Commissioner of Internal Revenue vs. Santos

Regional Trial Courts have jurisdiction to declare laws unconstitutional in the first instance, but this authority does not extend to ruling on the wisdom, justice, or expediency of legislation, which is exclusively a legislative prerogative.

The Guild of Philippine Jewelers, Inc. is an association of Filipino jewelry manufacturers, whose members include Hans Brumann, Inc., Miladay Jewels, Inc., Mercelles, Inc., Solid Gold International Traders, Inc., Diagem Trading Corporation, and Jewelry by Marco & Co., Inc. Antonio M. Marco served as the Guild's president. The dispute centers on the constitutionality of tax provisions imposing excise tax and customs duty on jewelry under Section 150(a) of the National Internal Revenue Code (as renumbered by Executive Order No. 273) and Section 104, Hdg. Nos. 71.01 to 71.04, Chapter 71 of the Tariff and Customs Code (as amended by Executive Order No. 470). Under the law in force at the time, jewelry was subject to a 20% excise tax and a 10% value-added tax, in addition to 3% to 10% customs duty on imported raw materials — rates which the jewelry industry contended were the highest in the Asia-Pacific region.

On August 5, 1988, Felicidad L. Viray, then Regional Director of BIR Region No. 4-A, issued Regional Mission Order No. 109-88 directing BIR officers, led by Eliseo Corcega, to conduct surveillance, monitoring, and inventory of all imported articles of Hans Brumann, Inc., and to place the same under preventive embargo. On August 17, 1988, the BIR officers proceeded to the establishment of Hans Brumann, Inc., served the Mission Order, and informed the establishment that they would conduct an inventory to determine whether the proper excise tax and value-added tax had been paid. With the assistance of an employee, they listed the articles displayed in the cabinets and requested proof of payment. The owner, Mr. Hans Brumann, signed a receipt acknowledging that the inventoried articles had been seized and left in his possession, and promising not to dispose of them without authority from the Commissioner of Internal Revenue pending investigation. Mr. Brumann never filed a protest with the BIR regarding the preventive embargo.

Thereafter, on October 17, 1988, Deputy Commissioner Eufracio D. Santos issued Letter of Authority No. 0020596 directing BIR officers to examine the books of accounts and other accounting records of Hans Brumann, Inc., for a stocktaking investigation for excise tax purposes covering the period January 1, 1988 to present. On October 27, 1988, Hans Brumann, Inc. was requested to prepare and make available certain documents in connection with the physical count of inventory, but the company did not produce the documents requested. Similar Letters of Authority were issued to examine the books of Miladay Jewels, Inc., Mercelles, Inc., Solid Gold International Traders, Inc., and Diagem Trading Corporation for the same purpose. In the case of Solid Gold and Diagem, BIR officers made an inventory of the articles in their establishments; no account was given of what transpired with respect to Miladay and Mercelles.

On November 29, 1988, Antonio M. Marco and Jewelry By Marco & Co., Inc. filed with the Regional Trial Court of Pasig City a petition for declaratory relief with writ of preliminary injunction and/or temporary restraining order, praying that Sections 126, 127(a) and (b), and 150(a) of the NIRC and Hdg. Nos. 71.01 to 71.04, Chapter 71 of the TCCP be declared unconstitutional and void, and that the Commissioners of Internal Revenue and Customs be enjoined from issuing mission orders and similar orders. The Guild of Philippine Jewelers, Inc. was later joined as a petitioner. In support of their petition, the private respondents submitted a position paper prepared by J. Antonio Buencamino of the Center for Research and Communication in cooperation with the Guild, purporting to be an exhaustive study of tax rates on jewelry prevailing in other Asian countries compared to those in the Philippines. The study showed that while the Philippines imposed a 20% excise tax, 10% VAT, and 3% to 10% customs duty on jewelry, countries such as Malaysia, Thailand, Singapore, and Hong Kong imposed no duties or taxes on imported gemstones, gold, or jewelry.

The RTC found that a justiciable controversy existed, adopting the factual statements in the private respondents' position paper as proven evidence. The trial court ruled that the questioned statutory provisions were confiscatory and destructive of the proprietary right of the petitioners to engage in business, in violation of Section 1, Article III of the Constitution, and declared them "inoperative and without force and effect" insofar as the petitioners were concerned, enjoining their enforcement.

• Lack of Authority to Rule on Tax Policy: Petitioners contended that the respondent judge had no authority to pass judgment upon the taxation policy of the government, as such matters fall within legislative prerogative.
• No Proof of Confiscatory Effect: Petitioners asserted that there was no showing that the tax laws on jewelry are confiscatory and destructive of private respondents' proprietary rights, as the lower court's conclusions were based on unproven comparative data from other Asian countries rather than on established factual evidence.

