Local Power of Taxation

In order for an entity to legally undertake a quarrying

business, he must first comply with all the requirements
a) Sources of revenues of LGUs imposed not only by the national government, but also by the
local government unit where his business is situated.
Particularly, Section 138(2) of RA 716026 requires that such
G.R. No. 188500, July 24, 2013 entity must first secure a governors permit prior to the start of
his quarrying operations, viz:cralavvo nline lawlib rary

PROVINCE OF CAGAYAN v. JOSEPH LASAM LARA

SECTION 138. Tax on Sand, Gravel and Other Quarry
Facts: Resources. x x x.

The permit to extract sand, gravel and other quarry

1. Lara obtained an Industrial Sand and Gravel
resources shall be issued exclusively by the provincial
Permit (ISAG Permit) from the Mines and
governor, pursuant to the ordinance of the sangguniang
Geosciences Bureau (MGB) of the DENR
panlalawigan. (Emphasis and underscoring supplied)
authorizing him to conduct quarrying operations
and extract and dispose of sand, gravel, and
xxxx
other unconsolidated materials from the Permit
Area. For the same purpose, he obtained an
In connection thereto, the Sangguniang Panlalawigan of
Environmental Compliance Certificate (ECC).
Cagayan promulgated Provincial Ordinance No. 2005-07,
2. Balisi, Laras representative, went to the Cagayan
Article H, Section 2H.04 of which provides:
Provincial Treasurers Office to pay the extraction
c ralavvon line lawlib rary

fee and other fees for Laras quarrying operations

but she was directed to first secure an Order of
Payment from the ENR Officer, petitioner Adap.
However, when Balisi went to ENRO Adap, the
latter refused.
3. Still adamant with his refusal, Atty. Casauay
tender and deposit the amount with the
Treasurers Office corresponding to the said
extraction fee and other related fees.
4. Lara commenced his quarrying operations
however, 4 trucks were stopped and impounded
by several local officials. Consequently, Lara was
able to secure a WPI enabling him to restart his
business.
5. Nonetheless, Lara received a Stoppage Order
from Cagayan Gov. Antonio directing him to stop
his quarrying operations for the following
reasons: (a) the ISAG Permit was not in
accordance with Republic Act No. (RA)
7942,10 otherwise known as the Philippine Mining
Act of 1995,; (b) failure to pay sand and gravel
fee under Prov. Ord. No. 2005-07; and (c) failure
to secure all necessary permits or clearances from
the local government unit concerned as required
by the [ECC].
6. Hence, Lara filed the present action for injunction
and damages with an urgent and ex-parte motion
for the issuance of a temporary restraining order
and/or preliminary injunction before the RTC.
7. RTC made permanent the writ of preliminary
injunction and thus, enjoined petitioners from
stopping or disturbing Laras quarrying
operations.
SECTION 2H.04. Permit for Gravel and Sand Extraction and
Quarrying. No person shall extract ordinary stones, gravel,
earth, boulders and quarry resources from public lands or from
the beds of seas, rivers, streams, creeks or other public
waters unless a permit has been issued by the
Governor (or his deputy as provided herein) x x x. (Emphasis
and underscoring supplied)
A plain reading of the afore-cited provisions clearly shows that
a governors permit is a pre-requisite before one can engage in
a quarrying business in Cagayan. Records, however, reveal
that Lara admittedly failed to secure the same; hence, he has
no right to conduct his quarrying operations within the Permit
Area. Consequently, he is not entitled to any injunction.
In view of the foregoing, the Court need not delve into the
issue respecting the necessity of securing a mayors permit,
especially since it is the main issue in another case, Civil Case
No. 7049, which remains pending before the court a quo.
WHEREFORE, the petition is GRANTED. Accordingly, the June
30, 2009 Decision of the Regional Trial Court of Tuguegarao
City, Cagayan, Branch 5 in Civil Case No. 7077 is
hereby REVERSED and SET ASIDE.

Issue:

Among others, petitioners argue that despite the issuance

of the ISAG Permit, Lara has yet to comply with its terms
and conditions as he has yet to secure the necessary
permits and clearances from the local government unit
concerned and hence, remains to be proscribed from
conducting any quarrying operations.23

The Courts Ruling

The petition is meritorious.


G.R. No. 120082 September
11, 1996
MACTAN CEBU INTERNATIONAL
AIRPORT AUTHORITY vs. HON.
FERDINAND J. MARCOS
We resolved to give due course to this
petition for it raises issues dwelling on the
scope of the taxing power of local
government units and the limits of tax
exemption privileges of government-
owned and controlled corporations.
FACTS:
1. MCIAA was created by R.A. 6958,
mandated to principally undertake the
economical, efficient and effective
control, management and supervision
of the airports in Cebu (Mactan Intl
and Lahug)
2. Since the time of its creation, MCIAA
enjoyed the privilege of exemption
from payment of realty taxes in
accordance with Section 14 of its
Charter.
3. however, Cesa, Officer-in-Charge,
Office of the Treasurer of the City of
Cebu, demanded payment for realty
taxes on several parcels of land
belonging to the petitioner in Apas and
Barrio Kasambagan.
4. MCIAA objected to such demand for
payment as baseless and unjustified,
claiming in its favor the aforecited
Section 14 of RA 6958 which exempts
it from payment of realty taxes. It was
also asserted that it is an
instrumentality of the government
performing governmental functions,
citing Section 133 of the Local
Government Code of 1991 which puts
limitations on the taxing powers of local
government units: the exercise of the
taxing powers of LGUs shall not extend
to the levy on the National
Government, its agencies and
instrumentalities, and local government
units.
5. Respondent City refused to cancel and set
aside petitioners realty tax account,
insisting that the MCIAA is a GOCC
whose tax exemption privilege has been
withdrawn by virtue of Sections 193 and
234 of the Local Government Code that
took effect on January 1, 1992.
6. MCIAA was compelled to pay its tax
account under protest and thereafter filed a
Petition for Declaratory Relief with the
RTC. Petitioner insisted that while it is
indeed a government-owned corporation, it
nonetheless stands on the same footing as
an agency or instrumentality of the
national government by the very nature of
its powers and functions.
7. the trial court dismissed the petition
that based on the repealing clause in RA
7160, it is safe to infer and state that the
tax exemption provided for in RA 6958
creating petitioner had been expressly
repealed by the provisions of the New
Local Government Code of 1991.
ISSUE:
I. RESPONDENT JUDGE ERRED IN FAILING
TO RULE THAT THE PETITIONER IS
VESTED WITH GOVERNMENT POWERS
AND FUNCTIONS WHICH PLACE IT IN
THE SAME CATEGORY AS AN
INSTRUMENTALITY OR AGENCY OF THE
GOVERNMENT.
II. RESPONDENT JUDGE ERRED IN RULING
THAT PETITIONER IS LIABLE TO PAY
REAL PROPERTY TAXES TO THE CITY
OF CEBU.
RULING:
I. An instrumentality of Government is
one created to perform
governmental functions primarily to
 promote certain aspects of the
economic life of the people.[
The power to tax is primarily vested in the
Considering its task not merely
Congress; however, in our jurisdiction, it may
to efficiently operate and
be exercised by local legislative bodies, no
manage the Mactan-Cebu
longer merely by virtue of a valid delegation
International Airport, but more
as before, but pursuant to direct authority
importantly, to carry out the
conferred by Section 5, Article X of the
Government policies of
Constitution.[22] Under the latter, the exercise
promoting and developing the
of the power may be subject to such
Central Visayas and Mindanao
guidelines and limitations as the Congress
regions as centers of
may provide which, however, must be
international trade and tourism,
consistent with the basic policy of local
and accelerating the
autonomy.
development of the means of
transportation and There can be no question that under
communication in the Section 14 of R.A. No. 6958 the petitioner is
country, and that it is an
[7] exempt from the payment of realty taxes
attached agency of the imposed by the National Government or any
Department of Transportation of its political subdivisions, agencies, and
and Communication instrumentalities. Nevertheless, since
(DOTC), the petitioner may
[8] taxation is the rule and exemption therefrom
stand in [sic] the same footing as the exception, the exemption may thus be
an agency or instrumentality of withdrawn at the pleasure of the taxing
the national government. Hence, authority. The only exception to this rule is
its tax exemption privilege under where the exemption was granted to private
Section 14 of its Charter cannot parties based on material consideration of a
be considered withdrawn with mutual nature, which then becomes
the passage of the Local contractual and is thus covered by the non-
Government Code of 1991 impairment clause of the Constitution.[23]
(hereinafter LGC) because The LGC, enacted pursuant to Section 3,
Section 133 thereof specifically Article X of the Constitution, provides for the
states that the `taxing powers of exercise by local government units of their
local government units shall not power to tax, the scope thereof or its
extend to the levy of taxes or limitations, and the exemptions from taxation.
fees or charges of any kind on
the national government, its Section 133 of the LGC prescribes the
agencies and instrumentalities. common limitations on the taxing powers of
local government units.
II. As to the second assigned error,
the petitioner contends that (o) TAXES, FEES OR CHARGES OF ANY KIND
ON THE NATIONAL GOVERNMENT, ITS
being an instrumentality of the AGENCIES AND INSTRUMENTALITIES, AND
National Government, LOCAL GOVERNMENT UNITS. (emphasis
respondent City of Cebu has no supplied)
power nor authority to impose Section 234 of the LGC provides for the
realty taxes upon it in exemptions from payment of real property
accordance with the aforesaid taxes and withdraws previous exemptions
Section 133 of the LGC, as therefrom granted to natural and juridical
explained in Basco vs. Philippine persons, including government-owned and
Amusement and Gaming
Corporation.
controlled corporations, except
provided therein.
These exemptions are based on the
ownership, character, and use of the
property. Thus:
(a) Ownership Exemptions. Exemptions
from real property taxes on the basis
of ownership are real properties owned
by: (i) the Republic, (ii) a province, (iii) a
city, (iv) a municipality, (v) a barangay,
and (vi) registered cooperatives.
(b) Character Exemptions. Exempted from
real property taxes on the basis of their
character are: (i) charitable institutions,
(ii) houses and temples of prayer like
churches, parsonages or convents
appurtenant thereto, mosques, and (iii)
non-profit or religious cemeteries.
(c) Usage exemptions. Exempted from
real property taxes on the basis of the
actual, direct and exclusive use to
which they are devoted are: (i) all
lands, buildings and improvements
which are actually directly and
exclusively used for religious, charitable
or educational purposes; (ii) all
machineries and equipment actually,
directly and exclusively used by local
water districts or by government-owned
or controlled corporations engaged in
the supply and distribution of water
and/or generation and transmission of
electric power; and (iii) all machinery
and equipment used for pollution
control and environmental protection.
2. Other Exemptions Withdrawn. All other
exemptions previously granted to natural or
juridical persons including government-
owned or controlled corporations are
withdrawn upon the effectivity of the Code.[26]
Thus, reading together Sections 133,
232, and 234 of the LGC, we conclude
that as a general rule, as laid down in
Section 133, the taxing powers of local
government units cannot extend to the
levy of, inter alia, taxes, fees and charges
of any kind on the National Government,
its agencies and instrumentalities, and
local government units; however,
pursuant to Section 232, provinces, cities,
and municipalities in the Metropolitan
as Manila Area may impose the real property tax
except on, inter alia, real property owned by
the Republic of the Philippines or any of its
political subdivisions except when the
beneficial use thereof has been granted, for
consideration or otherwise, to a taxable
person, as provided in item (a) of the first
paragraph of Section 234.
As to tax exemptions or incentives
granted to or presently enjoyed by natural or
juridical persons, including government-
owned and controlled corporations, Section
193 of the LGC prescribes the general
rule, viz., they are withdrawn upon the
effectivity of the LGC, except those granted
to local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock
and non-profit hospitals and educational
institutions, and unless otherwise provided in
the LGC. The latter proviso could refer to
Section 234 which enumerates the properties
exempt from real property tax. But the last
paragraph of Section 234 further qualifies the
retention of the exemption insofar as real
property taxes are concerned by limiting the
retention only to those enumerated therein;
all others not included in the enumeration lost
the privilege upon the effectivity of the
LGC. Moreover, even as to real property
owned by the Republic of the Philippines or
any of its political subdivisions covered by
item (a) of the first paragraph of Section 234,
the exemption is withdrawn if the beneficial
use of such property has been granted to a
taxable person for consideration or
otherwise.
Since the last paragraph of Section 234
unequivocally withdrew, upon the effectivity
of the LGC, exemptions from payment of real
property taxes granted to natural or juridical
persons, including government-owned or
controlled corporations, except as provided in
the said section, and the petitioner is,
undoubtedly, a government-owned
corporation, it necessarily follows that its
exemption from such tax granted it in Section
14 of its Charter, R.A. No. 6958, has been
withdrawn. Any claim to the contrary can only
be justified if the petitioner can seek
refuge under any of the exceptions
provided in Section 234, but not under
Section 133, as it now asserts, since, as
shown above, the said section is qualified
by Sections 232 and 234.
In short, the petitioner can no longer
invoke the general rule in Section 133
that the taxing powers of the local
government units cannot extend to the
levy of (o) taxes, fees or charges of any kind
on the National Government, its agencies or
instrumentalities, and local government units.
It must show that the parcels of land in
question, which are real property, are any
one of those enumerated in Section 234,
either by virtue of ownership, character,
or use of the property.
If Section 234(a) intended to extend
the exception therein to the withdrawal of
the exemption from payment of real
property taxes under the last sentence of
the said section to the agencies and
instrumentalities of the National
Government mentioned in Section 133(o),
then it should have restated the wording
of the latter. Yet, it did not.
G.R. No. 162015 March 6, 2006
CITY GOVERNMENT OF QUEZON CITY vs. BAYAN
TELECOMMUNICATIONS, INC.,
FACTS:
1. Bayantel is a legislative franchise holder under RA
3259 to establish and operate radio stations for
domestic telecommunications, radiophone,
broadcasting and telecasting.
2. Of relevance to this controversy is the tax
provision of Rep. Act No. 3259, embodied in
Section 14 thereof, which reads: The grantee shall
be liable to pay the same taxes on its real estate,
buildings and personal property, exclusive of the
franchise, as other persons or corporations are
now or hereafter may be required by law to pay.
3. On January 1, 1992, Rep. Act No. 7160, LGC took
effect. Section 232 of the Code grants local
government units within the Metro Manila Area the
power to levy tax on real properties. SEC. 234 -
Exemptions from Real Property Tax. The following
are exempted from payment of the real property
tax: Except as provided herein, any exemption
from payment of real property tax previously
granted to, or enjoyed by, all persons, whether
natural or juridical, including government-owned-
or-controlled corporations is hereby withdrawn
upon effectivity of this Code
4. Few months after the LGC took effect, Congress
enacted RA No. 7633, amending Bayantels
original franchise. Sec.11 provides. In addition
thereto, the grantee, its successors or assigns
shall pay a franchise tax equivalent to three
percent (3%) of all gross receipts of the telephone
or other telecommunications businesses
transacted under this franchise by the grantee, its
successors or assigns and the said percentage
shall be in lieu of all taxes on this franchise or
earnings thereof. Provided, That the grantee, its
successors or assigns shall continue to be liable
for income taxes payable under Title II of the
National Internal Revenue Code . xxx.
[Emphasis supplied]
5. It is undisputed that within the territorial boundary
of Quezon City, Bayantel owned several real
properties on which it maintained various
telecommunications facilities.
6. In 1993, the government of Quezon City, pursuant
to the taxing power vested on local government
units by Section 5, Article X of the 1987
Constitution, infra, in relation to Section 232 of the
LGC, supra, enacted City Ordinance No. SP-91, S-
93, otherwise known as the Quezon City Revenue
 Code (QCRC),5 imposing, under Section 5 hereby DECLARED exempt from real estate
thereof, a real property tax on all real taxation.
properties in Quezon City, and, reiterating in
its Section 6, the withdrawal of exemption ISSUE: Whether or not Bayantels real properties in
from real property tax under Section 234 of Quezon City are exempt from real property taxes under its
the LGC, supra. Furthermore, much like the legislative franchise?
LGC, the QCRC, under its Section 230,
withdrew tax exemption privileges in general. RULING:
7. Conformably with the Citys Revenue Code,
new tax declarations for Bayantels real
There seems to be no issue as to Bayantels exemption
properties in Quezon City were issued by the
from real estate taxes by virtue of the term "exclusive of
City Assessor and were received by Bayantel.
the franchise" qualifying the phrase "same taxes on its real
8. Meanwhile, on March 16, 1995, Rep. Act No.
estate, buildings and personal property," found in Section
7925,6 otherwise known as the "Public
14, supra, of its franchise, Rep. Act No. 3259, as originally
Telecommunications Policy Act of the
granted.
Philippines," envisaged to level the playing
field among telecommunications companies,
took effect. Section 23 of the Act provides: The legislative intent expressed in the phrase "exclusive of
this franchise" cannot be construed other than
distinguishing between two (2) sets of properties, be they
SEC. 23. Equality of Treatment in the
real or personal, owned by the franchisee, namely, (a)
Telecommunications Industry. Any
those actually, directly and exclusively used in its radio or
advantage, favor, privilege, exemption, or
telecommunications business, and (b) those properties
immunity granted under existing franchises, or
which are not so used. It is worthy to note that the
may hereafter be granted, shall ipso facto
properties subject of the present controversy are only
become part of previously granted
those which are admittedly falling under the first category.
telecommunications franchises and shall be
accorded immediately and unconditionally to
the grantees of such franchises: Provided, To the mind of the Court, Section 14 of Rep. Act No. 3259
however, That the foregoing shall neither effectively works to grant or delegate to local governments
apply to nor affect provisions of of Congress inherent power to tax the franchisees
telecommunications franchises concerning properties belonging to the second group of properties
territory covered by the franchise, the life span indicated above, that is, all properties which, "exclusive of
of the franchise, or the type of service this franchise," are not actually and directly used in the
authorized by the franchise. pursuit of its franchise. As may be recalled, the taxing
power of local governments under both the 1935 and the
1973 Constitutions solely depended upon an enabling law.
9. Bayantel wrote the office of the City Assessor
Absent such enabling law, local government units were
seeking the exclusion of its real properties in
without authority to impose and collect taxes on real
the city from the roll of taxable real properties.
properties within their respective territorial jurisdictions.
With its request having been denied, Bayantel
While Section 14 of Rep. Act No. 3259 may be validly
interposed an appeal with the Local Board of
viewed as an implied delegation of power to tax, the
Assessment Appeals (LBAA). And, evidently
delegation under that provision, as couched, is limited to
on its firm belief of its exempt status, Bayantel
impositions over properties of the franchisee which are not
did not pay the real property taxes assessed
actually, directly and exclusively used in the pursuit of its
against it by the Quezon City government.
franchise. Necessarily, other properties of Bayantel
10. Quezon City Treasurer sent out notices of
directly used in the pursuit of its business are beyond the
delinquency followed by the issuance of
pale of the delegated taxing power of local governments.
several warrants of levy against Bayantels
In a very real sense, therefore, real properties of Bayantel,
properties preparatory to their sale at a public
save those exclusive of its franchise, are subject to realty
auction.
taxes. Ultimately, therefore, the inevitable result was that
11. Bayantel filed with the RTC a petition for
all realties which are actually, directly and exclusively used
prohibition with an urgent application for a
in the operation of its franchise are "exempted" from any
temporary restraining order (TRO) and/or writ
property tax.
of preliminary injunction.
12. Lower court issued a TRO, followed, after due
hearing, by a writ of preliminary injunction. It Bayantels franchise being national in character, the
further declared pursuant to the enabling "exemption" thus granted under Section 14 of Rep. Act
franchise under Section 11 of Republic Act No. 3259 applies to all its real or personal properties found
No. 7633, the real estate properties and anywhere within the Philippine archipelago.
buildings of petitioner [now, respondent
Bayantel] which have been admitted to be However, with the LGCs taking effect on January 1, 1992,
used in the operation of petitioners franchise Bayantels "exemption" from real estate taxes for
described in the following tax declarations are properties of whatever kind located within the Metro
Manila area was, by force of Section 234 of the Code,
supra, expressly withdrawn. But, not long thereafter,
however, or on July 20, 1992, Congress passed Rep.
Act No. 7633 amending Bayantels original franchise.
Worthy of note is that Section 11 of Rep. Act No.
7633 is a virtual reenacment of the tax provision, i.e.,
Section 14, supra, of Bayantels original franchise
under Rep. Act No. 3259. Stated otherwise, Section
14 of Rep. Act No. 3259 which was deemed impliedly
repealed by Section 234 of the LGC was expressly
revived under Section 14 of Rep. Act No. 7633. In
concrete terms, the realty tax exemption heretofore
enjoyed by Bayantel under its original franchise, but
subsequently withdrawn by force of Section 234 of the
LGC, has been restored by Section 14 of Rep. Act
No. 7633.
And as earlier stated, the Citys Revenue Code, just
like the LGC, expressly withdrew, under Section 230
thereof, supra, all tax exemption privileges in general.
This thus raises the question of whether or not the
Citys Revenue Code pursuant to which the city
treasurer of Quezon City levied real property taxes
against Bayantels real properties located within the
City effectively withdrew the tax exemption enjoyed by
Bayantel under its franchise, as amended.
Bayantel answers the poser in the negative arguing
that once again it is only "liable to pay the same
taxes, as any other persons or corporations on all its
real or personal properties, exclusive of its franchise."
Bayantels posture is well-taken. While the system of
local government taxation has changed with the onset
of the 1987 Constitution, the power of local
government units to tax is still limited. For as the
Court stressed in Mactan, "the power to tax is [still]
primarily vested in the Congress."
DOCRTRINE: This new perspective is best
articulated by Fr. Joaquin G. Bernas, S.J., himself a
Commissioner of the 1986 Constitutional Commission
which crafted the 1987 Constitution, thus:
What is the effect of Section 5 on the fiscal position of
municipal corporations? Section 5 does not change
the doctrine that municipal corporations do not
possess inherent powers of taxation. What it does is
to confer municipal corporations a general power to
levy taxes and otherwise create sources of revenue.
They no longer have to wait for a statutory grant of
these powers. The power of the legislative authority
relative to the fiscal powers of local governments has
been reduced to the authority to impose limitations on
municipal powers. Moreover, these limitations must
be "consistent with the basic policy of local
autonomy." The important legal effect of Section 5 is
thus to reverse the principle that doubts are resolved
against municipal corporations. Henceforth, in
interpreting statutory provisions on municipal fiscal
powers, doubts will be resolved in favor of municipal
corporations. It is understood, however, that taxes
imposed by local government must be for a public
purpose, uniform within a locality, must not be
confiscatory, and must be within the jurisdiction of the
local unit to pass.11 (Emphasis supplied).
In net effect, the controversy presently before the Court
involves, at bottom, a clash between the inherent taxing
power of the legislature, which necessarily includes the
power to exempt, and the local governments delegated
power to tax under the aegis of the 1987 Constitution.
There can really be no dispute that the power of the
Quezon City Government to tax is limited by Section 232
of the LGC which expressly provides that "a province or
city or municipality within the Metropolitan Manila Area
may levy an annual ad valorem tax on real property such
as land, building, machinery, and other improvement not
hereinafter specifically exempted." Under this law, the
Legislature highlighted its power to thereafter exempt
certain realties from the taxing power of local government
units. For sure, in Philippine Long Distance Telephone
Company, Inc. (PLDT) vs. City of Davao,13 this Court has
upheld the power of Congress to grant exemptions over
the power of local government units to impose taxes.
There, the Court wrote:
Indeed, the grant of taxing powers to local government
units under the Constitution and the LGC does not affect
the power of Congress to grant exemptions to certain
persons, pursuant to a declared national policy. The legal
effect of the constitutional grant to local governments
simply means that in interpreting statutory provisions on
municipal taxing powers, doubts must be resolved in favor
of municipal corporations. (Emphasis supplied.)
Whether Congress actually did exempt Bayantels
properties at all by virtue of Section 11 of Rep. Act No.
7633?
Admittedly, Rep. Act No. 7633 was enacted subsequent to
the LGC. Perfectly aware that the LGC has already
withdrawn Bayantels former exemption from realty taxes,
Congress opted to pass Rep. Act No. 7633 using, under
Section 11 thereof, exactly the same defining phrase
"exclusive of this franchise" which was the basis for
Bayantels exemption from realty taxes prior to the LGC. In
plain language, Section 11 of Rep. Act No. 7633 states
that "the grantee, its successors or assigns shall be liable
to pay the same taxes on their real estate, buildings and
personal property, exclusive of this franchise, as other
persons or corporations are now or hereafter may be
required by law to pay." The Court views this subsequent
piece of legislation as an express and real intention on the
part of Congress to once again remove from the LGCs
delegated taxing power, all of the franchisees (Bayantels)
properties that are actually, directly and exclusively used
in the pursuit of its franchise.
WHEREFORE, the petition is DENIED.
 imposing real estate tax on, levying against, and auctioning for
public sale the airport lands and buildings, but this was dismissed for
having been filed out of time.

