Welcome to the Supreme Court of the Philippines
Welcome to the Supreme Court of the Philippines
Welcome to the Supreme Court of the Philippines
READ: Infographics on Bar Bulletin No. 2-2023 Re: Application Requirements for the 2023 Bar Examinations sc.judiciary.gov.ph/files/bar-2023 #WeCanDoIt #HernanDoIt #Bar2023

SC: Manila Water and Maynilad are Public Utilities Prohibited from Passing on Corporate Income Tax to Consumers

May 25, 2023

Water concessionaires Manila Water and Maynilad, as public utilities, cannot recover their corporate income taxes as operating expenses from consumers.

Thus ruled the Supreme Court En Banc, in a 102-page Decision penned by Senior Associate Justice Marvic M.V.F. Leonen, which resolved consolidated petitions involving Manila Water Company, Inc. (Manila Water) and Maynilad Water Services, Inc. (Maynilad).

In G.R. Nos. 181764 and 187380, the High Court denied the Petition for Review on Certiorari filed by Maynilad claiming it is not a public utility whose rates may be questioned by the National Water Resources Board (NWRB).

In G.R. Nos. 207444, 208207, 210147, 213227, and 219362, the Supreme Court upheld the respective Concession Agreements entered into by the Metropolitan Waterworks and Sewerage System (MWSS) with Manila Water and Maynilad, including the Agreements’ arbitration clause.

In G.R. No. 239938, the Court granted the Petition for Review on Certiorari and set aside the Court of Appeals’ ruling which had affirmed and confirmed the arbitral award in favor of Maynilad.

To address the national water crisis in the 1990s, waterworks and sewerage operations in Metro Manila were privatized in 1997, with the east area awarded to Manila Water and the west to Maynilad. The terms were set in the Concession Agreements entered into by the MWSS with Manila Water and Maynilad, respectively.

Under the Concession Agreements, in exchange for the exclusive right to operate the waterworks and sewerage in the east and west areas of Metro Manila, Manila Water and Maynilad shall pay the MWSS concession fees. In turn, the water concessionaires may bill consumers standard rates subject to the 12% limit on the rate of return under Republic Act (RA) No. 6234, the law creating the MWSS.

The Concession Agreements also provide that Manila Water and Maynilad may recover, by way of tariff, operating, capital maintenance, and investment expenditures as well as business taxes, among others.

The rates proposed by the water concessionaires are reviewed by the MWSS Regulatory Office, a five-person committee established under the jurisdiction of the MWSS Board of Trustees. Under the Concession Agreements, in case disputes are not resolved through mutual consultation and negotiation, they shall be submitted to arbitration before an appeals panel whose decisions shall be final and binding upon the parties.

Initially, the corporate income taxes paid by Manila Water and Maynilad were considered business taxes and part of operating expenses that may be recovered from consumers. However, on November 15, 2002, the Supreme Court, in Republic v. Meralco, ruled that public utilities are prohibited from including income taxes as operating expense for purposes of computing the rates chargeable to consumers. 

The SC ruling in Meralco prompted the MWSS Regulatory Office to issue a Notice of Extraordinary Price Adjustment to Manila Water and Maynilad, which the water concessionaires disputed on the ground that they are not public utilities.

However, the MWSS Board of Trustees subsequently adopted the findings of a technical working group (TWG) made up of the MWSS Regulatory Office and the water concessionaires. The TWG held that the Meralco ruling does not apply to Manila Water and Maynilad because the intention of the Concession Agreements is for the MWSS to remain the public utility and Manila Water and Maynilad its agents and contractors. As a result, the water concessionaires were again allowed to recover corporate income taxes by way of tariff.

In 2009, the Concession Agreements were extended for an additional 15 years.

In 2013, the MWSS Board of Trustees approved the recommendation of the MWSS Regulatory Office to deny the water concessionaires’ petition for tariff increase on the ground that they are prohibited from including their corporate income taxes as expenditures recoverable from consumers. This was objected to by Manila Water and Maynilad, prompting their respective submissions of the dispute to arbitration.

