Topic: Capital Gains Tax and Tax Assessment (Asked in the 2019 Bar Exam) registered enterprise, for
enterprise, for ¥2,100,000,000.00 (₱893,550,000.00). SMI-Ed Philippines
G.R. No. 175410               November 12, 2014
SMI-ED PHILIPPINES TECHNOLOGY, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONEN, J.:
In an action for the refund of taxes allegedly erroneously paid, the Court of Tax
Appeals may determine whether there are taxes that should have been paid in lieu of
the taxes paid. Determining the proper category of tax that should have been paid is
not an assessment. It is incidental to determining whether there should be a refund.
A Philippine Economic Zone Authority (PEZA)-registered corporation that has never
commenced operations may not avail the tax incentives and preferential rates given
to PEZA-registered enterprises. Such corporation is subject to ordinary tax rates
under the National Internal Revenue Code of 1997.
This is a petition for review1 on certiorari of the November 3, 2006 Court of Tax
Appeals En Banc decision.2 It affirmed the Court of Tax Appeals Second Division’s
decision3 and resolution4 denying petitioner SMI-Ed Philippines Technology, Inc.’s
(SMI-Ed Philippines) claim for tax refund.5
SMI-Ed Philippines is a PEZA-registered corporation authorized "to engage in the
business of manufacturing ultra high-density microprocessor unit package."6
After its registration on June 29, 1998, SMI-Ed Philippines constructed buildings and
purchased machineries and equipment.7 As of December 31, 1999, the total cost of
the properties amounted to ₱3,150,925,917.00.8
SMI-Ed Philippines "failed to commence operations."9 Its factory was temporarily
closed, effective October 15, 1999. On August 1, 2000, it sold its buildings and some
of its installed machineries and equipment to Ibiden Philippines, Inc., another PEZA-
was dissolved on November 30, 2000.10
In its quarterly income tax return for year 2000, SMI-Ed Philippines subjected the
entire gross sales of itsproperties to 5% final tax on PEZA registered corporations.
SMI-Ed Philippines paid taxes amounting to ₱44,677,500.00.11
On February 2, 2001, after requesting the cancellation of its PEZA registration and
amending its articles of incorporation to shorten its corporate term, SMI-Ed
Philippines filed an administrative claim for the refund of ₱44,677,500.00 with the
Bureauof Internal Revenue (BIR). SMIEd Philippines alleged that the amountwas
erroneously paid. It also indicated the refundable amount in its final income tax return
filed on March 1, 2001. It also alleged that it incurred a net loss of
₱2,233,464,538.00.12
The BIR did not act on SMI-Ed Philippines’ claim, which prompted the latter to file a
petition for reviewbefore the Court of Tax Appeals on September 9, 2002.13
The Court of Tax Appeals Second Division denied SMI-Ed Philippines’ claim for
refund in the decision dated December 29, 2004.14
The Court of Tax Appeals Second Division found that SMI-Ed Philippines’
administrative claim for refund and the petition for review with the Court of Tax
Appeals were filed within the two-year prescriptive period.15 However, fiscal
incentives given to PEZA-registered enterprises may be availed only by PEZA-
registered enterprises that had already commenced operations.16 Since SMI-Ed
Philippines had not commenced operations, it was not entitled to the incentives of
either the income tax holiday or the 5% preferential tax rate.17 Payment of the 5%
preferential tax amounting to ₱44,677,500.00 was erroneous.18
After finding that SMI-Ed Philippines sold properties that were capital assets under
Section 39(A)(1) of the National Internal Revenue Code of 1997, the Court of Tax
Appeals Second Division subjected the sale of SMIEd Philippines’ assets to 6%
capital gains tax under Section 27(D)(5) of the same Code and Section 2 of Revenue
Regulations No. 8-98.19 It was found liable for capital gains tax amounting to
₱53,613,000.00.20 Therefore, SMIEd Philippines must still pay the balance of
₱8,935,500.00 as deficiency tax,21 "which respondent should perhaps look
into."22 The dispositive portion of the Court of Tax Appeals Second Division’s decision
reads:
WHEREFORE, premises considered, the instant petition is hereby DENIED.
SO ORDERED.23
The Court of Tax Appeals denied SMI-Ed Philippines’ motion for reconsideration in its
June 15, 2005 resolution.24
On July 17, 2005, SMI-Ed Philippines filed a petition for review before the Court of
Tax Appeals En Banc.25 It argued that the Court of Tax Appeals Second Division
erroneously assessed the 6% capital gains tax on the sale of SMI-Ed Philippines’
equipment, machineries, and buildings.26 It also argued that the Court of Tax Appeals
Second Division cannot make an assessment at the first instance.27 Even if the Court
of Tax Appeals Second Division has such power, the period to make an assessment
had already prescribed.28
In the decision promulgated on November 3, 2006, the Court of Tax Appeals En
Banc dismissed SMI-Ed Philippines’ petition and affirmed the Court of Tax Appeals
Second Division’s decision and resolution.29 The dispositive portion of the Court of
Tax Appeals En Banc’s decision reads:
WHEREFORE, finding no reversible error to reverse the assailed Decision
promulgated on December 29, 2004 and the Resolution dated June 15, 2005, the
instant petition for review is hereby DISMISSED. Accordingly, the assailed Decision
and Resolution are hereby AFFIRMED. SO ORDERED.30
SMI-Ed Philippines filed a petition for review before this court on December 27,
2006,31 praying for the grant of its claim for refund and the reversal of the Court of
Tax Appeals En Banc’s decision.32
SMI-Ed Philippines assigned the following errors:
A. The honorable CTA En Banc grievously erred and acted beyond its
jurisdiction when it assessed for deficiency tax in the first instance.
B. Even assuming that the honorable CTA En Banc has the right to make an
assessment against the petitioner-appellant, it grievously erred in finding that
the machineries and equipment sold by the petitioner-appellant is subject to
the six percent (6%) capital gains tax under Section 27(D)(5) of the Tax
Code.33
Petitioner argued that the Court of Tax Appeals has no jurisdiction to make an
assessment since its jurisdiction, with respect to the decisions of respondent, is
merely appellate.34 Moreover, the power to make assessment had already prescribed
under Section 203 of the National Internal Revenue Code of 1997 since the return for
the erroneous payment was filed on September 13, 2000. This is more than three (3)
years from the last day prescribed by law for the filing of the return.35
Petitioner also argued that the Court of Tax Appeals En Banc erroneously subjected
petitioner’s machineries to 6% capital gains tax.36 Section 27(D)(5) of the National
Internal Revenue Code of 1997 is clear that the 6% capital gains tax on domestic
corporations applies only on the sale of lands and buildings and not tomachineries
and equipment.37 Since ¥1,700,000,000.00 of the ¥2,100,000,000.00 constituted the
consideration for the sale of petitioner’s machineries, only ¥400,000,000.00 or
₱170,200,000.00 should be subjected to the 6% capital gains tax.38 Petitioner should
be liable only for ₱10,212,000.00.39 It should be entitled to a refund of
₱34,464,500.00 after deducting ₱10,212,000.00 from the erroneously paid final tax of
₱44,677,500.00.40
In its comment, respondent argued that the Court of Tax Appeals’ determination of
petitioner’s liability for capital gains tax was not an assessment. Such determination
was necessary to settle the question regarding the tax consequence of the sale of the
properties.41 This is clearly within the Court of Tax Appeals’ jurisdiction under Section
7 of Republic Act No. 9282.42 Respondent also argued that "petitioner failed to justify
its claim for refund."43
The petition is meritorious.
I
Jurisdiction of the Court of Tax Appeals
The term "assessment" refers to the determination of amounts due from a person
obligated to make payments. In the context of national internal revenue collection, it
refers the determination of the taxes due from a taxpayer under the National Internal
Revenue Code of 1997.
The power and duty to assess national internal revenue taxes are lodged with the
BIR.44 Section 2 of the National Internal Revenue Code of 1997 provides:
SEC. 2. Powers and Duties of the Bureau of Internal Revenue. - The Bureau of
Internal Revenue shall be under the supervision and control of the Department of
Finance and its powers and duties shall comprehend the assessment and collection
ofall national internal revenue taxes, fees, and charges, and the enforcement of all
forfeitures, penalties, and fines connected therewith, including the execution of
judgments in all cases decided in its favor by the Court of Tax Appeals and the
ordinary courts. The Bureau shall give effect to and administer the supervisory and
police powers conferred to it by this Code or other laws. (Emphasis supplied) The
BIR is not mandated to make an assessment relative to every return filed with it. Tax
returns filed with the BIR enjoy the presumption that these are in accordance with the
law.45 Tax returns are also presumed correct since these are filed under the penalty
of perjury.46 Generally, however, the BIR assesses taxes when it appears, after a
return had been filed, that the taxes paid were incorrect,47 false,48 or fraudulent.49 The
BIR also assesses taxes when taxes are due but no return is filed.50 Thus:
SEC. 6. Power of the Commissioner to Make assessments and Prescribe additional
Requirements for Tax Administration and Enforcement.–
(A) Examination of Returns and Determination of Tax Due. - After a return has been
filed as required under the provisions of this Code, the Commissioner or his duly
authorized representative may authorize the examination of any taxpayer and the
assessment of the correct amount of tax: Provided, however; That failure to file a
return shall not prevent the Commissioner from authorizing the examination of any
taxpayer.The tax or any deficiency tax so assessed shall be paid upon notice and
demand from the Commissioner or from his duly authorized representative.
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of
Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to
file a return, the tax may be assessed, or a preceeding in court for the collection of
such tax may be filed without assessment, at any time within ten (10) years after the
discovery of the falsity, fraud or omission: Provided, That in a fraud assessment
which has become final and executory, the fact of fraud shall be judicially taken
cognizance of in the civil or criminal action for the collection thereof. (Emphasis
supplied)
The Court of Tax Appeals has no powerto make an assessment at the first instance.
On matters such as tax collection, tax refund, and others related to the national
internal revenue taxes, the Court of Tax Appeals’ jurisdiction is appellate in nature.
Section 7(a)(1) and Section 7(a)(2) of Republic Act No. 1125,51 as amended by
Republic Act No. 9282,52 provide that the Court of Tax Appeals reviews decisions and
inactions of the Commissioner of Internal Revenue in disputed assessments and
claims for tax refunds. Thus: SEC. 7. Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction toreview by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relations thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau of
Internal Revenue, where the National Internal Revenue Code provides a
specific period of action, in which case the inaction shall be deemed a
denial[.] (Emphasis supplied) Based on these provisions, the following must
be present for the Court of Tax Appeals to have jurisdiction over a case
involving the BIR’s decisions or inactions:
a) A case involving any of the following:
i. Disputed assessments;
ii. Refunds of internal revenue taxes, fees, or other charges,
penalties in relation thereto; and
 iii. Other matters arising under the National Internal Revenue
Code of 1997.
b) Commissioner of Internal Revenue’s decision or inaction in a case
submitted to him or her
Thus, the BIR first has to make an assessment of the taxpayer’s liabilities. When the
BIR makes the assessment, the taxpayer is allowed to dispute that assessment
before the BIR. If the BIR issues a decision that is unfavorable to the taxpayer or if
the BIR fails to act on a dispute brought by the taxpayer, the BIR’s decision or
inaction may be brought on appeal to the Court of Tax Appeals. The Court of Tax
Appeals then acquires jurisdiction over the case.
When the BIR’s unfavorable decision is brought on appeal to the Court of Tax
Appeals, the Court of Tax Appeals reviews the correctness of the BIR’s assessment
and decision. In reviewing the BIR’s assessment and decision, the Court of Tax
Appeals had to make its own determination of the taxpayer’s tax liabilities. The Court
of Tax Appeals may not make such determination before the BIR makes its
assessment and before a dispute involving such assessment is brought to the Court
of Tax Appeals on appeal.
The Court of Tax Appeals’ jurisdiction is not limited to cases when the BIR makes an
assessment or a decision unfavorable to the taxpayer. Because Republic Act No.
112553 also vests the Court of Tax Appeals with jurisdiction over the BIR’s inaction on
a taxpayer’s refund claim, there may be instances when the Court of Tax Appeals
has to take cognizance of cases that have nothing to do with the BIR’s assessments
or decisions. When the BIR fails to act on a claim for refund of voluntarily but
mistakenly paid taxes, for example, there is no decision or assessment involved.
Taxes are generally self-assessed. They are initially computed and voluntarily paid
by the taxpayer. The government does not have to demand it. If the tax payments are
correct, the BIR need not make an assessment.
The self-assessing and voluntarily paying taxpayer, however, may later find that he or
she has erroneously paid taxes. Erroneously paid taxes may come in the form of
amounts thatshould not have been paid. Thus, a taxpayer may find that he or she
has paid more than the amount that should have been paid under the law.
Erroneously paid taxes may also come in the form of tax payments for the wrong
category of tax. Thus, a taxpayer may find that he or she has paid a certain kindof tax
that he or she is not subject to.
In these instances, the taxpayer may ask for a refund. If the BIR fails to act on the
request for refund, the taxpayer may bring the matter to the Court of Tax Appeals.
From the taxpayer’s self-assessment and tax payment up to his or her request for
refund and the BIR’s inaction,the BIR’s participation is limited to the receipt of the
taxpayer’s payment. The BIR does not make an assessment; the BIR issues no
decision; and there is no dispute yet involved. Since there is no BIR assessment yet,
the Court of Tax Appeals may not determine the amount of taxes due from the
taxpayer. There is also no decision yet to review. However, there was inaction on the
part of the BIR. That inaction is within the Court of Tax Appeals’ jurisdiction.
In other words, the Court of Tax Appeals may acquire jurisdiction over cases even if
they do not involve BIR assessments or decisions.
In this case, the Court of Tax Appeals’ jurisdiction was acquired because petitioner
brought the case on appeal before the Court of Tax Appeals after the BIR had failed
to act on petitioner’s claim for refund of erroneously paid taxes. The Court of Tax
Appeals did not acquire jurisdiction as a result of a disputed assessment of a BIR
decision.
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6%
capital gains tax or other taxes at the first instance. The Court of Tax Appeals has no
power to make an assessment.
As earlier established, the Court of Tax Appeals has no assessment powers. In
stating that petitioner’s transactions are subject to capital gains tax, however, the
Court of Tax Appeals was not making an assessment. It was merely determining the
proper category of tax that petitioner should have paid, in view of its claim that it
erroneously imposed upon itself and paid the 5% final tax imposed upon PEZA-
registered enterprises.
The determination of the proper category of tax that petitioner should have paid is an
incidental matter necessary for the resolution of the principal issue, which is whether
petitioner was entitled to a refund.54
The issue of petitioner’s claim for tax refund is intertwined with the issue of the proper
taxes that are due from petitioner. A claim for tax refund carries the assumption that
the tax returns filed were correct.55 If the tax return filed was not proper, the
correctness of the amount paid and, therefore, the claim for refund become
questionable. In that case, the court must determine if a taxpayer claiming refund of
erroneously paid taxes is more properly liable for taxes other than that paid.
In South African Airways v. Commissioner of Internal Revenue,56 South African
Airways claimed for refund of its erroneously paid 2½% taxes on its gross Philippine
billings. This court did not immediately grant South African’s claim for refund. This is
because although this court found that South African Airways was not subject to the
2½% tax on its gross Philippine billings, this court also found that it was subject to
32% tax on its taxable income.57
In this case, petitioner’s claim that it erroneously paid the 5% final tax is an admission
that the quarterly tax return it filed in 2000 was improper. Hence, to determine if
petitioner was entitled to the refund being claimed, the Court of Tax Appeals has the
duty to determine if petitioner was indeed not liable for the 5% final tax and, instead,
liable for taxes other than the 5% final tax. As in South African Airways, petitioner’s
request for refund can neither be granted nor denied outright without such
determination.58
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax,
the amount of the taxpayer’s liability should be computed and deducted from the
refundable amount.
Any liability in excess of the refundable amount, however, may not be collected in a
case involving solely the issue of the taxpayer’s entitlement to refund. The question
of tax deficiencyis distinct and unrelated to the question of petitioner’s entitlement to
refund. Tax deficiencies should be subject to assessment procedures and the rules of
prescription. The court cannot be expected to perform the BIR’s duties whenever it
fails to do so either through neglect or oversight. Neither can court processes be
used as a tool to circumvent laws protecting the rights of taxpayers.
II
Petitioner’s entitlement to benefits given to PEZA-registered enterprises
Petitioner is not entitled to benefits given to PEZA-registered enterprises, including
the 5% preferential tax rate under Republic Act No. 7916 or the Special Economic
Zone Act of 1995. This is because it never began its operation.
Essentially, the purpose of Republic Act No. 7916 is to promote development and
encourage investments and business activities that will generate
employment.59 Giving fiscal incentives to businesses is one of the means devised to
achieve this purpose. It comes with the expectation that persons who will avail these
incentives will contribute to the purpose’s achievement. Hence, to avail the fiscal
incentives under Republic Act No. 7916, the law did not say that mere PEZA
registration is sufficient.
Republic Act No. 7916 or The Special Economic Zone Act of 1995 provides:
SEC. 23. Fiscal Incentives.— Business establishments operating within the
ECOZONES shall be entitled to the fiscal incentives as provided for under
Presidential Decree No. 66, the law creating the Export Processing Zone Authority, or
those provided under Book VI of Executive Order No. 226, otherwise known as the
Omnibus Investment Code of 1987.
Furthermore, tax credits for exporters using local materials as inputs shall enjoy the
same benefits provided for in the Export Development Act of 1994.
SEC. 24. Exemption from Taxes Under the National Internal Revenue Code. — Any
provision of existing laws, rules and regulations to the contrary notwithstanding, no
taxes, local and national, shall be imposed on business establishments operating
within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income
earned by all businesses and enterprises within the ECOZONE shall be remitted
tothe national government. This five percent (5%) shall be shared and distributed as
follows:
a. Three percent (3%) to the national government;
b. One percent (1%) to the localgovernment units affected by the declaration
of the ECOZONE inproportion to their population, land area, and equal
sharing factors; and
 c. One percent (1%) for the establishment of a development fund to be
utilized for the development of municipalities outside and contiguous to each
ECOZONE: Provided, however, That the respective share of the affected
local government units shall be determined on the basis of the following
formula:
1. Population - fifty percent (50%);
2. Land area - twenty-five percent (25%); and
3. Equal sharing - twenty-five percent (25%). (Emphasis supplied)
Based on these provisions, the fiscal incentives and the 5% preferential tax rate are
available only to businesses operating within the Ecozone.60 A business is
considered in operation when it starts entering into commercial transactions that are
not merely incidental to but are related to the purposes of the business. It is similar to
the definition of "doing business," as applied in actions involvingthe right of foreign
corporations to maintain court actions. In Mentholatum Co. Inc., et al. v. Mangaliman,
et al.,61 this court said that the terms "doing" or "engaging in" or "transacting"
business":
. . . impl[y] a continuity of commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in progressive prosecution of, the purpose and
object of its organization.62 Petitioner never started its operations since its registration
on June 29, 199863 because of the Asian financial crisis.64 Petitioner admitted
this.65 Therefore, it cannot avail the incentives provided under Republic Act No. 7916.
It is not entitled to the preferential tax rate of 5% on gross income in lieu of all taxes.
Because petitioner is not entitled to a preferential rate, it is subject to ordinary tax
rates under the National Internal Revenue Code of 1997.
III
Imposition of capital gains tax
The Court of Tax Appeals found that petitioner’s sale of its properties is subject to
capital gains tax.
For petitioner’s properties to be subjected to capital gains tax, the properties must
form part ofpetitioner’s capital assets.
Section 39(A)(1) of the National Internal Revenue Code of 1997 defines "capital
assets":
SEC. 39. Capital Gains and Losses. -
(A) Definitions.- As used in this Title -
(1) Capital Assets.- the term ‘capital assets’ means property held by the taxpayer
(whether or not connected with his trade or business), but does not include stock in
trade of the taxpayer or other property of a kind which would properly be included in
the inventory of the taxpayer if on hand at the close of the taxable year, or property
held by the taxpayer primarily for sale to customers in the ordinary course of his trade
orbusiness, or property used in the trade or business, of a character which is subject
to the allowance for depreciation provided in Subsection (F) of Section 34; or real
property used in trade or business of the taxpayer. (Emphasis supplied) Thus,
"capital assets" refers to taxpayer’s property that is NOT any of the following:
1. Stock in trade;
2. Property that should be included inthe taxpayer’s inventory at the close of
the taxable year;
3. Property held for sale in the ordinary course of the taxpayer’s business;
4. Depreciable property used in the trade or business; and
5. Real property used in the trade or business.
The properties involved in this case include petitioner’s buildings, equipment, and
machineries. They are not among the exclusions enumerated in Section 39(A)(1) of
the National Internal Revenue Code of 1997. None of the properties were used in
petitioner’s trade or ordinary course of business because petitioner never
commenced operations. They were not part of the inventory. None of themwere
stocks in trade. Based on the definition of capital assets under Section 39 of the
National Internal Revenue Code of 1997, they are capital assets.
Respondent insists that since petitioner’s machineries and equipment are classified
as capital assets, their sales should be subject to capital gains tax. Respondent is
mistaken.
In Commissioner of Internal Revenue v. Fortune Tobacco Corporation,66 this court
said:
The rule in the interpretation of tax laws is that a statute will not be construed as
imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot
be imposed without clear and express words for that purpose. Accordingly, the
general rule of requiring adherence to the letter in construing statutes applies with
peculiar strictness to tax laws and the provisions of a taxing act are not to be
extended by implication. In answering the question of who is subject to tax statutes, it
is basic that in case of doubt, such statutes are to be construed most strongly against
the government and in favor of the subjects or citizens because burdens are not to be
imposed nor presumed to be imposed beyond what statutes expressly and clearly
import. As burdens, taxes should not be unduly exacted nor assumed beyond the
plain meaning of the tax laws.67 (Citations omitted)
Capital gains of individuals and corporations from the sale of real properties are
taxed differently. Individuals are taxed on capital gains from sale of all real properties
located in the Philippines and classified as capital assets. Thus:
SEC. 24. Income Tax Rates.
....
(D) Capital Gains from Sale of Real Property. –
(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six
percent (6%) based on the gross selling price or current fair market value as
determined in accordance with Section 6(E) of this Code, whichever is higher, is
hereby imposed upon capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in the Philippines, classified as
capital assets, including pacto de retro sales and other forms of conditional sales, by
individuals, including estates and trusts: Provided, That the tax liability, if any, on
gains from sales or other dispositions of real property to the government or any of its
political subdivisions or agencies or to government-owned or controlled corporations
shall be determined either under Section 24 (A) or under this Subsection, at the
option of the taxpayer.68 (Emphasis supplied)
For corporations, the National Internal Revenue Code of 1997 treats the sale of land
and buildings, and the sale of machineries and equipment, differently. Domestic
corporations are imposed a 6% capital gains tax only on the presumed gain realized
from the sale of lands and/or buildings. The National Internal Revenue Code of 1997
does not impose the 6% capital gains tax on the gains realized from the sale of
machineries and equipment. Section 27(D)(5) of the National Internal Revenue Code
of 1997 provides:
SEC. 27. Rates of Income tax on Domestic Corporations. -
....
(D) Rates of Tax on Certain Passive Incomes. -
....
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or
Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed to
have been realized on the sale, exchange or disposition of lands and/or buildings
which are not actually used in the business of a corporation and are treated as capital
assets, based on the gross selling price of fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or
buildings. (Emphasis supplied)
Therefore, only the presumed gain from the sale of petitioner’s land and/or building
may be subjected to the 6% capital gains tax. The income from the sale of
petitioner’s machineries and equipment is subject to the provisions on normal
corporate income tax.
To determine, therefore, if petitioner is entitled to refund, the amount of capital gains
tax for the sold land and/or building of petitioner and the amount of corporate income
tax for the sale of petitioner’s machineries and equipment should be deducted from
the total final tax paid. Petitioner indicated, however, in its March 1, 2001 income tax
return for the 11-month period ending on November 30, 2000 that it suffered a net
loss of ₱2,233,464,538.00.69 This declaration was made under the pain of perjury.
Section 267 of the National Internal Revenue Code of 1997 provides:
SEC. 267. Declaration under Penalties of Perjury. - Any declaration, return and other
statement required under this Code, shall, in lieu of an oath, contain a written
statement that they are made under the penalties of perjury. Any person who willfully
files a declaration, return or statement containing information which is not true and
correct as to every material matter shall, upon conviction, be subject to the penalties
prescribed for perjury under the Revised Penal Code. Moreover, Rule 131, Section
3(ff) of the Rules of Court provides for the presumption that the law has been obeyed
unless contradicted or overcome by other evidence, thus:
SEC. 3. Disputable presumptions.— The following presumptions are satisfactory if
uncontradicted, but may be contradicted and overcome by other evidence:
....
(ff) That the law has been obeyed;
The BIR did not make a deficiency assessment for this declaration. Neither did the
BIR dispute this statement in its pleadings filed before this court. There is, therefore,
no reason todoubt the truth that petitioner indeed suffered a net loss in 2000.
Since petitioner had not started its operations, it was also not subject to the minimum
corporate income tax of 2% on gross income.70 Therefore, petitioner is not liable for
any income tax.
IV
Prescription
Section 203 of the National Internal Revenue Code of 1997 provides that as a
general rule, the BIR has three (3) years from the last day prescribed by law for the
filing of a return to make an assessment. If the return is filed beyond the last day
prescribed by law for filing, the three-year period shall run from the actual date of
filing. Thus:
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as
provided in Section 222, internal revenue taxes shall be assessed within three (3)
years after the last day prescribed by law for the filing of the return, and no
proceeding in court without assessment for the collection of such taxes shall be
begun after the expiration of such period: Provided, That in a case where a return is
filed beyond the period prescribed by law, the three (3)-year period shall be counted
from the day the return was filed. For purposes of this Section, a return filed before
the last day prescribed by law for the filing thereof shall be considered as filed on
such last day.
This court said that the prescriptive period to make an assessment of internal
revenue taxes is provided "primarily to safeguard the interests of taxpayers from
unreasonable investigation."71 This court explained in Commissioner of Internal
Revenue v. FMF Development Corporation72 the reason behind the provisions on
prescriptive periods for tax assessments: Accordingly, the government must assess
internal revenue taxes on time so as not to extend indefinitely the period of
assessment and deprive the taxpayer of the assurance that it will no longer be
subjected to further investigation for taxes after the expiration of reasonable period of
time.73
Rules derogating taxpayers’ right against prolonged and unscrupulous investigations
are strictly construed against the government.74
[T]he law on prescription should beinterpreted in a way conducive to bringing about
the beneficent purpose of affording protection to the taxpayer within the
contemplation of the Commission which recommended the approval of the law. To
the Government, its tax officers are obliged to act promptlyin the making of
assessment so that taxpayers, after the lapse of the period of prescription, would
have a feeling of security against unscrupulous tax agents who will always try to find
an excuse to inspect the books of taxpayers, not to determine the latter’s real liability,
but to take advantage of a possible opportunity to harass even law-abiding
businessmen. Without such legal defense, taxpayers would be open season to
harassment by unscrupulous tax agents.75
Moreover, in Commissioner of Internal Revenue v. BF Goodrich Phils.:76
For the purpose of safeguarding taxpayers from any unreasonable examination,
investigation or assessment, our tax law provides a statute of limitations in the
collection of taxes. Thus, the law on prescription, being a remedial measure, should
be liberally construed in order to afford such protection. As a corollary, the exceptions
to the law on prescription should perforce be strictly construed[.]

....

. . . . Such instances of negligence or oversight on the part of the BIR cannot

prejudice taxpayers, considering that the prescriptive period was precisely intended
to give them peace of mind.77 (Citation omitted)

The BIR had three years from the filing of petitioner’s final tax return in 2000 to
assess petitioner’s taxes. Nothing stopped the BIR from making the correct
assessment. The elevation of the refund claim with the Court of Tax Appeals was not
a bar against the BIR’s exercise of its assessment powers.

The BIR, however, did not initiate any assessment for deficiency capital gains
tax.78 Since more than a decade have lapsed from the filing of petitioner's return, the
BIR can no longer assess petitioner for deficiency capital gains taxes, if petitioner is
later found to have capital gains tax liabilities in excess of the amount claimed for
refund.

The Court of Tax Appeals should not be expected to perform the BIR's duties of
assessing and collecting taxes whenever the BIR, through neglect or oversight, fails
to do so within the prescriptive period allowed by law.

WHEREFORE, the Court of Tax Appeals' November 3, 2006 decision is SET ASIDE.
The Bureau of Internal Revenue is ordered to refund petitioner SMI-Ed Philippines
Technology, Inc. the amount of 5% final tax paid to the BIR, less the 6% capital gains
tax on the sale of petitioner SMI-Ed Philippines Technology, Inc. 's land and building.
In view of the lapse of the prescriptive period for assessment, any capital gains tax
accrued from the sale of its land and building that is in excess of the 5% final tax paid
to the Bureau of Internal Revenue may no longer be recovered from petitioner SMI-
Ed Philippines Technology, Inc.