Hence, MIAA filed this petition for review, pointing out that it is
exempt from real estate tax under Sec. 21 of its charter and Sec. 234
of the LGC. It invokes the principle that the government cannot tax
itself as a justification for exemption, since the airport lands and
buildings, being devoted to public use and public service, are owned
by the Republic of the Philippines. On the other hand, the City of
Paraaque invokes Sec. 193 of the LGC, which expressly withdrew
the tax exemption privileges of government-owned and controlled
corporations (GOCC) upon the effectivity of the LGC.

It asserts that an international airport is not among the exceptions

mentioned in the said law. Meanwhile, the City of Paraaque posted
and published notices announcing the public auction sale of the
airport lands and buildings. In the afternoon before the scheduled
public auction, MIAA applied with the Court for the issuance of a
TRO to restrain the auction sale. The Court issued a TRO on the day
of the auction sale, however, the same was received only by the City
of Paraaque three hours after the sale.

MIAA V. COURT OF APPEALS ISSUE:

[G.R. No. 155650, July 20, 2006]

Whether or not the airport lands and buildings of MIAA are exempt
from real estate tax?

FACTS:

HELD:

The Manila International Airport Authority (MIAA) operates

the Ninoy Aquino International Airport (NAIA) Complex in
Paraaque City under Executive Order No. 903 (MIAA Charter), The Petition is GRANTED.
as amended. As such operator, it administers the land,
improvements and equipment within the NAIA Complex. In
March 1997, the Office of the Government Corporate Counsel
(OGCC) issued Opinion No. 061 to the effect that the Local The airport lands and buildings of MIAA are exempt from real estate
Government Code of 1991 (LGC) withdrew the exemption tax imposed by local governments. Sec. 243(a) of the LGC exempts
from real estate tax granted to MIAA under from real estate tax any real property owned by the Republic of the
Philippines. This exemption should be read in relation with Sec.

Section 21 of its
Charter.
Page | 33

Thus, MIAA paid some of the real estate tax already due. In
June 2001, it received Final Notices of Real Estate Tax
Delinquency from the City of Paraaque for the taxable years
1992 to 2001. The City Treasurer subsequently issued notices
of levy and warrants of levy on the airport lands and buildings.

At the instance of MIAA, the OGCC issued Opinion No. 147

clarifying Opinion No. 061, pointing out that Sec. 206 of the
LGC requires persons exempt from real estate tax to show
proof of exemption. According to the OGCC, Sec. 21 of the
MIAA Charter is the proof that MIAA is exempt from real
estate tax. MIAA, thus, filed a petition with the Court of
Appeals seeking to restrain the City of Paraaque from

133(o) of the LGC, which provides that the exercise of the taxing
powers of local governments shall not extend to the levy of taxes,
fees or charges of any kind on the National Government, its agencies
and instrumentalities.
These provisions recognize the basic principle that local
governments cannot tax the national government, which historically
merely delegated to local governments the power to tax.
The rule is that a tax is never presumed and there must be clear
language in the law imposing the tax. This rule applies with greater
force when local governments seek to tax national government
instrumentalities. Moreover, a tax exemption is construed liberally
in favor of national government instrumentalities.
on its land and building, it shall be subject to no other tax. The telephone
posts, apparatus, equipment and communication facilities of the grantee
are exempted from the real estate tax.
Pursuant to the mandate of Sections 137 and 232 of the Local
Government Code, the Sangguniang Panlalawigan of respondent Province
of Pangasinan enacted on 29 December 1992, Provincial Tax Ordinance
No. 1, entitled "The Real Property Tax Ordinance of 1992." Section 4
thereof imposed a real property tax on real properties located within the
territorial jurisdiction of the province. The particular provision, however,
technically expanded the application of Sec. 6 of the provincial franchise
of petitioner DIGITEL to include machineries and other improvements, not
thereinafter exempted, to wit:
Section 4. Imposition of Real Property Tax. There shall be levied an
annual AD VALOREM tax on real property such as land, building,

MIAA is not a GOCC, but an instrumentality of the government.

The Republic remains the beneficial owner of the properties. MIAA

itself is owned solely by the Republic. At any time, the President can
transfer back to the Republic title to the airport lands and buildings
without the Republic paying MIAA any consideration. As long as the
airport lands and buildings are reserved for public use, their
ownership remains with the State. Unless the President issues a
proclamation withdrawing these properties from public use, they
remain properties of public dominion. As such, they are inalienable,
hence, they are not subject to levy on execution or foreclosure sale,
and they are exempt from real estate tax.

However, portions of the airport lands and buildings that MIAA

leases to private entities are not exempt from real estate tax. In such
a case, MIAA has granted the beneficial use of such portions for a
consideration to a taxable person.

DIGITAL TELECOM PHILS. VS. PANGASINAN,

[G.R. No. 152534, February 23, 2007]

FACTS:

On 13 November 1992, petitioner DIGITEL was granted, under

Provincial Ordinance No. 18-92, a provincial franchise to install,
maintain and operate a telecommunications system within the
territorial jurisdiction of respondent Province of Pangasinan. Under
the said provincial franchise, the grantee is required to pay franchise
and real property taxes, viz:

SECTION 6. The grantee shall pay to the Province of Pangasinan the

applicable franchise tax as maybe provided by appropriate
ordinances in accordance with the Local Government Code and
other existing laws. Except for the foregoing and the real estate tax
PUBLIC CORPORATION CASE DIGESTS || USC LAW
BATCH 2013
machinery, and other improvement not hereinafter specifically
exempted, situated or located within the territorial jurisdiction
of Pangasinan at the rate of one percent (1%) of the assessed
value of said real property. (Emphasis supplied.)6
provincial and legislative franchises are separate and distinct from
each other; and, that prior to the grant of its legislative franchise,
petitioner DIGITEL had already benefited from the use of it.
Moreover, it pointed out that Section 137 of the Local Government
Code had already withdrawn any exemption granted to anyone; as
such, the local government of a province may impose a tax on a
business enjoying a franchise.

On the other hand, petitioner DIGITEL maintains that its legislative

Thereafter, petitioner DIGITEL was granted by Republic Act No.
7678,7 a legislative franchise authorizing the grantee to install,
operate and maintain telecommunications systems, this time,
throughout the Philippines. Under its legislative franchise,
particularly Sec. 5 thereof, petitioner DIGITEL became liable for
the payment of a franchise tax "as may be prescribed by law of
all gross receipts of the telephone or other
telecommunications businesses transacted under it by the
grantee,"8 as well as real property tax "on its real estate, and
buildings "exclusive of this franchise."
franchise being an earlier enactment, by virtue of Section 23 of
Republic Act No. 7925, the ipso facto, immediate and unconditional
application to it of the tax exemption found in the franchises of
Globe, Smart and Bell, i.e., in Section 9 (b) of Republic Act No. 7229,
Globes legislative franchise; in Section 9 of Republic Act No. 7294,
Smarts legislative franchise; and Section 9 of Republic Act No. 7294,
Bells legislative franchise, all basically or similarly
Page | 34

Later, respondent Province of Pangasinan, in its examination of

its record found that petitioner DIGITEL had a franchise tax
deficiency for the years 1992, 1993 and 1994. It was alleged
that apart from the Php40,000.00 deposit representing the
grantees acquiescence or acceptance of the franchise, as
required by respondent Province of Pangasinan, petitioner
DIGITEL had never paid any franchise tax to respondent
Province of Pangasinan since the former started its operation
in 1992.

On 16 March 1995, Congress passed Republic Act No. 7925,

otherwise known as "The Public Telecommunications Policy Act
of the Philippines." Section 23 of this law entitled Equality of
Treatment in the Telecommunications Industry, provided for
the ipso facto application to any previously granted
telecommunications franchises of any advantage, favor,
privilege, exemption or immunity granted under existing
franchises, or those still to be granted, to be accorded
immediately and unconditionally to earlier grantees.