The separate arbitrations, however, resulted in different rulings. In the arbitration instituted by Manila Water, the Appeals Panel ruled that corporate income tax was not an allowable expenditure. On the other hand, in the arbitration instituted by Maynilad, it was held that Maynilad may recover its corporate income tax by way of tariff.

When the MWSS refused to enforce the arbitral award in favor of Maynilad, the latter demanded compensation for revenue losses of over PHP6,000,000,000.00 arising from the delay in the implementation of the adjusted rates. This became another subject of arbitration. 

Meanwhile, the arbitral award in favor of Maynilad was confirmed by the Regional Trial Court and the Court of Appeals, prompting the MWSS to go to the Supreme Court.

In resolving the consolidated petitions, the Supreme Court held the following:

On the jurisdiction of the NWRB

The NWRB, as the successor of the now defunct Public Service Commission with respect to water regulation, has jurisdiction on cases contesting water rates set by the MWSS, including the rates determined through the rate rebasing mechanism under the Concession Agreements.

On the validity of the Concession Agreements

There was no undue delegation of the State’s inherent powers in the execution of the Concession Agreements, which were entered into pursuant to RA 8041 or the National Water Crisis Act. All powers exercised by Manila Water and Maynilad under the Agreements are “in the name, place and stead” of the MWSS.

The extension of the terms of the Concession Agreements is likewise valid since the addition of 15 years to the original 25-year effectivity totals 40 years, well within the 50-year limit required by the Constitution.

On whether Manila Water and Maynilad are public utilities

Public utilities provide basic commodities and services indispensable to the public’s interests. Unlike an ordinary private business, public utilities cannot selectively serve a clientele, but must provide service to an indefinite public. Since Manila Water and Maynilad, under the Concession Agreements, are engaged in regularly supplying water—”the most basic of all necessities for human survival”—to an indefinite public, they are public utilities.

In addition, the fact that it is the MWSS that holds the legislative franchise is not inconsistent with the concessionaires’ status as public utilities. There is no requirement under the National Water Crisis Act that an entity must have a legislative franchise before it may operate the MWSS’ facilities.

Neither does the fact that it is the MWSS that owns the water facilities preclude the concessionaires from being public utilities. As previously held by the Court in Tatad v. Garcia, it is not the ownership, but the operation of the facilities used to provide the public service that vests the status as public utility.

On whether Manila Water and Maynilad can pass on corporate income tax to consumers

As held in Republic v. Meralco, public utilities are prohibited from passing on to consumers their corporate income tax as operating expenses since the privilege of earning income is enjoyed by the public utility, not the consumers.

As public utilities, Manila Water and Maynilad thus cannot recover its corporate income taxes from the consumers.

While the Concession Agreements provide that Manila Water and Maynilad are allowed to recover “Philippine business taxes” and to earn a rate of return on these taxes, this does not apply to corporate income taxes. As established in jurisprudence, corporate income taxes are not business taxes under Philippine law.

However, the income taxes already passed on to consumers may no longer be recovered as the right to a refund, which must be exercised within 30 days after the rates took effect, had long prescribed.

As public utilities, Manila Water and Maynilad are also bound by the 12% limit on the rate of their returns under the MWSS Charter.

On the validity of the arbitration clause in the Concession Agreements

The provision in the Concession Agreements that disputes shall be submitted for arbitration is consistent with the State’s policy to encourage the use of alternative modes of dispute resolution as a means to achieve speedy and impartial justice and unclog court dockets. Such arbitration clause also does not deprive the State of its regulatory powers over the concessionaires since the decisions arising from arbitration are still subject to judicial review.

As the disputes on water rate adjustment submitted for arbitration are not among those which cannot be resolved through alternative dispute resolution under the Alternative Dispute Resolution Act, the disputes were validly submitted for arbitration under the Concession Agreements.

On the validity of the arbitral award in favor of Maynilad

Under RA 6234, the MWSS is mandated to fix “just and equitable rates.”

The arbitral award in favor of Maynilad allows the latter to include its corporate income taxes in the computation of water rates. As discussed, the privilege of earning income is enjoyed by the public utility, not the consumers. Hence, the corporate income taxes do not inure to the benefit of water consumers. A large segment of the water consuming public will be made to pay for something that has no direct benefit to them, while some will enjoy water services without shouldering the same burden. The rates resulting from the arbitral award are thus both unjust and inequitable, in violation of RA 6234.

