taxation cases ( tax exeption of n-stock, n-profit edu ins-rules of contruction of tax laws)

7/27/2019 Taxation Cases ( Tax Exeption of N-stock, N-profit Edu Ins-rules of Contruction of Tax Laws)

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Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 189999 June 27, 2012

ANGELES UNIVERSITY FOUNDATION, Petitioner,vs.CITY OF ANGELES, JULIET G. QUINSAAT, in her capacity as Treasurer of Angeles City and ENGR. DONATON. DIZON, in his capacity as Acting Angeles City Building Official, Respondents.

D E C I S I O N

VILLARAMA, JR.,J.:

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, whichseeks to reverse and set aside the Decision1dated July 28, 2009 and Resolution2dated October 12, 2009 of the Courtof Appeals (CA) in CA-G.R. CV No. 90591. The CA reversed the Decision3dated September 21, 2007 of the RegionalTrial Court of Angeles City, Branch 57 in Civil Case No. 12995 declaring petitioner exempt from the payment ofbuilding permit and other fees and ordering respondents to refund the same with interest at the legal rate.

The factual antecedents:

Petitioner Angeles University Foundation (AUF) is an educational institution established on May 25, 1962 and wasconverted into a non-stock, non-profit education foundation under the provisions of Republic Act (R.A.) No. 60554onDecember 4, 1975.

Sometime in August 2005, petitioner filed with the Office of the City Building Official an application for a buildingpermit for the construction of an 11-storey building of the Angeles University Foundation Medical Center in its maincampus located at MacArthur Highway, Angeles City, Pampanga. Said office issued a Building Permit Fee Assessmentin the amount of P126,839.20. An Order of Payment was also issued by the City Planning and Development Office,Zoning Administration Unit requiring petitioner to pay the sum of P238,741.64 as Locational Clearance Fee.5

In separate letters dated November 15, 2005 addressed to respondents City Treasurer Juliet G. Quinsaat and ActingCity Building Official Donato N. Dizon, petitioner claimed that it is exempt from the payment of the building permitand locational clearance fees, citing legal opinions rendered by the Department of Justice (DOJ). Petitioner alsoreminded the respondents that they have previously issued building permits acknowledging such exemption frompayment of building permit fees on the construction of petitioners 4-storey AUF Information Technology Centerbuilding and the AUF Professional Schools building on July 27, 2000 and March 15, 2004, respectively.6

Respondent City Treasurer referred the matter to the Bureau of Local Government Finance (BLGF) of the Department

of Finance, which in turn endorsed the query to the DOJ. Then Justice Secretary Raul M. Gonzalez, in his letter-replydated December 6, 2005, cited previous issuances of his office (Opinion No. 157, s. 1981 and Opinion No. 147, s.1982) declaring petitioner to be exempt from the payment of building permit fees. Under the 1st Indorsement datedJanuary 6, 2006, BLGF reiterated the aforesaid opinion of the DOJ stating further that "xxx the Department ofFinance, thru this Bureau, has no authority to review the resolution or the decision of the DOJ."7

Petitioner wrote the respondents reiterating its request to reverse the disputed assessments and invoking the DOJlegal opinions which have been affirmed by Secretary Gonzalez. Despite petitioners plea, however, respondentsrefused to issue the building permits for the construction of the AUF Medical Center in the main campus andrenovation of a school building located at Marisol Village. Petitioner then appealed the matter to City Mayor Carmelo FLazatin but no written response was received by petitioner.8

Consequently, petitioner paid under protest9the following:

Medical Center (new construction)

Building Permit and Electrical Fee P 217,475.20

Locational Clearance Fee 283,741.64

Fire Code Fee 144,690.00

Total - P 645,906.84

School Building (renovation)
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Building Permit and Electrical Fee P 37,857.20


Fire Code Fee 5,967.74

Total - P 49,825.51

Petitioner likewise paid the following sums as required by the City Assessors Office:

Real Property Tax Basic Fee P 86,531.10SEF 43,274.54


Total P130,930.6410

[GRAND TOTAL - P 826,662.99]

By reason of the above payments, petitioner was issued the corresponding Building Permit, Wiring Permit, ElectricalPermit and Sanitary Building Permit. On June 9, 2006, petitioner formally requested the respondents to refund thefees it paid under protest. Under letters dated June 15, 2006 and August 7, 2006, respondent City Treasurer deniedthe claim for refund.11

On August 31, 2006, petitioner filed a Complaint12before the trial court seeking the refund of P826,662.99 plusinterest at the rate of 12% per annum, and also praying for the award of attorneys fees in the amount ofP300,000.00 and litigation expenses.

In its Answer,13respondents asserted that the claim of petitioner cannot be granted because its structures are notamong those mentioned in Sec. 209 of the National Building Code as exempted from the building permit fee.Respondents argued that R.A. No. 6055 should be considered repealed on the basis of Sec. 2104 of the NationalBuilding Code. Since the disputed assessments are regulatory in nature, they are not taxes from which petitioner isexempt. As to the real property taxes imposed on petitioners property located in Marisol Village, respondents pointedout that said premises will be used as a school dormitory which cannot be considered as a use exclusively foreducational activities.

Petitioner countered that the subject building permit are being collected on the basis of Art. 244 of theImplementingRules and Regulations of the Local Government Code, which impositions are really taxes considering that they are

provided under the chapter on "Local Government Taxation" in reference to the "revenue raising power" of localgovernment units (LGUs). Moreover, petitioner contended that, as held in Philippine Airlines, Inc. v. Edu,14fees maybe regarded as taxes depending on the purpose of its exaction. In any case, petitioner pointed out that the LocalGovernment Code of 1991 provides in Sec. 193 that non-stock and non-profit educational institutions like petitionerretained the tax exemptions or incentives which have been granted to them. Under Sec. 8 of R.A. No. 6055 andapplicable jurisprudence and DOJ rulings, petitioner is clearly exempt from the payment of building permit fees.15

On September 21, 2007, the trial court rendered judgment in favor of the petitioner and against the respondents. Thedispositive portion of the trial courts decision16reads:

WHEREFORE, premises considered, judgment is rendered as follows:

a. Plaintiff is exempt from the payment of building permit and other fees Ordering the Defendants to refundthe total amount of Eight Hundred Twenty Six Thousand Six Hundred Sixty Two Pesos and 99/100 Centavos(P826,662.99) plus legal interest thereon at the rate of twelve percent (12%) per annum commencing on thedate of extra-judicial demand or June 14, 2006, until the aforesaid amount is fully paid.

b. Finding the Defendants liable for attorneys fees in the amount of Seventy Thousand Pesos (Php70,000.00),plus litigation expenses.

c. Ordering the Defendants to pay the costs of the suit.

