CAses for Taxation

Republic vs. Caguioa

Petitioners seek via petition for certiorari and prohibition to annul (1) the May 4, 2005 Order1 issued by public

respondent Judge Ramon S. Caguioa of the Regional Trial Court (RTC), Branch 74, Olongapo City, granting

private respondents application for the issuance of a writ of preliminary injunction and (2) the Writ of Preliminary Injunction2 that was issued pursuant to such Order, which stayed the implementation of Republic Act

(R.A.) No. 9334, AN ACT INCREASING THE EXCISE TAX RATES IMPOSED ON ALCOHOL AND TOBACCO

PRODUCTS, AMENDING FOR THE PURPOSE SECTIONS 131, 141, 142, 143, 144, 145 AND 288 OF THE

NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED.

Petitioners likewise seek to enjoin, restrain and inhibit public respondent from enforcing the impugned issuances

and from further proceeding with the trial of Civil Case No. 102-0-05.

The relevant facts are as follows:

In 1992, Congress enacted Republic Act (R.A) No. 72273 or the Bases Conversion and Development Act of 1992

which, among other things, created the Subic Special Economic and Freeport Zone (SBF4) and the Subic Bay

Metropolitan Authority (SBMA).

R.A. No. 7227 envisioned the SBF to be developed into a "self-sustaining, industrial, commercial, financial and

investment center to generate employment opportunities in and around the zone and to attract and promote

productive foreign investments."5 In line with this vision, Section 12 of the law provided:

(b) The Subic Special Economic Zone shall be operated and managed as a separate customs

territory ensuring free flow or movement of goods and capital within, into and exported out of

the Subic Special Economic Zone, as well as provide incentives such as tax and duty-free

importations of raw materials, capital and equipment. However, exportation or removal of

goods from the territory of the Subic Special Economic Zone to the other parts of the

Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff

Code and other relevant tax laws of the Philippines;

(c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, no

taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of

paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the

Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the

local government units affected by the declaration of the zone in proportion to their population area, and

other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross

income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for

the development of municipalities outside the City of Olongapo and the Municipality of Subic, and other

municipalities contiguous to be base areas.

In case of conflict between national and local laws with respect to tax exemption privileges in the Subic

Special Economic Zone, the same shall be resolved in favor of the latter;

(d) No exchange control policy shall be applied and free markets for foreign exchange, gold, securities and

future shall be allowed and maintained in the Subic Special Economic Zone;

(e) The Central Bank, through the Monetary Board, shall supervise and regulate the operations of banks

and other financial institutions within the Subic Special Economic Zone;

(f) Banking and finance shall be liberalized with the establishment of foreign currency depository units of

local commercial banks and offshore banking units of foreign banks with minimum Central Bank

regulation;

(g) Any investor within the Subic Special Economic Zone whose continuing investment shall not be less

than Two hundred fifty thousand dollars ($250,000), his/her spouse and dependent children under twenty-

one (21) years of age, shall be granted permanent resident status within the Subic Special Economic Zone.

They shall have freedom of ingress and egress to and from the Subic Special Economic Zone without any

need of special authorization from the Bureau of Immigration and Deportation. The Subic Bay

Metropolitan Authority referred to in Section 13 of this Act may also issue working visas renewal every

two (2) years to foreign executives and other aliens possessing highly-technical skills which no Filipino

within the Subic Special Economic Zone possesses, as certified by the Department of Labor and

Employment. The names of aliens granted permanent residence status and working visas by the Subic Bay

Metropolitan Authority shall be reported to the Bureau of Immigration and Deportation within thirty (30)

days after issuance thereof;

x x x x. (Emphasis supplied)

Pursuant to the law, private respondents Indigo Distribution Corporation, W Star Trading and Warehousing

Corporation, Freedom Brands Philippines Corporation, Branded Warehouse, Inc., Altasia, Inc., Tainan Trade

(Taiwan) Inc., Subic Park N Shop, Incorporated, Trading Gateways International Philipines, Inc., Duty Free Superstore (DFS) Inc., Chijmes Trading, Inc., Premier Freeport, Inc., Future Trade Subic Freeport, Inc., Grand

Comtrade Intl., Corp., and First Platinum International, Inc., which are all domestic corporations doing business at the SBF, applied for and were granted Certificates of Registration and Tax Exemption6 by the SBMA.

These certificates allowed them to engage in the business either of trading, retailing or wholesaling, import and

export, warehousing, distribution and/or transshipment of general merchandise, including alcohol and tobacco

products, and uniformly granted them tax exemptions for such importations as contained in the following

provision of their respective Certificates:

ARTICLE IV. The Company shall be entitled to tax and duty-free importation of raw materials,

capital equipment, and household and personal items for use solely within the Subic Bay

Freeport Zone pursuant to Sections 12(b) and 12(c) of the Act and Sections 43, 45, 46 and 49 of the

Implementing Rules. All importations by the Company are exempt from inspection by the Societe Generale

de Surveillance if such importations are delivered immediately to and for use solely within the Subic Bay

Freeport Zone. (Emphasis supplied)

Congress subsequently passed R.A. No. 9334, however, effective on January 1, 2005,7 Section 6 of which provides:

Sec. 6. Section 131 of the National Internal Revenue Code of 1977, as amended, is hereby amended to read

as follows:

Sec. 131. Payment of Excise Taxes on Imported Articles.

(A) Persons Liable. Excise taxes on imported articles shall be paid by the owner or importer to the Customs Officers, conformably with the regulations of the Department of Finance and before the release of

such articles from the customshouse or by the person who is found in possession of articles which are

exempt from excise taxes other than those legally entitled to exemption.

In the case of tax-free articles brought or imported into the Philippines by persons, entities or agencies

exempt from tax which are subsequently sold, transferred or exchanged in the Philippines to non-exempt

persons or entities, the purchasers or recipients shall be considered the importers thereof, and shall be

liable for the duty and internal revenue tax due on such importation.

The provision of any special or general law to the contrary notwithstanding, the importation

of cigars and cigarettes, distilled spirits, fermented liquors and wines into the Philippines,

even if destined for tax and duty free shops, shall be subject to all applicable taxes, duties,

charges, including excise taxes due thereon. This shall apply to cigars and cigarettes, distilled

spirits, fermented liquors and wines brought directly into the duly chartered or legislated

freeports of the Subic Economic Freeport Zone, created under Republic Act No. 7227; x x x and

such other freeports as may hereafter be established or created by law: Provided, further, That

importations of cigars and cigarettes, distilled spirits, fermented liquors and wines made directly by a

government-owned and operated duty-free shop, like the Duty Free Philippines (DFP), shall be exempted

from all applicable duties only: x x x Provided, finally, That the removal and transfer of tax and duty-free

goods, products, machinery, equipment and other similar articles other than cigars and cigarettes, distilled

spirits, fermented liquors and wines, from one Freeport to another Freeport, shall not be deemed an

introduction into the Philippine customs territory. x x x. (Emphasis and underscoring supplied)

On the basis of Section 6 of R.A. No. 9334, SBMA issued on January 10, 2005 a Memorandum8 declaring that

effective January 1, 2005, all importations of cigars, cigarettes, distilled spirits, fermented liquors and wines into

the SBF, including those intended to be transshipped to other free ports in the Philippines, shall be treated as

ordinary importations subject to all applicable taxes, duties and charges, including excise taxes.

Meanwhile, on February 3, 2005, former Bureau of Internal Revenue (BIR) Commissioner Guillermo L. Parayno,

Jr. requested then Customs Commissioner George M. Jereos to immediately collect the excise tax due on imported

alcohol and tobacco products brought to the Duty Free Philippines (DFP) and Freeport zones.9

Accordingly, the Collector of Customs of the port of Subic directed the SBMA Administrator to require payment of

all appropriate duties and taxes on all importations of cigars and cigarettes, distilled spirits, fermented liquors

and wines; and for all transactions involving the said items to be covered from then on by a consumption entry and

no longer by a warehousing entry.10

On February 7, 2005, SBMA issued a Memorandum11 directing the departments concerned to require

locators/importers in the SBF to pay the corresponding duties and taxes on their importations of cigars, cigarettes,

liquors and wines before said items are cleared and released from the freeport. However, certain SBF locators

which were "exclusively engaged in the transshipment of cigarette products for foreign destinations" were allowed

by the SBMA to process their import documents subject to their submission of an Undertaking with the Bureau of

Customs.12

On February 15, 2005, private respondents wrote the offices of respondent Collector of Customs and the SBMA

Administrator requesting for a reconsideration of the directives on the imposition of duties and taxes, particularly

excise taxes, on their shipments of cigars, cigarettes, wines and liquors.13 Despite these letters, however, they were

not allowed to file any warehousing entry for their shipments.