The award will also result in disproportionate price difference between the water rates of Maynilad and Manila Water since the arbitral ruling in the arbitration instituted by Manila Water held that the latter cannot pass on its corporate income taxes to consumers. Confirming the arbitral award in favor of Maynilad will thus result in a violation of the equal protection clause guaranteed under the Constitution.

Under the Special Rules of Court on Alternative Dispute Resolution, courts may set aside an arbitral award, domestic or international, if recognizing the award will amount to a violation of public policy.

The arbitral award in favor of Maynilad, which results in water rates that are unjust and inequitable and violates the equal protection clause, must thus be set aside.

FULL TEXT OF G.R. No. 181764 dated December 7, 2021 at: https://sc.judiciary.gov.ph/181764-187380-207444-208207-210147-213227-219362-239938-maynilad-water-services-inc-vs-national-water-and-resources-board-et-al-metropolitan-waterworks-and-sewerage-system-and-metropolitan-waterw/

(Courtesy of the Supreme Court Public Information Office)

Privacy Notice for the Supreme Court website

Statement of Commitment to Data Privacy and Security

The Supreme Court of the Philippines respects your privacy and your data privacy rights, as well as employs reasonable measures to protect your personal data in accordance with Republic Act No. 10173 or the Data Privacy Act of 2012 (DPA), its Implementing Rules and Regulations, and the various issuances of the National Privacy Commission (NPC) (collectively, the Data Privacy Regulations).

Brief Service Description and Its General Purpose

Use of the Supreme Court Website

The Supreme Court website serves as the online repository of Supreme Court information, references, and resources accessible to the public. By agreeing to use the Supreme Court website, you agree to the collection, use, disclosure, processing, and storage of your non-personal identification information to enable the Supreme Court to monitor the website’s engagement.

What personal data do we collect?

The Supreme Court website, other than the Email Form (see separate Privacy Notice – Email Form), does not collect personal data or cookies. The following non-personal identification information, however, are collected and stored by WordPress Statistics, a third-party service, to enable the Supreme Court to monitor the website’s performance through its engagement with visitors:

(a) Browser;

(b) Device; and

(c) Internet Protocol address.

The information collected by WordPress Statistics are limited to the foregoing.

For further understanding, please see the brief discussion on WordPress Statistics below.

Why do we collect your non-personal identification information?

The information collected through WordPress Statistics shall be processed to enable the Supreme Court, not only to effectively manage its website, but also to efficiently disseminate information to the public.

How do we process your non-personal identification information?

Where you have provided us with your non-personal identification information, you agree to our collection, use, disclosure, storage, and other processing for the purposes and in the manner set forth in this Privacy Notice.

WordPress Statistics

The Supreme Court website uses a third-party website, WordPress Statistics, to gather anonymous statistical information from site visitors and analyze the web traffic data. Such data is not shared with any other party. WordPress Statistics collects the following:

  • Browser;
  • Device; and
  • Internet Protocol address.

For more information, you may visit: https://wp-statistics.com/2018/08/16/wp-statistics-gdpr/

How do we protect your non-personal identification information?

The foregoing information, which are encrypted, shall be captured, stored, and retrieved by the Supreme Court through the third-party server, WordPress Statistics, solely for the specific purposes stated in this Privacy Notice, i.e., for reference in helping the Supreme Court in effectively managing its website. The data shall be processed and stored with utmost security and confidentiality.

Only authorized website administrators of the Supreme Court have access to the collected data stored and reported in WordPress Statistics as installed in the Supreme Court website, which in turn are subject to strict security protocols.

How long will we keep your non-personal identification information?

The collected information shall be stored in the Supreme Court website database. The Public Information Office (PIO) directly administers and maintains the database and the Supreme Court website. Only the PIO website administrators and authorized personnel shall be granted access to the database of the Supreme Court website. Sharing of any information that are contained in the said database with unauthorized persons is strictly prohibited.

The non-personal identification information collected by WordPress Statistics is stored in its database and is accessible to the Supreme Court at any time via statistics reports until WordPress Statistics is uninstalled.