SO ORDERED.
Topic: Tax Assessment FITNESS BY DESIGN, INC
169 Aguirre St., BF Homes,
G.R. No. 215957 Paranaque City

COMMISSIONER OF INTERNAL REVENUE, Petitioner Gentlemen:

vs.
FITNESS BY DESIGN, INC., Respondent Please be informed that after investigation of your Internal revenue Tax Liabilities for
the year 1995 pursuant to Letter of Authority No. 000029353 dated May 13, 2002,
DECISION there has been found due deficiency taxes as shown hereunder:

LEONEN, J.: Assessment No. _____________

To avail of the extraordinary period of assessment in Section 222(a) of the National Income Tax    
Internal Revenue Code, the Commissioner of Internal Revenue should show that the
     
facts upon which the fraud' is based is communicated to the taxpayer. The burden of
proving that the facts exist in any subsequent proceeding is with the Commissioner. Taxable Income per return ₱  
Furthermore, the Final Assessment Notice is not valid if it does not contain a definite
due date for payment by the taxpayer. Add: Unreported Sales   7,156,336.08
Taxable Income per audit   7,156,336.08
This resolves a Petition for Review on Certiorari1 filed by the Commissioner of      
Internal Revenue, which assails the Decision2 dated July 14, 2014 and
Resolution3 dated December 16, 2014 of the Court of Tax Appeals. The Court of Tax Tax Due (35%)   2,504,717.63
Appeals En Banc affirmed the Decision of the First Division, which declared the
Add: Surcharge (50%) ₱ 1,252,358.81  
assessment issued against Fitness by Design, Inc. (Fitness) as invalid.4
Interest (20%/annum) until 4-15-
4,508,491. 73 5, 760,850.54
On April 11, 1996, Fitness filed its Annual Income Tax Return for the taxable year of 04
1995.5 According to Fitness, it was still in its pre-operating stage during the covered Deficiency Income Tax   ₱ 8,265,568.17
period.6
     
On June 9, 2004, Fitness received a copy of the Final Assessment Notice dated Value Added Tax    
March 17, 2004.7 The Final Assessment Notice was issued under Letter of Authority
No. 00002953.8 The Final Assessment Notice assessed that Fitness had a tax      
deficiency in the amount of ₱10,647,529.69.9 It provides: Unreported Sales   ₱ 7,156,336.08
Output Tax (10%)   715,633.61
FINAL ASSESSMENT NOTICE
Add: Surcharge (50%) ₱ 357,816.80  
March 17, 2004 Interest (20%/ annum) until 4- 1,303,823.60 1,661,640.41
15-04
Deficiency VAT ₱ 2,311,214.02
Documentary Stamp Tax    
     
Subscribe Capital Stock   ₱ 375,000.00
DST due (2/200)   3,750.00
Add: Surcharge (25%)   937.50
Deficiency DST   ₱ 4,687.50
     
Total Deficiency Taxes   ₱ 10,647,529.69
The complete details covering the aforementioned discrepancies established during
the investigation of this case are shown in the accompanying Annex 1 of this Notice.
The 50% surcharge and 20% interest have been imposed pursuant to Sections 248
and 249(B) of the [National Internal Revenue Code], as amended. Please note,
however, that the interest and the total amount due will have to be adjusted if
paid prior or beyond April 15, 2004.
In view thereof, you are requested to pay your aforesaid deficiency internal revenue
taxes liabilities through the duly authorized agent bank in which you are enrolled
within the time shown in the enclosed assessment notice.10 (Emphasis in the original)
Fitness filed a protest to the Final Assessment Notice on June 25, 2004. According to
Fitness, the Commissioner's period to assess had already prescribed. Further, the
assessment was without basis since the company was only incorporated on May 30,
1995.11
On February 2, 2005, the Commissioner issued a Warrant of Distraint and/or Levy
with Reference No. OCN WDL-95-05-005 dated February 1, 2005 to Fitness.12
Fitness filed before the First Division of the Court of Tax Appeals a Petition for
Review (With Motion to Suspend Collection of Income Tax, Value Added Tax,
Documentary Stamp Tax and Surcharges and Interests) on March 1, 2005.13
On May 17, 2005, the Commissioner of Internal Revenue filed an Answer to Fitness'
Petition and raised special and affirmative defenses.14 The Commissioner posited
that the Warrant of Distraint and/or Levy was issued in accordance with law.15 The
Commissioner claimed that its right to assess had not yet prescribed under Section
222(a)16 of the National Internal Revenue Code.17 Because the 1995 Income Tax
,Return filed by Fitness was false and fraudulent for its alleged intentional failure to
reflect its true sales, Fitness' respective taxes may be assessed at any time within 10
years from the discovery of fraud or omission.18
The Commissioner asserted further that the assessment already became final and
executory for Fitness' failure , to file a protest within the reglementary period.19 The
Commissioner denied that there was a protest to the Final Assessment Notice filed
by Fitness on June 25, 2004.20 According to the Commissioner, the alleged protest
was "nowhere to be found in the [Bureau of Internal Revenue] Records nor reflected
in the Record Book of the Legal Division as normally done by [its]' receiving clerk
when she received [sic] any document."21 Therefore, the Commissioner had sufficient
basis to collect the tax deficiency through the Warrant of Distraint and/or Levy.22
The alleged fraudulent return was discovered through a tip from a confidential
informant.23 The revenue officers' investigation revealed that Fitness had been
operating business with sales operations amounting to ₱7,156,336.08 in 1995, which
it neglected toreport in its income tax return.24 Fitness' failure to report its income
resulted in deficiencies to its income tax and value-added tax of ₱8,265,568.17 and
₱2,377,274.02 respectively, as well as the documentary stamp tax with regard to
capital stock subscription.25
Through the report, the revenue officers recommended the filing of a civil case for
collection of taxes and a criminal case for failure to declare Fitness' purported sales
in its 1995 Income Tax Return.26 Hence, a criminal complaint against Fitness was
filed before the Department of Justice.27
The Court of Tax Appeals First Division granted Fitness' Petition on the ground that
the assessment has already prescribed.28 It cancelled and set aside the Final
Assessment Notice dated March 1 7, 2004 as well as the Warrant of Distraint and/or
Levy issued by the Commissioner.29 It ruled that the Final Assessment Notice is
invalid for failure to comply with the requirements of Section 22830 of the National
Internal Revenue Code. The dispositive portion of the Decision reads:
WHEREFORE, the Petition for Review dated February 24, 2005 filed by petitioner
Fitness by Design, Inc., is hereby GRANTED. Accordingly, the Final Assessment
Notice dated 'March 17, 2004, finding petitioner liable for deficiency income tax,
documentary stamp tax and value-added tax for taxable year 1995 in the total
amount of ₱10,647,529.69 is hereby CANCELLED and SET ASIDE. The Warrant of
Distraint and Levy dated February 1, 2005 is 'likewise CANCELLED and SET
ASIDE.
SO ORDERED.31 (Emphasis in the original)
The Commissioner's Motion for Reconsideration and its Supplemental Motion for
Reconsideration were denied by the Court of Tax Appeals First Division.32
Aggrieved, 33 The Commissioner the Commissioner filed an appeal before the Court
of Tax Appeals En Banc.asserted ,that it had 10 years to make an assessment due to
the fraudulent income tax return filed by Fitness.34 It also claimed that the
assessment already attained finality due to Fitness' failure to file its protest within the
period provided by law.35
Fitness argued that the Final Assessment Notice issued to it could not be claimed as
a valid deficiency assessment that could justify the issuance of a warrant of distraint
and/or levy.36 It asserted that it was a mere request for payment as it did not provide
the period within which to pay the alleged liabilities.37
The Court of Tax Appeals En Banc  ruled in favor of Fitness. It affirmed the Decision
of the Court of Tax Appeals First Division, thus:
WHEREFORE, the instant Petition for Review is DENIED for lack of merit.
Accordingly, both the Decision and Resolution in CTA Case No. 7160 dated July 10,
2012 and November 21, 2012 respectively are AFFIRMED in toto.38 (Emphasis in the
original)
The Commissioner's Motion for Reconsideration was denied by the Court of Tax
Appeals En Banc in the Resolution39 dated December 16, 2014.
Hence, the Commissioner of Internal Revenue filed before this Court a Petition for
Review.
Petitioner Commissioner of Internal Revenue raises the sole issue of whether the
Final Assessment Notice issued against respondent Fitness by Design, Inc. is a valid
assessment under Section 228 of the National Internal Revenue Code and Revenue
Regulations No. 12-99.40
Petitioner argues that the Final Assessment Notice issued to respondent is valid
since it complies with Section 228 of the National Internal Revenue Code and
Revenue Regulations No. 12-99.41 The law states that the taxpayer shall be informed
in writing of the facts, jurisprudence, and law on which the assessment is
based.42 Nothing in the law provides that due date for payment is a substantive
requirement for the validity of a final assessment notice.43
Petitioner further claims that a perusal of the Final Assessment Notice shows that
April 15, 2004 is the due date for payment.44 The pertinent portion of the assessment
reads:
The complete details covering the aforementioned discrepancies established during
the investigation of this case are shown in the accompanying Annex 1 of this Notice.
The 50% surcharge and 20% interest have been imposed pursuant to Sections 248
and 249(B) of the [National Internal Revenue Code], as amended. Please note,
however, that the interest and the total amount due will have to be adjusted if paid
prior or beyond April 15, 2004.45 (Emphasis supplied)
This Court, through the Resolution46 dated July 22, 2015, required respondent to
comment on the Petition for Review.
In its Comment,47 respondent argues that the Final Assessment Notice issued was
merely a request and not a demand for payment of tax liabilities.48 The Final
Assessment Notice cannot be considered as a final deficiency assessment because
it deprived respondent of due process when it failed to reflect its fixed tax
liabilities.49 Moreover, it also gave respondent an indefinite period to pay its tax
liabilities.50
Respondent points out that an assessment should strictly comply with the law for its
validity.51 Jurisprudence provides that "not all documents coming from the [Bureau of
Internal Revenue] containing a computation of the tax liability can be deemed
assessments[,] which can attain finality."52 Therefore, the Warrant of Distraint and/or
Levy cannot be enforced since it is based on an invalid assessment.53
Respondent likewise claims that since the Final Assessment Notice was allegedly
based on fraud, it must show the details of the fraudulent acts imputed to it as part of
due process.54
I respond.72 If the taxpayer fails to respond, he or she will be considered in
The Petition has no merit.
An assessment "refers to the determination of amounts due from a person obligated
to make payments."55 "In the context of national internal revenue collection, it refers
to the determination of the taxes due from a taxpayer under the National Internal
Revenue Code of 1997."56
The assessment process starts with the filing of tax return and payment of tax by the
taxpayer.57 The initial assessment evidenced by the tax return is a self-assessment of
the taxpayer.58 The tax is primarily computed and voluntarily paid by the taxpayer
without need of any demand from government.59 If tax obligations are properly paid,
the Bureau of Internal Revenue may dispense with its own assessment.60
After filing a return, the Commissioner or his or her representative may allow the
examination of any taxpayer for assessment of proper tax liability.61 The failure of a
taxpayer to file his or her return will not hinder the Commissioner from permitting the
taxpayer's examination.62 The Commissioner can examine records or other data
relevant to his or her inquiry in order to verify the correctness of any return, or to
make a return in case of noncompliance, as well as to determine and collect tax
liability.63
The indispensability of affording taxpayers sufficient written notice of his or her tax
liability is a clear definite requirement.64 Section 228 of the National Internal Revenue
Code and Revenue Regulations No. 12-99, as amended, transparently outline the
procedure in tax assessment.65
Section 3 of Revenue Regulations No. 12-99,66 the then prevailing regulation
regarding the due process requirement in the issuance of a deficiency tax
assessment, requires a notice for informal conference.67 The revenue officer who
audited the taxpayer's records shall state in his or her report whether the taxpayer
concurs with his or her findings of liability for deficiency taxes.68 If the taxpayer does
not agree, based on the revenue officer's report, the taxpayer shall be informed in
writing69 of the discrepancies in his or her payment of internal revenue taxes for
"Informal Conference."70 The informal conference gives the taxpayer an opportunity
to present his or her side of the case.71
The taxpayer is given 15 days from receipt of the notice of informal conference to
default.73 The revenue officer74 endorses the case with the least possible delay to the
Assessment Division of the Revenue Regional Office or the Commissioner or his or
her authorized representative.75 The Assessment Division of the Revenue Regional
Office or the Commissioner or his or her authorized representative is responsible for
the "appropriate review and issuance of a deficiency tax assessment, if warranted."76
If, after the review conducted, there exists sufficient basis to assess the taxpayer with
deficiency taxes, the officer 'shall issue a preliminary assessment notice showing in
detail the facts, jurisprudence, and law on which the assessment is based.77 The
taxpayer is given 15 days from receipt of the pre-assessment notice to respond.78 If
the taxpayer fails to respond, he or she will be considered in default, and a formal
letter of demand and assessment notice will be issued.79
The formal letter of demand and assessment notice shall state the facts,
jurisprudence, and law on which the assessment was based; otherwise, these shall
be void.80 The taxpayer or the authorized representative may administratively protest
the formal letter of demand and assessment notice within 30 days from receipt of the
notice.81
II
The word "shall" in Section 228 of the National Internal Revenue Code and Revenue
Regulations No. 12-99 means the act of informing the taxpayer of both the legal and
factual bases of the assessment is mandatory.82 The law requires that the bases be
reflected in the formal letter of demand and assessment notice.83 This cannot be
presumed.84 Otherwise, the express mandate of Section 228 and Revenue
Regulations No. 12-99 would be nugatory.85 The requirement enables the taxpayer to
make an effective protest or appeal of the assessment or decision.86
The rationale behind the requirement that taxpayers should be informed of the facts
and the law on which the assessments are based conforms with the constitutional
mandate that no person shall be deprived of his or her property without due process
of law.87 Between the power of the State to tax and an individual's right to due
process, the scale favors the right of the taxpayer to due process.88
The purpose of the written notice requirement is to aid the taxpayer in making a
reasonable protest, if necessary.89 Merely notifying the taxpayer of his or her tax
liabilities without details or particulars is not enough.90
Commissioner of Internal Revenue v. United Salvage and Towage (Phils.), Inc.91 held
that a final assessment notice that only contained a table of taxes with no other
details was insufficient:
In the present case, a mere perusal of the [Final Assessment Notice] for the
deficiency EWT for taxable year 1994 will show that other than a tabulation of the
alleged deficiency taxes due, no further detail regarding the assessment was
provided by petitioner. Only the resulting interest, surcharge and penalty were
anchored with legal basis. Petitioner should have at least attached a detailed notice
of discrepancy or stated an explanation why the amount of P48,461.76 is collectible
against respondent and how the same was arrived at.92
Any deficiency to the mandated content of the assessment or its process will not be
tolerated.93 In Commissioner of Internal Revenue v. Enron,94 an advice of tax
deficiency from the Commissioner of Internal Revenue to an employee of Enron,
including the preliminary five (5)-day letter, were not considered valid substitutes for
the mandatory written notice of the legal and factual basis of the assessment.95 The
required issuance of deficiency tax assessment notice to the taxpayer is different
from the required contents of the notice.96 Thus:
The law requires that the legal and factual bases of the assessment be stated in the
formal letter of demand and assessment notice.1âwphi1 Thus, such cannot be
presumed. Otherwise, the express provisions of Article 228 of the [National Internal
Revenue Code] and [Revenue Regulations] No. 12-99 would be rendered
nugatory.  The alleged "factual bases" in the advice, preliminary letter and "audit
working papers" did not suffice. There was no going around the mandate of the law
that the legal and factual bases of the assessment be stated in writing in the formal
letter of demand accompanying the assessment notice.97 (Emphasis supplied)
However, the mandate of giving the taxpayer a notice of the facts and laws on which
the assessments are based should not be mechanically applied.98 To emphasize, the
purpose of this requirement is to sufficiently inform the taxpayer of the bases for the
assessment to enable him or her to make an intelligent protest.99
In Samar-I Electric Cooperative v. Commissioner of Internal Revenue, 100 substantial
compliance with Section 228 of the National Internal Revenue Code is allowed,
provided that the taxpayer would be later apprised in writing of the factual and legal
bases of the assessment to enable him or her to prepare for an effective
protest.101 Thus:
Although the [Final Assessment Notice] and demand letter issued to petitioner were
not accompanied by a written explanation of the legal and factual bases of the
deficiency taxes assessed against the petitioner, the records showed that respondent
in its letter dated April 10, 2003 responded to petitioner's October 14, 2002 letter-
protest, explaining at length the factual and legal bases of the deficiency tax
assessments and denying the protest.
Considering the foregoing exchange of correspondence and documents
between the parties, we find that the requirement of Section 228 was substantially
complied with. Respondent had fully informed petitioner in writing of the factual and
legal bases of the deficiency taxes assessment, which enabled the latter to file an
"effective" protest, much unlike the taxpayer's situation in Enron. Petitioner's right to
due process was thus not violated.102
A final assessment notice provides for the amount of tax due with a demand for
payment.103 This is to determine the amount of tax due to a taxpayer.104 However, due
process requires that taxpayers be informed in writing of the facts and law on which
the assessment is based in order to aid the taxpayer in making a reasonable
protest.105 To immediately ensue with tax collection without initially substantiating a
valid assessment contravenes the principle in administrative investigations "that
taxpayers should be able to present their case and adduce supporting evidence."106
Respondent filed its income tax return in 1995.107 Almost eight (8) years passed
before the disputed final assessment notice was issued. Respondent pleaded
prescription as its defense when it filed a protest to the Final Assessment Notice.
Petitioner claimed fraud assessment to justify the belated assessment made on
respondent.108 If fraud was indeed present, the period of assessment should be within
10 years.109 It is incumbent upon petitioner to clearly state the allegations of fraud
committed by respondent to serve the purpose of an assessment notice to aid
respondent in filing an effective protest.
III
The prescriptive period in making an assessment depends upon whether a tax return
was filed or whether the tax return filed was either false or fraudulent.1âwphi1 When
a tax return that is neither false nor fraudulent has been filed, the Bureau of Internal
Revenue may assess within three (3) years, reckoned from the date of actual filing or
from the last day prescribed by law for filing.110 However, in case of a false or
fraudulent return with intent to evade tax, Section 222(a) provides:
Section 222. Exceptions as to Period of Limitation of Assessment and Collection of
Taxes. –
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to
file a return, the tax may be assessed, or a proceeding in court for the collection of
such tax may be filed without assessment, at any time within ten (10) years after the
discovery of the falsity, fraud or omission: Provided, That in a fraud assessment
which has become final and executory, the fact of fraud shall be judicially taken
cognizance of in the civil or criminal action for the collection thereof. (Emphasis
supplied)
In Aznar v. Court of Tax Appeals,111 this Court interpreted Section 332112 (now
Section 222[a] of the National Internal Revenue Code) by dividing it in three (3)
different cases: first, in case of false return; second, in case of a fraudulent return
with intent to evade; and third, in case of failure to file a return.113 Thus:
Our stand that the law should be interpreted to mean a separation of the three
different situations of false return, fraudulent return with intent to evade tax and
failure to file a return is strengthened immeasurably by the last portion of the
provision which aggregates the situations into three different classes, namely
"falsity'', "fraud" and "omission."114
This Court held that there is a difference between "false return" and a "fraudulent
return."115 A false return simply involves a "deviation from the truth, whether
intentional or not" while a fraudulent return "implies intentional or deceitful entry with
intent to evade the taxes due."116
Fraud is a question of fact that should be alleged and duly proven.117 "The willful
neglect to file the required tax return or the fraudulent intent to evade the payment of
taxes, considering that the same is accompanied by legal consequences, cannot be
presumed."118 Fraud entails corresponding sanctions under the tax law. Therefore, it
is indispensable for the Commissioner of Internal Revenue to include the basis for its
allegations of fraud in the assessment notice.
During the proceedings in the Court of Tax Appeals First Division, respondent
presented its President, Domingo C. Juan Jr. (Juan, Jr.), as witness.119 Juan, Jr.
testified that respondent was, in its pre-operating stage in 1995.120 During that period,
respondent "imported equipment and distributed them for market testing in the
Philippines without earning any profit."121 He also confirmed that the Final
Assessment Notice and its attachments failed to substantiate the Commissioner's
allegations of fraud against respondent, thus:
More than three (3) years from the time petitioner filed its 1995 annual income tax
return on April 11, 1996, respondent issued to petitioner a [Final Assessment Notice]
dated March 17, 2004 for the year 1995, pursuant to the Letter of Authority No.
00002953 dated May 13, 2002. The attached Details of discrepancy containing the
assessment for income tax (IT), value-added tax (VAT) and documentary stamp tax
(DST) as well as the Audit Result/ Assessment Notice do not impute fraud on the
part of petitioner.  Moreover, it was obtained on information and documents illegally
obtained by a [Bureau of Internal Revenue] informant from petitioner's accountant
Elnora Carpio in 1996.122 (Emphasis supplied)
Petitioner did not refute respondent's allegations. For its defense, it presented
Socrates Regala (Regala), the Group Supervisor of the team, who examined
respondent's tax liabilities.123 Regala confirmed that the investigation was prompted
by a tip from an informant who provided them with respondent's list of sales.124 He
admitted125 that the gathered information did not show that respondent deliberately
failed to reflect its true income in 1995.126
IV
The issuance of a valid formal assessment is a substantive prerequisite for collection
of taxes.127 Neither the National Internal Revenue Code nor the revenue regulations
provide for a "specific definition or form of an assessment." However, the National
Internal Revenue Code defines its explicit functions and effects."128 An assessment
does not only include a computation of tax liabilities; it also includes a demand for
payment within a period prescribed.129 Its main purpose is to determine the amount
that a taxpayer is liable to pay.130
A pre-assessment notice "do[es] not bear the gravity of a formal assessment
notice."131 A pre-assessment notice merely gives a tip regarding the Bureau of
Internal Revenue's findings against a taxpayer for an informal conference or a
clarificatory meeting.132
A final assessment is a notice "to the effect that the amount therein stated is due as
tax and a demand for payment thereof."133 This demand for payment signals the time
"when penalties and interests begin to accrue against the taxpayer and enabling the
latter to determine his remedies[.]"134 Thus, it must be "sent to and received by the
taxpayer, and must demand payment of the taxes described therein within a specific
period."135
The disputed Final Assessment Notice is not a valid assessment.
First, it lacks the definite amount of tax liability for which respondent is accountable. It
does not purport to be a demand for payment of tax due, which a final assessment
notice should supposedly be. An assessment, in the context of the National Internal
Revenue Code, is a "written notice and demand made by the [Bureau of Internal
Revenue] on the taxpayer for the settlement of a due tax liability that is there:
definitely set and fixed."136 Although the disputed notice provides for the computations
of respondent's tax liability, the amount remains indefinite. It only provides that the
tax due is still subject to modification, depending on the date of payment. Thus:
The complete details covering the aforementioned discrepancies established during
the investigation of this case are shown in the accompanying Annex 1 of this Notice.
The 50% surcharge and 20% interest have been imposed pursuant to Sections 248
and 249 (B) of the [National Internal Revenue Code], as amended. Please
note, however, that the interest and the total amount due will have to be adjusted if
prior or beyond April 15, 2004.137 (Emphasis Supplied)
Second, there are no due dates in the Final Assessment Notice. This negates
petitioner's demand for payment.138 Petitioner's contention that April 15, 2004 should
be regarded as the actual due date cannot be accepted. The last paragraph of the
Final Assessment Notice states that the due dates for payment were supposedly
reflected in the attached assessment:
In view thereof, you are requested to pay your aforesaid deficiency internal revenue
tax liabilities through the duly authorized agent bank in which you are enrolled within
the time shown in the enclosed assessment notice.139 (Emphasis in the original)
However, based on the findings of the Court of Tax Appeals First Division, the
enclosed assessment pertained to remained unaccomplished.140
Contrary to petitioner's view, April 15, 2004 was the reckoning date of accrual of
penalties and surcharges and not the due date for payment of tax
liabilities.1avvphi1 The total amount depended upon when respondent decides to
pay. The notice, therefore, did not contain a definite and actual demand to pay.
Compliance with Section 228 of the National Internal Revenue Code is a
substantative requirement.141 It is not a mere formality.142 Providing the taxpayer with
the factual and legal bases for the assessment is crucial before proceeding with tax
collection. Tax collection should be premised on a valid assessment, which would
allow the taxpayer to present his or her case and produce evidence for
substantiation.143
The Court of Tax Appeals did not err in cancelling the Final Assessment Notice as
well as the Audit Result/Assessment Notice issued by petitioner to respondent for the
year 1995 covering the "alleged deficiency income tax, value-added tax and
documentary stamp tax amounting to ₱10,647,529.69, inclusive of surcharges and
interest"144 for lack of due process. Thus, the Warrant of Distraint and/or Levy is void
since an invalid assessment bears no valid effect.145
Taxes are the lifeblood of government and should be collected without
hindrance.146 However, the collection of taxes should be exercised "reasonably and in
accordance with the prescribed procedure."147
The essential nature of taxes for the existence of the State grants government with
vast remedies to ensure its collection. However, taxpayers are guaranteed their
fundamental right to due process of law, as articulated in various ways in the process
of tax assessment. After all, the State's purpose is to ensure the well-being of its
citizens, not simply to deprive them of their fundamental rights.
WHEREFORE, the Petition is DENIED. The Decision of the Court of Tax Appeals En
Banc dated July 14, 2014 and Resolution dated December 16, 2014 in CTA EB Case
No. 970 (CTA Case No. 7160) are hereby AFFIRMED.
Topic: Procedure in issuing an assessment / Requisites of a valid assessment/ Due
Process
 G.R. Nos. 201398-99, October 03, 2018 Return Date Filed
rd
3  Quarter VAT Return October 25, 1999
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. AVON PRODUCTS
MANUFACTURING, INC., Respondent. th
4  Quarter VAT Return January 25, 2000

G.R. Nos. 201418-19, October 3, 2018

 
AVON PRODUCTS MANUFACTURING, INC., Petitioner, v. THE COMMISSIONER
OF THE INTERNAL REVENUE, Respondent. Monthly Remittance
Return of Income Expanded Compensation
DECISION Taxes Withheld
January February 25, 1999 February 25, 1999
LEONEN, J.:
February March 25, 1999 March 25, 1999
Tax assessments issued in violation of the due process rights of a taxpayer are null March April 26, 1999 April 26, 1999
and void. While the government has an interest in the swift collection of taxes, the
April May 25, 1999 May 25, 1999
Bureau of Internal Revenue and its officers and agents cannot be overreaching in
their efforts, but must perform their duties in accordance with law, with their own rules May June 25, 1999 June 25, 1999
of procedure, and always with regard to the basic tenets of due process.
June July 26, 1999 July 26, 1999
The 1997 National Internal Revenue Code, also known as the Tax Code, and July August 25, 1999 August 25, 1999
revenue regulations allow a taxpayer to file a reply or otherwise to submit comments August September 27, 1999 September 27, 1999
or arguments with supporting documents at each stage in the assessment process.
Due process requires the Bureau of Internal Revenue to consider the defenses September October 25, 1999 October 25, 1999
and evidence submitted by the taxpayer and to render a decision based on October November 25, 1999 November 25, 1999
these submissions. Failure to adhere to these requirements constitutes a
denial of due process and taints the administrative proceedings with invalidity. November December 27, 1999 December 27, 1999
December January 25, 2000 January 25, 20008
These consolidated cases assail the Court of Tax Appeals En Banc November 9,
2011 Decision1 and April 10, 2012 Resolution2 in CTA EB Case Nos. 661 and 663.
The assailed Decision denied the respective Petitions for Review by the Avon signed two (2) Waivers of the Defense of Prescription dated October 14, 2002
Commissioner of Internal Revenue (Commissioner)3 and of Avon Products and December 27, 2002,9 which expired on January 14, 2003 and April 14, 2003,
Manufacturing, Inc. (Avon),4 and affirmed the Court of Tax Appeals Special First respectively.10
Division May 13, 2010 Decision.5 The assailed Resolution denied the
Commissioner's Motion for Reconsideration6 and Avon's Motion for Partial On July 14, 2004, Avon was served a Collection Letter11 dated July 9, 2004. It was
Reconsideration.7 required to pay P80,246,459.1512 broken down as follows:

Avon filed its Value Added Tax (VAT) Returns and Monthly Remittance Returns of KIND OF YEA BASIC TAX INTEREST COMPROMI TOTAL
Income Tax Withheld for the taxable year 1999 on the following dates:
 TAX R SE AMOUNT A conference was allegedly held on June 26, 2003 where Avon informed the revenue
officers that all the documents necessary to support its defenses had already been
Income 22,012,984. 13,207,790. 35,245,774.7 submitted. Another meeting was held on August 4, 2003, where it showed the original
1999 25,000.00
Tax 19 51 0 General Ledger Book as previously directed by the revenue officers. During these
meetings, the revenue officers allegedly expressed that they would cancel the
Excise Tax 1999 913,514.87 658,675.57 73,200.00 1,645,390.44 assessments resulting from the alleged discrepancy in sales if Avon would pay part
of the assessments.22
20,286,033. 13,254,677. 33,590,711.2
VAT 1999 50,000.00
82 47 9 Thus, on January 30, 2004, Avon paid the following portions of the Final Assessment
Notices:
Withholdin
g Tax
4,702,116.3 3,040,229.2 a) Disallowed taxes and licenses/Fringe Benefit Tax adjustment P153,559.37; and
on 1999 45,000.00 7,787,345.66
8 8
Compensat
ion b) Withholding Tax on Compensation - Late Remittance - P32,829.2823

Expanded However, in a Memorandum dated May 27, 2004, the Bureau of Internal Revenue's
1,187,610.8
Withholdin 1999 764,626.18 25,000.00 1,977,237.06 officers recommended the enforcement and collection of the assessments on the
8
g Tax sole justification that Avon failed to submit supporting documents within the 60-day
P49,102,260 P30,925,999 P218,200. P80,246,459. period as required under Section 228 of the Tax Code.24
TOTAL
.14 .01 00 1513
The Large Taxpayers Collection and Enforcement Division thereafter served Avon
with the Collection Letter dated July 9, 2004.25 Avon asserted that even the items
These deficiency assessments were the same deficiency taxes covered by the already paid on January 30, 2004 were still included in the deficiency tax
Preliminary Assessment Notice14 dated November 29, 2002, received by Avon on assessments covered by this Collection Letter.26
December 23, 2002.15
In a letter27 to the Deputy Commissioner for Large Taxpayers Service dated and filed
On February 14, 2003, Avon filed a letter dated February 13, 2003 protesting against on July 27, 2004, Avon requested the reconsideration and withdrawal of the
the Preliminary Assessment Notice.16 Collection Letter. It argued that it was devoid of legal and factual basis, and was
premature as the Commissioner of Internal Revenue had not yet acted on its protest
Without ruling on Avon's protest, the Commissioner prepared the Formal Letter of against the Final Assessment Notices.28
Demand17 and Final Assessment Notices,18 all dated February 28, 2003, received by
Avon on April 11, 2003. Except for the amount of interest, the Final Assessment The Commissioner did not act on Avon's request for reconsideration. Thus, Avon was
Notices were the same as the Preliminary Assessment Notice.19 constrained to treat the Collection Letter as denial of its protest.29

In a letter20 dated and filed on May 9, 2003, Avon protested the Final Assessment On August 13, 2004, Avon filed a Petition for Review before the Court of Tax
Notices. Avon resubmitted its protest to the Preliminary Assessment Notice and Appeals.30 On August 24, 2004, it filed an Urgent Motion for Suspension of Collection
adopted the same as its protest to the Final Assessment Notices.21 of Tax.31
On May 13, 2010, the Court of Tax Appeals Special First Division rendered its
Decision,32 partially granting Avon's Petition for Review insofar as it ordered
the cancellation of the Final Demand and Final Assessment Notices for deficiency
excise tax, VAT, withholding tax on compensation, and expanded withholding tax.
However, it ordered Avon to pay deficiency income tax in the amount of P357,345.88
including 20% deficiency interest on the total amount due pursuant to Section 249,
paragraphs (b) and (c)(3) of the Tax Code. The Court of Tax Appeals Special First
Division also made the following pronouncements:33
a) There was no deprivation of due process in the issuance by the CIR of the
assessment for deficiency income tax, deficiency excise tax, deficiency VAT,
deficiency final withholding tax on compensation and deficiency expanded
withholding tax against AVON for the latter was afforded an opportunity to explain
and present its evidence;
b) The Waivers of the Statute of Limitations executed by AVON are invalid and
ineffective as the CIR failed to provide [AVON] a copy of the accepted Waivers, as
required under Revenue Memorandum Order No. 20-90. Hence, the assessment of
AVON's deficiency VAT, deficiency expanded withholding tax and deficiency
withholding tax on compensation is considered to have prescribed;
c) AVON's failure to submit the relevant documents in support of its protest did not
make the assessment final and executory;
d) As to assessment on AVON's deficiency Income Tax,
(1) there was no undeclared sales/income in the amount of P62,911,619.58 per
ITR for the taxable year 1999;
(2) AVON's liability for disallowed taxes and licenses and December 1998 Fringe
Benefit Tax payment adjustment in the amount of P152,632.10 and P927.27,
respectively, or a total of P153,559.37 is extinguished in view of the payment
made;
 
(3) The discrepancy between Ending Inventories reflected in Balance Sheet and
Cost of Sales represents variance/adjustments on standard cost to actual cost
allocated to ending inventories and not under-declaration as alleged by CIR;
 
