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FIRST DIVISION In 1995, respondent received the amount of P1,707,772.

64, representing her sales


commission income from which JUBANITEX withheld the corresponding 10%
withholding tax amounting to P170,777.26, and remitted the same to the Bureau of
Internal Revenue (BIR). On October 17, 1997, respondent filed her 1995 income tax
COMMISSIONER OF G.R. No. 153793
return reporting a taxable income of P1,707,772.64 and a tax due of P170,777.26.[6]
INTERNAL REVENUE,
Petitioner, Present:
On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged
Panganiban, C.J. to have been mistakenly withheld and remitted by JUBANITEX to the BIR. Respondent
(Chairperson), contended that her sales commission income is not taxable in the Philippines because
- versus - Ynares-Santiago, the same was a compensation for her services rendered in Germany and therefore
Austria-Martinez, considered as income from sources outside the Philippines.
Callejo, Sr., and
Chico-Nazario, JJ. The next day, April 15, 1998, she filed a petition for review with the CTA contending that
JULIANE BAIER-NICKEL, as no action was taken by the BIR on her claim for refund.[7] On June 28, 2000, the CTA
rendered a decision denying her claim. It held that the commissions received by
represented by Marina Q. Guzman Promulgated:
respondent were actually her remuneration in the performance of her duties as
(Attorney-in-fact)
President of JUBANITEX and not as a mere sales agent thereof. The income derived by
Respondent. August 29, 2006 respondent is therefore an income taxable in the Philippines because JUBANITEX is a
domestic corporation.
x ---------------------------------------------------------------------------------------- x
On petition with the Court of Appeals, the latter reversed the Decision of the CTA,
DECISION holding that respondent received the commissions as sales agent of JUBANITEX and
not as President thereof. And since the source of income means the activity or service
that produce the income, the sales commission received by respondent is not taxable
in the Philippines because it arose from the marketing activities performed by
YNARES-SANTIAGO, J.:
respondent in Germany. The dispositive portion of the appellate courts Decision, reads:

WHEREFORE, premises considered, the assailed decision of the Court


Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002
of Tax Appeals dated June 28, 2000 is hereby REVERSED and SET
Decision[1] of the Court of Appeals in CA-G.R. SP No. 59794, which granted the tax
ASIDE and the respondent court is hereby directed to grant petitioner
refund of respondent Juliane Baier-Nickel and reversed the June 28, 2000 Decision[2] of
a tax refund in the amount of Php 170,777.26.
the Court of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails the May
8, 2002 Resolution[3] of the Court of Appeals denying its motion for reconsideration.
SO ORDERED.[8]
The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen, is
the President of JUBANITEX, Inc., a domestic corporation engaged in [m]anufacturing,
marketing on wholesale only, buying or otherwise acquiring, holding, importing and Petitioner filed a motion for reconsideration but was denied.[9] Hence, the
exporting, selling and disposing embroidered textile products.[4] Through JUBANITEXs instant recourse.
General Manager, Marina Q. Guzman, the corporation appointed and engaged the
services of respondent as commission agent. It was agreed that respondent will receive Petitioner maintains that the income earned by respondent is taxable in
10% sales commission on all sales actually concluded and collected through her the Philippines because the source thereof is JUBANITEX, a domestic corporation
efforts.[5] located in the City of Makati. It thus implied that source of income means the physical
source where the income came from. It further argued that since respondent is the
President of JUBANITEX, any remuneration she received from said corporation should
be construed as payment of her overall managerial services to the company and should Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether
not be interpreted as a compensation for a distinct and separate service as a sales or not engaged in trade or business, are subject to Philippine income taxation on their
commission agent. income received from all sources within the Philippines. Thus, the keyword in
determining the taxability of non-resident aliens is the incomes source. In construing
Respondent, on the other hand, claims that the income she received was the meaning of source in Section 25 of the NIRC, resort must be had on the origin of
payment for her marketing services. She contended that income of nonresident aliens the provision.
like her is subject to tax only if the source of the income is within the Philippines. Source,
according to respondent is the situs of the activity which produced the income. And The first Philippine income tax law enacted by the Philippine Legislature was Act No.
since the source of her income were her marketing activities in Germany, the income 2833,[10] which took effect on January 1, 1920.[11] Under Section 1 thereof, nonresident
she derived from said activities is not subject to Philippine income taxation. aliens are likewise subject to tax on income from all sources within the Philippine
Islands, thus
The issue here is whether respondents sales commission income is taxable in
the Philippines. SECTION 1. (a) There shall be levied, assessed, collected, and
paid annually upon the entire net income received in the preceding
Pertinent portion of the National Internal Revenue Code (NIRC), states: calendar year from all sources by every individual, a citizen or
resident of the Philippine Islands, a tax of two per centum upon such
income; and a like tax shall be levied, assessed, collected, and paid
SEC. 25. Tax on Nonresident Alien Individual.
annually upon the entire net income received in the preceding
calendar year from all sources within the Philippine Islands by every
(A) Nonresident Alien Engaged in Trade or Business Within individual, a nonresident alien, including interest on bonds, notes, or
the Philippines. other interest-bearing obligations of residents, corporate or
otherwise.
(1) In General. A nonresident alien individual engaged in
trade or business in the Philippines shall be subject to an income tax Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of
in the same manner as an individual citizen and a resident alien 1916 as amended by U.S. Revenue Law of 1917.[12] Being a law of American origin, the
individual, on taxable income received from all sources within authoritative decisions of the official charged with enforcing it in the U.S. have peculiar
the Philippines. A nonresident alien individual who shall come to the persuasive force in the Philippines.[13]
Philippines and stay therein for an aggregate period of more than
one hundred eighty (180) days during any calendar year shall be
The Internal Revenue Code of the U.S. enumerates specific types of income to
deemed a nonresident alien doing business in the Philippines,
be treated as from sources within the U.S. and specifies when similar types of income
Section 22(G) of this Code notwithstanding.
are to be treated as from sources outside the U.S.[14] Under the said Code,
compensation for labor and personal services performed in the U.S., is generally treated
xxxx as income from U.S. sources; while compensation for said services performed outside
the U.S., is treated as income from sources outside the U.S.[15] A similar provision is
found in Section 42 of our NIRC, thus:
(B) Nonresident Alien Individual Not Engaged in Trade or
Business Within the Philippines. There shall be levied, collected and
paid for each taxable year upon the entire income received from all SEC. 42. x x x
sources within the Philippines by every nonresident alien individual
not engaged in trade or business within the Philippines x x x a tax
(A) Gross Income From Sources Within the Philippines. x x x
equal to twenty-five percent (25%) of such income. x x x
xxxx The intention of Congress in the 1916 and subsequent
statutes was to discard the 1909 and 1913 basis of taxing nonresident
aliens and foreign corporations and to make the test of taxability the
(3) Services. Compensation for labor or personal services
source, or situs of the activities or property which produce the
performed in the Philippines;
income. The result is that, on the one hand, nonresident aliens and
nonresident foreign corporations are prevented from deriving
xxxx income from the United States free from tax, and, on the other hand,
there is no undue imposition of a tax when the activities do not take
(C) Gross Income From Sources Without the Philippines. x x place in, and the property producing income is not employed in, this
x country. Thus, if income is to be taxed, the recipient thereof must be
resident within the jurisdiction, or the property or activities out of
which the income issues or is derived must be situated within the
xxxx
jurisdiction so that the source of the income may be said to have a
situs in this country.
(3) Compensation for labor or personal services performed
without the Philippines;
The underlying theory is that the consideration for taxation
is protection of life and property and that the income rightly to be
The following discussions on sourcing of income under the Internal Revenue levied upon to defray the burdens of the United States Government
Code of the U.S., are instructive: is that income which is created by activities and property protected
by this Government or obtained by persons enjoying that
The Supreme Court has said, in a definition much quoted protection. [16]
but often debated, that income may be derived from three possible
sources only: (1) capital and/or (2) labor; and/or (3) the sale of capital The important factor therefore which determines the source of income of
assets. While the three elements of this attempt at definition need personal services is not the residence of the payor, or the place where the contract for
not be accepted as all-inclusive, they serve as useful guides in any service is entered into, or the place of payment, but the place where the services were
inquiry into whether a particular item is from sources within actually rendered.[17]
the United States and suggest an investigation into the nature and
location of the activities or property which produce the income.
In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue,[18] the Court
addressed the issue on the applicable source rule relating to reinsurance premiums paid
If the income is from labor the place where the labor is done by a local insurance company to a foreign insurance company in respect of risks located
should be decisive; if it is done in this country, the income should be in the Philippines. It was held therein that the undertaking of the foreign insurance
from sources within the United States. If the income is from capital, company to indemnify the local insurance company is the activity that produced the
the place where the capital is employed should be decisive; if it is income. Since the activity took place in the Philippines, the income derived therefrom
employed in this country, the income should be from sources within is taxable in our jurisdiction. Citing Mertens, The Law of Federal Income Taxation, the
the United States. If the income is from the sale of capital assets, the Court emphasized that the technical meaning of source of income is the property,
place where the sale is made should be likewise decisive. activity or service that produced the same. Thus:

Much confusion will be avoided by regarding the term The source of an income is the property, activity or service
source in this fundamental light. It is not a place, it is an activity or that produced the income. The reinsurance premiums remitted to
property. As such, it has a situs or location, and if that situs or location appellants by virtue of the reinsurance contracts, accordingly, had for
is within the United States the resulting income is taxable to their source the undertaking to indemnify Commonwealth Insurance
nonresident aliens and foreign corporations. Co. against liability. Said undertaking is the activity that produced the
reinsurance premiums, and the same took place in the Philippines. x series of trips each trip in the series corresponding to a different
x x the reinsured, the liabilities insured and the risk originally airline company; (3) receiving the fare from the whole trip; and (4)
underwritten by Commonwealth Insurance Co., upon which the consequently allocating to the various airline companies on the basis
reinsurance premiums and indemnity were based, were all situated of their participation in the services rendered through the mode of
in the Philippines. x x x[19] interline settlement as prescribed by Article VI of the Resolution No.
850 of the IATA Agreement. Those activities were in exercise of the
functions which are normally incident to, and are in progressive
In Commissioner of Internal Revenue v. British Overseas Airways
pursuit of, the purpose and object of its organization as an
Corporation (BOAC),[20] the issue was whether BOAC, a foreign airline company which
international air carrier. In fact, the regular sale of tickets, its main
does not maintain any flight to and from the Philippines is liable for Philippine income
activity, is the very lifeblood of the airline business, the generation of
taxation in respect of sales of air tickets in the Philippines, through a general sales agent
sales being the paramount objective. There should be no doubt then
relating to the carriage of passengers and cargo between two points both outside the
that BOAC was engaged in business in the Philippinesthrough a local
Philippines. Ruling in the affirmative, the Court applied the case of Alexander Howden
agent during the period covered by the assessments. x x x[21]
& Co., Ltd. v. Collector of Internal Revenue, and reiterated the rule that the source of
income is that activity which produced the income. It was held that the sale of tickets
in the Philippines is the activity that produced the income and therefore BOAC should xxxx
pay income tax in the Philippines because it undertook an income producing activity in
the country.
The source of an income is the property, activity or service
that produced the income. For the source of income to be considered
Both the petitioner and respondent cited the case of Commissioner of Internal as coming from the Philippines, it is sufficient that the income is
Revenue v. British Overseas Airways Corporation in support of their arguments, but the derived from activity within the Philippines. In BOAC's case, the sale
correct interpretation of the said case favors the theory of respondent that it is of tickets in the Philippines is the activity that produces the income.
the situs of the activity that determines whether such income is taxable in The tickets exchanged hands here and payments for fares were also
the Philippines. The conflict between the majority and the dissenting opinion in the said made here in Philippine currency. The situs of the source of payments
case has nothing to do with the underlying principle of the law on sourcing of is the Philippines. The flow of wealth proceeded from, and occurred
income. In fact, both applied the case of Alexander Howden & Co., Ltd. v. Collector of within, Philippine territory, enjoying the protection accorded by the
Internal Revenue. The divergence in opinion centered on whether the sale of tickets in Philippine government. In consideration of such protection, the flow
the Philippines is to be construed as the activity that produced the income, as viewed of wealth should share the burden of supporting the government.
by the majority, or merely the physical source of the income, as ratiocinated by Justice
Florentino P. Feliciano in his dissent. The majority, through Justice Ameurfina Melencio-
A transportation ticket is not a mere piece of paper. When
Herrera, as ponente, interpreted the sale of tickets as a business activity that gave rise
issued by a common carrier, it constitutes the contract between the
to the income of BOAC. Petitioner cannot therefore invoke said case to support its view
ticket-holder and the carrier. It gives rise to the obligation of the
that source of income is the physical source of the money earned. If such was the
purchaser of the ticket to pay the fare and the corresponding
interpretation of the majority, the Court would have simply stated that source of income
obligation of the carrier to transport the passenger upon the terms
is not the business activity of BOAC but the place where the person or entity disbursing
and conditions set forth thereon. The ordinary ticket issued to
the income is located or where BOAC physically received the same. But such was not
members of the traveling public in general embraces within its terms
the import of the ruling of the Court. It even explained in detail the business
all the elements to constitute it a valid contract, binding upon the
activity undertaken by BOAC in the Philippines to pinpoint the taxable activity and to
parties entering into the relationship.[22]
justify its conclusion that BOAC is subject to Philippine income taxation. Thus

The Court reiterates the rule that source of income relates to the property,
BOAC, during the periods covered by the subject
activity or service that produced the income. With respect to rendition of labor or
assessments, maintained a general sales agent in the Philippines.
personal service, as in the instant case, it is the place where the labor or service was
That general sales agent, from 1959 to 1971, was engaged in (1)
performed that determines the source of the income. There is therefore no merit in
selling and issuing tickets; (2) breaking down the whole trip into
petitioners interpretation which equates source of income in labor or personal service respondent was paid commission actually transpired outside the Philippines, is relevant
with the residence of the payor or the place of payment of the income. because respondent stayed in the Philippines for 89 days in 1995. Except for the months
of July and September 1995, respondent was in the Philippines in the months of March,
May, June, and August 1995,[30] the same months when she earned commission income
Having disposed of the doctrine applicable in this case, we will now determine
for services allegedly performed abroad. Furthermore, respondent presented no
whether respondent was able to establish the factual circumstances showing that her
evidence to prove that JUBANITEX does not sell embroidered products in
income is exempt from Philippine income taxation.
the Philippines and that her appointment as commission agent
is exclusively for Germany and other European markets.
The decisive factual consideration here is not the capacity in which respondent
received the income, but the sufficiency of evidence to prove that the services she
In sum, we find that the faxed documents presented by respondent did not
rendered were performed in Germany. Though not raised as an issue, the Court is
constitute substantial evidence, or that relevant evidence that a reasonable mind might
clothed with authority to address the same because the resolution thereof will settle
accept as adequate to support the conclusion[31] that it was in Germany where she
the vital question posed in this controversy.[23]
performed the income producing service which gave rise to the reported monthly sales
in the months of March and May to September of 1995. She thus failed to discharge
The settled rule is that tax refunds are in the nature of tax exemptions and are the burden of proving that her income was from sources outside the Philippines and
to be construed strictissimi juris against the taxpayer.[24] To those therefore, who claim exempt from the application of our income tax law. Hence, the claim for tax refund
a refund rest the burden of proving that the transaction subjected to tax is actually should be denied.
exempt from taxation.

The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,[32] a


In the instant case, the appointment letter of respondent as agent of previous case for refund of income withheld from respondents remunerations for
JUBANITEX stipulated that the activity or the service which would entitle her to 10% services rendered abroad, the Court in a Minute Resolution dated February 17,
commission income, are sales actually concluded and collected through [her] 2003,[33] sustained the ruling of the Court of Appeals that respondent is entitled to
efforts.[25] What she presented as evidence to prove that she performed income refund the sum withheld from her sales commission income for the year 1994. This
producing activities abroad, were copies of documents she allegedly faxed to ruling has no bearing in the instant controversy because the subject matter thereof is
JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be used the income of respondent for the year 1994 while, the instant case deals with her
in the finished products as well as samples of sales orders purportedly relayed to her income in 1995. Otherwise, stated, res judicata has no application here. Its elements
by clients. However, these documents do not show whether the instructions or orders are: (1) there must be a final judgment or order; (2) the court that rendered the
faxed ripened into concluded or collected sales in Germany. At the very least, these judgment must have jurisdiction over the subject matter and the parties; (3) it must be
pieces of evidence show that while respondent was in Germany, she sent a judgment on the merits; (4) there must be between the two cases identity of parties,
instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to of subject matter, and of causes of action. [34] The instant case, however, did not satisfy
consummated sales and whether these sales were truly concluded in Germany, the fourth requisite because there is no identity as to the subject matter of the previous
respondent presented no such evidence. Neither did she establish reasonable and present case of respondent which deals with income earned and activities
connection between the orders/instructions faxed and the reported monthly sales performed for different taxable years.
purported to have transpired in Germany.

WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision
The paucity of respondents evidence was even noted by Atty. Minerva and May 8, 2002 Resolution of the Court of Appeals in CA-G.R. SP No. 59794,
Pacheco, petitioners counsel at the hearing before the Court of Tax Appeals. She are REVERSED and SET ASIDE. The June 28, 2000 Decision of the Court of Tax Appeals
pointed out that respondent presented no contracts or orders signed by the customers in C.T.A. Case No. 5633, which denied respondents claim for refund of income tax paid
in Germany to prove the sale transactions therein.[26] Likewise, in her Comment to the for the year 1995 is REINSTATED.
Formal Offer of respondents evidence, she objected to the admission of the faxed
documents bearing instruction/orders marked as Exhibits R,[27] V, W, and X,[28] for being
SO ORDERED.
self serving.[29] The concern raised by petitioners counsel as to the absence of
substantial evidence that would constitute proof that the sale transactions for which
EN BANC
Net income per P472,025.16 P476,671.48 P734,812.77
G.R. No. 60714 October 4, 1991 investigation
COMMISSIONER OF INTERNAL REVENUE, petitioner
vs. Tax due thereon 133,608.00 135,001.00 212,444.00
JAPAN AIR LINES, INC., and THE COURT OF TAX APPEALS, Respondents.
The Solicitor General and Attys. F. R. Quiogue & F. T. Dumpit, for respondents Add: 50% surch. 66,804.00 67,500.50 106,222.00
1/2% mo. int.

PARAS, J.: (3 yrs.) 24,049.44 24,300.18 38,239.92

This petition for review seeks the reversal of the decision* of the Court of Tax Appeals
in CTA Case No. 2480 promulgated on January 15, 1982 which set aside petitioner's
Total due P224,461.44 P226,801.68 P356,905.92
assessment of deficiency income tax inclusive of interest and surcharge as well as
compromise penalty for violation of bookkeeping regulations charged against =========== =========== ===========
respondent.

The antecedental facts of the case are as follows: 1962 1963 SUMMARY

Net income per P1,065,641.63 P1,550,230.48 P224,461.44


Respondent Japan Air Lines, Inc. (hereinafter referred to as JAL for brevity), is a foreign investigation
corporation engaged in the business of international air carriage. From 1959 to 1963,
JAL did not have planes that lifted or landed passengers and cargo in the Philippines as
Tax due thereon 311,692.00 457,069.00 226,801.68
it had not been granted then by the Civil Aeronautics Board (CAB) a certificate of public
convenience and necessity to operate here. However, since mid-July, 1957, JAL had
Add:50% surch. 155,846.00 228,534.50 356,905.92
maintained an officeat the Filipinas Hotel, Roxas Boulevard, Manila. Said office did not
sell tickets but was maintained merely for the promotion of the company's public
1/2% mo. int. 523,642.56
relations and to hand out brochures, literature and other information playing up the
attractions of Japan as a tourist spot and the services enjoyed in JAL planes.
(3 yrs.) 56,104.56 82,272.42 767,875.92

On July 17, 1957, JAL constituted the Philippine Air Lines (PAL), as its general sales agent
in the Philippines. As an agent, PAL, among other things, sold for and in behalf of JAL, Total due P 523,642.56 P 767,875.92 P2,099,687.52
plane tickets and reservations for cargo spaces which were used by the passengers or ============= ============ =============
customers on the facilities of JAL.
Compromise Penalty P 1,500.00
On June 2, 1972, JAL received deficiency income tax assessment notices and a demand
On June 19, 1972, JAL protested said assessments alleging that as a non-resident
letter from petitioner Commissioner of Internal Revenue (hereinafter referred to as
foreign corporation, it was taxable only on income from Philippine sources as
Commissioner for brevity), all dated February 28, 1972, for a total amount of
determined under Section 37 of the Tax Code, and there being no such income during
P2,099,687.52 inclusive of 50% surcharge and interest, for years 1959 through 1963,
the period in question, it was not liable for the deficiency income tax liabilities assessed
computed as follows:
(Rollo, pp. 53-55). The Commissioner resolved otherwise and in a letter-decision dated
1959 1960 1961 December 21, 1972, denied JAL's request for cancellaton of the assessment (Ibid., p. 29).
JAL therefore, elevated the case to the Court of Tax Appeals which, in turn, reversed the "x x x x x x
decision (Ibid., pp. 51-76) and thereafter denied the motion for reconsideration filed by
the Commissioner (Ibid., p. 77). Hence, this petition.
"The source of an income is the property, activity or service that produced the
income. For the source of income to be considered as coming from the
Petitioner raises two issues in this wise: Philippines, it is sufficient that the income is derived from activity within the
Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity
that produces the income. The tickets exchanged hands here and payments
1. WHETHER OR NOT PROCEEDS FROM SALES OF JAPAN AIR LINES TICKETS SOLD IN
for fares were also made here in Philippine currency. The situs of the source of
THE PHILIPPINES ARE TAXABLE AS INCOME FROM SOURCES WITHIN THE PHILIPPINES.
payments is the Philippines. The flow of wealth proceeded from, and occurred
within, Philippine territory, enjoying the protection accorded by the Philippine
2. WHETHER OR NOT JAPAN AIR LINES IS A FOREIGN CORPORATION ENGAGED IN government. In consideration of such protection, the flow of wealth should
TRADE OR BUSINESS IN THE PHILIPPINES. share the burden of supporting the government.