The provincial franchise and real property taxes remained

unpaid despite the foregoing measures instituted.
Consequently, in a letter9 dated 30 October 1998, the
Provincial Legal Officer of respondent Province of Pangasinan,
Atty. Geraldine U. Baniqued, demanded from petitioner
DIGITEL compliance with Provincial Tax Ordinance No. 4.,
specifically the first paragraph of Section 4 thereof but which
was wittingly or unwittingly misquoted10 to read:

No persons shall establish and / or operate a public utility

business enterprises (sic) within the territorial jurisdiction of
the Province of Pangasinan whether in one municipality or
group of municipalities, except by virtue of a franchise granted
by the Sangguniang Panlalawigan of Pangasinan.

In ruling against the claimed exemption, the court a quo held

that petitioner DIGITELs legislative franchise does not work to
exempt the latter from payment of provincial franchise and
real property taxes. The court a quo reasoned that the

containing the phrase "shall pay a franchise tax equivalent to x x x of
all gross receipts of the business transacted under this franchise by
the grantee, its successors or assigns and the said percentage shall
be in lieu of all taxes on this franchise or earnings thereof.
Stated simply, Section 23 of Republic Act No. 7925, in relation to the
pertinent provisions of the legislative franchises of Globe, Smart and
Bell, "the national franchise tax for which petitioner (DIGITEL) is
liable to pay shall be in lieu of any and all taxes of any kind, nature
or description levied, established or collected by any authority
whatsoever, municipal, provincial, or national, from which the
grantee is hereby expressly granted.
R.A. No. 7925 is thus a legislative enactment designed to set the national
policy on telecommunications and provide the structures to implement it
to keep up with the technological advances in the industry and the needs
of the public. The thrust of the law is to promote gradually the
deregulation of the entry, pricing, and operations of all public
telecommunications entities and thus promote a level playing field in the
telecommunications industry(citation omitted). There is nothing in the
language of 23 nor in the proceedings of both the House of
Representatives and the Senate in enacting R.A. No. 7925 which shows
that it contemplates the grant of tax exemptions to all
telecommunications entities, including those whose exemptions had been
withdrawn by the LGC.
The foregoing pronouncement notwithstanding, in view of the passage of
Republic Act No. 7716,22 abolishing the franchise tax

ISSUE:

Whether or the in lieu of all taxes provision in the legislative

franchise of SMART, GLOBE, and DELL is applicable to DIGITAL, such
that they are exempt from National taxes and Income taxes.

Whether or not the Digital is exempted from paying Real Property

Taxes.

RULING:

The instant Petition is denied

The assailed Decision dated 14 June 2001, and the Resolution dated
15 February 2002, both rendered by the RTC of Lingayen,
Pangasinan, Branch 68 in Civil Case No. 18037, are hereby AFFIRMED
in so far as it finds petitioner DIGITEL liable for the payment of
provincial franchise and real property taxes. However, the amount
of taxes owing to respondent Province of Pangasinan must be
recomputed in accordance with the foregoing discussion.

The case at bar is actually not one of first impression. Indeed, as far
back as 2001, this Court has had the occasion to rule against the
claim for tax exemption under Republic Act No. 7925. In the case of
Philippine Long Distance Telephone Company, Inc. v. City of Davao,16
we already clarified the confusion brought about by the effect of
Section 23 of Republic Act No. 7925 that the word "exemption" as
used in the statute refers or pertains merely to an exemption from
regulatory or reporting requirements of the DOTC or the NTC and
not to the grantees tax liability. In denying PLDTs petition, this
Court, speaking through Mr. Justice Vicente V. Mendoza, held that in
approving Section 23 of Republic Act No. 7925, Congress did not
intend it to operate as a blanket tax exemption to all
telecommunications entities; thus, it cannot be considered as having
amended petitioner PLDTs franchise so as to entitle it to exemption
from the imposition of local franchise taxes.
PUBLIC CORPORATION CASE DIGESTS || USC LAW jurisdiction under Section 137 in relation to Section 151 of the LGC.
BATCH 2013 More importantly, it claimed that exemptions from taxation have
already been removed by Section 193 of the LGC:

imposed on telecommunications companies effective 1
January 1996 and in its place is imposed a 10 percent Value-
Added-Tax (VAT),23 the "in-lieu-of-all-taxes" clause/provision
in the legislative franchises of Globe, Smart and Bell, among
others, has now become functus officio, made inoperative for
lack of a franchise tax.Therefore, taking into consideration the
above, from 1 January 1996, petitioner DIGITEL ceased to be
liable for national franchise tax and in its stead is imposed a
10% VAT in accordance with Section 108 of the Tax Code.
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 RA
No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the
effectivity of this Code. [Emphasis supplied.]

As to the issue relating to the claim of payment of real The City of Iloilo argues, too, that Smarts claim for exemption from
property taxes, of particular import is Section 5 of Republic Act taxes under Section 9 of its franchise is not couched in plain and
No. 7678, the legislative franchise of petitioner DIGITEL. Sec. 5 unequivocal language such that it restored the withdrawal of tax
of said law again states that: exemptions under Section 193 above. It claims that if Congress

SECTION 5. Tax Provisions. The grantee shall be liable to pay

the same taxes on its real estate, buildings, and personal Page | 35
property exclusive of this franchise as other persons or
corporations are now or hereafter may be required by law to
pay x x x. (Emphasis supplied.)

Owing to the phrase "exclusive of this franchise," petitioner

DIGITEL stands firm in its position that it is equally exempt
from the payment of real property tax. It maintains that said
phrase found in Section 5 above-quoted qualifies or delimits
the scope of its liability respecting real property tax that real
property tax should only be imposed on its assets that are
actually, directly and exclusively used in the conduct of its
business pursuant to its franchise.

CITY OF ILOILO VS. SMART COMMUNICATIONS

[G.R. No. 167260, February 27, 2009]

FACTS:

The City of Iloilo assessed SMART for deficiency local franchise

and business taxes which it incurred for the years 1997 to
2001. SMART protested and claimed that exemption from
payment of local franchise and business taxes based on
Section 9 of its legislative franchise under Republic Act (R.A.)
No. 7294 (SMARTs franchise). Under SMARTs franchise, it was
required to pay a franchise tax equivalent to 3% of all gross
receipts, which amount shall be in lieu of all taxes. SMART
contends that the in lieu of all taxes clause covers local
franchise and business taxes.

The City of Iloilo posits that SMARTs claim for exemption

under its franchise is not equivocal enough to prevail over the
specific grant of power to local government units to exact
taxes from businesses operating within its territorial

intended that the tax exemption privileges withdrawn by Section
193 of RA 7160 *LGC+ were to be restored in respondents
*SMARTs+ franchise, it would have so expressly provided therein
and not merely [restored the exemption] by the simple expedient of
including the in lieu of all taxes provision in said franchise.`
paragraph of Section 9 speaks of tax returns filed and taxes paid
to the Commissioner of Internal Revenue or his duly authorized
representative in accordance with the National Internal Revenue
Code. Moreover, the same paragraph declares that the tax
returns shall be subject to audit by the Bureau of Internal
Revenue. Nothing is mentioned in Section 9 about local taxes.
The clear intent is for the in lieu of all taxes clause to apply
only to taxes under the National Internal Revenue Code and not
to local taxes.

ISSUE:

Nonetheless, even if Section 9 of SMARTs franchise can be construed as

covering local taxes as well, reliance thereon would now be unavailing.
Whether SMART is exempt from the payment of local franchise and The in lieu of all taxes clause basically exempts
business taxes

HELD:

We have indeed ruled that by virtue of Section 193 of the LGC, all
tax exemption privileges then enjoyed by all persons, save those
expressly mentioned, have been withdrawn effective January 1,
1992 the date of effectivity of the LGC. The first clause of Section
137 of the LGC states the same rule. However, the withdrawal of
exemptions, whether under Section 193 or 137 of the LGC, pertains
only to those already existing when the LGC was enacted. The
intention of the legislature was to remove all tax exemptions or
incentives granted prior to the LGC. As SMARTs franchise was made
effective on March 27, 1992 after the effectivity of the LGC
Section 193 will therefore not apply in this case.

But while Section 193 of the LGC will not affect the claimed tax
exemption under SMARTs franchise, we fail to find a categorical and
encompassing grant of tax exemption to SMART covering exemption
from both national and local taxes:

R.A. No 7294 does not expressly provide what kind of

taxes SMART is exempted from. It is not clear whether the
in lieu of all taxes provision in the franchise of SMART
would include exemption from local or national taxation.
What is clear is that SMART shall pay franchise tax
equivalent to three percent (3%) of all gross receipts of
the business transacted under its franchise. But whether
the franchise tax exemption would include exemption
from exactions by both the local and the national
government is not unequivocal.

The uncertainty in the in lieu of all taxes clause in R.A.

No. 7294 on whether SMART is exempted from both local
and national franchise tax must be construed strictly
against SMART which claims the exemption. [Emphasis
supplied.]

Justice Carpio, in his Separate Opinion in PLDT v. City of Davao,

explains why:

The proviso in the first paragraph of Section 9 of Smarts

franchise states that the grantee shall continue to be
liable for income taxes payable under Title II of the
National Internal Revenue Code. Also, the second
PUBLIC CORPORATION CASE DIGESTS || USC LAW
BATCH 2013
SMART from paying all other kinds of taxes for as long as it
pays the 3% franchise tax; it is the franchise tax that shall be in
lieu of all taxes, and not any other form of tax. Franchise taxes
on telecommunications companies, however, have been
abolished by R.A. No. 7716 or the Expanded Value-Added Tax
Law (E-VAT Law), which was enacted by Congress on January
1, 1996. To replace the franchise tax, the E-VAT Law imposed a
10% value-added tax on telecommunications companies under
Section 108 of the National Internal Revenue Code. The in lieu
of all taxes clause in the legislative franchise of SMART has
thus become functus officio, made inoperative for lack of a
franchise tax.
SMARTs claim for exemption from local business and franchise
taxes based on Section 9 of its franchise is therefore unfounded
1. whether GSIS under its charter is exempt from real
property taxation;
2. assuming that it is so exempt, whether GSIS is liable for
real property taxes for its properties leased to a taxable
entity;
3. whether the properties of GSIS are exempt from levy.
HELD:
GSIS enjoys under its charter full tax exemption. Moreover, as an
instrumentality of the national government, it is itself not liable to
pay real estate taxes assessed by the City of Manila against its
Katigbak and Concepcion-Arroceros properties. Following the
beneficial use rule, however, accrued real property taxes are due
from the Katigbak property, leased as it is to a taxable entity. But the
corresponding liability for the payment thereof devolves on the
taxable beneficial user. The Katigbak property cannot in any event
be subject of a public auction sale, notwithstanding its realty tax

GSIS vs. CITY TREASURER and CITY ASSESSOR of the CITY OF Page | 36
MANILA

[G.R. No. 186242, December 23, 2009]

FACTS:

GSIS owns or used to own two (2) parcels of land, the Katigbak
property and the Concepcion-Arroceros property. Both the
GSIS and the Metropolitan Trial Court (MeTC) of Manila
occupy the Concepcion-Arroceros property, while the Katigbak
property was under lease.

The City Treasurer of Manila assessed GSIS with unpaid real

property taxes due on the properties for years 1992 to 2002,
broken down as follows: (a) PhP 54,826,599.37 for the
Katigbak property; and (b) PhP 48,498,917.01 for the
Concepcion-Arroceros property. The letter warned of the
inclusion of the subject properties in the scheduled October
30, 2002 public auction of all delinquent properties in Manila
should the unpaid taxes remain unsettled before that date.

GSIS contended that it is exempted from all kinds of taxes,

including realty taxes, under Republic Act No. (RA) 8291 and
that: (a) the Katigbak property had been leased to and
occupied by the Manila Hotel Corporation (MHC), which has
contractually bound itself to pay any realty taxes that may be
imposed on the subject property; and (b) the Concepcion-
Arroceros property is partly occupied by GSIS and partly
occupied by the MeTC of Manila.

ISSUES:

delinquency. This means that the City of Manila has to satisfy its tax
claim by serving the accrued realty tax assessment on MHC, as the
taxable beneficial user of the Katigbak property and, in case of
nonpayment, through means other than the sale at public auction of
the leased property.
International Airport Authority, declared the GSIS liable for real property
taxes for the years 1992 to 1994 (contested real estate tax assessment
therein), its previous exemption under PD 1146 being considered
withdrawn with the enactment of the LGC in 1991.
Significantly, the Court, in City of Davao, stated the observation that the
GSIS tax-exempt status withdrawn in 1992 by the LGC was restored in
1997 by RA 8291.

1. GSIS Exempt from Real Property Tax

Under what may be considered as its first charter, the GSIS was set
up as a non-stock corporation managed by a board of trustees.
Notably, Section 26 of CA 186 (established GSIS in 1936 to manage
the pension system, life and retirement insurance, and other
benefits of all government employees) provided exemption from
any legal process and liens but only for insurance policies and their
proceeds
Real property taxes assessed and due from GSIS considered paid Sec. 39
of RA 8291 in 1997 xxx notwithstanding, any laws to the contrary, the
GSIS, its assets, revenues including all accruals thereto, and benefits paid,
shall be exempt from all taxes, assessments, fees, charges or duties of all
kinds. These exemptions shall

1977, PD 1146 - Sec. 33 provided for a new tax treatment for GSIS..
the System, its assets, revenues including all accruals thereto, and
benefits paid, shall be exempt from all taxes, assessments, fees,
charges or duties of all kinds.

RA 7160 lifted GSIS tax exemption

Of particular pertinence is the general provision on withdrawal of

tax exemption privileges in Sec. 193 of the LGC, and the special
provision on withdrawal of exemption from payment of real
property taxes in the last paragraph of the succeeding Sec. 234,
thus:

SEC. 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.

SEC. 234. Exemption from Real Property Tax. x x x Except

as provided herein, any exemption from payment of real
property tax previously granted to, or presently enjoyed
by, all persons, whether natural or juridical, including all
government-owned or controlled corporation are hereby
withdrawn upon the effectivity of this Code.

From the foregoing provisos, there can be no serious doubt about

the Congress intention to withdraw, subject to certain defined
exceptions, tax exemptions granted prior to the passage of RA 7160.
The question that easily comes to mind then is whether or not the
full tax exemption heretofore granted to GSIS under PD 1146,
particular insofar as realty tax is concerned, was deemed withdrawn.
We answer in the affirmative.

In Mactan Cebu International Airport Authority v. Marcos, the Court

held that the express withdrawal by the LGC of previously granted
exemptions from realty taxes applied to instrumentalities and
government-owned and controlled corporations (GOCCs), such as
the Mactan-Cebu International Airport Authority. In City of Davao v.
RTC, Branch XII, Davao City, the Court, citing Mactan Cebu
PUBLIC CORPORATION CASE DIGESTS || USC LAW
BATCH 2013
continue unless expressly and specifically revoked and any
assessment against the GSIS as of the approval of this Act are
hereby considered paid.
GSIS an instrumentality of the National Government
Third, GSIS manages the funds for the life insurance, retirement,
survivorship, and disability benefits of all government employees
and their beneficiaries. This undertaking, to be sure, constitutes an
essential and vital function which the government, through one of
its agencies or instrumentalities, ought to perform if social security
services to civil service employees are to be delivered with
reasonable dispatch. It is no wonder, therefore, that the Republic
guarantees the fulfillment of the obligations of the GSIS to its
members (government employees and their beneficiaries) when and
as they become due.

Apart from the foregoing consideration, the Courts fairly

recent ruling in Manila International Airport Authority v. Court
of Appeals, a case likewise involving real estate tax
assessments by a Metro Manila city on the real properties Page | 37
administered by MIAA, argues for the non-tax liability of GSIS
for real estate taxes. There, the Court held that MIAA does not
qualify as a GOCC, not having been organized either as a stock
corporation, its capital not being divided into shares, or as a
non-stock corporation because it has no members. MIAA is
rather an instrumentality of the National Government and,
hence, outside the purview of local taxation by force of Sec.
133 of the LGC providing in context that unless otherwise
provided, local governments cannot tax national government
instrumentalities. And as the Court pronounced in Manila
International Airport Authority, the airport lands and buildings
MIAA administers belong to the Republic of the Philippines,
which makes MIAA a mere trustee of such assets. No less than
the Administrative Code of 1987 recognizes a scenario where a
piece of land owned by the Republic is titled in the name of a
department, agency, or instrumentality.

