Topic: PURPOSES AND OBJECTIVES OF TAXATION

6. G.R. No. 166006               March 14, 2008

PLANTERS PRODUCTS, INC., Petitioner,

vs.
FERTIPHIL CORPORATION, Respondent.

DECISION

REYES, R.T., J.:

THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the constitutionality
of statutes, executive orders, presidential decrees and other issuances. The Constitution vests that
power not only in the Supreme Court but in all Regional Trial Courts.

The principle is relevant in this petition for review on certiorari of the Decision1 of the Court of
Appeals (CA) affirming with modification that of the RTC in Makati City,2 finding petitioner Planters
Products, Inc. (PPI) liable to private respondent Fertiphil Corporation (Fertiphil) for the levies it paid
under Letter of Instruction (LOI) No. 1465.

The Facts

Petitioner PPI and private respondent Fertiphil are private corporations incorporated under Philippine
laws.3 They are both engaged in the importation and distribution of fertilizers, pesticides and
agricultural chemicals.

On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI
No. 1465 which provided, among others, for the imposition of a capital recovery component (CRC)
on the domestic sale of all grades of fertilizers in the Philippines.4 The LOI provides:

3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula
a capital contribution component of not less than ₱10 per bag. This capital contribution shall be
collected until adequate capital is raised to make PPI viable. Such capital contribution shall be
applied by FPA to all domestic sales of fertilizers in the Philippines.5 (Underscoring supplied)

Pursuant to the LOI, Fertiphil paid ₱10 for every bag of fertilizer it sold in the domestic market to the
Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount collected to the Far East
Bank and Trust Company, the depositary bank of PPI. Fertiphil paid ₱6,689,144 to FPA from July 8,
1985 to January 24, 1986.6

After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the ₱10 levy. With the
return of democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No.
1465, but PPI refused to accede to the demand.7

Fertiphil filed a complaint for collection and damages8 against FPA and PPI with the RTC in Makati.
It questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid
and an unlawful imposition that amounted to a denial of due process of law.9 Fertiphil alleged that
the LOI solely favored PPI, a privately owned corporation, which used the proceeds to maintain its
monopoly of the fertilizer industry.

In its Answer,10 FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 was
a valid exercise of the police power of the State in ensuring the stability of the fertilizer industry in the
country. It also averred that Fertiphil did not sustain any damage from the LOI because the burden
imposed by the levy fell on the ultimate consumer, not the seller.

RTC Disposition

On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as follows:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff
and against the defendant Planters Product, Inc., ordering the latter to pay the former:

1) the sum of ₱6,698,144.00 with interest at 12% from the time of judicial demand;

2) the sum of ₱100,000 as attorney’s fees;

3) the cost of suit.

SO ORDERED.11

Ruling that the imposition of the ₱10 CRC was an exercise of the State’s inherent power of taxation,
the RTC invalidated the levy for violating the basic principle that taxes can only be levied for public
purpose, viz.:

It is apparent that the imposition of ₱10 per fertilizer bag sold in the country by LOI 1465 is
purportedly in the exercise of the power of taxation. It is a settled principle that the power of taxation
by the state is plenary. Comprehensive and supreme, the principal check upon its abuse resting in
the responsibility of the members of the legislature to their constituents. However, there are two
kinds of limitations on the power of taxation: the inherent limitations and the constitutional limitations.

One of the inherent limitations is that a tax may be levied only for public purposes:

The power to tax can be resorted to only for a constitutionally valid public purpose. By the same
token, taxes may not be levied for purely private purposes, for building up of private fortunes, or for
the redress of private wrongs. They cannot be levied for the improvement of private property, or for
the benefit, and promotion of private enterprises, except where the aid is incident to the public
benefit. It is well-settled principle of constitutional law that no general tax can be levied except for the
purpose of raising money which is to be expended for public use. Funds cannot be exacted under
the guise of taxation to promote a purpose that is not of public interest. Without such limitation, the
power to tax could be exercised or employed as an authority to destroy the economy of the people.
A tax, however, is not held void on the ground of want of public interest unless the want of such
interest is clear. (71 Am. Jur. pp. 371-372)

In the case at bar, the plaintiff paid the amount of ₱6,698,144.00 to the Fertilizer and Pesticide
Authority pursuant to the ₱10 per bag of fertilizer sold imposition under LOI 1465 which, in turn,
remitted the amount to the defendant Planters Products, Inc. thru the latter’s depository bank, Far
East Bank and Trust Co. Thus, by virtue of LOI 1465 the plaintiff, Fertiphil Corporation, which is a
private domestic corporation, became poorer by the amount of ₱6,698,144.00 and the defendant,
Planters Product, Inc., another private domestic corporation, became richer by the amount of
₱6,698,144.00.