The petition is impressed with merit. "x x x x x x

The issues in the case at bar have already been laid to rest in no less than three cases "True, Section 37(a) of the Tax Code, which enumerates items of gross income
resolved by this Court. Anent the first issue, the landmark case of Commissioner of from sources within the Philippines, namely: (1) interest, (2) dividends, (3)
Internal Revenue vs. British Overseas Airways Corporation (G.R. No.L-65773-74, April service, (4) rentals and royalties, (5) sale of real property, and (6) sale of
30, 1987, 149 SCRA 395) has categorically ruled: personal property, does not mention income from the sale of tickets for
international transportation. However, that does not render it less an income
"The Tax Code defines `gross income' thus: from sources within the Philippines.

`Gross income' includes gains, profits, and income derived from salaries, wages Section 37, by its language does not intend the enumeration to be exclusive. It merely
or compensation for personal service of whatever kind and in whatever form directs that the types of income listed therein be treated as income from sources within
paid, or from profession, vocations, trades, business, commerce, sales, or the Philippines. A cursory reading of the section will show that it does not state that it
dealings in property, whether real or personal, growing out of the ownership is an all-inclusive enumeration, and that no other kind of income may be so considered
or use of or interest in such property; also from interests, rents, dividends, (British Traders Insurance Co., Ltd. vs. Commissioner of Internal Revenue, 13 SCRA 719
securities, or the transaction of any business carried on for gain or profit, or [1965]).
gains, profits and income derived from any source whatever" (Sec.
29(3);Emphasis supplied) "x x x x x x

"The definition is broad and comprehensive to include proceeds from sales of "The absence of flight operations to and from the Philippines is not
transport documents. The words `income from any source whatever' disclose determinative of the source of income or the situs of income taxation. x x x
a legislative policy to include all income not expressly exempted within the The test of taxability is the `source'; and the source of an income is that activity
class of taxable income under our laws. Income means `cash received or its x x x which produced the income (Howden & Co., Ltd. vs. Collector of Internal
equivalent'; it is the amount of money coming to a person within a specific Revenue, 13 SCRA 601 [1965]). Unquestionably, the passage documentations
time x x x; it means something distinct from principal or capital. For, while in these cases were sold in the Philippines and the revenue therefrom was
capital is a fund, income is a flow. As used in our income tax law, `income' derived from a business activity regularly pursued within the Philippines. x x x
refers to the flow of wealth (Madrigal and Paternol vs. Rafferty and The word `source' conveys one essential Idea, that of origin, and the origin of
Concepcion, 38 Phil. 414 [1918]). the income herein is the Philippines (Manila Gas Corporation vs. Collector of
"x x x x x x Internal Revenue, 62 Phil. 895 [1935])."
The above ruling was adopted en toto in the subsequent case of Commissioner of There being no dispute that JAL constituted PAL as local agent to sell its airline tickets,
Internal Revenue vs. Air India and the Court of Tax Appeals (G.R. No. L-72443, January there can be no conclusion other than that JAL is a resident foreign corporation, doing
29, 1988, 157 SCRA 648) holding that the revenue derived from the sales of airplane business in the Philippines. Indeed, the sale of tickets is the very lifeblood of the airline
tickets through its agent Philippine Air Lines, Inc., here in the Philippines, must be business, the generation of sales being the paramount objective (Commissioner of
considered taxable income, and more recently, in the case of Commissioner of Internal Internal Revenue vs. British Overseas Airways Corporation, supra). The case of CIR vs.
Revenue vs. American Airlines, Inc. and Court of Tax Appeals (G.R. No. 67938, December American Airlines, Inc. (supra) sums it up as follows:
19, 1989, 180 SCRA 274), it was likewise declared that for the source of income to be
considered as coming from the Philippines, it is sufficient that the income is derived
"x x x, foreign airline companies which sold tickets in the Philippines through
from activities within this country regardless of the absence of flight operations within
their local agents, whether called liaison offices, agencies or branches, were
Philippine territory.
considered resident foreign corporations engaged in trade or business in the
country. Such activities show continuity of commercial dealings or
Verily, JAL is a resident foreign corporation under Section 84 (g) of the National Internal arrangements and performance of acts or works or the exercise of some
Revenue Code of1939. Definition of what a resident foreign corporation is was likewise functions normally incident to and in progressive prosecution of commercial
reproduced under Section 20 of the 1977 Tax Code. gain or for the purpose and object of the business organization."

The BOAC Doctrine has expressed in unqualified terms: Under Section 24 of Commonwealth Act No. 466 otherwise known as the "National
"Under Section 20 of the 1977 Tax Code: Internal Revenue Code of 1939", the applicable law in the case at bar, resident foreign
corporations are taxed thirty percentum (30%) upon the amount by which their total
net income exceed one hundred thousand pesos. JAL is liable to pay 30% of its total
"(h) the term `resident foreign corporation' applies to a foreign corporation
net income for the years 1959 through 1963 as contradistinguished from the
engaged in trade or business within the Philippines or having an office or place
computation arrived at by the Commissioner as shown in the assessment. Apparently,
of business therein.
the Commissioner failed to specify the tax base on the total net income of JAL in
figuring out the total income due, i.e., whether 25% or 30% level.
"(i) the term `non-resident foreign corporation' applies to a foreign
corporation not engaged in trade or business within the Philippines and not
Having established the tax liability of respondent JAL, the only thing left to determine
having any office or place of business therein."
is the propriety of the 50% surcharge imposed by petitioner. It appears that this must
be answered in the negative. As held in the case of CIR vs. Air India (supra):
"x x x. There is no specific criterion as to what constitutes `doing' or `engaging
in' or `transacting' business. Each case must be judged in the light of its
"The 50% surcharge or fraud penalty provided in Section 72 of the National
peculiar environmental circumstances. The term implies continuity of
Internal Revenue Code is imposed on a delinquent taxpayer who willfully
commercial dealings and arrangements, and contemplates, to that extent, the
neglects to file the required tax return within the period prescribed by the law,
performance of acts or works or the exercise of some of the functions normally
or who willfully files a false or fraudulent tax return, x x x.
incident to, and in progressive prosecution of commercial gain or for the
purpose and object of the business organization (The Mentholatum Co., Inc.,
et al. vs. Anacleto Mangaliman, et al., 72 Phil. 524 (1941); Section 1, R.A. No. "x x x x x x
5455). In order that a foreign corporation may be regarded as doing business
within a State, there must be continuity of conduct and intention to establish "On the other hand, the same Section provides that if the failure to file the
a continuous business, such as the appointment of a local agent, and not one required tax return is not due to willful neglect, a penalty of 25% is to be added
of a temporary character (Pacific Micronesian Line, Inc. vs. Del Rosario and to the amount of the tax due from the taxpayer."
Peligon, 96 Phil. 23, 30, citing Thompson on Corporations, Vol. 8, 3rd ed., pp.
844-847 and Fisher's Philippine Law of Stock Corporation, p. 415).
Nowhere in the records of the case can be found that JAL deliberately failed to file its
income tax returns for the years covered by the assessment. There was not even an
attempt by petitioner to prove the same or justify the imposition of the 50% surcharge. In sum, the following schedule as recomputed illustrates the total tax liability of the
All that petitioner did was to cite the provision of law upon which the surcharge was private respondent for the years 1959 through 1963 -
based without explaining why it was applicable to respondent's case. Such cannot be
| Net | 30% of Net | Add 25% | Add 6% | Summary of Total
countenanced for mere allegations are definitely not acceptable. The willful neglect to
| Income | Income as | surcharge | interest | Tax Due from the
file the required tax return or the fraudulent intent to evade the payment of taxes,
| | Income | under Sec. | per | Private
considering that the same is accompanied by legal consequences, cannot be presumed
| | Tax Due | 72 NIRC of | annum for | Respondent
(CIR vs. Air India, supra). The fraud contemplated by law is actual and constructive. It
| | under | 1939 | a |
must be intentional fraud, consisting of deception willfully and deliberately done or
| | Secs. 24(a) | | maximum |
resorted to in order to induce another to give up some legal right. Negligence, whether
and (b) (2) of 3 years
slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated
NIRC of under Sec.
by the law. It must amount to intentional wrongdoing with the sole object of evading
1939 51(d)
the tax (Aznar v. Court of Tax Appeals, G.R. No. L-20569, August 23, 1974, 58 SCRA 519).
NIRC of
This was not proven to be so in the case of JAL as it believed in good faith that it need
1939
not file the tax return for it had no taxable income then. The element of fraud is lacking.
At most, only negligence may be imputed to JAL for not ascertaining the dispensability _ __ _ _ __ __ __ __ _ _ __ __ __ __ _ _ __ __ __ __ _ _ __ __ __ _ _ __ __ __ __ __
of filing the tax returns. As such, JAL may be subjected only to the 25% surcharge 1959 | __ | __ | __ | __ __ | P 202,498.77
prescribed by the aforequoted law. 1960 | P | P | P | P | 204,492.05
1961 | 472,025.16 | 141,607.54 | 35,401.88 | 25,489.35 | 315,234.66
1962 | 476,671.48 | 143,001.44 | 35,750.36 | 25,740.25 | 399,615.60
As to the 1/2% interest per month, the same finds basis in Section 51(d) of the Tax Code
1963 | 734,812.77 | 220,443.83 | 55,110.95 | 39,679.88 | 581,336.42
then in force which states:
| 1,065,641.63 | 319,692.48 | 79,923.12 | |
(d) Interest on deficiency. Interest upon the amount determined as a deficiency
| 1,550,230.48 | 465,069.14 | 116,267.28 | |
shall be assessed at the same time as the deficiency and shall be paid upon P1,703,177.40
| | | | |
notice and demand from the Commissioner of Internal Revenue; and shall be ============
collected as a part of the tax, at the rate of six per centum per annum from the Accordingly, private respondent is liable for unpaid taxes and charges in the total
date prescribed for the payment of the tax x x x; PROVIDED, That the maximum amount of ONE MILLION SEVEN HUNDRED THREE THOUSAND ONE HUNDRED
amount that may be collected as interest on deficiency shall in no case exceed SEVENTY SEVENAND FORTY CENTAVOS (P1,703,177.40) The dismissal for lack of merit
the amount corresponding to a period of three years, the present provisions by this Court of the appeal in JAL v. Commissioner of Internal Revenue (G.R. No. L-
regarding prescription to the contrary notwithstanding. 30041) on February 3, 1969 is not res judicata to the present case. The Tax Court ruled
in that case that the mere sale of tickets, unaccompanied by the physical act of carriage
The 6% interest per annum is the same as 1/2% interest per month and petitioner of transportation, does not render the taxpayer therein subject to the common carrier's
correctly computed such interest equivalent to three years which is the maximum set tax. The common carrier's tax is an excise tax, being a tax on the activity of transporting,
by the law. conveying or removing passengers and cargo from one place to another. It purports to
tax the business of transportation. Being an excise tax, the same can be levied by the
State only when the acts, privileges or businesses are done or performed within the
On the other hand, the compromise penalty amounting to P1,500.00 for violation of
jurisdiction of the Philippines (Commissioner of Internal Revenue v. British Overseas
bookkeeping regulations appears to be without support. The particular provision in the
Airways Corporation, supra).
said regulations allegedly violated was not even specified. Furthermore, the term
"compromise penalty" itself is not found among the penal provisions of the
Bookkeeping Regulations (Revenue Regulations No. V-1, as amended, March 17, 1947, The subject matter of the case underconsideration is income tax, a direct tax on the
pp. 836-837, Revenue Regulations Updated by Prof. Eustaquio Ordono, income of persons and other entities "of whatever kind and in whatever form derived
1984).1âwphi1 The compromise penalty is therefore, improperly imposed. from any source." Since the two cases treat of a different subject matter, the decision in
G.R. No. L-30041 cannot be res judicata with respect to this case.
PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the decision of the Court of
Tax Appeals in CTA Case No. 2480 is SET ASIDE; and (c) private respondent JAL is
ordered to pay the amount of P1,703,177.40 as deficiency taxes for the fiscal years 1959
to 1963 inclusive of interest andsurcharges.
SO ORDERED.
THIRD DIVISION City of Iloilo, shall pay a municipal license tax of ten (P0.10) centavos
for every case of twenty-four bottles; PROVIDED, HOWEVER, that
G.R. No. L-52019 August 19, 1988 softdrinks sold to the public at not more than five (P0.05) centavos
per bottle shall pay a tax of one and one half (P0.015) (centavos) per
ILOILO BOTTLERS, INC., plaintiff-appellee,
case of twenty four bottles.
vs.
CITY OF ILOILO, defendant-appellant.
Efrain B. Trenas for plaintiff-appellee. Section 1-A—For purposes of this Ordinance, all deliveries and/or
dispatches emanating or made at the plant and all goods or stocks
Diosdado Garingalao for defendant-appellant.
taken out of the plant for distribution, sale or exchange irrespective
(of) where it would take place shall be covered by the operation of
CORTES, J.: this Ordinance.
The fundamental issue in this appeal is whether the Iloilo Bottlers, Inc. which had its
bottling plant in Pavia, Iloilo, but which sold softdrinks in Iloilo City, is liable under Iloilo
4. That prior to September, 1966, Santiago Syjuco Inc., owned and
City tax Ordinance No. 5, series of 1960, as amended, which imposes a municipal license
operated a bottling plant at Muelle Loney Street, Iloilo City, which
tax on distributors of soft-drinks.
was doing business under the name of Seven-up Bottling Company
of the Philippines and bottled the soft-drinks Pepsi-Cola and 7-up;
On July 12,1972, Iloilo Bottlers, Inc. filed a complaint docketed as Civil Case No. 9046 however sometime on September 14,1966, Santiago Syjuco, Inc.,
with the Court of First Instance of Iloilo praying for the recovery of the sum of P3,329.20, informed all its employees that it (was) closing its Iloilo Plant due to
which amount allegedly constituted payments of municipal license taxes under financial losses and in fact closed the same and later sold the plant
Ordinance No. 5 series of 1960, as amended, that the company paid under protest. to the plaintiff Iloilo Bottlers, Inc.

On November 15,1972, the parties submitted a partial stipulation of facts, the material 5. That thereafter, plaintiff operated the said plant by bottling the soft
portions of which state drinks Pepsi-Cola and 7-up; however, sometime in July 1968, plaintiff
closed said bottling plant at Muelle Loney, Iloilo City, and transferred
xxx xxx xxx its bottling operations to its new plant in Barrio Ungca, Municipality
of Pavia, Province of Iloilo, and which is outside the jurisdiction of the
City of Iloilo;
2. That plaintiff is engaged in the business of bottling softdrinks
under the trade name of Pepsi Cola And 7-up and selling the same
to its customers, with a bottling plant situated at Barrio Ungca 6. That from the time of (the) enactment (of the ordinance), the Seven
Municipality of Pavia, Iloilo, Philippines and which is outside the Up Bottling Company of the Philippines under Santiago Syjuco Inc.,
jurisdiction of defendant; had been religiously paying the defendant City of Iloilo the above-
mentioned municipal license tax due therefrom for bottler because
its bottling plant was then still situated at Muelle Loney St., Iloilo City;
3. That defendant enacted an ordinance on January 11, 1960 known but the plaintiff stopped paying the municipal license tax (after)
as Ordinance No. 5, Series of 1960 which ordinance was successively October 21, 1968 (when) it transferred its plant to Barrio Ungca
amended by Ordinance No. 28, Series of 1960; Ordinance No. 15, Municipality of Pavia, Iloilo which is outside the jurisdiction of the
Series of 1964; and Ordinance No. 45, Series of 1964; which provides City of Iloilo;
as follows:

7. That sometime on July 31, 1969, the defendant demanded from


Section l. — Any person, firm or corporation engaged in the the plaintiff the payment of the municipal license tax under the
distribution, manufacture or bottling of coca-cola, pepsi cola, tru- above-mentioned ordinance, a xerox copy of the said letter is
orange, seven-up and other soft drinks within the jurisdiction of the
attached to the complaint as Annex "A" and made an integral part protest agreed to the payment of the back taxes, on staggered basis,
hereof by reference. which was acceded to by the defendant;
12. That as computed by the plaintiff the following are its softdrinks
8. That plaintiff explained in a letter to the defendant that it could not sold in Iloilo City since it transferred its bottling plant from the City
anymore be liable to pay the municipal license fee because its of Iloilo to Barrio Ungca Pavia, Iloilo in July 1968, to wit: No. of Cases
bottling plant (was) not anymore inside the City of Iloilo, and that sold
moreover, since it itself (sold) its own products to its (customers)
directly, it could not be considered as a distributor in line with the SEVEN- PEPSI- TOTAL TAX
doctrines enunciated by the Supreme Court in the cases of City of UP COLA DUE
Manila vs. Bugsuk Lumber Co., L- 8255, July 11, 1957; Manila Trading
& Supply Co., Inc. vs. City of Manila L-1 2156, April 29, 1959; Central 1968 Jul to 39,340 49,060 88,400 P8,840
Azucarera de Don Pedro vs. City of Manila et al., G.R. No. L7679, Dec
September 29,1955; Cebu Portland Cement vs. City of Manila and City 1969 Jan to 81,240 87,660 168,900 16,890
Treasurer of Manila, L-1 4229,July 26,1960. A xerox copy of the said Dec
letter is attached as Annex "B" to the complaint and made an integral 1970 Jan to 79,389 89,211 168,600 16,600
part hereof by reference. As a result of the said letter of the plaintiff, Dec
the defendant did not anymore press the plaintiff to pay the said
1971 Jan to 80,670 88,480 169,150 16,915
municipal license tax;
Dec
TOTAL 280,639 314,411 595,050 P 59,505
9. That sometime on January 25, 1972, the defendant demanded
from the plaintiff compliance with the said ordinance for 1972 in view
of the fact that it was engaged in distribution of the softdrinks in the
City of Iloilo, and it further demanded from the plaintiff payment of
back taxes from the time it transferred its bottling plant to the 13. That the plaintiff does not maintain any store or commercial
Municipality of Pavia, Iloilo; establishment in the City of Iloilo from which it distributes its
products, but by means of a fleet of delivery trucks, plaintiff
10. That the plaintiff demurred to the said demand of the defendant distributes its products from its bottling plant at Barrio Ungca
raising as its jurisdiction the reason that its bottling plant is situated Municipality of Pavia, Iloilo, directly to its customers in the different
outside the City of Iloilo and as bottler could not be considered as towns of the Province of Iloilo as well as the City of Iloilo;
distributor under the said ordinance although it sells its product
directly to the consumer, in line with the jurisprudence enunciated by 14. That the plaintiff is already paying the National Government a
the Supreme Court but due to insistence of the defendant, the percentage Tax of 71/t, as manufacturer's sales tax on all the
plaintiff paid on April 20, 1972, the first quarter payment of the softdrinks it manufactures as follows:
municipal licence tax in the sum of P3,329.20, under protest, and
thereafter has been paying defendant every quarter under protest;
O.R. No. 4683995 - January, 1972 Sales P17,222.90
O.R. No. 5614767 - February " " 17,024.81
11. That on June l5, 1972,the defendant informed the plaintiff that it
O.R. No. .5614870 - March " " 17,589.19
must pay all the taxes due since July, 1968 up to the last quarter of
1971, otherwise it shall be constrained to cancel the operation of the O.R. No. 5614891 - April " " 18,726.77
business of the plaintiff, and because of this threat, and so as not to O.R. No. 5614897 - May " " 16,710.99
occasion disruption of its business operation, the plaintiff under O.R. No. 5614935 - June " " 14,791.20
O.R. No. 5614967 - July " " 13,952.00
O.R. No. 5614973 - August " " 15,726.16 The second ground is manifestly devoid of merit. It is clear from the ordinance that
O.R. No. 56'L4999 - September " " 19,159.54 three types of activities are covered: (1) distribution, (2) manufacture and (3) bottling of
softdrinks. A person engaged in any or all of these activities is subject to the tax.

and is also paying the municipal license tax to the municipality of


Pavia, Iloilo in the amount of P l0,000.00 every year, plus a municipal The first ground, however, merits serious consideration.
license tax for engaging in its business to the municipality of Pavia in
its amount of P2,000.00 every year. This Court has always recognized that the right to manufacture implies the right to
xxx xxx xxx sell/distribute the manufactured products [See Central Azucarera de Don Pedro v. City
of Manila and Sarmiento, 97 Phil. 627 (1955); Caltex (Philippines), Inc. v. City of Manila
and Cudiamat, G.R. No. L-22764, July 28, 1969, 28 SCRA 840, 843.] Hence, for tax
[Rollo, P. 10 (Record on Appeal, pp. 25-31)]
purposes, a manufacturer does not necessarily become engaged in the separate
business of selling simply because it sells the products it manufactures. In certain cases,
On the basis of the above stipulations, the court a quo rendered on January 26, 1973 a however, a manufacturer may also be considered as engaged in the separate business
decision in favor of Iloilo Bottlers, Inc. declaring the Corporation not liable under the of selling its products.
ordinance and directing the City of Iloilo to pay the sum of' P3,329.20. The decision was
amended in an Order dated March 15, 1973, so as to include the amounts paid by the
To determine whether an entity engaged in the principal business of manufacturing, is
company after the filing of the complaint. The City of Iloilo appealed to the Court of
likewise engaged in the separate business of selling, its marketing system or sales
Appeals which certified the case to this Court.
operations must be looked into.

