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[G.R. No. 183137. April 10, 2013.

]
PELIZLOY REALTY CORPORATION, represented herein by its President, GREGORY K.
LOY, petitioner, vs. THE PROVINCE OF BENGUET, respondent.
DECISION
LEONEN, J p:
The principal issue in this case is the scope of authority of a province to impose an amusement tax.
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying that the December
10, 2007 decision of the Regional Trial Court, Branch 62, La Trinidad, Benguet in Civil Case No. 06-CV-2232
be reversed and set aside and a new one issued in which: (1) respondent Province of Benguet is declared
as having no authority to levy amusement taxes on admission fees for resorts, swimming pools, bath
houses, hot springs, tourist spots, and other places for recreation; (2) Section 59, Article X of the Benguet
Provincial Revenue Code of 2005 is declared null and void; and (3) the respondent Province of Benguet is
permanently enjoined from enforcing Section 59, Article X of the Benguet Provincial Revenue Code of 2005.
Petitioner Pelizloy Realty Corporation ("Pelizloy") owns Palm Grove Resort, which is designed for recreation
and which has facilities like swimming pools, a spa and function halls. It is located at Asin, Angalisan,
Municipality of Tuba, Province of Benguet.
On December 8, 2005, the Provincial Board of the Province of Benguet approved Provincial Tax Ordinance
No. 05-107, otherwise known as the Benguet Revenue Code of 2005 ("Tax Ordinance"). Section 59, Article
X of the Tax Ordinance levied a ten percent (10%) amusement tax on gross receipts from admissions to
"resorts, swimming pools, bath houses, hot springs and tourist spots." Specifically, it provides the
following: IcTCHD
Article Ten: Amusement Tax on Admission
Section 59.Imposition of Tax. There is hereby levied a tax to be collected from the proprietors, lessees,
or operators of theaters, cinemas, concert halls, circuses, cockpits, dancing halls, dancing schools, night or
day clubs, and other places of amusement at the rate of thirty percent (30%) of the gross receipts from
admission fees; and
A tax of ten percent (10%) of gross receipts from admission fees for boxing, resorts, swimming pools,
bath houses, hot springs, and tourist spots is likewise levied. [Emphasis and underscoring supplied]
Section 162 of the Tax Ordinance provided that the Tax Ordinance shall take effect on January 1, 2006.
It was Pelizloy's position that the Tax Ordinance's imposition of a 10% amusement tax on gross receipts
from admission fees for resorts, swimming pools, bath houses, hot springs, and tourist spots is an ultra
vires act on the part of the Province of Benguet. Thus, it filed an appeal/petition before the Secretary of
Justice on January 27, 2006.
The appeal/petition was filed within the thirty (30)-day period from the effectivity of a tax ordinance
allowed by Section 187 of Republic Act No. 7160, otherwise known as the Local Government
Code (LGC). The appeal/petition was docketed as MSO-OSJ Case No. 03-2006.
Under Section 187 of the LGC, the Secretary of Justice has sixty (60) days from receipt of the appeal to
render a decision. After the lapse of which, the aggrieved party may file appropriate proceedings with a
court of competent jurisdiction.

Treating the Secretary of Justice's failure to decide on its appeal/petition within the sixty (60) days provided
by Section 187 of the LGC as an implied denial of such appeal/petition, Pelizloy filed a Petition for
Declaratory Relief and Injunction before the Regional Trial Court, Branch 62, La Trinidad, Benguet. The
petition was docketed as Civil Case No. 06-CV-2232.
Pelizloy argued that Section 59, Article X of the Tax Ordinance imposed a percentage tax in violation of the
limitation on the taxing powers of local government units (LGUs) under Section 133 (i) of the LGC. Thus, it
was null and void ab initio. Section 133 (i) of the LGC provides: SEIacA
Section 133.Common Limitations on the Taxing Powers of Local Government Units. Unless otherwise
provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall
not extend to the levy of the following:
xxx xxx xxx
(i)Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or
services except as otherwise provided herein.
The Province of Benguet assailed the Petition for Declaratory Relief and Injunction as an improper remedy.
It alleged that once a tax liability has attached, the only remedy of a taxpayer is to pay the tax and to sue
for recovery after exhausting administrative remedies.
On substantive grounds, the Province of Benguet argued that the phrase 'other places of amusement' in
Section 140 (a) of the LGC encompasses resorts, swimming pools, bath houses, hot springs, and tourist
spots since "Article 220 (b) (sic)" of the LGC defines "amusement" as "pleasurable diversion and
entertainment . . . synonymous to relaxation, avocation, pastime, or fun." However, the Province of
Benguet erroneously cited Section 220 (b) of the LGC. Section 220 of the LGC refers to valuation of real
property for real estate tax purposes. Section 131 (b) of the LGC, the provision which actually defines
"amusement", states:
Section 131.Definition of Terms. When used in this Title, the term:
xxx xxx xxx
(b)"Amusement" is a pleasurable diversion and entertainment. It is synonymous to relaxation, avocation,
pastime, or fun.
On December 10, 2007, the RTC rendered the assailed Decision dismissing the Petition for Declaratory
Relief and Injunction for lack of merit.
Procedurally, the RTC ruled that Declaratory Relief was a proper remedy. On the validity of Section 59,
Article X of the Tax Ordinance, the RTC noted that, while Section 59, Article X imposes a percentage tax,
Section 133 (i) of the LGC itself allowed for exceptions. It noted that what the LGC prohibits is not the
imposition by LGUs of percentage taxes in general but the "imposition and levy of percentage tax on sales,
barters, etc., on goods and services only." It further gave credence to the Province of Benguet's assertion
that resorts, swimming pools, bath houses, hot springs, and tourist spots are encompassed by the phrase
'other places of amusement' in Section 140 of the LGC. AcSIDE
On May 21, 2008, the RTC denied Pelizloy's Motion for Reconsideration.
Aggrieved, Pelizloy filed the present petition on June 10, 2008 on pure questions of law. It assailed the
legality of Section 59, Article X of the Tax Ordinance as being a (supposedly) prohibited percentage tax per
Section 133 (i) of the LGC.

In its Comment, the Province of Benguet, erroneously citing Section 40 of the LGC, argued that Section 59,
Article X of the Tax Ordinance does not levy a percentage tax "because the imposition is not based on
the total gross receipts of services of the petitioner but solely and actually limited on thegross receipts of
the admission fees collected." In addition, it argued that provinces can validly impose amusement taxes on
resorts, swimming pools, bath houses, hot springs, and tourist spots, these being 'amusement places'.
For resolution in this petition are the following issues:
1.Whether or not Section 59, Article X of Provincial Tax Ordinance No. 05-107, otherwise known as the
Benguet Revenue Code of 2005, levies a percentage tax.
2.Whether or not provinces are authorized to impose amusement taxes on admission fees to resorts,
swimming pools, bath houses, hot springs, and tourist spots for being "amusement places" under the Local
Government Code.
The power to tax "is an attribute of sovereignty," and as such, inheres in the State. Such, however, is not
true for provinces, cities, municipalities and barangays as they are not the sovereign; rather, they are mere
"territorial and political subdivisions of the Republic of the Philippines".
The rule governing the taxing power of provinces, cities, municipalities and barangays is summarized
in Icard v. City Council of Baguio:
It is settled that a municipal corporation unlike a sovereign state is clothed with no inherent power of
taxation. The charter or statute must plainly show an intent to confer that power or the municipality,
cannot assume it. And the power when granted is to be construed in strictissimi juris. Any doubt or
ambiguity arising out of the term used in granting that power must be resolved against the municipality.
Inferences, implications, deductions all these have no place in the interpretation of the taxing power
of a municipal corporation. [Underscoring supplied] EDATSI
Therefore, the power of a province to tax is limited to the extent that such power is delegated to it either
by the Constitution or by statute. Section 5, Article X of the 1987 Constitution is clear on this point:
Section 5.Each local government unit shall have the power to create its own sources of revenues and to
levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to
the local governments. [Underscoring supplied]
Per Section 5, Article X of the 1987 Constitution, "the power to tax is no longer vested exclusively on
Congress; local legislative bodies are now given direct authority to levy taxes, fees and other
charges." Nevertheless, such authority is "subject to such guidelines and limitations as the Congress may
provide".
In conformity with Section 3, Article X of the 1987 Constitution, Congress enacted Republic Act No. 7160,
otherwise known as the Local Government Code of 1991. Book II of the LGC governs local taxation and
fiscal matters.
Relevant provisions of Book II of the LGC establish the parameters of the taxing powers of LGUS found
below.
First, Section 130 provides for the following fundamental principles governing the taxing powers of LGUs:
1.Taxation shall be uniform in each LGU.
2.Taxes, fees, charges and other impositions shall:
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a.be equitable and based as far as practicable on the taxpayer's ability to pay;
b.be levied and collected only for public purposes;
c.not be unjust, excessive, oppressive, or confiscatory;
d.not be contrary to law, public policy, national economic policy, or in the restraint of trade.
3.The collection of local taxes, fees, charges and other impositions shall in no case be let to any private
person. IHCESD
4.The revenue collected pursuant to the provisions of the LGC shall inure solely to the benefit of, and be
subject to the disposition by, the LGU levying the tax, fee, charge or other imposition unless otherwise
specifically provided by the LGC.
5.Each LGU shall, as far as practicable, evolve a progressive system of taxation.
Second, Section 133 provides for the common limitations on the taxing powers of LGUs. Specifically,
Section 133 (i) prohibits the levy by LGUs of percentage or value-added tax (VAT) on sales, barters or
exchanges or similar transactions on goods or services except as otherwise provided by the LGC.
As it is Pelizloy's contention that Section 59, Article X of the Tax Ordinance levies a prohibited percentage
tax, it is crucial to understand first the concept of a percentage tax.
In Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc., the Supreme Court defined
percentage tax as a "tax measured by a certain percentage of the gross selling price or gross value in
money of goods sold, bartered or imported; or of the gross receipts or earnings derived by any person
engaged in the sale of services." Also, Republic Act No. 8424, otherwise known as the National Internal
Revenue Code (NIRC), in Section 125, Title V, lists amusement taxes as among the (other) percentage
taxes which are levied regardless of whether or not a taxpayer is already liable to pay value-added tax
(VAT). IcTEaC
Amusement taxes are fixed at a certain percentage of the gross receipts incurred by certain specified
establishments.
Thus, applying the definition in CIR v. Citytrust and drawing from the treatment of amusement taxes by the
NIRC, amusement taxes are percentage taxes as correctly argued by Pelizloy.
However, provinces are not barred from levying amusement taxes even if amusement taxes are a form of
percentage taxes. Section 133 (i) of the LGC prohibits the levy of percentage taxes "except as otherwise
provided" by the LGC.
Section 140 of the LGC provides:
SECTION 140.Amusement Tax. (a) The province may levy an amusement tax to be collected from
the proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other
places of amusement at a rate of not more than thirty percent (30%) of the gross receipts from admission
fees.
(b)In the case of theaters of cinemas, the tax shall first be deducted and withheld by their proprietors,
lessees, or operators and paid to the provincial treasurer before the gross receipts are divided between said
proprietors, lessees, or operators and the distributors of the cinematographic films.
(c)The holding of operas, concerts, dramas, recitals, painting and art exhibitions, flower shows, musical
programs, literary and oratorical presentations, except pop, rock, or similar concerts shall be exempt from
the payment of the tax herein imposed.
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(d)The Sangguniang Panlalawigan may prescribe the time, manner, terms and conditions for the payment
of tax. In case of fraud or failure to pay the tax, the Sangguniang Panlalawigan may impose such
surcharges, interests and penalties.
(e)The proceeds from the amusement tax shall be shared equally by the province and the municipality
where such amusement places are located. [Underscoring supplied] ASaTCE
Evidently, Section 140 of the LGC carves a clear exception to the general rule in Section 133 (i). Section
140 expressly allows for the imposition by provinces of amusement taxes on "the proprietors, lessees, or
operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement."
However, resorts, swimming pools, bath houses, hot springs, and tourist spots are not among those places
expressly mentioned by Section 140 of the LGC as being subject to amusement taxes. Thus, the
determination of whether amusement taxes may be levied on admissions to resorts, swimming pools, bath
houses, hot springs, and tourist spots hinges on whether the phrase 'other places of amusement'
encompasses resorts, swimming pools, bath houses, hot springs, and tourist spots.
Under the principle of ejusdem generis, "where a general word or phrase follows an enumeration of
particular and specific words of the same class or where the latter follow the former, the general word or
phrase is to be construed to include, or to be restricted to persons, things or cases akin to, resembling, or
of the same kind or class as those specifically mentioned."
The purpose and rationale of the principle was explained by the Court in National Power Corporation v.
Angas as follows:
The purpose of the rule on ejusdem generis is to give effect to both the particular and general words, by
treating the particular words as indicating the class and the general words as including all that is embraced
in said class, although not specifically named by the particular words. This is justified on the ground that if
the lawmaking body intended the general terms to be used in their unrestricted sense, it would have not
made an enumeration of particular subjects but would have used only general terms. [2 Sutherland,
Statutory Construction, 3rd ed., pp. 395-400].
In Philippine Basketball Association v. Court of Appeals, the Supreme Court had an opportunity to interpret
a starkly similar provision or the counterpart provision of Section 140 of the LGC in the Local Tax Code then
in effect. Petitioner Philippine Basketball Association (PBA) contended that it was subject to the imposition
by LGUs of amusement taxes (as opposed to amusement taxes imposed by the national government). In
support of its contentions, it cited Section 13 of Presidential Decree No. 231, otherwise known as the Local
Tax Code of 1973, (which is analogous to Section 140 of the LGC) providing the following: STaCIA
Section 13.Amusement tax on admission. The province shall impose a tax on admission to be collected
from the proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses and other
places of amusement . . . .
Applying the principle of ejusdem generis, the Supreme Court rejected PBA's assertions and noted that:
[I]n determining the meaning of the phrase 'other places of amusement', one must refer to the prior
enumeration of theaters, cinematographs, concert halls and circuses with artistic expression as their
common characteristic. Professional basketball games do not fall under the same category as theaters,
cinematographs, concert halls and circuses as the latter basically belong to artistic forms of entertainment
while the former caters to sports and gaming. [Underscoring supplied]
However, even as the phrase 'other places of amusement' was already clarified in Philippine Basketball
Association, Section 140 of the LGC adds to the enumeration of 'places of amusement' which may properly
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be subject to amusement tax. Section 140 specifically mentions 'boxing stadia' in addition to "theaters,
cinematographs, concert halls [and] circuses" which were already mentioned in PD No. 231. Also, 'artistic
expression' as a characteristic does not pertain to 'boxing stadia'.
In the present case, the Court need not embark on a laborious effort at statutory construction. Section 131
(c) of the LGC already provides a clear definition of 'amusement places':
Section 131.Definition of Terms. When used in this Title, the term:
xxx xxx xxx
(c)"Amusement Places" include theaters, cinemas, concert halls, circuses and other places of
amusement where one seeks admission to entertain oneself by seeing or viewing the show or
performances [Underscoring supplied].
Indeed, theaters, cinemas, concert halls, circuses, and boxing stadia are bound by a common typifying
characteristic in that they are all venues primarily for the staging of spectacles or the holding of public
shows, exhibitions, performances, and other events meant to be viewed by an audience. Accordingly, 'other
places of amusement' must be interpreted in light of the typifying characteristic of being venues "where
one seeks admission to entertain oneself by seeing or viewing the show or performances" or being venues
primarily used to stage spectacles or hold public shows, exhibitions, performances, and other events meant
to be viewed by an audience. HIaSDc
As defined in The New Oxford American Dictionary, 'show' means "a spectacle or display of something,
typically an impressive one"; while 'performance' means "anact of staging or presenting a play, a concert,
or other form of entertainment." As such, the ordinary definitions of the words 'show' and 'performance'
denote not only visual engagement (i.e., the seeing or viewing of things) but also active doing (e.g.,
displaying, staging or presenting) such that actions are manifested to, and (correspondingly) perceived by
an audience.
Considering these, it is clear that resorts, swimming pools, bath houses, hot springs and tourist spots
cannot be considered venues primarily "where one seeks admission to entertain oneself by seeing or
viewing the show or performances". While it is true that they may be venues where people are visually
engaged, they are not primarily venues for their proprietors or operators to actively display, stage or
present shows and/or performances.
Thus, resorts, swimming pools, bath houses, hot springs and tourist spots do not belong to the same
category or class as theaters, cinemas, concert halls, circuses, and boxing stadia. It follows that they
cannot be considered as among the 'other places of amusement' contemplated by Section 140 of
the LGC and which may properly be subject to amusement taxes.
At this juncture, it is helpful to recall this Court's pronouncements in Icard:
[T]he power [to tax] when granted [to a province] is to be construed in strictissimi juris. Any doubt or
ambiguity arising out of the term used in granting that power must be resolved against the [province].
Inferences, implications, deductions all these have no place in the interpretation of the taxing power
of a [province].
In this case, the definition of 'amusement places' in Section 131 (c) of the LGC is a clear basis for
determining what constitutes the 'other places of amusement' which may properly be subject to
amusement tax impositions by provinces. There is no reason for going beyond such basis. To do otherwise
would be to countenance an arbitrary interpretation/application of a tax law and to inflict an injustice on
unassuming taxpayers. cCaEDA
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The previous pronouncements notwithstanding, it will be noted that it is only the second paragraph of
Section 59, Article X of the Tax Ordinance which imposes amusement taxes on "resorts, swimming pools,
bath houses, hot springs, and tourist spots". The first paragraph of Section 59, Article X of the Tax
Ordinance refers to "theaters, cinemas, concert halls, circuses, cockpits, dancing halls, dancing schools,
night or day clubs, and other places of amusement". In any case, the issues raised by Pelizloy are pertinent
only with respect to the second paragraph of Section 59, Article X of the Tax Ordinance. Thus, there is no
reason to invalidate the first paragraph of Section 59, Article X of the Tax Ordinance. Any declaration as to
the Province of Benguet's lack of authority to levy amusement taxes must be limited to admission fees to
resorts, swimming pools, bath houses, hot springs and tourist spots.
Moreover, the second paragraph of Section 59, Article X of the Tax Ordinance is not limited to resorts,
swimming pools, bath houses, hot springs, and tourist spots but also covers admission fees for boxing. As
Section 140 of the LGC allows for the imposition of amusement taxes on gross receipts from admission fees
to boxing stadia, Section 59, Article X of the Tax Ordinance must be sustained with respect to admission
fees from boxing stadia.
WHEREFORE, the petition for review on certiorari is GRANTED. The second paragraph of Section 59,
Article X of the Benguet Provincial Revenue Code of 2005, in so far as it imposes amusement taxes on
admission fees to resorts, swimming pools, bath houses, hot springs and tourist spots, is declared null and
void. Respondent Province of Benguet is permanently enjoined from enforcing the second paragraph of
Section 59, Article X of the Benguet Provincial Revenue Code of 2005 with respect to resorts, swimming
pools, bath houses, hot springs and tourist spots.
SO ORDERED.
||| (Pelizloy Realty Corp. v. Province of Benguet, G.R. No. 183137, [April 10, 2013])