(4) AVON's claimed tax credits in the amount of P203,645.89 was disallowed as
the same was unsupported by withholding tax certificates as required under
Section 2.58.3 (B) of Revenue Regulations No. 2-98. However, the amount of
P140,505.28 was upheld as a proper deduction from its 1999 income tax due;
and
e) As to assessment on AVON's deficiency excise tax, the same is deemed cancelled
and withdrawn in view of its Application for Abatement over its deficiency excise tax
assessment for the year 1999 and its corresponding payment.34
The dispositive portion of the Court of Tax Appeals Special First Division May 13,
2010 Decision read:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, respondent is ORDERED TO CANCEL/WITHDRAW the Final Demand
and Final Assessment Notices: (1) Assessment No. LTAID-ET-99-00011 for
deficiency Excise Tax, (2) Assessment No. LTAID-II-VAT-99-00017 for deficiency
Value Added Tax, (3) Assessment No. LTAID-II-WTC-9900002 for deficiency
Withholding Tax on Compensation Under Withholding and Later Remittance, and (4)
Assessment No. LTAID-EWT-99-00010 for deficiency Expanded Withholding Tax.
However, petitioner is ORDERED TO PAY respondent the deficiency Income Tax
under Assessment No. LTAID-II-IT-99-00018 in the amount of P357,345.88 for
taxable year 1999.
In addition, petitioner is liable to pay: i) a deficiency interest on the deficiency basic
income tax due of P100,761.01 at the rate of 20% per annum from January 31, 2004
until fully paid pursuant to Section 249(B) of the 1997 NIRC and ii) a delinquency
interest on the total amount due (inclusive of the deficiency interest) at the rate of
20% per annum from July 24, 2004 until fully paid pursuant to Section 249(C)(3) of
the 1997 NIRC.
SO ORDERED.35
The parties' Motions for Partial Reconsideration were denied in the July 12, 2010
Resolution.36 Both parties filed their respective Petitions for Review before the Court
of Tax Appeals En Banc.37
In its assailed November 9, 2011 Decision,38 the Court of Tax Appeals En Banc
denied the respective Petitions of the Commissioner and Avon, and affirmed the
Court of Tax Appeals Special First Division May 13, 2010 Decision. It held that the
Waivers of the Defense of Prescription were defective, thereby rendering the
assessment of Avon's deficiency VAT, expanded withholding tax, and withholding tax
on compensation to have prescribed.39 It further ruled that contrary to the
Commissioner's argument, the requirement under Revenue Memorandum Order No.
20-90 to furnish the taxpayer with copies of the accepted waivers was not merely
formal in nature, and non-compliance with it rendered the Waivers of the Defense of
Prescription invalid and ineffective.40
On the issue of jurisdiction, the Court of Tax Appeals En Banc held that under
Section 228 of the Tax Code, the taxpayer has two (2) options in case of inaction of
the Commissioner on disputed assessments. The first option is to file a petition with
the Court of Tax Appeals within 30 days from the lapse of the 180-day period for the
Commissioner to decide. The second option is to await the final decision of the
Commissioner and appeal this decision within 30 days from its receipt. Here, Avon
opted for the second remedy by filing its petition on July 14, 2004, within 30 days
from receipt of the July 9, 2004 Collection Letter, which also served as the final
decision denying its protest. Hence, the Court of Tax Appeals En Banc ruled that it
had jurisdiction over the case.41
The Court of Tax Appeals En Banc further affirmed the Court of Tax Appeals Special
First Division's factual findings with regard to the cancellation of deficiency tax
assessments42 and disallowance of Avon's claimed tax credits.43
Finally, the Court of Tax Appeals En Banc rejected Avon's contention regarding
denial of due process. It held that Avon was accorded by the Commissioner a
reasonable opportunity to explain and present evidence.44 Moreover, the
Commissioner's failure to appreciate Avon's supporting documents and arguments
did not ipso facto amount to denial of due process absent any proof of irregularity in
the performance of duties.45
In its April 10, 2012 Resolution,46 the Court of Tax Appeals En Banc denied the
Commissioner's Motion for Reconsideration and Avon's Motion for Partial
Reconsideration. It held that the "RCBC case,"47 cited by the Commissioner, was not
on all fours with, and therefore not applicable as stare decisis in this case. Instead,
the ruling in CIR v. Kudos Metal Corporation,48 precluding the Bureau of Internal
Revenue from invoking the doctrine of estoppel to cover its failure to comply with the
procedures in the execution of a waiver, would apply.49
Hence, the present Petitions via Rule 45 were filed before this Court.
In her Petition,50 docketed as G.R. Nos. 201398-99, the Commissioner asserts that
Avon is estopped from assailing the validity of the Waivers of the Defense of
Prescription as it has paid the other assessments that these waivers covered. It also
avers that Avon's right to appeal its protest before the Court of Tax Appeals has
prescribed and that the assessments have attained finality. Finally, it states that Avon
is liable for the deficiency assessments.51
Avon, in its separate Petition,52 docketed as G.R. Nos. 201418-19, argues that the
assessments are void ab initio due to the failure of the Commissioner to observe due
process.53 It maintains that from the start up to the end of the administrative process,
the Commissioner ignored all of its protests and submissions.54
The Petitions were consolidated on July 4, 2012.55 The Commissioner and Avon
subsequently submitted their respective Memoranda56 in compliance with this Court's
June 5, 2013 Resolution.57
The issues for this Court's resolution are:
First, whether or not the Commissioner of Internal Revenue failed to observe
administrative due process, and consequently, whether or not the assessments are
void;
Second, whether or not Avon Products Manufacturing, Inc., by paying the other tax
assessments covered by the Waivers of the Defense of Prescription, is estopped
from assailing their validity;
Third, whether or not Avon Products Manufacturing, Inc.'s right to appeal its protest
before the Court of Tax Appeals has already prescribed; and whether or not the
assessments against it for deficiency income tax, excise tax, value-added tax,
withholding tax on compensation, and expanded withholding tax have already
attained finality; and
Finally, whether or not Avon Products Manufacturing, Inc. is liable for deficiency
income tax, excise tax, value-added tax, withholding tax on compensation, and
expanded withholding tax for the taxable year 1999.
I.A
Avon asserts that the deficiency tax assessments are void because they were made
without due process58 and were not based on actual facts but on the erroneous
presumptions of the Commissioner.59
It submits that a fundamental part of administrative due process is the administrative
body's due consideration and evaluation of all the evidence submitted by the affected
party. With regard to tax assessment and collection, Section 228 of the Tax Code
and Revenue Regulations No. 12-99 prescribe compliance with due process
requirements through all the four (4) stages of the assessment process, from the
preliminary findings up to the Commissioner's decision on the disputed assessment.60
Avon claims that from the start up to the end of the administrative process, the
Commissioner ignored all of its protests and submissions to contest the deficiency
tax assessments.61 The Commissioner issued identical Preliminary Assessment
Notice, Final Assessment Notices, and Collection Letters without considering Avon's
submissions or its partial payment of the assessments. Avon asserts that it was not
accorded a real opportunity to be heard, making all of the assessments null and
void.62
Avon's arguments are well-taken.
The Bureau of Internal Revenue is the primary agency tasked to assess and collect
proper taxes, and to administer and enforce the Tax Code.63 To perform its functions
of tax assessment and collection properly, it is given ample powers under the Tax
Code, such as the power to examine tax returns and books of accounts,64 to issue a
subpoena,65 and to assess based on best evidence obtainable,66 among others.
However, these powers must "be exercised reasonably and [under] the prescribed
procedure."67 The Commissioner and revenue officers must strictly comply with the
requirements of the law, with the Bureau of Internal Revenue's own rules,68 and with
due regard to taxpayers' constitutional rights.
The Commissioner exercises administrative adjudicatory power or quasi-judicial
function in adjudicating the rights and liabilities of persons under the Tax Code.
Quasi-judicial power has been described as:
Quasi-judicial or administrative adjudicatory power on the other hand is the power of
the administrative agency to adjudicate the rights of persons before it. It is the
power to hear and determine questions of fact to which the legislative policy is
to apply and to decide in accordance with the standards laid down by the law
itself in enforcing and administering the same law. The administrative body
exercises its quasi-judicial power when it performs in a judicial manner an act which
is essentially of an executive or administrative nature, where the power to act in
such manner is incidental to or reasonably necessary for the performance of
the executive or administrative duty entrusted to it.69 (Emphasis supplied,
citations omitted)
In carrying out these quasi-judicial functions, the Commissioner is required to
"investigate facts or ascertain the existence of facts, hold hearings, weigh evidence,
and draw conclusions from them as basis for their official action and exercise of
discretion in a judicial nature."70 Tax investigation and assessment necessarily
demand the observance of due process because they affect the proprietary rights of
specific persons.
This Court has stressed the importance of due process in administrative proceedings:
The principle of due process furnishes a standard to which governmental action
should conform in order to impress it with the stamp of validity. Fidelity to such
standard must of necessity be the overriding concern of government agencies
exercising quasi-judicial functions. Although a speedy administration of action implies
a speedy trial, speed is not the chief objective of a trial. Respect for the rights of all
parties and the requirements of procedural due process equally apply in proceedings
before administrative agencies with quasi-judicial perspective in administrative
decision making and for maintaining the vision which led to the creation of the
administrative office.71
In Ang Tibay v. The Court of Industrial Relations,72 this Court observed that although
quasi-judicial agencies "may be said to be free from the rigidity of certain procedural
requirements[, it] does not mean that it can, in justiciable cases coming before it,
entirely ignore or disregard the fundamental and essential requirements of due
process in trials and investigations of an administrative character."73 It then
enumerated the fundamental requirements of due process that must be respected in
administrative proceedings:
(1) The party interested or affected must be able to present his or her own case
and submit evidence in support of it.
   
(2) The administrative tribunal or body must consider the evidence
presented.
   
(3) There must be evidence supporting the tribunal's decision.
(4) The evidence must be substantial or "such relevant evidence as a reasonable
mind might accept as adequate to support a conclusion."74
   
(5) The administrative tribunal's decision must be rendered on the evidence
presented, or at least contained in the record and disclosed to the parties
affected.
   
(6) The administrative tribunal's decision must be based on the deciding
authority's own independent consideration of the law and facts governing the
case.
   