Thus, private respondent enterprises, through their representatives, brought before the RTC of Olongapo City a

special civil action for declaratory relief14 to have certain provisions of R.A. No. 9334 declared as unconstitutional,

which case was docketed as Civil Case No. 102-0-05.

In the main, private respondents submitted that (1) R.A. No. 9334 should not be interpreted as altering, modifying

or amending the provisions of R.A. No. 7227 because repeals by implication are not favored; (2) a general law like

R.A. No. 9334 cannot amend R.A. No. 7727, which is a special law; and (3) the assailed law violates the one bill-

one subject rule embodied in Section 26(1), Article VI15 of the Constitution as well as the constitutional

proscription against the impairment of the obligation of contracts.16

Alleging that great and irreparable loss and injury would befall them as a consequence of the imposition of taxes

on alcohol and tobacco products brought into the SBF, private respondents prayed for the issuance of a writ of

preliminary injunction and/or Temporary Restraining Order (TRO) and preliminary mandatory injunction to

enjoin the directives of herein petitioners.

Petitioners duly opposed the private respondents prayer for the issuance of a writ of preliminary injunction and/or TRO, arguing that (1) tax exemptions are not presumed and even when granted, are strictly construed against the

grantee; (2) an increase in business expense is not the injury contemplated by law, it being a case of damnum

absque injuria; and (3) the drawback mechanism established in the law clearly negates the possibility of the

feared injury.17

Petitioners moreover pointed out that courts are enjoined from issuing a writ of injunction and/or TRO on the

grounds of an alleged nullity of a law, ordinance or administrative regulation or circular or in a manner that

would effectively dispose of the main case. Taxes, they stressed, are the lifeblood of the government and their

prompt and certain availability is an imperious need. They maintained that greater injury would be inflicted on

the public should the writ be granted.

On May 4, 2005, the court a quo granted private respondents application for the issuance of a writ of preliminary injunction, after it found that the essential requisites for the issuance of a preliminary injunction were present.

As investors duly licensed to operate inside the SBF, the trial court declared that private respondents were

entitled to enjoy the benefits of tax incentives under R.A. No. 7227, particularly the exemption from local and

national taxes under Section 12(c); the aforecited provision of R.A. No. 7227, coupled with private respondents

Certificates of Registration and Tax Exemption from the SBMA, vested in them a clear and unmistakable right or

right in esse that would be violated should R.A. No. 9334 be implemented; and the invasion of such right is

substantial and material as private respondents would be compelled to pay more than what they should by way of

taxes to the national government.

The trial court thereafter ruled that the prima facie presumption of validity of R.A. No. 9334 had been overcome

by private respondents, it holding that as a partial amendment of the National Internal Revenue Code (NIRC) of

1997,18 as amended, R.A. No. 9334 is a general law that could not prevail over a special statute like R.A. No. 7227

notwithstanding the fact that the assailed law is of later effectivity.

The trial court went on to hold that the repealing provision of Section 10 of R.A. No. 9334 does not expressly

mention the repeal of R. A. No. 7227, hence, its repeal can only be an implied repeal, which is not favored; and

since R.A. No. 9334 imposes new tax burdens, whatever doubts arising therefrom should be resolved against the

taxing authority and in favor of the taxpayer.

The trial court furthermore held that R.A. No. 9334 violates the terms and conditions of private respondents subsisting contracts with SBMA, which are embodied in their Certificates of Registration and Exemptions in

contravention of the constitutional guarantee against the impairment of contractual obligations; that greater

damage would be inflicted on private respondents if the writ of injunction is not issued as compared to the injury

that the government and the general public would suffer from its issuance; and that the damage that private

respondents are bound to suffer once the assailed statute is implemented including the loss of confidence of their foreign principals, loss of business opportunity and unrealized income, and the danger of closing down their

businesses due to uncertainty of continued viability cannot be measured accurately by any standard.

With regard to the rule that injunction is improper to restrain the collection of taxes under Section 21819 of the

NIRC, the trial court held that what is sought to be enjoined is not per se the collection of taxes, but the

implementation of a statute that has been found preliminarily to be unconstitutional.

Additionally, the trial court pointed out that private respondents taxes have not yet been assessed, as they have not filed consumption entries on all their imported tobacco and alcohol products, hence, their duty to pay the

corresponding excise taxes and the concomitant right of the government to collect the same have not yet

materialized.

On May 11, 2005, the trial court issued a Writ of Preliminary Injunction directing petitioners and the SBMA

Administrator as well as all persons assisting or acting for and in their behalf "1) to allow the operations of

[private respondents] in accordance with R.A. No. 7227; 2) to allow [them] to file warehousing entries instead of

consumption entries as regards their importation of tobacco and alcohol products; and 3) to cease and desist from

implementing the pertinent provisions of R.A. No. 9334 by not compelling [private respondents] to immediately

pay duties and taxes on said alcohol and tobacco products as a condition to their removal from the port area for

transfer to the warehouses of [private respondents]."20

The injunction bond was approved at One Million pesos (P1,000,000).21

Without moving for reconsideration, petitioners have come directly to this Court to question the May 4, 2005

Order and the Writ of Preliminary Injunction which, they submit, were issued by public respondent with grave

abuse of discretion amounting to lack or excess of jurisdiction.

In particular, petitioners contend that public respondent peremptorily and unjustly issued the injunctive writ

despite the absence of the legal requisites for its issuance, resulting in heavy government revenue losses.22 They

emphatically argue that since the tax exemption previously enjoyed by private respondents has clearly been

withdrawn by R.A. No. 9334, private respondents do not have any right in esse nor can they invoke legal injury to

stymie the enforcement of R.A. No. 9334.

Furthermore, petitioners maintain that in issuing the injunctive writ, public respondent showed manifest bias and

prejudice and prejudged the merits of the case in utter disregard of the caveat issued by this Court in Searth

Commodities Corporation, et al. v. Court of Appeals23 and Vera v. Arca.24

Regarding the P1 million injunction bond fixed by public respondent, petitioners argue that the same is grossly

disproportionate to the damages that have been and continue to be sustained by the Republic.

In their Reply25 to private respondents Comment, petitioners additionally plead public respondents bias and partiality in allowing the motions for intervention of a number of corporations26 without notice to them and in

disregard of their present pending petition for certiorari and prohibition before this Court. The injunction bond

filed by private respondent Indigo Distribution Corporation, they stress, is not even sufficient to cover all the

original private respondents, much less, intervenor-corporations.

The petition is partly meritorious.

At the outset, it bears emphasis that only questions relating to the propriety of the issuance of the May 4, 2005

Order and the Writ of Preliminary Injunction are properly within the scope of the present petition and shall be so

addressed in order to determine if public respondent committed grave abuse of discretion. The arguments raised

by private respondents which pertain to the constitutionality of R.A. No. 9334 subject matter of the case pending

litigation before the trial court have no bearing in resolving the present petition.

Section 3 of Rule 58 of the Revised Rules of Court provides:

SEC. 3. Grounds for issuance of preliminary injunction. A preliminary injunction may be granted when it is established.

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in

restraining the commission or continuance of the act or acts complained of, or in requiring the performance

of an act or acts, either for a limited period or perpetually;

(b) That the commission, continuance or non-performance of the act or acts complained of during the

litigation would probably work injustice to the applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or

suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the

subject of the action or proceeding, and tending to render the judgment ineffectual.

For a writ of preliminary injunction to issue, the plaintiff must be able to establish that (1) there is a clear and

unmistakable right to be protected, (2) the invasion of the right sought to be protected is material and substantial,

and (3) there is an urgent and paramount necessity for the writ to prevent serious damage.27

Conversely, failure to establish either the existence of a clear and positive right which should be judicially

protected through the writ of injunction, or of the acts or attempts to commit any act which endangers or tends to

endanger the existence of said right, or of the urgent need to prevent serious damage, is a sufficient ground for

denying the preliminary injunction.28

It is beyond cavil that R.A. No. 7227 granted private respondents exemption from local and national taxes,

including excise taxes, on their importations of general merchandise, for which reason they enjoyed tax-exempt

status until the effectivity of R.A. No. 9334.