[G.R. No. 183505. February 26, 2010.]


COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SM PRIME HOLDINGS, INC. and FIRST
ASIA REALTY DEVELOPMENT CORPORATION,respondents.
DECISION
DEL CASTILLO, J p:
When the intent of the law is not apparent as worded, or when the application of the law would lead to
absurdity or injustice, legislative history is all important. In such cases, courts may take judicial notice of
the origin and history of the law, the deliberations during the enactment, as well as prior laws on the
same subject matter to ascertain the true intent or spirit of the law.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to Republic Act (RA)
No. 9282, seeks to set aside the April 30, 2008 Decision and the June 24, 2008 Resolution of the Court of
Tax Appeals (CTA).

Factual Antecedents
Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development Corporation (First Asia)
are domestic corporations duly organized and existing under the laws of the Republic of the Philippines.
Both are engaged in the business of operating cinema houses, among others.

CTA Case No. 7079


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On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a Preliminary Assessment
Notice (PAN) for value added tax (VAT) deficiency on cinema ticket sales in the amount of P119,276,047.40
for taxable year 2000. In response, SM Prime filed a letter-protest dated December 15, 2003.
On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the alleged VAT deficiency,
which the latter protested in a letter dated January 14, 2004.
On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay the VAT
deficiency for taxable year 2000 in the amount of P124,035,874.12. SAcCIH
On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA Case No. 7079.

CTA Case No. 7085


On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on cinema ticket sales for taxable year
1999 in the total amount of P35,823,680.93. First Asia protested the PAN in a letter dated July 9, 2002.
Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency which was
protested by First Asia in a letter dated December 12, 2002.
On September 6, 2004, the BIR rendered a Decision denying the protest and ordering First Asia to pay the
amount of P35,823,680.93 for VAT deficiency for taxable year 1999.
Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA, docketed as CTA
Case No. 7085.

CTA Case No. 7111


On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema ticket sales for taxable
year 2000 in the amount of P35,840,895.78. First Asia protested the PAN through a letter dated April 22,
2004.
Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency. First Asia protested the
same in a letter dated July 9, 2004.
On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT deficiency in the
amount of P35,840,895.78 for taxable year 2000.
This prompted First Asia to file a Petition for Review before the CTA on December 16, 2004. The case was
docketed as CTA Case No. 7111.

CTA Case No. 7272


Re: Assessment Notice No. 008-02
A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total amount of
P32,802,912.21 was issued against First Asia by the BIR. In response, First Asia filed a protest-letter dated
November 11, 2004. The BIR then sent a Formal Letter of Demand, which was protested by First Asia on
December 14, 2004.

Re: Assessment Notice No. 003-03


A PAN for VAT deficiency on cinema ticket sales in the total amount of P28,196,376.46 for the taxable year
2003 was issued by the BIR against First Asia. In a letter dated September 23, 2004, First Asia protested
the PAN. A Formal Letter of Demand was thereafter issued by the BIR to First Asia, which the latter
protested through a letter dated November 11, 2004. cECaHA
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On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia to pay the
amounts of P33,610,202.91 and P28,590,826.50 for VAT deficiency for taxable years 2002 and 2003,
respectively.
Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as CTA Case No.
7272.

Consolidated Petitions
The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions filed by SM Prime and First
Asia.
On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085, 7111 and 7272 with CTA
Case No. 7079 on the grounds that the issues raised therein are identical and that SM Prime is a majority
shareholder of First Asia. The motion was granted.
Upon submission of the parties' respective memoranda, the consolidated cases were submitted for decision
on the sole issue of whether gross receipts derived from admission tickets by cinema/theater operators or
proprietors are subject to VAT.

Ruling of the CTA First Division


On September 22, 2006, the First Division of the CTA rendered a Decision granting the Petition for Review.
Resorting to the language used and the legislative history of the law, it ruled that the activity of showing
cinematographic films is not a service covered by VAT under the National Internal Revenue Code (NIRC) of
1997, as amended, but an activity subject to amusement tax under RA 7160, otherwise known as the Local
Government Code (LGC) of 1991. Citing House Joint Resolution No. 13, entitled "Joint Resolution

Expressing the True Intent of Congress with Respect to the Prevailing Tax Regime in the Theater and Local
Film Industry Consistent with the State's Policy to Have a Viable, Sustainable and Competitive Theater and
Film Industry as One of its Partners in National Development," the CTA First Division held that the House
of Representatives resolved that there should only be one business tax applicable to theaters and movie
houses, which is the 30% amusement tax imposed by cities and provinces under the LGC of 1991. Further,
it held that consistent with the State's policy to have a viable, sustainable and competitive theater and film
industry, the national government should be precluded from imposing its own business tax in addition to
that already imposed and collected by local government units. The CTA First Division likewise found that
Revenue Memorandum Circular (RMC) No. 28-2001, which imposes VAT on gross receipts from admission
to cinema houses, cannot be given force and effect because it failed to comply with the procedural due
process for tax issuances under RMC No. 20-86. Thus, it disposed of the case as follows:
IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions for Review. Respondent's
Decisions denying petitioners' protests against deficiency value-added taxes are
hereby REVERSED. Accordingly, Assessment Notices Nos. VT-00-000098, VT-99-000057, VT-00-000122,
003-03 and 008-02 are ORDERED cancelled and set aside.
SO ORDERED.
Aggrieved, the CIR moved for reconsideration which was denied by the First Division in its Resolution dated
December 14, 2006.

Ruling of the CTA En Banc


Thus, the CIR appealed to the CTA En Banc. The case was docketed as CTA EB No. 244. The CTA En
Banc however denied the Petition for Review and dismissed as well petitioner's Motion for
Reconsideration.
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The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive enumeration of what
services are intended to be subject to VAT. And since the showing or exhibition of motion pictures, films or
movies by cinema operators or proprietors is not among the enumerated activities contemplated in the
phrase "sale or exchange of services," then gross receipts derived by cinema/theater operators or
proprietors from admission tickets in showing motion pictures, film or movie are not subject to VAT. It
reiterated that the exhibition or showing of motion pictures, films, or movies is instead subject to
amusement tax under the LGC of 1991. As regards the validity of RMC No. 28-2001, the CTA En
Banc agreed with its First Division that the same cannot be given force and effect for failure to comply with
RMC No. 20-86. TaSEHD
Issue
Hence, the present recourse, where petitioner alleges that the CTA En Banc seriously erred:
(1) In not finding/holding that the gross receipts derived by operators/proprietors of cinema houses from
admission tickets [are] subject to the 10% VAT because:
(a) THE EXHIBITION OF MOVIES BY CINEMA OPERATORS/PROPRIETORS TO THE PAYING PUBLIC IS A
SALE OF SERVICE;
(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE EXPRESSLY SUBJECT TO VAT UNDER
SECTION 108 OF THE NIRC OF 1997;
(c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF LAW AND THE APPLICATION OF
RULES OF STATUTORY CONSTRUCTION AND EXTRINSIC AIDS IS UNWARRANTED;
(d) GRANTING WITHOUT CONCEDING THAT RULES OF CONSTRUCTION ARE APPLICABLE HEREIN, STILL
THE HONORABLE COURT ERRONEOUSLY APPLIED THE SAME AND PROMULGATED DANGEROUS
PRECEDENTS;
(e) THERE IS NO VALID, EXISTING PROVISION OF LAW EXEMPTING RESPONDENTS' SERVICES FROM THE
VAT IMPOSED UNDER SECTION 108 OF THE NIRC OF 1997;
(f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER ISSUES TO BE TRIED BY THE
HONORABLE COURT; and
(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION OF SECTION 108 OF THE NIRC.
(2) In ruling that the enumeration in Section 108 of the NIRC of 1997 is exhaustive in coverage;
(3) In misconstruing the NIRC of 1997 to conclude that the showing of motion pictures is merely subject to
the amusement tax imposed by the Local Government Code; and
(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.
Simply put, the issue in this case is whether the gross receipts derived by operators or proprietors of
cinema/theater houses from admission tickets are subject to VAT.AEIHaS

Petitioner's Arguments
Petitioner argues that the enumeration of services subject to VAT in Section 108 of the NIRC is not
exhaustive because it covers all sales of services unless exempted by law. He claims that the CTA erred in
applying the rules on statutory construction and in using extrinsic aids in interpreting Section 108 because
the provision is clear and unambiguous. Thus, he maintains that the exhibition of movies by cinema
operators or proprietors to the paying public, being a sale of service, is subject to VAT.
10

Respondents' Arguments
Respondents, on the other hand, argue that a plain reading of Section 108 of the NIRC of 1997 shows that
the gross receipts of proprietors or operators of cinemas/theaters derived from public admission are not
among the services subject to VAT. Respondents insist that gross receipts from cinema/theater admission
tickets were never intended to be subject to any tax imposed by the national government. According to
them, the absence of gross receipts from cinema/theater admission tickets from the list of services which
are subject to the national amusement tax under Section 125 of the NIRC of 1997 reinforces this legislative
intent. Respondents also highlight the fact that RMC No. 28-2001 on which the deficiency assessments
were based is an unpublished administrative ruling.
Our Ruling
The petition is bereft of merit.

