FULL TEXT

PELIZLOY VS PROVINCE OF BENGUET

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 Comi,- 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 (} Decision 2 G.R. No. 183137 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 1 Section 187. Procedure for Approval and Effectivity of Tax, Ordinances and Revenue Measures; Mandatory Public Hearings. - The procedure for approval of local tax ordinances and revenue Decision 3 G.R. No. 183137 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: x x x (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 measures shall be in accordance with the provisions of this Code: Provided, That public hearings shall be conducted for the purpose prior to the enactment thereof: Provided, further, That any question on the constitutionality or legality of tax

ordinances or revenue measures may be raised on appeal within thirty (30) days from the effectivity thereof to the Secretary of Justice who shall render a decision within sixty (60) days from the date of receipt of the appeal: Provided, however, That such appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of the tax, fee, or charge levied therein: Provided, finally, That within thirty (30) days after receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction. 2 Rollo, p. 91. Decision 4 G.R. No. 183137 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: x x x (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 3 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. 4 Rollo, p. 92. 5 Id. at 101. Decision 5 G.R. No. 183137 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 6 Id. at 123. 7 Reyes v. Almanzor, 273 Phil. 558, 564 (1991). 8 Icard v. City Council of Baguio, 83 Phil 870, 873 (1949) and City of Iloilo v. Villanueva, 105 Phil. 337 (1959). 9 CONSTITUTION, Art. X, Sec. 1. 10 Supra note 8. 11 Id., citing Cu Unjieng vs. Patstone, 42 Phil. 818, 830 (1922); Pacific Commercial Co.vs. Romualdez, 49

Phil. 917, 924 (1927); Batangas Transportation Co. vs. Provincial Treasure of Batangas, 52 Phil. 190,196 (1928); Baldwin vs. Coty Council 53 Ala., p. 437; State vs. Smith 31 Lowa, p. 493; 38 Am Jur pp. 68, 72-73. Decision 6 G.R. No. 183137 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; 12 National Power Corporation v. City of Cabanatuan, 449 Phil. 233, 248 (2003), citing Mactan Cebu International Airport Authority vs. Marcos, G.R. No. 120082, September 11. 1996, 261 SCRA 667, 680, citing Cruz, Isagani A., CONSTITUTIONAL LAW (1991) at 84. 13 CONSTITUTION, Art. X, Sec. 5. 14 Section 3. The Congress shall enact a local government code which shall provide for a more responsive and accountable local government structure instituted through a system of decentralization with effective mechanisms of recall, initiative, and referendum, allocate among the different local government units their powers, responsibilities, and resources, and provide for the qualifications, election, appointment and removal, term, salaries, powers and functions and duties of local officials, and all other matters relating to the organization and operation of the local units. Decision 7 G.R. No. 183137 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 15 534 Phil. 517, 536 (2006), citing Commissioner of Internal Revenue v. Solidbank Corporation, G.R. No. 148191, November 25, 2003. 16 TITLE V OTHER PERCENTAGE TAXES x x x SECTION 125. Amusement Taxes. - There shall be collected from the proprietor, lessee or operator of cockpits, cabarets, night or day clubs, boxing exhibitions, professional basketball games, Jai-Alai and racetracks, a tax equivalent to: (a) Eighteen percent (18%) in the case of cockpits; (b) Eighteen percent (18%) in the case of cabarets, night or day clubs; (c) Ten percent (10%) in the case of boxing exhibitions: Provided, however, That boxing exhibitions wherein World or Oriental Championships in any division is at stake shall be exempt from amusement tax: Provided, further, That at least one of the contenders for World or Oriental Championship is a citizen of the Philippines and said exhibitions are promoted by a citizen/s of the Philippines or by a corporation or association at least sixty percent (60%) of the capital of which is owned by such citizens; (d) Fifteen percent (15%) in the case of professional basketball games as envisioned in Presidential Decree No. 871: Provided, however, That

the tax herein shall be in lieu of all Decision 8 G.R. No. 183137 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 other percentage taxes of whatever nature and description; and (e) Thirty percent (30%) in the case of Jai-Alai and racetracks of their gross receipts, irrespective, of whether or not any amount is charged for admission. For the purpose of the amusement tax, the term "gross receipts" embraces all the receipts of the proprietor, lessee or operator of the amusement place. Said gross receipts also include income from television, radio and motion picture rights, if any. A person or entity or association conducting any activity subject to the tax herein imposed shall be similarly liable for said tax with respect to such portion of the receipts derived by him or it. The taxes imposed herein shall be payable at the end of each quarter and it shall be the duty of the proprietor, lessee or operator concerned, as well as any party liable, within twenty (20) days after the end of each quarter, to make a true and complete return of the amount of the gross receipts derived during the preceding quarter and pay the tax due thereon. Decision 9 G.R. No. 183137 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 17 Miranda v. Abaya, 370 Phil. 642, 658, citing Vera v. Cuevas, G.R. Nos. L-33693-94, May 31, 1979,

90 SCRA 379. 18 G.R. Nos. 60225-26, May 8, 1992, 208 SCRA 542 (1992). 19 Id. at 547. 20 392 Phil. 133, 141 (2000). Decision 10 G.R. No. 183137 opposed to amusement taxes imposed by the national government). In support of its contentions, it cited Section 13 of Presidential Decree No. 231, otherwise known as the Local Tax Code of 1973, (which is analogous to Section 140 of the LGC) providing the following: 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: [I]n determining the meaning of the phrase 'other places of amusement', one must refer to the prior enumeration of theaters, cinematographs, concert halls and circuses with artistic expression as their common characteristic. Professional basketball games do not fall under the same category as theaters, cinematographs, concert halls and circuses as the latter basically belong to artistic forms of entertainment while the former caters to sports and gaming.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: x x x (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 21 Id. at 366. Decision 11 G.R. No. 183137 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: [T]he power [to tax] when granted [to a province] is to be construed in strictissimi juris. Any doubt or ambiguity arising out of the term used in granting that power must be resolved against the [province]. Inferences, implications, deductions – all these – have no place in the interpretation of the taxing power of a [province].25 22 THE NEW OXFORD AMERICAN DICTIONARY (2nd ed., 2005). 23 Id. at 1571. 24 Id. at 1264. 25 Supra note 8. Decision 12 G.R.No.l83137 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, cir-cuses, cockpits, dancing halls, dancing schools, night or day clubs, and other places of amusement". In any case, the issues raised by Pelizloy are pertinent only with respect to the second paragraph of Section 59, Article X of the Tax Ordinance. Thus, there is no reason to invalidate the first paragraph of Section 59, Article X of the Tax Ordinanc.e. 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. Associate Justice Decision WE CONCUR: 13 PRESBITERO . VELASCO, JR. Assoc ·ate Justice C airperson G.R. No. 183137 ROBERTO ~ A. ABAD Associate Justice JOSE CA~NDOZA Ass~~~ Justice ATTESTATION I attest that the conclusions in the above Decision had be reached in consultation before the case was assigned to the writer of the pinion of the Court's Division. PRES BITE As ociate Justice Chairp rson, Third Division CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the conclusions in the above Dt?cision had been reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. MARIA LOURDES P. A. SERENO Chief Justice

COMMISSIONER OF INTERNAL REVENUE VS SM PRIME HOLDINGS

When the intent of the law is not apparent as worded, or when the application of the law would lead to absurdity or injustice, legislative history is all important. In such cases, courts may take judicial notice of the origin and history of the law,[1] the deliberations during the enactment,[2] as well as prior laws on the same subject matter[3] to ascertain the true intent or spirit of the law.

 This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to Republic

Act (RA) No. 9282,[4] seeks to set aside the April 30, 2008 Decision[5] and the June 24, 2008 Resolution[6] of the Court of Tax Appeals (CTA).Factual Antecedents

 Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development

Corporation (First Asia) are domestic corporations duly organized and existing under the laws of the Republic of thePhilippines. Both are engaged in the business of operating cinema houses, among others.[7]

 CTA Case No. 7079  

On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a Preliminary Assessment Notice (PAN) for value added tax (VAT) deficiency on cinema ticket sales in the amount

ofP119,276,047.40 for taxable year 2000.[8] In response, SM Prime filed a letter-protest dated December 15, 2003.[9]

On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the alleged VAT deficiency, which the latter protested in a letter dated January 14, 2004.[10]

 On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay the

VAT deficiency for taxable year 2000 in the amount of P124,035,874.12.[11]

 On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA

Case No. 7079.[12]

 CTA Case No. 7085  

On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency oncinema ticket sales for taxable year 1999 in the total amount of P35,823,680.93.[13] First Asia protested the PAN in a letter dated July 9, 2002.[14]

 Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency which

was protested by First Asia in a letter dated December 12, 2002.[15]

 On September 6, 2004, the BIR rendered a Decision denying the protest and ordering First Asia to

pay the amount of P35,823,680.93 for VAT deficiency for taxable year 1999.[16]

 Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA, docketed

as CTA Case No. 7085.[17]

 CTA Case No. 7111  

On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema ticket sales for taxable year 2000 in the amount of P35,840,895.78. First Asia protested the PAN through a letter dated April 22, 2004.[18]

 Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency.