While perhaps not of governing sway in all fours inasmuch as

what were involved in Manila International Airport Authority,
e.g., airfields and runways, are properties of the public
dominion and, hence, outside the commerce of man, the
rationale underpinning the disposition in that case is squarely
applicable to GSIS, both MIAA and GSIS being similarly
situated. First, xxxGSIS capital is not divided into unit shares.
xxxAlso, GSIS has no members to speak of. Its management is
entrusted to a Board of Trustees whose members are
appointed by the President.

Second, the subject properties under GSISs name are likewise

owned by the Republic. The GSIS is but a mere trustee of the
subject properties which have either been ceded to it by the
Government or acquired for the enhancement of the system.
This particular property arrangement is clearly shown by the
fact that the disposal or conveyance of said subject properties
are either done by or through the authority of the President of
the Philippines. Specifically, in the case of the Concepcion-
Arroceros property, it was transferred, conveyed, and ceded to
this Court on April 27, 2005 through a presidential
proclamation, Proclamation No. 835. Pertinently, the text of
the proclamation announces that the Concepcion-Arroceros
property was earlier ceded to the GSIS on October 13, 1954
pursuant to Proclamation No. 78 for office purposes and had
since been titled to GSIS which constructed an office building
thereon. Thus, the transfer on April 27, 2005 of the
Concepcion-Arroceros property to this Court by the President
through Proclamation No. 835.
 2. The leased Katigbak property shall be taxable pursuant to the beneficial use principle under Sec. 234(a) of the
LGC

It is true that said Sec. 234(a), quoted below, exempts from real estate taxes real property owned by the Republic, unless the
beneficial use of the property is, for consideration, transferred to a taxable person.

SEC. 234. Exemptions from Real Property Tax. The following are exempted from payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or otherwise, to a taxable person.

This exemption, however, must be read in relation with Sec. 133(o) of the LGC, which prohibits LGUs from imposing
taxes or fees of any kind on the national government, its agencies, and instrumentalities:

SEC. 133. Common Limitations on the Taxing Powers of

Local Government Units. Unless otherwise provided

herein, the exercise of the taxing powers of provinces,

cities, municipalities, and barangays shall not extend to

the levy of the following:

xxxx

(o) Taxes, fees or charges of any kinds on the National Government, its agencies and instrumentalities, and local
government units. (Emphasis supplied.)

Thus read together, the provisions allow the Republic to grant the beneficial use of its property to an agency or instrumentality
of the national government. Such grant does not necessarily result in the loss of the tax exemption. The tax exemption the
property of the Republic or its instrumentality carries ceases only if, as stated in Sec. 234(a) of the LGC of 1991, beneficial use
thereof has been granted, for a consideration or otherwise, to a taxable person. GSIS, as a government instrumentality, is not
a taxable juridical person under Sec. 133(o) of the LGC. GSIS, however, lost in a sense that status with respect to the Katigbak
property when it contracted its beneficial use to MHC, doubtless a taxable person. Thus, the real estate tax assessment of PhP
54,826,599.37 covering 1992 to 2002 over the subject Katigbak property is valid insofar as said tax delinquency is concerned as
assessed over said property.

xxx as to which between GSIS, as the owner of the Katigbak property, or MHC, as the lessee thereof, is liable to pay the
accrued real estate tax, need not detain us long. MHC ought to pay. As we declared in Testate Estate of Concordia T. Lim, the
unpaid tax attaches to the property and is chargeable against the taxable person who had actual or beneficial use and
possession of it regardless of whether or not he is the owner.xxx Actual use refers to the purpose for which the property is
principally or predominantly utilized by the person in possession thereof.

3. GSIS Properties Exempt from Levy

It is without doubt that the subject GSIS properties are exempt from any attachment, garnishment, execution, levy, or other
legal processes. This is the clear import of the third paragraph of Sec. 39, RA 8291, xxx The funds and/or the properties
referred to herein as well as the benefits, sums or monies corresponding to the benefits under this Act shall be exempt from
attachment, garnishment, execution, levy or other processes issued by the courts, quasi-judicial agencies or administrative
bodies xxx

Even granting arguendo that GSIS liability for realty taxes attached from 1992, when RA 7160 effectively lifted its tax
exemption under
PUBLIC CORPORATION CASE DIGESTS || USC LAW BATCH 2013

PD 1146, to 1996, when RA 8291 restored the tax incentive, the levy on the subject properties to answer for the assessed
realty tax delinquencies cannot still be sustained. The simple reason: The governing law, RA 8291, in force at the time of
the levy prohibits it. And in the final analysis, the proscription against the levy extends to the leased Katigbak property,
the beneficial use doctrine, notwithstanding.

PIMENTEL VS AGUIRRE

[G.R. No. 132988, July 19, 2000]

The President cannot order the withholding of 10% of the lgus internal revenue allotments. This encroaches on the fiscal
autonomy of local government and violates the consti and the lgc.

ISSUE: Whether AO 372 of President Ramos which withholds 10% of lgus IRA is valid

Section 4 of AO 372 cannot, however, be upheld. A basic feature of local fiscal autonomy is the automatic release of the
shares of LGUs in the national internal revenue. This is mandated by no less than the Constitution. The Local Government
Code specifies further that the release shall be made directly to the LGU concerned within five

(5) days after every quarter of the year and "shall not be subject to any lien or holdback that may be imposed by the
national government for whatever purpose." As a rule, the term "shall" is a word of command that must be given a
compulsory meaning. The provision is, therefore, imperative.

Section 4 of AO 372, however, orders the withholding, effective January 1, 1998, of 10 percent of the LGUs' IRA "pending
the assessment and evaluation by the Development Budget Coordinating Committee of the emerging fiscal situation" in
the country. Such withholding clearly contravenes the Constitution and the law. Although temporary, it is equivalent to a
holdback, which means "something held back or withheld, often temporarily." Hence, the "temporary" nature of the
retention by the national government does not matter. Any retention is prohibited.

In sum, while Section 1 of AO 372 may be upheld as an advisory effected in times of national crisis, Section 4 thereof has
no color of validity at all. The latter provision effectively encroaches on the fiscal autonomy of local governments.
Concededly, the President was well-intentioned in issuing his Order to withhold the LGUs IRA, but the rule of law requires
that even the best intentions must be carried out within the parameters of the Constitution and the law. Verily, laudable
purposes must be carried out by legal methods.

Respondents and their successors are hereby permanently PROHIBITED from implementing Administrative Order Nos.
372 and 43 insofar as local government units are concerned.

G.R. No. 204429, February 18, 2014

SMART COMMUNICATIONS, INC., Petitioner, v. MUNICIPALITY OF MALVAR, BATANGAS, Respondent.

DECISION

CARPIO, J.:

The Case

This petition for review1 challenges the 26 June 2012 Decision2 and 13 November 2012 Resolution3 of the
Court of Tax Appeals (CTA) En Banc. The CTA En Banc affirmed the 17 December 2010 Decision4and 7 April
2011 Resolution5 of the CTA First Division, which in turn affirmed the 2 December 20086Decision and 21 May
2009 Order7 of the Regional Trial Court of Tanauan City, Batangas, Branch 6. The trial court declared void
the assessment imposed by respondent Municipality of Malvar, Batangas against petitioner Smart
Communications, Inc. for its telecommunications tower for 2001 to July 2003 and directed respondent to
assess petitioner only for the period starting 1 October 2003.

The Facts

Petitioner Smart Communications, Inc. (Smart) is a domestic corporation engaged in the business of
providing telecommunications services to the general public while respondent Municipality of Malvar,
Batangas (Municipality) is a local government unit created by law.

In the course of its business, Smart constructed a telecommunications tower within the territorial jurisdiction
of the Municipality. The construction of the tower was for the purpose of receiving and transmitting cellular
communications within the covered area.

On 30 July 2003, the Municipality passed Ordinance No. 18, series of 2003, entitled An Ordinance
Regulating the Establishment of Special Projects.

On 24 August 2004, Smart received from the Permit and Licensing Division of the Office of the Mayor of the
Municipality an assessment letter with a schedule of payment for the total amount of P389,950.00 for
Smarts telecommunications tower. The letter reads as follows:

This is to formally submit to your good office your schedule of payments in the Municipal Treasury of the
Local Government Unit of Malvar, province of Batangas which corresponds to the tower of your company
built in the premises of the municipality, to wit:

TOTAL
PHP
PROJECT
11,000,000.00
COST:
For the
Year 2001
2003
50% of 1%
of the total Php55,000.00
project cost
Add: 45%
24,750.00
surcharge
Php79,750.00
Multiply by
3 yrs.
(2001, Php239,250.00
2002,
2003)

For the
year 2004
1% of the
total Php110,000.00
project cost
37%
40,700.00
surcharge

Php150,700.00

TOTAL Php389,950.00

Hoping that you will give this matter your preferential attention.8

Due to the alleged arrears in the payment of the assessment, the Municipality also caused the posting of a
closure notice on the telecommunications tower.

On 9 September 2004, Smart filed a protest, claiming lack of due process in the issuance of the assessment
and closure notice. In the same protest, Smart challenged the validity of Ordinance No. 18 on which the
assessment was based.

In a letter dated 28 September 2004, the Municipality denied Smarts protest.

On 17 November 2004, Smart filed with Regional Trial Court of Tanauan City, Batangas, Branch 6, an
Appeal/Petition assailing the validity of Ordinance No. 18. The case was docketed as SP Civil Case No. 04
111920.

On 2 December 2008, the trial court rendered a Decision partly granting Smarts Appeal/Petition. The trial
court confined its resolution of the case to the validity of the assessment, and did not rule on the legality of
Ordinance No. 18. The trial court held that the assessment covering the period from 2001 to July 2003 was
void since Ordinance No. 18 was approved only on 30 July 2003. However, the trial court declared valid the
assessment starting 1 October 2003, citing Article 4 of the Civil Code of the Philippines,9 in relation to the
provisions of Ordinance No. 18 and Section 166 of Republic Act No. 7160 or the Local Government Code of
1991 (LGC).10 The dispositive portion of the trial courts Decision reads:

WHEREFORE, in light of the foregoing, the Petition is partly GRANTED. The assessment dated August 24,
2004 against petitioner is hereby declared null and void insofar as the assessment made from year 2001 to
July 2003 and respondent is hereby prohibited from assessing and collecting, from petitioner, fees during
the said period and the Municipal Government of Malvar, Batangas is directed to assess Smart
Communications, Inc. only for the period starting October 1, 2003.

No costs.
SO ORDERED.11

The trial court denied the motion for reconsideration in its Order of 21 May 2009.

On 8 July 2009, Smart filed a petition for review with the CTA First Division, docketed as CTA AC No. 58.

On 17 December 2010, the CTA First Division denied the petition for review. The dispositive portion of the
decision reads:

WHEREFORE, the Petition for Review is hereby DENIED, for lack of merit. Accordingly, the assailed Decision
dated December 2, 2008 and the Order dated May 21, 2009 of Branch 6 of the Regional Trial Court of
Tanauan City, Batangas in SP. Civil Case No. 04111920 entitled Smart Communications, Inc. vs.
Municipality of Malvar, Batangas are AFFIRMED.

SO ORDERED.12

On 7 April 2011, the CTA First Division issued a Resolution denying the motion for reconsideration.

Smart filed a petition for review with the CTA En Banc, which affirmed the CTA First Divisions decision and
resolution. The dispositive portion of the CTA En Bancs 26 June 2012 decision reads:

WHEREFORE, premises considered, the present Petition for Review is hereby DISMISSED for lack of merit.

Accordingly, the assailed Decision dated December 17, 2010 and Resolution dated April 7, 2011 are hereby
AFFIRMED.

SO ORDERED.13

The CTA En Banc denied the motion for reconsideration.

Hence, this petition.

The Ruling of the CTA En Banc

The CTA En Banc dismissed the petition on the ground of lack of jurisdiction. The CTA En Banc declared that
it is a court of special jurisdiction and as such, it can take cognizance only of such matters as are clearly
within its jurisdiction. Citing Section 7(a), paragraph 3, of Republic Act No. 9282, the CTA En Banc held that
the CTA has exclusive appellate jurisdiction to review on appeal, decisions, orders or resolutions of the
Regional Trial Courts in local tax cases originally resolved by them in the exercise of their original or
appellate jurisdiction. However, the same provision does not confer on the CTA jurisdiction to resolve cases
where the constitutionality of a law or rule is challenged.

The Issues

The petition raises the following arguments:

1. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being contrary to law
and jurisprudence considering that the CTA En Banc should have exercised its jurisdiction and declared the
Ordinance as illegal.

2. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being contrary to law
and jurisprudence considering that the doctrine of exhaustion of administrative remedies does not apply in
[this case].
3. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being contrary to law
and jurisprudence considering that the respondent has no authority to impose the socalled fees on the
basis of the void ordinance.14

The Ruling of the Court

The Court denies the petition.

On whether the CTA has jurisdiction over the present case

Smart contends that the CTA erred in dismissing the case for lack of jurisdiction. Smart maintains that the
CTA has jurisdiction over the present case considering the unique factual circumstances involved.

The CTA refuses to take cognizance of this case since it challenges the constitutionality of Ordinance No. 18,
which is outside the province of the CTA.

Jurisdiction is conferred by law. Republic Act No. 1125, as amended by Republic Act No. 9282, created the
Court of Tax Appeals. Section 7, paragraph (a), subparagraph (3)15 of the law vests the CTA with the
exclusive appellate jurisdiction over decisions, orders or resolutions of the Regional Trial Courts in
local tax cases originally decided or resolved by them in the exercise of their original or appellate
jurisdiction.

The question now is whether the trial court resolved a local tax case in order to fall within the ambit of the
CTAs appellate jurisdiction This question, in turn, depends ultimately on whether the fees imposed under
Ordinance No. 18 are in fact taxes.

Smart argues that the fees in Ordinance No. 18 are actually taxes since they are not regulatory, but
revenueraising. Citing Philippine Airlines, Inc. v. Edu,16 Smart contends that the designation of fees in
Ordinance No. 18 is not controlling.

The Court finds that the fees imposed under Ordinance No. 18 are not taxes.

Section 5, Article X of the 1987 Constitution provides that [e]ach local government unit 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 government.

Consistent with this constitutional mandate, the LGC grants the taxing powers to each local government
unit. Specifically, Section 142 of the LGC grants municipalities the power to levy taxes, fees, and charges
not otherwise levied by provinces. Section 143 of the LGC provides for the scale of taxes on business that
may be imposed by municipalities17 while Section 14718 of the same law provides for the fees and charges
that may be imposed by municipalities on business and occupation.

The LGC defines the term charges as referring to pecuniary liability, as rents or fees against persons or
property, while the term fee means a charge fixed by law or ordinance for the regulation or inspection of
a business or activity.19

In this case, the Municipality issued Ordinance No. 18, which is entitled An Ordinance Regulating the
Establishment of Special Projects, to regulate the placing, stringing, attaching, installing, repair and
construction of all gas mains, electric, telegraph and telephone wires, conduits, meters and other apparatus,
and provide for the correction, condemnation or removal of the same when found to be dangerous, defective
or otherwise hazardous to the welfare of the inhabitant[s].20 It was also envisioned to address the foreseen
environmental depredation to be brought about by these special projects to the Municipality.21 Pursuant
to these objectives, the Municipality imposed fees on various structures, which included telecommunications
towers.
As clearly stated in its whereas clauses, the primary purpose of Ordinance No. 18 is to regulate the placing,
stringing, attaching, installing, repair and construction of all gas mains, electric, telegraph and telephone
wires, conduits, meters and other apparatus listed therein, which included Smarts telecommunications
tower. Clearly, the purpose of the assailed Ordinance is to regulate the enumerated activities particularly
related to the construction and maintenance of various structures. The fees in Ordinance No. 18 are not
impositions on the building or structure itself; rather, they are impositions on the activity subject of
government regulation, such as the installation and construction of the structures.22

Since the main purpose of Ordinance No. 18 is to regulate certain construction activities of the identified
special projects, which included cell sites or telecommunications towers, the fees imposed in Ordinance
No. 18 are primarily regulatory in nature, and not primarily revenueraising. While the fees may
contribute to the revenues of the Municipality, this effect is merely incidental. Thus, the fees imposed in
Ordinance No. 18 are not taxes.