By subsequently enacting R.A. No. 9334, however, Congress expressed its intention to withdraw private

respondents tax exemption privilege on their importations of cigars, cigarettes, distilled spirits, fermented liquors and wines. Juxtaposed to show this intention are the respective provisions of Section 131 of the NIRC before and

after its amendment by R.A. No. 9334:

x x x x.

Sec. 131 of NIRC before R.A. No. 9334 Sec. 131, as amended by R.A. No. 9334

Sec. 131. Payment of Excise Taxes on

Imported Articles.

(A) Persons Liable. Excise taxes on imported articles shall be paid by the

owner or importer to the Customs

Officers, conformably with the

Sec. 131. Payment of Excise Taxes on

Imported Articles.

(A) Persons Liable. Excise taxes on imported articles shall be paid by the

owner or importer to the Customs

Officers, conformably with the

regulations of the Department of Finance

and before the release of such articles

from the customs house or by the person

who is found in possession of articles

which are exempt from excise taxes other

than those legally entitled to exemption.

In the case of tax-free articles brought or

imported into the Philippines by persons,

entities or agencies exempt from tax

which are subsequently sold, transferred

or exchanged in the Philippines to non-

exempt persons or entities, the

purchasers or recipients shall be

considered the importers thereof, and

shall be liable for the duty and internal

revenue tax due on such importation.

The provision of any special or general

law to the contrary notwithstanding, the

importation of cigars and cigarettes,

distilled spirits, fermented liquors and

wines into the Philippines, even if

destined for tax and duty free shops,

shall be subject to all applicable taxes,

duties, charges, including excise taxes

due thereon. Provided,

however, Thatthis shall not apply to

cigars and cigarettes, fermented

spirits and wines brought directly

into the duly chartered or legislated

freeports of the Subic Economic

Freeport Zone, created under

Republic Act No. 7227; the Cagayan

Special Economic Zone and

Freeport, created under Republic

Act No. 7922; and the Zamboanga City

Special Economic Zone, created under

Republic Act No. 7903, and are not

transshipped to any other port in the

Philippines: Provided, further, That

importations of cigars and cigarettes,

distilled spirits, fermented liquors and

wines made directly by a government-

owned and operated duty-free shop, like

the Duty Free Philippines (DFP), shall

be exempted from all applicable duties,

charges, including excise tax due

thereon; Provided still further, That such

articles directly imported by a

government-owned and operated duty-

free shop, like the Duty-Free Philippines,

shall be labeled "tax and duty-free" and

"not for resale": Provided, still further,

That if such articles brought into the

duly chartered or legislated freeports

under Republic Acts Nos. 7227, 7922 and

7903 are subsequently introduced into

the Philippine customs territory, then

such articles shall, upon such

regulations of the Department of Finance

and before the release of such articles

from the customs house or by the person

who is found in possession of articles

which are exempt from excise taxes other

than those legally entitled to exemption.

In the case of tax-free articles brought or

imported into the Philippines by persons,

entities or agencies exempt from tax

which are subsequently sold, transferred

or exchanged in the Philippines to non-

exempt persons or entities, the

purchasers or recipients shall be

considered the importers thereof, and

shall be liable for the duty and internal

revenue tax due on such importation.

The provision of any special or

general law to the contrary

notwithstanding, the importation of

cigars and cigarettes, distilled

spirits, fermented liquors and wines

into the Philippines, even if destined

for tax and duty free shops, shall be

subject to all applicable taxes,

duties, charges, including excise

taxes due thereon. This shall applyto

cigars and cigarettes, distilled

spirits, fermented liquors and wines

brought directly into the duly

chartered or legislated freeports of

the Subic Economic Freeport Zone,

created under Republic Act No. 7227;

the Cagayan Special Economic Zone

and Freeport, created under

Republic Act No. 7922; and the

Zamboanga City Special Economic Zone,

created under Republic Act No. 7903,

and such other freeports as may

hereafter be established or created by

law: Provided, further, That importations

of cigars and cigarettes, distilled spirits,

fermented liquors and wines made

directly by a government-owned and

operated duty-free shop, like the Duty

Free Philippines (DFP), shall be

exempted from all applicable duties

only: Provided still further, That such

articles directly imported by a

government-owned and operated duty-

free shop, like the Duty-Free Philippines,

shall be labeled "tax and duty-free" and

"not for resale":Provided, finally, That

the removal and transfer of tax and duty-

free goods, products, machinery,

equipment and other similar articles

other than cigars and cigarettes, distilled

spirits, fermented liquors and wines,

from one Freeport to another Freeport,

introduction, be deemed imported into

the Philippines and shall be subject to all

imposts and excise taxes provided herein

and other statutes: Provided, finally,

That the removal and transfer of tax and

duty-free goods, products, machinery,

equipment and other similar articles,

from one freeport to another freeport,

shall not be deemed an introduction into

the Philippine customs territory.

x x x x.

shall not be deemed an introduction into

the Philippine customs territory.

x x x x.

(Emphasis and underscoring supplied)

To note, the old Section 131 of the NIRC expressly provided that all taxes, duties, charges, including excise taxes

shall not apply to importations of cigars, cigarettes, fermented spirits and wines brought directly into the duly

chartered or legislated freeports of the SBF.

On the other hand, Section 131, as amended by R.A. No. 9334, now provides that such taxes, duties and charges,

including excise taxes, shall apply to importation of cigars and cigarettes, distilled spirits, fermented liquors and

wines into the SBF.

Without necessarily passing upon the validity of the withdrawal of the tax exemption privileges of private

respondents, it behooves this Court to state certain basic principles and observations that should throw light on

the propriety of the issuance of the writ of preliminary injunction in this case.

First. Every presumption must be indulged in favor of the constitutionality of a statute.29 The burden of proving

the unconstitutionality of a law rests on the party assailing the law.30 In passing upon the validity of an act of a co-

equal and coordinate branch of the government, courts must ever be mindful of the time-honored principle that a

statute is presumed to be valid.

Second. There is no vested right in a tax exemption, more so when the latest expression of legislative intent

renders its continuance doubtful. Being a mere statutory privilege,31 a tax exemption may be modified or

withdrawn at will by the granting authority.32

To state otherwise is to limit the taxing power of the State, which is unlimited, plenary, comprehensive and

supreme. The power to impose taxes is one so unlimited in force and so searching in extent, it is subject only to

restrictions which rest on the discretion of the authority exercising it.33

Third. As a general rule, tax exemptions are construed strictissimi juris against the taxpayer and liberally in favor

of the taxing authority.34 The burden of proof rests upon the party claiming exemption to prove that it is in fact

covered by the exemption so claimed.35 In case of doubt, non-exemption is favored.36

Fourth. A tax exemption cannot be grounded upon the continued existence of a statute which precludes its change

or repeal.37 Flowing from the basic precept of constitutional law that no law is irrepealable, Congress, in the

legitimate exercise of its lawmaking powers, can enact a law withdrawing a tax exemption just as efficaciously as

it may grant the same under Section 28(4) of Article VI38 of the Constitution. There is no gainsaying therefore that

Congress can amend Section 131 of the NIRC in a manner it sees fit, as it did when it passed R.A. No. 9334.

Fifth. The rights granted under the Certificates of Registration and Tax Exemption of private respondents are not

absolute and unconditional as to constitute rights in esse those clearly founded on or granted by law or is enforceable as a matter of law.39

These certificates granting private respondents a "permit to operate" their respective businesses are in the nature

of licenses, which the bulk of jurisprudence considers as neither a property nor a property right.40 The licensee

takes his license subject to such conditions as the grantor sees fit to impose, including its revocation at

pleasure.41 A license can thus be revoked at any time since it does not confer an absolute right.42

While the tax exemption contained in the Certificates of Registration of private respondents may have been part of

the inducement for carrying on their businesses in the SBF, this exemption, nevertheless, is far from being

contractual in nature in the sense that the non-impairment clause of the Constitution can rightly be invoked.43

Sixth. Whatever right may have been acquired on the basis of the Certificates of Registration and Tax Exemption

must yield to the States valid exercise of police power.44 It is well to remember that taxes may be made the implement of the police power.45

It is not difficult to recognize that public welfare and necessity underlie the enactment of R.A. No. 9334. As

petitioners point out, the now assailed provision was passed to curb the pernicious practice of some unscrupulous

business enterprises inside the SBF of using their tax exemption privileges for smuggling purposes. Smuggling in

whatever form is bad enough; it is worse when the same is allegedly perpetrated, condoned or facilitated by

enterprises hiding behind the cloak of their tax exemption privileges.