The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive
Section 108 of the NIRC of the 1997 reads:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to
ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or
lease of properties.
The phrase "sale or exchange of services" means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration,including those performed or rendered by
construction and service contractors; stock, real estate, commercial, customs and immigration brokers;
lessors of property, whether personal or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for
others; proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs
and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods
or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers
by land, air and water relative to their transport of goods or cargoes; services of franchise grantees of
telephone and telegraph, radio and television broadcasting and all other franchise grantees except those
under Section 119 of this Code; services of banks, non-bank financial intermediaries and finance
companies; and non-life insurance companies (except their crop insurances), including surety, fidelity,
indemnity and bonding companies; and similar services regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental faculties. The phrase "sale or exchange of
services" shall likewise include: ECAaTS
(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan,
secret formula or process, goodwill, trademark, trade brand or other like property or right;
xxx xxx xxx
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television
time.
xxx xxx xxx (Emphasis supplied)

11

A cursory reading of the foregoing provision clearly shows that the enumeration of the "sale or exchange of
services" subject to VAT is not exhaustive. The words, "including," "similar services," and "shall likewise
include," indicate that the enumeration is by way of example only.
Among those included in the enumeration is the "lease of motion picture films, films, tapes and discs." This,
however, is not the same as the showing or exhibition of motion pictures or films. As pointed out by the
CTA En Banc:
"Exhibition" in Black's Law Dictionary is defined as "To show or display. . . . To produce anything in public
so that it may be taken into possession" (6th ed., p. 573). While the word "lease" is defined as "a contract
by which one owning such property grants to another the right to possess, use and enjoy it on specified
period of time in exchange for periodic payment of a stipulated price, referred to as rent (Black's Law
Dictionary, 6th ed., p. 889). . . .
Since the activity of showing motion pictures, films or movies by cinema/theater operators or proprietors is
not included in the enumeration, it is incumbent upon the court to the determine whether such activity falls
under the phrase "similar services." The intent of the legislature must therefore be ascertained.

The legislature never intended operators


or proprietors of cinema/theater houses to be covered by VAT
Under the NIRC of 1939 the national government imposed amusement tax on proprietors, lessees, or
operators of theaters, cinematographs, concert halls, circuses, boxing exhibitions, and other places of
amusement, including cockpits, race tracks, and cabaret. In the case of theaters or cinematographs, the
taxes were first deducted, withheld, and paid by the proprietors, lessees, or operators of such theaters or
cinematographs before the gross receipts were divided between the proprietors, lessees, or operators of
the theaters or cinematographs and the distributors of the cinematographic films. Section 11 of the
Local Tax Code, however, amended this provision by transferring the power to impose amusement tax on
admission from theaters, cinematographs, concert halls, circuses and other places of amusements
exclusively to the local government. Thus, when the NIRC of 1977 was enacted, the national government
imposed amusement tax only on proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai
and race tracks. ADTCaI
On January 1, 1988, the VAT Law was promulgated. It amended certain provisions of the NIRC of 1977 by
imposing a multi-stage VAT to replace the tax on original and subsequent sales tax and percentage tax on
certain services. It imposed VAT on sales of services under Section 102 thereof, which provides:
SECTION 102. Value-added tax on sale of services. (a) Rate and base of tax. There shall be levied,
assessed and collected, a value-added tax equivalent to 10% percent of gross receipts derived by any
person engaged in the sale of services. The phrase "sale of services" means the performance of all kinds of
services for others for a fee, remuneration or consideration, including those performed or rendered by
construction and service contractors; stock, real estate, commercial, customs and immigration brokers;
lessors of personal property; lessors or distributors of cinematographic films; persons engaged in
milling, processing, manufacturing or repacking goods for others; and similar services regardless of whether
or not the performance thereof calls for the exercise or use of the physical or mental faculties: Provided
That the following services performed in the Philippines by VAT-registered persons shall be subject to 0%:
(1) Processing manufacturing or repacking goods for other persons doing business outside the Philippines
which goods are subsequently exported, . . .
xxx xxx xxx

12

"Gross receipts" means the total amount of money or its equivalent representing the contract price,
compensation or service fee, including the amount charged for materials supplied with the services and
deposits or advance payments actually or constructively received during the taxable quarter for the service
performed or to be performed for another person, excluding value-added tax.
(b) Determination of the tax. (1) Tax billed as a separate item in the invoice. If the tax is billed as a
separate item in the invoice, the tax shall be based on the gross receipts, excluding the tax.
(2) Tax not billed separately or is billed erroneously in the invoice. If the tax is not billed separately or is
billed erroneously in the invoice, the tax shall be determined by multiplying the gross receipts (including the
amount intended to cover the tax or the tax billed erroneously) by 1/11. (Emphasis supplied)
Persons subject to amusement tax under the NIRC of 1977, as amended, however, were exempted from
the coverage of VAT.
On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-88, which clarified that the
power to impose amusement tax on gross receipts derived from admission tickets was exclusive with the
local government units and that only the gross receipts of amusement places derived from sources other
than from admission tickets were subject to amusement tax under the NIRC of 1977, as amended.
Pertinent portions of RMC 8-88 read: DAEaTS
Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy amusement tax on gross receipts
arising from admission to places of amusement has been transferred to the local governments to the
exclusion of the national government.
xxx xxx xxx
Since the promulgation of the Local Tax Code which took effect on June 28, 1973 none of the amendatory
laws which amended the National Internal Revenue Code, including the value added tax law
under Executive Order No. 273, has amended the provisions of Section 11 of the Local Tax Code.
Accordingly, the sole jurisdiction for collection of amusement tax on admission receipts in places of
amusement rests exclusively on the local government, to the exclusion of the national government. Since
the Bureau of Internal Revenue is an agency of the national government, then it follows that it has no legal
mandate to levy amusement tax on admission receipts in the said places of amusement.
Considering the foregoing legal background, the provisions under Section 123 of the National Internal
Revenue Code as renumbered by Executive Order No. 273 (Sec. 228, old NIRC) pertaining to amusement
taxes on places of amusement shall be implemented in accordance with BIR RULING, dated December 4,
1973 and BIR RULING NO. 231-86 dated November 5, 1986 to wit:
". . . Accordingly, only the gross receipts of the amusement places derived from sources other
than from admission tickets shall be subject to . . . amusement tax prescribed under Section
228 of the Tax Code, as amended (now Section 123, NIRC, as amended by E.O. 273). The tax on
gross receipts derived from admission tickets shall be levied and collected by the city
government pursuant to Section 23 of Presidential Decree No. 231, as amended x x x" or by
the provincial government, pursuant to Section 11 of P.D. 231, otherwise known as the
Local Tax Code. (Emphasis supplied)
On October 10, 1991, the LGC of 1991 was passed into law. The local government retained the power to
impose amusement tax on proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses,
boxing stadia, and other places of amusement at a rate of not more than thirty percent (30%) of the gross
receipts from admission fees under Section 140 thereof. In the case of theaters or cinemas, the tax shall
first be deducted and withheld by their proprietors, lessees, or operators and paid to the local government
13

before the gross receipts are divided between said proprietors, lessees, or operators and the distributors of
the cinematographic films. However, the provision in the Local Tax Code expressly excluding the national
government from collecting tax from the proprietors, lessees, or operators of theaters, cinematographs,
concert halls, circuses and other places of amusements was no longer included. DEaCSA
In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its administration.
Three years later, RA 7716 was amended by RA 8241. Shortly thereafter, the NIRC of 1997 was signed
into law. Several amendments were made to expand the coverage of VAT. However, none pertain to
cinema/theater operators or proprietors. At present, only lessors or distributors of cinematographic films
are subject to VAT. While persons subject to amusement tax under the NIRCof 1997 are exempt from the
coverage of VAT. Based on the foregoing, the following facts can be established:
(1) Historically, the activity of showing motion pictures, films or movies by cinema/theater operators or
proprietors has always been considered as a form of entertainment subject to amusement tax.
(2) Prior to the Local Tax Code, all forms of amusement tax were imposed by the national government.
(3) When the Local Tax Code was enacted, amusement tax on admission tickets from theaters,
cinematographs, concert halls, circuses and other places of amusements were transferred to the local
government.
(4) Under the NIRC of 1977, the national government imposed amusement tax only on proprietors, lessees
or operators of cabarets, day and night clubs, Jai-Alai and race tracks.
(5) The VAT law was enacted to replace the tax on original and subsequent sales tax and percentage tax
on certain services.
(6) When the VAT law was implemented, it exempted persons subject to amusement tax under
the NIRC from the coverage of VAT.
(7) When the Local Tax Code was repealed by the LGC of 1991, the local government continued to impose
amusement tax on admission tickets from theaters, cinematographs, concert halls, circuses and other
places of amusements.
(8) Amendments to the VAT law have been consistent in exempting persons subject to amusement tax
under the NIRC from the coverage of VAT.
(9) Only lessors or distributors of cinematographic films are included in the coverage of VAT.
These reveal the legislative intent not to impose VAT on persons already covered by the amusement tax.
This holds true even in the case of cinema/theater operators taxed under the LGC of 1991 precisely
because the VAT law was intended to replace the percentage tax on certain services. The mere fact that
they are taxed by the local government unit and not by the national government is immaterial. The
Local Tax Code, in transferring the power to tax gross receipts derived by cinema/theater operators or
proprietor from admission tickets to the local government, did not intend to treat cinema/theater houses as
a separate class. No distinction must, therefore, be made between the places of amusement taxed by the
national government and those taxed by the local government. EIAScH
To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or
proprietors, who would be paying an additional 10% VAT on top of the 30% amusement tax imposed by
Section 140 of the LGC of 1991, or a total of 40% tax. Such imposition would result in injustice, as persons
taxed under the NIRC of 1997 would be in a better position than those taxed under the LGC of 1991. We
need not belabor that a literal application of a law must be rejected if it will operate unjustly or lead to
14

absurd results. Thus, we are convinced that the legislature never intended to include cinema/theater
operators or proprietors in the coverage of VAT.
On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals, to wit:
The power of taxation is sometimes called also the power to destroy. Therefore, it should be exercised with
caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in order to maintain the general
public's trust and confidence in the Government this power must be used justly and not treacherously.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT
Petitioner, in issuing the assessment notices for deficiency VAT against respondents, ratiocinated that:
Basically, it was acknowledged that a cinema/theater operator was then subject to amusement tax under
Section 260 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code of
1939, computed on the amount paid for admission. With the enactment of the Local Tax Code under
Presidential Decree (PD) No. 231, dated June 28, 1973, the power of imposing taxes on gross receipts from
admission of persons to cinema/theater and other places of amusement had, thereafter, been transferred
to the provincial government, to the exclusion of the national or municipal government (Sections 11 & 13,
Local Tax Code). However, the said provision containing the exclusive power of the provincial government
to impose amusement tax, had also been repealed and/or deleted by Republic Act (RA) No. 7160,
otherwise known as the Local Government Code of 1991, enacted into law on October 10, 1991.
Accordingly, the enactment of RA No. 7160, thus, eliminating the statutory prohibition on the
national government to impose business tax on gross receipts from admission of persons to
places of amusement, led the way to the valid imposition of the VAT pursuant to Section 102
(now Section 108) of the old Tax Code, as amended by the Expanded VAT Law (RA No. 7716)
and which was implemented beginning January 1, 1996. (Emphasis supplied)
We disagree.
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT on the
gross receipts of cinema/theater operators or proprietors derived from admission tickets. The removal of
the prohibition under the Local Tax Code did not grant nor restore to the national government the power to
impose amusement tax on cinema/theater operators or proprietors. Neither did it expand the coverage of
VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot be presumed nor can it be
extended by implication. A law will not be construed as imposing a tax unless it does so clearly, expressly,
and unambiguously. As it is, the power to impose amusement tax on cinema/theater operators or
proprietors remains with the local government. IDSaTE

Revenue Memorandum Circular No. 28-2001 is invalid


Considering that there is no provision of law imposing VAT on the gross receipts of cinema/theater
operators or proprietors derived from admission tickets, RMC No. 28-2001 which imposes VAT on the gross
receipts from admission to cinema houses must be struck down. We cannot overemphasize that RMCs must
not override, supplant, or modify the law, but must remain consistent and in harmony with, the law they
seek to apply and implement.
In view of the foregoing, there is no need to discuss whether RMC No. 28-2001 complied with the
procedural due process for tax issuances as prescribed under RMC No. 20-86.