In Progressive Development Corporation v. Quezon City,23 the Court declared that if the generating of
revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation
is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition a
tax.

In Victorias Milling Co., Inc. v. Municipality of Victorias,24 the Court reiterated that the purpose and effect of
the imposition determine whether it is a tax or a fee, and that the lack of any standards for such imposition
gives the presumption that the same is a tax.

We accordingly say that the designation given by the municipal authorities does not decide whether the
imposition is properly a license tax or a license fee. The determining factors are the purpose and effect of
the imposition as may be apparent from the provisions of the ordinance. Thus, [w]hen no police inspection,
supervision, or regulation is provided, nor any standard set for the applicant to establish, or that he agrees
to attain or maintain, but any and all persons engaged in the business designated, without qualification or
hindrance, may come, and a license on payment of the stipulated sum will issue, to do business, subject to
no prescribed rule of conduct and under no guardian eye, but according to the unrestrained judgment or
fancy of the applicant and licensee, the presumption is strong that the power of taxation, and not the police
power, is being exercised.

Contrary to Smarts contention, Ordinance No. 18 expressly provides for the standards which Smart must
satisfy prior to the issuance of the specified permits, clearly indicating that the fees are regulatory in nature.
These requirements are as follows:

SECTION 5. Requirements and Procedures in Securing Preliminary Development Permit.

The following documents shall be submitted to the SB Secretary in triplicate:

a) zoning clearance
b) Vicinity Map
c) Site Plan
d) Evidence of ownership
e) Certificate true copy of NTC Provisional Authority in case of Cellsites, telephone or telegraph line, ERB in
case of gasoline station, power plant, and other concerned national agencies
f) Conversion order from DAR is located within agricultural zone.
g) Radiation Protection Evaluation.
h) Written consent from subdivision association or the residence of the area concerned if the special projects
is located within the residential zone.
i) Barangay Council Resolution endorsing the special projects.

SECTION 6. Requirement for Final Development Permit Upon the expiration of 180 days and the
proponents of special projects shall apply for final [development permit] and they are require[d] to submit
the following:

a) evaluation from the committee where the Vice Mayor refers the special project
b) Certification that all local fees have been paid.
Considering that the fees in Ordinance No. 18 are not in the nature of local taxes, and Smart is questioning
the constitutionality of the ordinance, the CTA correctly dismissed the petition for lack of jurisdiction.
Likewise, Section 187 of the LGC,25 which outlines the procedure for questioning the constitutionality of a
tax ordinance, is inapplicable, rendering unnecessary the resolution of the issue on nonexhaustion of
administrative remedies.

On whether the imposition of the fees in Ordinance No. 18 is ultra vires

Smart argues that the Municipality exceeded its power to impose taxes and fees as provided in Book II, Title
One, Chapter 2, Article II of the LGC. Smart maintains that the mayors permit fees in Ordinance No. 18
(equivalent to 1% of the project cost) are not among those expressly enumerated in the LGC.

As discussed, the fees in Ordinance No.18 are not taxes. Logically, the imposition does not appear in the
enumeration of taxes under Section 143 of the LGC.

Moreover, even if the fees do not appear in Section 143 or any other provision in the LGC, the Municipality is
empowered to impose taxes, fees and charges, not specifically enumerated in the LGC or taxed under the
Tax Code or other applicable law. Section 186 of the LGC, granting local government units wide latitude in
imposing fees, expressly provides:

Section 186. Power To Levy Other Taxes, Fees or Charges. Local government units may exercise the
power to levy taxes, fees or charges on any base or subject not otherwise specifically enumerated herein or
taxed under the provisions of the National Internal Revenue Code, as amended, or other applicable laws:
Provided, That the taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory or
contrary to declared national policy: Provided, further, That the ordinance levying such taxes, fees or
charges shall not be enacted without any prior public hearing conducted for the purpose.

Smart further argues that the Municipality is encroaching on the regulatory powers of the National
Telecommunications Commission (NTC). Smart cites Section 5(g) of Republic Act No. 7925 which provides
that the National Telecommunications Commission (NTC), in the exercise of its regulatory powers, shall
impose such fees and charges as may be necessary to cover reasonable costs and expenses for the
regulation and supervision of the operations of telecommunications entities. Thus, Smart alleges that the
regulation of telecommunications entities and all aspects of its operations is specifically lodged by law on the
NTC.

To repeat, Ordinance No. 18 aims to regulate the placing, stringing, attaching, installing, repair and
construction of all gas mains, electric, telegraph and telephone wires, conduits, meters and other apparatus
within the Municipality. The fees are not imposed to regulate the administrative, technical, financial, or
marketing operations of telecommunications entities, such as Smarts; rather, to regulate the installation
and maintenance of physical structures Smarts cell sites or telecommunications tower. The regulation of
the installation and maintenance of such physical structures is an exercise of the police power of the
Municipality. Clearly, the Municipality does not encroach on NTCs regulatory powers.

The Court likewise rejects Smarts contention that the power to fix the fees for the issuance of development
permits and locational clearances is exercised by the Housing and Land Use Regulatory Board (HLURB).
Suffice it to state that the HLURB itself recognizes the local government units power to collect fees related
to land use and development. Significantly, the HLURB issued locational guidelines governing
telecommunications infrastructure. Guideline No. VI relates to the collection of locational clearance fees
either by the HLURB or the concerned local government unit, to wit:

VI. Fees

The Housing and Land Use Regulatory Board in the performance of its functions shall collect the locational
clearance fee based on the revised schedule of fees under the special use project as per Resolution No. 622,
series of 1998 or by the concerned LGUs subject to EO 72.26

On whether Ordinance No. 18 is valid and constitutional

Smart contends that Ordinance No. 18 violates Sections 130(b)(3)27 and 186 of the LGC since the fees are
unjust, excessive, oppressive and confiscatory. Aside from this bare allegation, Smart did not present any
evidence substantiating its claims. In Victorias Milling Co., Inc. v. Municipality of Victorias,28the Court
rejected the argument that the fees imposed by respondent therein are excessive for lack of evidence
supporting such claim, to wit:

An ordinance carries with it the presumption of validity. The question of reasonableness though is open to
judicial inquiry. Much should be left thus to the discretion of municipal authorities. Courts will go slow in
writing off an ordinance as unreasonable unless the amount is so excessive as to be prohibitive, arbitrary,
unreasonable, oppressive, or confiscatory. A rule which has gained acceptance is that factors relevant to
such an inquiry are the municipal conditions as a whole and the nature of the business made subject to
imposition.

Plaintiff, has however not sufficiently proven that, taking these factors together, the license taxes are
unreasonable. The presumption of validity subsists. For, plaintiff has limited itself to insisting that the
amounts levied exceed the cost of regulation and the municipality has adequate funds for the alleged
purposes as evidenced by the municipalitys cash surplus for the fiscal year ending 1956.

On the constitutionality issue, Smart merely pleaded for the declaration of unconstitutionality of Ordinance
No. 18 in the Prayer of the Petition, without any argument or evidence to support its plea. Nowhere in the
body of the Petition was this issue specifically raised and discussed. Significantly, Smart failed to cite any
constitutional provision allegedly violated by respondent when it issued Ordinance No. 18.

Settled is the rule that every law, in this case an ordinance, is presumed valid. To strike down a law as
unconstitutional, Smart has the burden to prove a clear and unequivocal breach of the Constitution, which
Smart miserably failed to do. In Lawyers Against Monopoly and Poverty (LAMP) v. Secretary of Budget and
Management,29 the Court held, thus:

To justify the nullification of the law or its implementation, there must be a clear and unequivocal, not a
doubtful, breach of the Constitution. In case of doubt in the sufficiency of proof establishing
unconstitutionality, the Court must sustain legislation because to invalidate [a law] based on x x x baseless
supposition is an affront to the wisdom not only of the legislature that passed it but also of the executive
which approved it. This presumption of constitutionality can be overcome only by the clearest showing that
there was indeed an infraction of the Constitution, and only when such a conclusion is reached by the
required majority may the Court pronounce, in the discharge of the duty it cannot escape, that the
challenged act must be struck down.

WHEREFORE, the Court DENIES the petition.

SO ORDERED.

G.R. No. 195390, December 10, 2014

GOV. LUIS RAYMUND F. VILLAFUERTE, JR., AND THE PROVINCE OF CAMARINES

SUR, Petitioners, v. HON. JESSE M. ROBREDO, IN HIS CAPACITY AS SECRETARY OF THE
DEPARTMENT OF THE INTERIOR AND LOCAL GOVERNMENT, Respondent.

DECISION

REYES, J.:

This is a petition for certiorari and prohibition1 under Rule 65 of the 1997 Revised Rules of Court filed by
former Governor Luis Raymund F. Villafuerte, Jr. (Villafuerte) and the Province of Camarines Sur
(petitioners), seeking to annul and set aside the following issuances of the late Honorable Jesse M. Robredo
(respondent), in his capacity as then Secretary of the Department of the Interior and Local Government
(DILG), to wit:
(a) Memorandum Circular (MC) No. 2010-83 dated August 31, 2010,
pertaining to the full disclosure of local budget and finances, and bids
and public offerings;2
(b) MC No. 2010-138 dated December 2, 2010, pertaining to the use of the
20% component of the annual internal revenue allotment shares;3 and
(c) MC No. 2011-08 dated January 13, 2011, pertaining to the strict
adherence to Section 90 of Republic Act (R.A.) No. 10147 or the General
Appropriations Act of 2011.4
The petitioners seek the nullification of the foregoing issuances on the ground of unconstitutionality and for
having been issued with grave abuse of discretion amounting to lack or excess of jurisdiction.

The Facts

In 1995, the Commission on Audit (COA) conducted an examination and audit on the manner the local
government units (LGUs) utilized their Internal Revenue Allotment (IRA) for the calendar years 1993-1994.
The examination yielded an official report, showing that a substantial portion of the 20% development fund
of some LGUs was not actually utilized for development projects but was diverted to expenses properly
chargeable against the Maintenance and Other Operating Expenses (MOOE), in stark violation of Section 287
of R.A. No. 7160, otherwise known as the Local Government Code of 1991 (LGC). Thus, on December 14,
1995, the DILG issued MC No. 95-216,5 enumerating the policies and guidelines on the utilization of the
development fund component of the IRA. It likewise carried a reminder to LGUs of the strict mandate to
ensure that public funds, like the 20% development fund, shall be spent judiciously and only for the very
purpose or purposes for which such funds are intended.6

On September 20, 2005, then DILG Secretary Angelo T. Reyes and Department of Budget and Management
Secretary Romulo L. Neri issued Joint MC No. 1, series of 2005,7 pertaining to the guidelines on the
appropriation and utilization of the 20% of the IRA for development projects, which aims to enhance
accountability of the LGUs in undertaking development projects. The said memorandum circular underscored
that the 20% of the IRA intended for development projects should be utilized for social development,
economic development and environmental management.8

On August 31, 2010, the respondent, in his capacity as DILG Secretary, issued the assailed MC No. 2010-
83,9 entitled Full Disclosure of Local Budget and Finances, and Bids and Public Offerings, which aims to
promote good governance through enhanced transparency and accountability of LGUs. The pertinent portion
of the issuance reads:

Legal and Administrative Authority

Section 352 of the Local Government Code of 1991 requires the posting within 30 days from the end of each
fiscal year in at least three (3) publicly accessible and conspicuous places in the local government unit a
summary of all revenues collected and funds received including the appropriations and disbursements of
such funds during the preceding fiscal year.

On the other hand, Republic Act No. 9184, known as the Government Procurement Reform Act, calls for the
posting of the Invitation to Bid, Notice of Award, Notice to Proceed and Approved Contract in the procuring
entitys premises, in newspapers of general circulation, the Philippine Government Electronic Procurement
System (PhilGEPS) and the website of the procuring entity.

The declared policy of the State to promote good local governance also calls for the posting of budgets,
expenditures, contracts and loans, and procurement plans of local government units in conspicuous places
within public buildings in the locality, in the web, and in print media of community or general circulation.

Furthermore, the President, in his first State of the Nation Address, directed all government agencies and
entities to bring to an end luxurious spending and misappropriation of public funds and to expunge
mendacious and erroneous projects, and adhere to the zero-based approach budgetary principle.

Responsibility of the Local Chief Executive

All Provincial Governors, City Mayors and Municipal Mayors, are directed to faithfully comply with the
abovecited [sic] provisions of laws, and existing national policy, by posting in conspicuous places within
public buildings in the locality, or in print media of community or general circulation, and in their websites,
the following:

1. CY 2010 Annual Budget, information detail to the level of particulars of personal services,
maintenance and other operating expenses and capital outlay per individual offices (Source
Document - Local Budget Preparation Form No. 3, titled, Program Appropriation and Obligation by
Object of Expenditure, limited to PS, MOOE and CO. For sample form, please visit
www.naga.gov.ph);

2. Quarterly Statement of Cash Flows, information detail to the level of particulars of cash flows from
operating activities (e.g. cash inflows, total cash inflows, total cash outflows), cash flows from
investing activities (e.g. cash outflows), net increase in cash and cash at the beginning of the period
(Source Document - Statement of Cash Flows Form);

3. CY 2009 Statement of Receipts and Expenditures, information detail to the level of particulars of
beginning cash balance, receipts or income on local sources (e.g., tax revenue, non-tax revenue),
external sources, and receipts from loans and borrowings, surplus of prior years, expenditures on
general services, economic services, social services and debt services, and total expenditures
(Source Document - Local Budget Preparation Form No. 2, titled, Statement of Receipts and
Expenditures);

4. CY 2010 Trust Fund (PDAF) Utilization, information detail to the level of particulars of object
expenditures (Source Document - Local Budget Preparation Form No. 3, titled, Program
Appropriation and Obligation by Object of Expenditure, limited to PDAF Utilization);

5. CY 2010 Special Education Fund Utilization, information detail to the level of particulars of object
expenditures (Source Document - Local Budget Preparation Form No. 3, titled, Program
Appropriation and Obligation by Object of Expenditure, limited to Special Education Fund);

6. CY 2010 20% Component of the IRA Utilization, information detail to the level of particulars of
objects of expenditure on social development, economic development and environmental
management (Source Document - Local Budget Preparation Form No. 3, titled, Program
Appropriation and Obligation by Object of Expenditure, limited to 20% Component of the Internal
Revenue Allotment);

7. CY 2010 Gender and Development Fund Utilization, information detail to the level of particulars of
object expenditures (Source Document - Local Budget Preparation Form No. 3, titled, Program
Appropriation and Obligation by Object of Expenditure, limited to Gender and Development Fund);

8. CY 2010 Statement of Debt Service, information detail to the level of name of creditor, purpose of
loan, date contracted, term, principal amount, previous payment made on the principal and interest,
amount due for the budget year and balance of the principal (Source Document - Local Budget
Preparation Form No. 6, titled, Statement of Debt Service);

9. CY 2010 Annual Procurement Plan or Procurement List, information detail to the level of name of
project, individual item or article and specification or description of goods and services, procurement
method, procuring office or fund source, unit price or estimated cost or approved budget for the
contract and procurement schedule (Source Document - LGU Form No. 02, Makati City. For sample
form, please visit www.makati.gov.ph.)[;]

10. Items to Bid, information detail to the level of individual Invitation to Bid, containing information as
prescribed in Section 21.1 of Republic Act No. 9184, or The Government Procurement Reform Act,
to be updated quarterly (Source Document - Invitation to Apply for Eligibility and to Bid, as
prescribed in Section 21.1 of R.A. No. 9184. For sample form, please visit www.naga.gov.ph);

11. Bid Results on Civil Works, and Goods and Services, information detail to the level of project
reference number, name and location of project, name (company and proprietor) and address of
winning bidder, bid amount, approved budget for the contract, bidding date, and contract duration,
 to be updated quarterly (Source Document Infrastructure Projects/Goods and Services Bid-Out
(2010), Naga City. For sample form, please visit www.naga.gov.ph); and

12. Abstract of Bids as Calculated, information detail to the level of project name, location,
implementing office, approved budget for the contract, quantity and items subject for bidding, and
bids of competing bidders, to be updated quarterly (Source Document - Standard Form No. SF-
GOOD-40, Revised May 24, 2004, Naga City. For sample form, please visit www.naga.gov.ph).