(7) The administrative tribunal's decision is rendered in a manner that the
parties may know the various issues involved and the reasons for the
decision.75
Mendoza v. Comelec76 explained that the first requirement is the party's substantive
right at the hearing stage of the proceedings, which, in essence, is the opportunity to
explain one's side or to seek a reconsideration of the adverse action or ruling.
It was emphasized, however, that the mere filing of a motion for reconsideration does
not always result in curing the due process defect,77 "especially if the motion was filed
precisely to raise the issue of violation of the right to due process and the lack of
opportunity to be heard on the merits remained."78
The second to the sixth requirements refer to the party's "inviolable rights applicable
at the deliberative stage."79 The decision-maker must consider the totality of the
evidence presented as he or she decides the case.80
The last requirement relating to the form and substance of the decision is the
decision-maker's '"duty to give reason' to enable the affected person to understand
how the rule of fairness has been administered in his [or her] case, to expose the
reason to public scrutiny and criticism, and to ensure that the decision will be thought
through by the decision-maker."81
The Ang Tibay safeguards were subsequently "simplified into four basic rights,"82 as
follows:
(a) [T]he right to notice, be it actual or constructive, of the institution of the
proceedings that may affect a person's legal right; (b) reasonable opportunity to
appear and defend his rights and to introduce witnesses and relevant evidence in his
favor; (c) a tribunal so constituted as to give him reasonable assurance of honesty
and impartiality, and one of competent jurisdiction; and (d) a finding or decision by
that tribunal supported by substantial evidence presented at the hearing or at least
ascertained in the records or disclosed to the parties.83 (Emphasis supplied)
Saunar v. Ermita84 expounded on Ang Tibay by emphasizing that while administrative
bodies enjoy a certain procedural leniency, they are nevertheless obligated to inform
themselves of all facts material and relevant to the case, and to render a decision
based on an accurate appreciation of facts. In this regard, this Court held that Ang
Tibay did not necessarily do away with the conduct of hearing and a party may
invoke its right to a hearing to thresh out substantial factual issues, thus:
A closer perusal of past jurisprudence shows that the Court did not intend to trivialize
the conduct of a formal hearing but merely afforded latitude to administrative bodies
especially in cases where a party fails to invoke the right to hearing or is given the
opportunity but opts not to avail of it. In the landmark case of Ang Tibay, the Court
explained that administrative bodies are free from a strict application of technical
rules of procedure and are given sufficient leeway. In the said case, however,
nothing was said that the freedom included the setting aside of a hearing but merely
to allow matters which would ordinarily be incompetent or inadmissible in the usual
judicial proceedings.
In fact, the seminal words of Ang Tibay manifest a desire for administrative bodies to
exhaust all possible means to ensure that the decision rendered be based on the
accurate appreciation of facts. The Court reminded that administrative bodies have
the active duty to use the authorized legal methods of securing evidence and
informing itself of facts material and relevant to the controversy. As such, it
would be more in keeping with administrative due process that the conduct of a
hearing be the general rule rather than the exception.
....
To reiterate, due process is a malleable concept anchored on fairness and equity.
The due process requirement before administrative bodies are not as strict compared
to judicial tribunals in that it suffices that a party is given a reasonable opportunity to
be heard. Nevertheless, such "reasonable opportunity" should not be confined to the
mere submission of position papers and/or affidavits and the parties must be given
the opportunity to examine the witnesses against them. The right to a hearing is a
right which may be invoked by the parties to thresh out substantial factual issues. It
becomes even more imperative when the rules itself of the administrative body
provides for one. While the absence of a formal hearing does not necessarily result in
the deprivation of due process, it should be acceptable only when the party does not
invoke the said right or waives the same. 85 (Emphasis supplied)
In Saunar, this Court held that the petitioner in that case was denied due process
when he was not notified of the clarificatory hearings conducted by the Presidential
Anti-Graft Commission. Under the Presidential Anti-Graft Commission's Rules, in the
event that a clarificatory hearing was determined to be necessary, the Presidential
Anti-Graft Commission must notify the parties of the clarificatory hearings. Further,
"the parties shall be afforded the opportunity to be present in the hearings without the
right to examine witnesses. They, however, may ask questions and elicit answers
from the opposing party coursed through the [Presidential Anti-Graft
Commission]."86 This Court held that the petitioner in Saunar was not treated fairly in
the proceedings before the Presidential Anti-Graft Commission because he was
deprived of the opportunity to be present in the clarificatory hearings and was denied
the chance to propound questions through the Presidential Anti-Graft Commission
against the opposing parties.
"[A] fair and reasonable opportunity to explain one's side"87 is one aspect of due
process. Another aspect is the due consideration given by the decision-maker to the
arguments and evidence submitted by the affected party.
Baguio Country Club Corp. v. National Labor Relations Commission 88 precisely
involved the question of the denial of due process for failure of the labor tribunals to
consider the evidence presented by the employer. The labor tribunals unanimously
denied the employer's application for clearance to terminate the services of an
employee on the ground of insufficient evidence to show a just cause for the
employee's dismissal, and ordered the reinstatement of the employee with
backwages.
This Court held that "[t]he summary procedures used by the [labor tribunals] were too
summary to satisfy the requirements of justice and fair play."89 It noted the irregular
procedures adopted by the Labor Arbiter. First, "[he] allowed a last minute position
paper of [the] respondent ... to be filed and without requiring a copy to be served
upon the Baguio Country Club and without affording the latter an opportunity to refute
or rebut the contents of the paper, [and] forthwith decided the case."90 Second, "the
petitioner specifically stressed to the arbiter that it was 'adopting the investigations
which were enclosed with the application to terminate, which are now parts of the
record of the Ministry of Labor, as part and parcel of this position paper."'91 But the
Labor Arbiter, instead of calling for the complete records of the conciliation
proceedings, "denied the application for clearance on the ground that all that was
before it was a position paper with mere quotations about an investigation
conducted . . ."92 This Court held that the affirmance by the Commission of the
decision of the Labor Arbiter was a denial of the elementary principle of fair play.
[I]t was a denial of elementary principles of fair play for the Commission not to have
ordered the elevation of the entire records of the case with the affidavits earlier
submitted as part of the position paper but completely ignored by the labor arbiter. Or
at the very least, the case should have been remanded to the labor arbiter consonant
with the requirements of administrative due process.
The ever increasing scope of administrative jurisdiction and the statutory grant of
expansive powers in the exercise of discretion by administrative agencies illustrate
our nation's faith in the administrative process as an efficient and effective mode of
public control over sensitive areas of private activity. Because of the specific
constitutional mandates on social justice and protection to labor, and the fact that
major labor management controversies are highly intricate and complex, the
legislature and executive have reposed uncommon reliance upon what they believe
is the expertise, the rational and efficient modes of ascertaining facts, and the
unbiased and discerning adjudicative techniques of the Ministry of Labor and
Employment and its instrumentalities.
....
The instant petition is a timely reminder to labor arbiters and all who wield quasi-
judicial power to ever bear in mind that evidence is the means, sanctioned by rules,
of ascertaining in a judicial or quasi-judicial proceeding, the truth respecting a matter
of fact ... The object of evidence is to establish the truth by the use of perceptive and
reasoning faculties . . . The statutory grant of power to use summary procedures
should heighten a concern for due process, for judicial perspectives in administrative
decision making, and for maintaining the visions which led to the creation of the
administrative office.93
In Alliance for the Family Foundation, Philippines, Inc. v. Garin,94 this Court held that
the Food and Drug Administration failed to observe the basic requirements of due
process when it did not act on or address the oppositions submitted by petitioner
Alliance for the Family Foundation, Philippines, Inc., but proceeded with the
registration, recertification, and distribution of the questioned contraceptive drugs and
devices. It ruled that petitioner was not afforded the genuine opportunity to be heard.
Administrative due process is anchored on fairness and equity in procedure.95 It is
satisfied if the party is properly notified of the charge against it and is given a fair and
reasonable opportunity to explain or defend itself.96 Moreover, it demands that the
party's defenses be considered by the administrative body in making its
conclusions,97 and that the party be sufficiently informed of the reasons for its
conclusions.
I.B
Section 228 of the Tax Code, as implemented by Revenue Regulations No. 12-99,
provides certain procedures to ensure that the right of the taxpayer to procedural due
process is observed in tax assessments, thus:
Section 228. Protesting of Assessment. — When the Commissioner or his duly
authorized representative finds that proper taxes should be assessed, he shall first
notify the taxpayer of his findings: Provided, however, That a preassessment notice
shall not be required in the following cases:
(a) When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and
automatically applied the same amount claimed against the estimated tax liabilities
for the taxable quarter or quarters of the succeeding taxable year; or
(d) When the excise tax due on excisable articles has not been paid; or
(e) When an article locally purchased or imported by an exempt person, such as, but
not limited to, vehicles, capital equipment, machineries and spare parts, has been
sold, traded or transferred to non-exempt persons.
The taxpayers shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void.
Within a period to be prescribed by implementing rules and regulations, the taxpayer
shall be required to respond to said notice. If the taxpayer fails to respond, the
Commissioner or his duly authorized representative shall issue an assessment based
on his findings.
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing rules
and regulations. Within sixty (60) days from filing of the protest, all relevant
supporting documents shall have been submitted; otherwise, the assessment shall
become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred
eighty (180) days from submission of documents, the taxpayer adversely affected by
the decision or inaction may appeal to the Court of Tax Appeals within thirty (30)
days from receipt of the said decision, or from the lapse of the one hundred eighty
(180)-day period; otherwise, the decision shall become final, executory and
demandable.
Section 3 of Revenue Regulations No. 12-9998 prescribes the due process
requirement for the four (4) stages of the assessment process:
Section 3. Due Process Requirement in the Issuance of a Deficiency Tax
Assessment. —
3.1 Mode of procedures in the issuance of a deficiency tax assessment:
3.1.1 Notice for informal conference. — The Revenue Officer who audited the
taxpayer's records shall, among others, state in his report whether or not the
taxpayer agrees with his findings that the taxpayer is liable for deficiency tax or taxes.
If the taxpayer is not amenable, based on the said Officer's submitted report of
investigation, the taxpayer shall be informed, in writing, by the Revenue District
Office or by the Special Investigation Division, as the case may be (in the case
Revenue Regional Offices) or by the Chief of Division concerned (in the case of the
BIR National Office) of the discrepancy or discrepancies in the taxpayer's
payment of his internal revenue taxes, for the purpose of "Informal
Conference,” in order to afford the taxpayer with an opportunity to present his
side of the case. If the taxpayer fails to respond within fifteen (15) days from
date of receipt of the notice for informal conference, he shall be considered in
default, in which case, the Revenue District Officer or the Chief of the Special
Investigation Division of the Revenue Regional Office, or the Chief of Division in the
National Office, as the case may be, shall endorse the case with the least possible
delay to the Assessment Division of the Revenue Regional Office or to the
Commissioner or his duly authorized representative, as the case may be, for
appropriate review and issuance of a deficiency tax assessment, if warranted.
3.1.2 Preliminary Assessment Notice (PAN). — If after review and evaluation by
the Assessment Division or by the Commissioner or his duly authorized
representative, as the case may be, it is determined that there exists sufficient basis
to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to
the taxpayer, at least by registered mail, a Preliminary Assessment Notice
(PAN) for the proposed assessment, showing in detail, the facts and the law,
rules and regulations, or jurisprudence on which the proposed assessment is
based . . . If the taxpayer fails to respond within fifteen (15) days from date of
receipt of the PAN, he shall be considered in default, in which case, a formal
letter of demand and assessment notice shall be caused to be issued by the said
Office, calling for payment of the taxpayer's deficiency tax liability, inclusive of the
applicable penalties.
....
3.1.4 Formal Letter of Demand and Assessment Notice. —The formal letter of
demand and assessment notice shall be issued by the Commissioner or his duly
authorized representative. The letter of demand calling for payment of the
taxpayer's deficiency tax or taxes shall state the facts, the law, rules and
regulations, or jurisprudence on which the assessment is based, otherwise,
the formal letter of demand and assessment notice shall be void . . .
3.1.5 Disputed Assessment. — The taxpayer or his duly authorized
representative may protest administratively against the aforesaid formal letter
of demand and assessment notice within thirty (30) days from date of receipt
thereof....
....
The taxpayer shall submit the required documents in support of his protest within
sixty (60) days from date of filing of his letter of protest, otherwise, the assessment
shall become final, executory and demandable. The phrase "submit the required
documents" includes submission or presentation of the pertinent documents for
scrutiny and evaluation by the Revenue Officer conducting the audit. The said
Revenue Officer shall state this fact in his report of investigation.
If the taxpayer fails to file a valid protest against the formal letter of demand and
assessment notice within thirty (30) days from date of receipt thereof, the
assessment shall become final, executory and demandable.
....
3.1.6 Administrative Decision on a Disputed Assessment. — The decision of the
Commissioner or his duly authorized representative shall (a) state the facts,
the applicable law, rules and regulations, or jurisprudence on which such
decision is based, otherwise, the decision shall be void . . . in which case, the
same shall not be considered a decision on a disputed assessment; and (b)
that the same is his final decision. (Emphasis supplied)
The importance of providing the taxpayer with adequate written notice of his or her
tax liability is undeniable. Under Section 228, it is explicitly required that the taxpayer
be informed in writing of the law and of the facts on which the assessment is made;
otherwise, the assessment shall be void. Section 3.1.2 of Revenue Regulations No.
12-99 requires the Preliminary Assessment Notice to show in detail the facts and law,
rules and regulations, or jurisprudence on which the proposed assessment is based.
Further, Section 3.1.4 requires that the Final Letter of Demand must state the facts
and law on which it is based; otherwise, the Final Letter of Demand and Final
Assessment Notices themselves shall be void. Finally, Section 3.1.6 specifically
requires that the decision of the Commissioner or of his or her duly authorized
representative on a disputed assessment shall state the facts and law, rules and
regulations, or jurisprudence on which the decision is based. Failure to do so would
invalidate the Final Decision on Disputed Assessment.
"The use of the word 'shall' in Section 228 of the [National Internal Revenue Code]
and in [Revenue Regulations] No. 12-99 indicates that the requirement of informing
the taxpayer of the legal and factual bases of the assessment and the decision made
against him [or her] is mandatory."99 This is an essential requirement of due process
and applies to the Preliminary Assessment Notice, Final Letter of Demand with the
Final Assessment Notices, and the Final Decision on Disputed Assessment.
On the other hand, the taxpayer is explicitly given the opportunity to explain or
present his or her side throughout the process, from tax investigation through tax
assessment. Under Section 3.1.1 of Revenue Regulations No. 12-99, the taxpayer is
given 15 days from receipt of the Notice for Informal Conference to respond;
otherwise, he or she will be considered in default and the case will be referred to the
Assessment Division for appropriate review and issuance of deficiency tax
assessment, if warranted. Again, under Section 228 of the Tax Code and Section
3.1.2 of Revenue Regulations No. 12-99, the taxpayer is required to respond within
15 days from receipt of the Preliminary Assessment Notice; otherwise, he or she will
be considered in default and the Final Letter of Demand and Final Assessment
Notices will be issued. After receipt of the Final Letter of Demand and Final
Assessment Notices, the taxpayer is given 30 days to file a protest, and
subsequently, to appeal his or her protest to the Court of Tax Appeals.
Avon asserts feigned compliance by the Bureau of Internal Revenue officials and
agents of their duties under the law and revenue regulation.100 It adds that the
administrative proceeding conducted by the Bureau of Internal Revenue was "a
farce," an idle ritual tantamount to a denial of its right to be heard.101 It specifies the
Bureau of Internal Revenue's inaction throughout the proceedings as follows:
First, during the informal conference, Avon orally rebutted and submitted a written
Reply102 dated November 26, 2002, with attached supporting documents, to the
summary of audit findings of the Bureau of Internal Revenue. Revenue Examiner
Enrico Z. Gesmundo (Gesmundo), on cross-examination, admitted receiving its
Reply with the appended documents and that this Reply should be the basis of the
Preliminary Assessment Notice.103
However, the Commissioner issued the Preliminary Assessment Notice dated
November 29, 2002, which simply reiterated the rebutted audit findings.104 The
alleged under-declared sales was increased by more than 300% based on the
alleged sales discrepancy in the Third Quarter VAT Return vis á vis Financial
Statement, without justifiable reason and despite clean opinion of Avon's external
auditor on its financial statements.105
Second, in its protest letter to the Preliminary Assessment Notice, Avon explained the
error in the presentation of export sales in the Third Quarter VAT Return. That is,
instead of presenting the total sales for the third quarter alone, the presentation was
a cumulative or year-to-date sales presentation. Avon appended copies of the Third
Quarter VAT Return and the General Ledger Pages of Export Sales to its protest
letter to prove the cumulative presentation of its sales. The Bureau of Internal
Revenue Examiners accepted their explanation during their meeting.106
However, within just two (2) weeks from receipt of Avon's protest letter, the
Commissioner issued the Final Letter of Demand and Final Assessment Notices,
reiterating the findings stated in the Preliminary Assessment Notice.107 The Bureau of
Internal Revenue chose to ignore Avon's explanations and refused to cancel the
assessments unless Avon would agree to pay the other deficiency assessments.108
Third, since the Final Assessment Notices merely reiterated the findings in the
Preliminary Assessment Notice, Avon resubmitted its protest letter and supporting
documents. During the conference with the revenue officers on August 4, 2003, Avon
explained that it had already submitted all the reconciliation, schedules, and other
supporting documents. It also submitted additional documents as directed by the
revenue officers on June 26, 2003,109 and presented the original General Ledger
Book for 1999 for comparison by the Bureau of Internal Revenue's officers with the
copies previously submitted. Again, Avon explained the alleged sales discrepancy to
the revenue officers, who were convinced that there was no under declaration of
sales, and that the sales discrepancy between the Annual Income Tax Return and
Quarterly VAT Return was merely due to erroneous presentation of sales in the Third
Quarter VAT Return.110
By this time, hoping that the Commissioner would cancel the deficiency income and
VAT assessments arising from the alleged sales discrepancy, Avon informed the
Bureau of Internal Revenue examiners that it would make a partial payment of the
assessments, which it did.111
Fourth, however, the Commissioner issued the Collection Letter112 dated July 9, 2004
without deciding on the protest letter to the Final Assessment Notices. Once again,
she failed to even comment on the arguments raised or address the documents
submitted by Avon. Even the amounts supposedly paid by Avon were not deducted
from the amount demanded in the Collection Letter. To justify its issuance, the
Commissioner falsely alleged Avon of failing to submit its supporting documents. 113
Fifth, Avon filed a request for withdrawal of the Collection Letter, but it was likewise
ignored.114
Finally, the documents which reveal the events after the filing of the protest to the
Final Assessment Notices on May 9, 2004 were missing from the Bureau of Internal
Revenue Records.115 These were (a) the handwritten Minutes of the Bureau of
Internal Revenue/Taxpayer Conference on June 26, 2003; (b) Avon's letter116 dated
August 1, 2003, with supporting documents, received by Revenue Officer Gesmundo
on August 4, 2003, showing Avon's submission of the documents required by the
Revenue Officers during the June 26, 2003 meeting; and (c) the two (2) Bureau of
Internal Revenue Tax Payment Confirmations dated January 30, 2004, and Payment
Forms called Bureau of Internal Revenue Form No. 0605.117
Avon further submits that the presumption of correctness of the assessments cannot
apply in the face of compelling proof that they were issued without due process. It
adds that "[h]ad the administrative process been conducted with fairness and in
accordance with the prescribed procedure, [it] need not have incurred [filing fees and
other litigation expenses to defend against a bloated deficiency tax assessment]."118
Against these claims of Avon, the Commissioner did not submit any refutation either
in her Comment119 or Memorandum,120 and even in her pleadings before the Court of
Tax Appeals. Instead, she could only give out a perfunctory resistance that "tax
assessments . . . are presumed correct and made in good faith."121
The Court of Tax Appeals ruled that the difference in the appreciation by the
Commissioner of Avon's supporting documents, which led to the deficiency tax
assessments, was not violative of due process. While the Commissioner has the duty
to receive the taxpayer's clarifications and explanations, she does not have the duty
to accept them on face value.122
This Court disagrees.
The facts demonstrate that Avon was deprived of due process. It was not fully
apprised of the legal and factual bases of the assessments issued against it. The
Details of Discrepancy123 attached to the Preliminary Assessment Notice, as well as
the Formal Letter of Demand with the Final Assessment Notices, did not even
comment or address the defenses and documents submitted by Avon. Thus, Avon
was left unaware on how the Commissioner or her authorized representatives
appreciated the explanations or defenses raised in connection with the assessments.
There was clear inaction of the Commissioner at every stage of the proceedings.
First, despite Avon's submission of its Reply, together with supporting documents, to
the revenue examiners' initial audit findings, and its explanation during the informal
conference,124 the Preliminary Assessment Notice was issued. The Preliminary
Assessment Notice reiterated the same audit findings, except for the alleged under-
declared sales which ballooned in amount from P15,700,000.00 to
P62,900,000.00,125 without any discussion or explanation on the merits of Avon's
explanations.
Upon receipt of the Preliminary Assessment Notice, Avon submitted its protest letter
and supporting documents,126 and even met with revenue examiners to explain.
Nonetheless, the Bureau of Internal Revenue issued the Final Letter of Demand and
Final Assessment Notices, merely reiterating the assessments in the Preliminary
Assessment Notice. There was no comment whatsoever on the matters raised by
Avon, or discussion of the Bureau of Internal Revenue's findings in a manner that
Avon may know the various issues involved and the reasons for the assessments.
Under the Bureau of Internal Revenue's own procedures, the taxpayer is required to
respond to the Notice of Informal Conference and to the Preliminary Assessment
Notice within 15 days from receipt. Despite Avon's timely submission of a Reply to
the Notice of Informal Conference and protest to the Preliminary Assessment Notice,
together with supporting documents, the Commissioner and her agents violated their
own procedures by refusing to answer or even acknowledge the submitted Reply and
protest.
The Notice of Informal Conference and the Preliminary Assessment Notice are a part
of due process.127 They give both the taxpayer and the Commissioner the opportunity
to settle the case at the earliest possible time without the need for the issuance of a
Final Assessment Notice. However, this purpose is not served in this case because
of the Bureau of Internal Revenue's inaction or failure to consider Avon's
explanations.
Upon receipt of the Final Assessment Notices, Avon resubmitted its protest and
submitted additional documents required by the revenue examiners, including the
original General Ledger for 1999. As testified by Avon's Finance Director, Mildred C.
Emlano, the Bureau of Internal Revenue examiners were convinced with Avon's
explanation during the meeting on August 4, 2003, particularly, that there was no
underdeclaration of sales.128 Still, the Commissioner merely issued a Collection Letter
dated July 9, 2004, demanding from Avon the payment of the same deficiency tax
assessments with a warning that should it fail to do so within the required period,
summary administrative remedies would be instituted without further notice.129 This
Collection Letter was based on the May 27, 2004 Memorandum of the Revenue
Officers stating that "[Avon] failed to submit supporting documents within 60-day
period."130 This inaction on the part of the Bureau of Internal Revenue and its agents
could hardly be considered substantial compliance of what is mandated by Section
228 of the Tax Code and the Revenue Regulation No. 12-99.
It is true that the Commissioner is not obliged to accept the taxpayer's explanations,
as explained by the Court of Tax Appeals.131 However, when he or she rejects these
explanations, he or she must give some reason for doing so. He or she must give the
particular facts upon which his or her conclusions are based, and those facts must
appear in the record.
Indeed, the Commissioner's inaction and omission to give due consideration to the
arguments and evidence submitted before her by Avon are deplorable transgressions
of Avon's right to due process.132 The right to be heard, which includes the right to
present evidence, is meaningless if the Commissioner can simply ignore the
evidence without reason.
In Edwards v. McCoy:133
The object of a hearing is as much to have evidence considered as it is to present it.
The right to adduce evidence, without the corresponding duty on the part of the board
to consider it, is vain. Such right is conspicuously futile if the person or persons to
whom the evidence is presented can thrust it aside without notice or consideration.134
In Ang Tibay, this Court similarly ruled that "[n]ot only must the party be given an
opportunity to present his case and to adduce evidence tending to establish the rights
which he asserts but the tribunal must consider the evidence presented."135
Furthermore, in Mendoza v. Commission on Elections,136 this Court explained:
[T]he last requirement, relating to the form and substance of the decision of a quasi-
judicial body, further complements the hearing and decision-making due process
rights and is similar in substance to the constitutional requirement that a decision of a
court must state distinctly the facts and the law upon which it is based. As a
component of the rule of fairness that underlies due process, this is the "duty
to give reason" to enable the affected person to understand how the rule of
fairness has been administered in his case, to expose the reason to public
scrutiny and criticism, and to ensure that the decision will be thought through
by the decision-maker.137 (Emphasis supplied, citation omitted)
In Villa v. Lazaro,138 this Court held that Anita Villa (Villa) was denied due process
when the then Human Settlement Regulatory Commission ignored her submission,
not once but thrice, of the official documents certifying to her compliance with the
pertinent locational, zoning, and land use requirements, and plans for the
construction of her funeral parlor. It imposed on Villa a fine of P10,000.00 and
required her to cease operations on the spurious premise that she had failed to
submit the required documents. This Court found the Commissioner's failure or
refusal to even acknowledge the documents submitted by Villa indefensible. It further
held that the defects in the administrative proceedings "translate to a denial of due
process against which the defense of failure to take timely appeal will not avail."139
Similarly, in this case, despite Avon's submission of its explanations and pieces of
evidence to the assessments, the Commissioner failed to acknowledge these
submissions and instead issued identical Preliminary Assessment Notice, Final Letter
of Demand with the Final Assessment Notices, and Collection Letter, the latter being
premised on Avon's alleged failure to submit supporting documents to its protest.
Had the Commissioner performed her functions properly and considered the
explanations and pieces of evidence submitted by Avon, this case could have been
settled at the earliest possible time. For instance, all the evidence needed to settle
the issue on under-declared sales, which constituted the bulk of the deficiency tax
assessments, have been submitted to the Bureau of Internal Revenue. Indeed, from
these same submissions, the Court of Tax Appeals concluded that there was no
under-declaration of sales. As aptly pointed out by Avon, "The [Commissioner could
not] feign simple mistake or misappreciation of the evidence . . . because [the issue
was] plain and simple."140
Moreover, the Court of Tax Appeals erroneously applied the "presumption of
regularity" in sustaining the Commissioner's assessments.
The presumption that official duty has been regularly performed is a disputable
presumption under Rule 131, Section 3(m) of the Rules of Court. As a disputable
presumption —
[I]t may be accepted and acted on where there is no other evidence to uphold the
contention for which it stands, or one which may be overcome by other evidence ...
The presumption of regularity of official acts may be rebutted by affirmative evidence
of irregularity or failure to perform a duty.141 (Citation omitted)
In Sevilla v. Cardenas,142 this Court refused to apply the "presumption of regularity"
when it noted that there was documentary and testimonial evidence that the civil
registrar did not exert utmost efforts before certifying that no marriage license was
issued in favor of one of the parties.
This Court also refused to apply the presumption of regularity in Bank of the
Philippine Islands v. Evangelista,143 where the process server failed to show that he
followed the required procedures:
We cannot sustain petitioner's argument, which is anchored on the presumption of
regularity in the process server's performance of duty. The Court already had
occasion to rule that "[c]ertainly, it was never intended that the presumption of
regularity in the performance of official duty will be applied even in cases where there
is no showing of substantial compliance with the requirements of the rules of
procedure." Such presumption does not apply where it is patent that the sheriff's or
server's return is defective. Under this circumstance, respondents are not duty-bound
to adduce further evidence to overcome the presumption, which no longer
holds.144 (Citations omitted)
Here, contrary to the ruling of the Court of Appeals, the presumption of regularity in
the performance of the Commissioner's official duties cannot stand in the face of
positive evidence of irregularity or failure to perform a duty.
I.C
The Commissioner's total disregard of due process rendered the identical Preliminary
Assessment Notice, Final Assessment Notices, and Collection Letter null and void,
and of no force and effect.
This Court has, in several cases, declared void any assessment that failed to strictly
comply with the due process requirements set forth in Section 228 of the Tax Code
and Revenue Regulation No. 12-99.
In Commissioner of Internal Revenue v. Metro Star Superama, Inc.,145 this Court held
that failure to send a Preliminary Assessment Notice stating the facts and the law on
which the assessment was made as required by Section 228 of the Tax Code
rendered the assessment made by the Commissioner as void. This Court explained:
Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be
informed that he is liable for deficiency taxes through the sending of a PAN. He must
be informed of the facts and the law upon which the assessment is made. The law
imposes a substantive, not merely a formal, requirement. To proceed heedlessly with
tax collection without first establishing a valid assessment is evidently violative of the
cardinal principle in administrative investigations — that taxpayers should be able to
present their case and adduce supporting evidence.146 (Citation omitted)
In Commissioner of Internal Revenue v. Reyes,147 this Court ruled as void an
assessment for deficiency estate tax issued by the Commissioner for failure to inform
the taxpayer of the law and the facts on which the assessment was made, in violation
of Section 228 of the Tax Code.
In Pilipinas Shell Petroleum Corporation v. Commissioner of Internal Revenue,148 this
Court ruled, among others, that the taxpayer was deprived of due process when the
Commissioner failed to issue a notice of informal conference and a Preliminary
Assessment Notice as required by Revenue Regulation No. 12-99, in relation to
Section 228 of the Tax Code. Hence, the assessment was void.
Compliance with strict procedural requirements must be followed in the collection of
taxes as emphasized in Commissioner of Internal Revenue v. Algue, Inc.:149
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation,
which is the promotion of the common good, may be achieved.
....
It is said that taxes are what we pay for civilized society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and operate
it. Hence, despite the natural reluctance to surrender part of one's hard-earned
income to the taxing authorities, every person who is able to must contribute his
share in the running of the government. The government for its part, is expected to
respond in the form of tangible and intangible benefits intended to improve the lives
of the people and enhance their moral and material values. This symbiotic
relationship is the rationale of taxation and should dispel the erroneous notion that it
is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a
requirement in all democratic regimes that it be exercised reasonably and in
accordance with the prescribed procedure. If it is not, then the taxpayer has a
right to complain and the courts will then come to his succor. For all the
awesome power of the tax collector, he may still be stopped in his tracks if the
taxpayer can demonstrate ... that the law has not been observed. 150 (Emphasis
supplied)
In this case, Avon was able to amply demonstrate the Commissioner's disregard of
the due process standards raised in Ang Tibay and subsequent cases, and of the
Commissioner's own rules of procedure. Her disregard of the standards and rules
renders the deficiency tax assessments null and void. This Court, nonetheless,
proceeds to discuss the points raised by the Commissioner pertaining to estoppel
and prescription.
II
As a general rule, petitioner has three (3) years from the filing of the return to assess
taxpayers. Section 203 of the Tax Code provides:
Section 203. Period of Limitation Upon Assessment and Collection. — Except as
provided in Section 222, internal revenue taxes shall be assessed within three (3)
years after the last day prescribed by law for the filing of the return, and no
proceeding in court without assessment for the collection of such taxes shall be
begun after the expiration of such period: Provided, That in a case where a return is
filed beyond the period prescribed by law, the three (3)-year period shall be counted
from the day the return was filed. For purposes of this Section, a return filed before
the last day prescribed by law for the filing thereof shall be considered as filed on
such last day.
An exception to the rule of prescription is found m Section 222, paragraphs (b) and
(d) of the same Code, viz:
Section 222. Exceptions as to Period of Limitation of Assessment and Collection of
Taxes. —
....
(b) If before the expiration of the time prescribed in Section 203 for the assessment of
the tax, both the Commissioner and the taxpayer have agreed in writing to its
assessment after such time, the tax may be assessed within the period agreed upon.
The period so agreed upon may be extended by subsequent written agreement made
before the expiration of the period previously agreed upon.
....
(d) Any internal revenue tax, which has been assessed within the period agreed upon
as provided in paragraph (b) hereinabove, may be collected by distraint or levy or by
a proceeding in court within the period agreed upon in writing before the expiration of
the five (5)-year period. The period so agreed upon may be extended by subsequent
written agreements made before the expiration of the period previously agreed upon.
Thus, the period to assess and collect taxes may be extended upon the
Commissioner and the taxpayer's written agreement, executed before the expiration
of the three (3)-year period.
In this case, two (2) waivers were supposedly executed by the parties extending the
prescriptive periods for assessment of income tax, VAT, and expanded and final
withholding taxes to January 14, 2003, and then to April 14, 2003.151
The Court of Tax Appeals, both the Special First Division and En Banc, declared the
two (2) Waivers of the Defense of Prescription defective and void, for the
Commissioner's failure to furnish signed copies of the Waivers to Avon, in violation of
the requirements provided in Revenue Memorandum Order No. 20-90.152
Indeed, a Waiver of the Defense of Prescription is a bilateral agreement
between a taxpayer and the Bureau of Internal Revenue to extend the period of
assessment and collection to a certain date. "The requirement to furnish the
taxpayer with a copy of the waiver is not only to give notice of the existence of
the document but of the acceptance by the [Bureau of Internal Revenue] and
the perfection of the agreement."153
However, the Commissioner in this case contends that Avon is estopped from
assailing the validity of the Waivers of the Defense of Prescription that it executed
when it paid portions of the disputed assessments.154 The Commissioner invokes the
ruling in Rizal Commercial Banking Corporation v. Commissioner of Internal
Revenue,155 which allegedly must be applied as stare decisis.156
The Commissioner's contention is untenable.
Rizal Commercial Banking Corporation is not on all fours with this case. The estoppel
upheld in that case arose from the benefit obtained by the taxpayer from its execution
of the waiver, in the form of a drastic reduction of the deficiency taxes, and the
taxpayer's payment of a portion of the reduced tax assessment. In that case, this
Court explained that Rizal Commercial Banking Corporation's partial payment of the
revised assessments effectively belied its insistence that the waivers were invalid and
the assessments were issued beyond the prescriptive period. Thus:
Estoppel is clearly applicable to the case at bench. RCBC, through its partial
payment of the revised assessments issued within the extended period as
provided for in the questioned waivers, impliedly admitted the validity of those
waivers. Had petitioner truly believed that the waivers were invalid and that the
assessments were issued beyond the prescriptive period, then it should not
have paid the reduced amount of taxes in the revised assessment. RCBC's
subsequent action effectively belies its insistence that the waivers are invalid.
The records show that on December 6, 2000, upon receipt of the revised
assessment, RCBC immediately made payment on the uncontested taxes.
Thus, RCBC is estopped from questioning the validity of the waivers. To hold
otherwise and allow a party to gainsay its own act or deny rights which it had
previously recognized would run counter to the principle of equity which this
institution holds dear.157  (Citation omitted)
Here, Avon claimed that it did not receive any benefit from the waivers.158 On the
contrary, there was even a drastic increase in the assessed deficiency taxes when
the Commissioner increased the alleged sales discrepancy from P15,700,000.00 in
the preliminary findings to P62,900,000.00 in the Preliminary Assessment Notice and
Final Assessment Notices. Furthermore, Avon was compelled to pay a portion of the
deficiency assessments "in compliance with the Revenue Officer's condition in the
hope of cancelling the assessments on the non-existent sales discrepancy."159 Under
these circumstances, Avon's payment of an insignificant portion of the assessment
cannot be deemed an admission or recognition of the validity of the waivers.
On the other hand, the Court of Tax Appeals' reliance on the general rule
enunciated in Commissioner of Internal Revenue v. Kudos Metal
Corporation160 is proper. In that case, this Court ruled that the Bureau of
Internal Revenue could not hide behind the doctrine of estoppel to cover its
failure to comply with its own procedures. "[A] waiver of the statute of
limitations [is] a derogation of the taxpayer's right to security against
prolonged and unscrupulous investigations [and thus, it] must be carefully and
strictly construed."161
III
The Commissioner of Internal Revenue in this case asserts that since Avon filed its
protest on May 9, 2003, it only had 30 days from November 5, 2003, i.e., the end of
the 180 days, or until December 5, 2003 within which to appeal to the Court of Tax
Appeals. As Avon only filed its appeal on August 13, 2004, its right to appeal has
prescribed.162
Avon counters that it acted in good faith and in accordance with Rule 4, Section 3 of
the Revised Rules of the Court of Tax Appeals and jurisprudence when it opted to
wait for the decision of the Commissioner and appeal it within the 30-day
period.163 "The Collection Letter, albeit void, constitutes a constructive denial of
Avon's protest and is the final decision of the [Commissioner] for purposes of
counting the reglementary 30-day period to appeal[.]"164 Since Avon received the
Collection Letter on July 14, 2004, its Petition for Review was timely filed on August
13, 2004.165 At any rate, Avon argues that the issue on the timeliness of its appeal
was raised by the Commissioner only in its Motion for Reconsideration of the Court of
Tax Appeals En Banc November 9, 2011 Decision, and a belated consideration of
this matter would violate its right to due process and fair play.166
The issue on whether Avon's Petition for Review before the Court of Tax Appeals
was time-barred requires the interpretation and application of Section 228 of the Tax
Code, viz:
Section 228. Protesting of Assessment. —
....
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing rules
and regulations. Within sixty (60) days from filing of the protest, all relevant
supporting documents shall have been submitted; otherwise, the assessment shall
become final.
If the protest is denied in whole or in part, or is not acted upon within one
hundred eighty (180) days from submission of documents, the taxpayer
adversely affected by the decision or inaction may appeal to the Court of Tax
Appeals within thirty (30) days from receipt of the said decision, or from the
lapse of the one hundred eighty (180)-day period; otherwise, the decision shall
become final, executory and demandable. (Emphasis supplied)
Section 228 of the Tax Code amended Section 229167 of the Old Tax Code168 by
adding, among others, the 180-day rule. This new provision presumably avoids the
situation in the past when a taxpayer would be held hostage by the Commissioner's
inaction on his or her protest. Under the Old Tax Code, in conjunction with Section 11
of Republic Act No. 1125, only the decision or ruling of the Commissioner on a
disputed assessment is appealable to the Court of Tax Appeals. Consequently, the
taxpayer then had to wait for the Commissioner's action on his or her protest, which
more often was long-delayed.169 With the amendment introduced by Republic Act No.
8424, the taxpayer may now immediately appeal to the Court of Tax Appeals in case
of inaction of the Commissioner for 180 days from submission of supporting
documents.
Republic Act No. 9282, or the new Court of Tax Appeals Law, which took effect on
April 23, 2004, amended Republic Act No. 1125 and included a provision
complementing Section 228 of the Tax Code, as follows:
Section 7. Jurisdiction. — The CTA shall exercise:
(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:
....
(2) Inaction by the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matters arising under the National Internal
Revenue Code or other laws administered by the Bureau of Internal Revenue, where
the National Internal Revenue Code provides a specific period of action, in
which case the inaction shall be deemed a denial[.] (Emphasis supplied)
Under Section 7(a)(2) above, it is expressly provided that the "inaction" of the
Commissioner on his or her failure to decide a disputed assessment within 180 days
is "deemed a denial" of the protest.
In Rizal Commercial Banking Corporation v. Commissioner of Internal
Revenue,170 this Court, by way of an obiter, ruled as follows:
In case the Commissioner failed to act on the disputed assessment within the 180-
day period from the date of submission of documents, a taxpayer can either: 1) file a
petition for review with the Court of Tax Appeals within 30 days after the expiration of
the 180-day period; or 2) await the final decision of the Commissioner on the
disputed assessment and appeal such final decision to the Court of Tax Appeals
within 30 days after receipt of a copy of such decision. However, these options are
mutually exclusive, and resort to one bars the application of the other.171
In Rizal Commercial Banking Corporation, the Commissioner failed to act on the
disputed assessment within 180 days from date of submission of documents. Thus,
Rizal Commercial Banking Corporation opted to file a Petition for Review before the
Court of Tax Appeals. Unfortunately, it was filed more than 30 days following the
lapse of the 180-day period. Consequently, it was dismissed by the Court of Tax
Appeals for late filing. Rizal Commercial Banking Corporation did not file a Motion for
Reconsideration or make an appeal; hence, the disputed assessment became final
and executory.
Subsequently, Rizal Commercial Banking Corporation filed a petition for relief from
judgment on the ground of excusable negligence, but this was denied by the Court of
Tax Appeals for lack of merit. This Court affirmed the Court of Tax Appeals. It further
held that even if the negligence of Rizal Commercial Banking Corporation's counsel
was excusable and the petition for relief from judgment would be granted, it would not
fare any better because its action for cancellation of assessments had already
prescribed since its Petition was filed beyond the 180+30-day period stated in
Section 228.
Rizal Commercial Banking Corporation then filed a Motion for Reconsideration.
Denying the motion, this Court held that it could not anymore "claim that the disputed
assessment is not yet final as it remained unacted upon by the Commissioner; that it
can still await the final decision of the Commissioner and thereafter appeal the same
to the Court of Tax Appeals."172 Since it had availed of the first option by filing a
petition for review because of the Commissioner's inaction, although late, it could no
longer resort to the second option.
Rizal Commercial Banking Corporation referred to Rule 4, Section 3(a)(2) of the 2005
Revised Rules of the Court of Tax Appeals, or the 2005 Court of Tax Appeals Rules,
which provides:
Section 3. Cases Within the Jurisdiction of the Court in Divisions. — The Court in
Divisions shall exercise:
(a) Exclusive original
or appellate
jurisdiction to
review by appeal
the following:
....
(2) Inaction by the Commissioner of Internal Revenue in
cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the
National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue, where
the National Internal Revenue Code or other applicable
law provides a specific period for action: Provided, that in
case of disputed assessments, the inaction of the
Commissioner of Internal Revenue within the one hundred
eighty day-period under Section 228 of the National
Internal Revenue Code shall be deemed a denial for
purposes of allowing the taxpayer to appeal his case to
the Court and does not necessarily constitute a formal
decision of the Commissioner of Internal Revenue on the
tax case; Provided, further, that should the taxpayer opt to
await the final decision of the Commissioner of Internal
Revenue on the disputed assessments beyond the one
hundred eighty day-period abovementioned, the taxpayer
may appeal such final decision to the Court under Section
3(a), Rule 8 of these Rules; and Provided, still further, that
in the case of claims for refund of taxes erroneously or
illegally collected, the taxpayer must file a petition for
review with the Court prior to the expiration of the two-year
period under Section 229 of the National Internal Revenue
Code[.] (Emphasis supplied)
In Lascona Land Co., Inc. v. Commissioner of Internal Revenue,173 this Court
reaffirmed Rizal Commercial Banking Corporation, viz:
In arguing that the assessment became final and executory by the sole reason that
petitioner failed to appeal the inaction of the Commissioner within 30 days after the
180-day reglementary period, respondent, in effect, limited the remedy of Lascona,
as a taxpayer, under Section 228 of the NIRC to just one, that is — to appeal the
inaction of the Commissioner on its protested assessment after the lapse of the 180-
day period. This is incorrect.
....
[W]hen the law provided for the remedy to appeal the inaction of the CIR, it did not
intend to limit it to a single remedy of filing of an appeal after the lapse of the 180-day
prescribed period. Precisely, when a taxpayer protested an assessment, he naturally
expects the CIR to decide either positively or negatively. A taxpayer cannot be
prejudiced if he chooses to wait for the final decision of the CIR on the protested
assessment. More so, because the law and jurisprudence have always contemplated
a scenario where the CIR will decide on the protested assessment.174
This Court, nonetheless, stressed that these two (2) options of the taxpayer, i.e., to
(1) file a petition for review before the Court of Tax Appeals within 30 days after the
expiration of the 180-day period; or (2) to await the final decision of the
Commissioner on the disputed assessment and appeal this final decision to the Court
of Tax Appeals within 30 days from receipt of it, "are mutually exclusive and resort to
one bars the application of the other." 175
Rule 4, Section 3(a)(2) of the 2005 Court of Tax Appeals Rules clarifies Section 7(a)
(2) of Republic Act No. 9282 by stating that the "deemed a denial'' rule is only for the
"purposes of allowing the taxpayer to appeal" in case of inaction of the Commissioner
and "does not necessarily constitute a formal decision of the Commissioner."
Furthermore, the same provision clarifies that the taxpayer may choose to wait for the
final decision of the Commissioner even beyond the 180-day period, and appeal from
it.
The 2005 Court of Tax Appeals Rules were approved by the Court En Banc on
November 22, 2005, in A.M. No. 05-11-07-CTA, pursuant to its constitutional rule-
making authority.176 Under Article VIII, Section 5, paragraph 5 of the 1987
Constitution:
Section 5. The Supreme Court shall have the following powers:
....
(5) Promulgate rules concerning the protection and enforcement of constitutional
rights, pleading, practice, and procedure in all courts, the admission to the
practice of law, the Integrated Bar, and legal assistance to the underprivileged.
Such rules shall provide a simplified and inexpensive procedure for the speedy
disposition of cases, shall be uniform for all courts of the same grade, and
shall not diminish, increase, or modify substantive rights. Rules of procedure of
special courts and quasi-judicial bodies shall remain effective unless
disapproved by the Supreme Court. (Emphases supplied)
In Metro Construction, Inc. v. Chatham Properties, Inc.,177 this Court held:
There is no controversy on the principle that the right to appeal is statutory. However,
the mode or manner by which this right may be exercised is a question of procedure
which may be altered and modified provided that vested rights are not impaired. The
Supreme Court is bestowed by the Constitution with the power and prerogative, inter
alia, to promulgate rules concerning pleadings, practice and procedure in all courts,
as well as to review rules of procedure of special courts and quasi-judicial bodies,
which, however, shall remain in force until disapproved by the Supreme Court. This
power is constitutionally enshrined to enhance the independence of the Supreme
Court.178 (Citation omitted)
Carpio-Morales v. Court of Appeals179 elucidated that while Congress has the
authority to establish the lower courts, including the Court of Tax Appeals, and to
define, prescribe, and apportion their jurisdiction, the authority to promulgate rules of
procedure is exclusive to this Court:
A court's exercise of the jurisdiction it has acquired over a particular case
conforms to the limits and parameters of the rules of procedure duly
promulgated by this Court. In other words, procedure is the framework within which
judicial power is exercised. In Manila Railroad Co. v. Attorney-General, the Court
elucidated that "[t]he power or authority of the court over the subject matter existed
and was fixed before procedure in a given cause began. Procedure does not alter
or change that power or authority; it simply directs the manner in which it shall
be fully and justly exercised. To be sure, in certain cases, if that power is not
exercised in conformity with the provisions of the procedural law, purely, the court
attempting to exercise it loses the power to exercise it legally. This does not mean
that it loses jurisdiction of the subject matter."
While the power to define, prescribe, and apportion the jurisdiction of the various
courts is, by constitutional design, vested unto Congress, the power to promulgate
rules concerning the protection and enforcement of constitutional rights,
pleading, practice, and procedure in all courts belongs exclusively to this
Court. (Emphasis in the original, citations omitted)180
Section 228 of the Tax Code and Section 7 of Republic Act No. 9282 should be read
in conjunction with Rule 4, Section 3(a)(2) of the 2005 Court of Tax Appeals Rules. In
other words, the taxpayer has the option to either elevate the case to the Court of
Tax Appeals if the Commissioner does not act on his or her protest, or to wait for the
Commissioner to decide on his or her protest before he or she elevates the case to
the Court of Tax Appeals. This construction is reasonable considering that Section
228 states that the decision of the Commissioner not appealed by the taxpayer
becomes final, executory, and demandable.
IV
In this case, Avon opted to wait for the final decision of the Commissioner on its
protest filed on May 9, 2003.
This Court holds that the Collection Letter dated July 9, 2004 constitutes the final
decision of the Commissioner that is appealable to the Court of Tax Appeals.181 The
Collection Letter dated July 9, 2004 demanded from Avon the payment of the
deficiency tax assessments with a warning that should it fail to do so within the
required period, summary administrative remedies would be instituted without further
notice.182 The Collection Letter was purportedly based on the May 27, 2004
Memorandum of the Revenue Officers stating that Avon "failed to submit supporting
documents within 60-day period."183 This Collection Letter demonstrated a character
of finality such that there can be no doubt that the Commissioner had already made a
conclusion to deny Avon's request and she had the clear resolve to collect the
subject taxes.
Avon received the Collection Letter on July 14, 2004. Hence, Avon's appeal to the
Court of Tax Appeals filed on August 13, 2004 was not time-barred.
In any case, even if this Court were to disregard the Collection Letter as a final
decision of the Commissioner on Avon's protest, the Collection Letter constitutes an
act of the Commissioner on "other matters" arising under the National Internal
Revenue Code, which, pursuant to Philippine Journalists, Inc. v. CIR,184 may be the
subject of an appropriate appeal before the Court of Tax Appeals.
On a final note, the Commissioner is reminded of her duty enunciated in Section
3.1.6 of Revenue Regulations No. 12-99 to render a final decision on disputed
assessment. Section 228 of the Tax Code requires taxpayers to exhaust
administrative remedies by filing a request for reconsideration or reinvestigation
within 30 days from receipt of the assessment. Exhaustion of administrative remedies
is required prior to resort to the Court of Tax Appeals precisely to give the
Commissioner the opportunity to "re-examine its findings and conclusions"185 and to
decide the Issues raised within her competence.186
Paat v. Court of Appeals187 wrote:
This Court in a long line of cases has consistently held that before a party is allowed
to seek the intervention of the court, it is a pre-condition that he should have availed
of all the means of administrative processes afforded him. Hence, if a remedy within
the administrative machinery can still be resorted to by giving the administrative
officer concerned every opportunity to decide on a matter that comes within his
jurisdiction then such remedy should be exhausted first before court's judicial power
can be sought. The premature invocation of court's intervention is fatal to one's cause
of action. Accordingly, absent any finding of waiver or estoppel the case is
susceptible of dismissal for lack of cause of action. This doctrine of exhaustion of
administrative remedies was not without its practical and legal reasons, for one
thing, availment of administrative remedy entails lesser expenses and provides
for a speedier disposition of controversies. It is no less true to state that the
courts of justice for reasons of comity and convenience will shy away from a
dispute until the system of administrative redress has been completed and
complied with so as to give the administrative agency concerned every
opportunity to correct its error and to dispose of the case. 188 (Emphasis
supplied, citations omitted)
Taxpayers cannot be left in quandary by the Commissioner's inaction on the
protested assessment. It is imperative that the taxpayers are informed of the
Commissioner's action for them to take proper recourse to the Court of Tax Appeals
at the opportune time.189 Furthermore, this Court had time and again expressed the
dictum that "the Commissioner should always indicate to the taxpayer in clear and
unequivocal language what constitutes his [or her] final determination of the disputed
assessment. That procedure is demanded by the pressing need for fair play,
regularity and orderliness in administrative action."190

While indeed the government has an interest in the swift collection of taxes, its
assessment and collection should be exercised justly and fairly, and always in strict
adherence to the requirements of the law and of the Bureau of Internal Revenue's
own rules.

WHEREFORE, the Petition of the Commissioner of Internal Revenue in G.R. Nos.

201398-99 is DENIED. The Petition of Avon Products Manufacturing, Inc. in G.R.
Nos. 201418-19 is GRANTED. The remaining deficiency Income Tax under
Assessment No. LTAID-II-IT-99-00018 in the amount of P357,345.88 for taxable year
1999, including increments, is hereby declared NULL and VOID and
is CANCELLED.

SO ORDERED.

Topics: Common Limitations on Local Government Unit’s Power to Tax/ General

Principles on Real Property Taxation/ Exemption from Real Property Taxation

G.R. No. 183416, October 05, 2016

PROVINCIAL ASSESSOR OF AGUSAN DEL SUR, Petitioner, v. FILIPINAS PALM

OIL PLANTATION, INC., Respondent.

