Diaz vs. Secretary of Finance

Information | Reference

Case Title: RENATO V. DIAZ and AURORA MA.F. TIMBOL, petitioners, vs. THESECRETARY OF FINANCE and THECOMMISSIONER OF INTERNALREVENUE, respondents.

Citation: 654 SCRA 96

More...

Search Result

G.R. No. 193007. July 19, 2011.*

RENATO V. DIAZ and AURORA MA. F. TIMBOL, petitioners, vs.THE SECRETARY OF FINANCE and THE COMMISSIONER OFINTERNAL REVENUE, respondents.

Taxation; Value Added Tax (VAT); Tollways; Declaratory Relief;Prohibition; A petition for declaratory relief may be treated as one forprohibition if the case has far-reaching implications and raisesquestions that need to be resolved for the public good; A petition forprohibition is a proper remedy to prohibit or nullify acts of executiveofficials that amount to usurpation of legislative author-

_______________

* EN BANC.

97

VOL. 654, JULY 19, 2011 97

Diaz vs. Secretary of Finance

ity.·On August 24, 2010 the Court issued a resolution, treating thepetition as one for prohibition rather than one for declaratory relief,the characterization that petitioners Diaz and Timbol gave theiraction. The government has sought reconsideration of the CourtÊsresolution, however, arguing that petitionersÊ allegations clearly madeout a case for declaratory relief, an action over which the Court hasno original jurisdiction. The government adds, moreover, that thepetition does not meet the requirements of Rule 65 for actions forprohibition since the BIR did not exercise judicial, quasi-judicial, orministerial functions when it sought to impose VAT on toll fees.Besides, petitioners Diaz and Timbol has a plain, speedy, andadequate remedy in the ordinary course of law against the BIR actionin the form of an appeal to the Secretary of Finance. But there areprecedents for treating a petition for declaratory relief as one forprohibition if the case has far-reaching implications and raisesquestions that need to be resolved for the public good. The Court hasalso held that a petition for prohibition is a proper remedy to prohibitor nullify acts of executive officials that amount to usurpation oflegislative authority.

Same; Same; Same; Pleadings, Practice and Procedure; Theimposition of value added tax (VAT) on toll fees has far-reachingimplications; The Supreme Court has ample power to waive technicalrequirements when the legal questions to be resolved are of greatimportance to the public.·The imposition of VAT on toll fees has far-reaching implications. Its imposition would impact, not only on themore than half a million motorists who use the tollways everyday, butmore so on the governmentÊs effort to raise revenue for fundingvarious projects and for reducing budgetary deficits. To dismiss thepetition and resolve the issues later, after the challenged VAT hasbeen imposed, could cause more mischief both to the tax-payingpublic and the government. A belated declaration of nullity of the BIRaction would make any attempt to refund to the motorists what theypaid an administrative nightmare with no solution. Consequently, itis not only the right, but the duty of the Court to take cognizance ofand resolve the issues that the petition raises. Although the petitiondoes not strictly comply with the requirements of Rule 65, the Courthas ample power to waive such technical requirements when the legalquestions to be resolved are of great importance to the public. Thesame may be said of the requirement of locus standi which is a mereprocedural requisite.98

Close Reader

SUPREME COURT REPORTS ANNOTATED VOLUME 654

98 SUPREME COURT REPORTS ANNOTATED


Same; Same; Same; Words and Phrases; The law imposes value addedtax (VAT) on „all kinds of services‰ rendered in the Philippines for afee, including those specified in the list·every activity that can beimagined as a form of „service‰ rendered for a fee should be deemedincluded unless some provision of law especially excludes it.·It isplain from the above that the law imposes VAT on „all kinds ofservices‰ rendered in the Philippines for a fee, including thosespecified in the list. The enumeration of affected services is notexclusive. By qualifying „services‰ with the words „all kinds,‰Congress has given the term „services‰ an all-encompassing meaning.The listing of specific services are intended to illustrate howpervasive and broad is the VATÊs reach rather than establish concretelimits to its application. Thus, every activity that can be imagined asa form of „service‰ rendered for a fee should be deemed includedunless some provision of law especially excludes it.

Same; Same; Same; When a tollway operator takes a toll fee from amotorist, the fee is in effect for the latterÊs use of the tollway facilitiesover which the operator enjoys private proprietary rights that itscontract and the law recognize.·Now, do tollway operators renderservices for a fee? Presidential Decree (P.D.) 1112 or the TollOperation Decree establishes the legal basis for the services thattollway operators render. Essentially, tollway operators construct,maintain, and operate expressways, also called tollways, at theoperatorsÊ expense. Tollways serve as alternatives to regular publichighways that meander through populated areas and branch out tolocal roads. Traffic in the regular public highways is for this reasonslow-moving. In consideration for constructing tollways at theirexpense, the operators are allowed to collect government-approvedfees from motorists using the tollways until such operators could fullyrecover their expenses and earn reasonable returns from theirinvestments. When a tollway operator takes a toll fee from a motorist,the fee is in effect for the latterÊs use of the tollway facilities overwhich the operator enjoys private proprietary rights that its contractand the law recognize. In this sense, the tollway operator is nodifferent from the following service providers under Section 108 whoallow others to use their properties or facilities for a fee: 1. Lessors ofproperty, whether personal or real; 2. Warehousing service operators;3. Lessors or distributors of cinematographic films; 4. Proprietors,operators or keepers of hotels, motels, resthouses, pension houses,inns, resorts; 5. Lending investors (for use of money); 6.

99

VOL. 654, JULY 19, 2011 99


Transportation contractors on their transport of goods or cargoes,including persons who transport goods or cargoes for hire and otherdomestic common carriers by land relative to their transport of goodsor cargoes; and 7. Common carriers by air and sea relative to theirtransport of passengers, goods or cargoes from one place in thePhilippines to another place in the Philippines.