SO ORDERED.17

Respondents appealed to the CA which reversed the trial court, holding that while petitioner is a tax-free entity, it isnot exempt from the payment of regulatory fees. The CA noted that under R.A. No. 6055, petitioner was grantedexemption only from income tax derived from its educational activities and real property used exclusively foreducational purposes. Regardless of the repealing clause in the National Building Code, the CA held that petitioner isstill not exempt because a building permit cannot be considered as the other "charges" mentioned in Sec. 8 of R.A.No. 6055 which refers to impositions in the nature of tax, import duties, assessments and other collections forrevenue purposes, following the ejusdem generisrule. The CA further stated that petitioner has not shown that the
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fees collected were excessive and more than the cost of surveillance, inspection and regulation. And while petitionermay be exempt from the payment of real property tax, petitioner in this case merely alleged that "the subjectproperty is to be used actually, directly and exclusively for educational purposes," declaring merely that such premisesis intended to house the sports and other facilities of the university but by reason of the occupancy of informal settlerson the area, it cannot yet utilize the same for its intended use. Thus, the CA concluded that petitioner is not entitledto the refund of building permit and related fees, as well as real property tax it paid under protest.

Petitioner filed a motion for reconsideration which was denied by the CA.

Hence, this petition raising the following grounds:

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND DECIDED A QUESTION OF SUBSTANCE IN A WAY NOTIN ACCORDANCE WITH LAW AND THE APPLICABLE DECISIONS OF THE HONORABLE COURT AND HAS DEPARTEDFROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS NECESSITATING THE HONORABLE COURTSEXERCISE OF ITS POWER OF SUPERVISION CONSIDERING THAT:

I. IN REVERSING THE TRIAL COURTS DECISION DATED 21 SEPTEMBER 2007, THE COURT OF APPEALS EFFECTIVELYWITHDREW THE PRIVILEGE OF EXEMPTION GRANTED TO NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONSBY VIRTUE OF RA 6055 WHICH WITHDRAWAL IS BEYOND THE AUTHORITY OF THE COURT OF APPEALS TO DO.

A. INDEED, RA 6055 REMAINS VALID AND IS IN FULL FORCE AND EFFECT. HENCE, THE COURT OFAPPEALS ERRED WHEN IT RULED IN THE QUESTIONED DECISION THAT NON-STOCK, NON-PROFITEDUCATIONAL FOUNDATIONS ARE NOT EXEMPT.

B. THE COURT OF APPEALS APPLICATION OF THE PRINCIPLE OF EJUSDEM GENERIS IN RULING INTHE QUESTIONED DECISION THAT THE TERM "OTHER CHARGES IMPOSED BY THE GOVERNMENT"UNDER SECTION 8 OF RA 6055 DOES NOT INCLUDE BUILDING PERMIT AND OTHER RELATED FEES

AND/OR CHARGES IS BASED ON ITS ERRONEOUS AND UNWARRANTED ASSUMPTION THAT THETAXES, IMPORT DUTIES AND ASSESSMENTS AS PART OF THE PRIVILEGE OF EXEMPTION GRANTEDTO NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS ARE LIMITED TO COLLECTIONS FORREVENUE PURPOSES.

C. EVEN ASSUMING THAT THE BUILDING PERMIT AND OTHER RELATED FEES AND/OR CHARGES ARENOT INCLUDED IN THE TERM "OTHER CHARGES IMPOSED BY THE GOVERNMENT" UNDER SECTION 8OF RA 6055, ITS IMPOSITION IS GENERALLY A TAX MEASURE AND THEREFORE, STILL COVEREDUNDER THE PRIVILEGE OF EXEMPTION.

II. THE COURT OF APPEALS DENIAL OF PETITIONER AUFS EXEMPTION FROM REAL PROPERTY TAXES CONTAINED INITS QUESTIONED DECISION AND QUESTIONED RESOLUTION IS CONTRARY TO APPLICABLE LAW ANDJURISPRUDENCE.18

Petitioner stresses that the tax exemption granted to educational stock corporations which have converted into non-

profit foundations was broadened to include any other charges imposed by the Government as one of the incentivesfor such conversion. These incentives necessarily included exemption from payment of building permit and relatedfees as otherwise there would have been no incentives for educational foundations if the privilege were only limited toexemption from taxation, which is already provided under the Constitution.

Petitioner further contends that this Court has consistently held in several cases that the primary purpose of theexaction determines its nature. Thus, a charge of a fixed sum which bears no relation to the cost of inspection andwhich is payable into the general revenue of the state is a tax rather than an exercise of the police power. Thestandard set by law in the determination of the amount that may be imposed as license fees is such that iscommensurate with the cost of regulation, inspection and licensing. But in this case, the amount representing thebuilding permit and related fees and/or charges is such an exorbitant amount as to warrant a valid imposition; suchamount exceeds the probable cost of regulation. Even with the alleged criteria submitted by the respondents (e.g.,character of occupancy or use of building/structure, cost of construction, floor area and height), and the constructionby petitioner of an 11-storey building, the costs of inspection will not amount to P645,906.84, presumably for thesalary of inspectors or employees, the expenses of transportation for inspection and the preparation and reproductionof documents. Petitioner thus concludes that the disputed fees are substantially and mainly for purposes of revenuerather than regulation, so that even these fees cannot be deemed "charges" mentioned in Sec. 8 of R.A. No. 6055,they should properly be treated as tax from which petitioner is exempt.

In their Comment, respondents maintain that petitioner is not exempt from the payment of building permit andrelated fees since the only exemptions provided in the National Building Code are public buildings and traditionalindigenous family dwellings. Inclusio unius est exclusio alterius. Because the law did not include petitioners buildingsfrom those structures exempt from the payment of building permit fee, it is therefore subject to the regulatory feesimposed under the National Building Code.

Respondents assert that the CA correctly distinguished a building permit fee from those "other charges" mentioned inSec. 8 of R.A. No. 6055. As stated by petitioner itself, charges refer to pecuniary liability, as rents, and fees againstpersons or property. Respondents point out that a building permit is classified under the term "fee." A fee is generallyimposed to cover the cost of regulation as activity or privilege and is essentially derived from the exercise of police
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power; on the other hand, impositions for services rendered by the local government units or for conveniencesfurnished, are referred to as "service charges".

Respondents also disagreed with petitioners contention that the fees imposed and collected are exorbitant andexceeded the probable expenses of regulation. These fees are based on computations and assessments made by theresponsible officials of the City Engineers Office in accordance with the Schedule of Fees and criteria provided inthe National Building Code. The bases of assessment cited by petitioner (e.g. salary of employees, expenses oftransportation and preparation and reproduction of documents) refer to charges and fees on business and occupationunder Sec. 147 of the Local Government Code, which do not apply to building permit fees. The parameters set bythe National Building Code can be considered as complying with the reasonable cost of regulation in the assessmentand collection of building permit fees. Respondents likewise contend that the presumption of regularity in theperformance of official duty applies in this case. Petitioner should have presented evidence to prove its allegationsthat the amounts collected are exorbitant or unreasonable.

For resolution are the following issues: (1) whether petitioner is exempt from the payment of building permit andrelated fees imposed under the National Building Code; and (2) whether the parcel of land owned by petitioner whichhas been assessed for real property tax is likewise exempt.