The tax ordinance imposes a tax on persons, firms, and corporations engaged in the
In several cases [See Central Azucarera de Don Pedro v. City of Manila and
business of:
Sarmiento, supra; Cebu Portland Cement Co. v. City of Manila and the City Treasurer,
108 Phil. 1063 (1960); Caltex (Philippines), Inc. v. City of Manila and Cudiamat, supra],
1. distribution of soft-drinks this Court had occasion to distinguish two marketing systems:
2. manufacture of soft-drinks, and
3. bottling of softdrinks within the territorial jurisdiction of the City of Iloilo. Under the first system, the manufacturer enters into sales transactions and invoices the
sales at its main office where purchase orders are received and approved before delivery
There is no question that after it transferred its plant to Pavia, Iloilo province, Iloilo orders are sent to the company's warehouses, where in turn actual deliveries are made.
Bottlers, Inc. no longer manufactured/bottled its soft drinks within Iloilo City. Thus, it No warehouse sales are made; nor are separate stores maintained where products may
cannot be taxed as one falling under the second or the third type of business. The be sold independently from the main office. The warehouses only serve as storage sites
resolution of this case therefore hinges on whether the company may be considered and delivery points of the products earlier sold at the main office. Under the second
engaged in the distribution of softdrinks in Iloilo City, even after it had transferred its system, sales transactions are entered into and perfected at stores or warehouses
bottling plant to Pavia, so as to be within the purview of the ordinance. maintained by the company. Anyone who desires to purchase the product may go to
the store or warehouse and there purchase the merchandise. The stores and
warehouses serve as selling centers.
Iloilo Bottlers, Inc. disclaims liability on two grounds: First, it contends that since it is not
engaged in the independent business of distributing soft-drinks, but that its activity of
selling is merely an incident to, or is a necessary consequence of its main or principal Entities operating under the first system are NOT considered engaged in the separate
business of bottling, then it is NOT liable under the city tax ordinance. Second, it claims business of selling or dealing in their products, independent of their manufacturing
that only manufacturers or bottlers having their plants inside the territorial jurisdiction business. Entities operating under the second system are considered engaged in the
of the city are covered by the ordinance. separate business of selling.
In the case at bar, the company distributed its softdrinks by means of a fleet of delivery
trucks which went directly to customers in the different places in lloilo province. Sales
transactions with customers were entered into and sales were perfected and
consummated by route salesmen. Truck sales were made independently of transactions
in the main office. The delivery trucks were not used solely for the purpose of delivering
softdrinks previously sold at Pavia. They served as selling units. They were what were
called, until recently, "rolling stores". The delivery trucks were therefore much the same
as the stores and warehouses under the second marketing system. Iloilo Bottlers, Inc.
thus falls under the second category above. That is, the corporation was engaged in the
separate business of selling or distributing soft-drinks, independently of its business of
bottling them.

The tax imposed under Ordinance No. 5 is an excise tax. It is a tax on the privilege of
distributing, manufacturing or bottling softdrinks. Being an excise tax, it can be levied
by the taxing authority only when the acts, privileges or businesses are done or
performed within the jurisdiction of said authority [Commissioner of Internal Revenue
v. British Overseas Airways Corp. and Court of Appeals, G.R. Nos. 65773-74, April 30,
1987, 149 SCRA 395, 410.] Specifically, the situs of the act of distributing, bottling or
manufacturing softdrinks must be within city limits, before an entity engaged in any of
the activities may be taxed in Iloilo City.

As stated above, sales were made by Iloilo Bottlers, Inc. in Iloilo City. Thus, We have no
option but to declare the company liable under the tax ordinance.

With the foregoing discussion, it becomes unnecessary to discuss the other issues
raised by the parties.

WHEREFORE, the appealed decision is hereby REVERSED. The complaint in Civil Case
No. 9046 is ordered DISMISSED. No Costs.
SO ORDERED.
EN BANC G.R. No. 65774 (CTA Case No. 2561, the Second Case)
G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner, On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and
vs. penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as compromise
APPEALS, respondents. penalties for violation of Section 46 (requiring the filing of corporation returns)
Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for respondent British Airways. penalized under Section 74 of the National Internal Revenue Code (NIRC).

MELENCIO-HERRERA, J.: On 25 November 1971, BOAC requested that the assessment be countermanded and
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the set aside. In a letter, dated 16 February 1972, however, the CIR not only denied the
joint Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated BOAC request for refund in the First Case but also re-issued in the Second Case the
26 January 1983, which set aside petitioner's assessment of deficiency income taxes deficiency income tax assessment for P534,132.08 for the years 1969 to 1970-71 plus
against respondent British Overseas Airways Corporation (BOAC) for the fiscal years P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's request for
1959 to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18 reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to file
November, 1983 denying reconsideration. the Second Case before the Tax Court praying that it be absolved of liability for
deficiency income tax for the years 1969 to 1971.

BOAC is a 100% British Government-owned corporation organized and existing under


the laws of the United Kingdom It is engaged in the international airline business and This case was subsequently tried jointly with the First Case.
is a member-signatory of the Interline Air Transport Association (IATA). As such it
operates air transportation service and sells transportation tickets over the routes of the On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the
other airline members. During the periods covered by the disputed assessments, it is CIR. The Tax Court held that the proceeds of sales of BOAC passage tickets in the
admitted that BOAC had no landing rights for traffic purposes in the Philippines, and Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during
was not granted a Certificate of public convenience and necessity to operate in the the period in question, do not constitute BOAC income from Philippine sources "since
Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly no service of carriage of passengers or freight was performed by BOAC within the
in 1961 and partly in 1962, when it was granted a temporary landing permit by the CAB. Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA
Consequently, it did not carry passengers and/or cargo to or from the Philippines, position was that income from transportation is income from services so that the place
although during the period covered by the assessments, it maintained a general sales where services are rendered determines the source. Thus, in the dispositive portion of
agent in the Philippines — Wamer Barnes and Company, Ltd., and later Qantas Airways its Decision, the Tax Court ordered petitioner to credit BOAC with the sum of
— which was responsible for selling BOAC tickets covering passengers and cargoes. 1 P858,307.79, and to cancel the deficiency income tax assessments against BOAC in the
G.R. No. 65773 (CTA Case No. 2373, the First Case) amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.

On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
BOAC the aggregate amount of P2,498,358.56 for deficiency income taxes covering the
years 1959 to 1963. This was protested by BOAC. Subsequent investigation resulted in
The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
the issuance of a new assessment, dated 16 January 1970 for the years 1959 to 1967 in
the amount of P858,307.79. BOAC paid this new assessment under protest.
1. Whether or not the revenue derived by private respondent British
Overseas Airways Corporation (BOAC) from sales of tickets in the
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which
Philippines for air transportation, while having no landing rights here,
claim was denied by the CIR on 16 February 1972. But before said denial, BOAC had
constitute income of BOAC from Philippine sources, and, accordingly,
already filed a petition for review with the Tax Court on 27 January 1972, assailing the
taxable.
assessment and praying for the refund of the amount paid.
2. Whether or not during the fiscal years in question BOAC s a business in the Philippines through a local agent during the period covered by the
resident foreign corporation doing business in the Philippines or has assessments. Accordingly, it is a resident foreign corporation subject to tax upon its
an office or place of business in the Philippines. total net income received in the preceding taxable year from all sources within the
3. In the alternative that private respondent may not be considered a Philippines. 5
resident foreign corporation but a non-resident foreign corporation,
then it is liable to Philippine income tax at the rate of thirty-five per Sec. 24. Rates of tax on corporations. — ...
cent (35%) of its gross income received from all sources within the
(b) Tax on foreign corporations. — ...
Philippines.
(2) Resident corporations. — A corporation organized, authorized, or
existing under the laws of any foreign country, except a foreign fife
Under Section 20 of the 1977 Tax Code: insurance company, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this
(h) the term resident foreign corporation engaged in trade or section upon the total net income received in the preceding taxable
business within the Philippines or having an office or place of year from all sources within the Philippines. (Emphasis supplied)
business therein.
Next, we address ourselves to the issue of whether or not the revenue from sales of
(i) The term "non-resident foreign corporation" applies to a foreign tickets by BOAC in the Philippines constitutes income from Philippine sources and,
corporation not engaged in trade or business within the Philippines accordingly, taxable under our income tax laws.
and not having any office or place of business therein
The Tax Code defines "gross income" thus:
It is our considered opinion that BOAC is a resident foreign corporation. There is no "Gross income" includes gains, profits, and income derived from
specific criterion as to what constitutes "doing" or "engaging in" or "transacting" salaries, wages or compensation for personal service of whatever
business. Each case must be judged in the light of its peculiar environmental kind and in whatever form paid, or from profession, vocations,
circumstances. The term implies a continuity of commercial dealings and arrangements, trades, business, commerce, sales, or dealings in property, whether
and contemplates, to that extent, the performance of acts or works or the exercise of real or personal, growing out of the ownership or use of or interest
some of the functions normally incident to, and in progressive prosecution of in such property; also from interests, rents, dividends, securities, or
commercial gain or for the purpose and object of the business organization. 2 "In order the transactions of any business carried on for gain or profile, or
that a foreign corporation may be regarded as doing business within a State, there must gains, profits, and income derived from any source whatever (Sec.
be continuity of conduct and intention to establish a continuous business, such as the 29[3]; Emphasis supplied)
appointment of a local agent, and not one of a temporary character. 3
The definition is broad and comprehensive to include proceeds from sales of transport
BOAC, during the periods covered by the subject - assessments, maintained a general documents. "The words 'income from any source whatever' disclose a legislative policy
sales agent in the Philippines, That general sales agent, from 1959 to 1971, "was to include all income not expressly exempted within the class of taxable income under
engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series our laws." Income means "cash received or its equivalent"; it is the amount of money
of trips — each trip in the series corresponding to a different airline company; (3) coming to a person within a specific time ...; it means something distinct from principal
receiving the fare from the whole trip; and (4) consequently allocating to the various or capital. For, while capital is a fund, income is a flow. As used in our income tax law,
airline companies on the basis of their participation in the services rendered through "income" refers to the flow of wealth. 6
the mode of interline settlement as prescribed by Article VI of the Resolution No. 850
of the IATA Agreement." 4 Those activities were in exercise of the functions which are
The records show that the Philippine gross income of BOAC for the fiscal years 1968-
normally incident to, and are in progressive pursuit of, the purpose and object of its
69 to 1970-71 amounted to P10,428,368 .00. 7
organization as an international air carrier. In fact, the regular sale of tickets, its main
activity, is the very lifeblood of the airline business, the generation of sales being the
paramount objective. There should be no doubt then that BOAC was "engaged in" Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the "transport of passengers and cargo to and from foreign cities", 12 it cannot alter the
income. 8 For the source of income to be considered as coming from the Philippines, it fact that income from the sale of tickets was derived from the Philippines. The word
is sufficient that the income is derived from activity within the Philippines. In BOAC's "source" conveys one essential idea, that of origin, and the origin of the income herein
case, the sale of tickets in the Philippines is the activity that produces the income. The is the Philippines. 13
tickets exchanged hands here and payments for fares were also made here in Philippine
currency. The site of the source of payments is the Philippines. The flow of wealth
It should be pointed out, however, that the assessments upheld herein apply only to
proceeded from, and occurred within, Philippine territory, enjoying the protection
the fiscal years covered by the questioned deficiency income tax assessments in these
accorded by the Philippine government. In consideration of such protection, the flow
cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree
of wealth should share the burden of supporting the government.
No. 69, promulgated on 24 November, 1972, international carriers are now taxed as
follows:
A transportation ticket is not a mere piece of paper. When issued by a common carrier, ... Provided, however, That international carriers shall pay a tax of 2-
it constitutes the contract between the ticket-holder and the carrier. It gives rise to the ½ per cent on their cross Philippine billings. (Sec. 24[b] [21, Tax
obligation of the purchaser of the ticket to pay the fare and the corresponding Code).
obligation of the carrier to transport the passenger upon the terms and conditions set
forth thereon. The ordinary ticket issued to members of the traveling public in general
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory
embraces within its terms all the elements to constitute it a valid contract, binding upon
definition of the term "gross Philippine billings," thus:
the parties entering into the relationship. 9
... "Gross Philippine billings" includes gross revenue realized from
uplifts anywhere in the world by any international carrier doing
True, Section 37(a) of the Tax Code, which enumerates items of gross income from
business in the Philippines of passage documents sold therein,
sources within the Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals
whether for passenger, excess baggage or mail provided the cargo
and royalties, (5) sale of real property, and (6) sale of personal property, does not
or mail originates from the Philippines. ...
mention income from the sale of tickets for international transportation. However, that
does not render it less an income from sources within the Philippines. Section 37, by its
language, does not intend the enumeration to be exclusive. It merely directs that the The foregoing provision ensures that international airlines are taxed on their income
types of income listed therein be treated as income from sources within the Philippines. from Philippine sources. The 2-½ % tax on gross Philippine billings is an income tax. If
A cursory reading of the section will show that it does not state that it is an all-inclusive it had been intended as an excise or percentage tax it would have been place under
enumeration, and that no other kind of income may be so considered. " 10 Title V of the Tax Code covering Taxes on Business.

BOAC, however, would impress upon this Court that income derived from Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by
transportation is income for services, with the result that the place where the services this Court of the appeal in JAL vs. Commissioner of Internal Revenue (G.R. No. L-30041)
are rendered determines the source; and since BOAC's service of transportation is on February 3, 1969, is res judicata to the present case. The ruling by the Tax Court in
performed outside the Philippines, the income derived is from sources without the that case was to the effect that the mere sale of tickets, unaccompanied by the physical
Philippines and, therefore, not taxable under our income tax laws. The Tax Court act of carriage of transportation, does not render the taxpayer therein subject to the
upholds that stand in the joint Decision under review. common carrier's tax. As elucidated by the Tax Court, however, the common carrier's
tax is an excise tax, being a tax on the activity of transporting, conveying or removing
passengers and cargo from one place to another. It purports to tax the business of
The absence of flight operations to and from the Philippines is not determinative of the
transportation. 14 Being an excise tax, the same can be levied by the State only when
source of income or the site of income taxation. Admittedly, BOAC was an off-line
the acts, privileges or businesses are done or performed within the jurisdiction of the
international airline at the time pertinent to this case. The test of taxability is the
Philippines. The subject matter of the case under consideration is income tax, a direct
"source"; and the source of an income is that activity ... which produced the
tax on the income of persons and other entities "of whatever kind and in whatever form
income. 11 Unquestionably, the passage documentations in these cases were sold in
derived from any source." Since the two cases treat of a different subject matter, the
the Philippines and the revenue therefrom was derived from a activity regularly pursued
decision in one cannot be res judicata to the other.
within the Philippines. business a And even if the BOAC tickets sold covered the
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET
ASIDE. Private respondent, the British Overseas Airways Corporation (BOAC), is hereby
ordered to pay the amount of P534,132.08 as deficiency income tax for the fiscal years
1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from April 16, 1972
for a period not to exceed three (3) years in accordance with the Tax Code. The BOAC
claim for refund in the amount of P858,307.79 is hereby denied. Without costs.
SO ORDERED.
Separate Opinions Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax Code"), as
amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3 August
TEEHANKEE, C.J., concurring: 1969, read as follows:
I concur with the Court's majority judgment upholding the assessments of deficiency
income taxes against respondent BOAC for the fiscal years 1959-1969 to 1970-1971 (2) Resident corporations. — A foreign corporation engaged in trade
and therefore setting aside the appealed joint decision of respondent Court of Tax or business with in the Philippines (expect foreign life insurance
Appeals. I just wish to point out that the conflict between the majority opinion penned companies) shall be taxable as provided in subsection (a) of this
by Mr. Justice Feliciano as to the proper characterization of the taxable income derived section.
by respondent BOAC from the sales in the Philippines of tickets foe BOAC form the
issued by its general sales agent in the Philippines gas become moot after November Section 24 (a) of the Tax Code in turn provides:
24, 1972. Booth opinions state that by amendment through P.D. No.69, promulgated
Rate of tax on corporations. — (a) Tax on domestic corporations. —
on November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the rate of
... and a like tax shall be livied, collected, and paid annually upon
income tax on foreign corporations, international carriers such as respondent BOAC,
the total net income received in the preceeding taxable year from all
have since then been taxed at a reduced rate of 2-½% on their gross Philippine billings.
sources within the Philippines by every corporation
There is, therefore, no longer ant source of substantial conflict between the two
organized, authorized, or existing under the laws of any foreign
opinions as to the present 2-½% tax on their gross Philippine billings charged against
country: ... . (Emphasis supplied)
such international carriers as herein respondent foreign corporation.

Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer
FELICIANO, J., dissenting:
when it amended once more Section 24 (b) (2) of the Tax Code so as to read as follows:
With great respect and reluctance, i record my dissent from the opinion of Mme. Justice
(2) Resident Corporations. — A corporation, organized, authorized
A.A. Melencio-Herrera speaking for the majority . In my opinion, the joint decision of
or existing under the laws of any foreign counrty, except foreign life
the Court of Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, is
insurance company, engaged in trade or business within the
correct and should be affirmed.
Philippines, shall be taxable as provided in subsection (a) of this
The fundamental issue raised in this petition for review is whether the British Overseas
section upon the total net income received in the preceding taxable
Airways Corporation (BOAC), a foreign airline company which does not maintain any
year from all sources within the Philippines. (Emphasis supplied)
flight operations to and from the Philippines, is liable for Philippine income taxation in
respect of "sales of air tickets" in the Philippines through a general sales agent, relating
to the carriage of passengers and cargo between two points both outside the Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-
Philippines. resident foreign corporations. Section 24 (b) (1) as amended by Republic Act No. 3825
approved 22 June 1963, read as follows:
1. The Solicitor General has defined as one of the issue in this case the question of:
(b) Tax on foreign corporations. — (1) Non-resident corporations. —
2. Whether or not during the fiscal years in question 1 BOAC [was] a
There shall be levied, collected and paid for each taxable year, in lieu
resident foreign corporation doing business in the Philippines or
of the tax imposed by the preceding paragraph upon the amount
[had] an office or place of business in the Philippines.
received by every foreign corporation not engaged in trade or
It is important to note at the outset that the answer to the above-quoted issue is not
business within the Philippines, from all sources within the
determinative of the lialibity of the BOAC to Philippine income taxation in respect of
Philippines, as interest, dividends, rents, salaries, wages, premium,
the income here involved. The liability of BOAC to Philippine income taxation in respect
annuities, compensations, remunerations, emoluments, or other
of such income depends, not on BOAC's status as a "resident foreign corporation" or
fixed or determinative annual or periodical gains, profits and income
alternatively, as a "non-resident foreign corporation," but rather on whether or not such
a tax equal to thirty per centum of such amount: provided, however,
income is derived from "source within the Philippines."
that premiums shall not include reinsurance premiums. 2
A "resident foreign corporation" or foreign corporation engaged in trade or business in
the Philippines or having an office or place of business in the Philippines is subject to
Philippine income taxation only in respect of income derived from sources within the
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and The Supreme Court has said, in a definition much quoted but often
therefore a resident foreign corporation, or not doing business in the Philippines and debated, that income may be derived from three possible sources
therefore a non-resident foreign corporation, it is liable to income tax only to the extent only: (1) capital and/or (2) labor and/or (3) the sale of capital assets.
that it derives income from sources within the Philippines. The circumtances that a While the three elements of this attempt at definition need not be
foreign corporation is resident in the Philippines yields no inference that all or any part accepted as all-inclusive, they serve as useful guides in any inquiry
of its income is Philippine source income. Similarly, the non-resident status of a foreign into whether a particular item is from "source within the United
corporation does not imply that it has no Philippine source income. Conversely, the States" and suggest an investigation into the nature and location of
receipt of Philippine source income creates no presumption that the recipient foreign the activities or property which produce the income. If the income is
corporation is a resident of the Philippines. The critical issue, for present purposes, is from labor (services) the place where the labor is done should be
therefore whether of not BOAC is deriving income from sources within the Philippines. decisive; if it is done in this counrty, the income should be from
"source within the United States." If the income is from capital, the
place where the capital is employed should be decisive; if it is
2. For purposes of income taxation, it is well to bear in mind that the "source of income"
employed in this country, the income should be from "source within
relates not to the physical sourcing of a flow of money or the physical situs of
the United States". If the income is from the sale of capital assets, the
payment but rather to the "property, activity or service which produced the income."
place where the sale is made should be likewise decisive. Much
In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the court dealt with the
confusion will be avoided by regarding the term "source" in this
issue of the applicable source rule relating to reinsurance premiums paid by a local
fundamental light. It is not a place; it is an activity or property. As
insurance company to a foreign reinsurance company in respect of risks located in the
such, it has a situs or location; and if that situs or location is within
Philippines. The Court said:
the United States the resulting income is taxable to nonresident
The source of an income is the property, activity or services that
aliens and foreign corporations. The intention of Congress in the
produced the income. The reinsurance premiums remitted to
1916 and subsequent statutes was to discard the 1909 and 1913 basis
appellants by virtue of the reinsurance contract, accordingly, had for
of taxing nonresident aliens and foreign corporations and to make
their source the undertaking to indemnify Commonwealth Insurance
the test of taxability the "source", or situs of the activities or property
Co. against liability. Said undertaking is the activity that produced the
which produce the income . . . . Thus, if income is to taxed, the
reinsurance premiums, and the same took place in the Philippines. —
recipient thereof must be resident within the jurisdiction, or the
[T]he reinsurance, the liabilities insured and the risk originally
property or activities out of which the income issue or is derived must
underwritten by Commonwealth Insurance Co., upon which the
be situated within the jurisdiction so that the source of the income
reinsurance premiums and indemnity were based, were all situated
may be said to have a situs in this country. The underlying theory is
in the Philippines. —4
that the consideration for taxation is protection of life and
The Court may be seen to be saying that it is the underlying prestation which is properly propertyand that the income rightly to be levied upon to defray the
regarded as the activity giving rise to the income that is sought to be taxed. In burdens of the United States Government is that income which is
the Howden case, that underlying prestation was theindemnification of the local created by activities and property protected by this Government or
insurance company. Such indemnification could take place only in the Philippines where obtained by persons enjoying that protection. 5
the risks were located and where payment from the foreign reinsurance (in case the
casualty insured against occurs) would be received in Philippine pesos under the
3. We turn now to the question what is the source of income rule applicable in the
reinsurance premiums paid by the local insurance companies constituted Philippine
instant case. There are two possibly relevant source of income rules that must be
source income of the foreign reinsurances.
confronted; (a) the source rule applicable in respect of contracts of service; and (b) the
source rule applicable in respect of sales of personal property.
The concept of "source of income" for purposes of income taxation originated in the
United States income tax system. The phrase "sources within the United States" was
Where a contract for the rendition of service is involved, the applicable source rule may
first introduced into the U.S. tax system in 1916, and was subsequently embodied in the
be simply stated as follows: the income is sourced in the place where the service
1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act 466, as
contracted for is rendered. Section 37 (a) (3) of our Tax Code reads as follows:
amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful to refer
to a standard U.S. text on federal income taxation: Section 37. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines. — The Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible,
following items of gross income shall be treated as gross income implication that income derived from transportation or other services rendered entirely
from sources within the Philippines: outside the Philippines must be treated as derived entirely from sources without the
xxx xxx xxx Philippines. This implication is reinforced by a consideration of certain provisions of
Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
(3) Services. — Compensation for labor or personal
promulgated by the Department of Finance on 10 February 1940. Section 155 of
services performed in the Philippines;... (Emphasis
Revenue Regulations No. 2 (implementing Section 37 of the Tax Code) provides in part
supplied)
as follows:
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources
Section 155. Compensation for labor or personnel services. — Gross
without the Philippines in the following manner:
income from sources within the Philippines includes compensation
for labor or personal services within the Philippines regardless of the
(c) Gross income from sources without the Philippines. — The residence of the payer, of the place in which the contract for services
following items of gross income shall be treated as income from was made, or of the place of payment — (Emphasis supplied)
sources without the Philippines:

Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code)
(3) Compensation for labor or personal services performed without deals with a particular species of foreign transportation companies — i.e.,
the Philippines; ... (Emphasis supplied) foreign steamship companies deriving income from sources partly within and partly
without the Philippines:
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only
in respect of services rendered by individual natural persons; they also apply to services Section 163 Foreign steamship companies. — The return of foreign
rendered by or through the medium of a juridical person. 6 Further, a contract of steamship companies whose vessels touch parts of the
carriage or of transportation is assimilated in our Tax Code and Revenue Regulations to Philippines should include as gross income, the total receipts of all
a contract for services. Thus, Section 37 (e) of the Tax Code provides as follows: out-going business whether freight or passengers. With the gross
income thus ascertained, the ratio existing between it and the gross
(e) Income form sources partly within and partly without the income from all ports, both within and without the Philippines of all
Philippines. — Items of gross income, expenses, losses and vessels, whether touching of the Philippines or not, should be
deductions, other than those specified in subsections (a) and (c) of determined as the basis upon which allowable deductions may be
this section shall be allocated or apportioned to sources within or computed, — . (Emphasis supplied)
without the Philippines, under the rules and regulations prescribed
by the Secretary of Finance. ... Gains, profits, and income Another type of utility or service enterprise is dealt with in Section 164 of Revenue
from (1) transportation or other services rendered partly within and Regulations No. 2 (again implementing Section 37 of the Tax Code) with provides as
partly without the Philippines, or (2) from the sale of personnel follows:
property produced (in whole or in part) by the taxpayer within and
Section 164. Telegraph and cable services. — A foreign corporation
sold without the Philippines, or produced (in whole or in part) by the
carrying on the business of transmission of telegraph or cable
taxpayer without and sold within the Philippines, shall be treated as
messages between points in the Philippines and points outside the
derived partly from sources within and partly from sources without
Philippines derives income partly form source within and partly from
the Philippines. ... (Emphasis supplied)
sources without the Philippines.
... (Emphasis supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived
from the 1939 U.S. Tax Code which "was based upon a recognition that transportation
Once more, a very strong inference arises under Sections 163 and 164 of Revenue
was a service and that the source of the income derived therefrom was to be treated as
Regulations No. 2 that steamship and telegraph and cable services rendered between
being the place where the service of transportation was rendered. 7
points both outside the Philippines give rise to income wholly from sources outside the Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Philippines, and therefore not subject to Philippine income taxation.
Section 159. Sale of personal property. Income derived from the
We turn to the "source of income" rules relating to the sale of personal property, upon purchase and sale of personal property shall be treated as derived
the one hand, and to the purchase and sale of personal property, upon the other hand. entirely from the country in which sold. The word "sold" includes
We consider first sales of personal property. Income from the sale of personal property "exchange." The "country" in which "sold" ordinarily means the place
by the producer or manufacturer of such personal property will be regarded as where the property is marketed. This Section does not apply to
sourced entirely within or entirely without the Philippines or as sourced partly within income from the sale personal property produced (in whole or in
and partly without the Philippines, depending upon two factors: (a) the place where the part) by the taxpayer within and sold without the Philippines or
sale of such personal property occurs; and (b) the place where such personal property produced (in whole or in part) by the taxpayer without and sold
was produced or manufactured. If the personal property involved was both produced within the Philippines. (See Section 162 of these regulations).
or manufactured and sold outside the Philippines, the income derived therefrom will be (Emphasis supplied)
regarded as sourced entirely outside the Philippines, although the personal property
had been produced outside the Philippines, or if the sale of the property takes place 4. It will be seen that the basic problem is one of characterization of the transactions
outside the Philippines and the personal was produced in the Philippines, then, the entered into by BOAC in the Philippines. Those transactions may be characterized either
income derived from the sale will be deemed partly as income sourced without the as sales of personal property (i. e., "sales of airline tickets") or as entering into a lease
Philippines. In other words, the income (and the related expenses, losses and of services or a contract of service or carriage. The applicable "source of income" rules
deductions) will be allocated between sources within and sources without the differ depending upon which characterization is given to the BOAC transactions.
Philippines. Thus, Section 37 (e) of the Tax Code, although already quoted above, may
be usefully quoted again:
The appropriate characterization, in my opinion, of the BOAC transactions is that of
entering into contracts of service, i.e., carriage of passengers or cargo between points
(e) Income from sources partly within and partly without the located outside the Philippines.
Philippines. ... Gains, profits and income from (1) transportation or
other services rendered partly within and partly without the
The phrase "sale of airline tickets," while widely used in popular parlance, does not
Philippines; or (2) from the sale of personal property produced (in
appear to be correct as a matter of tax law. The airline ticket in and of itself has no
whole or in part) by the taxpayer within and sold without the
monetary value, even as scrap paper. The value of the ticket lies wholly in the right
Philippines, or produced (in whole or in part) by the taxpayer without
acquired by the "purchaser" — the passenger — to demand a prestation from BOAC,
and sold within the Philippines, shall be treated as derived partly
which prestation consists of the carriage of the "purchaser" or passenger from the one
from sources within and partly from sources without the Philippines.
point to another outside the Philippines. The ticket is really the evidence of the contract
... (Emphasis supplied)
of carriage entered into between BOAC and the passenger. The money paid by the
passenger changes hands in the Philippines. But the passenger does not receive
In contrast, income derived from the purchase and sale of personal property — i. e., undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite
trading — is, under the Tax Code, regarded as sourced wholly in the place where the different from the purchase price of a physical good or commodity such as a pair of
personal property is sold. Section 37 (e) of the Tax Code provides in part as follows: shoes of a refrigerator or an automobile; it is really the compensation paid for the
undertaking of BOAC to transport the passenger or cargo outside the Philippines.
(e) Income from sources partly within and partly without the
Philippines ... Gains, profits and income derived from the purchase of The characterization of the BOAC transactions either as sales of personal property or as
personal property within and its sale without the Philippines or from purchases and sales of personal property, appear entirely inappropriate from other
the purchase of personal property without and its sale within the viewpoint. Consider first purchases and sales: is BOAC properly regarded as engaged in
Philippines, shall be treated as derived entirely from sources within trading — in the purchase and sale of personal property? Certainly, BOAC was not
the country in which sold. (Emphasis supplied) purchasing tickets outside the Philippines and selling them in the Philippines. Consider
next sales: can BOAC be regarded as "selling" personal property produced or
manufactured by it? In a popular or journalistic sense, BOAC might be described as discussed, to transportation or other services rendered partly within and partly without
"selling" "a product" — its service. However, for the technical purposes of the law on the Philippines, or wholly without the Philippines, has been set aside. in place of
income taxation, BOAC is in fact entering into contracts of service or carriage. The very Philippine income taxation, the Tax Code now imposes this 2½ per cent tax computed
existance of "source rules" specifically and precisely applicable to the rendition of on the basis of billings in respect of passengers and cargo originating from the
services must preclude the application here of "source rules" applying generally to sales, Philippines regardless of where embarkation and debarkation would be taking place.
and purchases and sales, of personal property which can be invoked only by the grace This 2-½ per cent tax is effectively a tax on gross receipts or an excise or privilege tax
of popular language. On a slighty more abstract level, BOAC's income is more and not a tax on income. Thereby, the Government has done away with the difficulties
appropriately characterized as derived from a "service", rather than from an "activity" (a attending the allocation of income and related expenses, losses and deductions.
broader term than service and including the activity of selling) or from the here involved Because taxes are the very lifeblood of government, the resulting potential "loss" or
is income taxation, and not a sales tax or an excise or privilege tax. "gain" in the amount of taxes collectible by the state is sometimes, with varying degrees
of consciousness, considered in choosing from among competing possible
characterizations under or interpretation of tax statutes. It is hence perhaps useful to
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the
point out that the determination of the appropriate characterization here — that of
Tax Code, as amended by Presidential Decree No. 69, promulgated on 24 November
contracts of air carriage rather than sales of airline tickets — entails no down-the-road
1972 and by Presidential Decree No. 1355, promulgated on 21 April 1978, in the
loss of income tax revenues to the Government. In lieu thereof, the Government takes
following manner:
in revenues generated by the 2-½ per cent tax on the gross Philippine billings or
receipts of international carriers.
(2) Resident corporations. — A corporation organized, authorized, or
I would vote to affirm the decision of the Court of Tax Appeals.
existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received in Separate Opinions
the preceeding taxable year from all sources within the
Philippines: Provided, however, That international carriers shall pay a TEEHANKEE, C.J., concurring:
tax of two and one-half per cent on their gross Philippine I concur with the Court's majority judgment upholding the assessments of deficiency
billings. "Gross Philippines of passage documents sold therein, income taxes against respondent BOAC for the fiscal years 1959-1969 to 1970-1971
whether for passenger, excess baggege or mail, provide the cargo or and therefore setting aside the appealed joint decision of respondent Court of Tax
mail originates from the Philippines. The gross revenue realized from Appeals. I just wish to point out that the conflict between the majority opinion penned
the said cargo or mail shall include the gross freight charge up to by Mr. Justice Feliciano as to the proper characterization of the taxable income derived
final destination. Gross revenues from chartered flights originating by respondent BOAC from the sales in the Philippines of tickets foe BOAC form the
from the Philippines shall likewise form part of "gross Philippine issued by its general sales agent in the Philippines gas become moot after November
billings" regardless of the place of sale or payment of the passage 24, 1972. Booth opinions state that by amendment through P.D. No.69, promulgated
documents. For purposes of determining the taxability to revenues on November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the rate of
from chartered flights, the term "originating from the Philippines" income tax on foreign corporations, international carriers such as respondent BOAC,
shall include flight of passsengers who stay in the Philippines for have since then been taxed at a reduced rate of 2-½% on their gross Philippine billings.
more than forty-eight (48) hours prior to embarkation. (Emphasis There is, therefore, no longer ant source of substantial conflict between the two
supplied) opinions as to the present 2-½% tax on their gross Philippine billings charged against
such international carriers as herein respondent foreign corporation.
Under the above-quoted proviso international carriers issuing for compensation
passage documentation in the Philippines for uplifts from any point in the world to any FELICIANO, J., dissenting:
other point in the world, are not charged any Philippine income tax on their Philippine
billings (i.e., billings in respect of passenger or cargo originating from the Philippines).
With great respect and reluctance, i record my dissent from the opinion of Mme. Justice
Under this new approach, international carriers who service port or points in the
A.A. Melencio-Herrera speaking for the majority . In my opinion, the joint decision of
Philippines are treated in exactly the same way as international carriers not serving any
port or point in the Philippines. Thus, the source of income rule applicable, as above
the Court of Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, is Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer
correct and should be affirmed. when it amended once more Section 24 (b) (2) of the Tax Code so as to read as follows:
The fundamental issue raised in this petition for review is whether the British Overseas (2) Resident Corporations. — A corporation, organized, authorized
Airways Corporation (BOAC), a foreign airline company which does not maintain any or existing under the laws of any foreign counrty, except foreign life
flight operations to and from the Philippines, is liable for Philippine income taxation in insurance company, engaged in trade or business within the
respect of "sales of air tickets" in the Philippines through a general sales agent, relating Philippines, shall be taxable as provided in subsection (a) of this
to the carriage of passengers and cargo between two points both outside the section upon the total net income received in the preceding taxable
Philippines. year from all sources within the Philippines. (Emphasis supplied)

1. The Solicitor General has defined as one of the issue in this case the question of: Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-
2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporations. Section 24 (b) (1) as amended by Republic Act No. 3825
resident foreign corporation doing business in the Philippines or approved 22 June 1963, read as follows:
[had] an office or place of business in the Philippines.
(b) Tax on foreign corporations. — (1) Non-resident corporations. —
It is important to note at the outset that the answer to the above-quoted issue is not There shall be levied, collected and paid for each taxable year, in lieu
determinative of the lialibity of the BOAC to Philippine income taxation in respect of of the tax imposed by the preceding paragraph upon the amount
the income here involved. The liability of BOAC to Philippine income taxation in respect received by every foreign corporation not engaged in trade or
of such income depends, not on BOAC's status as a "resident foreign corporation" or business within the Philippines, from all sources within the
alternatively, as a "non-resident foreign corporation," but rather on whether or not such Philippines, as interest, dividends, rents, salaries, wages, premium,
income is derived from "source within the Philippines." annuities, compensations, remunerations, emoluments, or other
fixed or determinative annual or periodical gains, profits and income
a tax equal to thirty per centum of such amount: provided, however,
A "resident foreign corporation" or foreign corporation engaged in trade or business in
that premiums shall not include reinsurance premiums. 2
the Philippines or having an office or place of business in the Philippines is subject to
Philippine income taxation only in respect of income derived from sources within the
Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax Code"), as Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and
amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3 August therefore a resident foreign corporation, or not doing business in the Philippines and
1969, read as follows: therefore a non-resident foreign corporation, it is liable to income tax only to the extent
that it derives income from sources within the Philippines. The circumtances that a
(2) Resident corporations. — A foreign corporation engaged in trade
foreign corporation is resident in the Philippines yields no inference that all or any part
or business with in the Philippines (expect foreign life insurance
of its income is Philippine source income. Similarly, the non-resident status of a foreign
companies) shall be taxable as provided in subsection (a) of this
corporation does not imply that it has no Philippine source income. Conversely, the
section.
receipt of Philippine source income creates no presumption that the recipient foreign
corporation is a resident of the Philippines. The critical issue, for present purposes, is
Section 24 (a) of the Tax Code in turn provides: therefore whether of not BOAC is deriving income from sources within the Philippines.
Rate of tax on corporations. — (a) Tax on domestic corporations. —
... and a like tax shall be livied, collected, and paid annually upon
2. For purposes of income taxation, it is well to bear in mind that the "source of income"
the total net income received in the preceeding taxable year from all
relates not to the physical sourcing of a flow of money or the physical situs of
sources within the Philippines by every corporation
payment but rather to the "property, activity or service which produced the income."
organized, authorized, or existing under the laws of any foreign
In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the court dealt with the
country: ... . (Emphasis supplied)
issue of the applicable source rule relating to reinsurance premiums paid by a local
insurance company to a foreign reinsurance company in respect of risks located in the
Philippines. The Court said:
The source of an income is the property, activity or services that fundamental light. It is not a place; it is an activity or property. As
produced the income. The reinsurance premiums remitted to such, it has a situs or location; and if that situs or location is within
appellants by virtue of the reinsurance contract, accordingly, had for the United States the resulting income is taxable to nonresident
their source the undertaking to indemnify Commonwealth Insurance aliens and foreign corporations. The intention of Congress in the
Co. against liability. Said undertaking is the activity that produced the 1916 and subsequent statutes was to discard the 1909 and 1913 basis
reinsurance premiums, and the same took place in the Philippines. — of taxing nonresident aliens and foreign corporations and to make
[T]he reinsurance, the liabilities insured and the risk originally the test of taxability the "source", or situs of the activities or property
underwritten by Commonwealth Insurance Co., upon which the which produce the income . . . . Thus, if income is to taxed, the
reinsurance premiums and indemnity were based, were all situated recipient thereof must be resident within the jurisdiction, or the
in the Philippines. —4 property or activities out of which the income issue or is derived must
be situated within the jurisdiction so that the source of the income
may be said to have a situs in this country. The underlying theory is
The Court may be seen to be saying that it is the underlying prestation which is properly
that the consideration for taxation is protection of life and
regarded as the activity giving rise to the income that is sought to be taxed. In
propertyand that the income rightly to be levied upon to defray the
the Howden case, that underlying prestation was the indemnification of the local
burdens of the United States Government is that income which is
insurance company. Such indemnification could take place only in the Philippines where
created by activities and property protected by this Government or
the risks were located and where payment from the foreign reinsurance (in case the
obtained by persons enjoying that protection. 5
casualty insured against occurs) would be received in Philippine pesos under the
reinsurance premiums paid by the local insurance companies constituted Philippine
source income of the foreign reinsurances. 3. We turn now to the question what is the source of income rule applicable in the
instant case. There are two possibly relevant source of income rules that must be
confronted; (a) the source rule applicable in respect of contracts of service; and (b) the
The concept of "source of income" for purposes of income taxation originated in the
source rule applicable in respect of sales of personal property.
United States income tax system. The phrase "sources within the United States" was
first introduced into the U.S. tax system in 1916, and was subsequently embodied in the Where a contract for the rendition of service is involved, the applicable source rule may
1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act 466, as be simply stated as follows: the income is sourced in the place where the service
amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful to refer contracted for is rendered. Section 37 (a) (3) of our Tax Code reads as follows:
to a standard U.S. text on federal income taxation:
Section 37. Income for sources within the Philippines.
The Supreme Court has said, in a definition much quoted but often (a) Gross income from sources within the Philippines. — The
debated, that income may be derived from three possible sources following items of gross income shall be treated as gross income
only: (1) capital and/or (2) labor and/or (3) the sale of capital assets. from sources within the Philippines:
While the three elements of this attempt at definition need not be xxx xxx xxx
accepted as all-inclusive, they serve as useful guides in any inquiry
into whether a particular item is from "source within the United
(3) Services. — Compensation for labor or personal
States" and suggest an investigation into the nature and location of
services performed in the Philippines;... (Emphasis
the activities or property which produce the income. If the income is
supplied)
from labor (services) the place where the labor is done should be
decisive; if it is done in this counrty, the income should be from
"source within the United States." If the income is from capital, the Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources
place where the capital is employed should be decisive; if it is without the Philippines in the following manner:
employed in this country, the income should be from "source within
the United States". If the income is from the sale of capital assets, the
place where the sale is made should be likewise decisive. Much
confusion will be avoided by regarding the term "source" in this
(c) Gross income from sources without the Philippines. — The for labor or personal services within the Philippines regardless of the
following items of gross income shall be treated as income from residence of the payer, of the place in which the contract for services
sources without the Philippines: was made, or of the place of payment — (Emphasis supplied)