Same; Same; Same; Franchises; Words and Phrases; Tollwayoperators are franchise grantees and they do not belong to exceptionsthat Section 119 spares from the payment of value added tax (VAT);The word „franchise‰ broadly covers government grants of a specialright to do an act or series of acts of public concern.·And not only dotollway operators come under the broad term „all kinds of services,‰they also come under the specific class described in Section 108 as „allother franchise grantees‰ who are subject to VAT, „except those underSection 119 of this Code.‰ Tollway operators are franchise granteesand they do not belong to exceptions (the low-income radio and/ortelevision broadcasting companies with gross annual incomes of lessthan P10 million and gas and water utilities) that Section 119 sparesfrom the payment of VAT. The word „franchise‰ broadly coversgovernment grants of a special right to do an act or series of acts ofpublic concern.

Same; Same; Same; Same; Nothing in Section 108 of the National

Internal Revenue Code indicates that the „franchise grantees‰ it speaksof are those who hold legislative franchises; The term „franchise‰ hasbeen broadly construed as referring, not only to authorizations thatCongress directly issues in the form of a special law, but also to thosegranted by administrative agencies to which the power to grantfranchises has been delegated by Congress.·Petitioners of coursecontend that tollway operators cannot be considered „franchisegrantees‰ under Section 108 since they do not hold legislativefranchises. But nothing in Section 108 indicates that the „franchisegrantees‰ it speaks of are those who hold legislative franchises.Petitioners give no reason, and the Court cannot surmise any, formaking a distinction between franchises granted by Congress andfranchises granted by some other government agency. The latter,properly constituted, may grant franchises. Indeed, franchisesconferred or granted by local authorities, as agents of the state,constitute as much a legislative franchise as though the grant hadbeen made by Congress itself. The term „franchise‰ has been broadly

100



construed as referring, not only to authorizations that Congressdirectly issues in the form of a special law, but also to those grantedby administrative agencies to which the power to grant franchises hasbeen delegated by Congress.

Same; Same; Same; Statutory Construction; Statements made byindividual members of Congress in the consideration of a bill do notnecessarily reflect the sense of that body and are, consequently, notcontrolling in the interpretation of law·the congressional will isultimately determined by the language of the law that the lawmakersvoted on.·Nor can petitioners cite as binding on the Courtstatements made by certain lawmakers in the course of congressionaldeliberations of the would-be law. As the Court said in South AfricanAirways v. Commissioner of Internal Revenue, 612 SCRA 665 (2010),„statements made by individual members of Congress in theconsideration of a bill do not necessarily reflect the sense of that bodyand are, consequently, not controlling in the interpretation of law.‰The congressional will is ultimately determined by the language ofthe law that the lawmakers voted on. Consequently, the meaning andintention of the law must first be sought „in the words of the statuteitself, read and considered in their natural, ordinary, commonlyaccepted and most obvious significations, according to good andapproved usage and without resorting to forced or subtleconstruction.‰

Same; Same; Same; Tollway fees are not taxes.·As can be seen, thediscussion in the MIAA case on toll roads and toll fees was made, notto establish a rule that tollway fees are userÊs tax, but to make thepoint that airport lands and buildings are properties of publicdominion and that the collection of terminal fees for their use doesnot make them private properties. Tollway fees are not taxes. Indeed,they are not assessed and collected by the BIR and do not go to thegeneral coffers of the government. It would of course be anothermatter if Congress enacts a law imposing a userÊs tax, collectible frommotorists, for the construction and maintenance of certain roadways.The tax in such a case goes directly to the government for thereplenishment of resources it spends for the roadways. This is not thecase here. What the government seeks to tax here are fees collectedfrom tollways that are constructed, maintained, and operated byprivate tollway operators at their own expense under the build,operate, and transfer scheme that the government has

101

VOL. 654, JULY 19, 2011 101


adopted for expressways. Except for a fraction given to thegovernment, the toll fees essentially end up as earnings of the tollway

operators.

Same; Same; Same; A tax is imposed under the taxing power of thegovernment principally for the purpose of raising revenues to fundpublic expenditures while toll fees are collected by private tollwayoperators as reimbursement for the costs and expenses incurred in theconstruction, maintenance and operation of the tollways, as well as toassure them a reasonable margin of income.·In sum, fees paid by thepublic to tollway operators for use of the tollways, are not taxes inany sense. A tax is imposed under the taxing power of the governmentprincipally for the purpose of raising revenues to fund publicexpenditures. Toll fees, on the other hand, are collected by privatetollway operators as reimbursement for the costs and expensesincurred in the construction, maintenance and operation of thetollways, as well as to assure them a reasonable margin of income.Although toll fees are charged for the use of public facilities,therefore, they are not government exactions that can be properlytreated as a tax. Taxes may be imposed only by the government underits sovereign authority, toll fees may be demanded by either thegovernment or private individuals or entities, as an attribute ofownership.

Same; Same; Same; Value added tax (VAT) on tollway operationscannot be deemed a tax on tax due to the nature of VAT as an indirecttax; Once shifted, the value added tax (VAT) ceases to be a tax andsimply becomes part of the cost that the buyer must pay in order topurchase the good, property or service.·Parenthetically, VAT ontollway operations cannot be deemed a tax on tax due to the nature ofVAT as an indirect tax. In indirect taxation, a distinction is madebetween the liability for the tax and burden of the tax. The seller whois liable for the VAT may shift or pass on the amount of VAT it paid ongoods, properties or services to the buyer. In such a case, what istransferred is not the selleÊs liability but merely the burden of theVAT. Thus, the seller remains directly and legally liable for paymentof the VAT, but the buyer bears its burden since the amount of VATpaid by the former is added to the selling price. Once shifted, the VATceases to be a tax and simply becomes part of the cost that the buyermust pay in order to purchase the good, property or service.Consequently, VAT on tollway operations is not

102



really a tax on the tollway user, but on the tollway operator. UnderSection 105 of the Code, VAT is imposed on any person who, in thecourse of trade or business, sells or renders services for a fee. In otherwords, the seller of services, who in this case is the tollway operator,is the person liable for VAT. The latter merely shifts the burden ofVAT to the tollway user as part of the toll fees.