Rule on tax exemption does not apply

15

Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an exemption
from the coverage of VAT. The rule that tax exemptions should be construed strictly against the taxpayer
presupposes that the taxpayer is clearly subject to the tax being levied against him. The reason is obvious:
it is both illogical and impractical to determine who are exempted without first determining who are covered
by the provision. Thus, unless a statute imposes a tax clearly, expressly and unambiguously, what applies
is the equally well-settled rule that the imposition of a tax cannot be presumed. In fact, in case of doubt,
tax laws must be construed strictly against the government and in favor of the taxpayer.
WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the Court of Tax
Appeals En Banc holding that gross receipts derived by respondents from admission tickets in showing
motion pictures, films or movies are not subject to value-added tax under Section 108 of the National
Internal Revenue Code of 1997, as amended, and its June 24, 2008 Resolution denying the motion for
reconsideration are AFFIRMED.
SO ORDERED.
||| (Commissioner of Internal Revenue v. SM Prime Holdings, Inc., G.R. No. 183505, [February 26, 2010])

[G.R. No. L-31156. February 27, 1976.]


PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiffappellant, vs. MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendantsappellees.

Sabido, Sabido & Associates for plaintiff-appellant.


Assistant Solicitor General Conrado T . Limcaoco and Solicitor Enrique M. Reyes for defendants-appellees.
SYNOPSIS
Pepsi-Cola Bottling Company of the Philippines, Inc., filed a complaint with preliminary injunction before the
Court of First Instance of Leyte to declare Section 2 of R.A. No. 2264, (known as the Local Autonomy Act)
unconstitutional as an undue delegation of the taxing authority and declare null and void Municipal
Ordinance No. 23, which levies and collects from soft drinks producers and manufactures a tax of 1/16 of a
centavo for every bottle of soft drinks corked, and Municipal Ordinance No. 27 which levies and collects on
soft drinks produced or manufactured within the territorial jurisdiction a tax of one centavo on each gallon
of volume capacity. The trial court dismissed the complaint and upheld the constitutionality of Sec. 2 of R.A.
No. 2264 and declared Municipal Ordinances Nos. 27 valid and constitutional. Appealed to the Court of
Appeals, the case was certified to the Supreme Court as involving pure question of law.
The Supreme Court upheld the validity of the delegation to Municipal Corporation or authority to tax and
likewise the validity of Municipal Ordinance No. 27, which repealed Municipal Ordinance No. 23.
SYLLABUS
1. TAXATION; NATURE; NON-DELEGATION OF POWER, EXCEPTION. The power of taxation is an
essential and inherent attribute of sovereignty, belonging as a matter of right to every independent
government, without being expressly conferred by the people. It is a power that is purely legislative and
which the central legislative body cannot delegate either to the executive or judicial department of
government without infringing upon the theory of separation of powers. The exception, however, lies in the
case of municipal corporations, to which, said theory does not apply. Legislative powers may be delegated
to local governments in respect of matters of local concern. This is sanctioned by immemorial. By necessary
16

implication, the legislative power to create political corporations for purpose of local self-government carries
with it the power to confer on such local government agencies the power to tax.
2. ID.; ID.; ID.; SCOPE OF LOCAL GOVERNMENT'S POWER TO TAX. The taxing authority conferred on
local governments under Section 2, Republic Act No. 2264, is broad enough as to extend to almost
"everything, excepting those which are mentioned therein." As long as the tax levied under the authority of
a city or municipal ordinance is not within the exceptions and limitations in the law, the same comes within
the ambit of the general rule, pursuant to the rules of expresio unius est exclusio alterius, and exceptio
firmat regulum in casibus non excepti. Municipalities are empowered to impose not only municipal license
taxes upon persons engaged in any business or occupation but also to levy for public purposes, just and
uniform taxes.
3. ID.; ID.; ID.; LIMITATION. Municipalities and municipal districts are prohibited to impose "any
percentage tax on sales or other in any form based thereon nor impose taxes on articles subject to specific
tax, except gasoline, under the provisions of the National Internal Revenue Code." For purposes of this
particular limitation, a municipal ordinance which prescribes a set of radio between the amount of the tax
and the volume of sales of the taxpayer imposes a sales tax and is null and void for being outside the
power of the municipality to enact.
4. ID.; ID.; ID.; DELEGATION OF POWER TO TAX UNDER NEW CONSTITUTION. Under the
New Constitution, local governments are granted autonomous authority to create their own sources of
revenue and to levy taxes. Section 5, Article XI Provides: "Each local government unit shall have the power
to create its sources of revenue and to levy taxes, subject to such limitations as may be provided by law."
Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the sphere of the
legislative power to enact and vest in local governments the power of local taxation.
5. ID.; ID.; ID.; VALIDITY THEREOF. The plenary nature of the delegated power of local governments
under Section 2, of R.A. No. 2264 would not suffice to invalidate the law as confiscatory and oppressive. In
delegating the authority, the State is not limited to the measure of that which is exercised by itself. When it
is said that the taxing power may be delegated to municipalities and the like, it is meant that there may be
delegated such measure of power to impose and collect taxes the legislature may deem expedient. Thus,
municipalities may be permitted to tax subjects which for reasons of public policy the State has not deemed
wise to tax for more general purposes.
6. ID.; REQUISITES FOR LAWFUL EXERCISE OF TAXING POWER. Constitutional injunction against
deprivation of property without due process of law may not be passed over under the guise of the taxing
power, except when the taking of the property is in the lawful exercise of the taxing power, as when, (1)
the tax is for a public purpose; (2) the rule on uniformity of taxation observed; (3) either the person or
property taxed is within the jurisdiction of the government levying the tax; and (4) in the assessment and
collection of certain kinds of taxes, notice and opportunity for hearing are provided.
7. ID.; ID.; INSTANCES WHERE DUE PROCESS IS VIOLATED. Due process is usually violated where the
tax imposed is for a private as distinguished from the public purposes; a tax a imposed on property outside
the State, i.e., extra-territorial taxation; and arbitrary or oppressive methods are used in assessing and
collecting taxes. But, a tax does not violate the due process clause, as applied to a particular taxpayer,
although the purpose of the tax will result in an injury rather than a benefit to such taxpayer. Due process
does not require that the property subject to the tax or the amount of tax to be raised should be
determined by judicial inquiry, and a notice and hearing as to the amount of tax and the manner in which it
shall be apportioned are generally not necessary to due process of law.
8. ID.; DOUBLE TAXATION; GENERALLY NOT FORBIDDEN. The delegated authority under Section 2 of
the Local Autonomy Act cannot be declared unconstitutional on the theory of double taxation. It must be
17

observed that the delegating authority specifies the limitations and enumerates the taxes over local
taxation may not be exercised. The reason is that the State has exclusively reversed the same for its own
prerogative. Moreover, double taxation, in general, is not forbidden by the fundamental law, since the
injunction against double taxation found in the Constitution of the United States and some states of the
Union has not been adopted as part thereof.
9. ID.; ID.; ID.; EXCEPTION. Double taxation becomes obnoxious only where the taxpayer is taxed twice
for the benefit of the same governmental entity or by the same jurisdiction for the same purpose, but not in
a case where one tax is imposed by the State and the other by the city or municipality.
10. ID.; ID.; ID.; INSTANT CASE. Where, as in the case at bar, the municipality of Tanauan enacted
Ordinance No. 27 imposing a tax of one centavo on each gallon of volume capacity while in the previous
Ordinance No. 23, it was 1/16 of a centavo for every bottle corked, it is clear that the intention of the
municipal council was to substitute Ordinance No. 27 to that of Ordinance No. 23, repealing the latter.
11. ID.; TAX LEVIED ON PRODUCE, NOT PERCENTAGE TAX. The imposition of "a tax of one centavo
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all soft drinks produced or
manufactured under Ordinance No. 27 does not partake of a nature of a percentage tax on sales, or other
taxes in any form based thereon. The tax is levied on the produce (whether sold or not) and not on the
sales. The volume capacity of the taxpayer's production of soft drinks is considered solely for purposes of
determining the tax rate on the products, but there is no set ratio between the volume of sales and the
amount of tax.
12. ID.; ID.; ID.; MUNICIPALITY ALLOWED TO INCREASE TAX AS LONG AS AMOUNT IS REASONABLE.
The tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity of all soft drinks,
produced or manufactured or an equivalent of 1-1/2 centavos per case, cannot be considered unjust and
unfair. An increase in the tax alone would not support the claim that the tax is oppressive, unjust and
confiscatory. Municipal corporations are allowed much discretion in determining the rates of impossible
taxes. This is in line with the constitutional policy of according the widest possible autonomy to local
government in matters of taxation, an aspect that is given expression in the Local Tax Code (PD No. 231,
July 1, 1973).
13. ID.; SPECIFIC TAXES; ARTICLES SUBJECT TO SPECIFIC TAX. Specific taxes are those imposed on
specified articles, such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars
and cigarettes, matches, firecrackers, manufactured oils and other fuels, coal bunker fuel oil
cinematographic films, playing cards, saccharine, opium and other habit forming drugs.
FERNANDO, J., concurring:
1. CONSTITUTIONAL LAW; TAXATION; POWER OF MUNICIPAL CORPORATION TO TAX UNDER THE
NEW CONSTITUTION. The present Constitution is quite explicit as to the power of taxation vested in
local and municipal corporations. It is therein specifically provided: "Each local government unit shall have
the power to create its own sources to revenue and to levy taxes, subject to such limitations as may be
provided by law."
2. ID.; ID.; LIMITATION ON POWER TO TAX UNDER THE 1935 CONSTITUTION. The only limitation on
the authority to tax under the 1935 Constitution was that while the President of the Philippines was vested
with the power of control over all executive departments, bureaus, or offices, he could only "exercise
general supervision over all local governments as may be provided by law." As far as legislative power over
local government was concerned, no restriction whatsoever was placed in the Congress of the Philippines.
It would appear therefore that the extent of the taxing power was solely for the legislative body to decide.
18

3. ID.; ID.; MUNICIPAL CORPORATION'S POWER TO TAX MUST BE CLEARLY SHOWN. Although the
scope of municipal taxing power had been enlarged by subsequent legislations, the Court, in Golden Ribbon
Lumber Co. vs. City of Butuan, L-18534, December 24, 1964, reaffirmed the traditional concept, thus: "The
rule is well-settled that municipal corporations, unlike sovereign states, are clothed with no power of
taxation; that its charter or a statute must clearly show an intent to confer that power of the municipal
corporation cannot assume and exercise it, and that any such power granted must be construed strictly,
any doubt or ambiguity arising from the terms of the grant to be resolved against the municipality."
4. ID.; ID.; DOUBLE TAXATION. The objection to the taxation as double may be laid down on one side.
The 14th Amendment (the due process clause) no more forbids double taxation than it does doubling the
amount of a tax, short of confiscation or proceedings unconstitutional on other grounds.
DECISION
MARTIN, J p:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294, which
was certified to Us by the Court of Appeals on October 6, 1969, as involving only pure questions of law,
challenging the power of taxation delegated to municipalities under the Local Autonomy Act (Republic Act
No. 2264, as amended, June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc.,
commenced a complaint with preliminary injunction before the Court of First Instance of Leyte for that
Court to declare Section 2 of Republic Act No. 2264, otherwise known as the Local Autonomy Act,
unconstitutional as an undue delegation of taxing authority as well as to declare Ordinances Nos. 23 and
27, series of 1962, of the Municipality of Tanauan, Leyte, null and void. aisa dc
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state
that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the production
tax rates imposed therein are practically the same, and second that on January 17, 1963, the acting
Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager of the Pepsi-Cola
Bottling Plant in said municipality, sought to enforce compliance by the latter of the provisions of said
Ordinance No. 27, series of 1962. LLpr
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies and
collects "from soft drinks producers and manufacturers a tax of one-sixteenth (1/16) of a centavo for every
bottle of soft drink corked." For the purpose of computing the taxes due, the person, firm, company or
corporation producing soft drinks shall submit to the Municipal Treasurer a monthly report of the total
number of bottles produced and corked during the month.
On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies and
collects "on soft drinks produced or manufactured within the territorial jurisdiction of this municipality a tax
of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity." For the purpose of
computing the taxes due, the person, firm, company, partnership, corporation or plant producing soft
drinks shall submit to the Municipal Treasurer a monthly report of the total number of gallons produced or
manufactured during the month.
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax."
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the complaint and
upholding the constitutionality of [Section 2, Republic Act No. 2264]; declaring Ordinances Nos. 23 and 27
valid, legal and constitutional; ordering the plaintiff to pay the taxes due under the oft-said Ordinances; and
to pay the costs."
19