Seventh. As a rule, courts should avoid issuing a writ of preliminary injunction which would in effect dispose of the

main case without trial.46 This rule is intended to preclude a prejudgment of the main case and a reversal of the

rule on the burden of proof since by issuing the injunctive writ, the court would assume the proposition that

petitioners are inceptively duty bound to prove.47

Eighth. A court may issue a writ of preliminary injunction only when the petitioner assailing a statute has made

out a case of unconstitutionality or invalidity strong enough, in the mind of the judge, to overcome the

presumption of validity, in addition to a showing of a clear legal right to the remedy sought.48

Thus, it is not enough that petitioners make out a case of unconstitutionality or invalidity to overcome the prima

facie presumption of validity of a statute; they must also be able to show a clear legal right that ought to be

protected by the court. The issuance of the writ is therefore not proper when the complainants right is doubtful or disputed.49

Ninth. The feared injurious effects of the imposition of duties, charges and taxes on imported cigars, cigarettes,

distilled spirits, fermented liquors and wines on private respondents businesses cannot possibly outweigh the dire consequences that the non-collection of taxes, not to mention the unabated smuggling inside the SBF, would

wreak on the government. Whatever damage would befall private respondents must perforce take a back seat to

the pressing need to curb smuggling and raise revenues for governmental functions.

All told, while the grant or denial of an injunction generally rests on the sound discretion of the lower court, this

Court may and should intervene in a clear case of abuse.50

One such case of grave abuse obtained in this case when public respondent issued his Order of May 4, 2005 and

the Writ of Preliminary Injunction on May 11, 200551 despite the absence of a clear and unquestioned legal rightof

private respondents.

In holding that the presumption of constitutionality and validity of R.A. No. 9334 was overcome by private

respondents for the reasons public respondent cited in his May 4, 2005 Order, he disregarded the fact that as a

condition sine qua non to the issuance of a writ of preliminary injunction, private respondents needed also to show

a clear legal right that ought to be protected. That requirement is not satisfied in this case.

To stress, the possibility of irreparable damage without proof of an actual existing right would not justify an

injunctive relief.52

Besides, private respondents are not altogether lacking an appropriate relief under the law. As petitioners point

out in their Petition53 before this Court, private respondents may avail themselves of a tax refund or tax credit

should R.A. No. 9334 be finally declared invalid.

Indeed, Sections 20454 and 22955 of the NIRC provide for the recovery of erroneously or illegally collected taxes

which would be the nature of the excise taxes paid by private respondents should Section 6 of R.A. No. 9334 be

declared unconstitutional or invalid.

It may not be amiss to add that private respondents can also opt not to import, or to import less of, those items

which no longer enjoy tax exemption under R.A. No. 9334 to avoid the payment of taxes thereon.

The Court finds that public respondent had also ventured into the delicate area which courts are cautioned from

taking when deciding applications for the issuance of the writ of preliminary injunction. Having ruled

preliminarily against the prima facie validity of R.A. No. 9334, he assumed in effect the proposition that private

respondents in their petition for declaratory relief were duty bound to prove, thereby shifting to petitioners the

burden of proving that R.A. No. 9334 is not unconstitutional or invalid.

In the same vein, the Court finds public respondent to have overstepped his discretion when he arbitrarily fixed

the injunction bond of the SBF enterprises at only P1million.

The alleged sparseness of the testimony of Indigo Corporations representative56 on the injury to be suffered by private respondents may be excused because evidence for a preliminary injunction need not be conclusive or

complete. Nonetheless, considering the number of private respondent enterprises and the volume of their

businesses, the injunction bond is undoubtedly not sufficient to answer for the damages that the government was

bound to suffer as a consequence of the suspension of the implementation of the assailed provisions of R.A. No.

9334.

Rule 58, Section 4(b) provides that a bond is executed in favor of the party enjoined to answer for all damages

which it may sustain by reason of the injunction. The purpose of the injunction bond is to protect the defendant

against loss or damage by reason of the injunction in case the court finally decides that the plaintiff was not

entitled to it, and the bond is usually conditioned accordingly.57

Recalling this Courts pronouncements in Olalia v. Hizon58 that:

x x x [T]here is no power the exercise of which is more delicate, which requires greater caution,

deliberation and sound discretion, or more dangerous in a doubtful case, than the issuance of an

injunction. It is the strong arm of equity that should never be extended unless to cases of great injury,

where courts of law cannot afford an adequate or commensurate remedy in damages.

Every court should remember that an injunction is a limitation upon the freedom of action of the

defendant and should not be granted lightly or precipitately. It should be granted only when the court is

fully satisfied that the law permits it and the emergency demands it,

it cannot be overemphasized that any injunction that restrains the collection of taxes, which is the inevitable

result of the suspension of the implementation of the assailed Section 6 of R.A. No. 9334, is a limitation upon the

right of the government to its lifeline and wherewithal.

The power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the

general welfare and well-being of the people.59 That the enforcement of tax laws and the collection of taxes are of

paramount importance for the sustenance of government has been repeatedly observed. Taxes being the lifeblood

of the government that should be collected without unnecessary hindrance,60 every precaution must be taken not

to unduly suppress it.

Whether this Court must issue the writ of prohibition, suffice it to stress that being possessed of the power to act

on the petition for declaratory relief, public respondent can proceed to determine the merits of the main case. To

halt the proceedings at this point may be acting too prematurely and would not be in keeping with the policy that

courts must decide controversies on the merits.

Moreover, lacking the requisite proof of public respondents alleged partiality, this Court has no ground to prohibit him from proceeding with the case for declaratory relief. For these reasons, prohibition does not lie.

WHEREFORE, the Petition is PARTLY GRANTED. The writ of certiorari to nullify and set aside the Order of

May 4, 2005 as well as the Writ of Preliminary Injunction issued by respondent Judge Caguioa on May 11, 2005

isGRANTED. The assailed Order and Writ of Preliminary Injunction are hereby declared NULL AND VOID and

accordingly SET ASIDE. The writ of prohibition prayed for is, however, DENIED. SO ORDERED.

Meralco vs. Laguna

On various dates, certain municipalities of the Province of Laguna including, Bian, Sta Rosa, San Pedro,

Luisiana, Calauan and Cabuyao, by virtue of existing laws then in effect, issued resolutions through their

respective municipal councils granting franchise in favor of petitioner Manila Electric Company (MERALCO) for

the supply of electric light, heat and power within their concerned areas. On 19 January 1983, MERALCO was

likewise granted a franchise by the National Electrification Administration to operate an electric light and power

service in the Municipality of Calamba, Laguna.

On 12 September 1991, Republic Act No. 7160, otherwise known as the Local Government Code of 1991, was

enacted to take effect on 01 January 1992 enjoining local government units to create their own sources of revenue

and to levy taxes, fees and charges, subject to the limitations expressed therein, consistent with the basic policy of

local autonomy. Pursuant to the provisions of the Code, respondent province enacted Laguna Provincial Ordinance

No. 01-92, effective 01 January 1993, providing, in part, as follows:

Sec. 2.09. Franchise Tax. There is hereby imposed a tax on businesses enjoying a franchise, at a rate of fifty

percent (50%) of one percent (1%) of the gross annual receipts, which shall include both cash sales and sales on

account realized during the preceding calendar year within this province, including the territorial limits on any

city located in the province[1]

On the basis of the above ordinance, respondent Provincial Treasurer sent a demand letter to MERALCO for

the corresponding tax payment. Petitioner MERALCO paid the tax, which then amounted to P19,520,628.42,

under protest. A formal claim for refund was thereafter sent by MERALCO to the Provincial Treasurer of Laguna

claiming that the franchise tax it had paid and continued to pay to the National Government pursuant to P.D. 551

already included the franchise tax imposed by the Provincial Tax Ordinance. MERALCO contended that the

imposition of a franchise tax under Section 2.09 of Laguna Provincial Ordinance No. 01-92, insofar as it concerned

MERALCO, contravened the provisions of Section 1 of P.D. 551 which read:

Any provision of law or local ordinance to the contrary notwithstanding, the franchise tax payable by all grantees

of franchises to generate, distribute and sell electric current for light, heat and power shall be two per cent (2%) of

their gross receipts received from the sale of electric current and from transactions incident to the generation,

distribution and sale of electric current.

Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly authorized

representative on or before the twentieth day of the month following the end of each calendar quarter or month, as

may be provided in the respective franchise or pertinent municipal regulation and shall, any provision of the Local

Tax Code or any other law to the contrary notwithstanding, be in lieu of all taxes and assessments of whatever

nature imposed by any national or local authority on earnings, receipts, income and privilege of generation,

distribution and sale of electric current.

On 28 August 1995, the claim for refund of petitioner was denied in a letter signed by Governor Jose D.

Lina. In denying the claim, respondents relied on a more recent law, i.e., Republic Act No. 7160 or the Local

Government Code of 1991, than the old decree invoked by petitioner.

On 14 February 1996, petitioner MERALCO filed with the Regional Trial Court of Sta Cruz, Laguna, a

complaint for refund, with a prayer for the issuance of a writ of preliminary injunction and/or temporary

restraining order, against the Province of Laguna and also Benito R. Balazo in his capacity as the Provincial

Treasurer of Laguna. Aside from the amount of P19,520,628.42 for which petitioner MERALCO had priority made

a formal request for refund, petitioner thereafter likewise made additional payments under protest on various

dates totaling P27,669,566.91.

The trial court, in its assailed decision of 30 September 1997, dismissed the complaint and concluded:

WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS, JUDGMENT is hereby

rendered in favor of the defendants and against the plaintiff, by:

1. Ordering the dismissal of the Complaint; and

2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid, binding, reasonable and enforceable.[2]

In the instant petition, MERALCO assails the above ruling and brings up the following issues; viz:

1. Whether the imposition of a franchise tax under Section 2.09 of Laguna Provincial Ordinance No. 01-

92, insofar as petitioner is concerned, is violative of the non-impairment clause of the Constitution and

Section 1 of Presidential Decree No. 551.

2. Whether Republic Act. No. 7160, otherwise known as the Local Government Code of 1991, has repealed,

amended or modified Presidential Decree No. 551.

3. Whether the doctrine of exhaustion of administrative remedies is applicable in this case.[3]

The petition lacks merit.

Prefatorily, it might be well to recall that local governments do not have the inherent power to tax[4] except

to the extent that such power might be delegated to them either by the basic law or by statute.Presently, under

Article X of the 1987 Constitution, a general delegation of that power has been given in favor of local government

units. Thus:

Sec. 3. The Congress shall enact a local government code which shall provide for a more responsive and

accountable local government structure instituted through a system of decentralization with effective mechanisms

of recall, initiative, and referendum, allocate among the different local government units their powers,

responsibilities, and resources, and provide for the qualifications, election, appointment and removal, term,

salaries, powers and functions, and duties of local officials, and all other matters relating to the organization and

operation of the local units.

x x x x x x x x x

Sec. 5. Each local government shall have the power to create its own sources of revenues and to levy taxes, fees,

and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic

policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments.

The 1987 Constitution has a counterpart provision in the 1973 Constitution which did come out with a similar

delegation of revenue making powers to local governments.[5]

Under the regime of the 1935 Constitution no similar delegation of tax powers was provided, and local

government units instead derived their tax powers under a limited statutory authority. Whereas, then, the

delegation of tax powers granted at that time by statute to local governments was confined and defined (outside of

which the power was deemed withheld), the present constitutional rule (starting with the 1973 Constitution),

however, would broadly confer such tax powers subject only to specific exceptions that the law might prescribe.

Under the now prevailing Constitution, where there is neither a grant nor a prohibition by statute, the tax

power must be deemed to exist although Congress may provide statutory limitations and guidelines. The

basic rationale for the current rule is to safeguard the viability and self-sufficiency of local government units by

directly granting them general and broad tax powers. Nevertheless, the fundamental law did not intend the

delegation to be absolute and unconditional; the constitutional objective obviously is to ensure that, while the local

government units are being strengthened and made more autonomous,[6] the legislature must still see to it that (a)

the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions; (b) each local

government unit will have its fair share of available resources; (c) the resources of the national government will

not be unduly disturbed; and (d) local taxation will be fair, uniform, and just.

The Local Government Code of 1991 has incorporated and adopted, by and large the provisions of the now

repealed Local Tax Code, which had been in effect since 01 July 1973, promulgated into law by Presidential Decree

No. 231[7] pursuant to the then provisions of Section 2, Article XI, of the 1973 Constitution. The 1991 Code

explicitly authorizes provincial governments, notwithstanding any exemption granted by any law or other special

law, x x x (to) impose a tax on businesses enjoying a franchise. Section 137 thereof provides:

Sec. 137. Franchise Tax Notwithstanding any exemption granted by any law or other special law, the province

may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%) of one percent

(1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within

its territorial jurisdiction. In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of

one percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the business

started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction

thereof, as provided herein. (Underscoring supplied for emphasis)

Indicative of the legislative intent to carry out the Constitutional mandate of vesting broad tax powers to local

government units, the Local Government Code has effectively withdrawn under Section 193 thereof, tax

exemptions or incentives theretofore enjoyed by certain entities. This law states:

Section 193 Withdrawal of Tax Exemption Privileges Unless otherwise provided in this Code, tax exemptions or

incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-

owned or controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938,

non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this

Code. (Underscoring supplied for emphasis)

The Code, in addition, contains a general repealing clause in its Section 534; thus:

Section 534. Repealing Clause. x x x.

(f) All general and special laws, acts, city charters, decrees, executive orders, proclamations and administrative

regulations, or part or parts thereof which are inconsistent with any of the provisions of this Code are hereby

repealed or modified accordingly. (Underscoring supplied for emphasis)[8]

To exemplify, in Mactan Cebu International Airport Authority vs. Marcos,[9] the Court upheld the withdrawal

of the real estate tax exemption previously enjoyed by Mactan Cebu International Airport Authority. The Court

ratiocinated:

x x x These policy considerations are consistent with the State policy to ensure autonomy to local governments and

the objective of the LGC that they enjoy genuine and meaningful local autonomy to enable them to attain their

fullest development as self-reliant communities and make them effective partners in the attainment of national

goals. The power to tax is the most effective instrument to raise needed revenues to finance and support myriad

activities of local government units for the delivery of basic service essential to the promotion of the general

welfare and the enhancement of peace, progress, and prosperity of the people. It may also be relevant to recall that

the original reasons for the withdrawal of tax exemption privileges granted to government-owned and controlled

corporations and all other units of government were that such privilege resulted in serious tax base erosion and

distortions in the tax treatment of similarly situated enterprises, and there was a need for these entities to share

in the requirements of development, fiscal or otherwise, by paying the taxes and other charges due from them.[10]

Petitioner in its complaint before the Regional Trial Court cited the ruling of this Court in Province of

Misamis Oriental vs. Cagayan Electric Power and Light Company, Inc.;[11] thus:

In an earlier case, the phrase shall be in lieu of all taxes and at any time levied, established by, or collected by any

authority found in the franchise of the Visayan Electric Company was held to exempt the company from payment

of the 5% tax on corporate franchise provided in Section 259 of the Internal Revenue Code (Visayan Electric Co.

vs. David, 49 O.G. [No. 4] 1385)

Similarly, we ruled that the provision: shall be in lieu of all taxes of every name and nature in the franchise of the

Manila Railroad (Subsection 12, Section 1, Act No. 1510) exempts the Manila Railroad from payment of internal

revenue tax for its importations of coal and oil under Act No. 2432 and the Amendatory Acts of the Philippine

Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).

The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No. 1497) justified the

exemption of the Philippine Railway Company from payment of the tax on its corporate franchise under Section

259 of the Internal Revenue Code, as amended by R.A. No. 39 (Philippine Railway Co vs. Collector of Internal

Revenue, 91 Phil. 35).

Those magic words, shall be in lieu of all taxes also excused the Cotabato Light and Ice Plant Company from the

payment of the tax imposed by Ordinance No. 7 of the City of Cotabato (Cotabato Light and Power Co. vs. City of

Cotabato, 32 SCRA 231).