[19] First Asia protested the same in a letter dated July 9, 2004.[20]

 On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT deficiency

in the amount of P35,840,895.78 for taxable year 2000.[21]

 This prompted First Asia to file a Petition for Review before the CTA on December 16, 2004. The

case was docketed as CTA Case No. 7111.[22]

 CTA Case No. 7272  Re: Assessment Notice No. 008-02 

A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total amount of P32,802,912.21 was issued against First Asia by the BIR. In response, First Asia filed a protest-letter datedNovember 11, 2004. The BIR then sent a Formal Letter of Demand, which was protested by First Asia on December 14, 2004.[23]

 Re: Assessment Notice No. 003-03 

A PAN for VAT deficiency on cinema ticket sales in the total amount of P28,196,376.46 for the taxable year 2003 was issued by the BIR against First Asia. In a letter dated September 23, 2004, First Asia protested the PAN. A Formal Letter of Demand was thereafter issued by the BIR to First Asia, which the latter protested through a letter dated November 11, 2004. [24]

 On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia to pay

the amounts of P33,610,202.91 and P28,590,826.50 for VAT deficiency for taxable years 2002 and 2003, respectively.[25]

 Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as CTA

Case No. 7272.[26]

 Consolidated Petitions

 The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions filed by SM Prime

and First Asia.[27]

 On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085, 7111 and 7272

with CTA Case No. 7079 on the grounds that the issues raised therein are identical and that SM Prime is a majority shareholder of First Asia. The motion was granted.[28]

 Upon submission of the parties respective memoranda, the consolidated cases were submitted for

decision on the sole issue of whether gross receipts derived from admission tickets by cinema/theater operators or proprietors are subject to VAT.[29]

 Ruling of the CTA First Division

 

On September 22, 2006, the First Division of the CTA rendered a Decision granting the Petition for Review. Resorting to the language used and the legislative history of the law, it ruled that the activity of showing cinematographic films is not a service covered by VAT under the National Internal Revenue Code (NIRC) of 1997, as amended, but an activity subject to amusement tax under RA 7160, otherwise known as the Local Government Code (LGC) of 1991. Citing House Joint Resolution No. 13, entitled Joint Resolution Expressing the True Intent of Congress with Respect to the Prevailing Tax Regime in the Theater and Local Film Industry Consistent with the States Policy to Have a Viable, Sustainable and Competitive Theater and Film Industry as One of its Partners in National Development,[30] the CTA First Division held that the House of Representatives resolved that there should only be one business tax applicable to theaters and movie houses, which is the 30% amusement tax imposed by cities and provinces under the LGC of 1991. Further, it held that consistent with the States policy to have a viable, sustainable and competitive theater and film industry, the national government should be precluded from imposing its own business tax in addition to that already imposed and collected by local government units. The CTA First Division likewise found that Revenue Memorandum Circular (RMC) No. 28-2001, which imposes VAT on gross receipts from admission to cinema houses, cannot be given force and effect because it failed to comply with the procedural due process for tax issuances under RMC No. 20-86.[31] Thus, it disposed of the case as follows:

 IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions

for Review. Respondents Decisions denying petitioners protests against deficiency value-added taxes are hereby REVERSED. Accordingly, Assessment Notices Nos. VT-00-000098, VT-99-000057, VT-00-000122, 003-03 and 008-02 are ORDERED cancelled and set aside.

 SO ORDERED.[32]

 Aggrieved, the CIR moved for reconsideration which was denied by the First Division in its

Resolution dated December 14, 2006.[33]

 Ruling of the CTA En Banc

 Thus, the CIR appealed to the CTA En Banc.[34] The case was docketed as CTA EB No. 244.

[35] The CTA En Banc however denied[36] the Petition for Review and dismissed[37] as well petitioners Motion for Reconsideration.

The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive enumeration of what services are intended to be subject to VAT. And since the showing or exhibition of motion pictures, films or movies by cinema operators or proprietors is not among the enumerated activities contemplated in the phrase sale or exchange of services, then gross receipts derived by cinema/ theater operators or proprietors from admission tickets in showing motion pictures, film or movie are not subject to VAT. It reiterated that the exhibition or showing of motion pictures, films, or movies is instead subject to amusement tax under the LGC of 1991. As regards the validity of RMC No. 28-2001, the

CTA En Banc agreed with its First Division that the same cannot be given force and effect for failure to comply with RMC No. 20-86.

 Issue

 Hence, the present recourse, where petitioner alleges that the CTA En Banc seriously erred:

 (1)                                 In not finding/holding that the gross receipts derived by operators/proprietors of

cinema houses from admission tickets [are] subject to the 10% VAT because: 

(a)          THE EXHIBITION OF MOVIES BY CINEMA OPERATORS/PROPRIETORS TO THE PAYING PUBLIC IS A SALE OF SERVICE;

 (b)         UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE

EXPRESSLY SUBJECT TO VAT UNDER SECTION 108 OF THE NIRC OF 1997;

 (c)          SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF

LAW AND THE APPLICATION OF RULES OF STATUTORY CONSTRUCTION AND EXTRINSIC AIDS IS UNWARRANTED;

 (d)         GRANTING WITHOUT CONCEDING THAT RULES OF

CONSTRUCTION ARE APPLICABLE HEREIN, STILL THE HONORABLE COURT ERRONEOUSLY APPLIED THE SAME AND PROMULGATED DANGEROUS PRECEDENTS;

 (e)          THERE IS NO VALID, EXISTING PROVISION OF LAW

EXEMPTING RESPONDENTS SERVICES FROM THE VAT IMPOSED UNDER SECTION 108 OF THE NIRC OF 1997;

 (f)             QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER

ISSUES TO BE TRIED BY THE HONORABLE COURT; and 

(g)          RESPONDENTS WERE TAXED BASED ON THE PROVISION OF SECTION 108 OF THE NIRC.

 (2)                                 In ruling that the enumeration in Section 108 of the NIRC of 1997 is exhaustive

in coverage; 

(3)                                 In misconstruing the NIRC of 1997 to conclude that the showing of motion pictures is merely subject to the amusement tax imposed by the Local Government Code; and

 (4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.[38]

 Simply put, the issue in this case is whether the gross receipts derived by operators or proprietors

of cinema/theater houses from admission tickets are subject to VAT. Petitioners Arguments 

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

 Respondents Arguments 

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

Our Ruling The petition is bereft of merit.

  The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive  

Section 108 of the NIRC of the 1997 reads: SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.

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

A cursory reading of the foregoing provision clearly shows that the enumeration of the sale or exchange of services subject to VAT is not exhaustive. The words, including, similar services, and shall likewise include, indicate that the enumeration is by way of example only.[39]

 Among those included in the enumeration is the lease of motion picture films, films, tapes and

discs. This, however, is not the same as the showing or exhibition of motion pictures or films. As pointed out by the CTA En Banc:

 Exhibition in Blacks Law Dictionary is defined as To show or display. x x x To produce anything in public so that it may be taken into possession (6th ed., p. 573). While the word lease is defined as a contract by which one owning such property grants to another the right to possess, use and enjoy it on specified period of time in exchange for periodic payment of a stipulated price, referred to as rent (Blacks Law Dictionary, 6th ed., p. 889). x x x[40]

 Since the activity of showing motion pictures, films or movies by cinema/ theater operators or

proprietors is not included in the enumeration, it is incumbent upon the court to the determine whether such activity falls under the phrase similar services. The intent of the legislature must therefore be ascertained.

 The legislature never intended operatorsor proprietors of cinema/theater houses to be covered by VAT  

Under the NIRC of 1939,[41] the national government imposed amusement tax on proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses, boxing exhibitions, and other places of amusement, including cockpits, race tracks, and cabaret.[42] In the case of theaters or cinematographs, the taxes were first deducted, withheld, and paid by the proprietors, lessees, or operators of such theaters or cinematographs before the gross receipts were divided between the proprietors, lessees, or operators of the theaters or cinematographs and the distributors of the cinematographic films. Section 11[43] of the Local Tax Code,[44] however, amended this provision by transferring the power to impose amusement tax[45] on admission from theaters, cinematographs, concert halls, circuses and other places of amusements exclusively to the local government. Thus, when the NIRC of 1977[46] was enacted, the national government imposed amusement tax only on proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks.[47]

 On January 1, 1988, the VAT Law[48] was promulgated. It amended certain provisions of the

NIRC of 1977 by imposing a multi-stage VAT to replace the tax on original and subsequent sales tax and percentage tax on certain services. It imposed VAT on sales of services under Section 102 thereof, which provides: 

SECTION 102. Value-added tax on sale of services. (a) Rate and base of tax. There shall be levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts derived by any person engaged in the sale of services. The phrase sale of services means the performance of all kinds of services for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of personal property; lessors or distributors of cinematographic films; persons engaged in milling,

processing, manufacturing or repacking goods for others; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties: Provided That the following services performed in the Philippines by VAT-registered persons shall be subject to 0%:

 (1) Processing manufacturing or repacking goods for other persons doing business

outside the Philippines which goods are subsequently exported, x x x x x x x Gross receipts means the total amount of money or its equivalent representing the

contract price, compensation or service fee, including the amount charged for materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the service performed or to be performed for another person, excluding value-added tax.

 (b) Determination of the tax. (1) Tax billed as a separate item in the invoice. If the tax is

billed as a separate item in the invoice, the tax shall be based on the gross receipts, excluding the tax.

