficiency taxes due to its subsequent
ruling changing the category of the taxpayers transactions for
the purpose of paying its VAT, this Court ruled that applying
such ruling retroactively would be prejudicial to the taxpayer.
(Emphasis supplied)
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a
general interpretative rule applicable to all taxpayers or a
specific ruling applicable only to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule
because it was a response to a query made, not by a particular
taxpayer, but by a government agency tasked with processing
tax refunds and credits, that is, the One Stop Shop InterAgency Tax Credit and Drawback Center of the Department
of Finance. This government agency is also the addressee, or
the entity responded to, in BIR Ruling No. DA-489-03. Thus,
while this government agency mentions in its query to the
Commissioner the administrative claim of Lazi Bay Resources
Development, Inc., the agency was in fact asking the
Commissioner what to do in cases like the tax claim of Lazi Bay
Resources Development, Inc., where the taxpayer did not wait
for the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative
rule. Thus, all taxpayers can rely on BIR Ruling No. DA-489-03
from the time of its issuance on 10 December 2003 up to its
reversal by this Court in Aichi on 6 October 2010, where this
Court held that the 120+30 day periods are mandatory and
jurisdictional
However, BIR Ruling No. DA-489-03 cannot be given retroactive
effect for four reasons: first, it is admittedly an erroneous

interpretation of the law; second, prior to its issuance, the BIR

held that the 120-day period was mandatory and jurisdictional,
which is the correct interpretation of the law; third, prior to its
issuance, no taxpayer can claim that it was misled by the BIR
into filing a judicial claim prematurely; and fourth, a claim for tax
refund or credit, like a claim for tax exemption, is strictly
construed against the taxpayer.
San Roque, therefore, cannot benefit from BIR Ruling No. DA489-03 because it filed its judicial claim prematurely on 10 April
2003, before the issuance of BIR Ruling No. DA-489-03 on 10
December 2003. To repeat, San Roque cannot claim that it was
misled by the BIR into filing its judicial claim prematurely
because BIR Ruling No. DA-489-03 was issued only after San
Roque filed its judicial claim. At the time San Roque filed its
judicial claim, the law as applied and administered by the BIR
was that the Commissioner had 120 days to act on
administrative claims. This was in fact the position of the BIR
prior to the issuance of BIR Ruling No. DA-489-03. Indeed, San
Roque never claimed the benefit of BIR Ruling No. DA-48903 or RMC 49-03, whether in this Court, the CTA, or before
the Commissioner.
Taganito, however, filed its judicial claim with the CTA on 14
February 2007, after the issuance of BIR Ruling No. DA-489-03
on 10 December 2003. Truly, Taganito can claim that in filing its
judicial claim prematurely without waiting for the 120-day period
to expire, it was misled by BIR Ruling No. DA-489-03. Thus,
Taganito can claim the benefit of BIR Ruling No. DA-489-03,
which shields the filing of its judicial claim from the vice of
prematurity.
Philexs situation is not a case of premature filing of its judicial
claim but of late filing, indeed very late filing. BIR Ruling No. DA489-03 allowed premature filing of a judicial claim, which means
non-exhaustion of the 120-day period for the Commissioner to
act on an administrative claim. Philex cannot claim the benefit of
BIR Ruling No. DA-489-03 because Philex did not file its judicial
claim prematurely but filed it long after the lapse of the 30-day

period following the expiration of the 120-day period. In fact,

Philex filed its judicial claim 426 days after the lapse of the 30day period.
VII. Existing Jurisprudence
There is no basis whatsoever to the claim that in five cases this
Court had already made a ruling that the filing dates of the
administrative and judicial claims are inconsequential, as long
as they are within the two-year prescriptive period. The effect of
the claim of the dissenting opinions is that San Roques failure
to wait for the 120-day mandatory period to lapse is
inconsequential, thus allowing San Roque to claim the tax
refund or credit. However, the five cases cited by the dissenting
opinions do not support even remotely the claim that this Court
had already made such a ruling. None of these five cases
mention, cite, discuss, rule or even hint that compliance
with the 120-day mandatory period is inconsequential as
long as the administrative and judicial claims are filed
within the two-year prescriptive period.
A final word. Taxes are the lifeblood of the nation. The
Philippines has been struggling to improve its tax efficiency
collection for the longest time with minimal success.
Consequently, the Philippines has suffered the economic
adversities arising from poor tax collections, forcing the
government to continue borrowing to fund the budget deficits.
This Court cannot turn a blind eye to this economic malaise by
being unduly liberal to taxpayers who do not comply with
statutory requirements for tax refunds or credits. The tax refund
claims in the present cases are not a pittance. Many other
companies stand to gain if this Court were to rule otherwise. The
dissenting opinions will turn on its head the well-settled doctrine
that tax refunds are strictly construed against the taxpayer.
WHEREFORE, the Court hereby (1) GRANTS the petition of the
Commissioner of Internal Revenue in G.R. No. 187485
to DENY the P483,797,599.65 tax refund or credit claim of San
Roque Power Corporation; (2) GRANTSthe petition of Taganito

Mining Corporation in G.R. No. 196113 for a tax refund or credit

of P8,365,664.38; and (3) DENIES the petition of Philex Mining
Corporation in G.R. No. 197156 for a tax refund or credit of
P23,956,732.44.