Tested by the standards of constitutionality as set forth in the afore-quoted jurisprudence, it is quite
evident that LOI 1465 insofar as it imposes the amount of ₱10 per fertilizer bag sold in the country
and orders that the said amount should go to the defendant Planters Product, Inc. is unlawful
because it violates the mandate that a tax can be levied only for a public purpose and not to benefit,
aid and promote a private enterprise such as Planters Product, Inc.12

PPI moved for reconsideration but its motion was denied.13 PPI then filed a notice of appeal with the
RTC but it failed to pay the requisite appeal docket fee. In a separate but related proceeding, this
Court14 allowed the appeal of PPI and remanded the case to the CA for proper disposition.

CA Decision

On November 28, 2003, the CA handed down its decision affirming with modification that of the
RTC, with the following fallo:

IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby AFFIRMED, subject to
the MODIFICATION that the award of attorney’s fees is hereby DELETED.15

In affirming the RTC decision, the CA ruled that the lis mota of the complaint for collection was the
constitutionality of LOI No. 1465, thus:

The question then is whether it was proper for the trial court to exercise its power to judicially
determine the constitutionality of the subject statute in the instant case.

As a rule, where the controversy can be settled on other grounds, the courts will not resolve the
constitutionality of a law (Lim v. Pacquing, 240 SCRA 649 [1995]). The policy of the courts is to
avoid ruling on constitutional questions and to presume that the acts of political departments are
valid, absent a clear and unmistakable showing to the contrary.

However, the courts are not precluded from exercising such power when the following requisites are
obtaining in a controversy before it: First, there must be before the court an actual case calling for
the exercise of judicial review. Second, the question must be ripe for adjudication. Third, the person
challenging the validity of the act must have standing to challenge. Fourth, the question of
constitutionality must have been raised at the earliest opportunity; and lastly, the issue of
constitutionality must be the very lis mota of the case (Integrated Bar of the Philippines v. Zamora,
338 SCRA 81 [2000]).

Indisputably, the present case was primarily instituted for collection and damages. However, a
perusal of the complaint also reveals that the instant action is founded on the claim that the levy
imposed was an unlawful and unconstitutional special assessment. Consequently, the requisite that
the constitutionality of the law in question be the very lis mota of the case is present, making it
proper for the trial court to rule on the constitutionality of LOI 1465.16

The CA held that even on the assumption that LOI No. 1465 was issued under the police power of
the state, it is still unconstitutional because it did not promote public welfare. The CA explained:

In declaring LOI 1465 unconstitutional, the trial court held that the levy imposed under the said law
was an invalid exercise of the State’s power of taxation inasmuch as it violated the inherent and
constitutional prescription that taxes be levied only for public purposes. It reasoned out that the
amount collected under the levy was remitted to the depository bank of PPI, which the latter used to
advance its private interest.

On the other hand, appellant submits that the subject statute’s passage was a valid exercise of
police power. In addition, it disputes the court a quo’s findings arguing that the collections under LOI
1465 was for the benefit of Planters Foundation, Incorporated (PFI), a foundation created by law to
hold in trust for millions of farmers, the stock ownership of PPI.

Of the three fundamental powers of the State, the exercise of police power has been characterized
as the most essential, insistent and the least limitable of powers, extending as it does to all the great
public needs. It may be exercised as long as the activity or the property sought to be regulated has
some relevance to public welfare (Constitutional Law, by Isagani A. Cruz, p. 38, 1995 Edition).

Vast as the power is, however, it must be exercised within the limits set by the Constitution, which
requires the concurrence of a lawful subject and a lawful method. Thus, our courts have laid down
the test to determine the validity of a police measure as follows: (1) the interests of the public
generally, as distinguished from those of a particular class, requires its exercise; and (2) the means
employed are reasonably necessary for the accomplishment of the purpose and not unduly
oppressive upon individuals (National Development Company v. Philippine Veterans Bank, 192
SCRA 257 [1990]).