 (2) Tax not billed separately or is billed erroneously in the invoice. If the tax is not billed

separately or is billed erroneously in the invoice, the tax shall be determined by multiplying the gross receipts (including the amount intended to cover the tax or the tax billed erroneously) by 1/11. (Emphasis supplied)

Persons subject to amusement tax under the NIRC of 1977, as amended, however, were exempted from the coverage of VAT.[49]

 On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-88, which

clarified that the power to impose amusement tax on gross receipts derived from admission tickets was exclusive with the local government units and that only the gross receipts of amusement places derived from sources other than from admission tickets were subject to amusement tax under the NIRC of 1977, as amended. Pertinent portions of RMC 8-88 read:

 Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy amusement

tax on gross receipts arising from admission to places of amusement has been transferred to the local governments to the exclusion of the national government.

 x x x xSince the promulgation of the Local Tax Code which took effect on June 28, 1973 none

of the amendatory laws which amended the National Internal Revenue Code, including the value added tax law under Executive Order No. 273, has amended the provisions of Section 11

of the Local Tax Code. Accordingly, the sole jurisdiction for collection of amusement tax on admission receipts in places of amusement rests exclusively on the local government, to the exclusion of the national government. Since the Bureau of Internal Revenue is an agency of the national government, then it follows that it has no legal mandate to levy amusement tax on admission receipts in the said places of amusement.

 Considering the foregoing legal background, the provisions under Section 123 of the

National Internal Revenue Code as renumbered by Executive Order No. 273 (Sec. 228, old NIRC) pertaining to amusement taxes on places of amusement shall be implemented in accordance with BIR RULING, dated December 4, 1973 and BIR RULING NO. 231-86 dated November 5, 1986 to wit:

 x x x Accordingly, only the gross receipts of the amusement places derived from

sources other than from admission tickets shall be subject to x x x amusement tax prescribed under Section 228 of the Tax Code, as amended (now Section 123, NIRC, as amended by E.O. 273). The tax on gross receipts derived from admission tickets shall be levied and collected by the city government pursuant to Section 23 of Presidential Decree No. 231, as amended x x x or by the provincial government, pursuant to Section 11 of P.D. 231, otherwise known as the Local Tax Code. (Emphasis supplied) On October 10, 1991, the LGC of 1991 was passed into law. The local government retained the

power to impose amusement tax on proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement at a rate of not more than thirty percent (30%) of the gross receipts from admission fees under Section 140 thereof.[50] In the case of theaters or cinemas, the tax shall first be deducted and withheld by their proprietors, lessees, or operators and paid to the local government before the gross receipts are divided between said proprietors, lessees, or operators and the distributors of the cinematographic films. However, the provision in the Local Tax Code expressly excluding the national government from collecting tax from the proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses and other places of amusements was no longer included. 

In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its administration. Three years later, RA 7716 was amended by RA 8241. Shortly thereafter, the NIRC of 1997[51] was signed into law. Several amendments[52] were made to expand the coverage of VAT. However, none pertain to cinema/theater operators or proprietors. At present, only lessors or distributors of cinematographic films are subject to VAT. While persons subject to amusement tax[53] under the NIRC of 1997 are exempt from the coverage of VAT.[54]

Based on the foregoing, the following facts can be established: 

(1)                 Historically, the activity of showing motion pictures, films or movies by cinema/theater operators or proprietors has always been considered as a form of entertainment subject to amusement tax.

 (2)                 Prior to the Local Tax Code, all forms of amusement tax were imposed by the

national government. (3)                 When the Local Tax Code was enacted, amusement tax on admission tickets from

theaters, cinematographs, concert halls, circuses and other places of amusements were transferred to the local government.

 (4)                 Under the NIRC of 1977, the national government imposed amusement tax only

on proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks.

 (5)                 The VAT law was enacted to replace the tax on original and subsequent sales tax

and percentage tax on certain services.(6)                 When the VAT law was implemented, it exempted persons subject to amusement

tax under the NIRC from the coverage of VAT. (7)                 When the Local Tax Code was repealed by the LGC of 1991, the local government

continued to impose amusement tax on admission tickets from theaters, cinematographs, concert halls, circuses and other places of amusements.

 (8)                 Amendments to the VAT law have been consistent in exempting persons subject to

amusement tax under the NIRC from the coverage of VAT. (9)                 Only lessors or distributors of cinematographic films are included in the coverage

of VAT. 

These reveal the legislative intent not to impose VAT on persons already covered by the amusement tax. This holds true even in the case of cinema/theater operators taxed under the LGC of 1991 precisely because the VAT law was intended to replace the percentage tax on certain services. The mere fact that they are taxed by the local government unit and not by the national government is immaterial. The Local Tax Code, in transferring the power to tax gross receipts derived by cinema/theater operators or proprietor from admission tickets to the local government, did not intend to treat cinema/theater houses as a separate class. No distinction must, therefore, be made between the places of amusement taxed by the national government and those taxed by the local government.

To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or proprietors, who would be paying an additional 10%[55] VAT on top of the 30% amusement tax imposed

by Section 140 of the LGC of 1991, or a total of 40% tax. Such imposition would result in injustice, as persons taxed under the NIRC of 1997 would be in a better position than those taxed under the LGC of 1991. We need not belabor that a literal application of a law must be rejected if it will operate unjustly or lead to absurd results.[56] Thus, we are convinced that the legislature never intended to include cinema/theater operators or proprietors in the coverage of VAT. On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals,[57] to wit: 

The power of taxation is sometimes called also the power to destroy. Therefore, it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg. And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously.

  The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT  

Petitioner, in issuing the assessment notices for deficiency VAT against respondents, ratiocinated that:

 Basically, it was acknowledged that a cinema/theater operator was then subject to

amusement tax under Section 260 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code of 1939, computed on the amount paid for admission. With the enactment of the Local Tax Code under Presidential Decree (PD) No. 231, dated June 28, 1973, the power of imposing taxes on gross receipts from admission of persons to cinema/theater and other places of amusement had, thereafter, been transferred to the provincial government, to the exclusion of the national or municipal government (Sections 11 & 13, Local Tax Code). However, the said provision containing the exclusive power of the provincial government to impose amusement tax, had also been repealed and/or deleted by Republic Act (RA) No. 7160, otherwise known as the Local Government Code of 1991, enacted into law on October 10, 1991. Accordingly, the enactment of RA No. 7160, thus, eliminating the statutory prohibition on the national government to impose business tax on gross receipts from admission of persons to places of amusement, led the way to the valid imposition of the VAT pursuant to Section 102 (now Section 108) of the old Tax Code, as amended by the Expanded VAT Law (RA No. 7716) and which was implemented beginning January 1, 1996.[58] (Emphasis supplied) We disagree.

 The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of

VAT on the gross receipts of cinema/theater operators or proprietors derived from admission tickets. The removal of the prohibition under the Local Tax Code did not grant nor restore to the national government the power to impose amusement tax on cinema/theater operators or proprietors. Neither did it expand the coverage of VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot be presumed nor can it be extended by implication. A law will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously.[59] As it is, the power to impose amusement tax on cinema/theater operators or proprietors remains with the local government.

 Revenue Memorandum Circular No. 28-2001 is invalid  

Considering that there is no provision of law imposing VAT on the gross receipts of cinema/theater operators or proprietors derived from admission tickets, RMC No. 28-2001 which imposes VAT on the gross receipts from admission to cinema houses must be struck down. We cannot overemphasize that RMCs must not override, supplant, or modify the law, but must remain consistent and in harmony with, the law they seek to apply and implement.[60]

 In view of the foregoing, there is no need to discuss whether RMC No. 28-2001 complied with the

procedural due process for tax issuances as prescribed under RMC No. 20-86. 

Rule on tax exemption does not apply 

Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an exemption from the coverage of VAT. The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the taxpayer is clearly subject to the tax being levied against him. [61] The reason is obvious: it is both illogical and impractical to determine who are exempted without first determining who are covered by the provision.[62] Thus, unless a statute imposes a tax clearly, expressly and unambiguously, what applies is the equally well-settled rule that the imposition of a tax cannot be presumed.[63] In fact, in case of doubt, tax laws must be construed strictly against the government and in favor of the taxpayer.[64]

 WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the

Court of Tax Appeals En Banc holding that gross receipts derived by respondents from admission tickets in showing motion pictures, films or movies are not subject to value-added tax under Section 108 of the National Internal Revenue Code of 1997, as amended, and its June 24, 2008 Resolution denying the motion for reconsideration are AFFIRMED.

 SO ORDERED.

 

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant, vs.MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant appellees.

Sabido, Sabido & Associates for appellant.

Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and Assistant Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.

 

MARTIN, J.:

This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294, which was certified to Us by the Court of Appeals on October 6, 1969, as involving only pure questions of law, challenging the power of taxation delegated to municipalities under the Local Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959).

On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc., commenced a complaint with preliminary injunction before the Court of First Instance of Leyte for that court to declare Section 2 of Republic Act No. 2264. 1 otherwise known as the Local Autonomy Act, unconstitutional as an undue delegation of taxing authority as well as to declare Ordinances Nos. 23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null and void.

On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the production tax rates imposed therein are practically the same, and second, that on January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce compliance by the latter of the provisions of said Ordinance No. 27, series of 1962.

Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies and collects "from soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo for every bottle of soft drink corked."  2 For the purpose of computing the taxes due, the person, firm, company or corporation producing soft drinks shall submit to the Municipal Treasurer a monthly report, of the total number of bottles produced and corked during the month. 3

On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies and collects "on soft drinks produced or manufactured within the territorial jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity." 4 For the purpose of computing the taxes due, the person, fun company, partnership, corporation or plant producing soft drinks shall submit to the Municipal Treasurer a monthly report of the total number of gallons produced or manufactured during the month. 5

The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'

On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due under the oft the said Ordinances; and to pay the costs."

From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals, which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as amended.

There are three capital questions raised in this appeal:

1. — Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and oppressive?

2. — Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or specific taxes?

3. — Are Ordinances Nos. 23 and 27 unjust and unfair?