Same; Same; Same; Parties; Non-Impairment Clause; A person whowill neither be prejudiced by nor be affected by the alleged diminutionin return of investments that may result from the value added tax(VAT) imposition has no personality to invoke the non-impairment ofcontract clause on behalf of private investors in the tollway projects.·Petitioner Timbol has no personality to invoke the non-impairment ofcontract clause on behalf of private investors in the tollway projects.She will neither be prejudiced by nor be affected by the allegeddiminution in return of investments that may result from the VATimposition. She has no interest at all in the profits to be earned underthe TOAs. The interest in and right to recover investments solelybelongs to the private tollway investors.

Same; Same; Same; The Court cannot rule on matters that aremanifestly conjectural, and neither can it prohibit the State fromexercising its sovereign taxing power based on uncertain, propheticgrounds.·Besides, her allegation that the private investorsÊ rate ofrecovery will be adversely affected by imposing VAT on tollwayoperations is purely speculative. Equally presumptuous is herassertion that a stipulation in the TOAs known as the MaterialAdverse Grantor Action will be activated if VAT is thus imposed. TheCourt cannot rule on matters that are manifestly conjectural. Neithercan it prohibit the State from exercising its sovereign taxing powerbased on uncertain, prophetic grounds.

Same; Same; Same; Administrative feasibility, one of the canons of a

sound tax system, simply means that the tax system should be capableof being effectively administered and enforced with the leastinconvenience to the taxpayer; Even if the imposition of value addedtax (VAT) on tollway operations may seem burdensome to implement,it is not necessarily invalid unless some aspect of it is shown to violateany law or the Constitution.·Administrative feasibility is one of thecanons of a sound tax system. It simply means that the tax systemshould be capable of being effectively administered and enforced withthe least inconvenience to the taxpayer.

103

VOL. 654, JULY 19, 2011 103


Non-observance of the canon, however, will not render a taximposition invalid „except to the extent that specific constitutional orstatutory limitations are impaired.‰ Thus, even if the imposition ofVAT on tollway operations may seem burdensome to implement, it isnot necessarily invalid unless some aspect of it is shown to violate anylaw or the Constitution. Here, it remains to be seen how the taxingauthority will actually implement the VAT on tollway operations. Anydeclaration by the Court that the manner of its implementation isillegal or unconstitutional would be premature. Although thetranscript of the August 12, 2010 Senate hearing provides some clueas to how the BIR intends to go about it, the facts pertaining to thematter are not sufficiently established for the Court to pass judgmenton. Besides, any concern about how the VAT on tollway operationswill be enforced must first be addressed to the BIR on whom the taskof implementing tax laws primarily and exclusively rests. The Courtcannot preempt the BIRÊs discretion on the matter, absent any clearviolation of law or the Constitution.

Same; Same; Same; Parties; The right to claim the 2% transitionalinput value added tax (VAT) belongs to the tollway operators who havenot questioned the Bureau of Internal Revenue Revenue MemorandumCircular (BIR RMC) 63-2010Ês validity.·For the same reason, theCourt cannot prematurely declare as illegal, BIR RMC 63-2010 whichdirects toll companies to record an accumulated input VAT of zerobalance in their books as of August 16, 2010, the date when the VATimposition was supposed to take effect. The issuance allegedlyviolates Section 111(A) of the Code which grants first time VAT payersa transitional input VAT of 2% on beginning inventory. In thisconnection, the BIR explained that BIR RMC 63-2010 is actually theproduct of negotiations with tollway operators who have beenassessed VAT as early as 2005, but failed to charge VAT-inclusive tollfees which by now can no longer be collected. The tollway operatorsagreed to waive the 2% transitional input VAT, in exchange forcancellation of their past due VAT liabilities. Notably, the right toclaim the 2% transitional input VAT belongs to the tollway operatorswho have not questioned the circularÊs validity. They are thus theones who have a right to challenge the circular in a direct and properaction brought for the purpose.

Same; Same; Same; Statutory Construction; If the legislative intentwas to exempt tollway operations from value added tax (VAT),

104



as petitioners so strongly allege, then it would have been well for thelaw to clearly say so.·In fine, the Commissioner of Internal Revenuedid not usurp legislative prerogative or expand the VAT lawÊscoverage when she sought to impose VAT on tollway operations.Section 108(A) of the Code clearly states that services of all otherfranchise grantees are subject to VAT, except as may be providedunder Section 119 of the Code. Tollway operators are not among thefranchise grantees subject to franchise tax under the latter provision.Neither are their services among the VAT-exempt transactions under

Section 109 of the Code. If the legislative intent was to exempttollway operations from VAT, as petitioners so strongly allege, then it

would have been well for the law to clearly say so. Tax exemptionsmust be justified by clear statutory grant and based on language inthe law too plain to be mistaken. But as the law is written, no suchexemption obtains for tollway operators. The Court is thus duty-bound to simply apply the law as it is found.

Same; Same; Same; Separation of Powers; The grant of tax exemptionis a matter of legislative policy that is within the exclusive prerogativeof Congress.·The grant of tax exemption is a matter of legislativepolicy that is within the exclusive prerogative of Congress. TheCourtÊs role is to merely uphold this legislative policy, as reflectedfirst and foremost in the language of the tax statute. Thus, anyunwarranted burden that may be perceived to result from enforcingsuch policy must be properly referred to Congress. The Court has nodiscretion on the matter but simply applies the law.

Same; Same; Same; Same; The executive exercises exclusive discretionin matters pertaining to the implementation and execution of tax laws·it is more properly suited to deal with the immediate and practicalconsequences of the value added tax (VAT) imposition.·The VAT onfranchise grantees has been in the statute books since 1994 whenR.A. 7716 or the Expanded Value-Added Tax law was passed. It isonly now, however, that the executive has earnestly pursued the VATimposition against tollway operators. The executive exercisesexclusive discretion in matters pertaining to the implementation andexecution of tax laws. Consequently, the executive is more properlysuited to deal with the immediate and practical consequences of theVAT imposition.

105

VOL. 654, JULY 19, 2011 105


PETITION FOR DECLARATORY RELIEF in the Supreme Court.

The facts are stated in the opinion of the Court.

Ma. Rica A. Gatchalian for petitioners.

The Solicitor General for respondents.

ABAD, J.:

May toll fees collected by tollway operators be subjected to value-added tax?