From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals, which, in
turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or specific taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right
to every independent government, without being expressly conferred by the people. It is a power that is
purely legislative and which the central legislative body cannot delegate either to the executive or judicial
department of the government without infringing upon the theory of separation of powers. The exception,
however, lies in the case of municipal corporations, to which, said theory does not apply. Legislative powers
may be delegated to local governments in respect of matters of local concern. This is sanctioned by
immemorial practice. By necessary implication, the legislative power to create political corporations for
purposes of local self-government carries with it the power to confer on such local governmental agencies
the power to tax. Under the New Constitution, local governments are granted the autonomous authority to
create their own sources of revenue and to levy taxes. Section 5, Article XI provides: "Each local
government unit shall have the power to create its sources of revenue and to levy taxes, subject to such
limitations as may be provided by law." Withal, it cannot be said that Section 2 of Republic Act No.
2264 emanated from beyond the sphere of the legislative power to enact and vest in local governments the
power of local taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would not
suffice to invalidate the said law as confiscatory and oppressive. In delegating the authority, the State is
not limited to the exact measure of that which is exercised by itself. When it is said that the taxing power
may be delegated to municipalities and the like, it is meant that there may be delegated such measure of
power to impose and collect taxes as the legislature may deem expedient. Thus, municipalities may be
permitted to tax subjects which for reasons of public policy the State has not deemed wise to tax for more
general purposes. This is not to say though that the constitutional injunction against deprivation of property
without due process of law may be passed over under the guise of the taxing power, except when the
taking of the property is in the lawful exercise of the taxing power, as when (1) the tax is for a public
purpose; (2) the rule on uniformity of taxation is observed; (3) either the person or property taxed is within
the jurisdiction of the government levying the tax; and (4) in the assessment and collection of certain kinds
of taxes notice and opportunity for hearing are provided. Due process is usually violated where the tax
imposed is for a private as distinguished from a public purpose; a tax is imposed on property outside the
State, i.e., extra-territorial taxation; and arbitrary or oppressive methods are used in assessing and
collecting taxes. But, a tax does not violate the due process clause, as applied to a particular taxpayer,
although the purpose of the tax will result in an injury rather than a benefit to such taxpayer. Due process
does not require that the property subject to the tax or the amount of tax to be raised should be
determined by judicial inquiry, and a notice and hearing as to the amount of the tax and the manner in
which it shall be apportioned are generally not necessary to due process of law.
There is no validity to the assertion that the delegated authority can be declared unconstitutional on the
theory of double taxation. It must be observed that the delegating authority specifies the limitations and
enumerates the taxes over which local taxation may not be exercised. The reason is that the State has
exclusively reserved the same for its own prerogative. Moreover, double taxation, in general, is not
forbidden by our fundamental law, since We have not adopted as part thereof the injunction against double
taxation found in the Constitution of the United States and some states of the Union. Double taxation
20

becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental
entity or by the same jurisdiction for the same purpose, but not in a case where one tax is imposed by the
State and the other by the city or municipality.
2. The plaintiff-appellant submits that Ordinance Nos. 23 and 27 constitute double taxation, because these
two ordinances cover the same subject matter and impose practically the same tax rate. The thesis
proceeds from its assumption that both ordinances are valid and legally enforceable. This is not so. As
earlier quoted, Ordinance No. 23, which was approved on September 25, 1962, levies or collects from soft
drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo for every bottle corked,
irrespective of the volume contents of the bottle used. When it was discovered that the producer or
manufacturer could increase the volume contents of the bottle and still pay the same tax rate, the
Municipality of Tanauan enacted Ordinance No. 27, approved on October 28, 1962, imposing a tax of one
centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The difference between the
two ordinances clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it was 1/16 of a
centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on each gallon (128 fluid
ounces, U.S.) of volume capacity. The intention of the Municipal Council of Tanauan in enacting Ordinance
No. 27 is thus clear: it was intended as a plain substitute for the prior Ordinance No. 23, and operates as a
repeal of the latter, even without words to that effect. Plaintiff-appellant in its brief admitted that
defendants-appellees are only seeking to enforce Ordinance No. 27, series of 1962. Even the stipulation of
facts confirms the fact that the Acting Municipal Treasurer of Tanauan, Leyte sought to compel compliance
by the plaintiff-appellant of the provisions of said Ordinance No. 27, series of 1962. The aforementioned
admission shows that only Ordinance No. 27, series of 1962 is being enforced by defendants-appellees.
Even the Provincial Fiscal, counsel for defendants-appellees admits in his brief "that Section 7 of Ordinance
No. 27, series of 1962 clearly repeals Ordinance No. 23 as the provisions of the latter are inconsistent with
the provisions of the former."

That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage or a
specific tax. Undoubtedly, the taxing authority conferred on local governments under Section 2, Republic
Act No. 2264, is broad enough as to extend to almost "everything, excepting those which are mentioned
therein." As long as the tax levied under the authority of a city or municipal ordinance is not within the
exceptions and limitations in the law, the same comes within the ambit of the general rule, pursuant to the
rules of expresio unius est exclusio alterius, and exceptio firmat regulum in casibus non excepti. The
limitation applies, particularly, to the prohibition against municipalities and municipal districts to impose
"any percentage tax on sales or other taxes in any form based thereon nor impose taxes on articles subject
to specific tax, except gasoline, under the provisions of the National Internal Revenue Code." For purposes
of this particular limitation, a municipal ordinance which prescribes a set ratio between the amount of the
tax and the volume of sales of the taxpayer imposes a sales tax and is null and void for being outside the
power of the municipality to enact. But, the imposition of "a tax of one centavo (P0.01) on each gallon
(128 fluid ounces, U.S.) of volume capacity" on all soft drinks produced or manufactured under Ordinance
No. 27 does not partake of the nature of a percentage tax on sales, or other taxes in any form based
thereon. The tax is levied on theproduce (whether sold or not) and not on the sales. The volume capacity
of the taxpayers production of soft drinks is considered solely for purposes of determining the tax rate on
the products, but there is no set ratio between the volume of sales and the amount of the tax.
Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified articles,
such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars and cigarettes,
matches, firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel oil,

21

cinematographic films, playing cards, saccharine, opium and other habit-forming drugs. Soft drink is not
one of those specified. cdphil
3. The tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all soft
drinks, produced or manufactured, or an equivalent of 1-1/2 centavos per case, cannot be considered
unjust and unfair. An increase in the tax alone would not support the claim that the tax is oppressive,
unjust and confiscatory. Municipal corporations are allowed much discretion in determining the rates of
imposable taxes. This is in line with the constitutional policy of according the widest possible autonomy to
local governments in matters of local taxation, an aspect that is given expression in the Local Tax Code (PD
No. 231, July 1, 1973). Unless the amount is so excessive as to be prohibitive, courts will go slow in writing
off an ordinance as unreasonable. Reluctance should not deter compliance with an ordinance such as
Ordinance No. 27 if the purpose of the law to further strengthen local autonomy were to be realized.
Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than ten
crowners or P2,000.00 with ten but not more than twenty crowners imposed on manufacturers, producers,
importers and dealers of soft drinks and/or mineral waters under Ordinance No. 54, series of 1964, as
amended by Ordinance No. 41, series of 1968, of defendant Municipality, appears not to affect the
resolution of the validity of Ordinance No. 27. Municipalities are empowered to impose, not only municipal
license taxes upon persons engaged in any business or occupation but also to levy for public purposes, just
and uniform taxes. The ordinance in question (Ordinance No. 27) comes within the second power of a
municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as the Local
Autonomy Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the Municipality of
Tanauan, Leyte, series of 1962, repealing Municipal Ordinance No. 23, same series, is hereby declared of
valid and legal effect. Costs against petitioner-appellant. cdta
SO ORDERED.
||| (Pepsi-Cola Bottling Co. of the Philippines, Inc. v. Municipality of Tanauan, G.R. No. L-31156, [February

27, 1976], 161 PHIL 591-611)

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[G.R. No. 155491. September 16, 2008.]


SMART COMMUNICATIONS, INC., petitioner, vs. THE CITY OF DAVAO, represented herein by its
Mayor HON. RODRIGO R. DUTERTE, and the SANGGUNIANG
PANLUNGSOD OF DAVAO CITY, respondents.
DECISION
NACHURA, J p:
This is a petition for review on certiorari under Rule 45 of the Rules of Court filed
by Smart Communications, Inc. (Smart) against the City of Davao, represented by its Mayor, Hon. Rodrigo
R. Duterte, and the Sangguniang Panlungsod of Davao City, to annul the Decision dated July 19,
2002 of the Regional Trial Court (RTC) and its Order dated September 26, 2002 in Sp. Civil Case No.
28,976-2002. CTAIHc

The Facts
On February 18, 2002, Smart filed a special civil action for declaratory relief under Rule 63 of the
Rules of Court, for the ascertainment of its rights and obligations under the Tax
Code of the City of Davao, particularly Section 1, Article 10 thereof, the pertinent portion of which reads:
Notwithstanding any exemption granted by any law or other special law, there is hereby imposed a tax on
businesses enjoying a franchise, at a rate of seventy-five percent (75%) of one percent (1%) of the gross
annual receipts for the preceding calendar year based on the income or receipts realized within the
territorial jurisdiction of Davao City.
Smart contends that its telecenter in Davao City is exempt from payment of franchise tax to the City, on the
following grounds: (a) the issuance of its franchise under Republic Act (R.A.) No. 7294 subsequent to R.A.
No. 7160 shows the clear legislative intent to exempt it from the provisions of R.A. 7160; (b) Section
137 of R.A. No. 7160 can only apply to exemptions already existing at the time of its effectivity and not to
future exemptions; (c) the power of the City of Davao to impose a franchise tax is subject to statutory
limitations such as the "in lieu of all taxes" clause found in Section 9 of R.A. No. 7294; and (d) the
imposition of franchise tax by the City ofDavao would amount to a violation of the constitutional provision
against impairment of contracts.
On March 2, 2002, respondents filed their Answer in which they contested the tax exemption claimed
by Smart. They invoked the power granted by the Constitution to local government units to create their
own sources of revenue.
On May 17, 2002, a pre-trial conference was held. Inasmuch as only legal issues were involved in the case,
the RTC issued an order requiring the parties to submit their respective memoranda and, thereafter, the
case would be deemed submitted for resolution. AcTHCE
On July 19, 2002, the RTC rendered its Decision denying the petition. The trial court noted that the
ambiguity of the "in lieu of all taxes" provision in R.A. No. 7294, on whether it covers both national and
local taxes, must be resolved against the taxpayer. The RTC ratiocinated that tax exemptions are
construed in strictissimi jurisagainst the taxpayer and liberally in favor of the taxing authority and, thus,
those who assert a tax exemption must justify it with words too plain to be mistaken and too categorical
not to be misinterpreted. On the issue of violation of the non-impairment clause of the Constitution, the
trial court cited Mactan Cebu International Airport Authority v. Marcos, and declared that the city's power
to tax is based not merely on a valid delegation of legislative power but on the direct authority granted to it
by the fundamental law. It added that while such power may be subject to restrictions or conditions
36

imposed by Congress, any such legislated limitation must be consistent with the basic policy of local
autonomy.
Smart filed a motion for reconsideration which was denied by the trial court in an Order dated September
26, 2002.
Thus, the instant case.
Smart assigns the following errors:
[a.] THE LOWER COURT ERRED IN NOT HOLDING THAT UNDER PETITIONER'S FRANCHISE (REPUBLIC
ACT NO. 7294), WHICH CONTAINS THE "IN LIEU OF ALL TAXES" CLAUSE, AND WHICH IS A SPECIAL LAW
ENACTED SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, NO FRANCHISE TAX MAY BE IMPOSED ON
PETITIONER BY RESPONDENT CITY.
[b.] THE LOWER COURT ERRED IN HOLDING THAT PETITIONER'S FRANCHISE IS A GENERAL LAW AND
DID NOT REPEAL RELEVANT PROVISIONS REGARDING FRANCHISE TAX OF THE LOCAL GOVERNMENT
CODE, WHICH ACCORDING TO THE COURT IS A SPECIAL LAW.
[c.] THE LOWER COURT ERRED IN NOT HOLDING THAT SECTION 137 OF THE LOCAL GOVERNMENT
CODE, WHICH, IN RELATION TO SECTION 151 THEREOF, ALLOWS RESPONDENT CITY TO IMPOSE THE
FRANCHISE TAX, AND SECTION 193 OF THE CODE, WHICH PROVIDES FOR WITHDRAWAL OF TAX
EXEMPTION PRIVILEGES, ARE NOT APPLICABLE TO THIS CASE. IcHTCS
[d.] THE LOWER COURT ERRED IN NOT HOLDING THAT SECTIONS 137 AND 193 OF THE LOCAL
GOVERNMENT CODE REFER ONLY TO EXEMPTIONS ALREADY EXISTING AT THE TIME OF ITS ENACTMENT
BUT NOT TO FUTURE EXEMPTIONS.
[e.] THE LOWER COURT ERRED IN APPLYING THE RULE OF STATUTORY CONSTRUCTION THAT TAX
EXEMPTIONS ARE CONSTRUED STRICTLY AGAINST THE TAXPAYER.
[f.] THE LOWER COURT ERRED IN NOT HOLDING THAT PETITIONER'S FRANCHISE (REPUBLIC ACT NO.
7294) HAS BEEN AMENDED AND EXPANDED BY SECTION 23 OFREPUBLIC ACT NO. 7925, "THE PUBLIC
TELECOMMUNICATIONS POLICY ACT", TAKING INTO ACCOUNT THE FRANCHISE OF GLOBE TELECOM,
INC. (GLOBE) (REPUBLIC ACT NO. 7229), WHICH ARE SPECIAL PROVISIONS AND WERE ENACTED
SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, THEREBY PROVIDING AN ADDITIONAL GROUND WHY
NO FRANCHISE TAX MAY BE IMPOSED ON PETITIONER BY RESPONDENT CITY.
[g.] THE LOWER COURT ERRED IN DISREGARDING THE RULING OF THE DEPARTMENT OF FINANCE,
THROUGH ITS BUREAU OF LOCAL GOVERNMENT FINANCE, THAT PETITIONER IS EXEMPT FROM THE
PAYMENT OF THE FRANCHISE TAX IMPOSABLE BY LOCAL GOVERNMENT UNITS UNDER THE LOCAL
GOVERNMENT CODE.
[h.] THE LOWER COURT ERRED IN NOT HOLDING THAT THE IMPOSITION OF THE LOCAL FRANCHISE TAX
ON PETITIONER WOULD VIOLATE THE CONSTITUTIONAL PROHIBITION AGAINST
IMPAIRMENT OF CONTRACTS.
[i.] THE LOWER COURT ERRED IN DENYING THE PETITION BELOW. ITDSAE

The Issue
In sum, the pivotal issue in this case is whether Smart is liable to pay the franchise tax imposed by
the City of Davao.