• Judicial Question, Not Policy Determination: Respondents argued that public respondent did not interfere with or encroach upon the prerogative of the legislature to determine tax policy on jewelry, but confined himself to the clearly judicial question of whether the questioned statutory provisions affect the constitutional right of private respondents to engage in business.
• Justiciable Controversy: Respondents maintained that the petition states a cause of action and that a justiciable controversy exists between the parties requiring a determination of the constitutionality of the laws imposing excise tax and customs duty on jewelry.

• RTC Jurisdiction to Declare Laws Unconstitutional: Whether the Regional Trial Court has jurisdiction to declare a law inoperative and without force and effect or otherwise unconstitutional.
• Wisdom vs. Validity of Legislation: Whether the Regional Trial Court, in ruling on the constitutionality of tax laws, may pass upon the wisdom, justice, or expediency of the legislation rather than its validity.
• Confiscatory Nature of Tax Provisions: Whether the tax provisions on jewelry under Section 150(a) of the NIRC and Section 104 of the TCCP are confiscatory and oppressive in violation of the due process clause.

• RTC Jurisdiction to Declare Laws Unconstitutional: Yes. Regional Trial Courts have jurisdiction to decide questions of constitutionality in the first instance, as the Constitution contemplates appellate review of final judgments of inferior courts in cases where constitutionality is in issue.
• Wisdom vs. Validity of Legislation: No. The authority of lower courts to declare laws unconstitutional does not extend to deciding questions which pertain to legislative policy; courts may not annul an act of the political departments simply because it is unwise or impractical.
• Confiscatory Nature of Tax Provisions: No. The RTC's finding that the tax provisions were confiscatory was based on the wisdom of the laws — comparative tax data from other countries — rather than on any constitutional infirmity in the laws' enactment or content, and thus the RTC erred in declaring them inoperative.

• RTC Jurisdiction to Declare Laws Unconstitutional: The Court reaffirmed that inferior courts have jurisdiction in cases involving the constitutionality of any treaty or law, citing J.M. Tuason and Co. vs. Court of Appeals and Ynos vs. Intermediate Court of Appeals. The Constitution speaks of appellate review of final judgments of inferior courts where constitutionality is in issue, thereby contemplating that such courts should have jurisdiction in the first instance. However, this jurisdiction is limited to examining the validity of a provision — that is, whether it was passed according to the procedures laid down by law — and does not extend to inquiring into the reasons for its existence.

• Wisdom vs. Validity of Legislation: The Court found that the respondent judge, in citing unproven comparative data on tax rates of various Asian countries and concluding that the Philippine jewelry industry suffers as a result, took it upon himself to supplant legislative policy regarding jewelry taxation. In advocating the abolition of local tax and duty on jewelry simply because other countries have adopted such policies, the judge overlooked that such matters are not for the courts to decide. The Court emphasized that the judiciary does not pass upon questions of wisdom, justice, or expediency of legislation, citing Angara vs. Electoral Commission. The policy of the courts is to avoid ruling on constitutional questions and to presume the validity of acts of the political departments, based on the doctrine of separation of powers. As held in Macasiano vs. National Housing Authority, a law has been carefully studied and determined to be in accordance with the fundamental law before its enactment. Debatable questions are for the legislature to decide; the courts do not sit to resolve the merits of conflicting issues. The arguments presented by the private respondents focused on the wisdom of the provisions they sought to nullify, and it is to the legislature that they must resort for relief, since the discretion to determine the nature, object, extent, coverage, and situs of taxation primarily lies with the legislature.

• Confiscatory Nature of Tax Provisions: The Court rejected the theory that tax rates of other countries should be used as a yardstick in determining the proper subjects of taxation in the Philippines. In imposing taxes and duties, the State exercises its sovereign prerogative, and it is inherent in the power to tax that the State is free to select the subjects of taxation. Inequalities resulting from singling out one particular class for taxation or exemption infringe no constitutional limitation, citing Lutz vs. Araneta and Tolentino vs. Secretary of Finance. The Court found no constitutional infirmity in the questioned provisions; the RTC's ruling was premised on policy considerations — the comparative disadvantage of Philippine jewelry manufacturers — which are matters beyond the reach of judicial questioning.

• Presumption of Constitutionality and Separation of Powers — The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of the political departments are valid in the absence of a clear and unmistakable showing to the contrary. This presumption is based on the doctrine of separation of powers, which enjoins upon each department a becoming respect for the acts of the other departments. A law, as the joint act of Congress and the President, is presumed to have been carefully studied and determined to be in accordance with the fundamental law before its enactment. The Court applied this doctrine to hold that the RTC erred in declaring the tax provisions inoperative based on policy considerations.