So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company when it was required to pay

the corporate franchise tax under Section 259 of the Internal Revenue Code as amended by R.A. No. 39 (Carcar

Electric & Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No. 4] 1068). This Court pointed out that such

exemption is part of the inducement for the acceptance of the franchise and the rendition of public service by the

grantee.[12]

In the recent case of the City Government of San Pablo, etc., et al. vs. Hon. Bienvenido V. Reyes, et al.,[13] the

Court has held that the phrase in lieu of all taxes have to give way to the peremptory language of the Local

Government Code specifically providing for the withdrawal of such exemptions, privileges, and that upon the

effectivity of the Local Government Code all exemptions except only as provided therein can no longer be invoked

by MERALCO to disclaim liability for the local tax. In fine, the Court has viewed its previous rulings as

laying stress more on the legislative intent of the amendatory law whether the tax exemption

privilege is to be withdrawn or not rather than on whether the law can withdraw, without violating

the Constitution, the tax exemption or not.

While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as being

in the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions,

nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions, in the real sense

of the term and where the non-impairment clause of the Constitution can rightly be invoked, are

those agreed to by the taxing authority in contracts, such as those contained in government bonds or

debentures, lawfully entered into by them under enabling laws in which the government, acting in its

private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax

exemptions of this kind may not be revoked without impairing the obligations of contracts.[14] These contractual

tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise

partakes the nature of a grant which is beyond the purview of the non-impairment clause of the

Constitution.[15] Indeed, Article XII, Section 11, of the 1987 Constitution, like its precursor provisions in the 1935

and the 1973 Constitutions, is explicit that no franchise for the operation of a public utility shall be granted except

under the condition that such privilege shall be subject to amendment, alteration or repeal by Congress as and

when the common good so requires.

WHEREFORE, the instant petition is hereby DISMISSED. No costs. SO ORDERED.

Province of Misamis Oriental vs. Cagayan Electric Company

The issue in this case is a legal one: whether or not a corporation whose franchise expressly provides that the

payment of the "franchise tax of three per centum of the gross earnings shall be in lieu of all taxes and

assessments of whatever authority upon privileges, earnings, income, franchise, and poles, wires, transformers,

and insulators of the grantee." (p. 20, Rollo), is exempt from paying a provincial franchise tax.

Cagayan Electric Power and Light Company, Inc. (CEPALCO for short) was granted a franchise on June 17, 1961

under Republic Act No. 3247 to install, operate and maintain an electric light, heat and power system in the City

of Cagayan de Oro and its suburbs. Said franchise was amended on June 21, 1963 by R.A. No. 3570 which added

the municipalities of Tagoloan and Opol to CEPALCO's sphere of operation, and was further amended on August

4, 1969 by R.A. No. 6020 which extended its field of operation to the municipalities of Villanueva and Jasaan.

R.A. Nos. 3247, 3570 and 6020 uniformly provide that:

Sec. 3. In consideration of the franchise and rights hereby granted, the grantee shall pay a

franchise tax equal to three per centum of the gross earnings for electric current sold under this

franchise, of which two per centum goes into the National Treasury and one per centum goes into

the treasury of the Municipalities of Tagoloan, Opol, Villanueva and Jasaan and Cagayan de Oro

City, as the case may be: Provided, That the said franchise tax of three per centum of the gross

earnings shall be in lieu of all taxes and assessments of whatever authority upon privileges

earnings, income, franchise,and poles, wires, transformers, and insulators of the grantee from

which taxes and assessments the grantee is hereby expressly exempted. (Emphasis supplied.)

On June 28, 1973, the Local Tax Code (P.D. No. 231) was promulgated, Section 9 of which provides:

Sec. 9. Franchise Tax.Any provision of special laws to the contrary notwithstanding, the province may impose a tax on businesses enjoying franchise, based on the gross receipts realized within its

territorial jurisdiction, at the rate of not exceeding one-half of one per cent of the gross annual

receipts for the preceding calendar year.

In the case of newly started business, the rate shall not exceed three thousand pesos per year.

Sixty per cent of the proceeds of the tax shall accrue to the general fund of the province and forty

per cent to the general fund of the municipalities serviced by the business on the basis of the gross

annual receipts derived therefrom by the franchise holder. In the case of a newly started business,

forty per cent of the proceeds of the tax shall be divided equally among the municipalities serviced

by the business. (Emphasis supplied.)

Pursuant thereto, the Province of Misamis Oriental (herein petitioner) enacted Provincial Revenue Ordinance No.

19, whose Section 12 reads:

Sec. 12. Franchise Tax.There shall be levied, collected and paid on businesses enjoying franchise tax of one-half of one per cent of their gross annual receipts for the preceding calendar year

realized within the territorial jurisdiction of the province of Misamis Oriental. (p. 27, Rollo.)

The Provincial Treasurer of Misamis Oriental demanded payment of the provincial franchise tax from CEPALCO.

The company refused to pay, alleging that it is exempt from all taxes except the franchise tax required by R.A. No.

6020. Nevertheless, in view of the opinion rendered by the Provincial Fiscal, upon CEPALCO's request, upholding

the legality of the Revenue Ordinance, CEPALCO paid under protest on May 27, 1974 the sum of P 4,276.28 and

appealed the fiscal's ruling to the Secretary of Justice who reversed it and ruled in favor of CEPALCO.

On June 26, 1976, the Secretary of Finance issued Local Tax Regulation No. 3-75 adopting entirely the opinion of

the Secretary of Justice.

On February 16, 1976, the Province filed in the Court of First Instance of Misamis Oriental a complaint for

declaratory relief praying, among others, that the Court exercise its power to construe P.D. No. 231 in relation to

the franchise of CEPALCO (R.A. No. 6020), and to declare the franchise as having been amended by P.D. No. 231.

The Court dismissed the complaint and ordered the Province to return to CEPALCO the sum of P4,276.28 paid

under protest.

The Province has appealed to this Court, alleging that the lower court erred in holding that:

1) CEPALCO's tax exemption under Section 3 of Republic Act No. 6020 was not amended or repealed by P.D. No.

231;

2) the imposition of the provincial franchise tax on CEPALCO would subvert the purpose of P.D. No. 231;

3) CEPALCO is exempt from paying the provincial franchise tax; and

4) petitioner should refund CEPALCO's tax payment of P4,276.28.

We find no merit in the petition for review.

There is no provision in P.D. No. 231 expressly or impliedly amending or repealing Section 3 of R.A. No. 6020. The

perceived repugnancy between the two statutes should be very clear before the Court may hold that the prior one

has been repealed by the later, since there is no express provision to that effect (Manila Railroad Co. vs. Rafferty,

40 Phil. 224). The rule is that a special and local statute applicable to a particular case is not repealed by a later

statute which is general in its terms, provisions and application even if the terms of the general act are broad

enough to include the cases in the special law (id.) unless there is manifest intent to repeal or alter the special law.

Republic Acts Nos. 3247, 3570 and 6020 are special laws applicable only to CEPALCO, while P.D. No. 231 is a

general tax law. The presumption is that the special statutes are exceptions to the general law (P.D. No. 231)

because they pertain to a special charter granted to meet a particular set of conditions and circumstances.

The franchise of respondent CEPALCO expressly exempts it from payment of "all taxes of whatever authority"

except the three per centum (3%) tax on its gross earnings.

In an earlier case, the phrase "shall be in lieu of all taxes and at any time levied, established by, or collected by

any authority" found in the franchise of the Visayan Electric Company was held to exempt the company from

payment of the 5% tax on corporate franchise provided in Section 259 of the Internal Revenue Code (Visayan

Electric Co. vs. David, 49 O.G. [No. 4] 1385).

Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name and nature" in the franchise of

the Manila Railroad (Subsection 12, Section 1, Act No. 1510) exempts the Manila Railroad from payment of

internal revenue tax for its importations of coal and oil under Act No. 2432 and the Amendatory Acts of the

Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).

The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No. 1497) justified the

exemption of the Philippine Railway Company from payment of the tax on its corporate franchise under Section

259 of the Internal Revenue Code, as amended by R.A. No. 39 (Philippine Railway Co. vs. Collector of Internal

Revenue, 91 Phil. 35).

Those magic words: "shall be in lieu of all taxes" also excused the Cotabato Light and Ice Plant Company from the

payment of the tax imposed by Ordinance No. 7 of the City of Cotabato (Cotabato Light and Power Co. vs. City of

Cotabato, 32 SCRA 231).

So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company when it was required to pay

the corporate franchise tax under Section 259 of the Internal Revenue Code, as amended by R.A. No. 39 (Carcar

Electric & Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No. 4] 1068). This Court pointed out that such

exemption is part of the inducement for the acceptance of the franchise and the rendition of public service by the

grantee. As a charter is in the nature of a private contract, the imposition of another franchise tax on the

corporation by the local authority would constitute an impairment of the contract between the government and the

corporation.