R.A. No. 6055 granted tax exemptions to educational institutions like petitioner which converted to non-stock, non-profit educational foundations. Section 8 of said law provides:

SECTION 8. The Foundation shall be exempt from the payment of all taxes, import duties, assessments, and othercharges imposed by the Government onall income derived from or property, real or personal, used exclusively for theeducational activities of the Foundation.(Emphasis supplied.)

On February 19, 1977, Presidential Decree (P.D.) No. 1096 was issued adopting the National Building Code of the

Philippines. The said Code requires every person, firm or corporation, including any agency or instrumentality of thegovernment to obtain a building permit for any construction, alteration or repair of any building or structure.19Buildingpermit refers to "a document issued by the Building Official x x x to an owner/applicant to proceed with theconstruction, installation, addition, alteration, renovation, conversion, repair, moving, demolition or other workactivity of a specific project/building/structure or portions thereof after the accompanying principal plans,specifications and other pertinent documents with the duly notarized application are found satisfactory andsubstantially conforming with the National Building Code of the Philippines x x x and its Implementing Rules andRegulations (IRR)."20Building permit fees refers to the basic permit fee and other charges imposed under theNationalBuilding Code.

Exempted from the payment of building permit fees are: (1) public buildings and (2) traditional indigenous familydwellings.21Not being expressly included in the enumeration of structures to which the building permit fees do notapply, petitioners claim for exemption rests solely on its interpretation of the term "other charges imposed by theNational Government" in the tax exemption clause of R.A. No. 6055.

A "charge" is broadly defined as the "price of, or rate for, something," while the word "fee" pertains to a "charge fixedby law for services of public officers or for use of a privilege under control of government."22As used in the LocalGovernment Code of 1991 (R.A. No. 7160), charges refers to pecuniary liability, as rents or fees against persons orproperty, while fee means a charge fixed by law or ordinance for the regulation or inspection of a business oractivity.23

That "charges" in its ordinary meaning appears to be a general term which could cover a specific "fee" does notsupport petitioners position that building permit fees are among those "other charges" from which it was expresslyexempted. Note that the "other charges" mentioned in Sec. 8 of R.A. No. 6055 is qualified by the words "imposed bythe Government on all x x x property used exclusively for the educational activities of the foundation." Building permitfees are not impositions on property but on the activity subject of government regulation. While it may be argued thatthe fees relate to particular properties, i.e., buildings and structures, they are actually imposed on certain activitiesthe owner may conduct either to build such structures or to repair, alter, renovate or demolish the same. This isevident from the following provisions of the National Building Code:

Section 102. Declaration of PolicyIt is hereby declared to be the policy of the State to safeguard life, health, property, and public welfare, consistentwith theprinciples of sound environmental management and control; and tothis end, make it the purpose of this Codeto provide for allbuildings and structures, a framework of minimum standards and requirements to regulate andcontrol their location, site, design quality of materials, construction, use, occupancy, and maintenance.

Section 103. Scope and Application

(a) The provisions of this Code shall apply to the design,location, sitting, construction, alteration, repair,conversion,use, occupancy, maintenance, moving, demolitionof, and addition to public and private buildings andstructures,except traditional indigenous family dwellingsas defined herein.

x x x x

Section 301. Building Permits
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No person, firm or corporation, including any agency orinstrumentality of the government shall erect, construct, alter,repair, move, convert or demolish any building or structure or causethe same to be done without first obtaining abuilding permittherefor from the Building Official assigned in the place where thesubject building is located or thebuilding work is to be done. (Italics supplied.)

That a building permit fee is a regulatory imposition is highlighted by the fact that in processing an application for abuilding permit, the Building Official shall see to it that the applicant satisfies and conforms with approved standardrequirements on zoning and land use, lines and grades, structural design, sanitary and sewerage, environmentalhealth, electrical and mechanical safety as well as with other rules and regulations implementing the National BuildingCode.24Thus, ancillary permits such as electrical permit, sanitary permit and zoning clearance must also be securedand the corresponding fees paid before a building permit may be issued. And as can be gleaned from theimplementing rules and regulations of the National Building Code, clearances from various government authoritiesexercising and enforcing regulatory functions affecting buildings/structures, like local government units, may befurther required before a building permit may be issued.25

Since building permit fees are not charges on property, they are not impositions from which petitioner is exempt.

As to petitioners argument that the building permit fees collected by respondents are in reality taxes because theprimary purpose is to raise revenues for the local government unit, the same does not hold water.

A charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held to be a taxrather than an exercise of the police power.26In this case, the Secretary of Public Works and Highways who ismandated to prescribe and fix the amount of fees and other charges that the Building Official shall collect inconnection with the performance of regulatory functions,27has promulgated and issued the Implementing Rules andRegulations28which provide for the bases of assessment of such fees, as follows:

1. Character of occupancy or use of building2. Cost of construction " 10,000/sq.m (A,B,C,D,E,G,H,I), 8,000 (F), 6,000 (J)

3. Floor area

4. Height

Petitioner failed to demonstrate that the above bases of assessment were arbitrarily determined or unrelated to theactivity being regulated. Neither has petitioner adduced evidence to show that the rates of building permit feesimposed and collected by the respondents were unreasonable or in excess of the cost of regulation and inspection.

In Chevron Philippines, Inc. v. Bases Conversion Development Authority,29this Court explained:

In distinguishing tax and regulation as a form of police power, the determining factor is the purpose of theimplemented measure. If the purpose is primarily to raise revenue, then it will be deemed a tax even though themeasure results in some form of regulation. On the other hand, if the purpose is primarily to regulate, then it is

deemed a regulation and an exercise of the police power of the state, even though incidentally, revenue is generated.Thus, in Gerochi v. Department of Energy, the Court stated:

"The conservative and pivotal distinction between these two (2) powers rests in the purpose for which the charge ismade. If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; butif regulation is the primary purpose, the fact that revenue is incidentally raised does not make the imposition atax."30(Emphasis supplied.)

Concededly, in the case of building permit fees imposed by the National Government under the National BuildingCode, revenue is incidentally generated for the benefit of local government units. Thus:

Section 208. Fees

Every Building Official shall keep a permanent record and accurate account of all fees and other charges fixed andauthorized by the Secretary to be collected and received under this Code.

Subject to existing budgetary, accounting and auditing rules and regulations, the Building Official is hereby authorizedto retain not more than twenty percent of his collection for the operating expenses of his office.

The remaining eighty percent shall be deposited with the provincial, city or municipal treasurer and shall accrue to theGeneral Fund of the province, city or municipality concerned.

Petitioners reliance on Sec. 193 of the Local Government Code of 1991 is likewise misplaced. Said provision states:

SECTION 193. Withdrawal of Tax Exemption Privileges. -- Unless otherwise provided in this Code, tax exemptions orincentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-ownedor controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stockand non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code.(Emphasis supplied.)
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Considering that exemption from payment of regulatory fees was not among those "incentives" granted to petitionerunder R.A. No. 6055, there is no such incentive that is retained under the Local Government Code of 1991.Consequently, no reversible error was committed by the CA in ruling that petitioner is liable to pay the subjectbuilding permit and related fees.