(3) Compensation for labor or personal services performed without Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code)
the Philippines; ... (Emphasis supplied) deals with a particular species of foreign transportation companies — i.e.,
foreign steamship companies deriving income from sources partly within and partly
without the Philippines:
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only
in respect of services rendered by individual natural persons; they also apply to services
rendered by or through the medium of a juridical person. 6 Further, a contract of Section 163 Foreign steamship companies. — The return of foreign
carriage or of transportation is assimilated in our Tax Code and Revenue Regulations to steamship companies whose vessels touch parts of the
a contract for services. Thus, Section 37 (e) of the Tax Code provides as follows: Philippines should include as gross income, the total receipts of all
out-going business whether freight or passengers. With the gross
income thus ascertained, the ratio existing between it and the gross
(e) Income form sources partly within and partly without the
income from all ports, both within and without the Philippines of all
Philippines. — Items of gross income, expenses, losses and
vessels, whether touching of the Philippines or not, should be
deductions, other than those specified in subsections (a) and (c) of
determined as the basis upon which allowable deductions may be
this section shall be allocated or apportioned to sources within or
computed, — . (Emphasis supplied)
without the Philippines, under the rules and regulations prescribed
by the Secretary of Finance. ... Gains, profits, and income
from (1) transportation or other services rendered partly within and Another type of utility or service enterprise is dealt with in Section 164 of Revenue
partly without the Philippines, or (2) from the sale of personnel Regulations No. 2 (again implementing Section 37 of the Tax Code) with provides as
property produced (in whole or in part) by the taxpayer within and follows:
sold without the Philippines, or produced (in whole or in part) by the Section 164. Telegraph and cable services. — A foreign corporation
taxpayer without and sold within the Philippines, shall be treated as carrying on the business of transmission of telegraph or cable
derived partly from sources within and partly from sources without messages between points in the Philippines and points outside the
the Philippines. ... (Emphasis supplied) Philippines derives income partly form source within and partly from
sources without the Philippines.
It should be noted that the above underscored portion of Section 37 (e) was derived ... (Emphasis supplied)
from the 1939 U.S. Tax Code which "was based upon a recognition that transportation
was a service and that the source of the income derived therefrom was to be treated as
Once more, a very strong inference arises under Sections 163 and 164 of Revenue
being the place where the service of transportation was rendered. 7
Regulations No. 2 that steamship and telegraph and cable services rendered between
points both outside the Philippines give rise to income wholly from sources outside the
Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, Philippines, and therefore not subject to Philippine income taxation.
implication that income derived from transportation or other services rendered entirely
outside the Philippines must be treated as derived entirely from sources without the
We turn to the "source of income" rules relating to the sale of personal property, upon
Philippines. This implication is reinforced by a consideration of certain provisions of
the one hand, and to the purchase and sale of personal property, upon the other hand.
Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
promulgated by the Department of Finance on 10 February 1940. Section 155 of
Revenue Regulations No. 2 (implementing Section 37 of the Tax Code) provides in part We consider first sales of personal property. Income from the sale of personal property
as follows: by the producer or manufacturer of such personal property will be regarded as
sourced entirely within or entirely without the Philippines or as sourced partly within
Section 155. Compensation for labor or personnel services. — Gross
and partly without the Philippines, depending upon two factors: (a) the place where the
income from sources within the Philippines includes compensation
sale of such personal property occurs; and (b) the place where such personal property produced (in whole or in part) by the taxpayer without and sold
was produced or manufactured. If the personal property involved was both produced within the Philippines. (See Section 162 of these regulations).
or manufactured and sold outside the Philippines, the income derived therefrom will be (Emphasis supplied)
regarded as sourced entirely outside the Philippines, although the personal property
had been produced outside the Philippines, or if the sale of the property takes place
4. It will be seen that the basic problem is one of characterization of the transactions
outside the Philippines and the personal was produced in the Philippines, then, the
entered into by BOAC in the Philippines. Those transactions may be characterized either
income derived from the sale will be deemed partly as income sourced without the
as sales of personal property (i. e., "sales of airline tickets") or as entering into a lease
Philippines. In other words, the income (and the related expenses, losses and
of services or a contract of service or carriage. The applicable "source of income" rules
deductions) will be allocated between sources within and sources without the
differ depending upon which characterization is given to the BOAC transactions.
Philippines. Thus, Section 37 (e) of the Tax Code, although already quoted above, may
be usefully quoted again:
The appropriate characterization, in my opinion, of the BOAC transactions is that of
entering into contracts of service, i.e., carriage of passengers or cargo between points
(e) Income from sources partly within and partly without the
located outside the Philippines.
Philippines. ... Gains, profits and income from (1) transportation or
other services rendered partly within and partly without the
Philippines; or (2) from the sale of personal property produced (in The phrase "sale of airline tickets," while widely used in popular parlance, does not
whole or in part) by the taxpayer within and sold without the appear to be correct as a matter of tax law. The airline ticket in and of itself has no
Philippines, or produced (in whole or in part) by the taxpayer without monetary value, even as scrap paper. The value of the ticket lies wholly in the right
and sold within the Philippines, shall be treated as derived partly acquired by the "purchaser" — the passenger — to demand a prestation from BOAC,
from sources within and partly from sources without the Philippines. which prestation consists of the carriage of the "purchaser" or passenger from the one
... (Emphasis supplied) point to another outside the Philippines. The ticket is really the evidence of the contract
of carriage entered into between BOAC and the passenger. The money paid by the
passenger changes hands in the Philippines. But the passenger does not receive
In contrast, income derived from the purchase and sale of personal property — i. e.,
undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite
trading — is, under the Tax Code, regarded as sourced wholly in the place where the
different from the purchase price of a physical good or commodity such as a pair of
personal property is sold. Section 37 (e) of the Tax Code provides in part as follows:
shoes of a refrigerator or an automobile; it is really the compensation paid for the
undertaking of BOAC to transport the passenger or cargo outside the Philippines.
(e) Income from sources partly within and partly without the
Philippines ... Gains, profits and income derived from the purchase of
The characterization of the BOAC transactions either as sales of personal property or as
personal property within and its sale without the Philippines or from
purchases and sales of personal property, appear entirely inappropriate from other
the purchase of personal property without and its sale within the
viewpoint. Consider first purchases and sales: is BOAC properly regarded as engaged in
Philippines, shall be treated as derived entirely from sources within
trading — in the purchase and sale of personal property? Certainly, BOAC was not
the country in which sold. (Emphasis supplied)
purchasing tickets outside the Philippines and selling them in the Philippines. Consider
next sales: can BOAC be regarded as "selling" personal property produced or
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly: manufactured by it? In a popular or journalistic sense, BOAC might be described as
"selling" "a product" — its service. However, for the technical purposes of the law on
income taxation, BOAC is in fact entering into contracts of service or carriage. The very
Section 159. Sale of personal property. Income derived from the
existance of "source rules" specifically and precisely applicable to the rendition of
purchase and sale of personal property shall be treated as derived
services must preclude the application here of "source rules" applying generally to sales,
entirely from the country in which sold. The word "sold" includes
and purchases and sales, of personal property which can be invoked only by the grace
"exchange." The "country" in which "sold" ordinarily means the place
of popular language. On a slighty more abstract level, BOAC's income is more
where the property is marketed. This Section does not apply to
appropriately characterized as derived from a "service", rather than from an "activity" (a
income from the sale personal property produced (in whole or in
part) by the taxpayer within and sold without the Philippines or
broader term than service and including the activity of selling) or from the here involved Because taxes are the very lifeblood of government, the resulting potential "loss" or
is income taxation, and not a sales tax or an excise or privilege tax. "gain" in the amount of taxes collectible by the state is sometimes, with varying degrees
of consciousness, considered in choosing from among competing possible
characterizations under or interpretation of tax statutes. It is hence perhaps useful to
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the
point out that the determination of the appropriate characterization here — that of
Tax Code, as amended by Presidential Decree No. 69, promulgated on 24 November
contracts of air carriage rather than sales of airline tickets — entails no down-the-road
1972 and by Presidential Decree No. 1355, promulgated on 21 April 1978, in the
loss of income tax revenues to the Government. In lieu thereof, the Government takes
following manner:
in revenues generated by the 2-½ per cent tax on the gross Philippine billings or
receipts of international carriers. I would vote to affirm the decision of the Court of Tax
(2) Resident corporations. — A corporation organized, authorized, or Appeals.
existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received in
the preceeding taxable year from all sources within the
Philippines: Provided, however, That international carriers shall pay a
tax of two and one-half per cent on their gross Philippine
billings. "Gross Philippines of passage documents sold therein,
whether for passenger, excess baggege or mail, provide the cargo or
mail originates from the Philippines. The gross revenue realized from
the said cargo or mail shall include the gross freight charge up to
final destination. Gross revenues from chartered flights originating
from the Philippines shall likewise form part of "gross Philippine
billings" regardless of the place of sale or payment of the passage
documents. For purposes of determining the taxability to revenues
from chartered flights, the term "originating from the Philippines"
shall include flight of passsengers who stay in the Philippines for
more than forty-eight (48) hours prior to embarkation. (Emphasis
supplied)

Under the above-quoted proviso international carriers issuing for compensation


passage documentation in the Philippines for uplifts from any point in the world to any
other point in the world, are not charged any Philippine income tax on their Philippine
billings (i.e., billings in respect of passenger or cargo originating from the Philippines).
Under this new approach, international carriers who service port or points in the
Philippines are treated in exactly the same way as international carriers not serving any
port or point in the Philippines. Thus, the source of income rule applicable, as above
discussed, to transportation or other services rendered partly within and partly without
the Philippines, or wholly without the Philippines, has been set aside. in place of
Philippine income taxation, the Tax Code now imposes this 2½ per cent tax computed
on the basis of billings in respect of passengers and cargo originating from the
Philippines regardless of where embarkation and debarkation would be taking place.
This 2-½ per cent tax is effectively a tax on gross receipts or an excise or privilege tax
and not a tax on income. Thereby, the Government has done away with the difficulties
attending the allocation of income and related expenses, losses and deductions.
SECOND DIVISION (6) years. The construction of the power station in respondent Batangas City was then
completed. BPC operated the station.
G.R. No. 152675 April 28, 2004
BATANGAS POWER CORPORATION, petitioner, On October 12, 1998, Batangas City (the city, for brevity), thru its legal officer Teodulfo
vs. A. Deguito, sent a letter to BPC demanding payment of business taxes and penalties,
BATANGAS CITY and NATIONAL POWER CORPORATION, respondents. commencing from the year 1994 as provided under Ordinance XI or the 1992 Batangas
x--------------------x City Tax Code.2 BPC refused to pay, citing its tax-exempt status as a pioneer enterprise
G.R. No. 152771 April 28, 2004 for six (6) years under Section 133 (g) of the Local Government Code (LGC).3
NATIONAL POWER CORPORATION, petitioner,
vs. On April 15, 1999, city treasurer Benjamin S. Pargas modified the city’s tax claim 4 and
HON. RICARDO R. ROSARIO, in his capacity as Presiding Judge, RTC, Br. 66, Makati demanded payment of business taxes from BPC only for the years 1998-1999. He
City; BATANGAS CITY GOVERNMENT; ATTY. TEODULFO DEGUITO, in his capacity acknowledged that BPC enjoyed a 6-year tax holiday as a pioneer industry but its tax
as Chief Legal Officer, Batangas City; and BENJAMIN PARGAS, in his capacity as exemption period expired on September 22, 1998, six (6) years after its registration with
City Treasurer, Batangas City, respondents. the BOI on September 23, 1992. The city treasurer held that thereafter BPC became
liable to pay its business taxes.
DECISION
BPC still refused to pay the tax. It insisted that its 6-year tax holiday commenced from
PUNO, J.: the date of its commercial operation on July 16, 1993, not from the date of its BOI
registration in September 1992.5 It furnished the city with a BOI letter6 wherein BOI
designated July 16, 1993 as the start of BPC’s income tax holiday as BPC was not able
Before us are two (2) consolidated petitions for review under Rule 45 of the Rules of
to immediately operate due to force majeure. BPC claimed that the local tax holiday is
Civil Procedure, seeking to set aside the rulings of the Regional Trial Court of Makati in
concurrent with the income tax holiday. In the alternative, BPC asserted that the city
its February 27, 2002 Decision in Civil Case No. 00-205.
should collect the tax from the NPC as the latter assumed responsibility for its payment
under their BOT Agreement.
The facts show that in the early 1990’s, the country suffered from a crippling power
crisis. Power outages lasted 8-12 hours daily and power generation was badly needed.
The matter was not put to rest. The city legal officer insisted7 that BPC’s tax holiday has
Addressing the problem, the government, through the National Power Corporation
already expired, while the city argued that it directed its tax claim to BPC as it is the
(NPC), sought to attract investors in power plant operations by providing them with
entity doing business in the city and hence liable to pay the taxes. The city alleged that
incentives, one of which was through the NPC’s assumption of payment of their taxes
it was not privy to NPC’s assumption of BPC’s tax payment under their BOT Agreement
in the Build Operate and Transfer (BOT) Agreement.
as the only parties thereto were NPC and BPC.

On June 29, 1992, Enron Power Development Corporation (Enron) and petitioner NPC
BPC adamantly refused to pay the tax claims and reiterated its position.8 The city was
entered into a Fast Track BOT Project. Enron agreed to supply a power station to NPC
likewise unyielding on its stand.9 On August 26, 1999, the NPC intervened.10 While
and transfer its plant to the latter after ten (10) years of operation. Section 11.02 of the
admitting assumption of BPC’s tax obligations under their BOT Agreement, NPC refused
BOT Agreement provided that NPC shall be responsible for the payment of all taxes
to pay BPC’s business tax as it allegedly constituted an indirect tax on NPC which is a
that may be imposed on the power station, except income taxes and permit fees.
tax-exempt corporation under its Charter.11
Subsequently, Enron assigned its obligation under the BOT Agreement to petitioner
Batangas Power Corporation (BPC).
In view of the deadlock, BPC filed a petition for declaratory relief12 with the Makati
Regional Trial Court (RTC) against Batangas City and NPC, praying for a ruling that it
On September 13, 1992, BPC registered itself with the Board of Investments (BOI) as a
was not bound to pay the business taxes imposed on it by the city. It alleged that under
pioneer enterprise. On September 23, 1992, the BOI issued a certificate of
the BOT Agreement, NPC is responsible for the payment of such taxes but as NPC is
registration1 to BPC as a pioneer enterprise entitled to a tax holiday for a period of six
exempt from taxes, both the BPC and NPC are not liable for its payment. NPC and WHICH EXEMPTS "NATIONAL GOVERNMENT, ITS AGENCIES AND
Batangas City filed their respective answers. INSTRUMENTALITIES" FROM THE IMPOSITION OF "TAXES, FEES OR CHARGES OF ANY
KIND."
On February 23, 2000, while the case was still pending, the city refused to issue a permit
to BPC for the operation of its business unless it paid the assessed business taxes III
amounting to close to ₱29M. RESPONDENT COURT ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO
LACK OR EXCESS OF JURISDICTION WHEN IT ERRONEOUSLY AND CAPRICIOUSLY
In view of this supervening event, BPC, whose principal office is in Makati City, filed a ADMITTED BPC’s SUPPLEMENTAL PETITION FOR INJUNCTION NOTWITHSTANDING
supplemental petition13 with the Makati RTC to convert its original petition into an THAT IT HAD NO JURISDICTION OVER THE PARTY (CITY GOVERNMENT OF BATANGAS)
action for injunction to enjoin the city from withholding the issuance of its business SOUGHT TO BE ENJOINED.
permit and closing its power plant. The city opposed on the grounds of lack of
jurisdiction and lack of cause of action.14 The Supplemental Petition was nonetheless In G.R. No. 152675, BPC also contends that the trial court erred: 1) in holding it liable
admitted by the Makati RTC. for payment of business taxes even if it is undisputed that NPC has already assumed
payment thereof; and, 2) in ruling that BPC’s 6-year tax holiday commenced on the date
On February 27, 2002, the Makati RTC dismissed the petition for injunction. It held that: of its registration with the BOI as a pioneer enterprise.
(1) BPC is liable to pay business taxes to the city; (2) NPC’s tax exemption was withdrawn
with the passage of R.A. No. 7160 (The Local Government Code); and, (3) the 6-year tax The issues for resolution are:
holiday granted to pioneer business enterprises starts on the date of registration with
1. whether BPC’s 6-year tax holiday commenced on the date of its BOI
the BOI as provided in Section 133 (g) of R.A. No. 7160, and not on the date of its actual
registration as a pioneer enterprise or on the date of its actual commercial
business operations.15
operation as certified by the BOI;
2. whether the trial court had jurisdiction over the petition for injunction
BPC and NPC filed with this Court a petition for review on certiorari16 assailing the against Batangas City; and,
Makati RTC decision. The petitions were consolidated as they impugn the same
3. whether NPC’s tax exemption privileges under its Charter were withdrawn
decision, involve the same parties and raise related issues.17
by Section 193 of the Local Government Code (LGC).

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


We find no merit in the petition.

I
On the first issue, petitioners BPC and NPC contend that contrary to the impugned
RESPONDENT COURT ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO decision, BPC’s 6-year tax holiday should commence on the date of its actual
LACK OR EXCESS OF JURISDICTION WHEN IT ARBITRARILY AND CAPRICIOUSLY RULED commercial operations as certified to by the BOI, not on the date of its BOI registration.
THAT PETITIONER NPC HAS LOST ITS TAX EXEMPTION PRIVILEGE BECAUSE SECTION
We disagree. Sec. 133 (g) of the LGC, which proscribes local government units (LGUs)
193 OF R.A. 7160 (LOCAL GOVERNMENT CODE) HAS WITHDRAWN SUCH PRIVILEGE
from levying taxes on BOI-certified pioneer enterprises for a period of six years from
DESPITE THE SETTLED JURISPRUDENCE THAT THE ENACTMENT OF A LEGISLATION, the date of registration, applies specifically to taxes imposed by the local
WHICH IS A GENERAL LAW, CANNOT REPEAL A SPECIAL LAW AND THAT SECTION 13 government, like the business tax imposed by Batangas City on BPC in the case at
OF R.A. 6395 (NPC LAW) WAS NOT SPECIFICALLY MENTIONED IN THE REPEALING bar. Reliance of BPC on the provision of Executive Order No. 226,18 specifically
CLAUSE IN SECTION 534 OF R.A. 7160, AMONG OTHERS. Section 1, Article 39, Title III, is clearly misplaced as the six-year tax holiday provided
therein which commences from the date of commercial operation refers to
II income taxes imposed by the national government on BOI-registered pioneer firms.
Clearly, it is the provision of the Local Government Code that should apply to the tax
RESPONDENT COURT ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO
claim of Batangas City against the BPC. The 6-year tax exemption of BPC should thus
LACK OR EXCESS OF JURISDICTION WHEN IT ARBITRARILY AND CAPRICIOUSLY
OMITTED THE CLEAR PROVISION OF SECTION 133, PARAGRAPH (O) OF R.A. 7160
commence from the date of BPC’s registration with the BOI on July 16, 1993 and end taxes, fees and charges shall accrue exclusively to the Local
on July 15, 1999. Governments.

Anent the second issue, the records disclose that petitioner NPC did not oppose BPC’s This paradigm shift results from the realization that genuine development can
conversion of the petition for declaratory relief to a petition for injunction or raise the be achieved only by strengthening local autonomy and promoting
issue of the alleged lack of jurisdiction of the Makati RTC over the petition for injunction decentralization of governance. For a long time, the country’s highly
before said court. Hence, NPC is estopped from raising said issue before us. The centralized government structure has bred a culture of dependence among
fundamental rule is that a party cannot be allowed to participate in a judicial local government leaders upon the national leadership. It has also "dampened
proceeding, submit the case for decision, accept the judgment only if it is favorable to the spirit of initiative, innovation and imaginative resilience in matters of local
him but attack the jurisdiction of the court when it is adverse.19 development on the part of local government leaders. The only way to shatter
this culture of dependence is to give the LGUs a wider role in the delivery of
basic services, and confer them sufficient powers to generate their own
Finally, on the third issue, petitioners insist that NPC’s exemption from all taxes under
sources for the purpose. To achieve this goal, x x x the 1987 Constitution
its Charter had not been repealed by the LGC. They argue that NPC’s Charter is a special
mandates Congress to enact a local government code that will, consistent with
law which cannot be impliedly repealed by a general and later legislation like the LGC.
the basic policy of local autonomy, set the guidelines and limitations to this
They likewise anchor their claim of tax-exemption on Section 133 (o) of the LGC which
grant of taxing powers x x x."
exempts government instrumentalities, such as the NPC, from taxes imposed by local
government units (LGUs), citing in support thereof the case of Basco v. PAGCOR.20
To recall, prior to the enactment of the x x x Local Government Code x x x, various
measures have been enacted to promote local autonomy. x x x Despite these initiatives,
We find no merit in these contentions. The effect of the LGC on the tax exemption
however, the shackles of dependence on the national government remained. Local
privileges of the NPC has already been extensively discussed and settled in the recent
government units were faced with the same problems that hamper their capabilities to
case of National Power Corporation v. City of Cabanatuan.21 In said case, this Court
participate effectively in the national development efforts, among which are: (a)
recognized the removal of the blanket exclusion of government instrumentalities
inadequate tax base, (b) lack of fiscal control over external sources of income, (c) limited
from local taxation as one of the most significant provisions of the 1991
authority to prioritize and approve development projects, (d) heavy dependence on
LGC. Specifically, we stressed that Section 193 of the LGC,22 an express and general
external sources of income, and (e) limited supervisory control over personnel of
repeal of all statutes granting exemptions from local taxes, withdrew the sweeping
national line agencies.
tax privileges previously enjoyed by the NPC under its Charter. We explained the
rationale for this provision, thus:
Considered as the most revolutionary piece of legislation on local autonomy, the LGC
effectively deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs
In recent years, the increasing social challenges of the times expanded the
to include taxes which were prohibited by previous laws x x x.
scope of state activity, and taxation has become a tool to realize social justice
and the equitable distribution of wealth, economic progress and the
protection of local industries as well as public welfare and similar objectives. Neither can the NPC successfully rely on the Basco case23 as this was decided prior to
Taxation assumes even greater significance with the ratification of the 1987 the effectivity of the LGC, when there was still no law empowering local government
Constitution. Thenceforth, the power to tax is no longer vested exclusively on units to tax instrumentalities of the national government.
Congress; local legislative bodies are now given direct authority to levy taxes,
fees and other charges pursuant to Article X, section 5 of the 1987
Consequently, when NPC assumed the tax liabilities of the BPC under their 1992 BOT
Constitution, viz:
Agreement, the LGC which removed NPC’s tax exemption privileges had already been
in effect for six (6) months. Thus, while BPC remains to be the entity doing business in
Section 5.- Each Local Government unit shall have the power to said city, it is the NPC that is ultimately liable to pay said taxes under the provisions of
create its own sources of revenue, to levy taxes, fees and charges both the 1992 BOT Agreement and the 1991 Local Government Code.
subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such
IN VIEW WHEREOF, the petitions are DISMISSED. No costs. SO ORDERED.
THIRD DIVISION
Petitioner PPI and private respondent Fertiphil are private corporations
incorporated under Philippine laws.[3] They are both engaged in the importation and
PLANTERS PRODUCTS, INC., G.R. No. 166006 distribution of fertilizers, pesticides and agricultural chemicals.
Petitioner,
Present: On June 3, 1985, then President Ferdinand Marcos, exercising his legislative
powers, issued LOI No. 1465 which provided, among others, for the imposition of a
YNARES-SANTIAGO, J.,
capital recovery component (CRC) on the domestic sale of all grades of fertilizers in
Chai the Philippines.[4] The LOI provides:
rperson,
AUSTRIA-MARTINEZ,
3. The Administrator of the Fertilizer Pesticide Authority to include in
- versus - CHICO-NAZARIO, its fertilizer pricing formula a capital contribution component of
NACHURA, and not less than P10 per bag. This capital contribution shall be
REYES, JJ. collected until adequate capital is raised to make PPI
viable. Such capital contribution shall be applied by FPA to all
domestic sales of fertilizers in the Philippines.[5] (Underscoring
supplied)
Promulgated:
FERTIPHIL CORPORATION,
Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the
Respondent. March 14, 2008
domestic market to the Fertilizer and Pesticide Authority (FPA). FPA then remitted the
amount collected to the Far East Bank and Trust Company, the depositary bank of
x--------------------------------------------------x PPI. Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986.[6]

DECISION After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of
the P10 levy. With the return of democracy, Fertiphil demanded from PPI a refund of
the amounts it paid under LOI No. 1465, but PPI refused to accede to the demand.[7]
REYES, R.T., J.:
Fertiphil filed a complaint for collection and damages[8] against FPA and PPI
with the RTC in Makati. It questioned the constitutionality of LOI No. 1465 for being
THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the unjust, unreasonable, oppressive, invalid and an unlawful imposition that amounted to
constitutionality of statutes, executive orders, presidential decrees and other a denial of due process of law.[9] Fertiphil alleged that the LOI solely favored PPI, a
issuances. The Constitution vests that power not only in the Supreme Court but in all privately owned corporation, which used the proceeds to maintain its monopoly of the
Regional Trial Courts. fertilizer industry.