The Facts and the Case

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners)filed this petition for declaratory relief1 assailing the validity of theimpending imposition of value-added tax (VAT) by the Bureau ofInternal Revenue (BIR) on the collections of tollway operators.

Petitioners claim that, since the VAT would result in increased tollfees, they have an interest as regular users of tollways in stopping theBIR action. Additionally, Diaz claims that he sponsored the approvalof Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) andRepublic Act 8424 (the 1997 National Internal Revenue Code or theNIRC) at the House of Representatives. Timbol, on the other hand,claims that she served as Assistant Secretary of the Department ofTrade and Industry and consultant of the Toll Regulatory Board(TRB) in the past administration.

Petitioners allege that the BIR attempted during the administrationof President Gloria Macapagal-Arroyo to impose VAT on toll fees. Theimposition was deferred, however, in view of the consistent oppositionof Diaz and other sectors to such move. But, upon President BenignoC. Aquino IIIÊs as-

_______________

1 Rollo, pp. 3-14.

106



sumption of office in 2010, the BIR revived the idea and would imposethe challenged tax on toll fees beginning August 16, 2010 unlessjudicially enjoined.

Petitioners hold the view that Congress did not, when it enacted theNIRC, intend to include toll fees within the meaning of „sale ofservices‰ that are subject to VAT; that a toll fee is a „userÊs tax,‰ not asale of services; that to impose VAT on toll fees would amount to a taxon public service; and that, since VAT was never factored into theformula for computing toll fees, its imposition would violate the non-impairment clause of the constitution.

On August 13, 2010 the Court issued a temporary restraining order(TRO), enjoining the implementation of the VAT. The Court requiredthe government, represented by respondents Cesar V. Purisima,Secretary of the Department of Finance, and Kim S. Jacinto-Henares,Commissioner of Internal Revenue, to comment on the petition within10 days from notice.2 Later, the Court issued another resolutiontreating the petition as one for prohibition.3

On August 23, 2010 the Office of the Solicitor General filed thegovernmentÊs comment.4 The government avers that the NIRCimposes VAT on all kinds of services of franchise grantees, includingtollway operations, except where the law provides otherwise; that theCourt should seek the meaning and intent of the law from the wordsused in the statute; and that the imposition of VAT on tollwayoperations has been the subject as early as 2003 of several BIRrulings and circulars.5

_______________

2 Id., at pp. 63-64.

3 Id., at pp. 143-144.

4 Id., at pp. 73-135.

5 The OSG cites VAT Ruling 045-03 (October 13, 2003) issued by then DeputyCommissioner Jose Mario Bunag in response to a query by the Philippine NationalConstruction Corporation (PNCC) on its VAT liability as operator of the South andNorth Luzon expressways. PNCC was informed „that with the promulgation of R.A.7716 restructuring the VAT system, services of all franchise

107

VOL. 654, JULY 19, 2011 107


The government also argues that petitioners have no right to invokethe non-impairment of contracts clause since they clearly have nopersonal interest in existing toll operating agreements (TOAs)between the government and tollway operators. At any rate, the non-impairment clause cannot limit the StateÊs sovereign taxing powerwhich is generally read into contracts.

Finally, the government contends that the non-inclusion of VAT in theparametric formula for computing toll rates cannot exempt tollwayoperators from VAT. In any event, it cannot be claimed that the rightsof tollway operators to a reasonable rate of return will be impaired bythe VAT since this is imposed on top of the toll rate. Further, theimposition of VAT on toll fees would have very minimal effect onmotorists using the tollways.

In their reply6 to the governmentÊs comment, petitioners point outthat tollway operators cannot be regarded as franchise granteesunder the NIRC since they do not hold legislative franchises. Further,the BIR intends to collect the VAT by rounding off the toll rate andputting any excess collection in an escrow account. But this would beillegal since only the Congress can modify VAT rates and authorize itsdisbursement. Finally, BIR Revenue Memorandum Circular 63-2010(BIR RMC 63-2010), which directs toll companies to record an

accumulated input VAT of zero balance in their books as of August 16,

2010, contravenes Section 111 of the NIRC which grants entities thatfirst become liable to VAT a transitional input tax credit of 2% onbeginning inventory. For this reason, the VAT on toll fees cannot beimplemented.

_______________

grantees, x x x are already subject to VAT.‰ The ruling was apparently clarified andreiterated in BIR Revenue Memorandum Circulars 52-2005 (September 28, 2005), 72-2009 (December 21, 2009) and 30-2010 (March 26, 2010).

6 Rollo, pp. 153-201.

108



The Issues Presented

The case presents two procedural issues:

1. Whether or not the Court may treat the petition for declaratory relief asone for prohibition; and

2. Whether or not petitioners Diaz and Timbol have legal standing to filethe action.

The case also presents two substantive issues:

1. Whether or not the government is unlawfully expanding VAT coverageby including tollway operators and tollway operations in the terms„franchise grantees‰ and „sale of services‰ under Section 108 of the Code; and

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

The CourtÊs Rulings

A. On the Procedural Issues:

On August 24, 2010 the Court issued a resolution, treating thepetition as one for prohibition rather than one for declaratory relief,the characterization that petitioners Diaz and Timbol gave theiraction. The government has sought reconsideration of the CourtÊsresolution,7 however, arguing that petitionersÊ allegations clearlymade out a case for declaratory relief, an action over which the Courthas no original jurisdiction. The government adds, moreover, that thepetition does not meet the requirements of Rule 65 for actions forprohibition since the BIR did not exercise judicial, quasi-judicial, orministerial functions when it sought to impose VAT on toll

_______________

7 Id., at pp. 457-476.

109

VOL. 654, JULY 19, 2011 109


fees. Besides, petitioners Diaz and Timbol has a plain, speedy, andadequate remedy in the ordinary course of law against the BIR actionin the form of an appeal to the Secretary of Finance.