In all cases, the information will be stored in a secure manner to ensure its confidentiality, integrity, and availability.

Upon expiration of the period of retention, the information collected through the Supreme Court website shall be disposed of and discarded in a secure manner that would prevent further processing, unauthorized access, or disclosure of your data.

Changes to our Privacy Notice:

The Privacy Notice may be updated from time to time. If material changes are required, any revisions shall be published on the Supreme Court website under the News and Announcements page for your immediate guidance. Therefore, we encourage you to review this Privacy Notice periodically so that you are up to date on our most current policies and practices.

This Privacy Notice was last updated on February 20, 2024.

How do you contact us?

If you have any privacy concerns or questions about your data privacy rights or our Privacy Notice, please contact us through:

Supreme Court of the Philippines
Padre Faura St., Ermita, Manila
Philippines 1000
+63 3 8552 9566


The Supreme Court Under
the 1987 Constitution

As in the 1935 and 1973 Constitutions, the 1987 Constitution provides that “[t]he judicial power shall be vested in one Supreme Court and in such lower courts as may be established by law.” (Art. VII, Sec. 1). The exercise of judicial power is shared by the Supreme Court with all lower courts, but it is only the Supreme Court’s decisions that are vested with precedential value or doctrinal authority, as its interpretations of the Constitution and the laws are final and beyond review by any other branch of government.

Unlike the 1935 and 1973 Constitutions, however, the 1987 Constitution defines the concept of judicial power. Under paragraph 2 of Section 1, Article VIII, “judicial power” includes not only the “duty of the courts of justice to settle actual controversies involving rights which are legally demandable and enforceable” but also “to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the government.” This latter provision dilutes the effectivity of the “political question” doctrine which places specific questions best submitted to the political wisdom of the people beyond the review of the courts.

Building on previous experiences under former Constitutions, the 1987 Constitution provides for specific safeguards to ensure the independence of the Judiciary. These are found in the following provisions:

    • The grant to the Judiciary of fiscal autonomy. “Appropriations for the Judiciary may not be reduced by the legislature below the amount appropriated for the previous year, and, after approval, shall be automatically and regularly released.” (Art. VIII, Sec. 3).
    • The grant to the Chief Justice of authority to augment any item in the general appropriation law for the Judiciary from savings in other items of said appropriation as authorized by law. (Art. VI, Sec. 25[5])
    • The removal from Congress of the power to deprive the Supreme Court of its jurisdiction over cases enumerated in Section 5 of Article VIII.
    • The grant to the Court of the power to appoint all officials and employees of the Judiciary in accordance with the Civil Service Law (Art. VIII, Sec. 5 [6])
    • The removal from the Commission of Appointments of the power to confirm appointments of justices and judges (Art. VIII, Sec. 8)
    • The removal from Congress of the power to reduce the compensation or salaries of the Justices and judges during their continuance in office. (Art. VIII, Sec. 10)
    • The prohibition against the removal of judges through legislative reorganization by providing that “(n)o law shall be passed reorganizing the Judiciary when it undermines the security of tenure of its members. (Art. VIII, Sec. 2)
    • The grant of sole authority to the Supreme Court to order the temporary detail of judges. (Art. VIII, Sec. 5[3])
    • The grant of sole authority to the Supreme Court to promulgate rules of procedure for the courts. (Art. VIII, Sec. 5[5])
    • The prohibition against designating members of the Judiciary to any agency performing quasi-judicial or administrative function. (Art. VIII, Sec. 12)
    • The grant of administrative supervision over the lower courts and its personnel in the Supreme Court. (Art. VIII, Sec. 6)

The Supreme Court under the present Constitution is composed of a Chief Justice and 14 Associate Justices. The members of the Court are appointed by the President from a list, prepared by the Judicial and Bar Council, of at least three nominees for every vacancy. This new process is intended to “de-politicize” the courts of justice, ensure the choice of competent judges, and fill existing vacancies without undue delay.