The principle is relevant in this petition for review on certiorari of the In its Answer,[10] FPA, through the Solicitor General, countered that the
Decision[1] of the Court of Appeals (CA) affirming with modification that of issuance of LOI No. 1465 was a valid exercise of the police power of the State in ensuring
the RTC in Makati City,[2] finding petitioner Planters Products, Inc. (PPI) liable to private the stability of the fertilizer industry in the country. It also averred that Fertiphil did not
respondent Fertiphil Corporation (Fertiphil) for the levies it paid under Letter of sustain any damage from the LOI because the burden imposed by the levy fell on the
Instruction (LOI) No. 1465. ultimate consumer, not the seller.

The Facts
RTC Disposition
constitutional law that no general tax can be levied
On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as except for the purpose of raising money which is
follows: to be expended for public use. Funds cannot be
exacted under the guise of taxation to promote a
purpose that is not of public interest. Without such
WHEREFORE, in view of the foregoing, the Court hereby
limitation, the power to tax could be exercised or
renders judgment in favor of the plaintiff and against the defendant
employed as an authority to destroy the economy
Planters Product, Inc., ordering the latter to pay the former:
of the people. A tax, however, is not held void on
the ground of want of public interest unless the
1) the sum of P6,698,144.00 with interest at 12% want of such interest is clear. (71 Am. Jur. pp. 371-
from the time of judicial demand; 372)
2) the sum of P100,000 as attorneys fees;
3) the cost of suit. In the case at bar, the plaintiff paid the amount of P6,698,144.00 to
the Fertilizer and Pesticide Authority pursuant to the P10 per bag of
fertilizer sold imposition under LOI 1465 which, in turn, remitted the
SO ORDERED.[11]
amount to the defendant Planters Products, Inc. thru the latters
depository bank, Far East Bank and Trust Co. Thus, by virtue of LOI
Ruling that the imposition of the P10 CRC was an exercise of the States inherent power 1465 the plaintiff, Fertiphil Corporation, which is a private domestic
of taxation, the RTC invalidated the levy for violating the basic principle that taxes can corporation, became poorer by the amount of P6,698,144.00 and the
only be levied for public purpose, viz.: defendant, Planters Product, Inc., another private domestic
corporation, became richer by the amount of P6,698,144.00.
It is apparent that the imposition of P10 per fertilizer bag
sold in the country by LOI 1465 is purportedly in the exercise of the Tested by the standards of constitutionality as set forth in the afore-
power of taxation. It is a settled principle that the power of taxation quoted jurisprudence, it is quite evident that LOI 1465 insofar as it
by the state is plenary. Comprehensive and supreme, the principal imposes the amount of P10 per fertilizer bag sold in the country and
check upon its abuse resting in the responsibility of the members of orders that the said amount should go to the defendant Planters
the legislature to their constituents. However, there are two kinds of Product, Inc. is unlawful because it violates the mandate that a tax
limitations on the power of taxation: the inherent limitations and the can be levied only for a public purpose and not to benefit, aid and
constitutional limitations. promote a private enterprise such as Planters Product, Inc.[12]

One of the inherent limitations is that a tax may be levied only for PPI moved for reconsideration but its motion was denied.[13] PPI then filed a notice of
public purposes: appeal with the RTC but it failed to pay the requisite appeal docket fee. In a separate
but related proceeding, this Court[14] allowed the appeal of PPI and remanded the case
The power to tax can be resorted to only for a to the CA for proper disposition.
constitutionally valid public purpose. By the same
token, taxes may not be levied for purely private CA Decision
purposes, for building up of private fortunes, or for
the redress of private wrongs. They cannot be
On November 28, 2003, the CA handed down its decision affirming with modification
levied for the improvement of private property, or
that of the RTC, with the following fallo:
for the benefit, and promotion of private
enterprises, except where the aid is incident to the
public benefit. It is well-settled principle of
IN VIEW OF ALL THE FOREGOING, the decision appealed In declaring LOI 1465 unconstitutional, the trial court held
from is hereby AFFIRMED, subject to the MODIFICATION that the that the levy imposed under the said law was an invalid exercise of
award of attorneys fees is hereby DELETED.[15] the States power of taxation inasmuch as it violated the inherent and
constitutional prescription that taxes be levied only for public
purposes. It reasoned out that the amount collected under the levy
In affirming the RTC decision, the CA ruled that the lis mota of the complaint for
was remitted to the depository bank of PPI, which the latter used to
collection was the constitutionality of LOI No. 1465, thus:
advance its private interest.

The question then is whether it was proper for the trial court to
On the other hand, appellant submits that the subject statutes
exercise its power to judicially determine the constitutionality of the
passage was a valid exercise of police power. In addition, it disputes
subject statute in the instant case.
the court a quos findings arguing that the collections under LOI 1465
was for the benefit of Planters Foundation, Incorporated (PFI), a
As a rule, where the controversy can be settled on other grounds, the foundation created by law to hold in trust for millions of farmers, the
courts will not resolve the constitutionality of a law (Lim v. Pacquing, stock ownership of PPI.
240 SCRA 649 [1995]). The policy of the courts is to avoid ruling on
constitutional questions and to presume that the acts of political
Of the three fundamental powers of the State, the exercise of police
departments are valid, absent a clear and unmistakable showing to
power has been characterized as the most essential, insistent and the
the contrary.
least limitable of powers, extending as it does to all the great public
needs. It may be exercised as long as the activity or the property
However, the courts are not precluded from exercising such power sought to be regulated has some relevance to public welfare
when the following requisites are obtaining in a controversy before (Constitutional Law, by Isagani A. Cruz, p. 38, 1995 Edition).
it: First, there must be before the court an actual case calling for the
exercise of judicial review. Second, the question must be ripe for
Vast as the power is, however, it must be exercised within the limits
adjudication. Third, the person challenging the validity of the act
set by the Constitution, which requires the concurrence of a lawful
must have standing to challenge. Fourth, the question of
subject and a lawful method. Thus, our courts have laid down the test
constitutionality must have been raised at the earliest opportunity;
to determine the validity of a police measure as follows: (1) the
and lastly, the issue of constitutionality must be the very lis motaof
interests of the public generally, as distinguished from those of a
the case (Integrated Bar of the Philippines v. Zamora, 338 SCRA 81
particular class, requires its exercise; and (2) the means employed are
[2000]).
reasonably necessary for the accomplishment of the purpose and not
unduly oppressive upon individuals (National Development
Indisputably, the present case was primarily instituted for collection Company v. Philippine Veterans Bank, 192 SCRA 257 [1990]).
and damages. However, a perusal of the complaint also reveals
that the instant action is founded on the claim that the levy imposed
It is upon applying this established tests that We sustain the trial
was an unlawful and unconstitutional special
courts holding LOI 1465 unconstitutional. To be sure, ensuring the
assessment. Consequently, the requisite that the constitutionality of
continued supply and distribution of fertilizer in the country is an
the law in question be the very lis mota of the case is present, making
undertaking imbued with public interest. However, the method by
it proper for the trial court to rule on the constitutionality of LOI
which LOI 1465 sought to achieve this is by no means a measure that
1465.[16]
will promote the public welfare. The governments commitment to
support the successful rehabilitation and continued viability of PPI, a
The CA held that even on the assumption that LOI No. 1465 was issued under the police private corporation, is an unmistakable attempt to mask the subject
power of the state, it is still unconstitutional because it did not promote public statutes impartiality. There is no way to treat the self-interest of a
welfare. The CA explained: favored entity,
like PPI, as identical with the general interest of the countrys farmers mother company. In this connection, the Republic
or even the Filipino people in general. Well to stress, substantive due hereby acknowledges that the advances by
process exacts fairness and equal protection disallows distinction Planters to Planters Foundation which were
where none is needed. When a statutes public purpose is spoiled by applied to the payment of the Planters shares now
private interest, the use of police power becomes a travesty which held in trust by Planters Foundation, have been
must be struck down for being an arbitrary exercise of government assigned to, among others, the
power. To rule in favor of appellant would contravene the general Creditors. Accordingly, the Republic, through FPA,
principle that revenues derived from taxes cannot be used for purely hereby agrees to deposit the proceeds of the
private purposes or for the exclusive benefit of private individuals.[17] capital recovery component in the special trust
account designated in the notice dated April 2,
1985, addressed by counsel for the Creditors to
The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for the
Planters Foundation. Such proceeds shall be
benefit of Planters Foundation, Inc., a foundation created to hold in trust the stock
deposited by FPA on or before the 15th day of each
ownership of PPI. The CA stated:
month.

Appellant next claims that the collections under LOI 1465 was for the
The capital recovery component shall continue to
benefit of Planters Foundation, Incorporated (PFI), a foundation
be charged and collected until payment in full of
created by law to hold in trust for millions of farmers, the stock
(a) the Unpaid Capital and/or (b) any shortfall in
ownership of PFI on the strength of Letter of Undertaking (LOU)
the payment of the Subsidy Receivables, (c) any
issued by then Prime Minister Cesar Virata on April 18, 1985 and
carrying cost accruing from the date hereof on the
affirmed by the Secretary of Justice in an Opinion dated October 12,
amounts which may be outstanding from time to
1987, to wit:
time of the Unpaid Capital and/or the Subsidy
Receivables and (d) the capital increases
2. Upon the effective date of this Letter of contemplated in paragraph 2 hereof. For the
Undertaking, the Republic shall cause FPA to purpose of the foregoing clause (c), the carrying
include in its fertilizer pricing formula a capital cost shall be at such rate as will represent the full
recovery component, the proceeds of which will be and reasonable cost to Planters of servicing its
used initially for the purpose of funding the unpaid debts, taking into account both its peso and
portion of the outstanding capital stock of Planters foreign currency-denominated obligations.
presently held in trust by Planters Foundation, Inc. (Records, pp. 42-43)
(Planters Foundation), which unpaid capital is
estimated at approximately P206 million (subject
Appellants proposition is open to question, to say the least. The LOU
to validation by Planters and Planters Foundation)
issued by then Prime Minister Virata taken together with the Justice
(such unpaid portion of the outstanding capital
Secretarys Opinion does not preponderantly demonstrate that the
stock of Planters being hereafter referred to as the
collections made were held in trust in favor of millions of
Unpaid Capital), and subsequently for such capital
farmers. Unfortunately for appellant, in the absence of sufficient
increases as may be required for the continuing
evidence to establish its claims, this Court is constrained to rely on
viability of Planters.
what is explicitly provided in LOI 1465 that one of the primary aims
in imposing the levy is to support the successful rehabilitation and
The capital recovery component shall be in the continued viability of PPI.[18]
minimum amount of P10 per bag, which will be
added to the price of all domestic sales of fertilizer
PPI moved for reconsideration but its motion was denied.[19] It then filed the
in the Philippines by any importer and/or fertilizer
present petition with this Court.
Issues Fertiphil has locus standi
because it suffered direct
injury; doctrine of standing is
Petitioner PPI raises four issues for Our consideration, viz.:
a mere procedural
technicality which may be
I waived.
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY
ATTACKED AND BE DECREED VIA A DEFAULT JUDGMENT IN A CASE PPI argues that Fertiphil has no locus standi to question the constitutionality
FILED FOR COLLECTION AND DAMAGES WHERE THE ISSUE OF of LOI No. 1465 because it does not have a personal and substantial interest in the case
CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE or will sustain direct injury as a result of its enforcement.[21] It asserts that Fertiphil did
CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR not suffer any damage from the CRC imposition because incidence of the levy fell on
ENTITY WHICH HAS NO STANDING TO DO SO. the ultimate consumer or the farmers themselves, not on the seller fertilizer company.[22]

II We cannot agree. The doctrine of locus standi or the right of appearance in a


LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF court of justice has been adequately discussed by this Court in a catena of
ASSURING THE FERTILIZER SUPPLY AND DISTRIBUTION IN THE cases. Succinctly put, the doctrine requires a litigant to have a material interest in the
COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY LAW outcome of a case. In private suits, locus standi requires a litigant to be a real party in
TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK interest, which is defined as the
OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT party who stands to be benefited or injured by the judgment in the suit or the party
TO THE EXERCISE OF TAXATION AND POLICE POWER FOR PUBLIC entitled to the avails of the suit.[23]
PURPOSES.
In public suits, this Court recognizes the difficulty of applying the doctrine
III especially when plaintiff asserts a public right on behalf of the general public because
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY of conflicting public policy issues. [24] On one end, there is the right of the ordinary
COMPONENT WAS REMITTED TO THE GOVERNMENT, AND BECAME citizen to petition the courts to be freed from unlawful government intrusion and illegal
GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE AND VALIDLY official action. At the other end, there is the public policy precluding excessive judicial
ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS interference in official acts, which may unnecessarily hinder the delivery of basic public
BY VIRTUE OF THE PRINCIPLE OF OPERATIVE FACT PRIOR TO ANY services.
DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465.
In this jurisdiction, We have adopted the direct injury test to determine locus
IV standi in public suits. In People v. Vera,[25] it was held that a person who impugns the
validity of a statute must have a personal and substantial interest in the case such that
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT)
he has sustained, or will sustain direct injury as a result. The direct injury test in public
FINDS NO APPLICATION IN THE INSTANT CASE.[20] (Underscoring
suits is similar to the real party in interest rule for private suits under Section 2, Rule 3
supplied)
of the 1997 Rules of Civil Procedure.[26]

Our Ruling
Recognizing that a strict application of the direct injury test may hamper public
interest, this Court relaxed the requirement in cases of transcendental importance or
We shall first tackle the procedural issues of locus standi and the jurisdiction of with far reaching implications. Being a mere procedural technicality, it has also been
the RTC to resolve constitutional issues. held that locus standi may be waived in the public interest.[27]
Whether or not the complaint for collection is characterized as a private or PPI insists that the RTC and the CA erred in ruling on the constitutionality of
public suit, Fertiphil has locus standi to file it. Fertiphil suffered a direct injury from the the LOI. It asserts that the constitutionality of the LOI cannot be collaterally attacked in
enforcement of LOI No. 1465. It was required, and it did pay, the P10 levy imposed for a complaint for collection.[28] Alternatively, the resolution of the constitutional issue is
every bag of fertilizer sold on the domestic market. It may be true that Fertiphil has not necessary for a determination of the complaint for collection.[29]
passed some or all of the levy to the ultimate consumer, but that does not disqualify it
from attacking the constitutionality of the LOI or from seeking a refund. As seller, it bore
Fertiphil counters that the constitutionality of the LOI was adequately pleaded
the ultimate burden of paying the levy. It faced the possibility of severe sanctions for
in its complaint. It claims that the constitutionality of LOI No. 1465 is the very lis mota of
failure to pay the levy. The fact of payment is sufficient injury to Fertiphil.
the case because the trial court cannot determine its claim without resolving the
issue.[30]
Moreover, Fertiphil suffered harm from the enforcement of the LOI because it
was compelled to factor in its product the levy. The levy certainly rendered the fertilizer
It is settled that the RTC has jurisdiction to resolve the constitutionality of a
products of Fertiphil and other domestic sellers much more expensive. The harm to
statute, presidential decree or an executive order. This is clear from Section 5, Article
their business consists not only in fewer clients because of the increased price, but also
VIII of the 1987 Constitution, which provides:
in adopting alternative corporate strategies to meet the demands of LOI No.
1465. Fertiphil and other fertilizer sellers may have shouldered all or part of the levy just
to be competitive in the market. The harm occasioned on the business of Fertiphil is SECTION 5. The Supreme Court shall have the following
sufficient injury for purposes of locus standi. powers:

Even assuming arguendo that there is no direct injury, We find that the liberal xxxx
policy consistently adopted by this Court on locus standi must apply. The issues raised
by Fertiphil are of paramount public importance. It involves not only the (2) Review, revise, reverse, modify, or affirm on appeal
constitutionality of a tax law but, more importantly, the use of taxes for public or certiorari, as the law or the Rules of Court may provide, final
purpose. Former President Marcos issued LOI No. 1465 with the intention of judgments and orders of lower courts in:
rehabilitating an ailing private company. This is clear from the text of the LOI. PPI is
expressly named in the LOI as the direct beneficiary of the levy. Worse, the levy was
(a) All cases in which the constitutionality
made dependent and conditional upon PPI becoming financially viable. The LOI
or validity of any treaty, international or executive
provided that the capital contribution shall be collected until adequate capital is raised
agreement, law, presidential decree,
to make PPI viable.
proclamation, order, instruction, ordinance, or
regulation is in question. (Underscoring supplied)
The constitutionality of the levy is already in doubt on a plain reading of the statute. It
is Our constitutional duty to squarely resolve the issue as the final arbiter of all
In Mirasol v. Court of Appeals,[31] this Court recognized the power of
justiciable controversies. The doctrine of standing, being a mere procedural technicality,
the RTC to resolve constitutional issues, thus:
should be waived, if at all, to adequately thresh out an important constitutional issue.