It is upon applying this established tests that We sustain the trial court’s holding LOI 1465
unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the country
is an undertaking imbued with public interest. However, the method by which LOI 1465 sought to
achieve this is by no means a measure that will promote the public welfare. The government’s
commitment to support the successful rehabilitation and continued viability of PPI, a private
corporation, is an unmistakable attempt to mask the subject statute’s impartiality. There is no way to
treat the self-interest of a favored entity, like PPI, as identical with the general interest of the
country’s farmers or even the Filipino people in general. Well to stress, substantive due process
exacts fairness and equal protection disallows distinction where none is needed. When a statute’s
public purpose is spoiled by private interest, the use of police power becomes a travesty which must
be struck down for being an arbitrary exercise of government power. To rule in favor of appellant
would contravene the general principle that revenues derived from taxes cannot be used for purely
private purposes or for the exclusive benefit of private individuals.17

The CA did not accept PPI’s claim that the levy imposed under LOI No. 1465 was for the benefit of
Planters Foundation, Inc., a foundation created to hold in trust the stock ownership of PPI. The CA
stated:

Appellant next claims that the collections under LOI 1465 was for the benefit of Planters Foundation,
Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers, the stock
ownership of PFI on the strength of Letter of Undertaking (LOU) issued by then Prime Minister Cesar
Virata on April 18, 1985 and affirmed by the Secretary of Justice in an Opinion dated October 12,
1987, to wit:

"2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in
its fertilizer pricing formula a capital recovery component, the proceeds of which will be used initially
for the purpose of funding the unpaid portion of the outstanding capital stock of Planters presently
held in trust by Planters Foundation, Inc. (Planters Foundation), which unpaid capital is estimated at
approximately ₱206 million (subject to validation by Planters and Planters Foundation) (such unpaid
portion of the outstanding capital stock of Planters being hereafter referred to as the ‘Unpaid
Capital’), and subsequently for such capital increases as may be required for the continuing viability
of Planters.

The capital recovery component shall be in the minimum amount of ₱10 per bag, which will be
added to the price of all domestic sales of fertilizer in the Philippines by any importer and/or fertilizer
mother company. In this connection, the Republic hereby acknowledges that the advances by
Planters to Planters Foundation which were applied to the payment of the Planters shares now held
in trust by Planters Foundation, have been assigned to, among others, the Creditors. Accordingly,
the Republic, through FPA, hereby agrees to deposit the proceeds of the capital recovery
component in the special trust account designated in the notice dated April 2, 1985, addressed by
counsel for the Creditors to Planters Foundation. Such proceeds shall be deposited by FPA on or
before the 15th day of each month.

The capital recovery component shall continue to be charged and collected until payment in full of
(a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any
carrying cost accruing from the date hereof on the amounts which may be outstanding from time to
time of the Unpaid Capital and/or the Subsidy Receivables and (d) the capital increases
contemplated in paragraph 2 hereof. For the purpose of the foregoing clause (c), the ‘carrying cost’
shall be at such rate as will represent the full and reasonable cost to Planters of servicing its debts,
taking into account both its peso and foreign currency-denominated obligations." (Records, pp. 42-
43)

Appellant’s proposition is open to question, to say the least. The LOU issued by then Prime Minister
Virata taken together with the Justice Secretary’s Opinion does not preponderantly demonstrate that
the collections made were held in trust in favor of millions of farmers. Unfortunately for appellant, in
the absence of sufficient evidence to establish its claims, this Court is constrained to rely on what is
explicitly provided in LOI 1465 – that one of the primary aims in imposing the levy is to support the
successful rehabilitation and continued viability of PPI.18

PPI moved for reconsideration but its motion was denied.19 It then filed the present petition with this
Court.

Issues

Petitioner PPI raises four issues for Our consideration, viz.:

THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BE

DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTION AND DAMAGES
WHERE THE ISSUE OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE
CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR ENTITY WHICH HAS
NO STANDING TO DO SO.

II

LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE FERTILIZER
SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A FOUNDATION
CREATED BY LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK
OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT TO THE EXERCISE OF
TAXATION AND POLICE POWER FOR PUBLIC PURPOSES.
 III

THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS REMITTED

TO THE GOVERNMENT, AND BECAME GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE
AND VALIDLY ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS BY
VIRTUE OF THE PRINCIPLE OF "OPERATIVE FACT" PRIOR TO ANY DECLARATION OF
UNCONSTITUTIONALITY OF LOI 1465.