The Ruling of the Court


37

We rule in the affirmative.


I. Prospective Effect of R.A. No. 7160
On March 27, 1992, Smart's legislative franchise (R.A. No. 7294) took effect. Section 9 thereof, quoted
hereunder, is at the heart of the present controversy:
Section 9. Tax provisions. The grantee, its successors or assigns shall be liable to pay the same taxes on
their real estate buildings and personal property, exclusive of this franchise, as other persons or
corporations which are now or hereafter may be required by law to pay. In addition thereto, the
grantee, its successors or assigns shall pay a franchise tax equivalent to three percent
(3%) of all gross receipts of the business transacted under this franchise by the grantee, its
successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or
earnings thereof: Provided, That the grantee, its successors or assigns shall continue to be liable for
income taxes payable under Title II of the National Internal Revenue Code pursuant to Section
2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the
amendment or repeal shall be applicable thereto. HCSAIa
The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal Revenue
or his duly authorized representative in accordance with the National Internal Revenue Code and the return
shall be subject to audit by the Bureau of Internal Revenue. (Emphasis supplied.)
Smart alleges that the "in lieu of all taxes" clause in Section 9 of its franchise exempts it from all taxes,
both local and national, except the national franchise tax (now VAT), income tax, and real property tax.
On January 1, 1992, two months ahead of Smart's franchise, the Local Government Code (R.A. No. 7160)
took effect. Section 137, in relation to Section 151 of R.A. No. 7160, allowed the imposition of franchise tax
by the local government units; while Section 193 thereof provided for the withdrawal of tax exemption
privileges granted prior to the issuance of R.A. No. 7160 except for those expressly mentioned therein, viz.:
Section 137. Franchise Tax. Notwithstanding any exemption granted by any law or other
special law, the province may impose a tax on businesses enjoying a franchise, at the rate not
exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized, within its territorial
jurisdiction.
In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent
(1%) of the capital investment. In the succeeding calendar year, regardless of when the business started to
operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction
thereon, as provided herein.
Section 151. Scope of Taxing Powers. Except as otherwise provided in this Code, the city may levy the
taxes, fees, and charges which the province or municipality may impose: Provided, however, That the
taxes, fees and charges levied and collected by highly urbanized and independent component cities shall
accrue to them and distributed in accordance with the provisions of this Code. DASEac
The rates of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than fifty percent (50%) except the rates of professional
and amusement taxes.
Section 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations, except local water districts, cooperatives duly
38

registered under RA No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code. (Emphasis supplied.)
Smart argues that it is not covered by Section 137, in relation to Section 151 of R.A. No. 7160, because its
franchise was granted after the effectivity of the said law. We agree with Smart's contention on this matter.
The withdrawal of tax exemptions or incentives provided in R.A. No. 7160 can only affect those franchises
granted prior to the effectivity of the law. The intention of the legislature to remove all tax exemptions or
incentives granted prior to the said law is very evident in the language ofSection 193 of R.A. No. 7160. No
interpretation is necessary.

II. The "in lieu of all taxes" Clause in R.A. No. 7294
The "in lieu of all taxes" clause in Smart's franchise is put in issue before the Court. In order to ascertain its
meaning, consistent with fundamentals of statutory construction, all the words in the statute must be
considered. The grant of tax exemption by R.A. No. 7294 is not to be interpreted from a consideration of a
single portion or of isolated words or clauses, but from a general view of the act as a whole. Every
part of the statute must be construed with reference to the context.
Smart is of the view that the only taxes it may be made to bear under its franchise are the national
franchise tax (now VAT), income tax, and real property tax. It claims exemption from the local franchise
tax because the "in lieu of taxes" clause in its franchise does not distinguish between national and local
taxes.
We pay heed that R.A. No. 7294 is not definite in granting exemption to Smart from local taxation. Section
9 of R.A. No. 7294 imposes on Smart a franchise tax equivalent to three percent (3%) of all gross
receipts of the business transacted under the franchise and the said percentage shall be in lieu of all taxes
on the franchise or earnings thereof. R.A. No 7294 does not expressly provide what kind of taxes Smart is
exempted from. It is not clear whether the "in lieu of all taxes" provision in the franchise of Smart would
include exemption from local or national taxation. What is clear is that Smart shall pay franchise tax
equivalent to three percent (3%) of all gross receipts of the business transacted under its franchise. But
whether the franchise tax exemption would include exemption from exactions by both the local and the
national government is not unequivocal.
The uncertainty in the "in lieu of all taxes" clause in R.A. No. 7294 on whether Smart is exempted from
both local and national franchise tax is construed strictly againstSmart who is claiming the
exemption. Smart has the burden of proving that, aside from the imposed 3% franchise tax, Congress
intended it to be exempt from all kindsof franchise taxes whether local or national.
However, Smart failed in this regard.
Tax exemptions are never presumed and are strictly construed against the taxpayer and liberally in
favor of the taxing authority. They can only be given force when the grant is clear and categorical. The
surrender of the power to tax, when claimed, must be clearly shown by a language that will admit of no
reasonable construction consistent with the reservation of the power. If the intention of the legislature is
open to doubt, then the intention of the legislature must be resolved in favor of the State.
In this case, the doubt must be resolved in favor of the City of Davao. The "in lieu of all taxes" clause
applies only to national internal revenue taxes and not to local taxes. As appropriately pointed out in the
separate opinion of Justice Antonio T. Carpio in a similar case involving a demand for exemption from local
franchise taxes:
[T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other than income tax, imposed
under the National Internal Revenue Code. The "in lieu of all taxes" clause does not apply to local taxes.
The proviso in the first paragraph of Section 9 of Smart's franchise states that the grantee shall "continue
39

to be liable for income taxes payable under Title II of the National Internal Revenue Code." Also, the
second paragraph of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of Internal
Revenue or his duly authorized representative in accordance with the National Internal Revenue Code."
Moreover, the same paragraph declares that the tax returns "shall be subject to audit by the
Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes. The clear intent is for the
"in lieu of all taxes" clause to apply only to taxes under the National Internal Revenue Code and not to local
taxes. Even with respect to national internal revenue taxes, the "in lieu of all taxes" clause does not apply
to income tax.
If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to local taxes,
Congress would have expressly mentioned the exemption from municipal and provincial taxes. Congress
could have used the language in Section 9(b) of Clavecilla's old franchise, as follows:
. . . in lieu of any and all taxes of any kind, nature or description levied, established or collected by any
authority whatsoever, municipal, provincial or national, from which the grantee is hereby expressly
exempted, . . . . (Emphasis supplied).
However, Congress did not expressly exempt Smart from local taxes. Congress used the "in lieu of all
taxes" clause only in reference to national internal revenue taxes. The only interpretation, under the rule on
strict construction of tax exemptions, is that the "in lieu of all taxes" clause in Smart's franchise refers only
to national and not to local taxes.
It should be noted that the "in lieu of all taxes" clause in R.A. No. 7294 has become functus officio with the
abolition of the franchise tax on telecommunications companies. As admitted by Smart in its pleadings, it is
no longer paying the 3% franchise tax mandated in its franchise. Currently, Smart along with other
telecommunications companies pays the uniform 10% value-added tax.
The VAT on sale of services of telephone franchise grantees is equivalent to 10% of gross receipts derived
from the sale or exchange of services. R.A. No. 7716, as amended by the Expanded Value Added Tax
Law (R.A. No. 8241), the pertinent portion of which is hereunder quoted, amended Section 9 of R.A. No.
7294: SCIacA
SEC. 102. Value-added tax on sale of services and use or lease of properties. (a) Rate and
base of tax. There shall be levied assessed and collected, a value-added tax equivalent to
ten percent (10%) of gross receipts derived from the sale or exchange of services, including
the use or lease of properties.
The phrase "sale or exchange of services" means the performance of all kinds of services in
the Philippines for others for a fee, remuneration or consideration, including those performed
or rendered by construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or
distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking
goods for others; proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns,
resorts; proprietors or operatorsof restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers; dealers in securities; lending investors; transportation contractors on their
transport of goods or cargoes, including persons who transport goods or cargoes for hire and other
domestic common carriers by land, air, and water relative to their transport of goods or
cargoes; services of franchise grantees of telephone and telegraph, radio and television
broadcasting and all other franchise grantees except those under Section 117 of this Code;
services of banks, non-bank financial intermediaries and finance companies; and non-life insurance
companies (except their crop insurances) including surety, fidelity, indemnity and bonding companies; and
40

similar services regardless of whether or not the performance thereof calls for the exercise or use of the
physical or mental faculties. . . . .
R.A. No. 7716, specifically Section 20 thereof, expressly repealed the provisions of all special laws relative
to the rate of franchise taxes. It also repealed, amended, or modified all other laws, orders, issuances, rules
and regulations, or parts thereof which are inconsistent with it. In effect, the "in lieu of all taxes" clause
in R.A. No. 7294 was rendered ineffective by the advent of the VAT Law.
However, the franchise tax that the City of Davao may impose must comply with Sections 137 and
151 of R.A. No. 7160. Thus, the local franchise tax that may be imposed by the City must not exceed
50% of 1% of the gross annual receipts for the preceding calendar year based on the income on receipts
realized within the territorial jurisdiction of Davao.

III. Opinion of the Bureau of Local Government Finance (BLGF)


In support of its argument that the "in lieu of all taxes" clause is to be construed as an exemption from
local franchise taxes, Smart submits the opinion of the Department of Finance, through the BLGF, dated
August 13, 1998 and February 24, 1998, regarding the franchises of Smart and Globe,
respectively. Smart presents the same arguments as the Philippine Long Distance Telephone Company in
the previous cases already decided by this Court. As previously held by the Court, the findings of the BLGF
are not conclusive on the courts:
[T]he BLGF opined that 23 of R.A. No. 7925 amended the franchise of petitioner and in effect restored its
exemptions from local taxes. Petitioner contends that courts should not set aside conclusions reached by
the BLGF because its function is precisely the study of local tax problems and it has necessarily developed
an expertise on the subject.
To be sure, the BLGF is not an administrative agency whose findings on questions of fact are given weight
and deference in the courts. The authorities cited by petitioner pertain to the Court of Tax Appeals, a highly
specialized court which performs judicial functions as it was created for the review of tax cases. In contrast,
the BLGF was created merely to provide consultative services and technical assistance to local governments
and the general public on local taxation, real property assessment, and other related matters, among
others. The question raised by petitioner is a legal question, to wit, the interpretation of 23 of R.A. No.
7925. There is, therefore, no basis for claiming expertise for the BLGF that administrative agencies are said
to possess in their respective fields.
Petitioner likewise argues that the BLGF enjoys the presumption of regularity in the performance of its duty.
It does enjoy this presumption, but this has nothing to do with the question in this case. This case does not
concern the regularity of performance of the BLGF in the exercise of its duties, but the correctness of its
interpretationof a provision of law.

IV. Tax Exclusion/Tax Exemption


Smart gives another perspective of the "in lieu of all taxes" clause in Section 9 of R.A. No. 7294 in order to
avoid the payment of local franchise tax. It says that, viewed from another angle, the "in lieu of all taxes"
clause partakes of the nature of a tax exclusion and not a tax exemption. A tax exemption means that the
taxpayer does not pay any tax at all. Smart pays VAT, income tax, and real property tax. Thus, what it
enjoys is more accurately a tax exclusion.
However, as previously held by the Court, both in their nature and effect, there is no essential difference
between a tax exemption and a tax exclusion. An exemption is an immunity or a privilege; it is the freedom
from a charge or burden to which others are subjected. An exclusion, on the other hand, is the
removal of otherwise taxable items from the reach of taxation, e.g., exclusions from gross income and
41

allowable deductions. An exclusion is, thus, also an immunity or privilege which frees a taxpayer from a
charge to which others are subjected. Consequently, the rule that a tax exemption should be applied
in strictissimi juris against the taxpayer and liberally in favor of the government applies equally to tax
exclusions.