On the first issue. It is settled that Regional Trial Courts have


RTC may resolve
constitutional issues; the the authority and jurisdiction to consider the constitutionality of a
constitutional issue was statute, presidential decree, or executive order. The Constitution
adequately raised in the vests the power of judicial review or the power to declare a law,
complaint; it is the lis mota of treaty, international or executive agreement, presidential decree,
the case. order, instruction, ordinance, or regulation not only in this Court, but
in all Regional Trial Courts.[32]
In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign xxxx
Affairs,[33] this Court reiterated:
(e) It was a glaring example of crony
There is no denying that regular courts have jurisdiction capitalism, a forced program through which the
over cases involving the validity or constitutionality of a rule or PPI, having been presumptuously masqueraded as
regulation issued by administrative agencies. Such jurisdiction, the fertilizer industry itself, was the sole and
however, is not limited to the Court of Appeals or to this Court alone anointed beneficiary;
for even the regional trial courts can take cognizance of actions
assailing a specific rule or set of rules promulgated by administrative
7. The CRC was an unlawful; and unconstitutional special
bodies. Indeed, the Constitution vests the power of judicial review or
assessment and its imposition is tantamount to illegal exaction
the power to declare a law, treaty, international or executive
amounting to a denial of due process since the persons of entities
agreement, presidential decree, order, instruction, ordinance, or
which had to bear the burden of paying the CRC derived no benefit
regulation in the courts, including the regional trial courts.[34]
therefrom; that on the contrary it was used by PPI in trying to regain
its former despicable monopoly of the fertilizer industry to the
Judicial review of official acts on the ground of unconstitutionality may be detriment of other distributors and importers.[38] (Underscoring
sought or availed of through any of the actions cognizable by courts of justice, not supplied)
necessarily in a suit for declaratory relief. Such review may be had in criminal actions,
as in People v. Ferrer[35] involving the constitutionality of the now defunct Anti-
The constitutionality of LOI No. 1465 is also the very lis mota of the complaint
Subversion law, or in ordinary actions, as in Krivenko v. Register of Deeds[36] involving
for collection. Fertiphil filed the complaint to compel PPI to refund the levies paid under
the constitutionality of laws prohibiting aliens from acquiring public lands. The
the statute on the ground that the law imposing the levy is unconstitutional. The thesis
constitutional issue, however, (a) must be properly raised and presented in the
is that an unconstitutional law is void. It has no legal effect. Being void, Fertiphil had no
case, and (b) its resolution is necessary to a determination of the case, i.e., the issue of
legal obligation to pay the levy. Necessarily, all levies duly paid pursuant to an
constitutionality must be the very lis mota presented.[37]
unconstitutional law should be refunded under the civil code principle against unjust
enrichment. The refund is a mere consequence of the law being declared
Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly and unconstitutional. The RTC surely cannot order PPI to refund Fertiphil if it does not
adequately raised in the complaint for collection filed with the RTC. The pertinent declare the LOI unconstitutional. It is the unconstitutionality of the LOI which triggers
portions of the complaint allege: the refund. The issue of constitutionality is the very lis mota of the complaint with
the RTC.
6. The CRC of P10 per bag levied under LOI 1465 on
domestic sales of all grades of fertilizer in the Philippines, is unlawful, The P10 levy under LOI No.
unjust, uncalled for, unreasonable, inequitable and 1465 is an exercise of the
oppressive because: power of taxation.
xxxx
At any rate, the Court holds that the RTC and the CA did not err in ruling against the
constitutionality of the LOI.
(c) It favors only one private domestic
corporation, i.e., defendant PPPI, and imposed at
the expense and disadvantage of the other PPI insists that LOI No. 1465 is a valid exercise either of the police power or
fertilizer importers/distributors who were the power of taxation. It claims that the LOI was implemented for the purpose of
themselves in tight business situation and were assuring the fertilizer supply and distribution in the country and for benefiting a
then exerting all efforts and maximizing foundation created by law to hold in trust for millions of farmers their stock ownership
management and marketing skills to remain in PPI.
viable;
Fertiphil counters that the LOI is unconstitutional because it was enacted to the imposition on the registration, operation or ownership of a motor
give benefit to a private company. The levy was imposed to pay the corporate debt of vehicle as a tax or fee. x x x Simply put, if the exaction under Rep. Act
PPI. Fertiphil also argues that, even if the LOI is enacted under the police power, it is 4136 were merely a regulatory fee, the imposition in Rep. Act 5448
still unconstitutional because it did not promote the general welfare of the people or need not be an additional tax. Rep. Act 4136 also speaks of other fees
public interest. such as the special permit fees for certain types of motor vehicles
(Sec. 10) and additional fees for change of registration (Sec.
11). These are not to be understood as taxes because such fees are
Police power and the power of taxation are inherent powers of the State. These
very minimal to be revenue-raising. Thus, they are not mentioned by
powers are distinct and have different tests for validity. Police power is the power of the
Sec. 59(b) of the Code as taxes like the motor vehicle registration fee
State to enact legislation that may interfere with personal liberty or property in order
and chauffeurs license fee. Such fees are to go into the expenditures
to promote the general welfare,[39] while the power of taxation is the power to levy taxes
of the Land Transportation Commission as provided for in the last
to be used for public purpose. The main purpose of police power is the regulation of a
proviso of Sec. 61.[44] (Underscoring supplied)
behavior or conduct, while taxation is revenue generation. The lawful subjects and
lawful means tests are used to determine the validity of a law enacted under the police
power.[40] The power of taxation, on the other hand, is circumscribed by inherent and The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory
constitutional limitations. purpose. The levy, no doubt, was a big burden on the seller or the ultimate consumer. It
increased the price of a bag of fertilizer by as much as five percent.[45] A plain reading
of the LOI also supports the conclusion that the levy was for revenue generation. The
We agree with the RTC that the imposition of the levy was an exercise by the
LOI expressly provided that the levy was imposed until adequate capital is raised to
State of its taxation power. While it is true that the power of taxation can be used as an
make PPI viable.
implement of police power,[41] the primary purpose of the levy is revenue generation. If
the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax.[42] Taxes are exacted only for a
public purpose. The P10 levy
is unconstitutional because it
In Philippine Airlines, Inc. v. Edu,[43] it was held that the imposition of a vehicle was not for a public purpose.
registration fee is not an exercise by the State of its police power, but of its taxation The levy was imposed to give
power, thus: undue benefit to PPI.

It is clear from the provisions of Section 73 of An inherent limitation on the power of taxation is public purpose. Taxes are
Commonwealth Act 123 and Section 61 of the Land Transportation exacted only for a public purpose. They cannot be used for purely private purposes or
and Traffic Code that the legislative intent and purpose behind the for the exclusive benefit of private persons.[46] The reason for this is simple. The power
law requiring owners of vehicles to pay for their registration is mainly to tax exists for the general welfare; hence, implicit in its power is the limitation that it
to raise funds for the construction and maintenance of highways and should be used only for a public purpose. It would be a robbery for the State to tax its
to a much lesser degree, pay for the operating expenses of the citizens and use the funds generated for a private purpose. As an old United States case
administering agency. x x x Fees may be properly regarded as taxes bluntly put it: To lay with one hand, the power of the government on the property of
even though they also serve as an instrument of regulation. the citizen, and with the other to bestow it upon favored individuals to aid private
enterprises and build up private fortunes, is nonetheless a robbery because it is done
Taxation may be made the implement of the state's police under the forms of law and is called taxation.[47]
power (Lutz v. Araneta, 98 Phil. 148). If the purpose is primarily
revenue, or if revenue is, at least, one of the real and substantial The term public purpose is not defined. It is an elastic concept that can be
purposes, then the exaction is properly called a tax. Such is the case hammered to fit modern standards. Jurisprudence states that public purpose should be
of motor vehicle registration fees. The same provision appears as given a broad interpretation. It does not only pertain to those purposes which are
Section 59(b) in the Land Transportation Code. It is patent therefrom traditionally viewed as essentially government functions, such as building roads and
that the legislators had in mind a regulatory tax as the law refers to
delivery of basic services, but also includes those purposes designed to promote social sellers of fertilizer to pay the levy is made indefinite. They are required to continuously
justice. Thus, public money may now be used for the relocation of illegal settlers, low- pay the levy until adequate capital is raised for PPI.
cost housing and urban or agrarian reform.
Third, the RTC and the CA held that the levies paid under the LOI were directly
While the categories of what may constitute a public purpose are continually remitted and deposited by FPA to Far East Bank and Trust Company, the depositary
expanding in light of the expansion of government functions, the inherent requirement bank of PPI.[49] This proves that PPI benefited from the LOI. It is also proves that the
that taxes can only be exacted for a public purpose still stands. Public purpose is the main purpose of the law was to give undue benefit and advantage to PPI.
heart of a tax law. When a tax law is only a mask to exact funds from the public when
its true intent is to give undue benefit and advantage to a private enterprise, that law
Fourth, the levy was used to pay the corporate debts of PPI. A reading of the
will not satisfy the requirement of public purpose.
Letter of Understanding[50] dated May 18, 1985 signed by then Prime Minister Cesar
Virata reveals that PPI was in deep financial problem because of its huge corporate
The purpose of a law is evident from its text or inferable from other secondary debts. There were pending petitions for rehabilitation against PPI before the Securities
sources. Here, We agree with the RTC and that CA that the levy imposed under LOI No. and Exchange Commission. The government guaranteed payment of PPIs debts to its
1465 was not for a public purpose. foreign creditors. To fund the payment, President Marcos issued LOI No. 1465. The
pertinent portions of the letter of understanding read:
First, the LOI expressly provided that the levy be imposed to benefit PPI, a
private company. The purpose is explicit from Clause 3 of the law, thus: Republic of the Philippines
Office of the Prime Minister
3. The Administrator of the Fertilizer Pesticide Authority to include in Manila
its fertilizer pricing formula a capital contribution component of
not less than P10 per bag. This capital contribution shall be
LETTER OF UNDERTAKING
collected until adequate capital is raised to make PPI
viable. Such capital contribution shall be applied by FPA to all
domestic sales of fertilizers in the Philippines.[48] (Underscoring May 18, 1985
supplied)
TO: THE BANKING AND FINANCIAL INSTITUTIONS
LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE CREDITORS)
It is a basic rule of statutory construction that the text of a statute should be OF PLANTERS PRODUCTS, INC. (PLANTERS)
given a literal meaning. In this case, the text of the LOI is plain that the levy was imposed
in order to raise capital for PPI. The framers of the LOI did not even hide the insidious
Gentlemen:
purpose of the law. They were cavalier enough to name PPI as the ultimate beneficiary
of the taxes levied under the LOI. We find it utterly repulsive that a tax law would
expressly name a private company as the ultimate beneficiary of the taxes to be levied This has reference to Planters which is the principal importer and
from the public. This is a clear case of crony capitalism. distributor of fertilizer, pesticides and agricultural chemicals in the
Philippines. As regards Planters, the Philippine Government confirms
its awareness of the following: (1) that Planters has outstanding
Second, the LOI provides that the imposition of the P10 levy was conditional obligations in foreign currency and/or pesos, to the Creditors, (2)
and dependent upon PPI becoming financially viable. This suggests that the levy was
that Planters is currently experiencing financial difficulties, and (3)
actually imposed to benefit PPI. The LOI notably does not fix a maximum amount when
that there are presently pending with the Securities and Exchange
PPI is deemed financially viable. Worse, the liability of Fertiphil and other domestic
Commission of the Philippines a petition filed at Planters own behest
for the suspension of payment of all its obligations, and a separate
petition filed by Manufacturers Hanover Trust Company, Manila REPUBLIC OF THE PHILIPPINES
Offshore Branch for the appointment of a rehabilitation receiver for By:
Planters.
(signed)
CESAR E. A. VIRATA
In connection with the foregoing, the Republic of the Philippines (the [51]
Prime Minister and Minister of Finance
Republic) confirms that it considers and continues to consider
Planters as a major fertilizer distributor. Accordingly, for and in
consideration of your expressed willingness to consider and It is clear from the Letter of Understanding that the levy was imposed precisely
participate in the effort to rehabilitate Planters, the Republic hereby to pay the corporate debts of PPI. We cannot agree with PPI that the levy was imposed
manifests its full and unqualified support of the successful to ensure the stability of the fertilizer industry in the country. The letter of
rehabilitation and continuing viability of Planters, and to that end, understanding and the plain text of the LOI clearly indicate that the levy was exacted
hereby binds and obligates itself to the creditors and Planters, as for the benefit of a private corporation.
follows:
All told, the RTC and the CA did not err in holding that the levy imposed under
xxxx LOI No. 1465 was not for a public purpose. LOI No. 1465 failed to comply with the public
purpose requirement for tax laws.

2. Upon the effective date of this Letter of Undertaking, the


Republic shall cause FPA to include in its fertilizer pricing formula a The LOI is still
capital recovery component, the proceeds of which will be used unconstitutional even if
enacted under the police
initially for the purpose of funding the unpaid portion of the
power; it did not promote
outstanding capital stock of Planters presently held in trust by
public interest.
Planters Foundation, Inc. (Planters Foundation), which unpaid capital
is estimated at approximately P206 million (subject to validation by
Planters and Planters Foundation) such unpaid portion of the Even if We consider LOI No. 1695 enacted under the police power of the State, it would
outstanding capital stock of Planters being hereafter referred to as still be invalid for failing to comply with the test of lawful subjects and lawful
the Unpaid Capital), and subsequently for such capital increases as means. Jurisprudence states the test as follows: (1) the interest of the public generally,
may be required for the continuing viability of Planters. as distinguished from those of particular class, requires its exercise; and (2) the means
employed are reasonably necessary for the accomplishment of the purpose and not
unduly oppressive upon individuals.[52]
xxxx
For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote
public interest. The law was enacted to give undue advantage to a private
The capital recovery component shall continue to be corporation. We quote with approval the CA ratiocination on this point, thus:
charged and collected until payment in full of (a) the Unpaid Capital
and/or (b) any shortfall in the payment of the Subsidy Receivables,
(c) any carrying cost accruing from the date hereof on the amounts It is upon applying this established tests that We sustain the
which may be outstanding from time to time of the Unpaid Capital trial courts holding LOI 1465 unconstitutional. To be sure, ensuring
and/or the Subsidy Receivables, and (d) the capital increases the continued supply and distribution of fertilizer in the country is an
contemplated in paragraph 2 hereof. For the purpose of the undertaking imbued with public interest. However, the method by
foregoing clause (c), the carrying cost shall be at such rate as will which LOI 1465 sought to achieve this is by no means a measure that
represent the full and reasonable cost to Planters of servicing its will promote the public welfare. The governments commitment to
debts, taking into account both its peso and foreign currency- support the successful rehabilitation and continued viability of PPI, a
denominated obligations. private corporation, is an unmistakable attempt to mask the subject
statutes impartiality. There is no way to treat the self-interest of a
favored entity, like PPI, as identical with the general interest of the The doctrine of operative fact, as an exception to the general rule, only
countrys farmers or even the Filipino people in general. Well to stress, applies as a matter of equity and fair play.[55] It nullifies the effects of an unconstitutional
substantive due process exacts fairness and equal protection law by recognizing that the existence of a statute prior to a determination of
disallows distinction where none is needed. When a statutes public unconstitutionality is an operative fact and may have consequences which cannot
purpose is spoiled by private interest, the use of police power always be ignored. The past cannot always be erased by a new judicial declaration.[56]
becomes a travesty which must be struck down for being an arbitrary
exercise of government power. To rule in favor of appellant would
The doctrine is applicable when a declaration of unconstitutionality will
contravene the general principle that revenues derived from taxes
impose an undue burden on those who have relied on the invalid law. Thus, it was
cannot be used for purely private purposes or for the exclusive
applied to a criminal case when a declaration of unconstitutionality would put the
benefit of private individuals. (Underscoring supplied)
accused in double jeopardy[57] or would put in limbo the acts done by a municipality in
reliance upon a law creating it.[58]
The general rule is that an
unconstitutional law is void;
Here, We do not find anything iniquitous in ordering PPI to refund the
the doctrine of operative fact
is inapplicable. amounts paid by Fertiphil under LOI No. 1465. It unduly benefited from the levy. It was
proven during the trial that the levies paid were remitted and deposited to its bank
account. Quite the reverse, it would be inequitable and unjust not to order a refund. To
PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is do so would unjustly enrich PPI at the expense of Fertiphil. Article 22 of the Civil Code
declared unconstitutional. It banks on the doctrine of operative fact, which provides explicitly provides that every person who, through an act of performance by another
that an unconstitutional law has an effect before being declared unconstitutional. PPI comes into possession of something at the expense of the latter without just or legal
wants to retain the levies paid under LOI No. 1465 even if it is subsequently declared to ground shall return the same to him. We cannot allow PPI to profit from an
be unconstitutional. unconstitutional law. Justice and equity dictate that PPI must refund the amounts paid
by Fertiphil.
We cannot agree. It is settled that no question, issue or argument will be
entertained on appeal, unless it has been raised in the court a quo.[53] PPI did not raise WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November
the applicability of the doctrine of operative fact with the RTC and the CA. It cannot 28, 2003 is AFFIRMED.
belatedly raise the issue with Us in order to extricate itself from the dire effects of an
unconstitutional law.
SO ORDERED.

At any rate, We find the doctrine inapplicable. The general rule is that an
unconstitutional law is void. It produces no rights, imposes no duties and affords no
protection. It has no legal effect. It is, in legal contemplation, inoperative as if it has not
been passed.[54] Being void, Fertiphil is not required to pay the levy. All levies paid
should be refunded in accordance with the general civil code principle against unjust
enrichment. The general rule is supported by Article 7 of the Civil Code, which provides:

ART. 7. Laws are repealed only by subsequent ones, and


their violation or non-observance shall not be excused by disuse or
custom or practice to the contrary.

When the courts declare a law to be inconsistent with the


Constitution, the former shall be void and the latter shall govern.
EN BANC EXECUTIVE SECRETARY, SECRETARY OF
AGRICULTURE, SECRETARY OF AGRARIAN
Petitioner-Organizations, namely: G.R. Nos. 147036-37 REFORM, PRESIDENTIAL COMMISSION ON
PAMBANSANG KOALISYON NG MGA GOOD GOVERNMENT, THE SOLICITOR
SAMAHANG MAGSASAKA AT MANGGAGAWA GENERAL, PHILIPPINE COCONUT PRODUCERS
SA NIYUGAN (PKSMMN), COCONUT INDUSTRY FEDERATION, INC. (COCOFED), and UNITED
REFORM MOVEMENT (COIR), BUKLOD NG COCONUT PLANTERS BANK (UCPB),
MALAYANG MAGBUBUKID, PAMBANSANG Respondents.
KILUSAN NG MGA SAMAHANG MAGSASAKA x ------------------------------------------------------ x
(PAKISAMA), CENTER FOR AGRARIAN REFORM,
EMPOWERMENT AND TRANSFORMATION TEODORO J. AMOR, representing the Peasant G.R. No. 147811
(CARET), PAMBANSANG KATIPUNAN NG MGA Alliance of Samar and Leyte (PASALEY),
SAMAHAN SA KANAYUNAN (PKSK); Petitioner- DOMINGO C. ENCALLADO, representing
Legislator: REPRESENTATIVE LORETA ANN Aniban ng Magsasaka at Manggagawa sa Niyugan
ROSALES; and Petitioner-Individuals, namely: (AMMANI), and VIDAL M. PILIIN, representing
VIRGILIO V. DAVID, JOSE MARIE FAUSTINO, the Laguna Coalition,
JOSE CONCEPCION, ROMEO ROYANDOYAN, Petitioners,
JOSE V. ROMERO, JR., ATTY. CAMILO L.
SABIO, and ATTY. ANTONIO T. CARPIO, - versus -
Petitioners, Present:
CORONA, C.J., EXECUTIVE SECRETARY, SECRETARY OF
CARPIO, AGRICULTURE, SECRETARY OF AGRARIAN
VELASCO, JR., REFORM, PRESIDENTIAL COMMISSION ON
LEONARDO-DE CASTRO, GOOD GOVERNMENT, THE SOLICITOR
BRION, GENERAL, PHILIPPINE COCONUT
- versus - PERALTA, PRODUCERS FEDERATION, UNITED Promulgated:
BERSAMIN, COCONUT PLANTERS BANK,

DEL Respondents. April 10, 2012


CASTILLO,
ABAD, x ---------------------------------------------------------------------------------------- x
VILLARAMA,
JR., DECISION
PEREZ,
MENDOZA, ABAD, J.:
SERENO,
REYES, and
PERLAS-
BERNABE, JJ.
These are consolidated petitions to declare unconstitutional certain presidential articles of incorporation were amended in July 1975, resulting in a change in the banks
decrees and executive orders of the martial law era relating to the raising and use of name from First United Bank to United Coconut Planters Bank (UCPB).[15]
coco-levy funds.
On July 14, 1976 President Marcos enacted P.D. 961,[16] the Coconut Industry Code,
The Facts and the Case which consolidated and codified existing laws relating to the coconut industry. The
Code provided that surpluses from the CCS Fund and the CID Fund collections, not used
On June 19, 1971 Congress enacted Republic Act (R.A.) 6260[1] that established a for replanting and other authorized purposes, were to be invested by acquiring shares
Coconut Investment Fund (CI Fund) for the development of the coconut industry of stock of corporations, including the San Miguel Corporation (SMC), engaged in
through capital financing.[2] Coconut farmers were to capitalize and administer the Fund undertakings related to the coconut and palm oil industries.[17] UCPB was to make such
through the Coconut Investment Company (CIC)[3] whose objective was, among others, investments and equitably distribute these for free to coconut farmers.[18] These
to advance the coconut farmers interests. For this purpose, the law imposed a levy investments constituted the Coconut Industry Investment Fund (CIIF). P.D. 961 also
of P0.55 on the coconut farmers first domestic sale of every 100 kilograms of copra, or provided that the coconut levy funds (coco-levy funds) shall be owned by the coconut
its equivalent, for which levy he was to get a receipt convertible into CIC shares of farmers in their private capacities.[19] This was reiterated in the PD 1468[20] amendment
stock.[4] of June 11, 1978.