1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government, without being expressly conferred by the people. 6 It is a power that is purely legislative and which the central legislative body cannot delegate either to the executive or judicial department of the government without infringing upon the theory of separation of powers. The exception, however, lies in the case of municipal corporations, to which, said theory does not apply. Legislative powers may be delegated to local governments in respect of matters of local concern. 7 This is sanctioned by immemorial practice. 8 By necessary implication, the legislative power to create political corporations for purposes of local self-government carries with it the power to confer on such local governmental agencies the power to tax. 9 Under the New Constitution, local governments are granted the autonomous authority to create their own sources of revenue and to levy taxes. Section 5, Article XI provides: "Each local government unit shall have the power to create its sources of revenue and to levy taxes, subject to such limitations as may be provided by law." Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the sphere of the legislative power to enact and vest in local governments the power of local taxation.

The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would not suffice to invalidate the said law as confiscatory and oppressive. In delegating the authority, the State is not limited 6 the exact measure of that which is exercised by itself. When it is said that the taxing power may be delegated to municipalities and the like, it is meant that there may be delegated such measure of power to impose and collect taxes as the legislature may deem expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public policy the State has not deemed wise to tax for more general purposes. 10 This is not to say though that the constitutional injunction against deprivation of property without due process of law may be passed over under the guise of the taxing power, except when the taking of the property is in the lawful exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the rule on uniformity of taxation is observed; (3) either the person or property taxed is within the jurisdiction of the government levying the tax; and (4) in the assessment and collection of certain kinds of taxes notice and opportunity for hearing are provided.  11 Due process is usually violated where the tax imposed is for a private as distinguished from a public purpose; a tax is imposed on property outside the State, i.e., extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and collecting taxes. But, a tax does not violate the due process clause, as applied to a particular taxpayer, although the purpose of the tax will result in an injury rather than a benefit to such taxpayer. Due process does not require that the property subject to the tax or the amount of tax to be raised should be determined by judicial inquiry, and a notice and hearing as to the amount of the tax and the manner in which it shall be apportioned are generally not necessary to due process of law. 12

There is no validity to the assertion that the delegated authority can be declared unconstitutional on the theory of double taxation. It must be observed that the delegating authority specifies the limitations and enumerates the taxes over which local taxation may not be exercised. 13 The reason is that the State has exclusively reserved the same for its own prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law, since We have not adopted as part thereof the injunction against double taxation found in the Constitution of the United States and some states of the Union.  14 Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity 15 or by the same jurisdiction for the same purpose, 16 but not in a case where one tax is imposed by the State and the other by the city or municipality. 17

2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because these two ordinances cover the same subject matter and impose practically the same tax rate. The thesis proceeds from its assumption that both ordinances are valid and legally enforceable. This is not so. As earlier quoted, Ordinance No. 23, which was approved on

September 25, 1962, levies or collects from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo for .every bottle corked, irrespective of the volume contents of the bottle used. When it was discovered that the producer or manufacturer could increase the volume contents of the bottle and still pay the same tax rate, the Municipality of Tanauan enacted Ordinance No. 27, approved on October 28, 1962, imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The difference between the two ordinances clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal of the latter, even without words to that effect. 18 Plaintiff-appellant in its brief admitted that defendants-appellees are only seeking to enforce Ordinance No. 27, series of 1962. Even the stipulation of facts confirms the fact that the Acting Municipal Treasurer of Tanauan, Leyte sought t6 compel compliance by the plaintiff-appellant of the provisions of said Ordinance No. 27, series of 1962. The aforementioned admission shows that only Ordinance No. 27, series of 1962 is being enforced by defendants-appellees. Even the Provincial Fiscal, counsel for defendants-appellees admits in his brief "that Section 7 of Ordinance No. 27, series of 1962 clearly repeals Ordinance No. 23 as the provisions of the latter are inconsistent with the provisions of the former."

That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage or a specific tax. Undoubtedly, the taxing authority conferred on local governments under Section 2, Republic Act No. 2264, is broad enough as to extend to almost "everything, accepting those which are mentioned therein." As long as the text levied under the authority of a city or municipal ordinance is not within the exceptions and limitations in the law, the same comes within the ambit of the general rule, pursuant to the rules of exclucion attehus and exceptio firmat regulum in cabisus non excepti 19 The limitation applies, particularly, to the prohibition against municipalities and municipal districts to impose "any percentage tax or other taxes in any form based thereon nor impose taxes on articles subject to specific tax except gasoline, under the provisions of the National Internal Revenue Code." For purposes of this particular limitation, a municipal ordinance which prescribes a set ratio between the amount of the tax and the volume of sale of the taxpayer imposes a sales tax and is null and void for being outside the power of the municipality to enact. 20But, the imposition of "a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all soft drinks produced or manufactured under Ordinance No. 27 does not partake of the nature of a percentage tax on sales, or other taxes in any form based thereon. The tax is levied on the produce (whether sold or not) and not on the sales. The volume capacity of the taxpayer's production of soft drinks is considered solely for purposes of determining the tax rate on the products, but there is not set ratio between the volume of sales and the amount of the tax. 21

Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified articles, such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars and cigarettes, matches firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards, saccharine, opium and other habit-forming drugs. 22 Soft drink is not one of those specified.

3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all softdrinks, produced or manufactured, or an equivalent of 1-½ centavos per case, 23 cannot be considered unjust and unfair. 24 an increase in the tax alone would not support the claim that the tax is oppressive, unjust and confiscatory. Municipal corporations are allowed much discretion in determining the reates of imposable taxes. 25 This is in line with the constutional policy of according the widest possible autonomy to local governments in matters of local taxation, an aspect that is given expression in the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is so excessive as to be prohibitive, courts will go slow in writing off an ordinance as unreasonable. 27 Reluctance should not deter compliance with an ordinance such as Ordinance No. 27 if the purpose of the law to further strengthen local autonomy were to be realized. 28

Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than ten crowners or P2,000.00 with ten but not more than twenty crowners imposed on manufacturers, producers, importers and dealers of soft drinks and/or mineral waters under Ordinance No. 54, series of 1964, as amended by Ordinance No. 41, series of 1968, of defendant Municipality, 29 appears not to affect the resolution of the validity of Ordinance No. 27. Municipalities are empowered to

impose, not only municipal license taxes upon persons engaged in any business or occupation but also to levy for public purposes, just and uniform taxes. The ordinance in question (Ordinance No. 27) comes within the second power of a municipality.

ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as the Local Autonomy Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the Municipality of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance No. 23, same series, is hereby declared of valid and legal effect. Costs against petitioner-appellant.

SO ORDERED.

FIRST PLANTERS VS CITY TREASURER OF PASAY CITY

First Planters Pawnshop, Inc. (petitioner) contests the deficiency value-added and documentary stamp taxes imposed upon it by the Bureau of Internal Revenue (BIR) for the year 2000. The core of petitioner's argument is that it is not a lending investor within the purview of Section 108(A) of the National Internal Revenue Code (NIRC), as amended, and therefore not subject to value-added tax (VAT). Petitioner also contends that a pawn ticket is not subject to documentary stamp tax (DST) because it is not proof of the pledge transaction, and even assuming that it is so, still, it is not subject to tax since a documentary stamp tax is levied on the document issued and not on the transaction. The facts: In a Pre-Assessment Notice dated July 7, 2003, petitioner was informed by the BIR that it has an existing tax deficiency on its VAT and DST liabilities for the year 2000. The deficiency assessment was at P541,102.79 for VAT and P23,646.33 for DST.[1] Petitioner protested the assessment for lack of legal and factual bases.[2]

 Petitioner subsequently received a Formal Assessment Notice on December 29, 2003, directing payment of VAT deficiency in the amount of P541,102.79 and DST deficiency in the amount of P24,747.13, inclusive of surcharge and interest.[3] Petitioner filed a protest,[4] which was denied by Acting Regional Director Anselmo G. Adriano per Final Decision on Disputed Assessment dated January 29, 2004.[5]

 Petitioner then filed a petition for review with the Court of Tax Appeals (CTA).[6] In a Decision dated May 9, 2005, the 2nd Division of the CTA upheld the deficiency assessment.[7] Petitioner filed a motion for reconsideration[8] which was denied in a Resolution dated October 7, 2005.[9]

 Petitioner appealed to the CTA En Banc which rendered a Decision dated June 7, 2006, the dispositive portion of which reads as follows: 

WHEREFORE, premises considered, the Petition for Review is hereby DENIED for lack of merit. The assailed Decision dated May 9, 2005 and Resolution dated October 7, 2005 are hereby AFFIRMED. SO ORDERED.[10]

 Petitioner sought reconsideration but this was denied by the CTA En Banc per Resolution dated August 14, 2006.[11]

 Hence, the present petition for review under Rule 45 of the Rules of Court based on the following grounds: 

ITHE HONORABLE COURT OF TAX APPEALS EN BANC GRAVELY ERRED IN FINDING PETITIONER LIABLE FOR VAT.

 II

THE HONORABLE COURT OF TAX APPEALS EN BANC GRAVELY ERRED IN RULING THAT PETITIONER IS LIABLE FOR DST ON PAWN TICKETS.[12]

 The determination of petitioner's tax liability depends on the tax treatment of a pawnshop business. Oddly, there has not been any definitive declaration in this regard despite the fact that pawnshops have long been in existence. All that has been stated is what pawnshops are not, but not what pawnshops are. 