Recently, this Court ruled that the franchise (R.A. No. 3843) of the Lingayen Gulf Electric Power Company which

provided that the company shall pay:

tax equal to 2% per annum of the gross receipts . . . and shall be in lieu of any and all taxes . . . now

or in the future . . . from which taxes . . . the grantee is hereby expressly exempted and . . . no other

tax . . . other than the franchise tax of 2% on the gross receipts as provided for in the original

franchise shall be collected.

exempts the company from paying the franchise tax under Section 259 of the National Internal Revenue

Code (Commissioner of Internal Revenue vs. Lingayen Gulf Electric Power Co., Inc., G.R. No. 23771,

August 4, 1988).

On the other hand, the Balanga Power Plant Company, Imus Electric Company, Inc., Guagua Electric Company,

Inc. were subjected to the 5% tax on corporate franchise under Section 259 of the Internal Revenue Code, as

amended, because Act No. 667 of the Philippine Commission and the ordinance or resolutions granting their

respective franchises did not contain the "in-lieu-of-all-taxes" clause (Balanga Power Plant Co. vs. Commissioner

of Internal Revenue, G.R. No. L-20499, June 30, 1965; Imus Electric Co. vs. Court of Tax Appeals, G.R. No. L-

22421, March 18, 1967; Guagua Electric Light vs. Collector of Internal Revenue, G.R. No. L-23611, April 24, 1967).

Local Tax Regulation No. 3-75 issued by the Secretary of Finance on June 26, 1976, has made it crystal clear that

the franchise tax provided in the Local Tax Code (P.D. No. 231, Sec. 9) may only be imposed on companies with

franchises that do not contain the exempting clause. Thus it provides:

The franchise tax imposed under local tax ordinance pursuant to Section 9 of the Local Tax Code,

as amended, shall be collected from businesses holding franchise but not from business

establishments whose franchise contain the "in-lieu-of-all-taxes-proviso".

Manila Electric Company vs. Vera, 67 SCRA 351, cited by the petitioner, is not applicable here because what the

Government sought to impose on Meralco in that case was not a franchise tax but a compensating tax on the poles,

wires, transformers and insulators which it imported for its use.

WHEREFORE, the petition for review is denied, and the decision of the Court of First Instance is hereby

affirmedin toto. No costs.

SO ORDERED.

Cagayan Electric Power vs. CIR

This is about the liability of petitioner Cagayan Electric Power & Light Co., Inc. for income tax amounting to

P75,149.73 for the more than seven-month period of the year 1969 in addition to franchise tax.

The petitioner is the holder of a legislative franchise, Republic Act No. 3247, under which its payment of 3% tax on

its gross earnings from the sale of electric current is "in lieu of all taxes and assessments of whatever authority

upon privileges, earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee, from

which taxes and assessments the grantee is hereby expressly exempted" (Sec. 3).

On June 27, 1968, Republic Act No. 5431 amended section 24 of the Tax Code by making liable for income tax all

corporate taxpayers not specifically exempt under paragraph (c) (1) of said section and section 27 of the Tax Code

notwithstanding the "provisions of existing special or general laws to the contrary". Thus, franchise companies

were subjected to income tax in addition to franchise tax.

However, in petitioner's case, its franchise was amended by Republic Act No. 6020, effective August 4, 1969, by

authorizing the petitioner to furnish electricity to the municipalities of Villanueva and Jasaan, Misamis Oriental

in addition to Cagayan de Oro City and the municipalities of Tagoloan and Opol. The amendment reenacted the

tax exemption in its original charter or neutralized the modification made by Republic Act No. 5431 more than a

year before.

By reason of the amendment to section 24 of the Tax Code, the Commissioner of Internal Revenue in a demand

letter dated February 15, 1973 required the petitioner to pay deficiency income taxes for 1968-to 1971. The

petitioner contested the assessments. The Commissioner cancelled the assessments for 1970 and 1971 but insisted

on those for 1968 and 1969.

The petitioner filed a petition for review with the Tax Court, which on February 26, 1982 held the petitioner liable

only for the income tax for the period from January 1 to August 3, 1969 or before the passage of Republic Act No.

6020 which reiterated its tax exemption. The petitioner appealed to this Court.

It contends that the Tax Court erred (1) in not holding that the franchise tax paid by the petitioner is a

commutative tax which already includes the income tax; (2) in holding that Republic Act No. 5431 as amended,

altered or repealed petitioner's franchise; (3) in holding that petitioner's franchise is a contract which can be

impaired by an implied repeal and (4) in not holding that section 24(d) of the Tax Code should be construed strictly

against the Government.

We hold that Congress could impair petitioner's legislative franchise by making it liable for income tax from which

heretofore it was exempted by virtue of the exemption provided for in section 3 of its franchise.

The Constitution provides that a franchise is subject to amendment, alteration or repeal by the Congress when the

public interest so requires (Sec. 8, Art. XIV, 1935 Constitution; Sec. 5, Art. XIV, 1973 Constitution),

Section 1 of petitioner's franchise, Republic Act No. 3247, provides that it is subject to the provisions of the

Constitution and to the terms and conditions established in Act No. 3636 whose section 12 provides that the

franchise is subject to amendment, alteration or repeal by Congress.

Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income tax all corporate taxpayers

not expressly exempted therein and in section 27 of the Code, had the effect of withdrawing petitioner's exemption

from income tax.

The Tax Court acted correctly in holding that the exemption was restored by the subsequent enactment on August

4, 1969 of Republic Act No. 6020 which reenacted the said tax exemption. Hence, the petitioner is liable only for

the income tax for the period from January 1 to August 3, 1969 when its tax exemption was modified by Republic

Act No. 5431.

It is relevant to note that franchise companies, like the Philippine Long Distance Telephone Company, have been

paying income tax in addition to the franchise tax.

However, it cannot be denied that the said 1969 assessment appears to be highly controversial. The Commissioner

at the outset was not certain as to petitioner's income tax liability. It had reason not to pay income tax because of

the tax exemption in its franchise.

For this reason, it should be liable only for tax proper and should not be held liable for the surcharge and interest.

(Advertising Associates, Inc. vs. Commissioner of Internal Revenue and Court of Tax Appeals, G. R. No. 59758,

December 26, 1984,133 SCRA 765; Imus Electric Co., Inc. vs. Commissioner of Internal Revenue, 125 Phil. 1024;

C.M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue, L-28383, June 22, 1976, 71 SCRA 511.)

WHEREFORE, the judgment of the Tax Court is affirmed with the modification that the petitioner is liable only

for the tax proper and that it should not pay the delinquency penalties. No costs.

SO ORDERED.

Casanovas vs. Hord

The plaintiff brought this action against the defendant, the Collector of Internal Revenue, to recover the sum of

P9,600, paid by him under protest as taxes on certain mining claims owned by him in the Province of Ambos

Camarines. Judgment was rendered in the court below in favor of the defendant, and from that judgment the

plaintiff appealed.

There is no dispute about the facts.

In January, 1897, the Spanish Government, in accordance with the provisions of the royal decree of the 14th of

May, 1867, granted to the plaintiff certain mines in the said Province of Ambos Camarines, of which mines the

plaintiff is now the owner.

That there were valid perfected mining concessions granted prior to the 11th of April, 1899, is conceded. They

were so considered by the Collector of Internal Revenue and were by him said to fall within the provisions of

section 134 of Act No. 1189, known as the Internal Revenue Act. That section is as follows:

SEC. 134. On all valid perfected mining concessions granted prior to April eleventh, eighteen hundred and

ninety-nine, there shall be levied and collected on the after January first, nineteen hundred and five, the

following taxes:

2. (a) On each claim containing an area of sixty thousand square meters, an annual tax of one hundred

pesos; (b) and at the same rate proportionately on each claim containing an area in excess of, or less than,

sixty thousand square meters.

3. On the gross output of each an ad valorem tax equal to three per centum of the actual market value of

such output.

The defendant accordingly imposed upon these properties the tax mentioned in section 134, which tax, as has

before been stated, plaintiff paid under protest.

The only question in the case is whether this section 134 is void or valid.

I. It is claimed by the plaintiff that it is void because it comes within the provision of section 5 of the act of

Congress of July 1, 19021 (32 U.S. Stat. L., 691), which provides "that no law impairing the obligation of contracts

shall be enacted." The royal decree of the 14th of May, 1867, provided, among other things, as follows:

ART. 76. On each pertenencia minera (mining claim) of the area prescribed in the first paragraph of article

13 (sixty thousand square meters) there shall be paid annually a fixed tax of forty escudos (about P20.00).