IV

THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO APPLICATION

IN THE INSTANT CASE.20 (Underscoring supplied)

Our Ruling

We shall first tackle the procedural issues of locus standi and the jurisdiction of the RTC to resolve
constitutional issues.

Fertiphil has locus standi because it suffered direct injury; doctrine of standing is a mere procedural
technicality which may be waived.

PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465
because it does not have a "personal and substantial interest in the case or will sustain direct injury
as a result of its enforcement."21 It asserts that Fertiphil did not suffer any damage from the CRC
imposition because "incidence of the levy fell on the ultimate consumer or the farmers themselves,
not on the seller fertilizer company."22

We cannot agree. The doctrine of locus standi or the right of appearance in a court of justice has
been adequately discussed by this Court in a catena of cases. Succinctly put, the doctrine requires a
litigant to have a material interest in the outcome of a case. In private suits, locus standi requires a
litigant to be a "real party in interest," which is defined as "the party who stands to be benefited or
injured by the judgment in the suit or the party entitled to the avails of the suit."23

In public suits, this Court recognizes the difficulty of applying the doctrine especially when plaintiff
asserts a public right on behalf of the general public because of conflicting public policy issues. 24 On
one end, there is the right of the ordinary citizen to petition the courts to be freed from unlawful
government intrusion and illegal official action. At the other end, there is the public policy precluding
excessive judicial interference in official acts, which may unnecessarily hinder the delivery of basic
public services.

In this jurisdiction, We have adopted the "direct injury test" to determine locus standi in public suits.
In People v. Vera,25 it was held that a person who impugns the validity of a statute must have "a
personal and substantial interest in the case such that he has sustained, or will sustain direct injury
as a result." The "direct injury test" in public suits is similar to the "real party in interest" rule for
private suits under Section 2, Rule 3 of the 1997 Rules of Civil Procedure.26

Recognizing that a strict application of the "direct injury" test may hamper public interest, this Court
relaxed the requirement in cases of "transcendental importance" or with "far reaching implications."
Being a mere procedural technicality, it has also been held that locus standi may be waived in the
public interest.27
Whether or not the complaint for collection is characterized as a private or public suit, Fertiphil has
locus standi to file it. Fertiphil suffered a direct injury from the enforcement of LOI No. 1465. It was
required, and it did pay, the ₱10 levy imposed for every bag of fertilizer sold on the domestic market.
It may be true that Fertiphil has passed some or all of the levy to the ultimate consumer, but that
does not disqualify it from attacking the constitutionality of the LOI or from seeking a refund. As
seller, it bore the ultimate burden of paying the levy. It faced the possibility of severe sanctions for
failure to pay the levy. The fact of payment is sufficient injury to Fertiphil.

Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was compelled to
factor in its product the levy. The levy certainly rendered the fertilizer products of Fertiphil and other
domestic sellers much more expensive. The harm to their business consists not only in fewer clients
because of the increased price, but also in adopting alternative corporate strategies to meet the
demands of LOI No. 1465. Fertiphil and other fertilizer sellers may have shouldered all or part of the
levy just to be competitive in the market. The harm occasioned on the business of Fertiphil is
sufficient injury for purposes of locus standi.

Even assuming arguendo that there is no direct injury, We find that the liberal policy consistently
adopted by this Court on locus standi must apply. The issues raised by Fertiphil are of paramount
public importance. It involves not only the constitutionality of a tax law but, more importantly, the use
of taxes for public purpose. Former President Marcos issued LOI No. 1465 with the intention of
rehabilitating an ailing private company. This is clear from the text of the LOI. PPI is expressly
named in the LOI as the direct beneficiary of the levy. Worse, the levy was made dependent and
conditional upon PPI becoming financially viable. The LOI provided that "the capital contribution shall
be collected until adequate capital is raised to make PPI viable."

The constitutionality of the levy is already in doubt on a plain reading of the statute. It is Our
constitutional duty to squarely resolve the issue as the final arbiter of all justiciable controversies.
The doctrine of standing, being a mere procedural technicality, should be waived, if at all, to
adequately thresh out an important constitutional issue.