The BIR itself has maintained an ambivalent stance on this issue. Initially, in Revenue Memorandum Order No. 15-91 issued on March 11, 1991, a pawnshop business was considered as akin to lending investors business activity and subject to 5% percentage tax beginning January 1, 1991, under Section 116 of the Tax Code of 1977, as amended by E.O. No. 273.[13]

 With the passage of Republic Act (R.A.) No. 7716 or the EVAT Law in 1994,[14] the BIR abandoned its earlier position and maintained that pawnshops are subject to 10% VAT, as implemented by Revenue Regulations No. 7-95. This was complemented by Revenue Memorandum Circular No. 45-01 dated October 12, 2001, which provided that pawnshop operators are liable to the 10% VAT based on gross receipts beginning January 1, 1996, while pawnshops whose gross annual receipts do not exceed P550,000.00 are liable for percentage tax, pursuant to Section 109(z) of the Tax Code of 1997. CTA decisions affirmed the BIR's position that pawnshops are subject to VAT. In H. Tambunting Pawnshop, Inc. v. Commissioner of Internal Revenue,[15] the CTA ruled that the petitioner therein was subject to 10% VAT under Section 108 of the Tax Code of 1997. Antam Pawnshop Corporation v. Commissioner of Internal Revenue[16] reiterates said ruling. It was the CTA's view that the

services rendered by pawnshops fall under the general definition of sale or exchange of services under Section 108(A) of the Tax Code of 1997. On July 15, 2003, the Court rendered Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.[17] in which it was categorically ruled that while pawnshops are engaged in the business of lending money, they are not considered lending investors for the purpose of imposing percentage taxes.[18] The Court gave the following reasons: first, under the 1997 Tax Code, pawnshops and lending investors were subjected to different tax treatments; second, Congress never intended pawnshops to be treated in the same way as lending investors; third, Section 116 of the NIRC of 1977 subjects to percentage tax dealers in securities and lending investors only; and lastly, the BIR had ruled several times prior to the issuance of RMO No. 15-91 and RMC 43-91 that pawnshops were not subject to the 5% percentage tax on lending investors imposed by Section 116 of the NIRC of 1977, as amended by Executive Order No. 273. In view of said ruling, the BIR issued Revenue Memorandum Circular No. 36-2004 dated June 16, 2004, canceling the previous lending investor's tax assessments on pawnshops. Said Circular stated, inter alia: 

In view of the said Supreme Court decision, all assessments on pawnshops for percentage taxes as lending investors are hereby cancelled. This Circular is being issued for the sole purpose of resolving the tax liability of pawnshops to the 5% lending investors tax provided under the then Section 116 of the NIRC of 1977, as amended, and shall not cover issues relating to their other tax liabilities. All internal revenue officials are enjoined from issuing assessments on pawnshops for percentage taxes on lending investors, under the then Section 116 of the NIRC of 1977, as amended.

For purposes of the gross receipt tax provided for under Republic Act No. 9294, the pawnshops are now subject thereof. This shall however, be covered by another issuance.[19]

 Revenue Memorandum Circular No. 37-2004 was issued on the same date whereby pawnshop businesses were allowed to settle their VAT liabilities for the tax years 1996-2002 pursuant to a memorandum of agreement entered into by the Commissioner of Internal Revenue and the Chambers of Pawnbrokers of the Philippines, Inc. The Circular likewise instructed all revenue officers to ensure that all VAT due from pawnshops beginningJanuary 1, 2003, including increments thereto, if any, are assessed and collected from pawnshops under its jurisdiction. In the interim, however, Congress passed Republic Act (R.A.) No. 9238 on February 5, 2004 entitled, An Act Amending Certain Sections of the National Internal Revenue Code of 1997, as amended, by Excluding Several Services from the Coverage of the Value-added Tax and Re-imposing the Gross Receipts Tax on Banks and Non-bank Financial Intermediaries Performing Quasi-banking Functions and Other Non-bank FinancialIntermediaries beginning January 01, 2004.[20]

 

Pending publication of R.A. No. 9238, the BIR issued Bank Bulletin No. 2004-01 on February 10, 2004 advising all banks and non-bank financial intermediaries that they shall remain liable under the VAT system. When R.A. No. 9238 took effect on February 16, 2004, the Department of Finance issued Revenue Regulations No. 10-2004 dated October 18, 2004, classifying pawnshops as Other Non-bank Financial Intermediaries.The BIR then issued Revenue Memorandum Circular No. 73-2004 on November 25, 2004, prescribing the guidelines and policies on the assessment and collection of 10% VAT for gross annual sales/receipts exceedingP550,000.00 or 3% percentage tax for gross annual sales/receipts not exceeding P550,000.00 of pawnshops prior to January 1, 2005. In fine, prior to the EVAT Law, pawnshops were treated as lending investors subject to lending investor's tax. Subsequently, with the Court's ruling in Lhuillier, pawnshops were then treated as VAT-able enterprises under the general classification of sale or exchange of services under Section 108(A) of the Tax Code of 1997, as amended. R.A. No. 9238 finally classified pawnshops as Other Non-bank Financial Intermediaries. The Court finds that pawnshops should have been treated as non-bank financial intermediaries from the very beginning, subject to the appropriate taxes provided by law, thus 

                    Under the National Internal Revenue Code of 1977,[21] pawnshops should have been levied the 5% percentage tax on gross receipts imposed on bank and non-bank financial intermediaries under Section 119 (now Section 121 of the Tax Code of 1997);

                    With the imposition of the VAT under R.A. No. 7716 or the EVAT Law, [22] pawnshops should have been subjected to the 10% VAT imposed on banks and non-bank financial intermediaries and financial institutions under Section 102 of the Tax Code of 1977 (now Section 108 of the Tax Code of 1997);[23]

                    This was restated by R.A. No. 8241,[24] which amended R.A. No. 7716, although the levy, collection and assessment of the 10% VAT on services rendered by banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions, were made effective January 1, 1998;[25]

                    R.A. No. 8424 or the Tax Reform Act of 1997[26] likewise imposed a 10% VAT under Section 108 but the levy, collection and assessment thereof were again deferred until December 31, 1999;[27]

                    The levy, collection and assessment of the 10% VAT was further deferred by R.A. No. 8761 until December 31, 2000, and by R.A. No. 9010, until December 31, 2002;

                    With no further deferments given by law, the levy, collection and assessment of the 10% VAT on banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions were finally made effective beginning January 1, 2003;

                    Finally, with the enactment of R.A. No. 9238, the services of banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions were specifically exempted from VAT,[28] and the 0% to 5% percentage tax on gross receipts on other non-bank financial intermediaries was reimposed under Section 122 of the Tax Code of 1997.[29]

 At the time of the disputed assessment, that is, for the year 2000, pawnshops were not subject to 10% VAT under the general provision on sale or exchange of services as defined under Section 108(A) of the Tax Code of 1997, which states: 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration x x x. Instead, due to the specific nature of its business, pawnshops were then subject to 10% VAT under the category of non-bank financial intermediaries, as provided in the same Section 108(A), which reads:

 

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. -

(A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties.

The phrase "sale or exchange of services" means the performance of all kinds or services in the Philippines for others for a fee, remuneration or consideration, including x x x services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise include: x x x (Emphasis and underscoring supplied)

 The tax treatment of pawnshops as non-bank financial intermediaries is not without basis. R.A. No. 337, as amended, or the General Banking Act characterizes the terms banking institution and bank as synonymous and interchangeable and specifically include commercial banks, savings bank, mortgage banks, development banks, rural banks, stock savings and loan associations, and branches and agencies in the Philippines of foreign banks.[30] R.A. No. 8791 or the General Banking Law of 2000, meanwhile, provided that banksshall refer to entities engaged in the lending of funds obtained in the form of deposits.[31] R.A. No. 8791 also included cooperative banks, Islamic banks and other banks as determined by the Monetary Board of the BangkoSentral ng Pilipinas in the classification of banks.[32]

 Financial intermediaries, on the other hand, are defined as persons or entities whose principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired by them, or otherwise coursed through them, either for their own account or for the account of others.[33]

 It need not be elaborated that pawnshops are non-banks/banking institutions. Moreover, the nature of their business activities partakes that of a financial intermediary in that its principal function is lending. 

A pawnshop's business and operations are governed by Presidential Decree (P.D.) No. 114 or the Pawnshop Regulation Act and Central Bank Circular No. 374 (Rules and Regulations for Pawnshops). Section 3 of P.D. No. 114 defines pawnshop as a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawn brokerage. That pawnshops are to be treated as non-bank financial intermediaries is further bolstered by the fact that pawnshops are under the regulatory supervision of the Bangko Sentral ng Pilipinas and covered by its Manual of Regulations for Non-Bank Financial Institutions. The Manual includes pawnshops in the list of non-bank financial intermediaries, viz.: 

4101Q.1 Financial Intermediaries

x x x

Non-bank financial intermediaries shall include the following:

(1) A person or entity licensed and/or registered with any government regulatory body as a non-bank financial intermediary, such as investment house, investment company, financing company, securities dealer/broker, lending investor,pawnshop, money broker x x x. (Emphasis supplied)

 Revenue Regulations No. 10-2004, in fact, recognized these bases, to wit: 

SEC. 2. BASES OF QUALIFYING PAWNSHOPS AS NON-BANK FINANCIAL INTERMEDIARIES. - Whereas, in relation to Sec. 2.3 of Rev. Regs No. 9-2004 defining Non-bank Financial Intermediaries, the term pawnshop as defined under Presidential Decree No. 114 which authorized its creation, to be a person or entity engaged in the business of lending money, all fall within the classification of Non-bank Financial Intermediaries and therefore, covered by Sec. 4 of R.A. No. 9238.

This classification is equally supported by Subsection 4101Q.1 of the BSP Manual of Regulations for Non-Bank Financial Intermediaries and reiterated in BSP Circular No. 204-99, classifying pawnshops as one of Non-bank Financial Intermediaries within the supervision of the Bangko Sentral ng Pilipinas.