DECISION

LEONEN, J.:

The exemption from real property taxes given to cooperatives applies regardless of
whether or not the land owned is leased. This exemption benefits the cooperative's
lessee. The characterization of machinery as real property is governed by the Local
Government Code and not the Civil Code.
This Petition1 for review assails the Decision2 dated September 26, 2007 and the
Resolution3 dated May 26, 2008 of the Court of Appeals in CA-G.R. SP No. 74060.
The Court of Appeals affirmed the Decision of the Central Board of Assessment
Appeals (CBAA) exempting Filipinas Palm Oil Plantation Inc. from payment of real
property taxes.4chanrobleslaw
Filipinas Palm Oil Plantation Inc. (Filipinas) is a private organization engaged in palm
oil plantation5 with a total land area of more than 7,000 hectares of National
Development Company (NDC) lands in Agusan del Sur.6 Harvested fruits from oil
palm trees are converted into oil through Filipinas' milling plant in the middle of the
plantation area.7 Within the plantation, there are also three (3) plantation roads and a
number of residential homes constructed by Filipinas for its
employees.8chanrobleslaw
After the Comprehensive Agrarian Reform Law9 was passed, NDC lands were
transferred to Comprehensive Agrarian Reform Law beneficiaries who formed
themselves as the merged NDC-Guthrie Plantations, Inc. - NDC-Guthrie Estates, Inc.
(NGPI-NGEI) Cooperatives.10 Filipinas entered into a lease contract agreement with
NGPI-NGEI.11chanrobleslaw
The Provincial-Assessor of Agusan del Sur (Provincial Assessor) is a government
agency in charge with the assessment of lands under the public domain.12 It
assessed Filipinas' properties found within the plantation area,13 which Filipinas
assailed before the Local Board of Assessment Appeals (LBAA) on the following
grounds:
chanRoblesvirtualLawlibrary
(1.) The [petitioner] Provincial Assessors of Agusan del Sur ERRED in finding that
the Market Value of a single fruit bearing oil palm tree is P207.00 when it should only
be P42.00 pesos per tree;
(2.) The [petitioner] ERRED in finding that the total number of standing and fruit
bearing oil palm tree is PI 10 [sic] trees per hectare when it should be only 92 trees;
(3.) The [petitioner] ERRED in finding that the Market Value[s] of the plantation roads
are:ChanRoblesVirtualawlibrary
A.) P270,000.00 per kilometer for primary roads
B.) P135,000.00 for secondary roads
C.) P67,567.00 for tertiary roads constructed by the company.
It should only be:ChanRoblesVirtualawlibrary
A.) P105,000.00 for primary roads
B.) P52,300.00 for secondary roads
C.) P26,250.00 for tertiary roads
Likewise, bridges, culverts, canals and pipes should not be assessed separately from
plantation roads, the same being components of the roads thereof;
(4.) The [petitioner] ERRED in imposing real property taxes against the petitioner for
roads, bridges, culverts, pipes and canals as these belonged to the cooperatives;
([5].) The [petitioner] ERRED in finding that the Market Value of NDC service area is
P11,000.00 per hectare when it should only be P6,000.00 per hectare;
([6].) The [petitioner] ERRED in imposing realty taxes on Residential areas built by
[respondent] except for three of them;
([7].) The [petitioner] ERRED when it included haulers and other equipments [sic]
which are unmovable as taxable real properties.14
In its Decision15 dated June 8, 1999, the LBAA found that the P207.00 market value
declared in the assessment by the Provincial Assessor was unreasonable.16 It found
that the market value should not have been more than P85.00 per oil palm tree.17 The
sudden increase of realty tax assessment level from P42.00 for each oil palm tree in
1993 to P207.00 was confiscatory.18chanrobleslaw
The LBAA adopted Filipinas' claim that the basis for assessment should only be 98
trees.19 Although one (1) hectare of land can accommodate 124 oil palm trees, the
mountainous terrain of the plantation should be considered.20 Because of the terrain,
not every meter of land can be fully planted with trees.21 The LBAA found that roads
of any kind, as well as all their improvements, should not be taxed since these roads
were intermittently used by the public.22 It resolved that the market valuation should
be based on the laws of the Department of Agrarian Reform since the area is owned
by the NDC, a quasi-governmental body of the Philippines.23chanrobleslaw
The LBAA exempted the low-cost housing units from taxation except those with a
market value of more than P150,000.00 under the Local Government Code.24 Finally,
the LBAA considered the road equipment and mini haulers as movables that are vital
to Filipinas' business.
Filipinas appealed before the CBAA on July 16, 1999.26 On November 21, 2001, the
CBAA rendered a decision, the dispositive portion of which reads:
chanRoblesvirtualLawlibrary
WHEREFORE, this Board has decided to set aside, as it does hereby set aside, the
decision rendered by the Local Board of Assessment Appeals of the Province of
Agusan del Sur on June 8, 1999 in an unnumbered case entitled "[F]ilipinas Palm Oil
Co., Inc. Petitioner, versus the Provincial Assessors Office of Agusan del Sur,
Respondent" and hereby orders as follows:
chanRoblesvirtualLawlibraryA. The market value for each oil palm tree should be
FIFTY- SEVEN & 55/100 PESOS (57.55), effective January 1, 1991. The
assessment for each municipality shall be based on the corresponding number of
trees as listed in Petitioner-Appellee's "Hectarage Statement" discussed
hereinabove;
B. Petitioner-Appellee should not be made to pay for the real property taxes due on
the roads starting from January 1, 1991;
C. Petitioner-Appellee is not liable to the Government for real property taxes on the
lands owned by the Multi-purpose Cooperative;
D. The housing units with a market value of PI75,000.00 or less each shall be
subjected to 0% assessment level, starting 1994;
E. Road Equipment and haulers are not real properties and, accordingly, Petitioner-
Appellee is not liable for real property tax thereon;
F. Any real property taxes already paid by Petitioner-Appellee which, by virtue "of this
decision, were not due, shall be applied to future taxes rightfully due from Petitioner-
Appellee.
SO ORDERED.27 (Emphasis supplied)
The CBAA denied the Motion for Reconsideration filed by the Provincial
Assessor.28 The Provincial Assessor filed a Petition for Review before the Court of
Appeals, which, in turn, sustained the CBAA's Decision.29chanrobleslaw
The Court of Appeals held that the land owned by NGPI-NGEI, which Filipinas has
been leasing, cannot be subjected to real property tax since these are owned by
cooperatives that are tax-exempt.30 Section 133(n) of the Local Government Code
provides:
chanRoblesvirtualLawlibrary
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:
....
(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises
and cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered
Sixty-nine hundred thirty-eight (R.A. No. 6938) otherwise known as the "Cooperative
Code of the Philippines." (Emphasis supplied)
Section 234(d) of the Local Government Code exempts duly registered cooperatives,
like NGPI-NGEI, from payment of real property taxes:
chanRoblesvirtualLawlibrary
SECTION 234. Exemptions from Real Property Tax. — The following are exempted
from payment of the real property tax:
....
(d) All real property owned by duly registered cooperatives as provided for under
R.A. No. 6938[.] (Emphasis supplied)
The Court of Appeals held that the pertinent provisions "neither distinguishes nor
specifies" that the exemption only applies to real properties used by the
cooperatives.31 It ruled that "[t]he clear absence of any restriction or limitation in the
provision could only mean that the exemption applies to wherever the properties are
situated and to whoever uses them."32 Therefore, the exemption privilege extends to
Filipinas as the cooperatives' lessee.33chanrobleslaw
On the roads constructed by Filipinas, the Court of Appeals held that although it is
undisputed that the roads were built primarily for Filipinas' benefit, the roads should
be tax-exempt since these roads were also being used by the cooperatives and the
public.34 It applied, by analogy, Bislig Bay Lumber Company, Inc. v. Provincial
Government of Surigao:35chanrobleslaw
We are inclined to uphold the theory of appellee. In the first place, it cannot be
disputed that the ownership of the road that was constructed by appellee belongs to
the government by right accession not only because it is inherently incorporated or
attached to the timber land leased to appellee but also because upon the expiration
of the concession, said road would ultimately pass to the national government. In the
second place, while the road was constructed by appellee primarily for its use and
benefit, the privilege is not exclusive, for, under the lease contract entered into by the
appellee and the government and by public in by the general. Thus, under said lease
contract, appellee cannot prevent the use of portions, of the concession for
homesteading purposes. It is also in duty bound to allow the free use of forest
products within the concession for the personal use of individuals residing in or within
the vicinity of the land. . . . In other words, the government has practically reserved
the rights to use the road to promote its varied activities. Since, as above shown, the
road in question cannot be considered as an improvement which belongs to appellee,
although in part is for its benefit, it is clear that the same cannot be the subject of
assessment within the meaning of section 2 of Commonwealth Act No.
470.36 (Citations omitted)
Furthermore, the Court of Appeals agreed with the CBAA that the roads constructed
by Filipinas had become permanent improvements on the land owned by NGPI-
NGEI.37 Articles 440 and 445 of the Civil Code provide that these improvements
redound to the benefit of the land owner under the right of accession:38chanrobleslaw
Article 440. The ownership of property gives the right by accession to everything
which is produced thereby, or which is incorporated or attached thereto, either
naturally or artificially.
....
Article 445. Whatever is built, planted or sown on the land of another and the
improvements or repairs made thereon, belong to the owner of the land, subject to
the provisions of the following articles.
On the road equipment and mini haulers as real properties subject to tax, the Court of
Appeals affirmed the CBAA's Decision that these are only movables.39 Section 199(o)
of the Local Government Code provides a definition of machinery subject to real
property taxation:
chanRoblesvirtualLawlibrary
SECTION 199. Definition of Terms. — When used in this Title, the term:
....
(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.
The Court of Appeals held that Section 19^(o) of the Local Government Code should
be construed to include machineries covered by the meaning of real properties
provided for under Article 415(5) of the Civil Code:40chanrobleslaw
Article 415. The following are immovable property:
....
(5) Machinery, receptacles, instruments or implements intended by the owner of the
tenement for an industry or works which may be carried on in a building or on a piece
of land, and which tend directly to meet the needs of the said industry or works[.]
The Court of Appeals cited Davao Sawmill Company v. Castillo,41 where it has been
held that machinery that is movable by nature becomes immobilized only when
placed by the owner of the tenement, but not so when placed by a tenant or any
other person having a temporary right unless this person acts as an agent of the
owner.42 Thus, the mini haulers and other road equipment retain their nature as
movables.43chanrobleslaw
The Provincial Assessor filed before this Court a Petition for Review raising the
following issues:
chanRoblesvirtualLawlibraryFirst, whether the exemption privilege of NGPI-NGEI
from payment of real property tax extends to respondent Filipinas Palm Oil Plantation
Inc. as lessee of the parcel of land owned by cooperatives; and cralawlawlibrary
Second, whether respondent's road equipment and mini haulers are movable
properties and have not been immobilized by destination for real property taxation.
Petitioner argues that based on Mactan Cebu International Airport Authority v.
Ferdinand J. Marcos,44 cooperatives cannot extend its exemption from real property
tax to taxable persons.45 It argues that Sections 198, 199, 205, and 217 of the Local
Government Code provide that real property taxes are assessed based on actual
use.46 Moreover, the exemption of cooperatives applies only when it is the
cooperative that actually, directly, and exclusively uses and possesses the
properties.47 Sections 198, 199, 205, and 217 of the Local Government Code provide:
chanRoblesvirtualLawlibrary
SECTION 198. Fundamental Principles. — The appraisal, assessment, levy and
collection of real property tax shall be guided by the following fundamental principles:
....
(b) Real property shall be classified for assessment purposes on the basis of its
actual use[.]
....
SECTION 199. Definition of Terms. — When used in this Title, the term:
....
(b) "Actual Use" refers to the purpose for which the property is principally or
predominantly utilized by the person in possession thereof[.]
....
SECTION 205. Listing of Real Property in the Assessment Rolls. —
....
(d) Real property owned by the Republic of the Philippines, its instrumentalities and
political subdivisions, the beneficial use of which has been granted, for consideration
or otherwise, to a taxable person, shall be listed, valued and assessed in the name of
the possessor, grantee or of the public entity if such property has been acquired or
held for resale or lease.
. . . .   to the nature of respondent's road equipment and mini haulers.
SECTION 217. Actual Use of Real Property as Basis for Assessment. — Real
property shall be classified, valued and assessed on the basis of its actual use
regardless of where located, whoever owns it, and whoever uses it. (Emphasis
supplied)
Petitioner claims that Section 199(o) of the Local Government Code specifically
covers respondent's road equipment and mini haulers since these are directly and
exclusively used to meet the needs of respondent's industry, business, or
activity.48 Article 415(5) of the Civil Code, which defines real property, should not be
made to control the Local Government Code,49 a subsequent legislation that
specifically defines "machinery" for taxation purposes.50chanrobleslaw
In the Resolution51 dated October 13, 2008, this Court denied the Petition for Review
due to procedural missteps, which included the failure to attach legible duplicate
original or certified true copies of the assailed decision and failure to pay proper fees.
On November 25, 2008, petitioner moved for reconsideration,52 praying for the
reversal of the Petition's denial due to mere technicalities.
On January 26, 2009, this Court granted Petitioner's Motion for Reconsideration.53 It
directed the reinstatement of the Petition and required respondent to
comment.54chanrobleslaw
On November 20, 2009, respondent filed its Comment.55chanrobleslaw
Respondent reiterates the rulings of the CBAA and the Court of Appeals that the
exemption of cooperatives from real property taxes extends to it as the lessee.56 It
asserts that under its lease agreement with NGPI-NGEI, it pays an Annual Fixed
Rental, which includes the payment of taxes.57 It claims that in case NGPI-NGEI is
liable to the local government for real property tax on the land, the tax should be
taken from the Annual Fixed Rental.58 To make respondent pay real property taxes
on the leased land would be equivalent to assessing it twice for the same
property.59chanrobleslaw
On the road equipment and mini haulers being subjected to real property taxation,
respondent maintains that it should be spared from real property tax since the
equipment and mini haulers are movables.60chanrobleslaw
The Petition is granted to modify the Court of Appeals Decision, but only with respect
Under Section 133(n) of the Local Government Code, the taxing power of local
government units shall not extend to the levy of taxes, fees, or charges on duly
registered cooperatives under the Cooperative Code.61 Section 234(d) of the Local
Government Code specifically provides for real property tax exemption to
cooperatives:
chanRoblesvirtualLawlibrary
SECTION 234. Exemptions from Real Property Tax. — The following
are exempted  from payment of the real property tax:
....
(d) All real property owned by duly registered cooperatives as provided for under paragraph of Section 234 further qualifies the retention of the exemption insofar as
[Republic Act] No. 6938[.] (Emphasis supplied) real property taxes are concerned by limiting the retention only to those enumerated
therein; all others not included in the enumeration lost the privilege upon the
effectivity of the L[ocal] G[overnment] C[ode]. Moreover, even as to real property
NGPI-NGEI, as the owner of the land being leased by respondent, falls within the
owned by the Republic of the Philippines or any of its political subdivisions covered
purview of the law. Section 234 of the Local Government Code exempts all real
by item (a) of the first paragraph of Section 234, the exemption is withdrawn if the
property owned by cooperatives without distinction. Nothing in the law suggests that
beneficial use of such property has been granted to a taxable person for
the real property tax exemption only applies when the property is used by the
consideration or otherwise.
cooperative itself. Similarly, the instance that the real property is leased to either an
individual or corporation is not a ground for withdrawal of tax
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity
exemption.62chanrobleslaw
of the L[ocal] G[overnment] C[ode], exemptions from payment of real property taxes
granted to natural or juridical persons, including government-owned or controlled
In arguing the first issue, petitioner hinges its claim on a misplaced reliance in
corporations, except as provided in the said section, and the petitioner is,
Mactan, which refers to the revocation of tax exemption due to the effectivity of the
undoubtedly, a government-owned corporation, it necessarily follows that its
Local Government Code. However, Mactan does not refer to the tax exemption
exemption from such tax granted it in Section 14 of its Charter, R.A. No. 6958, has
extended to cooperatives. The portion that petitioner cited specifically mentions that
been withdrawn. Any claim to the contrary can only be justified if the petitioner can
the exemption granted to cooperatives has not been withdrawn by the effectivity of
seek refuge under any of the exceptions provided in Section 234, but not under
the Local Government Code:
Section 133, as it now asserts, since, as shown above, the said section is qualified
by Sections 232 and 234.
chanRoblesvirtualLawlibrary
[S]ection 232 must be deemed to qualify Section 133.
In short, the petitioner can no longer invoke the general rule in Section 133 that the
taxing powers of the local government units cannot extend to the levy of:
Thus, reading together Sections 133, 232, and 234 of the L[ocal] G[overnment]
C[ode], we conclude that as a general rule, as laid down in Section 133, the taxing
chanRoblesvirtualLawlibrary
powers of local government units cannot extend to the levy of, inter alia, "taxes, fees
(o) taxes, fees or charges of any kind on the National Government, its agencies or
and charges of any kind on the National Government, its agencies and
instrumentalities, and local government units.
instrumentalities, and local government units"; however, pursuant to Section 232,
provinces, cities, and municipalities in the Metropolitan Manila Area may impose the
real property tax except on, inter alia, "real property owned by the Republic of the It must show that the parcels of land in question, which are real property, are any one
Philippines or any of its political subdivisions except when the beneficial use thereof of those enumerated in Section 234, either by virtue of ownership, character, or use
has been granted, for consideration or otherwise, to a taxable person," as provided in of the property.63 (Emphasis supplied)
item (a) of the first paragraph of Section 234.
The roads that respondent constructed within the leased area should not be
As to tax exemptions or incentives granted to or presently enjoyed by natural or assessed with real property taxes. Bislig Bay finds application here. Bislig Bay
juridical persons, including government-owned and controlled corporations, Section Lumber Company, Inc. (Bislig Bay) was a timber concessionaire of a portion of public
193 of the L[ocal] G[overnment] C[ode] prescribes the general rule, viz., they forest in the provinces of Agusan and Surigao.64 To aid in developing its concession,
are withdrawn upon the effectivity of the L[ocal] G[overnment] C[ode], except those Bislig Bay built a road at its expense from a barrio leading towards its area.65 The
granted to local water districts, cooperatives duly registered under R.A. No. 6938, Provincial Assessor of Surigao assessed Bislig Bay with real property tax on the
non-stock and non-profit hospitals and educational institutions, and unless otherwise constructed road, which was paid by the company under protest.66 It claimed that
provided in the L[ocal] Gfovernment] C[ode]. The latter proviso could refer to Section even if the road was constructed on public land, it should be subjected to real
234 which enumerates the properties exempt from real property tax. But the last
property tax because it was built by the company for its own benefit.67 On the other
hand, Bislig Bay asserted that the road should be exempted from real property tax
because it belonged to national government by right of accession.68 Moreover, the
road constructed already became an inseparable part of the land.69 The records also
showed that the road was not only built for the benefit of Bislig Bay, but also of the
public.70 This Court ruled for Bislig Bay, thus:
chanRoblesvirtualLawlibrary
We are inclined to uphold the theory of appellee. In the first place, it cannot be
disputed that the ownership of the road that was constructed by appellee belongs to
the government by right accession not only because it is inherently incorporated or
attached to the timber land leased to appellee but also because upon the expiration
of the concession, said road would ultimately pass to the national government. ... In
the second place, while the road was constructed by appellee primarily for its use
and benefit, the privilege is not exclusive, for, under the lease contract entered into
by the appellee and the government and by public in by the general. Thus, under said
lease contract, appellee cannot prevent the use of portions, of the concession for
homesteading purposes. ... It is also in duty bound to allow the free use of forest
products within the concession for the personal use of individuals residing in or within
the vicinity of the land. ... In other words, the government has practically reserved the
rights to use the road to promote its varied activities. Since, as above shown, the
road in question cannot be considered as an improvement which belongs to appellee,
although in part is for its benefit, it is clear that the same cannot be the subject of
assessment within the meaning of section 2 of Commonwealth Act No. 470.71
This was reiterated in Board of Assessment Appeals ofZamboanga del Sur v. Samar
Mining Company, Inc.72 Samar Mining Company, Inc. (Samar Mining) was a domestic
corporation engaged in the mining industry.73 Since Samar Mining's mining site and
mill were in an inland location entailing long distance from its area to the loading
point, Samar Mining was constrained to construct a road for its
convenience.74 Initially, Samar Mining filed miscellaneous lease applications for a
road right of way covering lands under the jurisdiction of the Bureau of Lands and the
Bureau of Forestry where the proposed road would pass through.75 Samar Mining
was given a "temporary permit to occupy and use the lands applied for by
it";76 hence, it was able to build what was eventually known as the Samico Road.
Samar Mining was assessed by the Provincial Assessor of Zamboanga del Sur with
real property taxes on the road, which prompted it to appeal before the Board of
Assessment Appeals.77 Invoking Bislig Bay, Samar Mining claimed that it should not
be assessed with real property tax since the road was constructed on public land.
This Court ruled for Samar Mining, thus:
chanRoblesvirtualLawlibrary
There is no question that the road constructed by respondent Saimar on the public
lands leased to it by the government is an improvement. But as to whether the same
is taxable under the aforequoted provision of the Assessment Law, this question has
already been answered in the negaitive by this Court. In the case of Bislig Bay
Lumber Co., Inc. vs. Provincial Government of Surigao, where a similar issue was
raised. . ..
....
. . .  What is emphasized in the Bislig case is that the improvement is exempt from
taxation because it is an integral part of the public land on which it is constructed and
the improvement is the property of the government by right of accession. Under
Section 3(a) of the Assessment Law, all properties owned by the government,
without any distinction, are exempt from taxation.79 (Emphasis supplied, citations
omitted)
The roads that respondent constructed became permanent improvements on the
land owned by the NGPI-NGEI by right of accession under the Civil Code, thus:
chanRoblesvirtualLawlibrary
Article 440. The ownership of property gives the right by accession to everything
which is produced thereby, or which is incorporated or attached thereto, either
naturally or artificially.
....
Article 445. Whatever is built, planted or sown on the land of another and the
improvements or repairs made thereon, belong to the owner of the land[.]
Despite the land being leased by respondent when the roads were constructed, the
ownership of the improvement still belongs to NGPI-NGEI. As provided under Article
440 and 445 of the Civil Code, the land is owned by the cooperatives at the time
respondent built the roads. Hence, whatever is incorporated in the land, either
naturally or artificially, belongs to the NGPI-NGEI as the landowner.
Although the roads were primarily built for respondent's benefit, the roads were also
being used by the members of NGPI and the public.80 Furthermore, the roads inured
to the benefit of NGPI-NGEI as owners of the land not only by right of accession but
through the express provision in the lease agreement:

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On March 7, 1990 NGPI Multi-Purpose Cooperative, Inc., as Lessor, and NDC-
Guthrie Plantations, Inc., as Lessee, entered into a "Lease Agreement" . . . covering
the agricultural lands transferred by NDC to the DAR, which lands the DAR ultimately
distributed undivided to qualified workers-beneficiaries. . . .
....
Clause No. 6.3 of the same lease agreement provides that "All taxes due on the
improvements on the Leased Property except those improvements on the Area that
the LESSOR shall have utilized under Clause 1.2 hereof, shall be for the account of
the LESSEE."
Clause No. 9.4 of the same lease agreement provides that ". . . All fixed and
permanent improvements, such as roads and palm trees introduced on the Leased
Property, shall automatically accrue to the LESSOR upon termination of this Lease
Agreement without need of reimbursement."
All the above-cited stipulations in the lease agreement between NGPI Multi-Purpose
Cooperative and NDC-Guthrie Plantations, Inc. were reconfirmed and reaffirmed in
the Addendum to Lease Agreement entered into by and between NGPI Multi-
Purpose Cooperative and Filipinas Palmoil Plantations, Inc. on January 30, 1998. . . .
The main subject of the said Addendum was the extension of the term of the lease
agreement up to December 31, 2032, along with economic benefits to the lessor
other than rentals.
There is no dispute that the roads are on the land owned by NGPI Multi-Purpose
Cooperative which leased the same to Petitioner-Appellee. These roads belong to
the Multi-Purpose Cooperative, not only by right of accession but also by express
provisions of the Contract of Lease[.]81
Respondent claims that under its lease agreement with NGPI-NGEI, it pays an
Annual Fixed Rental, which includes the payment of taxes.82 If NGPI-NGEI were
liable to the local government for real property tax on the land, the tax should be
taken from the Annual Fixed Rental:
chanRoblesvirtualLawlibrary
"2.1. In consideration of this Lease Agreement, the LESSEE shall pay the LESSOR
the following annual rentals:ChanRoblesVirtualawlibrary
"1) An annual fixed rental, in the following amount — "SIX HUNDRED THIRTY FIVE
PESOS" (P635.00) PER HECTARE PER ANNUM which would cover the following:
chanRoblesvirtualLawlibrary"(1) All Taxes on the Land
"(2) Administration Charges
"(3) Amortization charges
"It is understood that, if the annual fixed rental of "SIX HUNDRED THIRTY FIVE
PESOS" (p 635.00) is insufficient to pay any increase on the land taxes, the Lessee
shall pay the difference, provided such increase does not exceed ten percent (10%)
of the immediately preceding tax imposed on the land; provided further, that any
increase beyond these percentage shall be borne equally by the LESSOR and
LESSEE.
"The foregoing notwithstanding, it is understood and agreed that at all times,
liability for realty taxes on the Leased Property Primarily and principally lies with the
LESSOR and any reference herein to payment by LESSEE of said taxes is only for
purposes of earmarking the proceeds of the rentals herein agreed upon."
Clause No. 6.3 of the same lease agreement provides that "All taxes due on the
improvements on the Leased Property except those improvements on the Area that
the LESSOR shall have utilized under Clause 1.2 hereof, shall be for the account of
the LESSEE."83 (Emphasis supplied)
Therefore, NGPI-NGEI, as owner of the roads that permanently became part of the
land being leased by respondent, shall be liable for real property taxes, if any.
However, by express provision of the Local Government Code, NGPI-NGEI is
exempted from payment of real property tax.84chanrobleslaw
II
The road equipment and mini haulers shall be considered as real property, subject to
real property tax.
Section 199(o) of the Local Government Code defines "machinery" as real property
subject to real property tax,85 thus:
chanRoblesvirtualLawlibrary
SECTION 199. Definition of Terms. — When used in this Title, the term:
....
(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[.]
Article 415(5) of the New Civil Code defines "machinery" as that which constitutes an
immovable property:
chanRoblesvirtualLawlibrary
Article 415. The following are immovable property:
....
(5) Machinery, receptacles, instruments or implements intended by the owner of the
tenement for an industry or works which may be carried on in a building or on a piece
of land, and which tend directly to meet the needs of the said industry or works[.]
(Emphasis supplied)
Petitioner contends that the second sentence of Section 199(o) includes the road
equipment and mini haulers since these are directly and exclusively used by
respondent to meet the needs of its operations.86 It further claims that Article 415(5)
of the New Civil Code should not control the Local Government Code, a subsequent
legislation.87chanrobleslaw
On the other hand, respondent claims that the road equipment and mini haulers are
movables by nature. It asserts that although there may be a difference between the
meaning of "machinery" under the Local Government Code arid that of immovable
property under Article 415(5) of the Civil Code, "the controlling interpretation of
Section 199(o) of [the Local Government Code] is the interpretation of Article 415(5)
of the Civil Code."88chanrobleslaw
In Manila Electric Company v. City Assessor,89 a similar issue of which definition of
"machinery" prevails to warrant the assessment of real property tax on it was raised.
Manila Electric Company (MERALCO) insisted on harmonizing the provisions of the
Civil Code and the Local Government Code and asserted that "machinery"
contemplated under Section 199(o) of the Local Government must still be within the
contemplation of immovable property under Article 415 of the Civil Code.90 However,
this Court ruled that harmonizing such laws "would necessarily mean imposing
additional requirements for classifying machinery as real property for real property tax
purposes not provided for, or even in direct conflict with, the provisions of the Local
Government Code."91 Thus:
chanRoblesvirtualLawlibrary
While the Local Government Code still does not provide for a specific definition of
"real property," Sections 199(o) and 232 of the said Code, respectively, gives an
extensive definition of what constitutes "machinery" and unequivocally subjects such
machinery to real property tax. The Court reiterates that the machinery subject to real
property tax under the Local Government Code "may or may not be attached,
permanently or temporarily to the real property"; and the physical facilities for
production, installations, and appurtenant service facilities, those which are mobile,
self-powered or self-propelled, or are not permanently attached must (a) be actually,
directly, and exclusively used to meet the needs of the particular industry, business,
or activity; and (b) by their very nature and purpose, be designed for, or necessary for
manufacturing, mining, logging, commercial, industrial, or agricultural purposes.
....
Article 415, paragraph (5) of the Civil Code considers as immovables or real
properties "[m]achinery, receptacles, instruments or implements intended by the
owner of the tenement for an industry or works which may be carried on in a building
or on a piece of land, and which tend directly to meet the needs of the said industry
or works." The Civil Code, however, does not define "machinery."
The properties under Article 415, paragraph (5) of the Civil Code are immovables by
destination, or "those which are essentially movables, but by the purpose for which
they have been placed in an immovable, partake of the nature of the latter because
of the added utility derived therefrom." These properties, including  machinery,
become immobilized if the following requisites concur: (a) they are placed in the
tenement by the owner of such tenement; (b) they are destined for use in the industry
or work in the tenement; and (c) they tend to directly meet the needs of said industry
or works. The first two requisites are not found anywhere in the Local Government
Code.92 (Emphasis supplied, citations omitted)
Section 199(o) of the Local Government prevails over Article 415(5) of the Civil Code.
In Manila Electric Company:

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As between the Civil Code, a general law governing property and property relations,
and the Local Government Code, a special law granting local government units the
power to impose real property tax, then the latter shall prevail. As the Court
pronounced in Disomangcop v. The Secretary of the Department of Public Works
and Highways Simeon A. Datumanong:ChanRoblesVirtualawlibrary
It is a finely-imbedded principle in statutory construction that a special provision or
law prevails over a general one. Lex specialis derogant generali. As this Court
expressed in the case of Leveriza v. Intermediate Appellate Court, "another basic
principle of statutory construction mandates that general legislation must give way to
special legislation on the same subject, and generally be so interpreted as to
embrace only cases in which the special provisions are not applicable, that specific
statute prevails over a general statute and that where two statutes are of equal
theoretical application to a particular case, the one designed therefor specially should
prevail."
The Court also very clearly explicated in Vinzons-Chato v. Fortune Tobacco
Corporation that:
chanRoblesvirtualLawlibrary
A general law and a special law on the same subject are statutes in pari materia and
should, accordingly, be read together and harmonized, if possible, with a view to
giving effect to both. The rule is that where there are two acts, one of which is special
and particular and the other general which, if standing alone, would include the same
matter and thus conflict with the special act, the special law must prevail since it
evinces the legislative intent more clearly than that of a general statute and must not
be taken as intended to affect the more particular and specific provisions of the
earlier act, unless it is absolutely necessary so to construe it in order to give its words
any meaning at all.
The circumstance that the special law is passed before or after the general act does
not change the principle. Where the special law is later, it will be regarded as an
exception to, or a qualification of, the prior general act; and where the general act is
later, the special statute will be construed as remaining an exception to its terms,
unless repealed expressly or by necessary implication.
Furthermore, in Caltex (Philippines), Inc. v. Central Board of Assessment Appeals,
the Court acknowledged that "[i]t is a familiar phenomenon to see things classed as
real property for purposes of taxation which on general principle might be considered
personal property[.]"
Therefore, for determining whether machinery is real property subject to real property
tax, the definition and requirements under the Local Government Code are
controlling.93 (Emphasis supplied, citations omitted)
Respondent is engaged in palm oil plantation.94 Thus, it harvests fruits from palm
trees for oil conversion through its milling plant.95 By the nature of respondent's
business, transportation is indispensable for its operations.
Under the definition provided in Section 199(o) of the Local Government Code, the
road equipment and the mini haulers are classified as machinery, thus:
chanRoblesvirtualLawlibrary
SECTION 199. Definition of Terms. — When used in this Title, the terra:
....
(o) "Machinery" . . . 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 [.] (Emphasis supplied)
Petitioner is correct in claiming that the phrase pertaining to physical facilities for
production is comprehensive enough to include the road equipment and mini haulers
as actually, directly, and exclusively used by respondent to meet the needs of its
operations in palm oil production.96 Moreover, "mini-haulers are farm tractors pulling
attached trailers used in the hauling of seedlings during planting season and in
transferring fresh palm fruits from the farm [or] field to the processing plant within the
plantation area."97 The indispensability of the road equipment and mini haulers in
transportation makes it actually, directly, and exclusively used in the operation of
respondent's business.
In its Comment, respondent claims that the equipment is no longer vital to its
operation because it is currently employing equipment outside the company to do the
task.98 However, respondent never raised this contention before the lower courts.
Hence, this is a factual issue of which this Court cannot take cognizance. This Court
is not a trier of facts.99 Only questions of law are entertained in a petition for review
assailing a Court of Appeals decision.100chanrobleslaw

WHEREFORE, the Petition is PARTLY GRANTED. The Decision of the Court of

Appeals dated September 26, 2007 and the Resolution dated May 26, 2008 in CA-
G.R. SP No. 74060 are AFFIRMED with MODIFICATION, in that the road equipment
and the mini haulers should be assessed with real property taxes.

SO ORDERED.

Topic: Local Taxation: Amusement tax

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.:

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:
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).1 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:
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
(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.2
On substantive grounds, the Province of Benguet argued that the phrase ‘other
places of amusement’ in Section 140 (a) of the LGC3 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 x
x x synonymous to relaxation, avocation, pastime, or fun."4 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
(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."5 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.
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 the gross receipts of the admission fees
collected."6 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,"7 and as such, inheres in the State.
Such, however, is not true for provinces, cities, municipalities and barangays as they
are not the sovereign;8 rather, they are mere "territorial and political subdivisions of
the Republic of the Philippines".9
The rule governing the taxing power of provinces, cities, muncipalities and barangays
is summarized in Icard v. City Council of Baguio:10
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.11 [Underscoring supplied]
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."12 Nevertheless, such authority is
"subject to such guidelines and limitations as the Congress may provide".13
In conformity with Section 3, Article X of the 1987 Constitution,14 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:
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.
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.,15 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,16 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).
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.
(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]
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."17
The purpose and rationale of the principle was explained by the Court in National
Power Corporation v. Angas18 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].19
In Philippine Basketball Association v. Court of Appeals,20 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).1âwphi1 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:
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 xxx.
Applying the principle of ejusdem generis, the Supreme Court rejected PBA's
assertions and noted that:
In 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.21 [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 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
(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.
As defined in The New Oxford American Dictionary,22 ‘show’ means "a spectacle or
display of something, typically an impressive one";23 while ‘performance’ means "an
act of staging or presenting a play, a concert, or other form of entertainment."24 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:
The 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.25
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.
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".1âwphi1 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.

Topic: Remedies of Real Property Taxation

G.R. No. 184203               November 26, 2014

CITY OF LAPU-LAPU, Petitioner,
vs.
PHILIPPINE ECONOMIC ZONE AUTHORITY, Respondent.

x-----------------------x

G.R. No. 187583

PROVINCE OF BATAAN, represented by GOVERNOR ENRIQUE T. GARCIA,

JR., and EMERLINDA S. TALENTO, in her capacity as Provincial Treasurer of
Bataan, Petitioners,
vs.
PHILIPPINE ECONOMIC ZONE AUTHORITY, Respondent.