The Supreme Court Under
the Revolutionary Government

Shortly after assuming office as the seventh President of the Republic of the Philippines after the successful People Power Revolution, then President Corazon C. Aquino declared the existence of a revolutionary government under Proclamation No. 1 dated February 25, 1986. Among the more significant portions of this Proclamation was an instruction for “all appointive officials to submit their courtesy resignations beginning with the members of the Supreme Court.” The call was unprecedented, considering the separation of powers that the previous Constitutions had always ordained, but understandable considering the revolutionary nature of the post-People Power government. Heeding the call, the members of the Judiciary—from the Supreme Court to the Municipal Circuit Courts—placed their offices at the disposal of the President and submitted their resignations. President Corazon C, Aquino proceeded to reorganize the entire Court, appointing all 15 members.

On March 25, 1986, President Corazon Aquino, through Proclamation No. 3, also abolished the 1973 Constitution and put in place a Provisional “Freedom” Constitution. Under Article I, Section 2 of the Freedom Constitution, the provisions of the 1973 Constitution on the judiciary were adopted insofar as they were not inconsistent with Proclamation No. 3.

Article V of Proclamation No. 3 provided for the convening of a Constitutional Commission composed of 50 appointive members to draft a new constitution; this would be implemented by Proclamation No. 9. Under the leadership of retired SC Justice Cecilia Muñoz Palma as its President, the Constitutional Commission of 1986 submitted its output of to the people for ratification.

By a vote of 76.30%, the Filipino people then ratified the Constitution submitted to them in a national plebiscite on February 2, 1987.

President Aquino, other civilian officials, and members of the Armed Forces of the Philippines, upon the announcement of the ratification of the 1987 Constitution, swore allegiance to the new charter on February 11, 1987 thereby putting an end to the revolutionary government.


The Supreme Court Under
the 1973 Constitution

The declaration of Martial Law through Proclamation No. 1081 by former President Ferdinand E, Marcos in 1972 brought about the transition from the 1935 Constitution to the 1973 Constitution. This transition had implications on the Court’s composition and functions.

This period also brought in many legal issues of transcendental importance and consequence. Among these were the legality of the ratification of a new Constitution, the assumption of the totality of government authority by President Marcos, and the power to review the factual basis for a declaration of Martial Law by the Chief Executive, among others. Also writ large during this period was the relationship between the Court and the Chief Executive who, under Amendment No. 6 to the 1973 Constitution, had assumed legislative powers even while an elected legislative body continued to function.

The 1973 Constitution increased the number of the members of the Supreme Court from 11 to 15, with a Chief Justice and 14 Associate Justices. The Justices of the Court were appointed by the President alone, without the consent, approval, or recommendation of any other body or officials.


The Supreme Court of
the Second Republic

Following liberation from the Japanese occupation at the end of the Second World War and the Philippines’ subsequent independence from the United States, Republic Act No. 296 or the Judiciary Act of 1948 was enacted. This law grouped together the cases over which the Supreme Court could exercise exclusive jurisdiction for review on appeal, certiorari, or writ of error.


The Supreme Court During
the Commonwealth

Following the ratification of the 1935 Philippine Constitution in a plebiscite, the principle of separation of powers was adopted, not by express and specific provision to that effect, but by actual division of powers of the government—executive, legislative, and judicial—in different articles of the 1935 Constitution.

As in the United States, the judicial power was vested by the 1935 Constitution “in one Supreme Court and in such inferior courts as may be established by law.” It devolved on the Judiciary to determine whether the acts of the other two departments were in harmony with the fundamental law.

The Court during the Commonwealth was composed of “a Chief Justice and ten Associate Justices, and may sit en banc or in two divisions, unless otherwise provided by law.”


The Establishment of
the Supreme Court of the Philippines

On June 11, 1901, the Second Philippine Commission passed Act No. 136 entitled “An Act Providing for the Organization of Courts in the Philippine Islands” formally establishing the Supreme Court of the Philippine Islands and creating Courts of First Instance and Justices of the Peace Courts throughout the land. The judicial organization established by the Act was conceived by the American lawyers in the Philippine Commission, with its basic structures patterned after similar organizations in the United States.

The Supreme Court created under the Act was composed of a Chief Justice and six Judges. Five members of the Court could form a quorum, and the concurrence of at least four members was necessary to pronounce a judgment.