 Ultimately, R.A. No. 9238 categorically confirmed the classification of pawnshops as non-bank financial intermediaries. Coming now to the issue at hand - Since petitioner is a non-bank financial intermediary, it is subject to 10% VAT for the tax years 1996 to 2002; however, with the levy, assessment and collection of VAT from non-bank financial intermediaries being specifically deferred by law,[34] then petitioner is not liable for VAT during these tax years. But with the full implementation of the VAT system on non-bank financial intermediaries starting January 1, 2003, petitioner is liable for 10% VAT for said tax year. And beginning 2004 up to the present, by virtue of R.A. No. 9238, petitioner is no longer liable for VAT but it is subject to percentage tax on gross receipts from 0% to 5 %, as the case may be. Lastly, petitioner is liable for documentary stamp taxes. The Court has settled this issue in Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue,[35] in which it was ruled that the subject of DST is not limited to the document alone. Pledge, which is an exercise of a privilege to transfer obligations, rights or properties incident thereto, is also subject to DST, thus

x x x the subject of a DST is not limited to the document embodying the enumerated transactions. A DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties incident thereto. In Philippine Home Assurance Corporation v. Court of Appeals, it was held that:

x x x x

Pledge is among the privileges, the exercise of which is subject to DST. A pledge may be defined as an accessory, real and unilateral contract by virtue of which the debtor or a third person delivers to the creditor or to a third person movable property as security for the performance of the principal obligation, upon the fulfillment of which the thing pledged, with all its accessions and accessories, shall be returned to the debtor or to the third person. This is essentially the business of pawnshops which are defined under Section 3 of Presidential Decree No. 114, or the Pawnshop Regulation Act, as persons or entities engaged in lending money on personal property delivered as security for loans.

Section 12 of the Pawnshop Regulation Act and Section 21 of the Rules and Regulations For Pawnshops issued by the Central Bank to implement the Act, require every pawnshop or pawnbroker to issue, at the time of every such loan or pledge, a memorandum or ticket signed by the pawnbroker and containing the following details: (1) name and residence of the pawner; (2) date the loan is granted; (3) amount of principal loan; (4) interest rate in percent; (5) period of maturity; (6) description of pawn; (7) signature of pawnbroker or his authorized agent; (8) signature or thumb mark of pawner or his authorized agent; and (9) such other terms and conditions as may be agreed upon between the pawnbroker and the pawner. In addition, Central

Bank Circular No. 445, prescribed a standard form of pawn tickets with entries for the required details on its face and the mandated terms and conditions of the pledge at the dorsal portion thereof.

Section 3 of the Pawnshop Regulation Act defines a pawn ticket as follows:

x x x x

True, the law does not consider said ticket as an evidence of security or indebtedness. However, for purposes of taxation, the same pawn ticket is proof of an exercise of a taxable privilege of concluding a contract of pledge. At any rate, it is not said ticket that creates the pawnshops obligation to pay DST but the exercise of the privilege to enter into a contract of pledge. There is therefore no basis in petitioners assertion that a DST is literally a tax on a document and that no tax may be imposed on a pawn ticket.

The settled rule is that tax laws must be construed in favor of the taxpayer and strictly against the government; and that a tax cannot be imposed without clear and express words for that purpose. Taking our bearing from the foregoing doctrines, we scrutinized Section 195 of the NIRC, but there is no way that said provision may be interpreted in favor of petitioner. Section 195 unqualifiedly subjects all pledges to DST. It states that [o]n every x x x pledge x x x there shall be collected a documentary stamp tax x x x. It is clear, categorical, and needs no further interpretation or construction. The explicit tenor thereof requires hardly anything than a simple application.

x x x x

In the instant case, there is no law specifically and expressly exempting pledges entered into by pawnshops from the payment of DST. Section 199 of the NIRC enumerated certain documents which are not subject to stamp tax; but apawnshop ticket is not one of them. Hence, petitioners nebulous claim that it is not subject to DST is without merit. It cannot be over-emphasized that tax exemption represents a loss of revenue to the government and must, therefore, not rest on vague inference. Exemption from taxation is never presumed. For tax exemption to be recognized, the grant must be clear and express; it cannot be made to rest on doubtful implications.

 Under the principle of stare decisis et non quieta movere (follow past precedents and do not disturb what has been settled), once a case has been decided one way, any other case involving exactly the same point at issue, as in the case at bar, should be decided in the same manner.[36]

 WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated June 7, 2006 and Resolution dated August 14, 2006 of the Court of Tax Appeals En Banc is MODIFIED to the effect that the Bureau of Internal Revenue assessment for VAT deficiency in the amount of P541,102.79 for the year 2000 is REVERSED and SET ASIDE, while its assessment for DST deficiency in the amount of P24,747.13, inclusive of surcharge and interest, is UPHELD.

 SO ORDERED.

SMART COMMUNICATIONS VS CITY OF DAVAO

This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by Smart Communications, Inc. (Smart) against the City of Davao, represented by its Mayor, Hon. Rodrigo R. Duterte, and the Sangguniang Panlungsod of Davao City, to annul the Decision[1] dated July 19, 2002 of the Regional Trial Court (RTC) and its Order [2] dated September 26, 2002 in Sp. Civil Case No. 28,976-2002. The Facts

 On February 18, 2002, Smart filed a special civil action for declaratory relief [3] under Rule 63 of the Rules of Court, for the ascertainment of its rights and obligations under the Tax Code of the City ofDavao, [4] particularly Section 1, Article 10 thereof, the pertinent portion of which reads: 

Notwithstanding any exemption granted by any law or other special law, there is hereby imposed a tax on businesses enjoying a franchise, at a rate of seventy-five percent (75%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the income or receipts realized within the territorial jurisdiction of Davao City.  

Smart contends that its telecenter in Davao City is exempt from payment of franchise tax to the City, on the following grounds: (a) the issuance of its franchise under Republic Act (R.A.) No. 7294[5]subsequent to R.A. No. 7160 shows the clear legislative intent to exempt it from the provisions of R.A. 7160;[6] (b) Section 137 of R.A. No. 7160 can only apply to exemptions already existing at the time of its effectivity and not to future exemptions; (c) the power of the City of Davao to impose a franchise tax is subject to statutory limitations such as the in lieu of all taxes clause found in Section 9 of R.A. No. 7294; and (d) the imposition of franchise tax by the City of Davao would amount to a violation of the constitutional provision against impairment of contracts.[7]

 On March 2, 2002, respondents filed their Answer[8] in which they contested the tax exemption claimed by Smart. They invoked the power granted by the Constitution to local government units to create their own sources of revenue.[9]

 On May 17, 2002, a pre-trial conference was held. Inasmuch as only legal issues were involved in the case, the RTC issued an order requiring the parties to submit their respective memoranda and, thereafter, the case would be deemed submitted for resolution.[10]

 On July 19, 2002, the RTC rendered its Decision[11] denying the petition. The trial court noted that the ambiguity of the in lieu of all taxes provision in R.A. No. 7294, on whether it covers both national and local taxes, must be resolved against the taxpayer.[12] The RTC ratiocinated that tax exemptions are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority and, thus, those who assert a tax exemption must justify it with words too plain to be mistaken and too categorical not to be misinterpreted.[13] On the issue of violation of the non-impairment clause of the Constitution, the trial court cited Mactan Cebu International Airport Authority v. Marcos,[14] and declared that the citys power to tax is based not merely on a valid delegation of legislative power but on the direct authority granted to it by the fundamental law.  It added that while such power may be subject to restrictions or conditions imposed by Congress, any such legislated limitation must be consistent with the basic policy of local autonomy.[15]

 Smart filed a motion for reconsideration which was denied by the trial court in an Order[16] dated September 26, 2002.

 Thus, the instant case. Smart assigns the following errors: 

[a.] THE LOWER COURT ERRED IN NOT HOLDING THAT UNDER PETITIONERS FRANCHISE (REPUBLIC ACT NO. 7294), WHICH CONTAINS THE IN LIEU OF ALL TAXES CLAUSE, AND WHICH IS A SPECIAL LAW ENACTED SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, NO FRANCHISE TAX MAY BE IMPOSED ON PETITIONER BY RESPONDENT CITY. [b.] THE LOWER COURT ERRED IN HOLDING THAT PETITIONERS FRANCHISE IS A GENERAL LAW AND DID NOT REPEAL RELEVANT PROVISIONS REGARDING FRANCHISE TAX OF THE LOCAL GOVERNMENT CODE, WHICH ACCORDING TO THE COURT IS A SPECIAL LAW. [c.] THE LOWER COURT ERRED IN NOT HOLDING THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE, WHICH, IN RELATION TO SECTION 151 THEREOF, ALLOWS RESPONDENT CITY TO IMPOSE THE FRANCHISE TAX, AND SECTION 193 OF THE CODE, WHICH PROVIDES FOR WITHDRAWAL OF TAX EXEMPTION PRIVILEGES, ARE NOT APPLICABLE TO THIS CASE. [d.] THE LOWER COURT ERRED IN NOT HOLDING THAT SECTIONS 137 AND 193 OF THE LOCAL GOVERNMENT CODE REFER ONLY TO EXEMPTIONS ALREADY EXISTING AT THE TIME OF ITS ENACTMENT BUT NOT TO FUTURE EXEMPTIONS. [e.] THE LOWER COURT ERRED IN APPLYING THE RULE OF STATUTORY CONSTRUCTION THAT TAX EXEMPTIONS ARE CONSTRUED STRICTLY AGAINST THE TAXPAYER. [f.] THE LOWER COURT ERRED IN NOT HOLDING THAT PETITIONERS FRANCHISE (REPUBLIC ACT NO. 7294) HAS BEEN AMENDED AND EXPANDED BY SECTION 23 OF REPUBLIC ACT NO. 7925, THE PUBLIC TELECOMMUNICATIONS POLICY ACT, TAKING INTO ACCOUNT THE FRANCHISE OF GLOBE TELECOM, INC. (GLOBE) (REPUBLIC ACT NO. 7229), WHICH ARE SPECIAL PROVISIONS AND WERE ENACTED SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, THEREBY PROVIDING AN ADDITIONAL GROUND WHY NO FRANCHISE TAX MAY BE IMPOSED ON PETITIONER BY RESPONDENT CITY. [g.] THE LOWER COURT ERRED IN DISREGARDING THE RULING OF THE DEPARTMENT OF FINANCE, THROUGH ITS BUREAU OF LOCAL GOVERNMENT FINANCE, THAT PETITIONER IS EXEMPT FROM THE PAYMENT OF THE FRANCHISE TAX IMPOSABLE BY LOCAL GOVERNMENT UNITS UNDER THE LOCAL GOVERNMENT CODE. [h.] THE LOWER COURT ERRED IN NOT HOLDING THAT THE IMPOSITION OF THE LOCAL FRANCHISE TAX ON PETITIONER WOULD VIOLATE THE CONSTITUTIONAL PROHIBITION AGAINST IMPAIRMENT OF CONTRACTS. [i.] THE LOWER COURT ERRED IN DENYING THE PETITION BELOW.[17]