But there are precedents for treating a petition for declaratory reliefas one for prohibition if the case has far-reaching implications andraises questions that need to be resolved for the public good.8 TheCourt has also held that a petition for prohibition is a proper remedyto prohibit or nullify acts of executive officials that amount tousurpation of legislative authority.9Here, the imposition of VAT on toll fees has far-reaching implications.Its imposition would impact, not only on the more than half a million

motorists who use the tollways everyday, but more so on thegovernmentÊs effort to raise revenue for funding various projects andfor reducing budgetary deficits.

To dismiss the petition and resolve the issues later, after thechallenged VAT has been imposed, could cause more mischief both tothe tax-paying public and the government. A belated declaration ofnullity of the BIR action would make any attempt to refund to themotorists what they paid an administrative nightmare with nosolution. Consequently, it is not only the right, but the duty of theCourt to take cognizance of and resolve the issues that the petitionraises.

Although the petition does not strictly comply with the requirementsof Rule 65, the Court has ample power to waive such technicalrequirements when the legal questions to be resolved are of greatimportance to the public. The same may

_______________

8 Macasiano v. National Housing Authority, G.R. No. 107921, July 1, 1993, 224SCRA 236, 243.

9 See Ernesto B. Francisco, Jr. and Jose Ma. O. Hizon v. Toll Regulatory Board,G.R. No. 166910, October 19, 2010, 633 SCRA 470.

110



be said of the requirement of locus standi which is a mere proceduralrequisite.10

B. On the Substantive Issues:

One. The relevant law in this case is Section 108 of the NIRC, asamended. VAT is levied, assessed, and collected, according to Section108, on the gross receipts derived from the sale or exchange ofservices as well as from the use or lease of properties. The thirdparagraph of Section 108 defines „sale or exchange of services‰ asfollows:

„The phrase Âsale or exchange of servicesÊ means the performance ofall kinds of services in the Philippines for others for a fee,remuneration or consideration, including those performed orrendered by construction and service contractors; stock, real estate,commercial, customs and immigration brokers; lessors of property,whether personal or real; warehousing services; lessors ordistributors of cinematographic films; persons engaged in milling,processing, manufacturing or repacking goods for others;proprietors, operators or keepers of hotels, motels, resthouses,pension houses, inns, resorts; proprietors or operators ofrestaurants, refreshment parlors, cafes and other eating places,including clubs and caterers; dealers in securities; lendinginvestors; transportation contractors on their transport of goods orcargoes, including persons who transport goods or cargoes for hireand other domestic common carriers by land relative to theirtransport of goods or cargoes; common carriers by air and searelative to their transport of passengers, goods or cargoes from oneplace in the Philippines to another place in the Philippines; sales ofelectricity by generation companies, transmission, and distributioncompanies; services of franchise grantees of electric utilities,telephone and telegraph, radio and television broadcasting and allother franchise grantees except those under Section 119 of this Codeand non-life insurance companies (except their crop

_______________

10 Id.

111

VOL. 654, JULY 19, 2011 111


insurances), including surety, fidelity, indemnity and bondingcompanies; and similar services regardless of whether or not theperformance thereof calls for the exercise or use of the physical ormental faculties.‰ (Underscoring supplied)

It is plain from the above that the law imposes VAT on „all kinds ofservices‰ rendered in the Philippines for a fee, including thosespecified in the list. The enumeration of affected services is notexclusive.11 By qualifying „services‰ with the words „all kinds,‰Congress has given the term „services‰ an all-encompassing meaning.The listing of specific services are intended to illustrate howpervasive and broad is the VATÊs reach rather than establish concretelimits to its application. Thus, every activity that can be imagined asa form of „service‰ rendered for a fee should be deemed includedunless some provision of law especially excludes it.

Now, do tollway operators render services for a fee? PresidentialDecree (P.D.) 1112 or the Toll Operation Decree establishes the legalbasis for the services that tollway operators render. Essentially,tollway operators construct, maintain, and operate expressways, alsocalled tollways, at the operatorsÊ expense. Tollways serve asalternatives to regular public highways that meander throughpopulated areas and branch out to local roads. Traffic in the regularpublic highways is for this reason slow-moving. In consideration forconstructing tollways at their expense, the operators are allowed tocollect government-approved fees from motorists using the tollwaysuntil such operators could fully recover their expenses and earnreasonable returns from their investments.

When a tollway operator takes a toll fee from a motorist, the fee is ineffect for the latterÊs use of the tollway facilities over which theoperator enjoys private proprietary rights12

_______________

11 Commissioner of Internal Revenue v. SM Primeholdings, Inc., G.R. No. 183505,February 26, 2010, 613 SCRA 774, 788.

12 See North Negros Sugar Co. v. Hidalgo, 63 Phil. 664, 690 (1936).

112



that its contract and the law recognize. In this sense, the tollwayoperator is no different from the following service providers underSection 108 who allow others to use their properties or facilities for afee:

„1. Lessors of property, whether personal or real;

2. Warehousing service operators;

3. Lessors or distributors of cinematographic films;

4. Proprietors, operators or keepers of hotels, motels, resthouses, pensionhouses, inns, resorts;

5. Lending investors (for use of money);

6. Transportation contractors on their transport of goods or cargoes,including persons who transport goods or cargoes for hire and other domesticcommon carriers by land relative to their transport of goods or cargoes; and

7. Common carriers by air and sea relative to their transport of passengers,goods or cargoes from one place in the Philippines to another place in thePhilippines.‰

It does not help petitionersÊ cause that Section 108 subjects to VAT„all kinds of services‰ rendered for a fee „regardless of whether or notthe performance thereof calls for the exercise or use of the physical ormental faculties.‰ This means that „services‰ to be subject to VATneed not fall under the traditional concept of services, the personal or

professional kinds that require the use of human knowledge and

skills.