The foregoing circular also states that non-compliance will be meted sanctions in accordance with pertinent
laws, rules and regulations.10

On December 2, 2010, the respondent issued MC No. 2010-138,11 reiterating that 20% component of the
IRA shall be utilized for desirable social, economic and environmental outcomes essential to the attainment
of the constitutional objective of a quality of life for all. It also listed the following enumeration of expenses
for which the fund must not be utilized, viz:

1. Administrative expenses such as cash gifts, bonuses, food allowance, medical assistance, uniforms,
supplies, meetings, communication, water and light, petroleum products, and the like;
2. Salaries, wages or overtime pay;
3. Travelling expenses, whether domestic or foreign;
4. Registration or participation fees in training, seminars, conferences or conventions;
5. Construction, repair or refinishing of administrative offices;
6. Purchase of administrative office furniture, fixtures, equipment or appliances; and
7. Purchase, maintenance or repair of motor vehicles or motorcycles, except ambulances.12

On January 13, 2011, the respondent issued MC No. 2011-08,13 directing for the strict adherence to Section
90 of R.A. No. 10147 or the General Appropriations Act of 2011. The pertinent portion of the issuance reads
as follows:

Legal and Administrative Authority

Section 90 of Republic Act No. 10147 (General Appropriations Act) FY 2011 re Use and
Disbursement of Internal Revenue Allotment of LGUs, [sic] stipulates: The amount appropriated for
the LGUs share in the Internal Revenue Allotment shall be used in accordance with Sections 17 (g) and 287
of R.A. No 7160. The annual budgets of LGUs shall be prepared in accordance with the forms, procedures,
and schedules prescribed by the Department of Budget and Management and those jointly issued with the
Commission on Audit. Strict compliance with Sections 288 and 354 of R.A. No. 7160 and DILG Memorandum
Circular No. 2010-83, entitled Full Disclosure of Local Budget and Finances, and Bids and Public offering is
hereby mandated; PROVIDED, That in addition to the publication or posting requirement under Section 352
of R.A. No. 7160 in three (3) publicly accessible and conspicuous places in the local government unit, the
LGUs shall also post the detailed information on the use and disbursement, and status of programs and
projects in the LGUS websites. Failure to comply with these requirements shall subject the responsible
officials to disciplinary actions in accordance with existing laws. x x x14

xxxx

Sanctions

Non-compliance with the foregoing shall be dealt with in accordance with pertinent laws, rules and
regulations. In particular, attention is invited to the provision of the Local Government Code of 1991, quoted
as follows:chan roblesv irtuallawl ib rary

Section 60. Grounds for Disciplinary Actions - An elective local official may be disciplined, suspended, or
removed from office on: (c) Dishonesty, oppression, misconduct in office, gross negligence, or
dereliction of duty . x x x15 (Emphasis and underscoring in the original)

On February 21, 2011, Villafuerte, then Governor of Camarines Sur, joined by the Provincial Government of
Camarines Sur, filed the instant petition for certiorari, seeking to nullify the assailed issuances of the
respondent for being unconstitutional and having been issued with grave abuse of discretion.
On June 2, 2011, the respondent filed his Comment on the petition.16 Then, on June 22, 2011, the
petitioners filed their Reply (With Urgent Prayer for the Issuance of a Writ of Preliminary Injunction and/or
Temporary Restraining Order).17 In the Resolution18 dated October 11, 2011, the Court gave due course to
the petition and directed the parties to file their respective memorandum. In compliance therewith, the
respondent and the petitioners filed their Memorandum on January 19, 201219 and on February 8,
201220 respectively.

The petitioners raised the following issues:

Issues

THE HON. SECRETARY OF THE INTERIOR AND LOCAL GOVERNMENT COMMITTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN HE ISSUED THE ASSAILED
MEMORANDUM CIRCULARS IN VIOLATION OF THE PRINCIPLES OF LOCAL AUTONOMY AND FISCAL
AUTONOMY ENSHRINED IN THE 1987 CONSTITUTION AND THE LOCAL GOVERNMENT CODE OF 1991[.]

II

THE HON. SECRETARY OF THE INTERIOR AND LOCAL GOVERNMENT COMMITTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN HE INVALIDLY ASSUMED
LEGISLATIVE POWERS IN PROMULGATING THE ASSAILED MEMORANDUM CIRCULARS WHICH WENT
BEYOND THE CLEAR AND MANIFEST INTENT OF THE 1987 CONSTITUTION AND THE LOCAL GOVERNMENT
CODE OF 1991[.]21

Ruling of the Court

The present petition revolves around the main issue: Whether or not the assailed memorandum circulars
violate the principles of local and fiscal autonomy enshrined in the Constitution and the LGC.

The present petition is ripe for

judicial review.

At the outset, the respondent is questioning the propriety of the exercise of the Courts power of judicial
review over the instant case. He argues that the petition is premature since there is yet any actual
controversy that is ripe for judicial determination. He points out the lack of allegation in the petition that the
assailed issuances had been fully implemented and that the petitioners had already exhausted
administrative remedies under Section 25 of the Revised Administrative Code before filing the same in
court.22

It is well-settled that the Courts exercise of the power of judicial review requires the concurrence of the
following elements: (1) there must be an actual case or controversy calling for the exercise of judicial
power; (2) the person challenging the act must have the standing to question the validity of the subject act
or issuance; otherwise stated, he must have a personal and substantial interest in the case such that he has
sustained, or will sustain, direct injury as a result of its enforcement; (3) the question of constitutionality
must be raised at the earliest opportunity; and (4) the issue of constitutionality must be the very lis mota of
the case.23

The respondent claims that there is yet any actual case or controversy that calls for the exercise of judicial
review. He contends that the mere expectation of an administrative sanction does not give rise to a
justiciable controversy especially, in this case, that the petitioners have yet to exhaust administrative
remedies available.24

The Court disagrees.

In La Bugal-Blaan Tribal Association, Inc. v. Ramos,25 the Court characterized an actual case or
controversy, viz:

An actual case or controversy means an existing case or controversy that is appropriate or ripe for
determination, not conjectural or anticipatory, lest the decision of the court would amount to an advisory
opinion. The power does not extend to hypothetical questions since any attempt at abstraction could only
lead to dialectics and barren legal questions and to sterile conclusions unrelated to actualities.26 (Citations
omitted)

The existence of an actual controversy in the instant case cannot be overemphasized. At the time of filing of
the instant petition, the respondent had already implemented the assailed memorandum circulars. In fact,
on May 26, 2011, Villafuerte received Audit Observation Memorandum (AOM) No. 2011-009 dated May 10,
201127 from the Office of the Provincial Auditor of Camarines Sur, requiring him to comment on the
observation of the audit team, which states:

The Province failed to post the transactions and documents required under Department of Interior and Local
Government (DILG) Memorandum Circular No. 2010-83, thereby violating the mandate of full disclosure of
Local Budget and Finances, and Bids and Public Offering.

xxxx

The local officials concerned are reminded of the sanctions mentioned in the circular which is quoted
hereunder, thus:

Noncompliance with the foregoing shall be dealt with in accordance with pertinent laws, rules and
regulations. In particular, attention is invited to the provision of Local Government Code of 1991, quoted as
follows:cha nro blesvi rtua llawli bra ry

Section 60. Grounds for Disciplinary Actions An elective local official may be disciplined, suspended or
removed from office on: (c) Dishonesty, oppression, misconduct in office, gross negligence or dereliction of
duty.28

The issuance of AOM No. 2011-009 to Villafuerte is a clear indication that the assailed issuances of the
respondent are already in the full course of implementation. The audit memorandum specifically mentioned
of Villafuertes alleged non-compliance with MC No. 2010-83 regarding the posting requirements stated in
the circular and reiterated the sanctions that may be imposed for the omission. The fact that Villafuerte is
being required to comment on the contents of AOM No. 2011-009 signifies that the process of investigation
for his alleged violation has already begun. Ultimately, the investigation is expected to end in a resolution on
whether a violation has indeed been committed, together with the appropriate sanctions that come with it.
Clearly, Villafuertes apprehension is real and well-founded as he stands to be sanctioned for non-compliance
with the issuances.

There is likewise no merit in the respondents claim that the petitioners failure to exhaust administrative
remedies warrants the dismissal of the petition. It bears emphasizing that the assailed issuances were
issued pursuant to the rule-making or quasi-legislative power of the DILG. This pertains to the power to
make rules and regulations which results in delegated legislation that is within the confines of the granting
statute.29 Not to be confused with the quasi-legislative or rule-making power of an administrative agency is
its quasi-judicial or administrative adjudicatory power. This is the power to hear and determine questions of
fact to which the legislative policy is to apply and to decide in accordance with the standards laid down by
the law itself in enforcing and administering the same law.30 In challenging the validity of an administrative
issuance carried out pursuant to the agencys rule-making power, the doctrine of exhaustion of
administrative remedies does not stand as a bar in promptly resorting to the filing of a case in court. This
was made clear by the Court in Smart Communications, Inc. (SMART) v. National Telecommunications
Commission (NTC),31 where it was ruled, thus:

In questioning the validity or constitutionality of a rule or regulation issued by an administrative agency, a

party need not exhaust administrative remedies before going to court. This principle applies only where the
act of the administrative agency concerned was performed pursuant to its quasi-judicial function, and not
when the assailed act pertained to its rule-making or quasi-legislative power. x x x.32

Considering the foregoing clarification, there is thus no bar for the Court to resolve the substantive issues
raised in the petition.

The assailed memorandum circulars

do not transgress the local and fiscal
autonomy granted to LGUs.

The petitioners argue that the assailed issuances of the respondent interfere with the local and fiscal
autonomy of LGUs embodied in the Constitution and the LGC. In particular, they claim that MC No. 2010-
138 transgressed these constitutionally-protected liberties when it restricted the meaning of development
and enumerated activities which the local government must finance from the 20% development fund
component of the IRA and provided sanctions for local authorities who shall use the said component of the
fund for the excluded purposes stated therein.33 They argue that the respondent cannot substitute his own
discretion with that of the local legislative council in enacting its annual budget and specifying the
development projects that the 20% component of its IRA should fund.34

The argument fails to persuade.

The Constitution has expressly adopted the policy of ensuring the autonomy of LGUs.35 To highlight its
significance, the entire Article X of the Constitution was devoted to laying down the bedrock upon which this
policy is anchored.

It is also pursuant to the mandate of the Constitution of enhancing local autonomy that the LGC was
enacted. Section 2 thereof was a reiteration of the state policy. It reads, thus:

Sec. 2. Declaration of Policy. (a) It is hereby declared the policy of the State that the territorial and
political subdivisions of the State shall enjoy genuine and meaningful local autonomy to enable them to
attain their fullest development as self-reliant communities and make them more effective partners in the
attainment of national goals. Toward this end, the State shall provide for a more responsive and accountable
local government structure instituted through a system of decentralization whereby local government units
shall be given more powers, authority, responsibilities, and resources. The process of decentralization shall
proceed from the national government to the local government units.

Verily, local autonomy means a more responsive and accountable local government structure instituted
through a system of decentralization.36 In Limbona v. Mangelin,37 the Court elaborated on the concept of
decentralization, thus:

[A]utonomy is either decentralization of administration or decentralization of power. There is

decentralization of administration when the central government delegates administrative powers to political
subdivisions in order to broaden the base of government power and in the process to make local
governments more responsive and accountable, and ensure their fullest development as self-reliant
communities and make them more effective partners in the pursuit of national development and social
progress. At the same time, it relieves the central government of the burden of managing local affairs and
enables it to concentrate on national concerns. x x x.

Decentralization of power, on the other hand, involves an abdication of political power in the favor of local
governments [sic] units declared to be autonomous. In that case, the autonomous government is free to
chart its own destiny and shape its future with minimum intervention from central authorities. x x
x.38 (Citations omitted)

To safeguard the state policy on local autonomy, the Constitution confines the power of the President over
LGUs to mere supervision.39 The President exercises general supervision over them, but only to ensure
that local affairs are administered according to law. He has no control over their acts in the sense that he
can substitute their judgments with his own.40 Thus, Section 4, Article X of the Constitution, states:

Section 4. The President of the Philippines shall exercise general supervision over local governments.
Provinces with respect to component cities and municipalities, and cities and municipalities with respect to
component barangays, shall ensure that the acts of their component units are within the scope of their
prescribed powers and functions.

In Province of Negros Occidental v. Commissioners, Commission on Audit,41 the Court distinguished general
supervision from executive control in the following manner:

The Presidents power of general supervision means the power of a superior officer to see to it that
subordinates perform their functions according to law. This is distinguished from the Presidents power of
control which is the power to alter or modify or set aside what a subordinate officer had done in the
performance of his duties and to substitute the judgment of the President over that of the subordinate
officer. The power of control gives the President the power to revise or reverse the acts or decisions of a
subordinate officer involving the exercise of discretion.42 (Citations omitted)

It is the petitioners contention that the respondent went beyond the confines of his supervisory powers, as
alter ego of the President, when he issued MC No. 2010-138. They argue that the mandatory nature of the
circular, with the threat of imposition of sanctions for non-compliance, evinces a clear desire to exercise
control over LGUs.43

The Court, however, perceives otherwise.

A reading of MC No. 2010-138 shows that it is a mere reiteration of an existing provision in the LGC. It was
plainly intended to remind LGUs to faithfully observe the directive stated in Section 287 of the LGC to utilize
the 20% portion of the IRA for development projects. It was, at best, an advisory to LGUs to examine
themselves if they have been complying with the law. It must be recalled that the assailed circular was
issued in response to the report of the COA that a substantial portion of the 20% development fund of some
LGUs was not actually utilized for development projects but was diverted to expenses more properly
categorized as MOOE, in violation of Section 287 of the LGC. This intention was highlighted in the very first
paragraph of MC No. 2010-138, which reads:

Section 287 of the Local Government Code mandates every local government to appropriate in its annual
budget no less than 20% of its annual revenue allotment for development projects. In common
understanding, development means the realization of desirable social, economic and environmental
outcomes essential in the attainment of the constitutional objective of a desired quality of life for
all.44 (Underscoring in the original)

That the term development was characterized as the realization of desirable social, economic and
environmental outcome does not operate as a restriction of the term so as to exclude some other activities
that may bring about the same result. The definition was a plain characterization of the concept of
development as it is commonly understood. The statement of a general definition was only necessary to
illustrate among LGUs the nature of expenses that are properly chargeable against the development fund
component of the IRA. It is expected to guide them and aid them in rethinking their ways so that they may
be able to rectify lapses in judgment, should there be any, or it may simply stand as a reaffirmation of an
already proper administration of expenses.

The same clarification may be said of the enumeration of expenses in MC No. 2010-138. To begin with, it is
erroneous to call them exclusions because such a term signifies compulsory disallowance of a particular item
or activity. This is not the contemplation of the enumeration. Again, it is helpful to retrace the very reason
for the issuance of the assailed circular for a better understanding. The petitioners should be reminded that
the issuance of MC No. 2010-138 was brought about by the report of the COA that the development fund
was not being utilized accordingly. To curb the alleged misuse of the development fund, the respondent
deemed it proper to remind LGUs of the nature and purpose of the provision for the IRA through MC No.
2010-138. To illustrate his point, he included the contested enumeration of the items for which the
development fund must generally not be used. The enumerated items comprised the expenses which the
COA perceived to have been improperly earmarked or charged against the development fund based on the
audit it conducted.

Contrary to the petitioners posturing, however, the enumeration was not meant to restrict the discretion of
the LGUs in the utilization of their funds. It was meant to enlighten LGUs as to the nature of the
development fund by delineating it from other types of expenses. It was incorporated in the assailed circular
in order to guide them in the proper disposition of the IRA and avert further misuse of the fund by citing
current practices which seemed to be incompatible with the purpose of the fund. Even then, LGUs remain at
liberty to map out their respective development plans solely on the basis of their own judgment and utilize
their IRAs accordingly, with the only restriction that 20% thereof be expended for development projects.
They may even spend their IRAs for some of the enumerated items should they partake of indirect costs of
undertaking development projects. In such case, however, the concerned LGU must ascertain that applicable
rules and regulations on budgetary allocation have been observed lest it be inviting an administrative probe.