RTC may resolve constitutional issues; the constitutional issue was adequately raised in the
complaint; it is the lis mota of the case.

PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It asserts that
the constitutionality of the LOI cannot be collaterally attacked in a complaint for
collection.28 Alternatively, the resolution of the constitutional issue is not necessary for a
determination of the complaint for collection.29

Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its complaint. It
claims that the constitutionality of LOI No. 1465 is the very lis mota of the case because the trial
court cannot determine its claim without resolving the issue.30

It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute, presidential
decree or an executive order. This is clear from Section 5, Article VIII of the 1987 Constitution, which
provides:

SECTION 5. The Supreme Court shall have the following powers:

xxxx
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court
may provide, final judgments and orders of lower courts in:

(a) All cases in which the constitutionality or validity of any treaty, international or executive

agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in
question. (Underscoring supplied)

In Mirasol v. Court of Appeals,31 this Court recognized the power of the RTC to resolve constitutional
issues, thus:

On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to
consider the constitutionality of a statute, presidential decree, or executive order. The Constitution
vests the power of judicial review or the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or regulation not only in this Court, but
in all Regional Trial Courts.32

In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs,33 this Court
reiterated:

There is no denying that regular courts have jurisdiction over cases involving the validity or
constitutionality of a rule or regulation issued by administrative agencies. Such jurisdiction, however,
is not limited to the Court of Appeals or to this Court alone for even the regional trial courts can take
cognizance of actions assailing a specific rule or set of rules promulgated by administrative bodies.
Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order, instruction, ordinance, or regulation
in the courts, including the regional trial courts.34

Judicial review of official acts on the ground of unconstitutionality may be sought or availed of
through any of the actions cognizable by courts of justice, not necessarily in a suit for declaratory
relief. Such review may be had in criminal actions, as in People v. Ferrer35 involving the
constitutionality of the now defunct Anti-Subversion law, or in ordinary actions, as in Krivenko v.
Register of Deeds36 involving the constitutionality of laws prohibiting aliens from acquiring public
lands. The constitutional issue, however, (a) must be properly raised and presented in the case, and
(b) its resolution is necessary to a determination of the case, i.e., the issue of constitutionality must
be the very lis mota presented.37

Contrary to PPI’s claim, the constitutionality of LOI No. 1465 was properly and adequately raised in
the complaint for collection filed with the RTC. The pertinent portions of the complaint allege:

6. The CRC of ₱10 per bag levied under LOI 1465 on domestic sales of all grades of fertilizer in the
Philippines, is unlawful, unjust, uncalled for, unreasonable, inequitable and oppressive because:

xxxx

(c) It favors only one private domestic corporation, i.e., defendant PPPI, and imposed at the expense
and disadvantage of the other fertilizer importers/distributors who were themselves in tight business
situation and were then exerting all efforts and maximizing management and marketing skills to
remain viable;

xxxx
(e) It was a glaring example of crony capitalism, a forced program through which the PPI, having
been presumptuously masqueraded as "the" fertilizer industry itself, was the sole and anointed
beneficiary;

7. The CRC was an unlawful; and unconstitutional special assessment and its imposition is
tantamount to illegal exaction amounting to a denial of due process since the persons of entities
which had to bear the burden of paying the CRC derived no benefit therefrom; that on the contrary it
was used by PPI in trying to regain its former despicable monopoly of the fertilizer industry to the
detriment of other distributors and importers.38 (Underscoring supplied)

The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for collection. Fertiphil
filed the complaint to compel PPI to refund the levies paid under the statute on the ground that the
law imposing the levy is unconstitutional. The thesis is that an unconstitutional law is void. It has no
legal effect. Being void, Fertiphil had no legal obligation to pay the levy. Necessarily, all levies duly
paid pursuant to an unconstitutional law should be refunded under the civil code principle against
unjust enrichment. The refund is a mere consequence of the law being declared unconstitutional.
The RTC surely cannot order PPI to refund Fertiphil if it does not declare the LOI unconstitutional. It
is the unconstitutionality of the LOI which triggers the refund. The issue of constitutionality is the very
lis mota of the complaint with the RTC.

The ₱10 levy under LOI No. 1465 is an exercise of the power of taxation.

At any rate, the Court holds that the RTC and the CA did not err in ruling against the constitutionality
of the LOI.

PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of taxation. It
claims that the LOI was implemented for the purpose of assuring the fertilizer supply and distribution
in the country and for benefiting a foundation created by law to hold in trust for millions of farmers
their stock ownership in PPI.

Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a private
company. The levy was imposed to pay the corporate debt of PPI. Fertiphil also argues that, even if
the LOI is enacted under the police power, it is still unconstitutional because it did not promote the
general welfare of the people or public interest.

Police power and the power of taxation are inherent powers of the State. These powers are distinct
and have different tests for validity. Police power is the power of the State to enact legislation that
may interfere with personal liberty or property in order to promote the general welfare,39 while the
power of taxation is the power to levy taxes to be used for public purpose. The main purpose of
police power is the regulation of a behavior or conduct, while taxation is revenue generation. The
"lawful subjects" and "lawful means" tests are used to determine the validity of a law enacted under
the police power.40 The power of taxation, on the other hand, is circumscribed by inherent and
constitutional limitations.

We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation
power. While it is true that the power of taxation can be used as an implement of police power,41 the
primary purpose of the levy is revenue generation. If the purpose is primarily revenue, or if revenue
is, at least, one of the real and substantial purposes, then the exaction is properly called a tax.42

In Philippine Airlines, Inc. v. Edu,43 it was held that the imposition of a vehicle registration fee is not
an exercise by the State of its police power, but of its taxation power, thus:
It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61 of the Land
Transportation and Traffic Code that the legislative intent and purpose behind the law requiring
owners of vehicles to pay for their registration is mainly to raise funds for the construction and
maintenance of highways and to a much lesser degree, pay for the operating expenses of the
administering agency. x x x Fees may be properly regarded as taxes even though they also serve as
an instrument of regulation.

Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil. 148). If
the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes,
then the exaction is properly called a tax. Such is the case of motor vehicle registration fees. The
same provision appears as Section 59(b) in the Land Transportation Code. It is patent therefrom that
the legislators had in mind a regulatory tax as the law refers to the imposition on the registration,
operation or ownership of a motor vehicle as a "tax or fee." x x x Simply put, if the exaction under
Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an
"additional" tax. Rep. Act 4136 also speaks of other "fees" such as the special permit fees for certain
types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11). These are
not to be understood as taxes because such fees are very minimal to be revenue-raising. Thus, they
are not mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle registration fee and
chauffeurs’ license fee. Such fees are to go into the expenditures of the Land Transportation
Commission as provided for in the last proviso of Sec. 61.44 (Underscoring supplied)

The ₱10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy, no
doubt, was a big burden on the seller or the ultimate consumer. It increased the price of a bag of
fertilizer by as much as five percent.45 A plain reading of the LOI also supports the conclusion that
the levy was for revenue generation. The LOI expressly provided that the levy was imposed "until
adequate capital is raised to make PPI viable."

Taxes are exacted only for a public purpose. The ₱10 levy is unconstitutional because it was not for
a public purpose. The levy was imposed to give undue benefit to PPI.

An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public
purpose. They cannot be used for purely private purposes or for the exclusive benefit of private
persons.46 The reason for this is simple. The power to tax exists for the general welfare; hence,
implicit in its power is the limitation that it should be used only for a public purpose. It would be a
robbery for the State to tax its citizens and use the funds generated for a private purpose. As an old
United States case bluntly put it: "To lay with one hand, the power of the government on the property
of the citizen, and with the other to bestow it upon favored individuals to aid private enterprises and
build up private fortunes, is nonetheless a robbery because it is done under the forms of law and is
called taxation."47

The term "public purpose" is not defined. It is an elastic concept that can be hammered to fit modern
standards. Jurisprudence states that "public purpose" should be given a broad interpretation. It does
not only pertain to those purposes which are traditionally viewed as essentially government
functions, such as building roads and delivery of basic services, but also includes those purposes
designed to promote social justice. Thus, public money may now be used for the relocation of illegal
settlers, low-cost housing and urban or agrarian reform.

While the categories of what may constitute a public purpose are continually expanding in light of the
expansion of government functions, the inherent requirement that taxes can only be exacted for a
public purpose still stands. Public purpose is the heart of a tax law. When a tax law is only a mask to
exact funds from the public when its true intent is to give undue benefit and advantage to a private
enterprise, that law will not satisfy the requirement of "public purpose."
The purpose of a law is evident from its text or inferable from other secondary sources. Here, We
agree with the RTC and that CA that the levy imposed under LOI No. 1465 was not for a public
purpose.