And not only do tollway operators come under the broad term „allkinds of services,‰ they also come under the specific class described inSection 108 as „all other franchise grantees‰ who are subject to VAT,„except those under Section 119 of this Code.‰

Tollway operators are franchise grantees and they do not belong toexceptions (the low-income radio and/or television broadcastingcompanies with gross annual incomes of less than P10 million andgas and water utilities) that Section

113

VOL. 654, JULY 19, 2011 113


11913 spares from the payment of VAT. The word „franchise‰ broadlycovers government grants of a special right to do an act or series ofacts of public concern.14

Petitioners of course contend that tollway operators cannot beconsidered „franchise grantees‰ under Section 108 since they do nothold legislative franchises. But nothing in Section 108 indicates thatthe „franchise grantees‰ it speaks of are those who hold legislativefranchises. Petitioners give no reason, and the Court cannot surmiseany, for making a distinction between franchises granted by Congressand franchises granted by some other government agency. The latter,properly constituted, may grant franchises. Indeed, franchisesconferred or granted by local authorities, as agents of the state,constitute as much a legislative franchise as though the grant hadbeen made by Congress itself.15 The term „franchise‰ has beenbroadly construed as referring, not only to authorizations thatCongress directly issues in the form of a special law, but also to thosegranted by administrative agen-

_______________

13 SEC. 119. Tax on Franchises.·Any provision of general or special law to thecontrary notwithstanding, there shall be levied, assessed and collected in respect toall franchises on radio and/or television broadcasting companies whose annual grossreceipts of the preceding year do not exceed Ten million pesos (P10,000,000), subjectto Section 236 of this Code, a tax of three percent (3%) and on electric, gas and waterutilities, a tax of two percent (2%) on the gross receipts derived from the businesscovered by the law granting the franchise: Provided, however, That radio andtelevision broadcasting companies referred to in this Section shall have an option tobe registered as a value-added taxpayer and pay the tax due thereon; Provided,further, That once the option is exercised, said option shall be irrevocable.

14 Associated Communications & Wireless Services v. NationalTelecommunications Commission, 445 Phil. 621, 641; 397 SCRA 574, 595 (2003).

15 Philippine Airlines, Inc. v. Civil Aeronautics Board, 337 Phil. 254, 265; 270SCRA 538, 550 (1997).

114



cies to which the power to grant franchises has been delegated byCongress.16

Tollway operators are, owing to the nature and object of theirbusiness, „franchise grantees.‰ The construction, operation, andmaintenance of toll facilities on public improvements are activities ofpublic consequence that necessarily require a special grant ofauthority from the state. Indeed, Congress granted special franchisefor the operation of tollways to the Philippine National ConstructionCompany, the former tollway concessionaire for the North and SouthLuzon Expressways. Apart from Congress, tollway franchises mayalso be granted by the TRB, pursuant to the exercise of its delegated

powers under P.D. 1112.17 The franchise in this case is evidenced by a„Toll Operation Certificate.‰18

Petitioners contend that the public nature of the services rendered bytollway operators excludes such services from the term „sale ofservices‰ under Section 108 of the Code. But, again, nothing inSection 108 supports this contention. The reverse is true. Inspecifically including by way of example electric utilities, telephone,telegraph, and broadcasting companies in its list of VAT-coveredbusinesses, Section 108 opens other companies rendering publicservice for a fee to the imposition of VAT. Businesses of a publicnature such as public utilities and the collection of tolls or charges forits use or service is a franchise.19

Nor can petitioners cite as binding on the Court statements made bycertain lawmakers in the course of congressional deliberations of thewould-be law. As the Court said in South African Airways v.Commissioner of Internal Revenue,20

_______________

16 Metropolitan Cebu Water District v. Adala, G.R. No. 168914, July 4, 2007, 526SCRA 465, 476.

17 Supra note 9.

18 Section 3(e), P.D. 1112.

19 36 Am Jur 2d S3.

20 G.R. No. 180356, February 16, 2010, 612 SCRA 665, 676.

115

VOL. 654, JULY 19, 2011 115


„statements made by individual members of Congress in theconsideration of a bill do not necessarily reflect the sense of that bodyand are, consequently, not controlling in the interpretation of law.‰The congressional will is ultimately determined by the language ofthe law that the lawmakers voted on. Consequently, the meaning andintention of the law must first be sought „in the words of the statuteitself, read and considered in their natural, ordinary, commonlyaccepted and most obvious significations, according to good andapproved usage and without resorting to forced or subtleconstruction.‰

Two. Petitioners argue that a toll fee is a „userÊs tax‰ and to imposeVAT on toll fees is tantamount to taxing a tax.21 Actually, petitionersbase this argument on the following discussion in ManilaInternational Airport Authority (MIAA) v. Court of Appeals:22

„No one can dispute that properties of public dominion mentionedin Article 420 of the Civil Code, like „roads, canals, rivers, torrents,ports and bridges constructed by the State,‰ are owned by the State.The term „ports‰ includes seaports and airports. The MIAA AirportLands and Buildings constitute a „port‰ constructed by the State.Under Article 420 of the Civil Code, the MIAA Airport Lands andBuildings are properties of public dominion and thus owned by theState or the Republic of the Philippines.

x x x The operation by the government of a tollway does not changethe character of the road as one for public use. Someone must payfor the maintenance of the road, either the public indirectly throughthe taxes they pay the government, or only those among the publicwho actually use the road through the toll fees they pay upon usingthe road. The tollway system is even a more efficient and equitablemanner of taxing the public for the maintenance of public roads.

The charging of fees to the public does not determine the characterof the property whether it is for public domin-

_______________

21 Rollo, p. 517.

22 G.R. No. 155650, July 20, 2006, 495 SCRA 591.

116



ion or not. Article 420 of the Civil Code defines property of publicdominion as „one intended for public use.‰ Even if the governmentcollects toll fees, the road is still „intended for public use‰ if anyonecan use the road under the same terms and conditions as the rest ofthe public. The charging of fees, the limitation on the kind ofvehicles that can use the road, the speed restrictions and otherconditions for the use of the road do not affect the public characterof the road.

The terminal fees MIAA charges to passengers, as well as thelanding fees MIAA charges to airlines, constitute the bulk of theincome that maintains the operations of MIAA. The collection ofsuch fees does not change the character of MIAA as an airport forpublic use. Such fees are often termed userÊs tax. This means taxingthose among the public who actually use a public facility instead oftaxing all the public including those who never use the particularpublic facility. A userÊs tax is more equitable·a principle of taxationmandated in the 1987 Constitution.‰23 (Underscoring supplied)

Petitioners assume that what the Court said above, equating terminalfees to a „userÊs tax‰ must also pertain to tollway fees. But the mainissue in the MIAA case was whether or not Parañaque City could sellairport lands and buildings under MIAA administration at publicauction to satisfy unpaid real estate taxes. Since local governmentshave no power to tax the national government, the Court held thatthe City could not proceed with the auction sale. MIAA forms part ofthe national government although not integrated in the departmentframework.‰24 Thus, its airport lands and buildings are properties ofpublic dominion beyond the commerce of man under Article 420(1)25of the Civil Code and could not be sold at public auction.