DECISION

LEONEN, J.:

The Philippine Economic Zone Authority is exempt from payment of real property
taxes.
These are consolidated1 petitions for review on certiorari the City of Lapu-Lapu and
the Province of Bataan separately filed against the Philippine Economic Zone
Authority (PEZA).
In G.R. No. 184203, the City of Lapu-Lapu (the City) assails the Court of Appeals’
decision2 dated January 11, 2008 and resolution3 dated August 6, 2008, dismissing
the City’s appeal for being the wrong mode of appeal. The City appealed the
Regional Trial Court,Branch 111, Pasay City’s decision finding the PEZA exempt
from payment of real property taxes.
In G.R. No. 187583, the Province of Bataan (the Province) assails the Court of
Appeals’ decision4 dated August 27, 2008 and resolution5 dated April 16, 2009,
granting the PEZA’s petition for certiorari. The Court of Appeals ruled that the
Regional Trial Court, Branch 115, Pasay City gravely abused its discretion in finding
the PEZA liable for real property taxes to the Province of Bataan.
Facts common to the consolidated petitions
In the exercise of his legislative powers,6 President Ferdinand E. Marcos issued
Presidential Decree No. 66 in 1972, declaring as government policy the
establishment of export processing zones in strategic locations in the Philippines.
Presidential Decree No. 66 aimed "to encourage and promote foreign commerce as a
means of making the Philippines a center of international trade, of strengthening our
export trade and foreign exchange position, of hastening industrialization,of reducing
domestic unemployment, and of accelerating the development of the country."7
To carry out this policy, the Export Processing Zone Authority (EPZA) was created to
operate, administer, and manage the export processing zones established in the Port
of Mariveles, Bataan8 and such other export processing zones that may be created
by virtue of the decree.9
The decree declared the EPZA non-profit in character10 with all its revenues devoted
to its development, improvement, and maintenance.11 To maintain this non-profit
character, the EPZA was declared exempt from all taxes that may be due to the
Republic of the Philippines, its provinces, cities, municipalities, and other government
agencies and instrumentalities.12 Specifically, Section 21 of Presidential Decree No.
66 declared the EPZA exempt from payment of real property taxes:
Section 21. Non-profit Character of the Authority; Exemption from Taxes. The
Authority shall be non-profit and shall devote and use all its returns from its capital
investment, as well as excess revenues from its operations, for the development,
improvement and maintenance and other related expenditures of the Authority to pay
its indebtedness and obligations and in furtherance and effective implementation of
the policy enunciated in Section 1 of this Decree. In consonance therewith, the
Authority is hereby declared exempt:
....
(b) From all income taxes, franchise taxes, realty taxes and all other kinds of taxes
and licenses to be paid to the National Government, its provinces, cities,
municipalities and other government agenciesand instrumentalities[.]
In 1979, President Marcos issued Proclamation No. 1811, establishing the Mactan
Export Processing Zone. Certain parcels of land of the public domain located in the
City of Lapu-Lapuin Mactan, Cebu were reserved to serve as site of the Mactan
Export Processing Zone.
In 1995, the PEZA was created by virtue of Republic Act No. 7916 or "the Special
Economic Zone Act of 1995"13 to operate, administer, manage, and develop
economic zones in the country.14 The PEZA was granted the power to register,
regulate, and supervise the enterprises located in the economic zones.15 By virtue of
the law, the export processing zone in Mariveles, Bataan became the Bataan
Economic Zone16 and the Mactan Export Processing Zone the Mactan Economic
Zone.17
As for the EPZA, the law required it to "evolve into the PEZA in accordance with the
guidelines and regulations set forth in an executive order issued for [the] purpose."18
On October 30, 1995, President Fidel V. Ramos issued Executive Order No. 282,
directing the PEZA to assume and exercise all of the EPZA’s powers, functions, and
responsibilities "as provided in Presidential Decree No. 66, as amended, insofar as
they are not inconsistent with the powers, functions, and responsibilities of the PEZA,
as mandated under [the Special Economic Zone Act of 1995]."19 All of EPZA’s
properties, equipment, and assets, among others, were ordered transferred to the
PEZA.20
Facts of G.R. No. 184203
In the letter21 dated March 25, 1998, the City of Lapu-Lapu, through the Office of the
Treasurer, demanded from the PEZA 32,912,350.08 in real property taxes for the
period from 1992 to 1998 on the PEZA’s properties located in the Mactan Economic
Zone.
The City reiterated its demand in the letter22 dated May 21, 1998. It cited Sections
193 and 234 of the Local Government Code of 1991 that withdrew the real property
tax exemptions previously granted to or presently enjoyed by all persons. The City
pointed out that no provision in the Special Economic Zone Act of 1995 specifically
exempted the PEZA from payment of real property taxes, unlike Section 21 of
Presidential Decree No. 66 that explicitly provided for EPZA’s exemption. Since no
legal provision explicitly exempted the PEZA from payment of real property taxes, the
City argued that it can tax the PEZA.
The City made subsequent demands23 on the PEZA. In its last reminder24 dated May
13, 2002, the City assessed the PEZA 86,843,503.48 as real property taxes for the
period from 1992 to 2002.
On September 11, 2002, the PEZAfiled a petition for declaratory Relief25 with the
Regional Trial Court of Pasay City, praying that the trial court declare it exempt from
payment ofreal property taxes. The case was raffled to Branch 111.
The City answered26 the petition, maintaining that the PEZA is liable for real property
taxes. To support its argument, the City cited a legal opinion dated September 6,
1999 issued by the Department of Justice,27 which stated that the PEZA is not
exempt from payment of real property taxes. The Department of Justice based its
opinion on Sections 193 and 234 of the Local Government Code that withdrew the
tax exemptions, including real property tax exemptions, previously granted to all
persons.
A reply28 was filed by the PEZA to which the City filed a rejoinder.29
Pursuant to Rule 63, Section 3 of Rules of Court,30 the Office of the Solicitor General
filed a comment31 on the PEZA’s petition for declaratory relief. It agreed that the
PEZA is exempt from payment of real property taxes, citing Sections 24 and 51 of the
Special Economic Zone Act of 1995.
The trial court agreed with the Solicitor General. Section 24 of the Special Economic
Zone Act of 1995 provides:
SEC. 24. Exemption from National and Local Taxes. – Except for real property taxes
on land owned by developers, no taxes, local and national, shall be imposed on
business establishments operating within the ECOZONE. In lieu thereof, five percent
(5%) of the gross income earned by all business enterprises within the ECOZONE
shall be paid and remitted as follows:
a. Three percent (3%) to the National Government;
b. Two percent (2%) which shall be directly remitted by the business
establishments to the treasurer’s office of the municipality or city where the
enterprise is located.
Section 51 of the law, on the other hand, provides:
SEC. 51. Ipso-Facto Clause. – All privileges, benefits, advantages or exemptions
granted to special economic zones under Republic Act No. 7227, shall ipso-facto be
accorded to special economic zones already created or to be created under this Act.
The free port status shall not be vested upon new special economic zones.
Based on Section 51, the trial court held that all privileges, benefits, advantages, or
exemptions granted tospecial economic zones created under the Bases Conversion
and Development Act of 1992 apply to special economic zones created under the
Special Economic ZoneAct of 1995.
Since these benefits include exemption from payment of national or local taxes, these
benefits apply to special economic zones owned by the PEZA.
According to the trial court, the PEZA remained tax-exempt regardless of Section 24
of the Special Economic Zone Act of 1995. It ruled that Section 24, which taxes real
property owned by developers of economic zones, only applies to private developers
of economic zones, not to public developers like the PEZA. The PEZA, therefore, is
not liable for real property taxes on the land it owns.
Characterizing the PEZA as an agency of the National Government, the trial court
ruled that the City had no authority to tax the PEZA under Sections 133(o) and 234(a)
of the Local Government Code of 1991.
In the resolution32 dated June 14, 2006, the trial court granted the PEZA’s petition for
declaratory relief and declared it exempt from payment of real property taxes.
The City filed a motion for reconsideration,33 which the trial court denied in its
resolution34 dated September 26, 2006.
The City then appealed35 to the Court of Appeals.
The Court of Appeals noted the following issues the City raised in its appellant’s brief:
(1) whether the trial court had jurisdiction over the PEZA’s petition for declaratory
relief; (2) whether the PEZA is a government agency performing governmental
functions; and (3) whether the PEZA is exempt from payment of real property taxes.
The issues presented by the City, according to the Court of Appeals, are pure
questions of law which should have been raised in a petition for review on certiorari
directly filed before this court. Since the City availed itself of the wrong mode of
appeal, the Court of Appeals dismissed the City’s appeal in the decision36 dated
January 11, 2008.
The City filed a motion for extension of time to file a motion for
reconsideration,37 which the Court of Appeals denied in the resolution38 dated April
11, 2008.
Despite the denial of its motion for extension, the City filed a motion for
reconsideration.39 In the resolution40 dated August 6, 2008, the Court of Appeals
denied that motion.
In its petition for review on certiorari with this court,41 the City argues that the Court of
Appeals "hid under the skirts of technical rules"42 in resolving its appeal. The City
maintains that its appeal involved mixed questions of fact and law. According to the
City, whether the PEZA performed governmental functions "cannot completely be
addressed by law but [by] the factual and actual activities [the PEZA is] carrying
out."43
Even assuming that the petition involves pure questions of law, the City contends that
the subject matter of the case "is of extreme importance with [far-reaching]
consequence that [its magnitude] would surely shape and determine the course ofour
nation’s future."44 The Court of Appeals, the City argues, should have resolved the
case on the merits.
The City insists that the trial court had no jurisdiction to hear the PEZA’s petition for
declaratory relief. According to the City, the case involves real property located in the
City of Lapu-Lapu. The petition for declaratory relief should have been filed before
the Regional Trial Court of the City of Lapu-Lapu.45
Moreover, the Province of Bataan, the City of Baguio, and the Province of Cavite
allegedly demanded real property taxes from the PEZA. The City argues that the
PEZA should have likewise impleaded these local government units as respondents
in its petition for declaratory relief. For its failure to do so, the PEZA violated Rule 63,
Section 2 of the Rules of Court, and the trial court should have dismissed the
petition.46
This court ordered the PEZA to comment on the City’s petition for review on
certiorari.47
At the outset of its comment, the PEZA argues that the Court of Appeals’ decision
dated January 11, 2008 had become final and executory. After the Court of Appeals
had denied the City’s appeal, the City filed a motion for extension of time to file a
motion for reconsideration. Arguing that the time to file a motion for reconsideration is
not extendible, the PEZA filed its motion for reconsideration out of time. The Cityhas
no more right to appeal to this court.48
The PEZA maintains that the City availed itself of the wrong mode of appeal before
the Court of Appeals. Since the City raised pure questions of law in its appeal, the
PEZA argues that the proper remedy is a petition for review on certiorari with this
court, not an ordinary appeal before the appellate court. The Court of Appeals,
therefore, correctly dismissed outright the City’s appeal under Rule 50, Section 2 of
the Rules of Court.49
On the merits, the PEZA argues that it is an agency and instrumentality of the
National Government. It is therefore exempt from payment of real property taxes
under Sections 133(o) and 234(a) of the Local Government Code.50 It adds that the
tax privileges under Sections 24 and 51 of the Special Economic Zone Act of 1995
applied to it.51
Considering that the site of the Mactan Economic Zoneis a reserved land under
Proclamation No. 1811, the PEZA claims that the properties sought to be taxed are
lands of public dominion exempt from real property taxes.52
As to the jurisdiction issue, the PEZA counters that the Regional Trial Court of Pasay
had jurisdiction to hear its petition for declaratory relief under Rule 63, Section 1 of
the Rules of Court.[53]] It also argued that it need not implead the Province of
Bataan, the City of Baguio, and the Province of Cavite as respondents considering
that their demands came after the PEZA had already filed the petition in court.54
Facts of G.R. No. 187583
After the City of Lapu-Lapu had demanded payment of real property taxes from the
PEZA, the Province of Bataan followed suit. In its letter55 dated May 29, 2003, the
Province, through the Office of the Provincial Treasurer, informed the PEZA that it
would be sending a real property tax billing to the PEZA. Arguing that the PEZA is a
developer of economic zones, the Province claimed that the PEZA is liable for real
property taxes under Section 24 of the Special Economic Zone Act of 1995.
56
In its reply letter  dated June 18, 2003, the PEZA requested the Province to suspend
the service of the real property tax billing. It cited its petition for declaratory relief
against the City of Lapu-Lapu pending before the Regional Trial Court, Branch 111,
Pasay City as basis.
The Province argued that serving a real property tax billing on the PEZA "would not
in any way affect [its] petition for declaratory relief before [the Regional Trial Court] of
Pasay City."57 Thus, in its letter58 dated June 27, 2003, the Province notified the
PEZAof its real property tax liabilities for June 1, 1995 to December 31, 2002 totalling
₱110,549,032.55.
After having been served a tax billing, the PEZA again requested the Province to
suspend collecting its alleged real property tax liabilities until the Regional Trial Court
of Pasay Cityresolves its petition for declaratory relief.59
The Province ignored the PEZA’s request. On January 20, 2004, the Province served
on the PEZA a statement of unpaid real property tax for the period from June 1995 to
December 2004.60
The PEZA again requested the Province to suspend collecting its alleged real
property taxes.61 The Province denied the request in its letter62 dated January 29,
2004, then servedon the PEZA a warrant of levy63 covering the PEZA’s real
properties located in Mariveles, Bataan.
The PEZA’s subsequent requests64 for suspension of collection were all denied by
the Province.65 The Province then served on the PEZA a notice of delinquency in the
payment of real property taxes66 and a notice of sale of real property for unpaid real
property tax.67 The Province finally sent the PEZA a notice of public auction of the
latter’s properties in Mariveles, Bataan.68
On June 14, 2004, the PEZA filed a petition for injunction69 with prayer for issuance of
a temporary restraining order and/or writ of preliminary injunction before the Regional
Trial Court of Pasay City, arguing that it is exempt from payment ofreal property
taxes. It added that the notice of sale issued by the Province was void because it was
not published in a newspaper ofgeneral circulation asrequired by Section 260 of the
Local Government Code.70
The case was raffled to Branch 115.
In its order71 dated June 18, 2004, the trial court issued a temporary restraining order
against the Province. After the PEZA had filed a ₱100,000.00 bond,72 the trial court
issued a writ of preliminary injunction,73 enjoining the Province from selling the
PEZA’s real properties at public auction.
On March 3, 2006, the PEZA and Province both manifested that each would file a
memorandum after which the case would be deemed submitted for decision. The
parties then filed their respective memoranda.74
In the order75 dated January 31, 2007, the trial court denied the PEZA’s petition for
injunction. The trial court ruled that the PEZA is not exempt from payment of real
property taxes. According to the trial court, Sections 193 and 234 of the Local
Government Code had withdrawn the real property tax exemptions previously
granted to all persons, whether natural or juridical.76 As to the tax exemptions under
Section 51 of the Special Economic Zone Act of 1995, the trial court ruled that the
provision only applies to businesses operating within the economic zones, not to the
PEZA.77
The PEZA filed before the Court of Appeals a petition for certiorari78 with prayer for
issuance of a temporary restraining order.
The Court of Appeals issued a temporary restraining order, enjoining the Province
and its Provincial Treasurer from selling PEZA's properties at public auction
scheduled on October 17, 2007.79 It also ordered the Province to comment on the
PEZA’s petition.
In its comment,80 the Province alleged that it received a copy of the temporary
restraining order only on October 18, 2007 when it had already sold the PEZA’s
properties at public auction. Arguing that the act sought to be enjoined was already
fait accompli, the Province prayed for the dismissal of the petition for certiorari.
The PEZA then filed a supplemental petition for certiorari, prohibition, and
mandamus81 against the Province, arguing that the Provincial Treasurer of Bataan
acted with grave abuse of discretion in issuing the notice of delinquency and notice of
sale. It maintained that it is exempt from payment of real property taxes because it is
a government instrumentality. It added that its lands are property of public dominion
which cannot be sold at public auction.
The PEZA also filed a motion82 for issuance of an order affirming the temporary
restraining order and a writ of preliminary injunction to enjoin the Province from
consolidating title over the PEZA’s properties.
In its resolution83 dated January 16, 2008,the Court of Appeals admitted the
supplemental petition for certiorari, prohibition, and mandamus. It required the
Province to comment on the supplemental petition and to file a memorandum on the
PEZA’s prayer for issuance of temporary restraining order.
The Province commented84 on the PEZA’s supplemental petition, to which the PEZA
replied.85
The Province then filed a motion86 for leave to admit attached rejoinder with motion to
dismiss. In the rejoinder with motion to dismiss,87 the Province argued for the first
time that the Court of Appeals had no jurisdiction over the subject matter of the
action.
According to the Province, the PEZA erred in filing a petition for certiorari. Arguing
that the PEZA sought to reverse a Regional Trial Court decision in a local tax case,
the Province claimed that the court with appellate jurisdiction over the action is the
Court of Tax Appeals. The PEZA then prayed that the Court of Appeals dismiss the
petition for certiorari for lack of jurisdiction over the subject matter of the action.
The Court of Appeals held that the issue before it was whether the trial court judge
gravely abused his discretion in dismissing the PEZA’s petition for prohibition. This
issue, according to the Court of Appeals, is properly addressed in a petition for
certiorari over which it has jurisdiction to resolve. It, therefore, maintained jurisdiction
to resolve the PEZA’s petition for certiorari.88
Although it admitted that appeal, not certiorari, was the PEZA’s proper remedy to
reverse the trial court’s decision,89 the Court of Appeals proceeded to decide the
petition for certiorari in "the broader interest of justice."90
The Court of Appeals ruled that the trial court judge gravely abused his discretion in
dismissing the PEZA’s petition for prohibition. It held that Section 21 of Presidential
Decree No. 66 and Section 51 of the Special Economic Zone Act of 1995 granted the
PEZA exemption from payment of real property taxes.91 Based on the criteria set in
Manila International Airport Authority v. Court of Appeals,92 the Court of Appeals
found that the PEZA is an instrumentality of the national government. No taxes,
therefore, could be levied on it by local government units.93
In the decision94 dated August 27, 2008, the Court of Appeals granted the PEZA’s
petition for certiorari. It set aside the trial court’s decision and nullified all the
Province’s proceedings with respect to the collection of real property taxes from the
PEZA.
The Province filed a motion for reconsideration,95 which the Court of Appeals denied
in the resolution96 dated April 16, 2009 for lack of merit.
In its petition for review on certiorari with this court,97 the Province of Bataan insists
that the Court of Appeals had no jurisdiction to take cognizance of the PEZA’s
petition for certiorari. The Province maintains that the Court of Tax Appeals had
jurisdiction to hear the PEZA’s petition since it involved a local tax case decided by a
Regional Trial Court.98
The Province reiterates that the PEZA is not exempt from payment of real property
taxes. The Province points out that the EPZA, the PEZA’s predecessor, had to be
categorically exempted from payment of real property taxes. The EPZA, therefore,
was not inherently exempt from payment of real property taxes and so is the PEZA.
Since Congress omitted from the Special Economic Zone Act of 1995 a provision
specifically exempting the PEZA from payment of real property taxes, the Province
argues that the PEZA is a taxable entity. It cited the rule in statutory construction that
provisions omitted in revised statutes are deemed repealed.99
With respect to Sections 24 and 51 of the Special Economic Zone Act of 1995
granting tax exemptions and benefits, the Province argues that these provisions only
apply to business establishments operating within special economic zones,100 not to
the PEZA.
This court ordered the PEZA tocomment on the Province’s petition for review on
certiorari.101 In its comment,102 the PEZA argues that the Court of Appeals had
jurisdiction to hear its petition for certiorari since the issue was whether the trial court
committed grave abuse of discretion in denying its petition for injunction. The PEZA
maintains thatit is exempt from payment of real property taxes under Section 21 of
Presidential Decree No. 66 and Section 51 of the Special Economic Zone Act of
1995.
The Province filed its reply,103 reiterating its arguments in its petition for review on
certiorari. On the PEZA’s motion,104 this court consolidated the petitions filed by the
City of Lapu-Lapu and the Province of Bataan.105
The issues for our resolution are the following:
I. Whether the Court of Appeals erred in dismissing the City of Lapu-Lapu’s
appeal for raising pure questions of law;
II. Whether the Regional Trial Court, Branch 111, Pasay City had jurisdiction
to hear, try, and decide the City of Lapu-Lapu’s petition for declaratory relief;
III. Whether the petition for injunction filed before the Regional Trial Court,
Branch 115, Pasay City, is a local tax case appealable to the Court of Tax
Appeals; and
IV. Whether the PEZA is exempt from payment of real property taxes.
We deny the consolidated petitions.
I.
The Court of Appeals did not err in
dismissing the City of Lapu-Lapu’s
appeal for raising pure questions of law
Under the Rules of Court, there are three modes of appeal from Regional Trial Court
decisions. The first mode is through an ordinary appeal before the Court of Appeals
where the decision assailed was rendered in the exercise of the Regional Trial
Court’s original jurisdiction. Ordinary appeals are governed by Rule 41, Sections 3 to
13 of the Rules of Court. In ordinary appeals, questions of fact or mixed questions of
fact and law may be raised.106
The second mode is through a petition for review before the Court of Appeals where
the decision assailed was rendered by the Regional Trial Court in the exercise of its
appellate jurisdiction. Rule 42 of the Rules of Court governs petitions for review
before the Court of Appeals. In petitions for review under Rule 42, questions of fact,
of law, or mixed questions of fact and law may be raised.107
The third mode is through an appealby certiorari before this court under Rule 45
where only questions of law shall be raised.108
A question of fact exists when there is doubt as to the truth or falsity of the alleged
facts.109 On the other hand, there is a question of law if the appeal raises doubt as to
the applicable law on a certain set of facts.110
Under Rule 50, Section 2, an improper appeal before the Court of Appeals is
dismissed outright and shall not be referred to the proper court:
SEC. 2. Dismissal of improper appeal to the Court of Appeals. – An appeal under
Rule 41 taken from the Regional Trial Court to the Court of Appeals raising only
questions of law shall be dismissed, issues purely of law not being reviewable by said
court. Similarly, an appeal by notice of appeal instead of by petition for review from
the appellate judgment of a Regional Trial Court shall be dismissed.
An appeal erroneously taken to the Court of Appeals shall not be transferred to the
appropriate court but shall be dismissed outright.
Rule 50, Section 2 repealed Rule 50, Section 3 of the 1964 Rules of Court, which
provided that improper appeals to the Court of Appeals shall not be dismissed but
shall be certified to the proper court for resolution:
Sec. 3. Where appealed case erroneously, brought. — Where the appealed case has
been erroneously brought to the Court of Appeals, it shall not dismiss the appeal, but
shall certify the case to the proper court, with a specific and clear statement of the
grounds therefor.
With respect to appeals by certiorari directly filed before this court but which raise
questions of fact, paragraph 4(b) of Circular No. 2-90 dated March 9, 1990 states that
this court "retains the option, in the exercise of its sound discretion and considering
the attendant circumstances, either itself to take cognizance of and decide such
issues or to refer them to the Court of Appeals for determination." In Indoyon, Jr. v.
Court of Appeals,111 we said that this court "cannot tolerate ignorance of the law on
appeals."112 It is not this court’s task to determine for litigants their proper remedies
under the Rules.113
We agree that the City availed itself of the wrong mode of appeal before the Court of
Appeals. The City raised pure questions of law in its appeal. The issue of whether the
Regional Trial Court of Pasay had jurisdiction over the PEZA’s petition for declaratory
relief is a question of law, jurisdiction being a matter of law.114 The issue of whether
the PEZA is a government instrumentality exempt from payment of real property
taxes is likewise a question of law since this question is resolved by examining the
provisions of the PEZA’s charter as well as other laws relating to the PEZA.115
The Court of Appeals, therefore, did not err in dismissing the City’s appeal pursuant
to Rule 50, Section 2 of the Rules of Court.
Nevertheless, considering the important questions involved in this case, we take
cognizance of the City’s petition for review on certiorari in the interest of justice.
In Municipality of Pateros v. The Honorable Court of Appeals,116 the Municipality of
Pateros filed an appeal under Rule 42 before the Court of Appeals, which the Court
of Appeals denied outright for raising pure questions of law. This court agreed that
the Municipality of Pateros "committed a procedural infraction"117 and should have
directly filed a petition for review on certiorari before this court. Nevertheless, "in the
interest of justice and in order to write finisto [the] controversy,"118 this court "opt[ed]
to relax the rules"119 and proceeded to decide the case. This court said:
While it is true that rules of procedure are intended to promote rather than frustrate
the ends of justice, and while the swift unclogging of the dockets of the courts is a
laudable objective, it nevertheless must not be met at the expense of substantial
justice.
The Court has allowed some meritorious cases to proceed despite inherent
procedural defects and lapses. Thisis in keeping with the principle that rules of
procedure are mere tools designed to facilitate the attainment of justice, and that
strict and rigid application ofrules which should result in technicalities that tend to
frustrate rather than promote substantial justice must always be avoided. It is a far
better and more prudent cause of action for the court to excuse a technical lapse and
afford the parties a review of the case to attain the ends of justice, rather than
dispose of the case on technicality and cause grave injustice to the parties, giving a
false impression of speedy disposal of cases while actually resulting in more delay, if
not a miscarriage of justice.120
Similar to Municipality of Pateros, we opt to relax the rules in this case. The PEZA
operates or otherwise administers special economic zones all over the country.
Resolving the substantive issue of whether the PEZA is taxable for real property
taxes will clarify the taxing powers of all local government units where special
economic zones are operated. This case, therefore, should be decided on the merits.
II.
The Regional Trial Court of Pasay had no
jurisdiction to hear, try, and decide the
PEZA’s petition for declaratory relief
against the City of Lapu-Lapu
Rule 63 of the Rules of Court governs actions for declaratory relief. Section 1 of Rule
63 provides:
SECTION 1. Who may file petition. – Any person interested under a deed, will,
contract or other written instrument, or whose rights are affected by a statute,
executive order or regulation, ordinance, or any other governmental regulation may,
before breach or violation, thereof, bring an action in the appropriate Regional Trial
Court to determine any question of construction or validity arising, and for a
declaration of his rights or duties, thereunder.
An action for reformation of an instrument, to quiet title to real property or remove
clouds therefrom, or to consolidate ownership under Article 1607 of the Civil Code,
may be brought under this Rule.
The court with jurisdiction over petitions for declaratory relief is the Regional Trial
Court, the subject matter of litigation in an action for declaratory relief being incapable
of pecuniary estimation.121 Section 19 of the Judiciary Reorganization Act of 1980
provides:
SEC. 19. Jurisdiction in Civil Cases. – Regional Trial Courts shall exercise exclusive
original jurisdiction:
(1) In all civil actions in which the subject of litigation is incapable of pecuniary
estimation[.]
Consistent with the law, the Rules state that a petition for declaratory relief is filed "in
the appropriate Regional Trial Court."122
A special civil action for declaratory relief is filed for a judicial determination of any
question of construction or validity arising from, and for a declaration of rights and
duties, under any of the following subject matters: a deed, will, contract or other
written instrument, statute, executive order or regulation, ordinance, orany other
governmental regulation.123 However, a declaratory judgment may issue only if there
has been "no breach of the documents in question."124 If the contract or statute
subject matter of the action has already been breached, the appropriate ordinary civil
action must be filed.125 If adequate relief is available through another form of action or
proceeding, the other action must be preferred over an action for declaratory relief.126
In Ollada v. Central Bank of the Philippines,127 the Central Bank issued CB-IED Form
No. 5 requiring certified public accountants to submit an accreditation under oath
before they were allowed to certify financial statements submitted to the bank.
Among those financial statements the Central Bank disallowed were those certified
by accountant Felipe B. Ollada.128 Claiming that the requirement "restrained the
legitimate pursuit of one’s trade,"129
Ollada filed a petition for declaratory relief against the Central Bank.
This court ordered the dismissal of Ollada’s petition "without prejudice to [his] seeking
relief in another appropriate action."130 According to this court, Ollada’s right had
already been violated when the Central Bank refused to accept the financial
statements he prepared. Since there was already a breach, a petition for declaratory
relief was not proper. Ollada must pursue the "appropriate ordinary civil action or
proceeding."131 This court explained:
Petitioner commenced this action as, and clearly intended it to be one for Declaratory
Relief under the provisions of Rule 66 of the Rules of Court. On the question of when
a special civil action of this nature would prosper, we have already held that the
complaint for declaratory relief will not prosper if filed after a contract, statute or right
has been breached or violated. In the present case such is precisely the situation
arising from the facts alleged in the petition for declaratory relief. As vigorously
claimed by petitioner himself, respondent had already invaded or violated his right
and caused him injury — all these giving him a complete cause of action enforceable
in an appropriate ordinary civil action or proceeding. The dismissal of the action was,
therefore, proper in the lightof our ruling in De Borja vs. Villadolid, 47 O.G. (5) p.
2315, and Samson vs. Andal, G.R. No. L-3439, July 31, 1951, where we held that an
action for declaratory relief should be filed before there has been a breach of a
contract, statutes or right, and that it is sufficient tobar such action, that there had
been a breach — which would constitute actionable violation. The rule is that an
action for Declaratory Relief is proper only if adequate relief is not available through
the means of other existing forms of action or proceeding (1 C.J.S. 1027-1028).132
It is also required that the parties to the action for declaratory relief be those whose
rights or interests are affected by the contract or statute in question.133 "There must
be an actual justiciable controversy or the ‘ripening seeds’ of one"134 between the
parties. The issue between the parties "must be ripe for judicial determination."135 An
action for declaratory relief based on theoreticalor hypothetical questions cannot be
filed for our courts are not advisory courts.136
In Republic v. Roque,137 this court dismissed respondents’ petition for declaratory
relief for lack of justiciable controversy. According to this court, "[the respondents’]
fear of prospective prosecution [under the Human Security Act] was solely based on
remarks of certain government officials which were addressed to the general
public."138
In Velarde v. Social Justice Society,139 this court refused to resolve the issue of
"whether or not [a religious leader’s endorsement] of a candidate for elective office or
in urging or requiring the members of his flock to vote for a specific candidate is
violative [of the separation clause]."140 According to the court, there was no justiciable
controversy and ordered the dismissal of the Social Justice Society’s petition for
declaratory relief. This court explained: Indeed, SJS merely speculated or anticipated
without factual moorings that, as religious leaders, the petitioner and his co-
respondents below had endorsed or threatened to endorse a candidate or candidates
for elective offices; and that such actual or threatened endorsement "will enable
[them] to elect men to public office who [would] in turn be forever beholden to their
leaders, enabling them to control the government"[;] and "pos[ing] a clear and
present danger ofserious erosion of the people’s faith in the electoral process[;] and
reinforc[ing] their belief that religious leaders determine the ultimate result of
elections," which would then be violative of the separation clause.
Such premise is highly speculative and merely theoretical, to say the least. Clearly, it
does not suffice to constitute a justiciable controversy. The Petition does not even
allege any indication or manifest intent on the part of any of the respondents below to
champion an electoral candidate, or to urge their so-called flock to vote for, or not to
vote for, a particular candidate. It is a time-honored rule that sheer speculation does
not give rise to an actionable right.
Obviously, there is no factual allegation that SJS’ rights are being subjected to any
threatened, imminent and inevitable violation that should be prevented by the
declaratory relief sought. The judicial power and duty of the courts to settle actual
controversies involving rights that are legally demandable and enforceable cannot be
exercised when there is no actual or threatened violation of a legal right.
All that the 5-page SJS Petition prayed for was "that the question raised in paragraph
9 hereof be resolved." In other words, it merely sought an opinion of the trial court on
whether the speculated acts of religious leaders endorsing elective candidates for
political offices violated the constitutional principle on the separation of church and
state. SJS did not ask for a declaration of its rights and duties; neither did it pray for
the stoppage of any threatened violation of its declared rights. Courts, however, are
proscribed from rendering an advisory opinion.141 In sum, a petition for declaratory
relief must satisfy six requisites:
[F]irst, the subject matter of the controversy must be a deed, will, contract or other
written instrument, statute, executive order or regulation, or ordinance; second, the
terms of said documents and the validity thereof are doubtful and require judicial
construction; third, there must have been no breach of the documents in question;
fourth, there must be an actual justiciable controversy or the "ripening seeds" of one
between persons whose interests are adverse; fifth, the issue must be ripe for judicial
determination; and sixth, adequate relief is not available through other means or
other forms of action or proceeding.142 (Emphases omitted)
We rule that the PEZA erred in availing itself of a petition for declaratory relief against
the City. The City had already issued demand letters and real property tax
assessment against the PEZA, in violation of the PEZA’s alleged tax-exempt status
under its charter. The Special Economic Zone Act of 1995, the subject matter of
PEZA’s petition for declaratory relief, had already been breached. The trial court,
therefore, had no jurisdiction over the petition for declaratory relief. There are several
aspects of jurisdiction.143 Jurisdiction over the subject matter is "the power to hear
and determine cases of the general class to which the proceedings in question
belong."144 It is conferred by law, which may either be the Constitution or a
statute.145 Jurisdiction over the subject matter means "the nature of the cause of
action and the relief sought."146 Thus, the cause of action and character of the relief
sought as alleged in the complaint are examinedto determine whether a court had
jurisdiction over the subject matter.147 Any decision rendered by a court without
jurisdiction over the subjectmatter of the action is void.148
Another aspect of jurisdiction is jurisdiction over the person. It is "the power of [a]
court to render a personal judgment or to subject the parties in a particular action to
the judgment and other rulings rendered in the action."149 A court automatically
acquires jurisdiction over the person of the plaintiff upon the filing of the initiatory
pleading.150 With respect to the defendant, voluntary appearance in court or a valid
service of summons vests the court with jurisdiction over the defendant’s
person.151 Jurisdiction over the person of the defendant is indispensable in actions in
personamor those actions based on a party’s personal liability.152 The proceedings in
an action in personamare void if the court had no jurisdiction over the person of the
defendant.153
Jurisdiction over the resor the thing under litigation is acquired either "by the seizure
of the property under legal process, whereby it is brought into actual custody of the
law; or asa result of the institution of legal proceedings, in which the power of the