Now, on petitioners claim that it is exempted from the payment of real property tax assessed against its real propertypresently occupied by informal settlers.

Section 28(3), Article VI of the 1987 Constitution provides:

x x x x

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profitcemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used for religious, charitableor educational purposes shall be exempt from taxation.

x x x x (Emphasis supplied.)

Section 234(b) of the Local Government Code of 1991 implements the foregoing constitutional provision by declaringthat --

SECTION 234. Exemptions from Real Property Tax. The following are exempted from payment of the real propertytax:

x x x x

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religiouscemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable

or educational purposes;x x x x (Emphasis supplied.)

In Lung Center of the Philippines v. Quezon City,31this Court held that only portions of the hospital actually, directlyand exclusively used for charitable purposes are exempt from real property taxes, while those portions leased toprivate entities and individuals are not exempt from such taxes. We explained the condition for the tax exemptionprivilege of charitable and educational institutions, as follows:

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioneris burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real propertiesare ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as possessed andenjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in amanner to exclude; as enjoying a privilege exclusively." If real property is used for one or more commercial purposes,it is not exclusively used for the exempted purposes but is subject to taxation. The words "dominant use" or "principaluse" cannot be substituted for the words "used exclusively" without doing violence to the Constitutions and the law.Solely is synonymous with exclusively.1wphi1

What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediateand actual application of the property itself to the purposes for which the charitable institution is organized. It is notthe use of the income from the real property that is determinative of whether the property is used for tax-exemptpurposes.32(Emphasis and underscoring supplied.)

Petitioner failed to discharge its burden to prove that its real property is actually, directly and exclusively used foreducational purposes. While there is no allegation or proof that petitioner leases the land to its present occupants, stillthere is no compliance with the constitutional and statutory requirement that said real property is actually, directlyand exclusively used for educational purposes. The respondents correctly assessed the land for real property taxes forthe taxable period during which the land is not being devoted solely to petitioners educational activities. Accordingly,the CA did not err in ruling that petitioner is likewise not entitled to a refund of the real property tax it paid underprotest.

WHEREFORE, the petition is DENIED. The Decision dated July 28, 2009 and Resolution dated October 12, 2009 of theCourt of Appeals in CA-G.R. CV No. 90591 are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.


Manila

FIRST DIVISION

G.R. No. 124043 October 14, 1998
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COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S CHRISTIAN ASSOCIATION OF THEPHILIPPINES, INC., respondents.

PANGANIBAN,J.:

Is the income derived from rentals of real property owned by the Young Men's Christian Association of the Philippines,Inc. (YMCA) established as "a welfare, educational and charitable non-profit corporation" subject to income taxunder the National Internal Revenue Code (NIRC) and the Constitution?

The Case

This is the main question raised before us in this petition for review on certiorarichallenging two Resolutions issued bythe Court of Appeals 1 on September 28, 1995 2 and February 29, 1996 3 in CA-GR SP No. 32007. Both Resolutionsaffirmed the Decision of the Court of Tax Appeals (CTA) allowing the YMCA to claim tax exemption on the latter'sincome from the lease of its real property.

The Facts

The facts are undisputed. 4 Private Respondent YMCA is a non-stock, non-profit institution, which conducts variousprograms and activities that are beneficial to the public, especially the young people, pursuant to its religious,educational and charitable objectives.

In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a portion of itspremises to small shop owners, like restaurants and canteen operators, and P44,259.00 from parking fees collected

from non-members. On July 2, 1984, the commissioner of internal revenue (CIR) issued an assessment to privaterespondent, in the total amount of P415,615.01 including surcharge and interest, for deficiency income tax, deficiencyexpanded withholding taxes on rentals and professional fees and deficiency withholding tax on wages. Privaterespondent formally protested the assessment and, as a supplement to its basic protest, filed a letter dated October8, 1985. In reply, the CIR denied the claims of YMCA.

Contesting the denial of its protest, the YMCA filed a petition for review at the Court of Tax Appeals (CTA) on March14, 1989. In due course, the CTA issued this ruling in favor of the YMCA:

. . . [T]he leasing of [private respondent's] facilities to small shop owners, to restaurant and canteenoperators and the operation of the parking lot are reasonably incidental to and reasonably necessaryfor the accomplishment of the objectives of the [private respondents]. It appears from the testimoniesof the witnesses for the [private respondent] particularly Mr. James C. Delote, former accountant ofYMCA, that these facilities were leased to members and that they have to service the needs of itsmembers and their guests. The rentals were minimal as for example, the barbershop was onlycharged P300 per month. He also testified that there was actually no lot devoted for parking space butthe parking was done at the sides of the building. The parking was primarily for members with stickerson the windshields of their cars and they charged P.50 for non-members. The rentals and parking feeswere just enough to cover the costs of operation and maintenance only. The earning[s] from theserentals and parking charges including those from lodging and other charges for the use of therecreational facilities constitute [the] bulk of its income which [is] channeled to support its manyactivities and attainment of its objectives. As pointed out earlier, the membership dues are veryinsufficient to support its program. We find it reasonably necessary therefore for [private respondent]to make [the] most out [of] its existing facilities to earn some income. It would have been different ifunder the circumstances, [private respondent] will purchase a lot and convert it to a parking lot tocater to the needs of the general public for a fee, or construct a building and lease it out to the highestbidder or at the market rate for commercial purposes, or should it invest its funds in the buy and sellof properties, real or personal. Under these circumstances, we could conclude that the activities arealready profit oriented, not incidental and reasonably necessary to the pursuit of the objectives of theassociation and therefore, will fall under the last paragraph of Section 27 of the Tax Code and anyincome derived therefrom shall be taxable.

Considering our findings that [private respondent] was not engaged in the business of operating orcontracting [a] parking lot, we find no legal basis also for the imposition of [a] deficiency fixed tax and[a] contractor's tax in the amount[s] of P353.15 and P3,129.73, respectively.

xxx xxx xxx

WHEREFORE, in view of all the foregoing, the following assessments are hereby dismissed for lack ofmerit:

1980 Deficiency Fixed Tax P353,15;

1980 Deficiency Contractor's Tax P3,129.23;


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1980 Deficiency Income Tax P372,578.20.

While the following assessments are hereby sustained:

1980 Deficiency Expanded Withholding Tax P1,798.93;

1980 Deficiency Withholding Tax on Wages P33,058.82

plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but not to exceedthree (3) years pursuant to Section 51(e)(2) & (3) of the National Internal Revenue Code effective asof 1984. 5

Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In its Decision of February16, 1994, the CA 6 initially decided in favor of the CIR and disposed of the appeal in the following manner:

Following the ruling in the afore-cited cases ofProvince of Abra vs. Hernando and Abra Valley CollegeInc. vs. Aquino, the ruling of the respondent Court of Tax Appeals that "the leasing of petitioner's(herein respondent's) facilities to small shop owners, to restaurant and canteen operators and theoperation of the parking lot are reasonably incidental to and reasonably necessary for theaccomplishment of the objectives of the petitioners, and the income derived therefrom are taxexempt, must be reversed.

WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed the assessment for:

1980 Deficiency Income Tax P 353.15

1980 Deficiency Contractor's Tax P 3,129.23, &

1980 Deficiency Income Tax P 372,578.20

but the same is AFFIRMED in all other respect. 7

Aggrieved, the YMCA asked for reconsideration based on the following grounds:

I

The findings of facts of the Public Respondent Court of Tax Appeals being supported by substantialevidence [are] final and conclusive.

II

The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent from the income onrentals of small shops and parking fees [are] in accord with the applicable law and jurisprudence. 8

Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and promulgated onSeptember 28, 1995 its first assailed Resolution which, in part, reads:

The Court cannot depart from the CTA's findings of fact, as they are supported by evidence beyondwhat is considered as substantial.

xxx xxx xxx

The second ground raised is that the respondent CTA did not err in saying that the rental from smallshops and parking fees do not result in the loss of the exemption. Not even the petitioner wouldhazard the suggestion that YMCA is designed for profit. Consequently, the little income from smallshops and parking fees help[s] to keep its head above the water, so to speak, and allow it to continuewith its laudable work.

The Court, therefore, finds the second ground of the motion to be meritorious and in accord with lawand jurisprudence.

WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTA's decision is

AFFIRMED in toto. 9The internal revenue commissioner's own Motion for Reconsideration was denied by Respondent Court in its secondassailed Resolution of February 29, 1996. Hence, this petition for review under Rule 45 of the Rules of Court. 10

The Issues

Before us, petitioner imputes to the Court of Appeals the following errors:

I

In holding that it had departed from the findings of fact of Respondent Court of Tax Appeals when itrendered its Decision dated February 16, 1994; and

II


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In affirming the conclusion of Respondent Court of Tax Appeals that the income of private respondentfrom rentals of small shops and parking fees [is] exempt from taxation. 11

This Court's Ruling

The petition is meritorious.

First Issue:Factual Findings of the CTA

Private respondent contends that the February 16, 1994 CA Decision reversed the factual findings of the CTA. On theother hand, petitioner argues that the CA merely reversed the "ruling of the CTA that the leasing of private

respondent's facilities to small shop owners, to restaurant and canteen operators and the operation of parking lots arereasonably incidental to and reasonably necessary for the accomplishment of the objectives of the private respondentand that the income derived therefrom are tax exempt." 12 Petitioner insists that what the appellate court reversedwas the legal conclusion, not the factual finding, of the CTA. 13The commissioner has a point.

Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by substantial evidence, willbe disturbed on appeal unless it is shown that the said court committed gross error in the appreciation of facts.14 Inthe present case, this Court finds that the February 16, 1994 Decision of the CA did not deviate from this rule. Thelatter merely applied the law to the facts as found by the CTA and ruled on the issue raised by the CIR: "Whether ornot the collection or earnings of rental income from the lease of certain premises and income earned from parkingfees shall fall under the last paragraph of Section 27 of the National Internal Revenue Code of 1977, as amended." 15

Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned issue, as indeed it wasexpected to. That it did so in a manner different from that of the CTA did not necessarily imply a reversal of factualfindings.

The distinction between a question of law and a question of fact is clear-cut. It has been held that "[t]here is aquestion of law in a given case when the doubt or difference arises as to what the law is on a certain state of facts;there is a question of fact when the doubt or difference arises as to the truth or falsehood of alleged facts." 16In thepresent case, the CA did not doubt, much less change, the facts narrated by the CTA. It merely applied the law to thefacts. That its interpretation or conclusion is different from that of the CTA is not irregular or abnormal.

Second Issue:Is the Rental Income of the YMCA Taxable?

We now come to the crucial issue: Is the rental income of the YMCA from its real estate subject to tax? At the outset,we set forth the relevant provision of the NIRC:

Sec. 27. Exemptions from tax on corporations. The following organizations shall not be taxed underthis Title in respect to income received by them as such

xxx xxx xxx(g) Civic league or organization not organized for profit but operated exclusively for the promotion ofsocial welfare;

(h) Club organized and operated exclusively for pleasure, recreation, and other non-profitablepurposes, no part of the net income of which inures to the benefit of any private stockholder ormember;

xxx xxx xxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind andcharacter of the foregoing organizations from any of their properties, real or personal, or from any oftheir activities conducted for profit, regardless of the disposition made of such income, shall be subjectto the tax imposed under this Code. (as amended by Pres. Decree No. 1457)

Petitioner argues that while the income received by the organizations enumerated in Section 27 (now Section 26) ofthe NIRC is, as a rule, exempted from the payment of tax "in respect to income received by them as such," theexemption does not apply to income derived ". . . from any of their properties, real or personal, or from any of theiractivities conducted for profit, regardless of the disposition made of such income . . . ."

Petitioner adds that "rental income derived by a tax-exempt organization from the lease of its properties, real orpersonal, [is] not, therefore, exempt from income taxation, even if such income [is] exclusively used for theaccomplishment of its objectives." 17 We agree with the commissioner.

Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in interpretation inconstruing tax exemptions. 18 Furthermore, a claim of statutory exemption from taxation should be manifest. andunmistakable from the language of the law on which it is based. Thus, the claimed exemption "must expressly begranted in a statute stated in a language too clear to be mistaken." 19


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In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very wording of the lastparagraph of then Section 27 of the NIRC which mandates that the income of exempt organizations (such as theYMCA) from any of their properties, real or personal, be subject to the tax imposed by the same Code. Because thelast paragraph of said section unequivocally subjects to tax the rent income of the YMCA from its real property,20 theCourt is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted attempt atconstruction.

It is axiomatic that where the language of the law is clear and unambiguous, its express terms must beapplied. 21Parenthetically, a consideration of the question of construction must not even begin, particularly when suchquestion is on whether to apply a strict construction or a liberal one on statutes that grant tax exemptions to"religious, charitable and educational propert[ies] or institutions." 22

The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification that the income from theproperties must arise from activities 'conducted for profit' before it may be considered taxable." 23 This argument iserroneous. As previously stated, a reading of said paragraph ineludibly shows that the income from any property ofexempt organizations, as well as that arising from any activity it conducts for profit, is taxable. The phrase "any oftheir activities conducted for profit" does not qualify the word "properties." This makes from the property of theorganization taxable, regardless of how that income is used whether for profit or for lofty non-profit purposes.

Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible error when it allowed, onreconsideration, the tax exemption claimed by YMCA on income it derived from renting out its real property, on thesolitary but unconvincing ground that the said income is not collected for profit but is merely incidental to itsoperation. The law does not make a distinction. The rental income is taxable regardless of whence such income isderived and how it is used or disposed of. Where the law does not distinguish, neither should we.