_______________

23 Id., at pp. 622-623.

24 Id., at p. 618.

25 Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents,ports and bridges constructed by the State,

117

VOL. 654, JULY 19, 2011 117


As can be seen, the discussion in the MIAA case on toll roads and tollfees was made, not to establish a rule that tollway fees are userÊs tax,but to make the point that airport lands and buildings are propertiesof public dominion and that the collection of terminal fees for theiruse does not make them private properties. Tollway fees are nottaxes. Indeed, they are not assessed and collected by the BIR and donot go to the general coffers of the government.

It would of course be another matter if Congress enacts a lawimposing a userÊs tax, collectible from motorists, for the constructionand maintenance of certain roadways. The tax in such a case goesdirectly to the government for the replenishment of resources itspends for the roadways. This is not the case here. What thegovernment seeks to tax here are fees collected from tollways that areconstructed, maintained, and operated by private tollway operators attheir own expense under the build, operate, and transfer scheme thatthe government has adopted for expressways.26 Except for a fractiongiven to the government, the toll fees essentially end up as earningsof the tollway operators.

In sum, fees paid by the public to tollway operators for use of thetollways, are not taxes in any sense. A tax is imposed under the

taxing power of the government principally for the purpose of raisingrevenues to fund public expenditures.27 Toll fees, on the other hand,are collected by private tollway operators as reimbursement for the

costs and expenses incurred in the construction, maintenance andoperation of the tollways, as well as to assure them a reasonablemargin of income. Although toll fees are charged for the use of publicfacilities, therefore, they are not government exactions that can be

_______________

banks, shores, roadsteads, and others of similar character;

x x x x

26 See first and third „Whereas Clause‰ of P.D. 1112.

27 See Law of Basic Taxation in the Philippines (Revised Ed.), Benjamin B. Aban,p. 14.

118



properly treated as a tax. Taxes may be imposed only by thegovernment under its sovereign authority, toll fees may be demandedby either the government or private individuals or entities, as anattribute of ownership.28

Parenthetically, VAT on tollway operations cannot be deemed a tax ontax due to the nature of VAT as an indirect tax. In indirect taxation, adistinction is made between the liability for the tax and burden of thetax. The seller who is liable for the VAT may shift or pass on theamount of VAT it paid on goods, properties or services to the buyer. Insuch a case, what is transferred is not the sellerÊs liability but merelythe burden of the VAT.29

Thus, the seller remains directly and legally liable for payment of theVAT, but the buyer bears its burden since the amount of VAT paid bythe former is added to the selling price. Once shifted, the VAT ceasesto be a tax30 and simply becomes part of the cost that the buyer mustpay in order to purchase the good, property or service.

Consequently, VAT on tollway operations is not really a tax on thetollway user, but on the tollway operator. Under Section 105 of theCode, 31 VAT is imposed on any person who, in

_______________

28 See The Fundamentals of Taxation (2004 Ed.), Hector S. De Leon and HectorM. De Leon, Jr., p. 16.

29 Contex Corporation v. Commissioner of Internal Revenue, G.R. No. 151135, July2, 2004, 433 SCRA 376, 384-385.

30 The National Internal Revenue Code Annotated, Eighth Ed. (Vol. II), Hector S.De Leon and Hector M. De Leon, Jr., p. 3.

31 SEC. 105. Persons Liable.·Any person who, in the course of trade orbusiness, sells, barters, exchanges, leases goods or properties, rendered services, andany person who imports goods shall be subject to the value-added tax (VAT) imposedin Sections 106 to 108 of this Code.

x x x x

The phrase Âin the course of trade or businessÊ means the regular conduct orpursuit of a commercial or an economic activity, including transactions incidentalthereto, by any person regardless of

119

VOL. 654, JULY 19, 2011 119


the course of trade or business, sells or renders services for a fee. Inother words, the seller of services, who in this case is the tollwayoperator, is the person liable for VAT. The latter merely shifts theburden of VAT to the tollway user as part of the toll fees.

For this reason, VAT on tollway operations cannot be a tax on taxeven if toll fees were deemed as a „userÊs tax.‰ VAT is assessed againstthe tollway operatorÊs gross receipts and not necessarily on the tollfees. Although the tollway operator may shift the VAT burden to thetollway user, it will not make the latter directly liable for the VAT.The shifted VAT burden simply becomes part of the toll fees that onehas to pay in order to use the tollways.32

Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on behalf of private investors in thetollway projects. She will neither be prejudiced by nor be affected bythe alleged diminution in return of investments that may result fromthe VAT imposition. She has no interest at all in the profits to beearned under the TOAs. The interest in and right to recoverinvestments solely belongs to the private tollway investors.

Besides, her allegation that the private investorsÊ rate of recovery willbe adversely affected by imposing VAT on tollway operations is purelyspeculative. Equally presumptuous is her assertion that a stipulationin the TOAs known as the Material Adverse Grantor Action will beactivated if VAT is thus imposed. The Court cannot rule on mattersthat are manifestly conjectural. Neither can it prohibit the State fromexercising its sovereign taxing power based on uncertain, propheticgrounds.

_______________

whether or not the person engaged therein is a nonstock, nonprofit privateorganization (irrespective of the disposition of its net income) and whether or not itsells exclusively to members or their guests), or government entity.