court is recognized and made effective."154 Jurisdiction over the res is necessary in
actions in remor those actions "directed against the thing or property or status of a
person and seek judgments with respect thereto as against the whole world."155 The
proceedings in an action in rem are void if the court had no jurisdiction over the thing
under litigation.156
In the present case, the Regional Trial Court had no jurisdiction over the subject
matter of the action, specifically, over the remedy sought. As this court explained in
Malana v. Tappa:157
. . . an action for declaratory relief presupposes that there has been no actual breach
of the instruments involved or of rights arising thereunder. Since the purpose of an
action for declaratory relief is to secure an authoritative statement of the rights and
obligations of the parties under a statute, deed, or contract for their guidance in the
enforcement thereof, or compliance therewith, and not to settle issues arising from an
alleged breach thereof, it may be entertained only before the breach or violation of
the statute, deed, or contract to which it refers. A petition for declaratory relief gives a
practical remedy for ending controversies that have not reached the state where
another relief is immediately available; and supplies the need for a form of action that
will set controversies at rest before they lead to a repudiation of obligations, an
invasion of rights, and a commission of wrongs.
Where the law or contract has already been contravened prior to the filing of an
action for declaratory relief, the courts can no longer assume jurisdiction over the
action. In other words, a court has no more jurisdiction over an action for declaratory
relief if its subject has already been infringed or transgressed before the institution of
the action.158 (Emphasis supplied)
The trial court should have dismissed the PEZA’s petition for declaratory relief for
lack of jurisdiction.
Once an assessment has already been issued by the assessor, the proper remedy of
a taxpayer depends on whether the assessment was erroneous or illegal.
An erroneous assessment "presupposes that the taxpayer is subject to the tax but is
disputing the correctness of the amount assessed."159 With an erroneous
assessment, the taxpayer claims that the local assessor erred in determining any of
the items for computing the real property tax, i.e., the value of the real property or the
portion thereof subject to tax and the proper assessment levels. In case of an
erroneous assessment, the taxpayer must exhaust the administrative remedies
provided under the Local Government Code before resorting to judicial action.
The taxpayer must first pay the realproperty tax under protest. Section 252 of the
Local Government Code provides:
SECTION 252. Payment Under Protest. -(a) No protest shall be entertained unless
the taxpayer first paysthe tax. There shall be annotated on the tax receipts the words
"paid under protest". The protest in writing must be filed within thirty (30) days from
payment of the tax to the provincial, city treasurer or municipal treasurer, in the case
of a municipality within Metropolitan Manila Area, who shall decide the protest within
sixty (60) days from receipt.
(b) The tax or a portion thereof paidunder protest, shall be held in trust by the
treasurer concerned.
(c) In the event that the protest is finally decided in favor of the taxpayer, the
amount or portion of the tax protested shall be refunded to the protestant, or
applied as tax credit against his existing or future tax liability.
(d) In the event that the protest is denied or upon the lapse of the sixty day
period prescribed in subparagraph (a), the taxpayer may avail of the
remedies as provided for in Chapter 3, Title II, Book II of this Code.
Should the taxpayer find the action on the protest unsatisfactory, the taxpayer may
appeal with the Local Board of Assessment Appeals within 60 days from receipt of
the decision on the protest:
SECTION 226. Local Board of Assessment Appeals. - Any owner or person having
legal interest in the property who is not satisfied with the action of the provincial, city
or municipal assessor in the assessment of his property may, within sixty (60) days
from the date of receipt of the written notice of assessment, appeal to the Board of
Assessment Appeals of the provincial or city by filing a petition under oath in the form
prescribed for the purpose, together with copies of the tax declarations and such
affidavits or documents submitted in support of the appeal.
Payment under protest and appeal to the Local Board of Assessment Appeals are
"successive administrative remedies to a taxpayer who questions the correctness of
an assessment."160 The Local Board Assessment Appeals shall not entertain an
appeal "without the action of the local assessor"161 on the protest.
If the taxpayer is still unsatisfied after appealing with the Local Board of Assessment
Appeals, the taxpayer may appeal with the Central Board of Assessment Appeals
within 30 days from receipt of the Local Board’s decision:
SECTION 229. Action by the Local Board of Assessment Appeals. - (a) The Board
shall decide the appeal within one hundred twenty (120) days from the date of receipt
of such appeal. The Board, after hearing, shall render its decision based on
substantial evidence or such relevant evidence on record as a reasonable mind might
accept as adequate to support the conclusion. (b) In the exercise ofits appellate
jurisdiction, the Board shall have the power to summon witnesses, administer oaths,
conduct ocular inspection, take depositions, and issue subpoena and subpoena
duces tecum. The proceedings of the Board shall be conducted solely for the
purpose of ascertaining the facts without necessarily adhering to technical rules
applicable in judicial proceedings.
(c) The secretary of the Board shall furnish the owner of the property or the person
having legal interest therein and the provincial or city assessor with a copy of the
decision of the Board. In case the provincial or city assessor concurs in the revision
or the assessment, it shall be his duty to notify the owner of the property or the
person having legal interest therein of such factusing the form prescribed for the
purpose. The owner of the property or the person having legal interest therein or the
assessor who is not satisfied with the decision of the Board, may, within thirty (30)
days after receipt of the decision of said Board, appeal to the Central Board of
Assessment Appeals, as herein provided. The decision of the Central Board shall be
final and executory. (Emphasis supplied)
On the other hand, an assessment is illegal if it was made without authority under the
law.162 In case of an illegal assessment, the taxpayer may directly resort to judicial
action without paying under protest the assessed tax and filing an appeal with the
Local and Central Board of Assessment Appeals.
In Ty v. Trampe,163 the Municipal Assessor of Pasig sent Alejandro B. Ty a notice of
assessment with respect to Ty’s real properties in Pasig. Without resorting to the
administrative remedies under the Local Government Code, Ty filed before the
Regional Trial Court a petition, praying that the trial court nullify the notice of
assessment. In assessing the real property taxes due, the Municipal Assessor used a
schedule of market values solely prepared by him. This, Ty argued, was void for
being contrary to the Local Government Code requiring that the schedule of market
values be jointly prepared by the provincial, city, and municipal assessors of the
municipalities within the Metropolitan Manila Area.
This court ruled that the assessmentwas illegal for having been issued without
authority of the Municipal Assessor. Reconciling provisions of the Real Property Tax
Code and the Local Government Code, this court held that the schedule of market
valuesmust be jointly prepared by the provincial, city, and municipal assessors of the
municipalities within the Metropolitan Manila Area.
As to the issue of exhaustion of administrative remedies, this court held that Ty did
not err in directly resorting to judicial action. According to this court, payment under
protest is required only "where there is a question as to the reasonableness of the
amount assessed."164 As to appeals before the Local and Central Board of
Assessment Appeals, they are "fruitful only where questions of fact are involved."165
Ty raised the issue of the legality of the notice of assessment, an issue that did not
go into the reasonableness of the amount assessed. Neither did the issue involve a
question of fact. Ty raised a question of law and, therefore, need not resort to the
administrative remedies provided under the Local Government Code.
In the present case, the PEZA did not avail itself of any of the remedies against a
notice of assessment. A petition for declaratory relief is not the proper remedy once a
notice of assessment was already issued.
Instead of a petition for declaratory relief, the PEZA should have directly resorted to a
judicial action. The PEZA should have filed a complaint for injunction, the
"appropriate ordinary civil action"166 to enjoin the City from enforcing its demand and
collecting the assessed taxes from the PEZA. After all, a declaratory judgment as to
the PEZA’s tax-exempt status is useless unless the City isenjoined from enforcing its
demand.
Injunction "is a judicial writ, process or proceeding whereby a party is ordered to do
or refrain from doing a certain act."167 "It may be the main action or merely a
provisional remedy for and as incident in the main action."168 The essential requisites
of a writ of injunction are: "(1) there must be a right in esseor the existence of a right
to be protected; and (2) the act against which the injunction is directed to constitute a
violation of such right."169
We note, however, that the City confused the concepts of jurisdiction and venue in
contending that the Regional Trial Court of Pasay had no jurisdiction because the
real properties involved in this case are located in the City of Lapu-Lapu.
On the one hand, jurisdiction is "the power to hear and determine cases of the
general class to which the proceedings in question belong."170 Jurisdiction is a matter
of substantive law.171 Thus, an action may be filed only with the court or tribunal
where the Constitution or a statute says it can be brought.172 Objections to jurisdiction
cannot be waived and may be brought at any stage of the proceedings, even on
appeal.173 When a case is filed with a court which has no jurisdiction over the action,
the court shall motu propriodismiss the case.174
On the other hand, venue is "the place of trial or geographical location in which an
action or proceeding should be brought." 175 In civil cases, venue is a matter of
procedural law.176 A party’s objections to venue must be brought at the earliest
opportunity either in a motion to dismiss or in the answer; otherwise the objection
shall be deemed waived.177 When the venue of a civil action is improperly laid, the
court cannot motu propriodismiss the case.178
The venue of an action depends on whether the action is a real or personal action.
Should the action affect title to or possession of real property, or interest therein, it is
a real action. The action should be filed in the proper court which has jurisdiction over
the area wherein the real property involved, or a portion thereof, is situated.179 If the
action is a personal action, the action shall be filed with the proper court where the
plaintiff or any of the principal plaintiffs resides, or where the defendant or any of the
principal defendants resides, or in the case of a non-resident defendant where he
may be found, at the election of the plaintiff.180
The City was objecting to the venue of the action, not to the jurisdiction of the
Regional Trial Court of Pasay. In essence, the City was contending that the PEZA’s
petition is a real action as it affects title to or possession of real property, and,
therefore, the PEZA should have filed the petition with the Regional Trial Court of
Lapu-Lapu City where the real properties are located. However, whatever objections
the City has against the venue of the PEZA’s action for declaratory relief are already
deemed waived. Objections to venue must be raised at the earliest possible
opportunity.181 The City did not file a motion to dismiss the petition on the ground that
the venue was improperly laid. Neither did the City raise this objection in its answer.
In any event, the law sought to be judicially interpreted in this case had already been
breached. The Regional Trial Court of Pasay, therefore, had no jurisdiction over the
PEZA’s petition for declaratory relief against the City.
III.
The Court of Appeals had no jurisdiction
over the PEZA’s petition for certiorari
against the Province of Bataan
Appeal is the remedy "to obtain a reversal or modification of a judgment on the
merits."182 A judgment on the merits is one which "determines the rights and liabilities
of the parties based on the disclosed facts, irrespective of the formal, technical or
dilatory objections."183 It is not even necessary that the case proceeded to trial.184 So
long as the "judgment is general"185 and "the parties had a full legal opportunity to be
heard on their respective claims and contentions,"186 the judgment is on the merits.
On the other hand, certiorari is a special civil action filed to annul or modify a
proceeding of a tribunal, board, or officer exercising judicial or quasi-judicial
functions.187 Certiorari, which in Latin means "to be more fully informed,"188 was
originally a remedy in the common law. This court discussed the history of the
remedy of certiorari in Spouses Delos Santos v. Metropolitan Bank and Trust
Company:189
In the common law, from which the remedy of certiorari evolved, the writ of certiorari
was issued out of Chancery, or the King’s Bench, commanding agents or officers of
the inferior courts to return the record of a cause pending before them, so as to give
the party more sure and speedy justice, for the writ would enable the superior court to
determine froman inspection of the record whether the inferior court’s judgment was
rendered without authority. The errors were of such a nature that, if allowed to stand,
they would result in a substantial injury to the petitioner to whom no other remedy
was available. If the inferior court acted without authority, the record was then revised
and corrected in matters of law. The writ of certiorari was limited to cases in which
the inferior court was said to be exceeding its jurisdiction or was not proceeding
according to essential requirements of law and would lie only to review judicial or
quasi-judicial acts.190
In our jurisdiction, the term "certiorari" is used in two ways. An appeal before this
court raising pure questions of law is commenced by filing a petition for reviewon
certiorari under Rule 45 of the Rules of Court. An appeal by certiorari, which
continues the proceedings commenced before the lower courts,191 is filed to reverse
or modify judgments or final orders.192 Under the Rules, an appeal by certiorarimust
be filed within 15 days from notice of the judgment or final order, or of the denial of
the appellant’s motion for new trial or reconsideration.193
A petition for certiorari under Rule 65, on the other hand, is an independent and
original action filed to set aside proceedings conducted without or in excess of
jurisdiction or with grave abuse of discretion amounting to lack or excess of
jurisdiction.194 Under the Rules, a petition for certiorari may only be filed if there is no
appeal or any plain, speedy, or adequate remedy in the ordinary course of law.195 The
petition must be filed within 60 days from notice of the judgment, order, or
resolution.196
Because of the longer period to file a petition for certiorari, some litigants attempt to
file petitions for certiorari as substitutes for lost appeals by certiorari. However, Rule
65 is clear that a petition for certiorari will not prosper if appeal is available. Appealis
the proper remedy even if the error, or one of the errors, raised is grave abuse of
discretion on the part of the court rendering judgment.197 If appeal is available, a
petition for certiorari cannot be filed.
In this case, the trial court’s decision dated January 31, 2007 is a judgment on the
merits. Based on the facts disclosed by the parties, the trial court declared the PEZA
liable to the Province of Bataan for real property taxes. The PEZA’s proper remedy
against the trial court’s decision, therefore, is appeal.
Since the PEZA filed a petition for certiorari against the trial court’s decision, it
availed itself of the wrong remedy. As the Province of Bataan contended, the trial
court’s decision dated January 31, 2007 "is only an error of judgment appealable to
the higher level court and may not be corrected by filing a petition for
certiorari."198 That the trial court judge allegedly committed grave abuse of discretion
does not make the petition for certiorari the correct remedy. The PEZA should
haveraised this ground in an appeal filed within 15 days from notice of the assailed
resolution.
This court, "in the liberal spirit pervading the Rules of Court and in the interest of
substantial justice,"199 has treated petitions for certiorari as an appeal: "(1) if the
petition for certiorari was filed within the reglementary period within which to file a
petition for review on certiorari; (2) when errors of judgment are averred; and (3)
when there is sufficient reason to justify the relaxation of the rules."200 Considering
that "the nature of an action is determined by the allegationsof the complaint or the
petition and the character of the relief sought,"201 a petition which "actually avers
errors of judgment rather than errors than that of jurisdiction"202 may be considered a
petition for review.
However, suspending the application of the Rules has its disadvantages. Relaxing
procedural rules may reduce the "effective enforcement of substantive
rights,"203 leading to "arbitrariness, caprice, despotism, or whimsicality in the
settlement of disputes."204 Therefore, for this court to suspend the application of the
Rules, the accomplishment of substantial justice must outweigh the importance of
predictability of court procedures.
The PEZA’s petition for certiorari may be treated as an appeal. First, the petition for
certiorari was filed withinthe 15-day reglementary period for filing an appeal. The
PEZA filed its petition for certiorari before the Court of Appeals on October 15,
2007,205 which was 12 days from October 3, 2007206 when the PEZA had notice of the
trial court’s order denying the motion for reconsideration.
Second, the petition for certiorari raised errors of judgment. The PEZA argued that
the trial court erred in ruling that it is not exempt from payment of real property taxes
given Section 21 of Presidential Decree No. 66 and Sections 11 and 51 of the
Special Economic Zone Act of 1995.207
Third, there is sufficient reason to relax the rules given the importance of the
substantive issue presented in this case.
However, the PEZA’s petition for certiorari was filed before the wrong court. The
PEZA should have filed its petition before the Court of Tax Appeals.
The Court of Tax Appeals has the exclusive appellate jurisdiction over local tax cases
decided by Regional Trial Courts. Section 7, paragraph (a)(3) of Republic Act No.
1125, as amended by Republic Act No. 9282, provides:
Sec. 7. Jurisdiction. – The [Court of Tax Appeals] shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
 ....
3. Decisions, orders or resolutions of the Regional Trial Courts in local tax
cases originally decided or resolved by them in the exercise of their original
or appellate jurisdiction[.]
The local tax cases referred to in Section 7, paragraph (a)(3) of Republic Act No.
1125, as amended, include cases involving real property taxes. Real property
taxation is governed by Book II of the Local Government Code on "Local Taxation
and Fiscal Matters." Real property taxes are collected by the Local Treasurer,208 not
by the Bureau of Internal Revenue in charge of collecting national internal revenue
taxes, fees, and charges.209
Section 7, paragraph (a)(5) of Republic Act No. 1125, as amended by Republic Act
No. 9282, separately provides for the exclusive appellate jurisdiction of the Court of
Tax Appeals over decisions of the Central Board of Assessment Appeals involving
the assessment or collection of real property taxes:
Sec. 7. Jurisdiction. – The [Court of Tax Appeals] shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
....
5. Decisions of the Central Board of Assessment Appeals in the exercise of its
appellate jurisdiction over cases involving the assessment and taxation of real
property originally decided by the provincial or city board of assessment appeals[.]
This separate provision, nevertheless, does not bar the Court of Tax Appeals from
taking cognizance of trial court decisions involving the collection of real property tax
cases. Sections 256210 and 266211 of the Local Government Code expressly allow
localgovernment units to file "in any court of competent jurisdiction" civil actions to
collect basic real property taxes. Should the trial court rule against them, local
government units cannot be barred from appealing before the Court of Tax Appeals –
the "highly specialized body specifically created for the purpose of reviewing tax
cases."212
We have also ruled that the Court of Tax Appeals, not the Court of Appeals, has the
exclusive original jurisdiction over petitions for certiorari assailing interlocutory orders
issued by Regional Trial Courts in a local tax case. We explained in The City of
Manila v. Hon. Grecia-Cuerdo213 that while the Court of Tax Appeals has no express
grant of power to issue writs of certiorari under Republic Act No. 1125,214 as
amended, the tax court’s judicial power as defined in the Constitution215 includes the
power to determine "whether or not there has been grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of the [Regional Trial Court] in
issuing an interlocutory order of jurisdiction in cases falling within the exclusive
appellate jurisdiction of the tax court."216 We further elaborated:
Indeed, in order for any appellate court to effectively exercise its appellate
jurisdiction, it must have the authority to issue, among others, a writ of certiorari. In
transferring exclusive jurisdiction over appealed tax cases to the CTA, it can
reasonably be assumed that the law intended to transfer also such power as is
deemed necessary, if not indispensable, in aid of such appellate jurisdiction. There is
no perceivable reason why the transfer should only be considered as partial, not
total.
....
If this Court were to sustain petitioners' contention that jurisdiction over their certiorari
petition lies with the CA, this Court would be confirming the exercise by two judicial
bodies, the CA and the CTA, of jurisdiction over basically the same subject matter –
precisely the split-jurisdiction situation which is anathema to the orderly
administration of justice.The Court cannot accept that such was the legislative
motive, especially considering that the law expressly confers on the CTA, the tribunal
with the specialized competence over tax and tariff matters, the role of judicial review
over local tax cases without mention of any other court that may exercise such
power. Thus, the Court agrees with the ruling of the CA that since appellate
jurisdiction over private respondents' complaint for tax refund is vested in the CTA, it
follows that a petition for certiorari seeking nullification of an interlocutory order
issued in the said case should, likewise, be filed with the same court. To rule
otherwise would lead to an absurd situation where one court decides an appeal in the
main case while another court rules on an incident in the very same case.
Stated differently, it would be somewhat incongruent with the pronounced judicial
abhorrence to split jurisdiction to conclude that the intention of the law is to divide the
authority over a local tax case filed with the RTC by giving to the CA or this Court
jurisdiction to issue a writ of certiorari against interlocutory orders of the RTC but
giving to the CTA the jurisdiction over the appeal from the decision of the trial court in
the same case. It is more in consonance with logic and legal soundness to conclude
that the grant of appellate jurisdiction to the CTA over tax cases filed in and decided
by the RTC carries withit the power to issue a writ of certiorari when necessary in aid
of such appellate jurisdiction. The supervisory power or jurisdiction of the CTA to
issue a writ of certiorari in aid of its appellate jurisdiction should co-exist with, and be
a complement to, its appellate jurisdiction to review, by appeal, the final orders and
decisionsof the RTC, in order to have complete supervision over the acts of the
latter.217 (Citations omitted)
In this case, the petition for injunction filed before the Regional Trial Court of Pasay
was a local tax case originally decided by the trial court in its original jurisdiction.
Since the PEZA assailed a judgment, not an interlocutory order, of the Regional Trial
Court, the PEZA’s proper remedy was an appeal to the Court of Tax Appeals.
Considering that the appellate jurisdiction of the Court of Tax Appeals is to the
exclusion of all other courts, the Court of Appeals had no jurisdiction to take
cognizance of the PEZA’s petition. The Court of Appeals acted without jurisdiction in
rendering the decision in CA-G.R. SP No. 100984. Its decision in CA-G.R. SP No.
100984 is void.218
The filing of appeal in the wrong court does not toll the period to appeal.
Consequently, the decision of the Regional Trial Court, Branch 115, Pasay City,
became final and executory after the lapse of the 15th day from the PEZA’s receipt of
the trial court’s decision.219 The denial of the petition for injunction became final and
executory.
IV.
The remedy of a taxpayer depends on the
stage in which the local government unit
is enforcing its authority to impose real
property taxes
The proper remedy of a taxpayer depends on the stage in which the local
government unit is enforcing its authority to collect real property taxes. For the
guidance of the members of the bench and the bar, we reiterate the taxpayer’s
remedies against the erroneous or illegal assessment of real property taxes.
Exhaustion of administrative remedies under the Local Government Code is
necessary in cases of erroneous assessments where the correctness of the amount
assessed is assailed. The taxpayer must first pay the tax then file a protest with the
Local Treasurer within 30 days from date of payment of tax.220 If protest is denied or
upon the lapse of the 60-day period to decide the protest, the taxpayer may appeal to
the Local Board of Assessment Appeals within 60 days from the denial of the protest
or the lapse of the 60-day period to decide the protest.221 The Local Board of
Assessment Appeals has 120 days to decide the appeal.222
If the taxpayer is unsatisfied withthe Local Board’s decision, the taxpayer may appeal
before the Central Board of Assessment Appeals within 30 days from receipt of the
Local Board’s decision.223
The decision of the Central Board of Assessment Appeals is appealable before the
Court of Tax Appeals En Banc.224 The appeal before the Court of Tax Appeals shall
be filed following the procedure under Rule 43 of the Rules of Court.225
The Court of Tax Appeals’ decision may then be appealed before this court through a
petition for review on certiorari under Rule 45 of the Rules of Court raising pure
questions of law.226
In case of an illegal assessment where the assessment was issued without authority,
exhaustion of administrative remedies is not necessary and the taxpayer may directly
resort to judicial action.227 The taxpayer shall file a complaint for injunction before the
Regional Trial Court228 to enjoin the local government unit from collecting real
property taxes.
The party unsatisfied with the decision of the Regional Trial Court shall file an appeal,
not a petition for certiorari, before the Court of Tax Appeals, the complaint being a
local tax case decided by the Regional Trial Court.229 The appeal shall be filed within
fifteen (15) days from notice of the trial court’s decision.
The Court of Tax Appeals’ decision may then be appealed before this court through a
petition for review on certiorari under Rule 45 of the Rules of Court raising pure
questions of law.230
In case the local government unit has issued a notice of delinquency, the taxpayer
may file a complaint for injunction to enjoin the impending sale of the real property at
public auction. In case the local government unit has already sold the property at
public auction, the taxpayer must first deposit with the court the amount for which the
real property was sold, together with interest of 2% per month from the date ofsale to
the time of the institution of action. The taxpayer may then file a complaint to assail
the validity of the public auction.231 The decisions of the Regional Trial Court in these
cases shall be appealable before the Court of Tax Appeals,232 and the latter’s
decisions appealable before this court through a petition for review on certiorari under
Rule 45 of the Rules of Court.233
V.
The PEZA is exempt from payment of
real property taxes
The jurisdictional errors in this case render these consolidated petitions moot. We do
not review void decisions rendered without jurisdiction.
However, the PEZA alleged that several local government units, including the City of
Baguio and the Province of Cavite, have issued their respective real property tax
assessments against the PEZA. Other local government units will likely follow suit,
and either the PEZA or the local government units taxing the PEZA may file their
respective actions against each other.
In the interest of judicial economy234 and avoidance of conflicting decisions involving
the same issues,235 we resolve the substantive issue of whether the PEZA is exempt
from payment of real property taxes.
Real property taxes are annual taxes levied on real property such as lands, buildings,
machinery, and other improvements not otherwise specifically exempted under the
Local Government Code.236 Real property taxes are ad valorem, with the amount
charged based on a fixed proportion of the value of the property.237 Under the law,
provinces, cities, and municipalities within the Metropolitan Manila Area have the
power to levy real property taxes within their respective territories.238
The general rule is that real properties are subject to real property taxes. This is true
especially since the Local Government Code has withdrawn exemptions from real
property taxes of all persons, whether natural or juridical:
SEC. 234. Exemptions from Real Property Tax. – The following are exempted from
payment of real property tax:
(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, nonprofit or religious cemeteries and all lands, buildings,
and improvements actually, directly, and exclusively used for religious,
charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively
used by local water districts and government-owned or – controlled
corporations engaged in the supply and distribution of water and/or
generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided under
R.A. No. 6938; and
(e) Machinery and equipment usedfor pollution control and environmental
protection.
Except as provided herein, any exemption from payment of real property taxes
previously granted to, or presently enjoyed by, all persons, whether natural or
juridical, including government-owned or -controlled corporations are hereby
withdrawn upon the effectivity of this Code. (Emphasis supplied)
The person liable for real property taxes is the "taxable person who had actual or
beneficial use and possession [of the real property for the taxable period,] whether or
not [the person owned the property for the period he or she is being taxed]."239
The exceptions to the rule are provided in the Local Government Code. Under
Section 133(o), local government units have no power to levy taxes of any kind on
the national government, its agencies and instrumentalities and local government
units:
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. –
Unless otherwise provided herein, the exercise of taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:
....
(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units.
Specifically on real property taxes, Section 234 enumerates the persons and real
property exempt from real property taxes:
SEC. 234. Exemptions from Real Property Tax. – The following are exempted from
payment of real property tax:
(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, nonprofitor religious cemeteries and all lands, buildings,
and improvements actually, directly, and exclusively used for religious,
charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively
used by local water districts and government-owned or – controlled
corporations engaged in the supply and distribution of water and/or
generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided under
R.A. No. 6938; and
(e) Machinery and equipment used for pollution control and environmental
protection.
Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by, all persons, whether natural or
juridical, including all government-owned or -controlled corporations are hereby
withdrawn upon the effectivity of this Code. (Emphasis supplied)
For persons granted tax exemptions or incentives before the effectivity of the Local
Government Code, Section 193 withdrew these tax exemption privileges. These
persons consist of both natural and juridical persons, including government-owned or
controlled corporations:
SEC. 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 registered under R.A.
6938, non stock and non profit hospitals and educational institutions, are hereby
withdrawn upon effectivity of this Code.
As discussed, Section 234 withdrew all tax privileges with respect to real property
taxes. Nevertheless, local government units may grant tax exemptions under such
terms and conditions asthey may deem necessary:
SEC. 192. Authority to Grant Tax Exemption Privileges. – Local government units
may, through ordinances duly approved, grant tax exemptions, incentives or reliefs
under such terms and conditions as they may deem necessary.
In Mactan Cebu International Airport Authority v. Hon. Marcos,240 this court classified
the exemptions from real property taxes into ownership, character, and usage
exemptions. Ownership exemptions are exemptions based on the ownership of the
real property. The exemptions of real property owned by the Republic of the
Philippines, provinces, cities, municipalities, barangays, and registered cooperatives
fall under this classification.241 Character exemptions are exemptions based on the
character of the real property. Thus, no real property taxes may be levied on
charitable institutions, houses and temples of prayer like churches, parsonages, or
convents appurtenant thereto, mosques, and non profitor religious cemeteries.242
Usage exemptions are exemptions based on the use of the real property. Thus, no
real property taxes may be levied on real property such as: (1) lands and buildings
actually, directly, and exclusively used for religious, charitable or educational
purpose; (2) 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 (3) machinery and equipment used for pollution control and
environmental protection.243
Persons may likewise be exempt from payment of real properties if their charters,
which were enacted or reenacted after the effectivity of the Local Government Code,
exempt them payment of real property taxes.244
V.
(A) The PEZA is an instrumentality of the national government
An instrumentality is "any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter."245
Examples of instrumentalities of the national government are the Manila International
Airport Authority,246 the Philippine Fisheries Development Authority,247 the
Government Service Insurance System,248 and the Philippine Reclamation
Authority.249 These entities are not integrated within the department framework but
are nevertheless vested with special functions to carry out a declared policy of the
national government.
Similarly, the PEZA is an instrumentality of the national government. It is not
integrated within the department framework but is an agency attached to the
Department of Trade and Industry.250 Book IV, Chapter 7, Section 38(3)(a) of the
Administrative Code of 1987 defines "attachment": SEC. 38. Definition of
Administrative Relationship.– Unless otherwise expressly stated in the Code or in
other laws defining the special relationships of particular agencies, administrative
relationships shall be categorized and defined as follows:
....
(3) Attachment.– (a) This refers to the lateral relationship between the department or
its equivalent and the attached agency or corporation for purposes of policy and
program coordination. The coordination may be accomplished by having the
department represented in the governing board of the attached agency or
corporation, either as chairman or as a member, with or without voting rights, if this is
permitted by the charter; having the attached corporation or agency comply with a
system of periodic reporting which shall reflect the progress of the programs and
projects; and having the department or its equivalent provide general policies through
its representative in the board, which shall serve as the framework for the internal
policies of the attached corporation or agency[.]
Attachment, which enjoys "a larger measure of independence"251 compared with
other administrative relationships such as supervision and control, is further
explained in Beja, Sr. v. Court of Appeals:252
An attached agency has a larger measure of independence from the Department to
which it is attached than one which is under departmental supervision and control or
administrative supervision. This is borne out by the "lateral relationship" between the
Department and the attached agency. The attachment is merely for "policy and
program coordination." With respect to administrative matters, the independence of
an attached agency from Departmental control and supervision is further reinforced
by the fact that even an agency under a Department’s administrative supervision is
free from Departmental interference with respect to appointments and other
personnel actions "in accordance with the decentralization of personnel functions"
under the Administrative Code of 1987. Moreover, the Administrative Code explicitly
provides that Chapter 8 of Book IV on supervision and control shall not apply to
chartered institutions attached to a Department.253
With the PEZA as an attached agency to the Department of Trade and Industry, the
13-person PEZA Board is chaired by the Department Secretary.254 Among the
powers and functions of the PEZA is its ability to coordinate with the Department of
Trade and Industry for policy and program formulation and implementation.255 In
strategizing and prioritizing the development of special economic zones, the PEZA
coordinates with the Department of Trade and Industry.256
The PEZA also administers its own funds and operates autonomously, with the PEZA
Board formulating and approving the PEZA’s annual budget.257 Appointments and
other personnel actions in the PEZA are also free from departmental interference,
with the PEZA Board having the exclusive and final authority to promote, transfer,
assign and reassign officers of the PEZA.258
As an instrumentality of the national government, the PEZA is vested with special
functions or jurisdiction by law. Congress created the PEZA to operate, administer,
manage and develop special economic zones in the Philippines.259 Special economic
zones are areas with highly developed or which have the potential to be developed
into agro-industrial, industrial tourist/recreational, commercial, banking, investment
and financial centers.260 By operating, administering, managing, and developing
special economic zones which attract investments and promote use of domestic
labor, the PEZA carries out the following policy of the Government: SECTION 2.
Declaration of Policy. — It is the declared policy of the government to translate into
practical realities the following State policies and mandates in the 1987 Constitution,
namely:
(a) "The State recognizes the indispensable role of the private sector,
encourages private enterprise, and provides incentives to needed
investments." (Sec. 20, Art. II)
(b) "The State shall promote the preferential use of Filipino labor, domestic
materials and locally produced goods, and adopt measures that help make
them competitive." (Sec. 12, Art. XII) In pursuance of these policies, the
government shall actively encourage, promote, induce and accelerate a
sound and balanced industrial, economic and social development of the