The petitioners likewise misread the issuance by claiming that the provision of sanctions therein is a clear
indication of the Presidents interference in the fiscal autonomy of LGUs. The relevant portion of the assailed
issuance reads, thus:

All local authorities are further reminded that utilizing the 20% component of the Internal Revenue
Allotment, whether willfully or through negligence, for any purpose beyond those expressly prescribed by
law or public policy shall be subject to the sanctions provided under the Local Government Code and under
such other applicable laws.45
Significantly, the issuance itself did not provide for sanctions. It did not particularly establish a new set of
acts or omissions which are deemed violations and provide the corresponding penalties therefor. It simply
stated a reminder to LGUs that there are existing rules to consider in the disbursement of the 20%
development fund and that non-compliance therewith may render them liable to sanctions which are
provided in the LGC and other applicable laws. Nonetheless, this warning for possible imposition of sanctions
did not alter the advisory nature of the issuance.

At any rate, LGUs must be reminded that the local autonomy granted to them does not completely severe
them from the national government or turn them into impenetrable states. Autonomy does not make local
governments sovereign within the state.46 In Ganzon v. Court of Appeals,47 the Court reiterated:

Autonomy, however, is not meant to end the relation of partnership and interdependence between the
central administration and local government units, or otherwise, to usher in a regime of federalism. The
Charter has not taken such a radical step. Local governments, under the Constitution, are subject to
regulation, however limited, and for no other purpose than precisely, albeit paradoxically, to enhance self-
government.48

Thus, notwithstanding the local fiscal autonomy being enjoyed by LGUs, they are still under the supervision
of the President and maybe held accountable for malfeasance or violations of existing laws. Supervision is
not incompatible with discipline. And the power to discipline and ensure that the laws be faithfully executed
must be construed to authorize the President to order an investigation of the act or conduct of local officials
when in his opinion the good of the public service so requires.49

Clearly then, the Presidents power of supervision is not antithetical to investigation and imposition of
sanctions. In Hon. Joson v. Exec. Sec. Torres,50 the Court pointed out, thus:

Independently of any statutory provision authorizing the President to conduct an investigation of the nature
involved in this proceeding, and in view of the nature and character of the executive authority with which
the President of the Philippines is invested, the constitutional grant to him of power to exercise general
supervision over all local governments and to take care that the laws be faithfully executed must be
construed to authorize him to order an investigation of the act or conduct of the petitioner herein.
Supervision is not a meaningless thing. It is an active power. It is certainly not without limitation, but it at
least implies authority to inquire into facts and conditions in order to render the power real and effective. x x
x.51 (Emphasis ours and italics in the original)

As in MC No. 2010-138, the Court finds nothing in two other questioned issuances of the respondent, i.e.,
MC Nos. 2010-83 and 2011-08, that can be construed as infringing on the fiscal autonomy of LGUs. The
petitioners claim that the requirement to post other documents in the mentioned issuances went beyond the
letter and spirit of Section 352 of the LGC and R.A. No. 9184, otherwise known as the Government
Procurement Reform Act, by requiring that budgets, expenditures, contracts and loans, and procurement
plans of LGUs be publicly posted as well.52

Pertinently, Section 352 of the LGC reads:

Section 352. Posting of the Summary of Income and Expenditures. Local treasurers, accountants, budget
officers, and other accountable officers shall, within thirty (30) days from the end of the fiscal year, post in
at least three (3) publicly accessible and conspicuous places in the local government unit a summary of all
revenues collected and funds received including the appropriations and disbursements of such funds during
the preceding fiscal year.

R.A. No. 9184, on the other hand, requires the posting of the invitation to bid, notice of award, notice to
proceed, and approved contract in the procuring entitys premises, in newspapers of general circulation, and
the website of the procuring entity.53

It is well to remember that fiscal autonomy does not leave LGUs with unbridled discretion in the
disbursement of public funds. They remain accountable to their constituency. For, public office was created
for the benefit of the people and not the person who holds office.

The Court strongly enunciated in ABAKADA GURO Party List (formerly AASJS), et al. v. Hon. Purisima, et
al.,54 thus:
Public office is a public trust. It must be discharged by its holder not for his own personal gain but for the
benefit of the public for whom he holds it in trust. By demanding accountability and service with
responsibility, integrity, loyalty, efficiency, patriotism and justice, all government officials and employees
have the duty to be responsive to the needs of the people they are called upon to serve.55

Thus, the Constitution strongly summoned the State to adopt and implement a policy of full disclosure of all
transactions involving public interest and provide the people with the right to access public
information.56 Section 352 of the LGC is a response to this call for transparency. It is a mechanism of
transparency and accountability of local government officials and is in fact incorporated under Chapter IV of
the LGC which deals with Expenditures, Disbursements, Accounting and Accountability.

In the same manner, R.A. No. 9184 established a system of transparency in the procurement process and in
the implementation of procurement contracts in government agencies.57 It is the public monitoring of the
procurement process and the implementation of awarded contracts with the end in view of guaranteeing
that these contracts are awarded pursuant to the provisions of the law and its implementing rules and
regulations, and that all these contracts are performed strictly according to specifications.58

The assailed issuances of the respondent, MC Nos. 2010-83 and 2011-08, are but implementation of this
avowed policy of the State to make public officials accountable to the people. They are amalgamations of
existing laws, rules and regulation designed to give teeth to the constitutional mandate of transparency and
accountability.

A scrutiny of the contents of the mentioned issuances shows that they do not, in any manner, violate the
fiscal autonomy of LGUs. To be clear, [f]iscal autonomy means that local governments have the power to
create their own sources of revenue in addition to their equitable share in the national taxes released by the
national government, as well as the power to allocate their resources in accordance with their own priorities.
It extends to the preparation of their budgets, and local officials in turn have to work within the constraints
thereof.59

It is inconceivable, however, how the publication of budgets, expenditures, contracts and loans and
procurement plans of LGUs required in the assailed issuances could have infringed on the local fiscal
autonomy of LGUs. Firstly, the issuances do not interfere with the discretion of the LGUs in the specification
of their priority projects and the allocation of their budgets. The posting requirements are mere
transparency measures which do not at all hurt the manner by which LGUs decide the utilization and
allocation of their funds.

Secondly, it appears that even Section 352 of the LGC that is being invoked by the petitioners does not
exclude the requirement for the posting of the additional documents stated in MC Nos. 2010-83 and 2011-
08. Apparently, the mentioned provision requires the publication of a summary of revenues collected and
funds received, including the appropriations and disbursements of such funds. The additional requirement
for the posting of budgets, expenditures, contracts and loans, and procurement plans are well-within the
contemplation of Section 352 of the LGC considering they are documents necessary for an accurate
presentation of a summary of appropriations and disbursements that an LGU is required to publish.

Finally, the Court believes that the supervisory powers of the President are broad enough to embrace the
power to require the publication of certain documents as a mechanism of transparency. In Pimentel, Jr. v.
Hon. Aguirre,60 the Court reminded that local fiscal autonomy does not rule out any manner of national
government intervention by way of supervision, in order to ensure that local programs, fiscal and otherwise,
are consistent with national goals. The President, by constitutional fiat, is the head of the economic and
planning agency of the government, primarily responsible for formulating and implementing continuing,
coordinated and integrated social and economic policies, plans and programs for the entire country.61

Moreover, the Constitution, which was drafted after long years of dictatorship and abuse of power, is now
replete with numerous provisions directing the adoption of measures to uphold transparency and
accountability in government, with a view of protecting the nation from repeating its atrocious past. In
particular, the Constitution commands the strict adherence to full disclosure of information on all matters
relating to official transactions and those involving public interest. Pertinently, Section 28, Article II and
Section 7, Article III of the Constitution, provide:

Article II
Declaration of Principles and State Policies Principles
Section 28. Subject to reasonable conditions prescribed by law, the State adopts and implements a policy of
full public disclosure of all its transactions involving public interest.

Article III
Bill of Rights

Section 7. The right of the people to information on matters of public concern shall be recognized. Access to
official records, and to documents and papers pertaining to official acts, transactions, or decisions, as well as
to government research data used as basis for policy development, shall be afforded the citizen, subject to
such limitations as may be provided by law.

In the instant case, the assailed issuances were issued pursuant to the policy of promoting good governance
through transparency, accountability and participation. The action of the respondent is certainly within the
constitutional bounds of his power as alter ego of the President.

It is needless to say that the power to govern is a delegated authority from the people who hailed the public
official to office through the democratic process of election. His stay in office remains a privilege which may
be withdrawn by the people should he betray his oath of office. Thus, he must not frown upon accountability
checks which aim to show how well he is performing his delegated power. For, it is through these
mechanisms of transparency and accountability that he is able to prove to his constituency that he is worthy
of the continued privilege.

WHEREFORE, in view of the foregoing considerations, the petition is DISMISSED for lack of merit.

SO ORDERED.

[G.R. No. 132988. July 19, 2000]

AQUILINO Q. PIMENTEL JR., petitioner, vs. Hon. ALEXANDER

AGUIRRE in his capacity as Executive Secretary, Hon. EMILIA
BONCODIN in her capacity as Secretary of the Department of
Budget and Management, respondents.
ROBERTO PAGDANGANAN, intervenor.

DECISION
PANGANIBAN, J.:

The Constitution vests the President with the power of supervision, not control, over
local government units (LGUs). Such power enables him to see to it that LGUs and their
officials execute their tasks in accordance with law. While he may issue advisories and
seek their cooperation in solving economic difficulties, he cannot prevent them from
performing their tasks and using available resources to achieve their goals. He may not
withhold or alter any authority or power given them by the law. Thus, the withholding of
a portion of internal revenue allotments legally due them cannot be directed by
administrative fiat.

The Case

Before us is an original Petition for Certiorari and Prohibition seeking (1) to annul
Section 1 of Administrative Order (AO) No. 372, insofar as it requires local government
units to reduce their expenditures by 25 percent of their authorized regular
appropriations for non-personal services; and (2) to enjoin respondents from
implementing Section 4 of the Order, which withholds a portion of their internal revenue
allotments.
On November 17, 1998, Roberto Pagdanganan, through Counsel Alberto C. Agra,
filed a Motion for Intervention/Motion to Admit Petition for Intervention, [1] attaching
thereto his Petition in Intervention[2] joining petitioner in the reliefs sought. At the time,
intervenor was the provincial governor of Bulacan, national president of the League of
Provinces of the Philippines and chairman of the League of Leagues of Local
Governments. In a Resolution dated December 15, 1998, the Court noted said Motion
and Petition.

The Facts and the Arguments

On December 27, 1997, the President of the Philippines issued AO 372. Its full text,
with emphasis on the assailed provisions, is as follows:

"ADMINISTRATIVE ORDER NO. 372

ADOPTION OF ECONOMY MEASURES IN GOVERNMENT FOR FY 1998

WHEREAS, the current economic difficulties brought about by the peso

depreciation requires continued prudence in government fiscal management
to maintain economic stability and sustain the country's growth momentum;

WHEREAS, it is imperative that all government agencies adopt cash

management measures to match expenditures with available resources;

NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Republic of the

Philippines, by virtue of the powers vested in me by the Constitution, do
hereby order and direct:

SECTION 1. All government departments and agencies, including state

universities and colleges, government-owned and controlled
corporations and local governments units will identify and implement
measures in FY 1998 that will reduce total expenditures for the year by
at least 25% of authorized regular appropriations for non-personal
services items, along the following suggested areas:

1. Continued implementation of the streamlining policy on organization and staffing by

deferring action on the following:

a. Operationalization of new agencies;

b. Expansion of organizational units and/or creation of positions;

c. Filling of positions; and

d. Hiring of additional/new consultants, contractual and casual personnel,

regardless of funding source.

2. Suspension of the following activities:

a. Implementation of new capital/infrastructure projects, except those

which have already been contracted out;

b. Acquisition of new equipment and motor vehicles;

c. All foreign travels of government personnel, except those associated

with scholarships and trainings funded by grants;

d. Attendance in conferences abroad where the cost is charged to the

government except those clearly essential to Philippine
commitments in the international field as may be determined by
the Cabinet;

e. Conduct of trainings/workshops/seminars, except those conducted

by government training institutions and agencies in the
performance of their regular functions and those that are funded
by grants;

f. Conduct of cultural and social celebrations and sports activities,

except those associated with the Philippine Centennial celebration
and those involving regular competitions/events;
 g. Grant of honoraria, except in cases where it constitutes the only
source of compensation from government received by the person
concerned;

h. Publications, media advertisements and related items, except those

required by law or those already being undertaken on a regular
basis;

i. Grant of new/additional benefits to employees, except those

expressly and specifically authorized by law; and

j. Donations, contributions, grants and gifts, except those given by

institutions to victims of calamities.

3. Suspension of all tax expenditure subsidies to all GOCCs and LGUs

4. Reduction in the volume of consumption of fuel, water, office supplies, electricity and
other utilities
5. Deferment of projects that are encountering significant implementation problems
6. Suspension of all realignment of funds and the use of savings and reserves

SECTION 2. Agencies are given the flexibility to identify the specific sources
of cost-savings, provided the 25% minimum savings under Section 1 is
complied with.

SECTION 3. A report on the estimated savings generated from these

measures shall be submitted to the Office of the President, through the
Department of Budget and Management, on a quarterly basis using the
attached format.

SECTION 4. Pending the assessment and evaluation by the Development Budget

Coordinating Committee of the emerging fiscal situation, the amount
equivalent to 10% of the internal revenue allotment to local government units
shall be withheld.
SECTION 5. The Development Budget Coordination Committee shall conduct a
monthly review of the fiscal position of the National Government and if necessary,
shall recommend to the President the imposition of additional reserves or the lifting
of previously imposed reserves.
SECTION 6. This Administrative Order shall take effect January 1, 1998 and shall
remain valid for the entire year unless otherwise lifted.

DONE in the City of Manila, this 27th day of December, in the year of our Lord,
nineteen hundred and ninety-seven."
 Subsequently, on December 10, 1998, President Joseph E. Estrada issued AO 43,
amending Section 4 of AO 372, by reducing to five percent (5%) the amount of internal
revenue allotment (IRA) to be withheld from the LGUs.
Petitioner contends that the President, in issuing AO 372, was in effect exercising
the power of control over LGUs. The Constitution vests in the President, however, only
the power of general supervision over LGUs, consistent with the principle of local
autonomy. Petitioner further argues that the directive to withhold ten percent (10%) of
their IRA is in contravention of Section 286 of the Local Government Code and of
Section 6, Article X of the Constitution, providing for the automatic release to each of
these units its share in the national internal revenue.
The solicitor general, on behalf of the respondents, claims on the other hand that
AO 372 was issued to alleviate the "economic difficulties brought about by the peso
devaluation" and constituted merely an exercise of the President's power of supervision
over LGUs. It allegedly does not violate local fiscal autonomy, because it
merely directs local governments to identify measures that will reduce their total
expenditures for non-personal services by at least 25 percent. Likewise, the withholding
of 10 percent of the LGUs IRA does not violate the statutory prohibition on the
imposition of any lien or holdback on their revenue shares, because such withholding is
"temporary in nature pending the assessment and evaluation by the Development
Coordination Committee of the emerging fiscal situation."

The Issues

The Petition[3] submits the following issues for the Court's resolution:

"A. Whether or not the president committed grave abuse of discretion [in]
ordering all LGUS to adopt a 25% cost reduction program in violation of the
LGU[']S fiscal autonomy

"B. Whether or not the president committed grave abuse of discretion in

ordering the withholding of 10% of the LGU[']S IRA"

In sum, the main issue is whether (a) Section 1 of AO 372, insofar as it "directs"
LGUs to reduce their expenditures by 25 percent; and (b) Section 4 of the same
issuance, which withholds 10 percent of their internal revenue allotments, are valid
exercises of the President's power of general supervision over local governments.
Additionally, the Court deliberated on the question whether petitioner had the locus
standi to bring this suit, despite respondents' failure to raise the issue. [4] However, the
intervention of Roberto Pagdanganan has rendered academic any further discussion on
this matter.
 The Court's Ruling

The Petition is partly meritorious.

Main Issue:
Validity of AO 372
Insofar as LGUs Are Concerned

Before resolving the main issue, we deem it important and appropriate to define
certain crucial concepts: (1) the scope of the President's power of general supervision
over local governments and (2) the extent of the local governments' autonomy.