The pertenencia referred to in the second paragraph of the same article, though of greater area than the

others (one hundred and fifty thousand square meters), shall pay only twenty escudos (about P10.00).

ART. 78. Pertenencia of iron mines and mines of combustible minerals shall be exempt from the annual tax

for a period of thirty years from the date of publication of this decree.

ART. 80. A further tax of three per centum on the gross earnings shall be paid without deduction of costs

of any kind whatsoever. All substances enumerated in section one shall be exempt from said tax of three

per centum for a period of thirty years.

ART. 81. No other taxes than those herein mentioned shall be imposed upon mining and metallurgical

industries.

The royal decree and regulation for its enforcement provided that the deeds granted by the Government should be

in a particular form, which form was inserted in the regulations. It must be presumed that the deeds granted to

the plaintiff were made as provided by law, and, in fact, one of such concessions was exhibited during the

argument in this court, and was found to be in exact conformity with the form prescribed by law. The deed is as

follows:

Don Camilo Garcia de Polavieja, Marquez de Polavieja, Teniente General de los Ejercitos Nacionales,

Caballero Gran Cruz de la Real y Militar Orden de San Hermenegildo, de la Real y distinguida de Isabel la

Catolica, de la del Merito Militar Roja, de la de la Corona de Italia, Comendador de Carlos Tercero,

Bennemerito de la Patria en grado eminente, condecorado con varias cruses de distincion por meritos de

guerra, Capitan General y Gobernador General de Filipinas.

Whereas I have granted to Don Joaquin Casanovas y Llovet and to Don Martin Buck the concession of a

gold mine entitled "Nueva California Segunda" in the jurisdiction of Paracale, Province of Ambos

Camarines: Now, therefore, in the name of His Majesty the King (whom God preserve), and pursuant to

the provisions of article 37 of the royal decree of May 14, 1867, regulating mining in these Islands, I issue,

this fifth day of November, eighteen hundred and ninety-six, this title deed to four pertenencias,

comprising an area of two hundred and forty thousand square meters, as shown in the attached sketch

map drafted by the engineer Don Enrique Abella y Casariego, and dated at Manila December sixteenth of

the said year, subject to the following general terms and conditions:

1. That the mine shall be worked in conformity with the rules in mining, the grantee and his laborers to be

governed by the police rules established by existing regulations.

2. That the grantee shall be liable for all damages to third parties that may be caused by his operations.

3. That the grantee shall likewise indemnify his neighbors for any damage they may suffer by reason of

water accumulated on his works, if, upon being requested, he fail to drain the same within the time

indicated.

4. That he shall contribute for the drainage of the adjacent mines and for the general galleries for drainage

or haulage in proportion to the benefit he derives therefrom, whenever, by authority of the Governor-

General, such works shall be opened for a group of pertenencias or for the entire mining locality in which

the mine is situated.

5. That he shall commence work on the mine immediately upon receipt of this concession unless prevented

by force majeure.

6. That he shall keep the mine in active operation by employing at the rate of at least four laborers for

eachpertenencia for at least six months of each year.

7. That he shall strengthen the walls of the mine within the time indicated whenever, by reason of

mismanagement of the work, it threatens to cave in, unless he be prevented by force majeure.

8. That he shall not render further profitable development of the mine difficult or impossible by avaricious

operation.

9. That he shall not suspend the operation of the mine with the intention of abandoning the same without

first informing the Governor of his intention, in which case he must leave the mine in a good state of

timbering.

10. That he shall pay taxes on the mine and its output as prescribed in the royal decree.

11. Finally, that he shall comply with all the requirements contained in the royal decree and in the

regulations for concessions of the same nature as the present.

Without special conditions.

Now, therefore, by virtue of this title deed, I grant to Don Joaquin Casanovas y Llovet and to Don Martin

Buck the ownership of the said mine for an unlimited period of time so long as they shall comply with the

foregoing terms and conditions, to the end that they may develop the same and make free use and

disposition of the output thereof, with the right to alienate the said mine subject to the provisions of

existing laws, and to enjoy all the rights and benefits conceded to such grantees by the royal decree and by

the mining regulations. And for the prompt fulfillment and observance of the said conditions, both on the

part of the said grantees and by all authorities, courts, corporations, and private persons whom it may

concern, I have ordered this title deed to be issued given under my hand and the proper seal and countersigned by the undersigned Director-General of Civil Administration.

It seems very clear to us that this deed constituted a contract between the Spanish Government and the plaintiff,

the obligation of which contract was impaired by the enactment of section 134 of the Internal Revenue Law above

cited, thereby infringing the provisions above quoted from section 5 of the act of Congress of July 1, 1902. This

conclusion seems necessarily to result from the decisions of the Supreme Court of the United States in similar

cases. In the case of McGee vs. Mathis (4 Wallace, 143), it appeared that the State of Arkansas, by an act of the

legislature of 1851, provided for the sale of certain swamp lands granted to it by the United States; for the issue of

transferable scrip receivable for any lands not already taken up at the time of selection by the holder; for contracts

for the making of levees and drains, and for the payment of contractors in scrip and otherwise. In the fourteenth

section of this act it was provided that

To encourage by all just means the progress and completion of the reclaiming of such lands by offering

inducements to purchasers and contractors to take up said lands, all said swamp and overflowed lands

shall be exempt from taxation for the term of ten years or until they shall be reclaimed.

In 1855 this section was repealed and provision was made by law for the taxation of swamp and overflowed lands,

sold or to be sold, precisely as other lands. McGee, before this appeal, had become the owner by transfer from

contractors of a large amount of scrip issued under the Act of 1851, and with this scrip, after the repeal, took up

and paid for many sections and parts of sections of the granted lands. Taxes were levied by the State on the lands

so taken up by McGee. The Supreme Court held that these taxes could not be collected. The Court said at page

156:

It seems quite clear that the Act of 1851 authorizing the issue of land scrip constituted a contract between

the State and the holders of the land scrip issued under the act.

In the case of the Home of the Friendless vs. Rouse (8 Wallace, 430), it appeared that on the 3d day of February,

1853, the legislature of Missouri passed on act to incorporate the Home of the Friendless in the city of St. Louis.

Section 1 of the act provided that

All property of said corporation shall be exempt from taxation.

The court held that the State had no power afterwards to pass laws providing for the levying of taxes upon this

institution. The Court said among other things at page 438:

The validity of this contract is questioned at the bar on the ground that the legislature had no authority to

grant away the power of taxation. The answer to this position is, that the question is no longer open for

argument here, for it is settled by the repeated adjudications of this court, that a State may be contract

based on a consideration exempt the property of an individual or corporation from taxation, either for a

specified period or permanently. And it is equally well settled that the exemption is presumed to be on

sufficient consideration, and binds the State if the charter containing it is accepted.

In the case of The Asylum vs. The City of New Orleans (105 U.S., 362), it appears that St. Ariva's Asylum was

incorporated by an act of the legislature of Louisiana, approved April 29, 1853. The law incorporating it provided

that it should enjoy the same exemption from taxation which was enjoyed by the Orphan Boys' Asylum of New

Orleans. The law relating to the last named institution provided (page 364):

That, from and after the passage of this act, all the property, real and personal, belonging to the Orphan

Boys' Asylum of New Orleans be, and the same is hereby exempted from all taxation, either by the State,

parish, or city in which it is situated, any law to the contrary notwithstanding.

It was held that the State had no power by subsequent legislation to impose taxes upon the property of this

institution.

That the doctrine announced in these cases is still maintained in that court is apparent from the case of

Powersvs. The Detroit, Grand Haven and Milwaukee Railway which was decided on the 16th of April, 1906, and

reported in 201 U. S., 543. Section 9 of the act of the legislature of Michigan, incorporating the railway company,

provided:

Said company shall, on or before the 1st day of July, pay to the State treasurer, an annual tax of one per

cent on the capital stock of said company, pain in, which tax shall be in lieu of all other taxation.

The court said at page 556:

It has often been decided by this court, so often that a citation on authorities in unnecessary, that the

legislature of a State may, in the absence of special restrictions in its constitution, make a valid contract

with a corporation in respect to taxation, and that such contract can be enforced against the State at the

instance of the corporation.

The case at bar falls within the cases hereinbefore cited. It is to be distinguished from the case of the Metropolitan

Street Railway Company vs. The New