32 Supra note 27, at pp. 24-25.

120



Four. Finally, petitioners assert that the substantiationrequirements for claiming input VAT make the VAT on tollwayoperations impractical and incapable of implementation. They cite thefact that, in order to claim input VAT, the name, address and taxidentification number of the tollway user must be indicated in theVAT receipt or invoice. The manner by which the BIR intends toimplement the VAT·by rounding off the toll rate and putting anyexcess collection in an escrow account·is also illegal, while thealternative of giving „change‰ to thousands of motorists in order tomeet the exact toll rate would be a logistical nightmare. Thus,according to them, the VAT on tollway operations is notadministratively feasible.33

Administrative feasibility is one of the canons of a sound tax system.It simply means that the tax system should be capable of beingeffectively administered and enforced with the least inconvenience tothe taxpayer. Non-observance of the canon, however, will not render atax imposition invalid „except to the extent that specificconstitutional or statutory limitations are impaired.‰34 Thus, even ifthe imposition of VAT on tollway operations may seem burdensome toimplement, it is not necessarily invalid unless some aspect of it isshown to violate any law or the Constitution.

Here, it remains to be seen how the taxing authority will actuallyimplement the VAT on tollway operations. Any declaration by theCourt that the manner of its implementation is illegal orunconstitutional would be premature. Although the transcript of theAugust 12, 2010 Senate hearing provides some clue as to how the BIRintends to go about it,35 the facts pertaining to the matter are notsufficiently established for the Court to pass judgment on. Besides,any concern about

_______________

33 Rollo, p. 540.

34 Tax Law and Jurisprudence, Third Edition (2006), Justice Jose C. Vitug andJustice Ernesto D. Acosta, pp. 2-3.

35 Rollo, pp. 246-254.

121

VOL. 654, JULY 19, 2011 121


how the VAT on tollway operations will be enforced must first beaddressed to the BIR on whom the task of implementing tax lawsprimarily and exclusively rests. The Court cannot preempt the BIRÊsdiscretion on the matter, absent any clear violation of law or theConstitution.

For the same reason, the Court cannot prematurely declare as illegal,BIR RMC 63-2010 which directs toll companies to record anaccumulated input VAT of zero balance in their books as of August 16,2010, the date when the VAT imposition was supposed to take effect.The issuance allegedly violates Section 111(A)36 of the Code whichgrants first time VAT payers a transitional input VAT of 2% onbeginning inventory.

In this connection, the BIR explained that BIR RMC 63-2010 isactually the product of negotiations with tollway operators who havebeen assessed VAT as early as 2005, but failed to charge VAT-inclusive toll fees which by now can no longer be collected. Thetollway operators agreed to waive the 2% transitional input VAT, inexchange for cancellation of their past due VAT liabilities. Notably,the right to claim the 2% transitional input VAT belongs to thetollway operators who have not questioned the circularÊs validity.They are thus the ones who have a right to challenge the circular in adirect and proper action brought for the purpose.

_______________

36 SEC. 111. Transitional/Presumptive Input Tax credits.·

(A) Transitional Input Tax Credits.·A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to thefiling of an inventory according to rules and regulations prescribed by the Secretaryof Finance, upon recommendation of the Commissioner, be allowed input tax on hisbeginning inventory of goods, materials and supplies equivalent to two percent (2%)of the value of such inventory or the actual value-added tax paid on such goods,materials, and supplies, whichever is higher, which shall be creditable against theoutput tax.

122



Conclusion

In fine, the Commissioner of Internal Revenue did not usurplegislative prerogative or expand the VAT lawÊs coverage when shesought to impose VAT on tollway operations. Section 108(A) of theCode clearly states that services of all other franchise grantees aresubject to VAT, except as may be provided under Section 119 of theCode. Tollway operators are not among the franchise grantees subjectto franchise tax under the latter provision. Neither are their servicesamong the VAT-exempt transactions under Section 109 of the Code.

If the legislative intent was to exempt tollway operations from VAT,as petitioners so strongly allege, then it would have been well for thelaw to clearly say so. Tax exemptions must be justified by clearstatutory grant and based on language in the law too plain to bemistaken.37 But as the law is written, no such exemption obtains fortollway operators. The Court is thus duty-bound to simply apply thelaw as it is found.

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

is within the exclusive prerogative of Congress. The CourtÊs role is tomerely uphold this legislative policy, as reflected first and foremost inthe language of the tax statute. Thus, any unwarranted burden thatmay be perceived to result from enforcing such policy must beproperly referred to Congress. The Court has no discretion on the

matter but simply applies the law.

The VAT on franchise grantees has been in the statute books since1994 when R.A. 7716 or the Expanded Value-Added Tax law waspassed. It is only now, however, that the executive has earnestlypursued the VAT imposition against tollway operators. The executiveexercises exclusive discretion in matters pertaining to theimplementation and execution of tax laws. Consequently, theexecutive is more properly suited

_______________

37 Supra note 27, at p. 119.

123

VOL. 654, JULY 19, 2011 123


to deal with the immediate and practical consequences of the VATimposition.

WHEREFORE, the Court DENIES respondents Secretary of Financeand Commissioner of Internal RevenueÊs motion for reconsideration ofits August 24, 2010 resolution, DISMISSES the petitioners Renato V.Diaz and Aurora Ma. F. TimbolÊs petition for lack of merit, and SETSASIDE the CourtÊs temporary restraining order dated August 13,2010.

SO ORDERED.

Corona (C.J.), Carpio, Velasco, Jr., Leonardo-De Castro, Brion,Peralta, Del Castillo, Villarama, Jr., Perez and Mendoza, JJ., concur.

Bersamin, J., On Leave.

Sereno, J., On Official Leave.

RespondentsÊ motion for reconsideration denied, petition dismissedand temporary restraining order set aside.

Notes.·A toll way is not an ordinary road·the special purpose forwhich a toll way is constructed necessitates the imposition ofguidelines in the manner of its use and operation. (Mirasol vs.Department of Public Works and Highways, 490 SCRA 318 [2006])

Undeniably, the collection of toll fees is part of the execution orimplementation of the Manila-Cavite Toll Expressway Project(MCTEP) as agreed upon in the Toll Operation Agreement (TOA).(Francisco, Jr. vs. UEM-MARA Philippines Corporation, 536 SCRA518 [2007])

··o0o··

© Copyright 2010 CentralBooks Inc. All rights reserved.

Documents

Diaz vs. Secretary of Finance