About a year following his proclamation of martial law in the country or on August 20, In 1980, President Marcos issued P.D. 1699,[21] suspending the collections of the CCS
1973 President Ferdinand E. Marcos issued Presidential Decree (P.D.) 276,[5] which Fund and the CID Fund. But in 1981 he issued P.D. 1841[22] which revived the collection
established a Coconut Consumers Stabilization Fund (CCS Fund), to address the crisis of coconut levies. P.D. 1841 renamed the CCS Fund into the Coconut Industry
at that time in the domestic market for coconut-based consumer goods. The CCS Fund Stabilization Fund (CIS Fund).[23] This Fund was to be earmarked proportionately among
was to be built up through the imposition of a P15.00-levy for every first sale of 100 several development programs, such as coconut hybrid replanting program, insurance
kilograms of copra resecada.[6] The levy was to cease after a year or earlier provided the coverage for the coconut farmers, and scholarship program for their children.[24]
crisis was over. Any remaining balance of the Fund was to revert to the CI Fund
established under R.A. 6260.[7] In November 2000 then President Joseph Estrada issued Executive Order (E.O.)
312,[25] establishing a Sagip Niyugan Program which sought to provide immediate
A year later or on November 14, 1974 President Marcos issued P.D. 582,[8] creating a income supplement to coconut farmers and encourage the creation of a sustainable
permanent fund called the Coconut Industry Development Fund (CID Fund) to channel local market demand for coconut oil and other coconut products.[26] The Executive
for the ultimate direct benefit of coconut farmers part of the levies that they were Order sought to establish a P1-billion fund by disposing of assets acquired using coco-
already paying. The Philippine Coconut Authority (PCA) was to provide P100 million as levy funds or assets of entities supported by those funds.[27] A committee was created
initial capital of the CID Fund and, thereafter, give the Fund at least P0.20 per kilogram to manage the fund under this program.[28] A majority vote of its members could
of copra resecada out of the PCAs collection of coconut consumers stabilization levy. In engage the services of a reputable auditing firm to conduct periodic audits. [29]
case of the lifting of this levy, the PCA was then to impose a permanent levy of P0.20
on the first sale of every kilogram of copra to form part of the CID Fund.[9] Also, under At about the same time, President Estrada issued E.O. 313,[30] which created an
P.D. 582, the Philippine National Bank (PNB), then owned by the Government, was to irrevocable trust fund known as the Coconut Trust Fund (the Trust Fund). This aimed to
receive on deposit, administer, and use the CID Fund.[10] P.D. 582 authorized the PNB provide financial assistance to coconut farmers, to the coconut industry, and to other
to invest the unused portion of the CID Fund in easily convertible investments, the agri-related programs.[31] The shares of stock of SMC were to serve as the Trust Funds
earnings of which were to form part of the Fund.[11] initial capital.[32] These shares were acquired with CII Funds and constituted
approximately 27% of the outstanding capital stock of SMC. E.O. 313 designated UCPB,
In 1975 President Marcos enacted P.D. 755[12] which approved the acquisition of a through its Trust Department, as the Trust Funds trustee bank. The Trust Fund
commercial bank for the benefit of the coconut farmers to enable such bank to Committee would administer, manage, and supervise the operations of the Trust
promptly and efficiently realize the industrys credit policy.[13] Thus, the PCA bought Fund.[33] The Committee would designate an external auditor to do an annual audit or
72.2% of the shares of stock of First United Bank, headed as often as needed but it may also request the Commission on Audit (COA) to
by Pedro Cojuangco.[14] Due to changes in its corporate identity and purpose, the banks intervene.[34]
To implement its mandate, E.O. 313 directed the Presidential Commission on Good But, as the Court previously held, where there are serious allegations that a
Government, the Office of the Solicitor General, and other government agencies to law has infringed the Constitution, it becomes not only the right but the duty of the
exclude the 27% CIIF SMC shares from Civil Case 0033, entitled Republic of the Court to look into such allegations and, when warranted, uphold the supremacy of the
Philippines v. Eduardo Cojuangco, Jr., et al., which was then pending before the Constitution.[39] Moreover, where the issues raised are of paramount importance to the
Sandiganbayan and to lift the sequestration over those shares.[35] public, as in this case, the Court has the discretion to brush aside technicalities of
procedure.[40]
On January 26, 2001, however, former President Gloria Macapagal-Arroyo ordered the
suspension of E.O.s 312 and 313.[36] This notwithstanding, on March 1, 2001 petitioner Second. The Court has to uphold petitioners right to institute these
organizations and individuals brought the present action in G.R. 147036-37 to petitions. The petitioner organizations in these cases represent coconut farmers on
declare E.O.s 312 and 313 as well as Article III, Section 5 of P.D. 1468 whom the burden of the coco-levies attaches. It is also primarily for their benefit that
unconstitutional. On April 24, 2001 the other sets of petitioner organizations and the levies were imposed.
individuals instituted G.R. 147811 to nullify Section 2 of P.D. 755 and Article III, Section
5 of P.D.s 961 and 1468 also for being unconstitutional.
The individual petitioners, on the other hand, join the petitions as
taxpayers. The Court recognizes their right to restrain officials from wasting public
The Issues Presented funds through the enforcement of an unconstitutional statute.[41] This so-called
taxpayers suit is based on the theory that expenditure of public funds for the purpose
The parties submit the following issues for adjudication: of executing an unconstitutional act is a misapplication of such funds.[42]

Procedurally Besides, the 1987 Constitution accords to the citizens a greater participation
in the affairs of government. Indeed, it provides for people's initiative, the right to
information on matters of public concern (including the right to know the state of health
1. Whether or not petitioners special civil actions of certiorari under Rule 65 of their President), as well as the right to file cases questioning the factual bases for the
constituted the proper remedy for their actions; and suspension of the privilege of writ of habeas corpus or declaration of martial law. These
2. Whether or not petitioners have legal standing to bring the same to court. provisions enlarge the peoples right in the political as well as the judicial field. It grants
them the right to interfere in the affairs of government and challenge any act tending
On the substance to prejudice their interest.

3. Whether or not the coco-levy funds are public funds; and Third. For some time, different and conflicting notions had been formed as to
the nature and ownership of the coco-levy funds. The Court, however, finally put an end
to the dispute when it categorically ruled in Republic of the Philippines v.
4. Whether or not (a) Section 2 of P.D. 755, (b) Article III, Section 5 of P.D.s 961 COCOFED[43] that these funds are not only affected with public interest; they are, in
and 1468, (c) E.O. 312, and (d) E.O. 313 are unconstitutional. fact, prima facie public funds. Prima facie means a fact presumed to be true unless
disproved by some evidence to the contrary.[44]
The Rulings of the Court
The Court was satisfied that the coco-levy funds were raised pursuant to law
First. UCPB questions the propriety of the present petitions to support a proper governmental purpose. They were raised with the use of the police
for certiorari and mandamus under Rule 65 on the ground that there are no ongoing and taxing powers of the State for the benefit of the coconut industry and its farmers
proceedings in any tribunal or board or before a government official exercising judicial, in general. The COA reviewed the use of the funds. The Bureau of Internal Revenue (BIR)
quasi-judicial, or ministerial functions.[37] UCPB insists that the Court exercises appellate treated them as public funds and the very laws governing coconut levies recognize their
jurisdiction with respect to issues of constitutionality or validity of laws and presidential public character.[45]
orders.[38]
The Court has also recently declared that the coco-levy funds are in the nature owned government bank) and not in the Philippine Treasury. In Osmea v. Orbos,[61] the
of taxes and can only be used for public purpose.[46] Taxes are enforced proportional Court held that the oil price stabilization fund was a special fund mainly because this
contributions from persons and property, levied by the State by virtue of its sovereignty was segregated from the general fund and placed in what the law referred to as a trust
for the support of the government and for all its public needs.[47] Here, the coco-levy account. Yet it remained subject to COA scrutiny and review. The Court finds no
funds were imposed pursuant to law, namely, R.A. 6260 and P.D. 276. The funds were substantial distinction between these funds and the coco-levy funds, except as to the
collected and managed by the PCA, an independent government corporation directly industry they each support.
under the President.[48] And, as the respondent public officials pointed out,
the pertinent laws used the term levy,[49] which means to tax,[50] in describing the Fourth. Petitioners in G.R. 147811 assert that Section 2 of P.D. 755 above is
exaction. void and unconstitutional for disregarding the public character of coco-levy funds. The
subject section provides:
Of course, unlike ordinary revenue laws, R.A. 6260 and P.D. 276 did not raise
money to boost the governments general funds but to provide means for the Section 2. Financial Assistance. x x x and since the
rehabilitation and stabilization of a threatened industry, the coconut industry, which is operations, and activities of the Philippine Coconut Authority are all
so affected with public interest as to be within the police power of the State.[51] The in accord with the present social economic plans and programs of
funds sought to support the coconut industry, one of the main economic backbones of the Government, all collections and levies which the Philippine
the country, and to secure economic benefits for the coconut farmers and farm Coconut Authority is authorized to levy and collect such as but not
workers. The subject laws are akin to the sugar liens imposed by Sec. 7(b) of P.D. limited to the Coconut Consumers Stabilization Levy, and the
388,[52] and the oil price stabilization funds under P.D. 1956,[53] as amended by E.O. Coconut Industry Development Fund as prescribed by Presidential
137.[54] Decree No. 582 shall not be considered or construed, under any
law or regulation, special and/or fiduciary funds and do not form
Respondent UCPB suggests that the coco-levy funds are closely similar to the part of the general funds of the national government within the
Social Security System (SSS) funds, which have been declared to be not public funds contemplation of Presidential Decree No. 711. (Emphasis ours)
but properties of the SSS members and held merely in trust by the government.[55] But
the SSS Law[56] collects premium contributions. It does not collect taxes from members The Court has, however, already passed upon this question in Philippine
for a specific public purpose. They pay contributions in exchange for insurance Coconut Producers Federation, Inc. (COCOFED) v. Republic of the Philippines.[62] It held
protection and benefits like loans, medical or health services, and retirement as unconstitutional Section 2 of P.D. 755 for effectively authorizing the PCA to utilize
packages. The benefits accrue to every SSS member, not to the public, in general.[57] portions of the CCS Fund to pay the financial commitment of the farmers to acquire
UCPB and to deposit portions of the CCS Fund levies with UCPB interest free. And as
Furthermore, SSS members do not lose ownership of their contributions. The there also provided, the CCS Fund, CID Fund and like levies that PCA is authorized to
government merely holds these in trust, together with his employers contribution, to collect shall be considered as non-special or fiduciary funds to be transferred to the
answer for his future benefits.[58] The coco-levy funds, on the other hand, belong to the general fund of the Government, meaning they shall be deemed private funds.
government and are subject to its administration and disposition. Thus, these funds,
including its incomes, interests, proceeds, or profits, as well as all its assets, properties, Identical provisions of subsequent presidential decrees likewise declared
and shares of stocks procured with such funds must be treated, used, administered, and coco-levy funds private properties of coconut farmers. Article III, Section 5 of P.D. 961
managed as public funds.[59] reads:

Lastly, the coco-levy funds are evidently special funds. In Gaston v. Republic Section 5. Exemptions. The Coconut Consumers
Planters Bank,[60] the Court held that the State collected stabilization fees from sugar Stabilization Fund and the Coconut Industry Development Fund as
millers, planters, and producers for a special purpose: to finance the growth and well as all disbursements of said funds for the benefit of the coconut
development of the sugar industry and all its components. The fees were levied for a farmers as herein authorized shall not be construed or interpreted,
special purpose and, therefore, constituted special fund when collected. Its character as under any law or regulation, as special and/or fiduciary funds, or
such fund was made clear by the fact that they were deposited in the PNB (then a wholly as part of the general funds of the national government within
the contemplation of P.D. No. 711; nor as a subsidy, donation, levy, farmers, they could not, individually or collectively, waive what have not been and could
government funded investment, or government share within the not be legally imparted to them.
contemplation of P.D. 898, the intention being that said Fund
and the disbursements thereof as herein authorized for the
Section 2 of P.D. 755, Article III, Section 5 of P.D. 961, and Article III, Section 5
benefit of the coconut farmers shall be owned by them in their
of P.D. 1468 completely ignore the fact that coco-levy funds are public funds raised
own private capacities. (Emphasis ours)
through taxation. And since taxes could be exacted only for a public purpose, they
cannot be declared private properties of individuals although such individuals fall within
Section 5 of P.D. 1468 basically reproduces the above provision, thus a distinct group of persons.[65]

Section 5. Exemption. The Coconut Consumers The Court of course grants that there is no hard-and-fast rule for determining
Stabilization Fund and the Coconut Industry Development Fund, as what constitutes public purpose. It is an elastic concept that could be made to fit into
well as all disbursements as herein authorized, shall not be modern standards. Public purpose, for instance, is no longer restricted to traditional
construed or interpreted, under any law or regulation, as special government functions like building roads and school houses or safeguarding public
and/or fiduciary funds, or as part of the general funds of the health and safety. Public purpose has been construed as including the promotion of
national government within the contemplation of P.D. 711; nor as social justice. Thus, public funds may be used for relocating illegal settlers, building
subsidy, donation, levy government funded investment, or low-cost housing for them, and financing both urban and agrarian reforms that benefit
government share within the contemplation of P.D. 898, the certain poor individuals. Still, these uses relieve volatile iniquities in society and,
intention being that said Fund and the disbursements thereof as
therefore, impact on public order and welfare as a whole.
herein authorized for the benefit of the coconut farmers shall be
owned by them in their private capacities: Provided, however, That
the President may at any time authorize the Commission on Audit or But the assailed provisions, which removed the coco-levy funds from the
any other officer of the government to audit the business affairs, general funds of the government and declared them private properties of coconut
administration, and condition of persons and entities who receive farmers, do not appear to have a color of social justice for their purpose. The levy on
subsidy for coconut-based consumer products x x x. (Emphasis ours) copra that farmers produce appears, in the first place, to be a business tax judging by
its tax base. The concept of farmers-businessmen is incompatible with the idea that
coconut farmers are victims of social injustice and so should be beneficiaries of the
Notably, the raising of money by levy on coconut farm production, a form of
taxes raised from their earnings.
taxation as already stated, began in 1971 for the purpose of developing the coconut
industry and promoting the interest of coconut farmers. The use of the fund was
expanded in 1973 to include the stabilization of the domestic market for coconut-based It would altogether be different of course if the laws mentioned set apart a
consumer goods and in 1974 to divert part of the funds for obtaining direct benefit to portion of the coco-levy fund for improving the lives of destitute coconut farm owners
coconut farmers. After five years or in 1976, however, P.D. 961 declared the coco-levy or workers for their social amelioration to establish a proper government purpose. The
funds private property of the farmers. P.D. 1468 reiterated this declaration in 1978. But support for the poor is generally recognized as a public duty and has long been an
neither presidential decree actually turned over possession or control of the funds to accepted exercise of police power in the promotion of the common good.[66] But the
the farmers in their private capacity. The government continued to wield undiminished declarations do not distinguish between wealthy coconut farmers and the impoverished
authority over the management and disposition of those funds. ones. And even if they did, the Government cannot just embark on a philanthropic orgy
of inordinate dole-outs for motives political or otherwise.[67] Consequently, such
declarations are void since they appropriate public funds for private purpose and,
In any event, such declaration is void. There is ownership when a thing
therefore, violate the citizens right to substantive due process.[68]
pertaining to a person is completely subjected to his will in everything that is not
prohibited by law or the concurrence with the rights of another.[63] An owner is free to On another point, in stating that the coco-levy fund shall not be construed or
exercise all attributes of ownership: the right, among others, to possess, use and enjoy, interpreted, under any law or regulation, as special and/or fiduciary funds, or as part of
abuse or consume, and dispose or alienate the thing owned.[64] The owner is of course the general funds of the national government, P.D.s 961 and 1468 seek to remove such
free to waive all or some of these rights in favor of others. But in the case of the coconut fund from COA scrutiny.
This is also the fault of President Estradas E.O. 312 which deals with P1 billion special purpose for which the law raises coco-levy funds in that it permits the use of
to be generated out of the sale of coco-fund acquired assets. Thus coco-levy funds for improving productivity in other food areas. Thus:

Section 5. Audit of Fund and Submission of Report. The Section 2. Purpose of the Fund. The Fund shall be
Committee, by a majority vote, shall engage the services of a established for the purpose of financing programs of assistance for
reputable auditing firm to conduct periodic audits of the fund. It the benefit of the coconut farmers, the coconut industry, and other
shall render a quarterly report on all pertinent transactions and agri-related programs intended to maximize food productivity,
availments of the fund to the Office of the President within the first develop business opportunities in the countryside, provide
three (3) working days of the succeeding quarter. (Emphasis ours) livelihood alternatives, and promote anti-poverty
programs. (Emphasis ours)

E.O. 313 has a substantially identical provision governing the management


and disposition of the Coconut Trust Fund capitalized with the substantial SMC shares xxxx
of stock that the coco-fund acquired. Thus
Section 9. Use and Disposition of the Trust Income. The
Section 13. Accounting. x x x Coconut Trust Fund Committee, on an annual basis, shall determine
and establish the amount comprising the Trust Income. After such
determination, the Committee shall earmark, allocate and disburse
The Fund shall be audited annually or as often as
the Trust Income for the following purposes, namely:
necessary by an external auditor designated by the
Committee. The Committee may also request the Commission on
Audit to conduct an audit of the Fund. (Emphasis ours) xxxx

But, since coco-levy funds are taxes, the provisions of P.D.s 755, 961 and 1468 (d) Thirty percent (30%) of the Trust Income shall be
as well as those of E.O.s 312 and 313 that remove such funds and the assets acquired used to assist and fund agriculturally-related programs for the
through them from the jurisdiction of the COA violate Article IX-D, Section 2(1)[69] of Government, as reasonably determined by the Trust Fund
the 1987 Constitution. Section 2(1) vests in the COA the power and authority to examine Committee, implemented for the purpose of: (i) maximizing food
uses of government money and property. The cited P.D.s and E.O.s also contravene productivity in the agriculture areas of the country, (ii) enhancing the
Section 2[70] of P.D. 898 (Providing for the Restructuring of the Commission on Audit), upliftment and well-being of the living conditions of farmers and
which has the force of a statute. agricultural workers, (iii) developing viable industries and business
opportunities in the countryside, (iv) providing alternative means of
livelihood to the direct dependents of agriculture businesses and
And there is no legitimate reason why such funds should be shielded from
enterprises, and (v) providing financial assistance and support to
COA review and audit. The PCA, which implements the coco-levy laws and collects the
coconut farmers in times of economic hardship due to extremely low
coco-levy funds, is a government-owned and controlled corporation subject to COA
prices of copra and other coconut products, natural calamities, world
review and audit.
market dislocation and similar occurrences, including financial
support to the ERAPs Sagip Niyugan Program established under
E.O. 313 suffers from an additional infirmity. Its title, Rationalizing the Use of Executive Order No. 312 dated November 3, 2000; x x x. (Emphasis
the Coconut Levy Funds by Constituting a Fund for Assistance to Coconut Farmers as ours)
an Irrevocable Trust Fund and Creating a Coconut Trust Fund Committee for the
Management thereof tends to mislead. Apparently, it intends to create a trust fund out
Clearly, E.O. 313 above runs counter to the constitutional provision which
of the coco-levy funds to provide economic assistance to the coconut farmers and,
directs that all money collected on any tax levied for a special purpose shall be treated
ultimately, benefit the coconut industry.[71] But on closer look, E.O. 313 strays from the
as a special fund and paid out for such purpose only.[72] Assisting other agriculturally-
related programs is way off the coco-funds objective of promoting the general interests enable it to effectively perform its functions and
of the coconut industry and its farmers. responsibilities. (Emphasis ours)

A final point, the E.O.s also transgress P.D. 1445,[73] Section 84(2),[74] the first Section 7. Functions and Responsibilities of the
part by the previously mentioned sections of E.O. 313 and the second part by Section Committee. The Coconut Trust Fund Committee shall have the
4 of E.O. 312 and Sections 6 and 7 of E.O. 313. E.O. 313 vests the power to administer, following functions and responsibilities:
manage, and supervise the operations and disbursements of the Trust Fund it (a) set the investment policy of the Trust Fund;
established (capitalized with SMC shares bought out of coco-levy funds) in a Coconut
(b) establish priorities for assistance giving preference to
Trust Fund Committee. Thus
small coconut farmers and farmworkers which shall be
reviewed periodically and revised as necessary in
Section 6. Creation of the Coconut Trust Fund accordance with changing conditions;
Committee. A Committee is hereby created to administer, (c) receive, process and approve project proposals for
manage and supervise the operations of the Trust Fund, chaired financing by the Trust Fund;
by the President with ten (10) members, as follows: (d) decide on the use of the Trust Funds income or net
earnings including final action on applications for
(a) four (4) representatives from the government assistance, grants and/or loans;
sector, two of whom shall be the Secretary of (e) avail of professional counsel and services by retaining an
Agriculture and the Secretary of Agrarian Reform investment and financial manager, if desired;
who shall act as Vice Chairmen; (f) formulate the rules and regulations governing the
(b) four (4) representatives from coconut farmers allocation, utilization and disbursement of the Fund; and
organizations, one of whom shall come from a list (g) perform such other acts and things as may be necessary
of nominees from the Philippine Coconut proper or conducive to attain the purposes of the
Producers Federation Inc. (COCOFED); Fund. (Emphasis ours)
(c) a representative from the CIIF; and
(d) a representative from a non-government Section 4 of E.O. 312 does essentially the same thing. It vests the management
organization (NGO) involved in agricultural and and disposition of the assistance fund generated from the sale of coco-levy fund-
rural development. acquired assets into a Committee of five members. Thus, Section 4 of E.O. 312 provides

All decisions of the Coconut Trust Fund Committee shall be Section 4. Funding. Assets acquired through the coconut
determined by a majority vote of all the members. levy funds or by entities financed by the coconut levy funds identified
by the President for appropriate disposal or sale, shall be sold or
The Coconut Trust Fund Committee shall perform the functions and disposed to generate a maximum fund of ONE BILLION PESOS
duties set forth in Section 7 hereof, with the skill, care, prudence and (P1,000,000,000.00) which shall be managed by a Committee
diligence necessary under the circumstances then prevailing that a composed of a Chairman and four (4) members to be appointed
prudent man acting in like capacity would exercise. by the President whose term shall be co-terminus with the
Program. x x x (Emphasis ours)
The members of the Coconut Trust Fund Committee shall be
appointed by the President and shall hold office at his pleasure. In effect, the above transfers the power to allocate, use, and disburse coco-
levy funds that P.D. 232 vested in the PCA and transferred the same, without
The Coconut Trust Fund Committee is authorized to hire legislative authorization and in violation of P.D. 232, to the Committees mentioned
administrative, technical and/or support staff as may be required to
above. An executive order cannot repeal a presidential decree which has the same
standing as a statute enacted by Congress.
UCPB invokes the principle of separability to save the assailed laws from being
struck down. The general rule is that where part of a statute is void as repugnant to the
Constitution, while another part is valid, the valid portion, if susceptible to being
separated from the invalid, may stand and be enforced. When the parts of a statute,
however, are so mutually dependent and connected, as conditions, considerations, or
compensations for each other, as to warrant a belief that the legislature intended them
as a whole, the nullity of one part will vitiate the rest. In which case, if some parts are
unconstitutional, all the other provisions which are thus dependent, conditional, or
connected must consequently fall with them.[75]

But, given that the provisions of E.O.s 312 and 313, which as already stated
invalidly transferred powers over the funds to two committees that President Estrada
created, the rest of their provisions became non-operational. It is evident that President
Estrada would not have created the new funding programs if they were to be managed
by some other entity. Indeed, he made himself Chairman of the Coconut Trust Fund
and left to his discretion the appointment of the members of the other committee.

WHEREFORE, the Court GRANTS the petition in G.R. 147036-37, PARTLY


GRANTS the petition in G.R. 147811, and declares the following VOID:

a) E.O. 312, for being repugnant to Section 84(2) of P.D.


1445, and Article IX-D, Section 2(1) of the Constitution; and

b) E.O. 313, for being in contravention of Section 84(2) of


P.D. 1445, and Article IX-D, Section 2(1) and Article VI, Section 29(3)
of the Constitution.

The Court has previously declared Section 2 of P.D. 755 and Article III, Section
5 of P.D.s 961 and 1468 unconstitutional.

SO ORDERED.

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