country in order to provide jobs to the people especially those in the rural
areas, increase their productivity and their individual and family income, and
thereby improve the level and quality of their living condition through the
establishment, among others, of special economic zones in suitable and
strategic locations in the country and through measures that shall effectively
attract legitimate and productive foreign investments.261
Being an instrumentality of the national government, the PEZA cannot be taxed by
local government units.
Although a body corporate vested with some corporate powers,262 the PEZA is not a
government-owned or controlled corporation taxable for real property taxes.
Section 2(13) of the Introductory Provisions of the Administrative Code of 1987
defines the term "government-owned or controlled corporation":
SEC. 2. General Terms Defined. – Unless the specific words of the text, or the
context as a whole, or a particular statute, shall require a different meaning:
....
(13) Government-owned or controlled corporation refers to any agency organized as
a stock or non-stock corporation, vested with functions relating to public needs
whether governmental or proprietary in nature, and owned by the Government
directly or through its instrumentalities either wholly, or, where applicable as in the
case of stock corporations, to the extent of at least fifty-one (51) per cent of its capital
stock: Provided, That government owned or controlled corporations may be further
categorized by the Department of the Budget, the Civil Service Commission, and the
Commission on Audit for purposes of the exercise and discharge of their respective
powers, functions and responsibilities with respect to such corporations.
Government entities are created by law, specifically, by the Constitution or by statute.
In the case of government-owned or controlled corporations, they are incorporated by
virtue of special charters263 to participate in the market for special reasons which may
be related to dysfunctions or inefficiencies of the market structure. This is to adjust
reality as against the concept of full competition where all market players are price
takers. Thus, under the Constitution, government-owned or controlled corporations
are created in the interest of the common good and should satisfy the test of
economic viability.264 Article XII, Section 16 of the Constitution provides:
Section 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the
common good and subject to the test of economic viability.
Economic viability is "the capacity to function efficiently in business."265 To be
economically viable, the entity "should not go into activities which the private sector
can do better."266
To be considered a government-owned or controlled corporation, the entity must
have been organized as a stock or non-stock corporation.267
Government instrumentalities, on the other hand, are also created by law but partake
of sovereign functions. When a government entity performs sovereign functions, it
need not meet the test of economic viability. In Manila International Airport Authority
v. Court of Appeals,268 this court explained:
In contrast, government instrumentalities vested with corporate powers and
performing governmental orpublic functions need not meet the test of economic
viability. These instrumentalities perform essential public services for the common
good, services that every modern State must provide its citizens. These
instrumentalities need not be economically viable since the government may even
subsidize their entire operations. These instrumentalities are not the "government-
owned or controlled corporations" referred to in Section 16, Article XII of the 1987
Constitution.
Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental
or public functions. Congress has plenary authority to create government
instrumentalities vested with corporate powers provided these instrumentalities
perform essential government functions or public services. However, when the
legislature creates through special charters corporations that perform economic or
commercial activities, such entities — known as "government-owned or controlled
corporations" — must meetthe test of economic viability because they compete in the
market place.
....
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to
the Constitutional Commission the purpose of this test, as follows:
MR. OPLE: Madam President, the reason for this concern is really that when the
government creates a corporation, there is a sense in which this corporation
becomes exempt from the test of economic performance. We know what happened
in the past. If a government corporation loses, then it makes its claim upon the
taxpayers' money through new equity infusions from the government and what is
always invoked is the common good. That is the reason why this year, out of a
budget of ₱115 billion for the entire government, about ₱28 billion of this will go into
equity infusions to support a few government financial institutions. And this is all
taxpayers' money which could have been relocated to agrarian reform, to social
services like health and education, to augment the salaries of grossly underpaid
public employees. And yet this is all going down the drain.
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the
"common good," this becomes a restraint on future enthusiasts for state capitalism to
excuse themselves from the responsibility of meeting the market test so that they
become viable. And so, Madam President, I reiterate, for the committee's
consideration and I am glad that I am joined in this proposal by Commissioner Foz,
the insertion of the standard of "ECONOMIC VIABILITY OR THE ECONOMIC
TEST," together with the common good.
....
Clearly, the test of economic viability does not apply to government entities vested
with corporate powers and performing essential public services. The State is
obligated to render essential public services regardless of the economic viability of
providing such service. The noneconomic viability of rendering such essential public
service does not excuse the State from withholding such essential services from the
public.269 (Emphases and citations omitted)
The law created the PEZA’s charter. Under the Special Economic Zone Act of 1995,
the PEZA was established primarily to perform the governmental function of
operating,administering, managing, and developing special economic zones to attract
investments and provide opportunities for preferential use of Filipino labor.
Under its charter, the PEZA was created a body corporate endowed with some
corporate powers. However, it was not organized as a stock270 or non-
stock271 corporation. Nothing in the PEZA’s charter provides that the PEZA’s capital is
divided into shares.272 The PEZA also has no members who shall share in the
PEZA’s profits.
The PEZA does not compete with other economic zone authorities in the country.
The government may even subsidize the PEZA’s operations. Under Section 47 of the
Special Economic Zone Act of 1995, "any sum necessary to augment [the PEZA’s]
capital outlay shall be included in the General Appropriations Act to be treated as an
equity of the national government."273
The PEZA, therefore, need not be economically viable. It is not a government-owned
or controlled corporation liable for real property taxes.
V. (B)
The PEZA assumed the non-profit character, including the tax exempt status, of the
EPZA
The PEZA’s predecessor, the EPZA, was declared non-profit in character with all its
revenues devoted for its development, improvement, and maintenance. Consistent
with this non-profit character, the EPZA was explicitly declared exempt from real
property taxes under its charter. Section 21 of Presidential Decree No. 66 provides:
Section 21. Non-profit Character of the Authority; Exemption from Taxes. The
Authority shall be non-profit and shall devote and use all its returns from its capital
investment, as well as excess revenues from its operations, for the development,
improvement and maintenance and other related expenditures of the Authority to pay
its indebtedness and obligations and in furtherance and effective implementation of
the policy enunciated in Section 1 of this Decree. In consonance therewith, the
Authority is hereby declared exempt:
....
(b) From all income taxes, franchise taxes, realty taxes and all other kinds of taxes
and licenses to be paid to the National Government, its provinces, cities,
municipalities and other government agencies and instrumentalities[.]
The Special Economic Zone Act of 1995, on the other hand, does not specifically
exempt the PEZA from payment of real property taxes.
Nevertheless, we rule that the PEZA is exempt from real property taxes by virtue of
its charter. A provision in the Special Economic Zone Act of 1995 explicitly exempting
the PEZA is unnecessary. The PEZA assumed the real property exemption of the
EPZA under Presidential Decree No. 66.
Section 11 of the Special Economic Zone Act of 1995 mandated the EPZA "to evolve
into the PEZA in accordance with the guidelines and regulations set forth in an
executive order issued for this purpose." President Ramos then issued Executive
Order No. 282 in 1995, ordering the PEZA to assume the EPZA’s powers, functions,
and responsibilities under Presidential Decree No. 66 not inconsistent with the
Special Economic Zone Act of 1995:
SECTION 1. Assumption of EPZA’s Powers and Functions by PEZA. All the powers,
functions and responsibilities of EPZA as provided under its Charter, Presidential
Decree No. 66, as amended, insofar as they are not inconsistent with the
powers,functions and responsibilities of the PEZA, as mandated under Republic Act
No. 7916, shall hereafter be assumed and exercised by the PEZA. Henceforth, the
EPZA shall be referred to as the PEZA.
The following sections of the Special Economic Zone Act of 1995 provide for the
PEZA’s powers,functions, and responsibilities:
SEC. 5. Establishment of ECOZONES. – To ensure the viability and geographical
dispersal of ECOZONES through a system of prioritization, the following areas are
initially identified as ECOZONES, subject to the criteria specified in Section 6:
....
The metes and bounds of each ECOZONE are to be delineated and more particularly
described in a proclamation to be issued by the President of the Philippines, upon the
recommendation of the Philippine Economic Zone Authority (PEZA), which shall be
established under this Act, in coordination with the municipal and / or city council,
National Land Use Coordinating Committee and / or the Regional Land Use
Committee.
SEC. 6. Criteria for the Establishment of Other ECOZONES. – In addition to the
ECOZONES identified in Section 5 of this Act, other areas may be established as
ECOZONES in a proclamation to be issued by the President of the Philippines
subject to the evaluation and recommendation of the PEZA, based on a detailed
feasibility and engineering study which must conform to the following criteria:
(a) The proposed area must be identified as a regional growth center in the
Medium-Term Philippine Development Plan or by the Regional Development
Council;
(b) The existence of required infrastructure in the proposed ECOZONE, such
as roads, railways, telephones, ports, airports, etc., and the suitability and
capacity of the proposed site to absorb such improvements;
(c) The availability of water source and electric power supply for use of the
ECOZONE;
(d) The extent of vacant lands available for industrial and commercial
development and future expansion of the ECOZONE as well as of lands
 adjacent to the ECOZONE available for development of residential areas for
the ECOZONE workers;
(e) The availability of skilled, semi-skilled and non-skilled trainable labor force
in and around the ECOZONE;
(f) The area must have a significant incremental advantage over the existing
economic zones and its potential profitability can be established;
(g) The area must be strategically located; and
(h) The area must be situated where controls can easily be established to
curtail smuggling activities.
Other areas which do not meet the foregoing criteria may be established as
ECOZONES: Provided, That the said area shall be developed only through local
government and/or private sector initiative under any of the schemes allowed in
Republic Act No. 6957 (the build-operate-transfer law), and without any financial
exposure on the part of the national government: Provided, further, That the area can
be easily secured to curtail smuggling activities: Provided, finally, That after five (5)
years the area must have attained a substantial degree of development, the
indicators of which shall be formulated by the PEZA.
SEC. 7. ECOZONE to be a Decentralized Agro-Industrial, Industrial, Commercial /
Trading, Tourist, Investment and Financial Community. - Within the framework of the
Constitution, the interest of national sovereignty and territorial integrity of the
Republic, ECOZONE shall be developed, as much as possible, into a decentralized,
self-reliant and self-sustaining industrial, commercial/trading, agro-industrial, tourist,
banking, financial and investment center with minimum government intervention.
Each ECOZONE shall be provided with transportation, telecommunications, and
other facilities needed to generate linkage with industries and employment
opportunitiesfor its own inhabitants and those of nearby towns and cities.
The ECOZONE shall administer itself on economic, financial, industrial, tourism
development and such other matters within the exclusive competence of the national
government.
The ECOZONE may establish mutually beneficial economic relations with other
entities within the country, or, subject to the administrative guidance of the
Department of Foreign Affairs and/or the Department of Trade and Industry, with
foreign entities or enterprises.
Foreign citizens and companies owned by non-Filipinos in whatever proportion may
set up enterprises in the ECOZONE, either by themselves or in joint venture with
Filipinos in any sector of industry, international trade and commerce within the
ECOZONE. Their assets, profits and other legitimate interests shall be protected:
Provided, That the ECOZONE through the PEZA may require a minimum investment
for any ECOZONE enterprises in freely convertible currencies: Provided, further, That
the new investment shall fall under the priorities, thrusts and limits provided for in the
Act.
SEC. 8. ECOZONE to be Operated and Managed as Separate Customs Territory. –
The ECOZONE shall be managed and operated by the PEZA as separate customs
territory.
The PEZA is hereby vested with the authority to issue certificate of origin for products
manufactured or processed in each ECOZONE in accordance with the prevailing
rules or origin, and the pertinent regulations of the Department of Trade and Industry
and/or the Department of Finance.
SEC. 9. Defense and Security. – The defense of the ECOZONE and the security of
its perimeter fence shall be the responsibility of the national government in
coordination with the PEZA. Military forces sent by the national government for the
purpose of defense shall not interfere in the internal affairs of any of the ECOZONE
and expenditure for these military forces shall be borne by the national government.
The PEZA may provide and establish the ECOZONES’ internal security and
firefighting forces.
SEC. 10. Immigration. – Any investor within the ECOZONE whose initial investment
shall not be less than One Hundred Fifty Thousand Dollars ($150,000.00), his/her
spouse and dependent children under twenty-one (21) years of age shall be granted
permanent resident status within the ECOZONE. They shall have freedom of ingress
and egress to and from the ECOZONE without any need of special authorization from
the Bureau of Immigration.
The PEZA shall issue working visas renewable every two (2) years to foreign
executives and other aliens, processing highly-technical skills which no Filipino within
the ECOZONE possesses, as certified by the Department of Labor and Employment.
The names of aliens granted permanent resident status and working visas by the
PEZA shall be reported to the Bureau of Immigration within thirty (30) days after
issuance thereof.
SEC. 13. General Powers and Functions of the Authority. – The PEZA shall have the
following powers and functions:
(a) To operate, administer, manage and develop the ECOZONE according to
the principles and provisions set forth in this Act;
(b) To register, regulate and supervise the enterprises in the ECOZONE in
an efficient and decentralized manner;
(c) To coordinate with local government units and exercise general
supervision over the development, plans, activities and operations of the
ECOZONES, industrial estates, export processing zones, free trade zones,
and the like;
(d) In coordination with local government units concerned and appropriate
agencies, to construct,acquire, own, lease, operate and maintain on its own
or through contract, franchise, license, bulk purchase from the private sector
and build-operate-transfer scheme or joint venture, adequate facilities and
infrastructure, such as light and power systems, water supply and distribution
systems, telecommunication and transportation, buildings, structures,
warehouses, roads, bridges, ports and other facilities for the operation and
development of the ECOZONE;
(e) To create, operate and/or contractto operate such agencies and
functional units or offices of the authority as it may deem necessary;
(f) To adopt, alter and use a corporate seal; make contracts, lease, own or
otherwise dispose of personal or real property; sue and be sued; and
otherwise carry out its duties and functions as provided for in this Act;
(g) To coordinate the formulation and preparation of the development plans
of the different entities mentioned above;
(h) To coordinate with the National Economic Development Authority
(NEDA), the Department of Trade and Industry (DTI), the Department of
Science and Technology (DOST), and the local government units and
appropriate government agencies for policy and program formulation and
implementation; and
(i) To monitor and evaluate the development and requirements of entities in
subsection (a) and recommend to the local government units or other
appropriate authorities the location, incentives, basic services, utilities and
infrastructure required or to be made available for said entities.
SEC. 17. Investigation and Inquiries. – Upon a written formal complaint made under
oath, which on its face provides reasonable basis to believe that some anomaly or
irregularity might have been committed, the PEZA or the administrator of the
ECOZONE concerned, shall have the power to inquire into the conduct of firms or
employees of the ECOZONE and to conduct investigations, and for that purpose may
subpoena witnesses, administer oaths, and compel the production of books, papers,
and other evidences: Provided, That to arrive at the truth, the investigator(s) may
grant immunity from prosecution to any person whose testimony or whose
possessions of documents or other evidence is necessary or convenient to determine
the truth in any investigation conducted by him or under the authority of the PEZA or
the administrator of the ECOZONE concerned.
SEC. 21. Development Strategy of the ECOZONE. - The strategy and priority of
development of each ECOZONE established pursuant to this Act shall be formulated
by the PEZA, in coordination with the Department of Trade and Industry and the
National Economic and Development Authority; Provided, That such development
strategy is consistent with the priorities of the national government as outlined in the
medium-term Philippine development plan. It shall be the policy of the government
and the PEZA to encourage and provide Incentives and facilitate private sector
participation in the construction and operation of public utilities and infrastructure in
the ECOZONE, using any of the schemes allowed in Republic Act No. 6957 (the
build-operate-transfer law).
SEC. 22. Survey of Resources. The PEZA shall, in coordination with appropriate
authorities and neighboring cities and municipalities, immediately conduct a survey of
the physical, natural assets and potentialities of the ECOZONE areas under its
jurisdiction.
SEC. 26. Domestic Sales. – Goods manufactured by an ECOZONE enterprise shall
be made available for immediate retail sales in the domestic market, subject to
payment of corresponding taxes on the raw materials and other regulations that may
be adopted by the Board of the PEZA. However, in order to protect the domestic
industry, there shall be a negative list of Industries that willbe drawn up by the PEZA.
Enterprises engaged in the industries included in the negative list shall not be
allowed to sell their products locally. Said negative list shall be regularly updated by
the PEZA.
The PEZA, in coordination with the Department of Trade and Industry and the Bureau
of Customs, shall jointly issue the necessary implementing rules and guidelines for
the effective Implementation of this section.
SEC. 29. Eminent Domain. – The areas comprising an ECOZONE may be expanded
or reduced when necessary. For this purpose, the government shall have the power
to acquire, either by purchase, negotiation or condemnation proceedings, any private
lands within or adjacent to the ECOZONE for:
a. Consolidation of lands for zone development purposes;
b. Acquisition of right of way to the ECOZONE; and
c. The protection of watershed areas and natural assets valuable to the
prosperity of the ECOZONE.
If in the establishment of a publicly-owned ECOZONE, any person or group of
persons who has been occupying a parcel of land within the Zone has to be evicted,
the PEZA shall provide the person or group of persons concerned with proper
disturbance compensation: Provided, however, That in the case of displaced agrarian
reform beneficiaries, they shall be entitled to the benefits under the Comprehensive
Agrarian Reform Law, including but not limited to Section 36 of Republic Act No.
3844, in addition to a homelot in the relocation site and preferential employment in
the project being undertaken.
SEC. 32. Shipping and Shipping Register. – Private shipping and related business
including private container terminals may operate freely in the ECOZONE, subject
only to such minimum reasonable regulations of local application which the PEZA
may prescribe.
The PEZA shall, in coordination with the Department of Transportation and
Communications, maintain a shipping register for each ECOZONE as a business
register of convenience for ocean-going vessels and issue related certification.
Ships of all sizes, descriptions and nationalities shall enjoy access to the ports of the
ECOZONE, subject only to such reasonable requirement as may be prescribed by
the PEZA In coordination with the appropriate agencies of the national government.
SEC. 33. Protection of Environment. - The PEZA, in coordination with the appropriate
agencies, shall take concrete and appropriate steps and enact the proper measure
for the protection of the local environment.
SEC. 34. Termination of Business. - Investors In the ECOZONE who desire to
terminate business or operations shall comply with such requirements and
procedures which the PEZA shall set, particularly those relating to the clearing of
debts. The assets of the closed enterprise can be transferred and the funds con be
remitted out of the ECOZONE subject to the rules, guidelines and procedures
prescribed jointly by the Bangko Sentral ng Pilipinas, the Department of Finance and
the PEZA.
SEC. 35. Registration of Business Enterprises. - Business enterprises within a
designated ECOZONE shall register with the PEZA to avail of all incentives and
benefits provided for in this Act.
SEC. 36. One Stop Shop Center. - The PEZA shall establish a one stop shop center
for the purpose of facilitating the registration of new enterprises in the ECOZONE.
Thus, all appropriate government agencies that are Involved In registering, licensing
or issuing permits to investors shall assign their representatives to the ECOZONE to
attend to Investor’s requirements.
SEC. 39. Master Employment Contracts. - The PEZA, in coordination with the
Department of Tabor and Employment, shall prescribe a master employment contract
for all ECOZONE enterprise staff members and workers, the terms of which provide
salaries and benefits not less than those provided under this Act, the Philippine Labor
Code, as amended, and other relevant issuances of the national government.
SEC. 41. Migrant Worker. - The PEZA, in coordination with the Department of Labor
and Employment, shall promulgate appropriate measures and programs leading to
the expansion of the services of the ECOZONE to help the local governments of
nearby areas meet the needs of the migrant workers.
SEC. 42. Incentive Scheme. - An additional deduction equivalent to one- half (1/2) of
the value of training expenses incurred in developing skilled or unskilled labor or for
managerial or other management development programs incurred by enterprises in
the ECOZONE can be deducted from the national government's share of three
percent (3%) as provided In Section 24.
The PEZA, the Department of Labor and Employment, and the Department of
Finance shall jointly make a review of the incentive scheme provided In this section
every two (2) years or when circumstances so warrant.
SEC. 43. Relationship with the Regional Development Council. - The PEZA shall
determine the development goals for the ECOZONE within the framework of national
development plans, policies and goals, and the administrator shall, upon approval by
the PEZA Board, submit the ECOZONE plans, programs and projects to the regional
development council for inclusion in and as inputs to the overall regional
development plan.
SEC. 44. Relationship with the Local Government Units. - Except as herein provided,
the local government units comprising the ECOZONE shall retain their basic
autonomy and identity. The cities shall be governed by their respective charters and
the municipalities shall operate and function In accordance with Republic Act No.
7160, otherwise known as the Local Government Code of 1991.
SEC. 45. Relationship of PEZA to Privately-Owned Industrial Estates. – Privately-
owned industrial estates shall retain their autonomy and independence and shall be
monitored by the PEZA for the implementation of incentives.
SEC. 46. Transfer of Resources. - The relevant functions of the Board of Investments
over industrial estates and agri-export processing estates shall be transferred to the
PEZA. The resources of government owned Industrial estates and similar bodies
except the Bases Conversion Development Authority and those areas identified
under Republic Act No. 7227, are hereby transferred to the PEZA as the holding
agency. They are hereby detached from their mother agencies and attached to the
PEZA for policy, program and operational supervision.
The Boards of the affected government-owned industrial estates shall be phased out
and only the management level and an appropriate number of personnel shall be
retained.
Government personnel whose services are not retained by the PEZA or any
government office within the ECOZONE shall be entitled to separation pay and such
retirement and other benefits theyare entitled to under the laws then in force at the
time of their separation: Provided, That in no case shall the separation pay be less
than one and one-fourth (1 1/4) month of every year of service.
The non-profit character of the EPZA under Presidential Decree No. 66 is not
inconsistent with any of the powers, functions, and responsibilities of the PEZA. The
EPZA’s non-profit character, including the EPZA’s exemption from real property
taxes, must be deemed assumed by the PEZA.
In addition, the Local Government Code exempting instrumentalities of the national
government from real property taxes was already in force274 when the PEZA’s charter
was enacted in 1995. It would have been redundant to provide for the PEZA’s
exemption in its charter considering that the PEZA is already exempt by virtue of
Section 133(o) of the Local Government Code.
As for the EPZA, Commonwealth Act No. 470 or the Assessment Law was in force
when the EPZA’s charter was enacted. Unlike the Local Government Code,
Commonwealth Act No. 470 does not contain a provision specifically exempting
instrumentalities of the national government from payment of real property taxes.275 It
was necessary to put an exempting provision in the EPZA’s charter.
Contrary to the PEZA’s claim, however, Section 24 of the Special Economic Zone Act
of 1995 is not a basis for the PEZA’s exemption. Section 24 of the Special Economic
Zone Act of 1995 provides:
Sec. 24. Exemption from National and Local Taxes. — Except for real property taxes
on land owned by developers, no taxes, local and national, shall be imposed on
business establishments operating within the ECOZONE. In lieu thereof, five percent
(5%) of the gross income earned by all business enterprises within the
ECOZONEshall be paid and remitted as follows:
(a) Three percent (3%) to the National Government;
(b) Two percent (2%) which shall be directly remitted by the business
establishments to the treasurer's office of the municipality or city where the
enterprise is located. (Emphasis supplied)
Tax exemptions provided under Section 24 apply only to business establishments
operating within economic zones. Considering that the PEZA is not a business
establishment but an instrumentality performing governmental functions, Section 24
is inapplicable to the PEZA. Also, contrary to the PEZA’s claim, developers
ofeconomic zones, whether public or private developers, are liable for real property
taxes on lands they own. Section 24 does not distinguish between a public and
private developer. Thus, courts cannot distinguish.276 Unless the public developer is
exempt under the Local Government Code or under its charter enacted after the
Local Government Code’s effectivity, the public developer must pay real property
taxes on their land.
At any rate, the PEZA cannot be taxed for real property taxes even if it acts as a
developer or operator of special economic zones. The PEZA is an instrumentality of
the national government exempt from payment of real property taxes under Section
133(o) of the Local Government Code. As this court said in Manila International
Airport Authority, "there must be express language in the law empowering local
governments to tax national government instrumentalities. Any doubt whether such
power exists is resolved against local governments."277
V. (C)
Real properties under the PEZA’s title are owned by the Republic of the Philippines
Under Section 234(a) of the LocalGovernment Code, real properties owned by the
Republic of the Philippines are exempt from real property taxes:
SEC. 234. Exemptions from Real Property Tax. – The following are exempted from
payment of real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person[.]
Properties owned by the state are either property of public dominion or patrimonial
property. Article 420 of the Civil Code of the Philippines enumerates property of
public dominion:
Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents,
ports and bridges constructed by the State, banks, shores, roadsteads, and
others of similar character;
(2) Those which belong to the State, without belonging for public use, and
are intended for some public service or for the development of the national
wealth.
Properties of public dominion are outside the commerce of man. These properties
are exempt from "levy, encumbrance or disposition through public or private
sale."278 As this court explained in Manila International Airport Authority:
Properties of public dominion, being for public use, are not subject to levy,
encumbrance or disposition through public or private sale. Any encumbrance, levy on
execution or auction sale of any property of public dominion is void for being contrary
to public policy. Essential public services will stop if properties of public dominion are
subject to encumbrances, foreclosures and auction sale[.]279
On the other hand, all other properties of the state that are not intended for public use
or are not intended for some public service or for the development of the national
wealth are patrimonial properties. Article 421 of the Civil Code of the Philippines
provides:
Art. 421. All other property of the State, which is not of the character stated in the
preceding article, is patrimonial property.
Patrimonial properties are also properties of the state, but the state may dispose of
its patrimonial property similar to private persons disposing of their property.
Patrimonial properties are within the commerce of man and are susceptible to
prescription, unless otherwise provided.280
In this case, the properties sought to be taxed are located in publicly owned
economic zones. These economic zones are property of public dominion. The City
seeks to tax properties located within the Mactan Economic Zone,281 the site of which
was reserved by President Marcos under Proclamation No. 1811, Series of 1979.
Reserved lands are lands of the public domain set aside for settlement or public use,
and for specific public purposes by virtue of a presidential proclamation.282 Reserved
lands are inalienable and outside the commerce of man,283 and remain property of
the Republic until withdrawn from publicuse either by law or presidential
proclamation.284 Since no law or presidential proclamation has been issued
withdrawing the site of the Mactan Economic Zone from public use, the property
remains reserved land.
As for the Bataan Economic Zone, the law consistently characterized the property as
a port. Under Republic Act No. 5490, Congress declared Mariveles, Bataan "a
principal port of entry"285 to serve as site of a foreign trade zone where foreign and
domestic merchandise may be brought in without being subject to customs and
internal revenue laws and regulations of the Philippines.286
Section 4 of Republic Act No. 5490 provided that the foreign trade zone in Mariveles,
Bataan "shall at all times remain to be owned by the Government":
SEC. 4. Powers and Duties.– The Foreign Trade Zone Authority shall have the
following powers and duties:
a. To fix and delimit the site of the Zone which at all times remain to be owned by the
Government, and which shall have a contiguous and adequate area with well defined
and policed boundaries, with adequate enclosures to segregate the Zone from the
customs territory for protection of revenues, together with suitable provisions for
ingress and egress of persons, conveyance, vessels and merchandise sufficient for
the purpose of this Act[.] (Emphasis supplied)
The port in Mariveles, Bataan then became the Bataan Economic Zone under the
Special Economic Zone Act of 1995.287 Republic Act No. 9728 then converted the
Bataan Economic Zone into the Freeport Area of Bataan.288
A port of entry, where imported goods are unloaded then introduced in the market for
public consumption, is considered property for public use. Thus, Article 420 of the
Civil Code classifies a port as property of public dominion. The Freeport Area of
Bataan, where the government allows tax and duty-free importation of goods,289 is
considered property of public dominion. The Freeport Area of Bataan is owned by the
state and cannot be taxed under Section 234(a) of the Local Government Code.
Properties of public dominion, even if titled in the name of an instrumentality as in this
case, remain owned by the Republic of the Philippines. If property registered in the
name of an instrumentality is conveyed to another person,the property is considered
conveyed on behalf of the Republic of the Philippines. Book I, Chapter 12, Section 48
of the Administrative Code of 1987 provides:
SEC. 48. Official Authorized to Convey Real Property. – Whenever real property of
the government is authorized by law to be conveyed, the deed of conveyance shall
be executed in behalf of the government by the following:
....
(2) For property belonging to the Republic of the Philippines, but titled in the name of
any political subdivision orof any corporate agency or instrumentality, by the
executive head of the agency or instrumentality. (Emphasis supplied)
In Manila International Airport Authority, this court explained:
[The exemption under Section 234(a) of the Local Government Code] should be read
in relation with Section 133(o) of the same Code, which prohibits local governments
from imposing "[t]axes, fess or charges of any kind on the National Government, its
agencies and instrumentalitiesx x x." The real properties owned by the Republic are
titled either in the name of the Republic itself or in the name of agencies or
instrumentalities of the National Government.The Administrative Code allows real
property owned by the Republic to be titled in the name of agencies or
instrumentalities of the national government. Such real properties remained owned
by the Republic of the Philippines and continue to be exempt from real estate tax.
The Republic may grant the beneficialuse of its real property to an agency or
instrumentality of the national government. This happens when title of the real
property is transferred to an agency or instrumentality even as the Republic remains
the owner of the real property. Such arrangement does not result in the loss of the
tax exemption/ Section 234(a) of the Local Government Code states that real
property owned by the Republic loses its tax exemption only if the "beneficial use
thereof has been granted, for consideration or otherwise, to a taxable person." . . .
290
 (Emphasis in the original; italics supplied)
Even the PEZA’s lands and buildings whose beneficial use have been granted to
other persons may not be taxed with real property taxes. The PEZA may only lease
its lands and buildings to PEZA-registered economic zone enterprises and
entities.291 These PEZA-registered enterprises and entities, which operate within
economic zones, are not subject to real property taxes. Under Section 24 of the
Special Economic Zone Act of 1995, no taxes, whether local or national, shall be
imposed on all business establishments operating within the economic zones: SEC.
24. Exemption from National and Local Taxes. – Except for real property on land
owned by developers, no taxes, local and national, shall be imposed on business
establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of
the gross income earned by all business enterprises within the ECOZONE shall be
paid and remitted as follows:
a. Three percent (3%) to the National Government;
b. Two percent (2%) which shall be directly remitted by the business establishments
to the treasurer’s office of the municipality or city where the enterprise is
located.292 (Emphasis supplied)
In lieu of revenues from real property taxes, the City of Lapu-Lapu collects two-fifths
of 5% final tax on gross income paid by all business establishments operating
withinthe Mactan Economic Zone:
SEC. 24. Exemption from National and Local Taxes. – Except for real property on
land owned by developers, no taxes, local and national, shall be imposed on
business establishments operating within the ECOZONE. In lieu thereof, five percent
(5%) of the gross income earned by all business enterprises within the ECOZONE
shall be paid and remitted as follows:
For its part, the Province of Bataan collects a fifth of the 5% final tax on gross income
paid by all business establishments operating within the Freeport Area of Bataan:
Section 6. Imposition of a Tax Rate of Five Percent (5%) on Gross Income Earned. -
No taxes, local and national, shall be imposed on business establishments operating
withinthe FAB. In lieu thereof, said business establishments shall pay a five percent
(5%) final tax on their gross income earned in the following percentages:
(a) One per centum (1%) to the National Government;
(b) One per centum (1%) to the Province of Bataan;
(c) One per centum (1%) to the treasurer's office of the Municipality of
Mariveles; and
(d) Two per centum (2%) to the Authority of the Freeport of Area of
Bataan.294 (Emphasis supplied)
Petitioners, therefore, are not deprived of revenues from the operations of economic
zones within their respective territorial jurisdictions.
The national government ensured that loeal government units comprising economic
zones shall retain their basic autonomy and identity.295
All told, the PEZA is an instrumentality of the national
government.1âwphi1 Furthermore, the lands owned by the PEZA are real properties
owned by the Republic of the Philippines. The City of Lapu-Lapu and the Province of
Bataan cannot collect real property taxes from the PEZA.
WHEREFORE, the consolidated petitions are DENIED.
SO ORDERED.

a. Three percent (3%) to the National Government;

b. Two percent (2%) which shall be directly remitted by the business

establishments to the treasurer’s office of the municipality or city where the
enterprise is located.293 (Emphasis supplied)