  

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

The Ruling of the Court We rule in the affirmative. I. Prospective Effect of R.A. No. 7160 On March 27, 1992, Smarts legislative franchise (R.A. No. 7294) took effect. Section 9 thereof, quoted hereunder, is at the heart of the present controversy: 

Section 9. Tax provisions. The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate buildings and personal property, exclusive of' this franchise, as other persons or corporations which are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue. (Emphasis supplied.)  

Smart alleges that the in lieu of all taxes clause in Section 9 of its franchise exempts it from all taxes, both local and national, except the national franchise tax (now VAT), income tax, and real property tax.[18]

 On January 1, 1992, two months ahead of Smarts franchise, the Local Government Code (R.A. No. 7160) took effect. Section 137, in relation to Section 151 of R.A. No. 7160, allowed the imposition of franchise tax by the local government units; while Section 193 thereof provided for the withdrawal of tax exemption privileges granted prior to the issuance of R.A. No. 7160 except for those expressly mentioned therein, viz.: 

Section 137. Franchise Tax. Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at the rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction. 

In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the business started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereon, as provided herein. Section 151. Scope of Taxing Powers. Except as otherwise provided in this Code, the city may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this Code. 

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes. 

 Section 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under RA No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis supplied.)  

Smart argues that it is not covered by Section 137, in relation to Section 151 of R.A. No. 7160, because its franchise was granted after the effectivity of the said law. We agree with Smarts contention on this matter. The withdrawal of tax exemptions or incentives provided in R.A. No. 7160 can only affect those franchises granted prior to the effectivity of the law. The intention of the legislature to remove all tax exemptions or incentives granted prior to the said law is evident in the language of Section 193 of R.A. No. 7160. No interpretation is necessary. II. The in lieu of all taxes Clause in R.A. No. 7294 The in lieu of all taxes clause in Smarts franchise is put in issue before the Court. In order to ascertain its meaning, consistent with fundamentals of statutory construction, all the words in the statute must be considered. The grant of tax exemption by R.A. No. 7294 is not to be interpreted from a consideration of a single portion or of isolated words or clauses, but from a general view of the act as a whole. Every part of the statute must be construed with reference to the context.[19]

 Smart is of the view that the only taxes it may be made to bear under its franchise are the national franchise tax (now VAT), income tax, and real property tax.[20] It claims exemption from the local franchise tax because the in lieu of taxes clause in its franchise does not distinguish between national and local taxes.[21]

 We pay heed that R.A. No. 7294 is not definite in granting exemption to Smart from local taxation. Section 9 of R.A. No. 7294 imposes on Smart a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under the franchise and the said percentage shall be in lieu of all taxes on the franchise or earnings thereof. R.A. No 7294 does not expressly provide what kind of taxes Smart is exempted from. It is not clear whether the in lieu of all taxes provision in the franchise of Smart would include exemption from local or national taxation. What is clear is that Smart shall pay franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under its franchise. But whether the franchise tax exemption would include exemption from exactions by both the local and the national government is not unequivocal. The uncertainty in the in lieu of all taxes clause in R.A. No. 7294 on whether Smart is exempted from both local and national franchise tax must be construed strictly against Smart which claims the exemption. Smart has the burden of proving that, aside from the imposed 3% franchise tax, Congress intended it to be exempt from all kinds of franchise taxes whether local or national. However, Smart failed in this regard. Tax exemptions are never presumed and are strictly construed against the taxpayer and liberally in favor of the taxing authority.[22] They can only be given force when the grant is clear and categorical. [23] The surrender of the power to tax, when claimed, must be clearly shown by a language that will admit of no reasonable construction consistent with the reservation of the power. If the intention of the legislature is open to doubt, then the intention of the legislature must be resolved in favor of the State.[24]

 In this case, the doubt must be resolved in favor of the City of Davao. The in lieu of all taxes clause applies only to national internal revenue taxes and not to local taxes. As appropriately pointed out in the separate opinion of Justice Antonio T. Carpio in a similar case[25] involving a demand for exemption from local franchise taxes: 

[T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other than income tax, imposed under the National Internal Revenue Code. The "in lieu of all taxes" clause does not apply to local taxes. The

proviso in the first paragraph of Section 9 of Smart's franchise states that the grantee shall "continue to be liable for income taxes payable under Title II of the National Internal Revenue Code." Also, the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code." Moreover, the same paragraph declares that the tax returns "shall be subject to audit by the Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes. The clear intent is for the "in lieu of all taxes" clause to apply only to taxes under the National Internal Revenue Code and not to local taxes. Even with respect to national internal revenue taxes, the "in lieu of all taxes" clause does not apply to income tax. If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to local taxes, Congress would have expressly mentioned the exemption from municipal and provincial taxes. Congress could have used the language in Section 9(b) of Clavecilla's old franchise, as follows: 

x x x in lieu of any and all taxes of any kind, nature or description levied, established or collected by any authority whatsoever, municipal, provincial or national, from which the grantee is hereby expressly exempted, x x x. (Emphasis supplied).

 However, Congress did not expressly exempt Smart from local taxes. Congress used the "in lieu of all taxes" clause only in reference to national internal revenue taxes. The only interpretation, under the rule on strict construction of tax exemptions, is that the "in lieu of all taxes" clause in Smart's franchise refers only to national and not to local taxes.  

It should be noted that the in lieu of all taxes clause in R.A. No. 7294 has become functus officio with the abolition of the franchise tax on telecommunications companies.[26] As admitted by Smart in its pleadings, it is no longer paying the 3% franchise tax mandated in its franchise. Currently, Smart along with other telecommunications companies pays the uniform 10% value-added tax.[27]

 The VAT on sale of services of telephone franchise grantees is equivalent to 10% of gross receipts derived from the sale or exchange of services.[28] R.A. No. 7716, as amended by the Expanded Value Added Tax Law (R.A. No. 8241), the pertinent portion of which is hereunder quoted, amended Section 9 of R.A. No. 7294: 

SEC. 102. Value-added tax on sale of services and use or lease of properties. (a) Rate and base of tax. There shall be levied assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase sale or exchange of services means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered byconstruction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land, air, and water relative to their transport of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 117 of this Code; services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop insurances) including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. x x x.[29]

  

R.A. No. 7716, specifically Section 20 thereof, expressly repealed the provisions of all special laws relative to the rate of franchise taxes. It also repealed, amended, or modified all other laws, orders, issuances, rules and regulations, or parts thereof which are inconsistent with it.[30] In effect, the in lieu of all taxes clause in R.A. No. 7294 was rendered ineffective by the advent of the VAT Law.[31]

  However, the franchise tax that the City of Davao may impose must comply with Sections 137 and 151 of R.A. No. 7160. Thus, the local franchise tax that may be imposed by the City must not exceed 50% of 1% of the gross annual receipts for the preceding calendar year based on the income on receipts realized within the territorial jurisdiction of Davao. III. Opinion of the Bureau of Local Government Finance (BLGF) In support of its argument that the in lieu of all taxes clause is to be construed as an exemption from local franchise taxes, Smart submits the opinion of the Department of Finance, through the BLGF, dated August 13, 1998 and February 24, 1998, regarding the franchises of Smart and Globe, respectively.[32] Smart presents the same arguments as the Philippine Long Distance Telephone Company in the previous cases already decided by this Court. [33] As previously held by the Court, the findings of the BLGF are not conclusive on the courts: 

[T]he BLGF opined that 23 of R.A. No. 7925 amended the franchise of petitioner and in effect restored its exemptions from local taxes. Petitioner contends that courts should not set aside conclusions reached by the BLGF because its function is precisely the study of local tax problems and it has necessarily developed an expertise on the subject. To be sure, the BLGF is not an administrative agency whose findings on questions of fact are given weight and deference in the courts. The authorities cited by petitioner pertain to the Court of Tax Appeals, a highly specialized court which performs judicial functions as it was created for the review of tax cases. In contrast, the BLGF was created merely to provide consultative services and technical assistance to local governments and the general public on local taxation, real property assessment, and other related matters, among others. The question raised by petitioner is a legal question, to wit, the interpretation of 23 of R.A. No. 7925. There is, therefore, no basis for claiming expertise for the BLGF that administrative agencies are said to possess in their respective fields. Petitioner likewise argues that the BLGF enjoys the presumption of regularity in the performance of its duty. It does enjoy this presumption, but this has nothing to do with the question in this case. This case does not concern the regularity of performance of the BLGF in the exercise of its duties, but the correctness of its interpretation of a provision of law.[34]