First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. The
purpose is explicit from Clause 3 of the law, thus:

3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula
a capital contribution component of not less than ₱10 per bag. This capital contribution shall be
collected until adequate capital is raised to make PPI viable. Such capital contribution shall be
applied by FPA to all domestic sales of fertilizers in the Philippines.48 (Underscoring supplied)

It is a basic rule of statutory construction that the text of a statute should be given a literal meaning.
In this case, the text of the LOI is plain that the levy was imposed in order to raise capital for PPI.
The framers of the LOI did not even hide the insidious purpose of the law. They were cavalier
enough to name PPI as the ultimate beneficiary of the taxes levied under the LOI. We find it utterly
repulsive that a tax law would expressly name a private company as the ultimate beneficiary of the
taxes to be levied from the public. This is a clear case of crony capitalism.

Second, the LOI provides that the imposition of the ₱10 levy was conditional and dependent upon
PPI becoming financially "viable." This suggests that the levy was actually imposed to benefit PPI.
The LOI notably does not fix a maximum amount when PPI is deemed financially "viable." Worse,
the liability of Fertiphil and other domestic sellers of fertilizer to pay the levy is made indefinite. They
are required to continuously pay the levy until adequate capital is raised for PPI.

Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and
deposited by FPA to Far East Bank and Trust Company, the depositary bank of PPI.49 This proves
that PPI benefited from the LOI. It is also proves that the main purpose of the law was to give undue
benefit and advantage to PPI.

Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of
Understanding50 dated May 18, 1985 signed by then Prime Minister Cesar Virata reveals that PPI
was in deep financial problem because of its huge corporate debts. There were pending petitions for
rehabilitation against PPI before the Securities and Exchange Commission. The government
guaranteed payment of PPI’s debts to its foreign creditors. To fund the payment, President Marcos
issued LOI No. 1465. The pertinent portions of the letter of understanding read:

Republic of the Philippines

Office of the Prime Minister
Manila

LETTER OF UNDERTAKING

May 18, 1985

TO: THE BANKING AND FINANCIAL INSTITUTIONS

LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE "CREDITORS")
OF PLANTERS PRODUCTS, INC. ("PLANTERS")

Gentlemen:
This has reference to Planters which is the principal importer and distributor of fertilizer, pesticides
and agricultural chemicals in the Philippines. As regards Planters, the Philippine Government
confirms its awareness of the following: (1) that Planters has outstanding obligations in foreign
currency and/or pesos, to the Creditors, (2) that Planters is currently experiencing financial
difficulties, and (3) that there are presently pending with the Securities and Exchange Commission of
the Philippines a petition filed at Planters’ own behest for the suspension of payment of all its
obligations, and a separate petition filed by Manufacturers Hanover Trust Company, Manila Offshore
Branch for the appointment of a rehabilitation receiver for Planters.

In connection with the foregoing, the Republic of the Philippines (the "Republic") confirms that it
considers and continues to consider Planters as a major fertilizer distributor. Accordingly, for and in
consideration of your expressed willingness to consider and participate in the effort to rehabilitate
Planters, the Republic hereby manifests its full and unqualified support of the successful
rehabilitation and continuing viability of Planters, and to that end, hereby binds and obligates itself to
the creditors and Planters, as follows:

xxxx

2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in its
fertilizer pricing formula a capital recovery component, the proceeds of which will be used initially for
the purpose of funding the unpaid portion of the outstanding capital stock of Planters presently held
in trust by Planters Foundation, Inc. ("Planters Foundation"), which unpaid capital is estimated at
approximately ₱206 million (subject to validation by Planters and Planters Foundation) such unpaid
portion of the outstanding capital stock of Planters being hereafter referred to as the "Unpaid
Capital"), and subsequently for such capital increases as may be required for the continuing viability
of Planters.

xxxx

The capital recovery component shall continue to be charged and collected until payment in full of
(a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any
carrying cost accruing from the date hereof on the amounts which may be outstanding from time to
time of the Unpaid Capital and/or the Subsidy Receivables, and (d) the capital increases
contemplated in paragraph 2 hereof. For the purpose of the foregoing clause (c), the "carrying cost"
shall be at such rate as will represent the full and reasonable cost to Planters of servicing its debts,
taking into account both its peso and foreign currency-denominated obligations.