Constitutional Provisions

On Taxation

Invoking not only the NIRC but also the fundamental law, private respondent submits that Article VI, Section 28 ofpar. 3 of the 1987 Constitution, 24 exempts "charitable institutions" from the payment not only of property taxes butalso of income tax from any source. 25 In support of its novel theory, it compares the use of the words "charitableinstitutions," "actually" and "directly" in the 1973 and the 1987 Constitutions, on the one hand; and in Article VI,Section 22, par. 3 of the 1935 Constitution, on the other hand. 26

Private respondent enunciates three points. First, the present provision is divisible into two categories: (1)"[c]haritable institutions, churches and parsonages or convents appurtenant thereto, mosques and non-profitcemeteries," the incomes of which are, from whatever source, all tax-exempt; 27 and (2) "[a]ll lands, buildings andimprovements actually and directly used for religious, charitable or educational purposes," which are exempt onlyfrom property taxes. 28Second, Lladoc v. Commissioner of Internal Revenue, 29 which limited the exemption only tothe payment of property taxes, referred to the provision of the 1935 Constitution and not to its counterparts in the

1973 and the 1987 Constitutions.30

Third, the phrase "actually, directly and exclusively used for religious, charitableor educational purposes" refers not only to "all lands, buildings and improvements," but also to the above-quoted firstcategory which includes charitable institutions like the private respondent. 31

The Court is not persuaded. The debates, interpellations and expressions of opinion of the framers of the Constitutionreveal their intent which, in turn, may have guided the people in ratifying the Charter. 32 Such intent must beeffectuated.

Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now a member of this Court,stressed during the Concom debates that ". . . what is exempted is not the institution itself . . .; those exempted fromreal estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitableor educationalpurposes." 33 Father Joaquin G. Bernas, an eminent authority on the Constitution and also a member of the Concom,adhered to the same view that the exemption created by said provision pertained only to property taxes.34

In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax exemption covers propertytaxesonly." 35 Indeed, the income tax exemption claimed by private respondent finds no basis in Article VI, Section 26, par.3 of the Constitution.

Private respondent also invokes Article XIV, Section 4, par. 3 of the Character, 36 claiming that the YMCA "is a non-stock, non-profit educational institution whose revenues and assets are used actually, directly and exclusively foreducational purposes so it is exempt from taxes on its properties and income." 37 We reiterate that private respondentis exempt from the payment of property tax, but not income tax on the rentals from its property. The bare allegationalone that it is a non-stock, non-profit educational institution is insufficient to justify its exemption from the paymentof income tax.

As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence, for the YMCA to begranted the exemption it claims under the aforecited provision, it must prove with substantial evidence that (1) it fallsunder the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from


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taxation is used actually, directly, and exclusively for educational purposes. However, the Court notes that not ascintilla of evidence was submitted by private respondent to prove that it met the said requisites.

Is the YMCA an educationalinstitution within the purview of Article XIV, Section 4, par. 3 of the Constitution? We rulethat it is not. The term "educational institution" or "institution of learning" has acquired a well-known technicalmeaning, of which the members of the Constitutional Commission are deemed cognizant. 38 Under the Education Actof 1982, such term refers to schools. 39 The school system is synonymous with formal education, 40 which "refers tothe hierarchically structured and chronologically graded learnings organized and provided by the formal school systemand for which certification is required in order for the learner to progress through the grades or move to the higherlevels." 41 The Court has examined the "Amended Articles of Incorporation" and "By-Laws" 43of the YMCA, but foundnothing in them that even hints that it is a school or an educational institution. 44

Furthermore, under the Education Act of 1982, even non-formal education is understood to be school-based and"private auspices such as foundations and civic-spirited organizations" are ruled out. 45 It is settled that the term"educational institution," when used in laws granting tax exemptions, refers to a ". . . school seminary, college oreducational establishment . . . ." 46 Therefore, the private respondent cannot be deemed one of the educationalinstitutions covered by the constitutional provision under consideration.

. . . Words used in the Constitution are to be taken in their ordinary acceptation. While in its broadestand best sense education embraces all forms and phases of instruction, improvement anddevelopment of mind and body, and as well of religious and moral sentiments, yet in the commonunderstanding and application it means a place where systematic instruction in any or all of the usefulbranches of learning is given by methods common to schools and institutions of learning. That weconceive to be the true intent and scope of the term [educational institutions,] as used in theConstitution. 47

Moreover, without conceding that Private Respondent YMCA is an educational institution, the Court also notes that theformer did not submit proof of the proportionate amount of the subject income that was actually, directly andexclusively used for educational purposes. Article XIII, Section 5 of the YMCA by-laws, which formed part of theevidence submitted, is patently insufficient, since the same merely signified that "[t]he net income derived from therentals of the commercial buildings shall be apportioned to the Federation and Member Associations as the NationalBoard may decide." 48 In sum, we find no basis for granting the YMCA exemption from income tax under theconstitutional provision invoked.

Cases Cited by Private

Respondent Inapplicable

The cases 49 relied on by private respondent do not support its cause. YMCA of Manila v. Collector of InternalRevenue 50andAbra Valley College, Inc. v. Aquino51 are not applicable, because the controversy in both casesinvolved exemption from the payment of property tax, not income tax. Hospital de San Juan de Dios, Inc. v. Pasay

City52

is not in point either, because it involves a claim for exemption from the payment of regulatory fees,specifically electrical inspection fees, imposed by an ordinance of Pasay City an issue not at all related to thatinvolved in a claimed exemption from the payment of income taxes imposed on property leases. In Jesus SacredHeart College v. Com. of Internal Revenue, 53 the party therein, which claimed an exemption from the payment ofincome tax, was an educational institution which submitted substantial evidence that the income subject of thecontroversy had been devoted or used solely for educational purposes. On the other hand, the private respondent inthe present case has not given any proof that it is an educational institution, or that part of its rent income is actually,directly and exclusively used for educational purposes.

Epilogue

In deliberating on this petition, the Court expresses its sympathy with private respondent. It appreciates the nobilityof its cause. However, the Court's power and function are limited merely to applying the law fairly and objectively. Itcannot change the law or bend it to suit its sympathies and appreciations. Otherwise, it would be overspilling its roleand invading the realm of legislation.

We concede that private respondent deserves the help and the encouragement of the government. It needs laws thatcan facilitate, and not frustrate, its humanitarian tasks. But the Court regrets that, given its limited constitutionalauthority, it cannot rule on the wisdom or propriety of legislation. That prerogative belongs to the politicaldepartments of government. Indeed, some of the members of the Court may even believe in the wisdom andprudence of granting more tax exemptions to private respondent. But such belief, however well-meaning and sincere,cannot bestow upon the Court the power to change or amend the law.

WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated September 28, 1995 andFebruary 29, 1996 are hereby REVERSED and SET ASIDE. The Decision of the Court of Appeals dated February 16,1995 is REINSTATED, insofar as it ruled that the income derived by petitioner from rentals of its real property issubject to income tax. No pronouncement as to costs.

SO ORDERED.


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EN BANC

G.R. No. 168056 September 1, 2005

ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S.ALBANO, Petitioners,vs.THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY OF THEDEPARTMENT OF FINANCE CESAR PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL REVENUEGUILLERMO PARAYNO, JR., Respondent.

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G.R. No. 168207

AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. ESTRADA, PANFILO M. LACSON, ALFREDO S.LIM, JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEA III, Petitioners,vs.EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA, SECRETARY OF FINANCE, GUILLERMOL. PARAYNO, JR., COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE, Respondent.