Scope of President's Power of Supervision Over LGUs

Section 4 of Article X of the Constitution confines the President's power over local
governments to one of general supervision. It reads as follows:

"Sec. 4. The President of the Philippines shall exercise general supervision

over local governments. x x x"

This provision has been interpreted to exclude the power of control. In Mondano v.
Silvosa,[5] the Court contrasted the President's power of supervision over local
government officials with that of his power of control over executive officials of the
national government. It was emphasized that the two terms -- supervision and control --
differed in meaning and extent. The Court distinguished them as follows:

"x x x In administrative law, supervision means overseeing or the power or

authority of an officer to see that subordinate officers perform their duties. If
the latter fail or neglect to fulfill them, the former may take such action or step
as prescribed by law to make them perform their duties. Control, on the other
hand, means the power of an officer to alter or modify or nullify or set aside
what a subordinate officer ha[s] done in the performance of his duties and to
substitute the judgment of the former for that of the latter."[6]

In Taule v. Santos,[7] we further stated that the Chief Executive wielded no more
authority than that of checking whether local governments or their officials were
performing their duties as provided by the fundamental law and by statutes. He cannot
interfere with local governments, so long as they act within the scope of their
authority. "Supervisory power, when contrasted with control, is the power of mere
oversight over an inferior body; it does not include any restraining authority over such
body,"[8] we said.
In a more recent case, Drilon v. Lim,[9] the difference between control and
supervision was further delineated. Officers in control lay down the rules in the
performance or accomplishment of an act. If these rules are not followed, they may, in
their discretion, order the act undone or redone by their subordinates or even decide to
do it themselves. On the other hand, supervision does not cover such
authority. Supervising officials merely see to it that the rules are followed, but they
themselves do not lay down such rules, nor do they have the discretion to modify or
replace them. If the rules are not observed, they may order the work done or redone,
but only to conform to such rules. They may not prescribe their own manner of
execution of the act. They have no discretion on this matter except to see to it that the
rules are followed.
Under our present system of government, executive power is vested in the
President.[10] The members of the Cabinet and other executive officials are merely alter
egos. As such, they are subject to the power of control of the President, at whose will
and behest they can be removed from office; or their actions and decisions changed,
suspended or reversed.[11] In contrast, the heads of political subdivisions are elected by
the people. Their sovereign powers emanate from the electorate, to whom they are
directly accountable. By constitutional fiat, they are subject to the Presidents
supervision only, not control, so long as their acts are exercised within the sphere of
their legitimate powers. By the same token, the President may not withhold or alter any
authority or power given them by the Constitution and the law.

Extent of Local Autonomy

Hand in hand with the constitutional restraint on the President's power over local
governments is the state policy of ensuring local autonomy.[12]
In Ganzon v. Court of Appeals,[13] we said that local autonomy signified "a more
responsive and accountable local government structure instituted through a system of
decentralization."The grant of autonomy is intended to "break up the monopoly of the
national government over the affairs of local governments, x x x not x x x to end the
relation of partnership and interdependence between the central administration and
local government units x x x." Paradoxically, local governments are still subject to
regulation, however limited, for the purpose of enhancing self-government.[14]
Decentralization simply means the devolution of national administration, not power,
to local governments. Local officials remain accountable to the central government as
the law may provide.[15] The difference between decentralization of administration and
that of power was explained in detail in Limbona v. Mangelin[16] as follows:

"Now, autonomy is either decentralization of administration or decentralization

of power. There is decentralization of administration when the central
government delegates administrative powers to political subdivisions in order
to broaden the base of government power and in the process to make local
governments 'more responsive and accountable,'[17] and 'ensure their fullest
development as self-reliant communities and make them more effective partners in the pursuit of national
development and social progress.'[18] At the same time, it relieves the central government of the burden of
managing local affairs and enables it to concentrate on national concerns. The President exercises
'general supervision'[19] over them, but only to 'ensure that local affairs are administered according to
law.'[20] He has no control over their acts in the sense that he can substitute their judgments with his
own.[21]

Decentralization of power, on the other hand, involves an abdication of

political power in the favor of local government units declared to be
autonomous. In that case, the autonomous government is free to chart its own
destiny and shape its future with minimum intervention from central
authorities. According to a constitutional author, decentralization of power
amounts to 'self-immolation,' since in that event, the autonomous government
becomes accountable not to the central authorities but to its constituency."[22]

Under the Philippine concept of local autonomy, the national government has not
completely relinquished all its powers over local governments, including autonomous
regions. Only administrative powers over local affairs are delegated to political
subdivisions. The purpose of the delegation is to make governance more directly
responsive and effective at the local levels. In turn, economic, political and social
development at the smaller political units are expected to propel social and economic
growth and development. But to enable the country to develop as a whole, the
programs and policies effected locally must be integrated and coordinated towards a
common national goal. Thus, policy-setting for the entire country still lies in the
President and Congress. As we stated in Magtajas v. Pryce Properties Corp.,
Inc., municipal governments are still agents of the national government. [23]

The Nature of AO 372

Consistent with the foregoing jurisprudential precepts, let us now look into the
nature of AO 372. As its preambular clauses declare, the Order was a "cash
management measure" adopted by the government "to match expenditures with
available resources," which were presumably depleted at the time due to "economic
difficulties brought about by the peso depreciation." Because of a looming financial
crisis, the President deemed it necessary to "direct all government agencies, state
universities and colleges, government-owned and controlled corporations as well as
local governments to reduce their total expenditures by at least 25 percent along
suggested areas mentioned in AO 372.
Under existing law, local government units, in addition to having administrative
autonomy in the exercise of their functions, enjoy fiscal autonomy as well. Fiscal
autonomy means that local governments have the power to create their own sources of
revenue in addition to their equitable share in the national taxes released by the national
government, as well as the power to allocate their resources in accordance with their
own priorities. It extends to the preparation of their budgets, and local officials in turn
have to work within the constraints thereof. They are not formulated at the national level
and imposed on local governments, whether they are relevant to local needs and
resources or not. Hence, the necessity of a balancing of viewpoints and the
harmonization of proposals from both local and national officials, [24] who in any case are
partners in the attainment of national goals.
Local fiscal autonomy does not however rule out any manner of national
government intervention by way of supervision, in order to ensure that local programs,
fiscal and otherwise, are consistent with national goals. Significantly, the President, by
constitutional fiat, is the head of the economic and planning agency of the
government,[25] primarily responsible for formulating and implementing continuing,
coordinated and integrated social and economic policies, plans and programs [26] for the
entire country. However, under the Constitution, the formulation and the implementation
of such policies and programs are subject to "consultations with the appropriate public
agencies, various private sectors, and local government units." The President cannot do
so unilaterally.
Consequently, the Local Government Code provides:[27]

"x x x [I]n the event the national government incurs an unmanaged public
sector deficit, the President of the Philippines is hereby authorized, upon the
recommendation of [the] Secretary of Finance, Secretary of the Interior and
Local Government and Secretary of Budget and Management, and subject to
consultation with the presiding officers of both Houses of Congress and the
presidents of the liga, to make the necessary adjustments in the internal
revenue allotment of local government units but in no case shall the allotment
be less than thirty percent (30%) of the collection of national internal revenue
taxes of the third fiscal year preceding the current fiscal year x x x."

There are therefore several requisites before the President may interfere in local
fiscal matters: (1) an unmanaged public sector deficit of the national government; (2)
consultations with the presiding officers of the Senate and the House of
Representatives and the presidents of the various local leagues; and (3) the
corresponding recommendation of the secretaries of the Department of Finance, Interior
and Local Government, and Budget and Management. Furthermore, any adjustment in
the allotment shall in no case be less than thirty percent (30%) of the collection of
national internal revenue taxes of the third fiscal year preceding the current one.
Petitioner points out that respondents failed to comply with these requisites before
the issuance and the implementation of AO 372. At the very least, they did not even try
to show that the national government was suffering from an unmanageable public
sector deficit. Neither did they claim having conducted consultations with the different
leagues of local governments.Without these requisites, the President has no authority to
adjust, much less to reduce, unilaterally the LGU's internal revenue allotment.
The solicitor general insists, however, that AO 372 is merely directory and has been
issued by the President consistent with his power of supervision over local
governments. It is intended only to advise all government agencies and instrumentalities
to undertake cost-reduction measures that will help maintain economic stability in the
country, which is facing economic difficulties. Besides, it does not contain any sanction
in case of noncompliance. Being merely an advisory, therefore, Section 1 of AO 372 is
well within the powers of the President. Since it is not a mandatory imposition, the
directive cannot be characterized as an exercise of the power of control.
While the wordings of Section 1 of AO 372 have a rather commanding tone, and
while we agree with petitioner that the requirements of Section 284 of the Local
Government Code have not been satisfied, we are prepared to accept the solicitor
general's assurance that the directive to "identify and implement measures x x x that will
reduce total expenditures x x x by at least 25% of authorized regular appropriation" is
merely advisory in character, and does not constitute a mandatory or binding order that
interferes with local autonomy. The language used, while authoritative, does not amount
to a command that emanates from a boss to a subaltern.
Rather, the provision is merely an advisory to prevail upon local executives to
recognize the need for fiscal restraint in a period of economic difficulty. Indeed, all
concerned would do well to heed the President's call to unity, solidarity and teamwork to
help alleviate the crisis. It is understood, however, that no legal sanction may be
imposed upon LGUs and their officials who do not follow such advice. It is in this light
that we sustain the solicitor general's contention in regard to Section 1.

Withholding a Part of LGUs' IRA

Section 4 of AO 372 cannot, however, be upheld. A basic feature of local fiscal

autonomy is the automatic release of the shares of LGUs in the national internal
revenue. This is mandated by no less than the Constitution.[28] The Local Government
Code[29] specifies further that the release shall be made directly to the LGU concerned
within five (5) days after every quarter of the year and "shall not be subject to any lien or
holdback that may be imposed by the national government for whatever purpose."[30] As
a rule, the term "shall" is a word of command that must be given a compulsory
meaning.[31] The provision is, therefore, imperative.
Section 4 of AO 372, however, orders the withholding, effective January 1, 1998, of
10 percent of the LGUs' IRA "pending the assessment and evaluation by the
Development Budget Coordinating Committee of the emerging fiscal situation" in the
country. Such withholding clearly contravenes the Constitution and the law. Although
temporary, it is equivalent to a holdback, which means "something held back or
withheld, often temporarily."[32] Hence, the "temporary" nature of the retention by the
national government does not matter. Any retention is prohibited.
In sum, while Section 1 of AO 372 may be upheld as an advisory effected in times
of national crisis, Section 4 thereof has no color of validity at all. The latter provision
effectively encroaches on the fiscal autonomy of local governments. Concededly, the
President was well-intentioned in issuing his Order to withhold the LGUs IRA, but the
rule of law requires that even the best intentions must be carried out within the
parameters of the Constitution and the law. Verily, laudable purposes must be carried
out by legal methods.
 Refutation of Justice Kapunan's Dissent

Mr. Justice Santiago M. Kapunan dissents from our Decision on the grounds that,
allegedly, (1) the Petition is premature; (2) AO 372 falls within the powers of the
President as chief fiscal officer; and (3) the withholding of the LGUs IRA is implied in the
President's authority to adjust it in case of an unmanageable public sector deficit.
First, on prematurity. According to the Dissent, when "the conduct has not yet
occurred and the challenged construction has not yet been adopted by the agency
charged with administering the administrative order, the determination of the scope and
constitutionality of the executive action in advance of its immediate adverse effect
involves too remote and abstract an inquiry for the proper exercise of judicial function."
This is a rather novel theory -- that people should await the implementing evil to
befall on them before they can question acts that are illegal or unconstitutional. Be it
remembered that the real issue here is whether the Constitution and the law are
contravened by Section 4 of AO 372, not whether they are violated by the acts
implementing it. In the unanimous en banc case Taada v. Angara, [33] this Court held that
when an act of the legislative department is seriously alleged to have infringed the
Constitution, settling the controversy becomes the duty of this Court. By the mere
enactment of the questioned law or the approval of the challenged action, the dispute is
said to have ripened into a judicial controversy even without any other overt act. Indeed,
even a singular violation of the Constitution and/or the law is enough to awaken judicial
duty. Said the Court:

"In seeking to nullify an act of the Philippine Senate on the ground that it
contravenes the Constitution, the petition no doubt raises a justiciable
controversy. Where an action of the legislative branch is seriously alleged to
have infringed the Constitution, it becomes not only the right but in fact the
duty of the judiciary to settle the dispute. 'The question thus posed is judicial
rather than political. The duty (to adjudicate) remains to assure that the
supremacy of the Constitution is upheld.'[34] Once a 'controversy as to the application or
interpretation of a constitutional provision is raised before this Court x x x , it becomes a legal issue which
the Court is bound by constitutional mandate to decide.'[35]

xxxxxxxxx

"As this Court has repeatedly and firmly emphasized in many cases,[36] it will not
shirk, digress from or abandon its sacred duty and authority to uphold the Constitution in matters that
involve grave abuse of discretion brought before it in appropriate cases, committed by any officer,
agency, instrumentality or department of the government."

In the same vein, the Court also held in Tatad v. Secretary of the Department of
Energy:[37]
"x x x Judicial power includes not only the duty of the courts to settle actual
controversies involving rights which are legally demandable and enforceable,
but also the duty to determine whether or not there has been grave abuse of
discretion amounting to lack or excess of jurisdiction on the part of any branch
or instrumentality of government. The courts, as guardians of the Constitution,
have the inherent authority to determine whether a statute enacted by the
legislature transcends the limit imposed by the fundamental law. Where the
statute violates the Constitution, it is not only the right but the duty of the
judiciary to declare such act unconstitutional and void."

By the same token, when an act of the President, who in our constitutional scheme
is a coequal of Congress, is seriously alleged to have infringed the Constitution and the
laws, as in the present case, settling the dispute becomes the duty and the
responsibility of the courts.
Besides, the issue that the Petition is premature has not been raised by the parties;
hence it is deemed waived. Considerations of due process really prevents its use
against a party that has not been given sufficient notice of its presentation, and thus has
not been given the opportunity to refute it.[38]
Second, on the President's power as chief fiscal officer of the country. Justice
Kapunan posits that Section 4 of AO 372 conforms with the President's role as chief
fiscal officer, who allegedly "is clothed by law with certain powers to ensure the
observance of safeguards and auditing requirements, as well as the legal prerequisites
in the release and use of IRAs, taking into account the constitutional and statutory
mandates."[39] He cites instances when the President may lawfully intervene in the fiscal
affairs of LGUs.
Precisely, such powers referred to in the Dissent have specifically been authorized
by law and have not been challenged as violative of the Constitution. On the other hand,
Section 4 of AO 372, as explained earlier, contravenes explicit provisions of the Local
Government Code (LGC) and the Constitution. In other words, the acts alluded to in the
Dissent are indeed authorized by law; but, quite the opposite, Section 4 of AO 372 is
bereft of any legal or constitutional basis.
Third, on the President's authority to adjust the IRA of LGUs in case of an
unmanageable public sector deficit. It must be emphasized that in striking down Section
4 of AO 372, this Court is not ruling out any form of reduction in the IRAs of
LGUs. Indeed, as the President may make necessary adjustments in case of an
unmanageable public sector deficit, as stated in the main part of this Decision, and in
line with Section 284 of the LGC, which Justice Kapunan cites. He, however, merely
glances over a specific requirement in the same provision -- that such reduction is
subject to consultation with the presiding officers of both Houses of Congress and, more
importantly, with the presidents of the leagues of local governments.
Notably, Justice Kapunan recognizes the need for "interaction between the national
government and the LGUs at the planning level," in order to ensure that "local
development plans x x x hew to national policies and standards." The problem is that no
such interaction or consultation was ever held prior to the issuance of AO 372. This is
why the petitioner and the intervenor (who was a provincial governor and at the same
time president of the League of Provinces of the Philippines and chairman of the
League of Leagues of Local Governments) have protested and instituted this
action. Significantly, respondents do not deny the lack of consultation.
In addition, Justice Kapunan cites Section 287[40] of the LGC as impliedly authorizing
the President to withhold the IRA of an LGU, pending its compliance with certain
requirements.Even a cursory reading of the provision reveals that it is totally
inapplicable to the issue at bar. It directs LGUs to appropriate in their annual budgets 20
percent of their respective IRAs for development projects. It speaks of no positive power
granted the President to priorly withhold any amount. Not at all.
WHEREFORE, the Petition is GRANTED. Respondents and their successors are
hereby permanently PROHIBITED from implementing Administrative Order Nos. 372
and 43, respectively dated December 27, 1997 and December 10, 1998, insofar as local
government units are concerned.
SO ORDERED.