• Judicial Restraint on Questions of Wisdom — The judiciary does not pass upon questions of wisdom, justice, or expediency of legislation. Courts may only interpret and apply the law and, despite doubts about its wisdom, cannot repeal or amend it. Debatable questions are for the legislature to decide. The Court applied this doctrine to hold that the RTC's analysis of comparative tax data and its conclusion that the jewelry industry suffers as a result constituted an impermissible ruling on the wisdom of the legislation.

• Jurisdiction of Inferior Courts on Constitutional Questions — Regional Trial Courts have jurisdiction to decide questions of constitutionality in the first instance, as the Constitution contemplates appellate review of final judgments of inferior courts in cases where constitutionality is in issue. However, this authority is limited to examining the validity of a provision — whether it was passed according to the procedures laid down by law — and does not extend to inquiring into the reasons for its existence or the wisdom behind it.

• State's Prerogative to Select Subjects of Taxation — It is inherent in the power to tax that the State is free to select the subjects of taxation. Inequalities which result from singling out one particular class for taxation or exemption infringe no constitutional limitation. The Court applied this doctrine to reject the argument that Philippine tax rates on jewelry should conform to those of other Asian countries.

• "What we see here is a debate on the WISDOM of the laws in question. This is a matter on which the RTC is not competent to rule." — This passage identifies the fundamental error in the RTC's decision: the trial court ruled on the wisdom rather than the validity of the tax provisions, which is beyond its competence.

• "The trial court is not the proper forum for the ventilation of the issues raised by the private respondents. The arguments they presented focus on the wisdom of the provisions of law which they seek to nullify. Regional Trial Courts can only look into the validity of a provision, that is, whether or not it has been passed according to the procedures laid down by law, and thus cannot inquire as to the reasons for its existence." — This passage defines the scope and limits of RTC jurisdiction over constitutional questions, distinguishing validity from wisdom.

• "This Court, however, cannot subscribe to the theory that the tax rates of other countries should be used as a yardstick in determining what may be the proper subjects of taxation in our own country. It should be pointed out that in imposing the aforementioned taxes and duties, the State, acting through the legislative and executive branches, is exercising its sovereign prerogative." — This passage articulates the doctrine that the selection of subjects of taxation is a sovereign prerogative not subject to comparison with other jurisdictions' policies.

• Macasiano vs. National Housing Authority, 224 SCRA 236 (1993) — Followed for the doctrine that the policy of the courts is to avoid ruling on constitutional questions and to presume the validity of acts of the political departments, based on the separation of powers.
• Angara vs. Electoral Commission, 63 Phil. 139 (1936) — Followed for Justice Laurel's pronouncement that the judiciary does not pass upon questions of wisdom, justice, or expediency of legislation.
• J.M. Tuason and Co. vs. Court of Appeals, 3 SCRA 696 (1961) — Followed for the proposition that the Constitution contemplates jurisdiction of inferior courts in cases involving constitutionality of any treaty or law.
• Ynos vs. Intermediate Court of Appeals, 148 SCRA 659 (1987) — Followed, reaffirming the authority of lower courts to decide questions of constitutionality in the first instance.
• Lutz vs. Araneta, 98 Phil. 148 (1955) — Followed for the doctrine that the State is free to select the subjects of taxation and that inequalities resulting from singling out one class for taxation infringe no constitutional limitation.
• Tan vs. Del Rosario, Jr., 237 SCRA 324 (1994) — Followed for the principle that the discretion to determine the nature, object, extent, coverage, and situs of taxation primarily lies with the legislature.
• Lim vs. Pacquing, 240 SCRA 649 (1995) — Followed for the principle that where a controversy may be settled on a platform other than constitutional adjudication, the court should exercise becoming modesty and avoid the constitutional question.

• Section 1, Article III, 1987 Constitution — The due process clause providing that no person shall be deprived of life, liberty, or property without due process of law. The RTC invoked this provision to find the tax laws confiscatory and destructive of proprietary rights; the Supreme Court held this was error, as the RTC's analysis addressed legislative wisdom, not constitutional validity.
• Section 150(a), National Internal Revenue Code (as renumbered by Executive Order No. 273) — Imposes a 20% excise tax on jewelry, pearls, precious and semi-precious stones, and goods made of or ornamented with precious metals. This provision was declared "inoperative and without force and effect" by the RTC, a ruling reversed by the Supreme Court.
• Section 104, Hdg. Nos. 71.01 to 71.04, Chapter 71, Tariff and Customs Code (as amended by Executive Order No. 470) — Imposes import duty on natural or cultured pearls and precious or semi-precious stones at rates of 3% to 10% to be applied in stages from 1991 to 1994, and 30% in 1995. This provision was likewise declared "inoperative" by the RTC, a ruling reversed by the Supreme Court.

Padilla, Bellosillo, Vitug, and Kapunan, JJ., concurred.