V. Section 23 of R.A. No. 7925


To further its claim, Smart invokes Section 23 of the Public Telecommunications Policy Act (R.A. No. 7925):
SEC. 23. Equality of Treatment in the Telecommunications Industry. Any advantage, favor,
privilege, exemption, or immunity granted under existing franchises, or may hereafter be
granted, shall ipso facto become part of previously granted telecommunications franchise and
shall be accorded immediately and unconditionally to the grantees of such franchises: Provided,
however, That the foregoing shall neither apply to nor affect provisions oftelecommunications franchises
concerning territory covered by the franchise, the life span of the franchise, or the type of service
authorized by the franchise. (Emphasis supplied.)
In sum, Smart wants us to interpret anew Section 23 of R.A. No. 7925, in connection with the
franchise of Globe (R.A. No. 7227), which was enacted on March 19, 1992.
Allegedly, by virtue of Section 23 of R.A. No. 7925, otherwise known as the "most favored treatment
clause" or the "equality clause", the provision in the franchise ofGlobe exempting it from local taxes is
automatically incorporated in the franchise of Smart. Smart posits that, since the franchise of Globe
contains a provision exempting it from municipal or local franchise tax, this provision should also
benefit Smart by virtue of Section 23 of R.A. No. 7925. The provision in Globe's franchise invoked
by Smart reads:
(b) The grantee shall further pay to the Treasurer of the Philippines each year after the audit and
approval of the accounts as prescribed in this Act, one and one-half per centum of all gross receipts from
business transacted under this franchise by the said grantee in the Philippines, in lieu of any and all
taxes of any kind, nature or description levied, established or collected by any authority
whatsoever, municipal, provincial or national, from which the grantee is hereby expressly
exempted, effective from the date of the approval of Republic Act Numbered Sixteen hundred eighteen.
We find no reason to disturb the previous pronouncements of this Court regarding the
interpretation of Section 23 of R.A. No. 7925. As aptly explained in the en bancdecision of this Court
in Philippine Long Distance Telephone Company, Inc. v. City of Davao, and recently inDigital
Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan, Congress, in approving Section
23 of R.A. No. 7925, did not intend it to operate as a blanket tax exemption to all telecommunications
entities. The language of Section 23 of R.A. No. 7925 and the proceedings of both Houses of Congress are
bereft of anything that would signify the grant of tax exemptions to all telecommunications entities,
including those whose exemptions had been withdrawn by R.A. No. 7160. The term "exemption" in Section
23 of R.A. No. 7925 does not mean tax exemption. The term refers to exemption from certain regulations
and requirements imposed by the National Telecommunications Commission. ESTcIA
Furthermore, in the franchise of Globe (R.A. No. 7229), the legislature incontrovertibly stated that it will be
liable for one and one-half per centum of all gross receipts from business transacted under the franchise, in
lieu of any and all taxes of any kind, nature, or description levied, established, or collected by any authority
whatsoever, municipal, provincial, or national, from which the grantee is hereby expressly exempted. The
grant of exemption from municipal, provincial, or national is clear and categorical that aside from the
franchise tax collected by virtue of R.A. No. 7229, no other franchise tax may be collected from Globe
42

regardless of who the taxing power is. No such provision is found in the franchise of Smart; the kind of tax
from which it is exempted is not clearly specified. CSDcTA
As previously explained by the Court, the stance of Smart would lead to absurd consequences.
The acceptance of petitioner's theory would result in absurd consequences. To illustrate: In its franchise,
Globe is required to pay a franchise tax of only one and one-half percentum (1 1/2%) of all gross receipts
from its transactions while Smart is required to pay a tax of three percent (3%) on all gross receipts from
business transacted. Petitioner's theory would require that, to level the playing field, any "advantage, favor,
privilege, exemption, or immunity" granted to Globe must be extended to all telecommunications
companies, including Smart. If, later, Congress again grants a franchise to another telecommunications
company imposing, say, one percent (1%) franchise tax, then all other telecommunications franchises will
have to be adjusted to "level the playing field" so to speak. This could not have been the intent of Congress
in enacting 23 of Rep. Act 7925. Petitioner's theory will leave the Government with the burden of having
to keep track of all granted telecommunications franchises, lest some companies be treated unequally. It is
different if Congress enacts a law specifically granting uniform advantages, favor, privilege, exemption, or
immunity to all telecommunications entities.

VI. Non-impairment Clause of the Constitution


Another argument of Smart is that the imposition of the local franchise tax by the City of Davao would
violate the constitutional prohibition against impairment ofcontracts. The franchise, according to petitioner,
is in the nature of a contract between the government and Smart.
However, we find that there is no violation of Article III, Section 10 of the 1987 Philippine Constitution. As
previously discussed, the franchise of Smart does not expressly provide for exemption from local taxes.
Absent the express provision on such exemption under the franchise, we are constrained to rule against it.
The "in lieu of all taxes" clause in Section 9 of R.A. No. 7294 leaves much room for interpretation. Due to
this ambiguity in the law, the doubt must be resolved against the grant of tax exemption.
Moreover, Smart's franchise was granted with the express condition that it is subject to amendment,
alteration, or repeal. As held in Tolentino v. Secretary of Finance: DASEac
It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment,
fetter the exercise of the taxing power of the State. For not only are existing laws read into contracts in
order to fix obligations as between parties, but the reservation of essential attributes of sovereign power is
also read into contracts as a basic postulate of the legal order. The policy of protecting contracts against
impairment presupposes the maintenance of a government which retains adequate authority to secure the
peace and good order of society.
In truth, the Contract Clause has never been thought as a limitation on the exercise of the State's
power of taxation save only where a tax exemption has been granted for a valid consideration. . . . .
WHEREFORE, the instant petition is DENIED for lack of merit. Costs against petitioner. aIAcCH
SO ORDERED.
||| (Smart Communications, Inc. v. City of Davao, G.R. No. 155491, [September 16, 2008], 587 PHIL 20-

41)

[G.R. No. 170532. April 30, 2009.]

43

THE PROVINCIAL ASSESSOR OF MARINDUQUE, petitioner, vs. THE HONORABLE COURT OF


APPEALS AND MARCOPPER MINING CORPORATION,respondents.
DECISION
AUSTRIA-MARTINEZ, J p:
The Provincial Assessor of the Province of Marinduque (petitioner) assails by Petition for Certiorari under
Rule 65 of the Rules of Court the May 30, 2005 Decision of the Court of Appeals (CA) which declared the
Siltation Dam and Decant System of Marcopper Mining Corporation (respondent) exempt from real property
tax; and the September 29, 2005 CA Resolution which denied petitioner's motion for
reconsideration. DEcTCa
Petitioner issued against respondent an Assessment Notice, dated March 28, 1994, for real property taxes
due on the latter's real properties, including its Siltation Dam and Decant System (subject property)
at Barangay Lamese, Sta. Cruz, Marinduque. The subject property is covered by Tax Declaration No. 0535697 dated November 17, 1993, and has a market value of Php36,360,996.19.
Respondent paid the tax demanded, but appealed the assessment before the Local Board of Assessment
Appeals (LBAA) on the ground that the subject property is exempt from real property taxation under
Section 234 (e) of Republic Act (R.A.) No. 7160 or the Local Government Code of 1991, which provides:
Sec. 234.Exemptions from Real Property Tax. The following are exempted from payment of the real
property tax:
xxx xxx xxx
(e)Machinery and equipment used for pollution control and environmental protection.
xxx xxx xxx (Emphasis supplied)
Attached to its appeal is an Affidavit issued by its Chief Mining Engineer Ricardo Esquieres, Jr. (Esquieres),
stating that the subject property was constructed to comply with the condition imposed by the Department
of Environment and Natural Resources (DENR) that respondent prevent run-offs and silt materials from
contaminating the Mogpog and Boac Rivers; and describing the subject property as a specialized
combination of essential impervious earth materials with a special provision for a spillway and a diversion
canal. Esquieres explains that the subject property is intended for the purpose of pollution control,
sediment control, domestic and agricultural water supply and flood control.
Respondent also submitted a May 24, 1994 Certification issued by DENR Regional Technical Director Carlos
J. Magno that the subject property is a "Siltation Damstructure intended primarily for pollution control of
silted materials . . . ."
In a Decision dated November 10, 1995, the LBAA dismissed respondent's appeal for having been filed out
of time. It further held that the subject property is taxable as an improvement on the principal real
property, citing the ruling of the Court in Benguet Corporation v. Central Board of Assessment Appeals that
a tailings dam is a permanent improvement not exempt from real property taxation.
Respondent appealed to the Central Board of Assessment Appeals (CBAA) which, in a Decision dated
December 21, 1998, held that respondent's appeal with the LBAA was timely, but the same lacked legal
basis because the subject property was neither a machinery nor an equipment but a permanent
improvement, and therefore not tax exempt under Sec. 234 (e) of R.A. No. 7160. Citing the definition of
machinery under Sec. 199 of R.A. No. 7160, viz.: TAEcSC
Sec. 199.Definition of Terms. When used in this Title, the term:
44

xxx xxx xxx


(o)Machinery embraces machines, equipment, mechanical contrivances, instruments, appliances or
apparatus which may or may not be attached, permanently or temporarily, to the real property. It includes
the physical facilities for production, the installations and appurtenant service facilities, those which are
mobile, self-powered or self-propelled, and those not permanently attached to the real property which are
actually, directly, and exclusively used to meet the needs of the particular industry, business or activity and
which by their very nature and purpose are designed for, or necessary to its manufacturing, mining,
logging, commercial, industrial or agricultural purposes."
the CBAA held that to be considered a "machinery", the subject property must either be a physical facility
for production, or a service facility, or one that is actually, directly and exclusively used to meet the needs
of the particular industry, business, or activity and which by its very nature and purpose is designed for, or
necessary to a manufacturing, mining, logging, commercial, industrial or agricultural purpose. The subject
property does not produce anything nor operate as auxiliary to a production process; thus, it is neither a
physical facility for production nor a service facility. It is not even necessary to the mining activity of
respondent because its purpose is merely to contain silt and sediments.
Moreover, the CBAA noted that based on an ocular inspection it conducted, the subject property had not
been actually used for pollution control for it had been out of operation since 1993.
Respondent filed a Petition/Motion for Partial Reconsideration, but the CBAA denied the same in its July 27,
2000 Resolution.
Respondent appealed to the CA on the sole issue of whether the subject property is tax exempt under Sec.
234 (e) of R.A. No. 7160.
The CA reversed the LBAA and CBAA in its Decision dated May 30, 2005 herein assailed, the dispositive
portion of which reads:
THE FOREGOING DISQUISITIONS CONSIDERED, the instant petition for review is hereby GRANTED, the
assailed Decision and Resolution of the Central Board of Assessment Appeals, dated December 21, 1998
and July 27, 2000, respectively are REVERSED and SET ASIDE. The petitioner's siltation dam and decant
system being exempt from real property tax as it is hereby determined, the Municipal Treasurer of Sta.
Cruz, Marinduque, is hereby directed to refund the tax payments made by petitioner under protest, or in
lieu thereof, to credit said payments in favor of petitioner for any taxes it will be required to pay in the
future.
SO ORDERED.
The CA held that the concept of machinery under Section 199 of R.A. No. 7160 is broad enough to include
a "machinery, instrument, apparatus or device consisting of parts which, functioning together, allows a
person to perform a task more efficiently", such as the subject property. Not only does it function as a
machinery, but it is also actually and directly used for the mining business of petitioner. The CA noted that
it was constructed in compliance with a DENR requirement; thus, it "is part and parcel of [respondent's]
mining operations to protect the environment within which it operates . . . [i]t is a device used for cleaning
up after production, in order to clean the water which must necessarily flow into the Mogpog and Boac
Rivers".
Thus, the CA held that the subject property is exempt from real property taxation under Section 91 of R.A.
No. 7942 or the Philippine Mining Act of 1995, viz.:

45

Sec. 91.Incentives for Pollution Control Devices. Pollution control devices acquired, constructed or

installed by contractors shall not be considered as improvements on the land or building


where they are placed, and shall not be subject to real property and other taxes or
assessments: Provided, however, That payment of mine wastes and tailings fees is not exempted.
(Emphasis supplied)
It qualifies as a pollution control device defined under DENR Administrative Order No. 95-23 as an
"infrastructure, machinery, equipment, and/or improvement used for impounding, treating or
neutralizing, precipitating, filtering, conveying and cleansing mine industrial waste and tailing, as well as
eliminating and reducing hazardous effects of solid particles, chemicals, liquids or other harmful byproducts and gases emitted from any facility utilized in mining operations for their disposal". The definition
"extends to all kinds of pollution control devices acquired, constructed, or installed on the land or buildings
of the mining corporation".
Finally, the CA ruled that, contrary to the view of the CBAA, the non-operational state of the subject
property "does not remove it from the purview of the clear provisions of R.A. No. 7160 . . . and R.A. No.
7942 . . . [i]n the absence of clear and convincing evidence that the siltation dam and decant system was
inutile to achieve its purpose prior to being damaged, and continued to be so . . . ."
Petitioner filed a Motion for Reconsideration but the CA denied it in a Resolution dated September 29,
2005.
Hence, the present petition, raising two main issues:
I.The propriety of the present action for certiorari under Rule 65 of the Rules of Court: EHCaDS
i.Whether or not there is available to Petitioner, the remedy of appeal or other plain, speedy and adequate
remedy in the ordinary course of law;
ii.Whether or not a petition for review on certiorari under Rule 45 of the Rules of Court is the appropriate
remedy;
iii.Whether or not, if available to the Petitioner, the remedy of appeal or other plain, speedy and adequate
remedy in the ordinary course of law were lost through the fault of the Petitioner.
II.Whether or not the Respondent court committed grave abuse of discretion amounting to lack or excess
of jurisdiction when it rendered the Decision and its subsequent Resolution, exempting the siltation dam
and decant system of Respondent Marcopper from the real property tax imposed by the Provincial
Government ofMarinduque.
i.Respondent Court of Appeals committed grave abuse of discretion amounting to lack or excess
of jurisdiction when it whimsically, arbitrarily and capriciously disregarded by treating as though non-

existent, the established and undisputed fact that the Siltation Dam Decant System of
Respondent Marcopperwas damaged and has not been in operation since 1993 up to, at the very least, the
ocular inspection conducted by the CBAA in November 1996, if not up to the present, given the failure of
Respondent Marcopper to claim otherwise;
ii.Respondent Court of Appeals committed grave abuse of discretion amounting to lack or excess of
jurisdiction when it whimsically, arbitrarily and capriciously disregarded, by treating as though non-existent,
the established and undisputed fact that Respondent Marcopper does not have a certificate of tax
exemption from the DENR under the provisions of the Philippine Mining Act of 1995 so as to entitle it to
exemption from the realty tax imposed by the local government of Marinduque.