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G.R. No. 168461

ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its President, ROSARIO ANTONIO; PETRONDEALERS ASSOCIATION represented by its President, RUTH E. BARBIBI; ASSOCIATION OF CALTEX DEALERS OF THEPHILIPPINES represented by its President, MERCEDITAS A. GARCIA; ROSARIO ANTONIO doing business under thename and style of "ANB NORTH SHELL SERVICE STATION"; LOURDES MARTINEZ doing business under the name andstyle of "SHELL GATE N. DOMINGO"; BETHZAIDA TAN doing business under the name and style of "ADVANCE SHELLSTATION"; REYNALDO P. MONTOYA doing business under the name and style of "NEW LAMUAN SHELL SERVICESTATION"; EFREN SOTTO doing business under the name and style of "RED FIELD SHELL SERVICE STATION";DONICA CORPORATION represented by its President, DESI TOMACRUZ; RUTH E. MARBIBI doing business under thename and style of "R&R PETRON STATION"; PETER M. UNGSON doing business under the name and style of "CLASSICSTAR GASOLINE SERVICE STATION"; MARIAN SHEILA A. LEE doing business under the name and style of "NTEGASOLINE & SERVICE STATION"; JULIAN CESAR P. POSADAS doing business under the name and style of"STARCARGA ENTERPRISES"; ADORACION MAEBO doing business under the name and style of "CMA MOTORISTSCENTER"; SUSAN M. ENTRATA doing business under the name and style of "LEONAS GASOLINE STATION andSERVICE CENTER"; CARMELITA BALDONADO doing business under the name and style of "FIRST CHOICE SERVICE

CENTER"; MERCEDITAS A. GARCIA doing business under the name and style of "LORPED SERVICE CENTER";RHEAMAR A. RAMOS doing business under the name and style of "RJRAM PTT GAS STATION"; MA. ISABEL VIOLAGOdoing business under the name and style of "VIOLAGO-PTT SERVICE CENTER"; MOTORISTS HEART CORPORATIONrepresented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; MOTORISTS HARVARD CORPORATIONrepresented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; MOTORISTS HERITAGE CORPORATIONrepresented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; PHILIPPINE STANDARD OILCORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; ROMEO MANUEL doingbusiness under the name and style of "ROMMAN GASOLINE STATION"; ANTHONY ALBERT CRUZ III doing businessunder the name and style of "TRUE SERVICE STATION", Petitioners,vs.CESAR V. PURISIMA, in his capacity as Secretary of the Department of Finance and GUILLERMO L.PARAYNO, JR., in his capacity as Commissioner of Internal Revenue, Respondent.

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G.R. No. 168463FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA, RODOLFO G. PLAZA,DARLENE ANTONINO-CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C. AGARAO, JR. JUAN EDGARDO M. ANGARA,JUSTIN MARC SB. CHIPECO, FLORENCIO G. NOEL, MUJIV S. HATAMAN, RENATO B. MAGTUBO, JOSEPH A. SANTIAGO,TEOFISTO DL. GUINGONA III, RUY ELIAS C. LOPEZ, RODOLFO Q. AGBAYANI and TEODORO A. CASIO, Petitioners,vs.CESAR V. PURISIMA, in his capacity as Secretary of Finance, GUILLERMO L. PARAYNO, JR., in his capacityas Commissioner of Internal Revenue, and EDUARDO R. ERMITA, in his capacity as ExecutiveSecretary, Respondent.

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G.R. No. 168730


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ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : It is not?

ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order that granted the Petroleum companiessome subsidy . . . interrupted

J. PANGANIBAN : Thats correct . . .

ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted

J. PANGANIBAN : . . . mitigating measures . . .

ATTY. BANIQUED : Yes, Your Honor.J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of the Excise Tax andthe import duties. That is why, it is not correct to say that the VAT as to petroleum dealers increased prices by 10%.

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to cover the E-Vat tax.If you consider the excise tax and the import duties, the Net Tax would probably be in the neighborhood of 7%? Weare not going into exact figures I am just trying to deliver a point that different industries, different products, differentservices are hit differently. So its not correct to say that all prices must go up by 10%.

ATTY. BANIQUED : Youre right, Your Honor.

J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present imposed a Sales Tax of3%. When this E-Vat law took effect the Sales Tax was also removed as a mitigating measure. So, therefore, there is

no justification to increase the fares by 10% at best 7%, correct?ATTY. BANIQUED : I guess so, Your Honor, yes.

J. PANGANIBAN : There are other products that the people were complaining on that first day, were being increasedarbitrarily by 10%. And thats one reason among many others this Court had to issue TRO because of the confusion inthe implementation. Thats why we added as an issue in this case, even ifits tangentially taken up by the pleadingsof the parties, the confusion in the implementation of the E-vat. Our people were subjected to the mercy of thatconfusion of an across the board increase of 10%, which you yourself now admit and I think even the Government wiladmit is incorrect. In some cases, it should be 3% only, in some cases it should be 6% depending on these mitigatingmeasures and the location and situation of each product, of each service, of each company, isnt it?

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO pending the clarification of all these and wewish the government will take time to clarify all these by means of a more detailed implementing rules, in case the

law is upheld by this Court. . . .6The Court also directed the parties to file their respective Memoranda.

G.R. No. 168056

Before R.A. No. 9337 took effect, petitionersABAKADA GURO Party List, et al., filed a petition for prohibition on May27, 2005. They question the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107and 108, respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goodsand properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6 imposes a 10% VAT on sale ofservices and use or lease of properties. These questioned provisions contain a uniformprovisoauthorizing thePresident, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006,after any of the following conditions have been satisfied, to wit:

. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raisethe rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two andfour-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1%).

Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive authorityto fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution.

G.R. No. 168207

On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorarilikewise assailing theconstitutionality of Sections 4, 5 and 6 of R.A. No. 9337.
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Aside from questioning the so-called stand-by authorityof the President to increase the VAT rate to 12%, on theground that it amounts to an undue delegation of legislative power, petitioners also contend that the increase in theVAT rate to 12% contingent on any of the two conditions being satisfied violates the due process clause embodied inArticle III, Section 1 of the Constitution, as it imposes an unfair and additional tax burden on the people, in that: (1)the 12% increase is ambiguous because it does not state if the rate would be returned to the original 10% if theconditions are no longer satisfied; (2) the rate is unfair and unreasonable, as the people are unsure of the applicableVAT rate from year to year; and (3) the increase in the VAT rate, which is supposed to be an incentive to thePresident to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should only be based on fiscaladequacy.

Petitioners further claim that the inclusion of a stand-by authoritygranted to the President by the BicameralConference Committee is a violation of the "no-amendment rule" upon last reading of a bill laid down in Article VI,Section 26(2) of the Constitution.