REPUBLIC OF THE PHILIPPINES

By:

(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance51

It is clear from the Letter of Understanding that the levy was imposed precisely to pay the corporate
debts of PPI. We cannot agree with PPI that the levy was imposed to ensure the stability of the
fertilizer industry in the country. The letter of understanding and the plain text of the LOI clearly
indicate that the levy was exacted for the benefit of a private corporation.
All told, the RTC and the CA did not err in holding that the levy imposed under LOI No. 1465 was not
for a public purpose. LOI No. 1465 failed to comply with the public purpose requirement for tax laws.

The LOI is still unconstitutional even if enacted under the police power; it did not promote public
interest.

Even if We consider LOI No. 1695 enacted under the police power of the State, it would still be
invalid for failing to comply with the test of "lawful subjects" and "lawful means." Jurisprudence states
the test as follows: (1) the interest of the public generally, as distinguished from those of particular
class, requires its exercise; and (2) the means employed are reasonably necessary for the
accomplishment of the purpose and not unduly oppressive upon individuals.52

For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote public
interest. The law was enacted to give undue advantage to a private corporation. We quote with
approval the CA ratiocination on this point, thus:

It is upon applying this established tests that We sustain the trial court’s holding LOI 1465
unconstitutional.  To be sure, ensuring the continued supply and distribution of fertilizer in the
1awphil

country is an undertaking imbued with public interest. However, the method by which LOI 1465
sought to achieve this is by no means a measure that will promote the public welfare. The
government’s commitment to support the successful rehabilitation and continued viability of PPI, a
private corporation, is an unmistakable attempt to mask the subject statute’s impartiality. There is no
way to treat the self-interest of a favored entity, like PPI, as identical with the general interest of the
country’s farmers or even the Filipino people in general. Well to stress, substantive due process
exacts fairness and equal protection disallows distinction where none is needed. When a statute’s
public purpose is spoiled by private interest, the use of police power becomes a travesty which must
be struck down for being an arbitrary exercise of government power. To rule in favor of appellant
would contravene the general principle that revenues derived from taxes cannot be used for purely
private purposes or for the exclusive benefit of private individuals. (Underscoring supplied)

The general rule is that an unconstitutional law is void; the doctrine of operative fact is inapplicable.

PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared unconstitutional.
It banks on the doctrine of operative fact, which provides that an unconstitutional law has an effect
before being declared unconstitutional. PPI wants to retain the levies paid under LOI No. 1465 even
if it is subsequently declared to be unconstitutional.

We cannot agree. It is settled that no question, issue or argument will be entertained on appeal,
unless it has been raised in the court a quo.53 PPI did not raise the applicability of the doctrine of
operative fact with the RTC and the CA. It cannot belatedly raise the issue with Us in order to
extricate itself from the dire effects of an unconstitutional law.

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

ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance shall not
be excused by disuse or custom or practice to the contrary.
When the courts declare a law to be inconsistent with the Constitution, the former shall be void and
the latter shall govern.

The doctrine of operative fact, as an exception to the general rule, only applies as a matter of equity
and fair play.55 It nullifies the effects of an unconstitutional law by recognizing that the existence of a
statute prior to a determination of unconstitutionality is an operative fact and may have
consequences which cannot always be ignored. The past cannot always be erased by a new judicial
declaration.56

The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden on
those who have relied on the invalid law. Thus, it was applied to a criminal case when a declaration
of unconstitutionality would put the accused in double jeopardy57 or would put in limbo the acts done
by a municipality in reliance upon a law creating it.58

Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid by Fertiphil
under LOI No. 1465. It unduly benefited from the levy. It was proven during the trial that the levies
paid were remitted and deposited to its bank account. Quite the reverse, it would be inequitable and
unjust not to order a refund. To do so would unjustly enrich PPI at the expense of Fertiphil. Article 22
of the Civil Code explicitly provides that "every person who, through an act of performance by
another comes into possession of something at the expense of the latter without just or legal ground
shall return the same to him." We cannot allow PPI to profit from an unconstitutional law. Justice and
equity dictate that PPI must refund the amounts paid by Fertiphil.

WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November 28, 2003 is
AFFIRMED.

SO ORDERED.

RUBEN T. REYES
Associate Justice