Case Digest: Planters Products, Inc. v. Fertiphil Corporation, G.R. No. 166006, March 14, 2008

Taxation | Taxation Distinguished from Other Inherent Powers and Impositions

Facts: 

• Planters Products, Inc. and private respondent Fertiphil Corporation are both engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals.
• President Ferdinand Marcos issued LOI No. 1465 on June 3, 1985, imposing a capital recovery component (CRC) on domestic fertilizer sales to support PPI's viability.
• Pursuant to the LOI, Fertiphil paid ₱10 per bag of fertilizer sold domestically to Fertilizer Pesticide Authorit (FPA), totaling ₱6,689,144 from July 1985 to January 1986.
• After the 1986 Edsa Revolution, FPA stopped the levy imposition voluntarily.
• Fertiphil demanded a refund from PPI, which refused.
• FPA argued that LOI No. 1465 was a valid exercise of state police power to stabilize the fertilizer industry, and the burden fell on consumers, not sellers.

Issue: Whether the issuance of LOI No. 1465 was unconstitutional. YES

Held:

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

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, 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. 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,  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.

Taxation may be made the implement of the state's police power. 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.  

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.  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." 

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.

 

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. 

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 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.  

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. 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. 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 jeopardy or would put in limbo the acts done by a municipality in reliance upon a law creating it.

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.