G.R. No. 168461

Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association ofPilipinas Shell Dealers, Inc.,etal., assailing the following provisions of R.A. No. 9337:

1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable goods shall beamortized over a 60-month period, if the acquisition, excluding the VAT components, exceeds One Million Pesos (P1,000,000.00);

2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input tax to be creditedagainst the output tax; and

3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its political subdivisions,

instrumentalities or agencies, including GOCCs, to deduct a 5% final withholding tax on gross payments of goods andservices, which are subject to 10% VAT under Sections 106 (sale of goods and properties) and 108 (sale of servicesand use or lease of properties) of the NIRC.

Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive, andconfiscatory.

Petitioners argument is premised on the constitutional right of non-deprivation of life, liberty or property without dueprocess of law under Article III, Section 1 of the Constitution. According to petitioners, the contested sections imposelimitations on the amount of input tax that may be claimed. Petitioners also argue that the input tax partakes thenature of a property that may not be confiscated, appropriated, or limited without due process of law. Petitionersfurther contend that like any other property or property right, the input tax credit may be transferred or disposed of,and that by limiting the same, the government gets to tax a profit or value-added even if there is no profit or value-added.

Petitioners also believe that these provisions violate the constitutional guarantee of equal protection of the law underArticle III, Section 1 of the Constitution, as the limitation on the creditable input tax if: (1) the entity has a high ratioof input tax; or (2) invests in capital equipment; or (3) has several transactions with the government, is not based onreal and substantial differences to meet a valid classification.

Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI, Section 28(1) of theConstitution, and that it is the smaller businesses with higher input tax to output tax ratio that will suffer theconsequences thereof for it wipes out whatever meager margins the petitioners make.

G.R. No. 168463

Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this petitionforcertiorarion June 30, 2005. They question the constitutionality of R.A. No. 9337 on the following grounds:

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in violation of Article VI,Section 28(2) of the Constitution;

2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass on provisions present inSenate Bill No. 1950 and House Bill No. 3705; and

3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121, 125,7148, 151, 236,237 and 288, which were present in Senate Bill No. 1950, violates Article VI, Section 24(1) of the Constitution, whichprovides that all appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives

G.R. No. 168730

On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorariand prohibition on July 20, 2005,alleging unconstitutionality of the law on the ground that the limitation on the creditable input tax in effect allows

VAT-registered establishments to retain a portion of the taxes they collect, thus violating the principle that taxcollection and revenue should be solely allocated for public purposes and expenditures. Petitioner Garcia further claims
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that allowing these establishments to pass on the tax to the consumers is inequitable, in violation of Article VI,Section 28(1) of the Constitution.

RESPONDENTS COMMENT

The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily, respondents contendthat R.A. No. 9337 enjoys the presumption of constitutionality and petitioners failed to cast doubt on its validity.

Relying on the case ofTolentino vs. Secretary of Finance, 235 SCRA

630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the bicameralproceedings, exclusive origination of revenue measures and the power of the Senate concomitant thereto, have

already been settled. With regard to the issue of undue delegation of legislative power to the President, respondentscontend that the law is complete and leaves no discretion to the President but to increase the rate to 12% once any ofthe two conditions provided therein arise.

Respondents also refute petitioners argument that the increase to 12%, as well as the 70% limitation on thecreditable input tax, the 60-month amortization on the purchase or importation of capital goodsexceedingP1,000,000.00, and the 5% final withholding tax by government agencies, is arbitrary, oppressive, andconfiscatory, and that it violates the constitutional principle on progressive taxation, among others.

Finally, respondents manifest that R.A. No. 9337 is the anchor of the governments fiscal reform agenda. A reform inthe value-added system of taxation is the core revenue measure that will tilt the balance towards a sustainablemacroeconomic environment necessary for economic growth.

ISSUES

The Court defined the issues, as follows:

PROCEDURAL ISSUE

Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

SUBSTANTIVE ISSUES

1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate thefollowing provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A.No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

RULING OF THE COURT

As a prelude, the Court deems it apt to restate the general principles and concepts of value-added tax (VAT), as theconfusion and inevitably, litigation, breeds from a fallacious notion of its nature.

The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or propertiesand services.8Being an indirect tax on expenditure, the seller of goods or services may pass on the amount of taxpaid to the buyer,9with the seller acting merely as a tax collector.10The burden of VAT is intended to fall on theimmediate buyers and ultimately, the end-consumers.

In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in,without transferring the burden to someone else.11Examples are individual and corporate income taxes, transfertaxes, and residence taxes.12

In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different mode.Prior to 1978, the system was a single-stage tax computed under the "cost deduction method" and was payable onlyby the original sellers. The single-stage system was subsequently modified, and a mixture of the "cost deductionmethod" and "tax credit method" was used to determine the value-added tax payable.13Under the "tax creditmethod," an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on itspurchases, inputs and imports.14

It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT system wasrationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the "tax credit method."15
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E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law,16R.A. No. 8241 or the Improved VATLaw,17R.A. No. 8424 or the Tax Reform Act of 1997,18and finally, the presently beleaguered R.A. No. 9337, alsoreferred to by respondents as the VAT Reform Act.

The Court will now discuss the issues in logical sequence.

PROCEDURAL ISSUE

I.

Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, andb. Article VI, Section 26(2)

A. The Bicameral Conference Committee

Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee exceeded itsauthority by:

1) Inserting the stand-by authorityin favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;

2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;

3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax; and

4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition to thevalue-added tax.

Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee.It should be borne in mind that the power of internal regulation and discipline are intrinsic in any legislative body for,as unerringly elucidated by Justice Story, "[i]f the power did not exist, it would be utterly impracticable totransact the business of the nation, either at all, or at least with decency, deliberation, and order."19Thus,Article VI, Section 16 (3) of the Constitution provides that "each House may determine the rules of its proceedings."Pursuant to this inherent constitutional power to promulgate and implement its own rules of procedure, the respectiverules of each house of Congress provided for the creation of a Bicameral Conference Committee.

Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:

Sec. 88. Conference Committee. In the event that the House does not agree with the Senate on the amendment toany bill or joint resolution, the differences may be settled by the conference committees of both chambers.

In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to and support theHouse Bill. If the differences with the Senate are so substantial that they materially impair the House Bill, the panelshall report such fact to the House for the latters appropriate action.

Sec. 89. Conference Committee Reports. . . . Each report shall contain a detailed, sufficiently explicit statement ofthe changes in or amendments to the subject measure.

. . .

The Chairman of the House panel may be interpellated on the Conference Committee Report prior to the votingthereon. The House shall vote on the Conference Committee Report in the same manner and procedure as it votes ona bill on third and final reading.

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

Sec. 35. In the event that the Senate does not agree with the House of Representatives on the provision of any bill orjoint resolution, the differences shall be settled by a conference committee of both Houses which shall meet within ten(10) days after their composition. The President shall designate the members of the Senate Panel in the conference

committee with the approval of the Senate.Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the changes in, oramendments to the subject measure, and shall be signed by a majority of the members of each House panel, votingseparately.

A comparative presentation of the conflicting House and Senate provisions and a reconciled version thereof with theexplanatory statem

taxation cases ( tax exeption of n-stock, n-profit edu ins-rules of contruction of tax laws)

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