Act No. 136 abolished the Audiencia established under General Order No. 20 and declared that the Supreme Court created by the Act be substituted in its place. This effectively severed any nexus between the present Supreme Court and the Audiencia.

The Anglo-American legal system under which the Supreme Court of the Philippine Islands was expected to operate was entirely different from the old Spanish system that Filipinos were familiar with. Adjustments had to be made; hence, the decisions of the Supreme Court during its early years reflected a blend of both the Anglo-American and Spanish systems. The jurisprudence was a gentle transition from the old order to the new.


The Judicial System During
the American Occupation

After Spain’s defeat in the Spanish-American War in the late 1890s, The subsequent occupation by the Americans of the Philippine Islands paved the way for considerable changes in the control, disposition, and governance of the Islands.

The judicial system established during the regime of the military government functioned as an instrument of the executive—not of the judiciary—as an independent and separate branch of government. Secretary of State John Hay, on May 12, 1899, proposed a plan for a colonial government of the Philippine Islands which would give Filipinos the largest measure of self-government. The plan contemplated an independent judiciary manned by judges chosen from qualified locals and Americans.

On May 29, 1899, General Elwell Stephen Otis, Military Governor for the Philippines, issued General Order No. 20, reestablishing the Audiencia Teritorial de Manila which was to apply Spanish laws and jurisprudence recognized by the American military governor as continuing in force.

The Audiencia was composed of a presiding officer and eight members organized into two divisions: the sala de lo civil or the civil branch, and the sala de lo criminal or the criminal branch.

It was General Otis himself who personally selected the first appointees to the Audiencia. Cayetano L. Arellano was appointed President (equivalent to Chief Justice) of the Court, with Manuel Araullo as president of the sala de lo civil and Raymundo Melliza as president of the salo de lo criminal. Gregorio Araneta and Lt. Col. E.H. Crowder were appointed associate justices of the civil branch while Ambrosio Rianzares, Julio Llorente, Major R.W. Young, and Captain W.E. Brikhimer were designated associate justices of the criminal branch. Thus, the reestablished Audiencia became the first agency of the new insular government where Filipinos were appointed side by side with Americans.


The Judicial System Under
the Spanish Regime

During the early Spanish occupation, King Philip II established the Real Audiencia de Manila which was given not only judicial but legislative, executive, advisory, and administrative functions as well. Composed of the incumbent governor general as the presidente (presiding officer), four oidores (equivalent to associate justices), an asesor (legal adviser), an alguacil mayor (chief constable), among other officials, the Real Audiencia de Manila was both a trial and appellate court. It had exclusive original, concurrent original, and exclusive appellate jurisdictions.

Initially, the Audiencia was given a non-judicial role in the colonial administration, to deal with unforeseen problems within the territory that arose from time to time—it was given the power to supervise certain phases of ecclesiastical affairs as well as regulatory functions, such as fixing of prices at which merchants could sell their commodities. Likewise, the Audiencia had executive functions, like the allotment of lands to the settlers of newly established pueblos. However, by 1861, the Audiencia had ceased to perform these executive and administrative functions and had been restricted to the administration of justice.

When the Audiencia Territorial de Cebu was established in 1886, the name of the Real Audiencia de Manila was changed to Audiencia Territorial de Manila.


The Judicial System of the
Pre-Colonization Filipinos

When the Spanish colonizers first arrived in the Philippine archipelago, they found the indigenous Filipinos without any written laws. The laws enforced were mainly derived from customs, usages, and tradition. These laws were believed to be God-given and were orally transmitted from generation to generation.

A remarkable feature of these customs and traditions was that they were found to be very similar to one another notwithstanding that they were observed in widely dispersed islands of the archipelago. There were no judges and lawyers who were trained formally in the law, although there were elders who devoted time to the study of the customs, usages, and traditions of their tribes to qualify them as consultants or advisers on these matters.

The unit of government of the indigenous Filipinos was the barangay, which was a family-based community of 30 to 100 families, occupying a pook (“locality” or “area”) headed by a chieftain called datu who exercised all functions of government—executive, legislative, and judicial—a barangay was not only a political but a social and an economic organization. In the exercise of his judicial authority, the datu acted as a judge (hukom) in settling disputes and deciding cases in his barangay.

Mobile Menu