46

iii.Respondent Court of Appeals committed grave abuse of discretion amounting to lack or excess of
jurisdiction when, inspite of the non-operation during the relevant years of the Siltation Dam and Decant
System, the lack of certificate of tax exemption therefor and the clear and unambiguous provisions of
theLocal Government Code and the Philippine Mining Act of 1995, it declared the aforesaid real property as
a machinery and equipment or a pollution control device that is exempt from realty tax. (Emphasis
supplied) ScHADI
Petitioner posits that the CA committed not only a reversible error in holding that the subject property is tax
exempt under Sec. 234 (e) of R.A. No. 7160, but also a grave abuse of discretion in discarding key factual
findings of both the LBAA and the CBAA regarding the nature of the subject property which factual
findings respondent did not even controvert. Petitioner points out that the CBAA found that the subject
property had not been used for pollution control because it had been out of operation since 1993; and
respondent admitted this in its Petition for Review before the CA where it categorically stated that "[w]hat
is not denied, however, which even the barangay resolutions state was that the siltation dam was damaged
in 1993 when a typhoon hit Marinduque. This naturally affected the environment in the area for which
reason Marcopper specifically wanted to repair the dam". Yet, petitioner argues, the CA completely ignored
such undisputed fact by holding that there is "absence of clear and convincing evidence that the siltation
dam and decant system was inutile to achieve its purpose prior to being damaged, and continued to be so .
. . ".
Petitioner further cites the finding of the CBAA that respondent did not obtain from the DENR a certification
of the tax exempt classification of the subject properties. This CBAA finding was not controverted by
respondent in its pleadings before the CA; yet, said court completely glossed over this matter and declared
the subject properties tax exempt.
On the other hand, respondent contends that petitioner's mode of appeal from the CA Decision should have
been a Petition for Review on Certiorari under Rule 45 of the Rules of Court filed within fifteen (15) days
from October 13, 2005, the day petitioner received notice of the CA Resolution denying its motion for
reconsideration. That petitioner filed instead a Petition for Certiorari on December 12, 2005 the 60th day
from receipt of the CA Resolution indicates that it resorted to a special civil action for certiorari as a
substitute for the appeal it had lost; worse, petitioner raised factual issues which the Court cannot resolve
for it is no trier of facts.
The petition has merit.

On the proper mode of appeal


Previously, under Section 36 of Presidential Decree (P.D.) No. 464 or the Real Property Tax Code, the
proper mode of appeal from a decision rendered by the CBAA was by special civil action for certiorari filed
directly with the Court. However, with the passage of R.A. No. 7902, granting the CA exclusive appellate
jurisdiction over decisions of boards and commissions, the Court issued Revised Administrative Circular No.
1-95 which provides under paragraphs 1 and 5 that appeal from a decision of the CBAA shall be by
Petition for Review with the CA. Thus, from the final judgment of the CA, appeal to the Court on questions
of law is by Petition for Review on Certiorari under Rule 45 of the Rules of Court. The availability of such
remedy bars recourse to a special civil action for certiorari even if one of the grounds invoked is grave
abuse of discretion. ESacHC
Indeed, petitioner erred in its mode of appeal by Petition for Certiorari under Rule 65. Nonetheless, in its
Resolution of July 5, 2006, the Court gave due course to the petition for it involves not only the power of
taxation of a local government unit but also its stewardship of the environment. The higher interest of
public welfare dictates that the Court suspend its rules pro hac vice in order to resolve the merits of the
petition.
47

On whether the subject property is exempt


from real property taxation
It should be borne in mind that the protest and appeals filed by respondents before the LBAA, CBAA, and
CA refer to the Assessment Notice dated March 28, 1994 andeffective January 1, 1995. No other
assessment notice is under question.
The disputed assessment notice having taken effect on January 1, 1995, its validity is determined by the
provisions of Title II (Real Property Taxation) of R.A. No. 7160, effective January 1, 1992. R.A. No.
7942 has no bearing on the matter, for this law came into effect only on April 14, 1995. Hence, reference
to R.A. No. 7942 by the CA and the respondent are all out of place.
Title II of R.A. No. 7160 governs the administration, appraisal, assessment, levy and collection of real
property tax. Section 234 thereof grants exemption from real property taxation based on ownership,
character or usage. As the Court explained in Mactan Cebu International Airport Authority v. Marcos, to
wit:
Section 234 of the LGC provides for the exemptions from payment of real property taxes and withdraws
previous exemptions therefrom granted to natural and juridical persons, including government-owned and
controlled corporations, except as provided therein.
xxx xxx xxx
These exemptions are based on the ownership, character, and use of the property. Thus:
(a)Ownership Exemptions. Exemptions from real property taxes on the basis of ownership are real
properties owned by: (i) the Republic, (ii) a province, (iii) a city, (iv) a municipality, (v) a barangay, and (vi)
registered cooperatives.
(b)Character Exemptions. Exempted from real property taxes on the basis of their character are: (i)
charitable institutions, (ii) houses and temples of prayer like churches, parsonages or convents appurtenant
thereto, mosques, and (iii) non-profit or religious cemeteries. IcSEAH
(c)Usage exemptions. Exempted from real property taxes on the basis of the actual, direct and
exclusive use to which they are devoted are: (i) all lands, buildings and improvements which are
actually directly and exclusively used for religious, charitable or educational purposes; (ii) all machineries
and equipment actually, directly and exclusively used by local water districts or by government-owned or
controlled corporations engaged in the supply and distribution of water and/or generation and transmission
of electric power; and (iii) all machinery and equipment used for pollution control and

environmental protection.
To help provide a healthy environment in the midst of the modernization of the country, all machinery and
equipment for pollution control and environmental protection may not be taxed by local governments.
(Emphasis supplied)
As held in Mactan, the exemption granted under Sec. 234 (e) of R.A. No. 7160 to "[m]achinery and
equipment used for pollution control and environmental protection" is based on usage. The term usage
means direct, immediate and actual application of the property itself to the exempting purpose. Section
199 of R.A. No. 7160defines actual use as "the purpose for which the property is principally or
predominantly utilized by the person in possession thereof". It contemplates concrete, as distinguished
from mere potential, use. Thus, a claim for exemption under Sec. 234 (e) of R.A. No. 7160 should be
supported by evidence that the property sought to be exempt is actually, directly and exclusively used for
pollution control and environmental protection.
48

The records yield no allegation or evidence by respondent that the subject property was actually, directly
and exclusively used for pollution control and environmental protection during the period covered by
the assessment notice under protest. Rather, the finding of the CBAA that said property "apparently
out of commission and not apt to its function as would control pollution and protect the
environment" stands undisputed; such finding is even admitted by respondent when, to repeat, in its
Petition for Review before the CA, it categorically stated that "[w]hat is not denied, however, which even
the barangay resolutions state was that the siltation dam was damaged in 1993 when a typhoon
hit Marinduque. This naturally affected the environment in the area for which reason Marcopper specifically
wanted to repair the dam".
Moreover, Sec. 206 prescribes the evidentiary requirements for exemption from real property taxation, viz.:
Sec. 206.Proof of Exemption of Real Property from Taxation. Every person by or for whom real

property is declared, who shall claim tax exemption for such property under this Title shall file
with the provincial, city or municipal assessor within thirty (30) days from the date of the
declaration of real property sufficient documentary evidence in support of such claim including
corporate charters, title of ownership, articles of incorporation, bylaws, contracts, affidavits,
certifications and mortgage deeds, and similar documents. If the required evidence is not
submitted within the period herein prescribed, the property shall be listed as taxable in the assessment roll.
However, if the property shall be proven to be tax exempt, the same shall be dropped from the assessment
roll. (Emphasis supplied)
The burden is upon the taxpayer to prove, by clear and convincing evidence, that his claim for exemption
has legal and factual basis.
As aptly pointed out by petitioner, there is no allegation nor evidence in respondent's pleadings that it had
complied with the procedural requirement under Sec. 206. There is nothing in the records which would
indicate that, within 30 days from its filing of Tax Declaration No. 05-35697 on November 17,
1993, respondent filed with the provincial assessor an application for exemption or any documentary
evidence of the exempt status of the subject property.
What respondent submitted along with its appeal before the LBAA are Affidavit of Esquieres, the project
design of the subject property, as well as a Certification dated May 24, 1994 issued by Carlos J. Magno,
Regional Technical Director of DENR Regional Office No. IV.
But far from proving that the subject property is tax exempt, the documents classify the subject property as
anything but machinery or equipment.
The DENR Certification classifies the subject property as a "structure intended primarily for pollution
control of silted materials in order to protect the environmental degredation of Maguila-guila, MangamuMogpog River system from getting turbid". That the subject property is a structure is further underscored
by the project design which describes the subject property as a "zoned earth siltation dam" composed of a
clay core consisting of clayey materials or impervious fill, a random fill made up of heavily to intensely
fractured metarock, and filters comprised of course tailings, river sand deposits and course filter gravels.
It is described in greater detail by respondent's Chief Mining Engineer Ricardo Esquieres, Jr. in an October
11, 1994 Affidavit attached to respondent's appeal before the LBAA, thus:
7.The siltation dam and decant system was constructed sometime in August 1992. It is not only a
specialized combination of essential impervious earth materials which provide adequate strength and
detention of turbid streamwater. It also has special provisions like spillway and diversion canal which also
promote its integrity by providing a safe outlet of the impounded streamwater. Basically, the zoned-earth
dam is composed of a clay core, random fill and filter drains. cAHIaE
49

1.Clay core impervious central portion of the dam to be inclined with a width to heat ratio greater than
1.0 and designed to be thick thick enough to reduce seepage.
2.Random fill relatively more permeable than the clay core and of greater strength. Placed at the
upstream face of the dam (to serve as armor or ballast against slope stability).
3.Filters designed to ensure that the dam structure is always in its full drained state, thus, relieving any
pore pressure that may develop behind the dam.
Therefore, by design, composition and function, the subject property is a structure adhered to the soil, and
has neither a mechanical contrivance, instrument, tool, implement, appliances, apparatus, nor
paraphernalia that produces a mechanical effect or performs a mechanical work of any kind. It meets none
of the following features of a machinery as described in Section 199 (o) of R.A. No. 7160:
(o)"Machinery" embraces machines, equipment, mechanical contrivances, instruments, appliances or
apparatus which may or may not be attached, permanently or temporarily, to the real property. It includes
the physical facilities for production, the installations and appurtenant service facilities, those which are
mobile, self-powered or self-propelled and those not permanently attached to the real property which are
actually, directly, and exclusively used to meet the needs of the particular industry, business or activity and
which by their very nature and purpose are designed for, or necessary to its manufacturing, mining,
logging, commercial, industrial or agricultural purposes.
That a structure such as the subject property does not qualify as a machinery or equipment used for
pollution control as contemplated under R.A. No. 7160 is evident from the adoption of an expanded
definition of pollution control device in R.A. No. 7942. Under Section 3 (am) thereof, a pollution control
device now also refers to "infrastructure" or "improvement", and not just to machinery or equipment. This
new concept, however, cannot benefit respondent, for the assessment notice under review pertains to real
property tax assessed prior to the amendment of Sec. 234 (e) of R.A. No. 7160 by Sec. 91 in relation to
Sec. 3 (am) of R.A. No. 7942. It is settled that tax laws are prospective in application, unless expressly
provided to apply retroactively. R.A. No. 7942 does not provide for the retroactive application of its
provisions.
In sum, the CA committed grave abuse of discretion in ignoring irrefutable evidence that the subject
property is not a machinery used for pollution control, but a structure adhering to the soil and intended for
pollution control, but has not been actually applied for that purpose during the period under assessment.
WHEREFORE, the petition is GRANTED. The Decision dated May 30, 2005 and Resolution dated September
29, 2005 are REVERSED and SET ASIDE. The Assessment Notice dated March 28, 1994 is declared VALID
under the then applicable Republic Act No. 7160. CAETcH
No costs.
SO ORDERED.
||| (Provincial Assessor of Marinduque v. Court of Appeals, G.R. No. 170532, [April 30, 2009], 605 PHIL

357-375)

50