  

IV. Tax Exclusion/Tax Exemption Smart gives another perspective of the in lieu of all taxes clause in Section 9 of R.A. No. 7294 in order to avoid the payment of local franchise tax. It says that, viewed from another angle, the in lieu of all taxes clause partakes of the nature of a tax exclusion and not a tax exemption. A tax exemption means that the taxpayer does not pay any tax at all. Smart pays VAT, income tax, and real property tax. Thus, what it enjoys is more accurately a tax exclusion.[35]

 However, as previously held by the Court, both in their nature and effect, there is no essential difference between a tax exemption and a tax exclusion. An exemption is an immunity or a privilege; it is the freedom from a charge or burden to which others are subjected. An exclusion, on the other hand, is the removal of otherwise taxable items from the reach of taxation, e.g., exclusions from gross income and allowable deductions. An exclusion is, thus, also an immunity or privilege

which frees a taxpayer from a charge to which others are subjected. Consequently, the rule that a tax exemption should be applied in strictissimi juris against the taxpayer and liberally in favor of the government applies equally to tax exclusions.[36]

 V. Section 23 of R.A. No. 7925 To further its claim, Smart invokes Section 23 of the Public Telecommunications Policy Act (R.A. No. 7925): 

SECTION 23. Equality of Treatment in the Telecommunications Industry. Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shallipso facto become part of previously granted telecommunications franchise and shall be accorded immediately and unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the life span of the franchise, or the type of service authorized by the franchise.(Emphasis supplied.)  

In sum, Smart wants us to interpret anew Section 23 of R.A. No. 7925, in connection with the franchise of Globe (R.A. No. 7227),[37] which was enacted on March 19, 1992. Allegedly, by virtue of Section 23 of R.A. No. 7925, otherwise known as the most favored treatment clause or the equality clause, the provision in the franchise of Globe exempting it from local taxes is automatically incorporated in the franchise of Smart.[38] Smart posits that, since the franchise of Globe contains a provision exempting it from municipal or local franchise tax, this provision should also benefit Smart by virtue of Section 23 of R.A. No. 7925. The provision in Globes franchise invoked by Smart reads: 

(b) The grantee shall further pay to the Treasurer of the Philippines each year after the audit and approval of the accounts as prescribed in this Act, one and one-half per centum of all gross receipts from business transacted under this franchise by the said grantee in the Philippines, in lieu of any and all taxes of any kind, nature or description levied, established or collected by any authority whatsoever, municipal, provincial or national, from which the grantee is hereby expressly exempted, effective from the date of the approval of Republic Act Numbered Sixteen hundred eighteen.[39]

  

We find no reason to disturb the previous pronouncements of this Court regarding the interpretation of Section 23 of R.A. No. 7925. As aptly explained in the en banc decision of this Court in Philippine Long Distance Telephone Company, Inc. v. City of Davao,[40] and recently in Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan,[41] Congress, in approving Section 23 of R.A. No. 7925, did not intend it to operate as a blanket tax exemption to all telecommunications entities.[42] The language of Section 23 of R.A. No. 7925 and the proceedings of both Houses of Congress are bereft of anything that would signify the grant of tax exemptions to all telecommunications entities, including those whose exemptions had been withdrawn by R.A. No. 7160.[43] The termexemption in Section 23 of R.A. No. 7925 does not mean tax exemption. The term refers to exemption from certain regulations and requirements imposed by the National Telecommunications Commission.[44]

 Furthermore, in the franchise of Globe (R.A. No. 7229), the legislature incontrovertibly stated that it will be liable for one and one-half per centum of all gross receipts from business transacted under the franchise, in lieu of any and all taxes of any kind, nature, or description levied, established, or collected by any authority whatsoever, municipal, provincial, or national, from which the grantee is hereby expressly exempted.[45] The grant of exemption from municipal, provincial, or national is clear and categorical that aside from the franchise tax collected by virtue of R.A. No. 7229, no other franchise tax may be collected from Globe regardless of who the taxing power is. No such provision is found in the franchise of Smart; the kind of tax from which it is exempted is not clearly specified. 

As previously explained by the Court, the stance of Smart would lead to absurd consequences. 

The acceptance of petitioner's theory would result in absurd consequences. To illustrate: In its franchise, Globe is required to pay a franchise tax of only one and one-half percentum (1%) of all gross receipts from its transactions while Smart is required to pay a tax of three percent (3%) on all gross receipts from business transacted. Petitioner's theory would require that, to level the playing field, any "advantage, favor, privilege, exemption, or immunity" granted to Globe must be extended to all telecommunications companies, including Smart. If, later, Congress again grants a franchise to another telecommunications company imposing, say, one percent (1%) franchise tax, then all other telecommunications franchises will have to be adjusted to "level the playing field" so to speak. This could not have been the intent of Congress in enacting 23 of Rep. Act 7925. Petitioner's theory will leave the Government with the burden of having to keep track of all granted telecommunications franchises, lest some companies be treated unequally. It is different if Congress enacts a law specifically granting uniform advantages, favor, privilege, exemption, or immunity to all telecommunications entities.[46]

  VI. Non-impairment Clause of the Constitution

 Another argument of Smart is that the imposition of the local franchise tax by the City of  Davao would violate the constitutional prohibition against impairment of contracts. The franchise, according to petitioner, is in the nature of a contract between the government and Smart.[47]

 However, we find that there is no violation of Article III, Section 10 of the 1987 Philippine Constitution.  As previously discussed, the franchise of Smart does not expressly provide for exemption from local taxes. Absent the express provision on such exemption under the franchise, we are constrained to rule against it. The in lieu of all taxes clause in Section 9 of R.A. No. 7294 leaves much room for interpretation. Due to this ambiguity in the law, the doubt must be resolved against the grant of tax exemption. Moreover, Smarts franchise was granted with the express condition that it is subject to amendment, alteration, or repeal.[48] As held in Tolentino v. Secretary of Finance: [49]

 It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing power of the State. For not only are existing laws read into contracts in order to fix obligations as between parties, but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace and good order of society.  

In truth, the Contract Clause has never been thought as a limitation on the exercise of the States power of taxation save only where a tax exemption has been granted for a valid consideration. x x x.

  

WHEREFORE, the instant petition is DENIED for lack of merit. Costs against petitioner. 

SO ORDERED

PROVINCIAL ASSESSOR OF MARINDUQUE VS CA AND MARCOPPER MINING CORP.

The Provincial Assessor of the Province of Marinduque (petitioner) assails by Petition for Certiorari under Rule 65 of the Rules of Court the May 30, 2005 Decision[1] of the Court of Appeals (CA) which declared the Siltation Dam and Decant System of Marcopper Mining Corporation (respondent) exempt from real property tax; and the September 29, 2005 CA Resolution [2] which denied petitioners motion for reconsideration.

 

Petitioner issued against respondent an Assessment Notice,[3] dated March 28, 1994, for real property taxes due on the latter's real properties, including its Siltation Dam and Decant System (subject property) at BarangayLamese, Sta. Cruz, Marinduque. The subject property is covered by Tax Declaration No. 05-35697 dated November 17, 1993, and has a market value of Php36,360,996.19.[4]

 

Respondent paid the tax demanded,[5] but appealed the assessment before the Local Board of Assessment Appeals (LBAA) on the ground that the subject property is exempt from real property taxation under Section 234(e) of Republic Act (R.A.) No. 7160[6] or the Local Government Code of 1991, which provides:

 

Sec. 234. Exemptions from Real Property Tax. - The following are exempted from payment of the real property tax:

x x x

 

(e) Machinery and equipment used for pollution control and environmental protection.

 

x x x x (Emphasis supplied)

Attached to its appeal is an Affidavit issued by its Chief Mining Engineer Ricardo Esquieres, Jr. (Esquieres), stating that the subject property was constructed to comply with the condition imposed by the Department of Environment and Natural Resources (DENR) that respondent prevent run-offs and silt materials from contaminating the Mogpog and Boac Rivers; and describing the subject property as a specialized combination of essential impervious earth materials with a special provision for a spillway and a diversion canal. Esquieres explains that the subject property is intended for the purpose of pollution control, sediment control, domestic and agricultural water supply and flood control.[7]

 Respondent also submitted a May 24, 1994 Certification issued by DENR Regional Technical Director Carlos J. Magno that the subject property is a SiltationDam structure intended primarily for pollution control of silted materials x x x.[8]

 In a Decision[9] dated November 10, 1995, the LBAA dismissed respondent's appeal for having been filed out of time. It further held that the subject property is taxable as an improvement on the principal real property, citing the ruling of the Court in Benguet Corporation v. Central Board of Assessment Appeals[10] that a tailings dam is a permanent improvement not exempt from real property taxation. 

Respondent appealed[11] to the Central Board of Assessment Appeals (CBAA) which, in a Decision[12] dated December 21, 1998, held that respondents appeal with the LBAA is timely, but the same lacked legal basis because the subject property was neither a machinery nor an equipment but a permanent improvement, and therefore not tax exempt under Sec. 234(e) of R.A. No. 7160. Citing the definition of machinery under Sec. 199 of R.A. No. 7160, viz.:

 

Sec. 199. Definition of Terms. When used in this Title, the term:

 

x x x x

 

(o) Machinery embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus which may or may not be attached, permanently or temporarily, to the real property. It includes the physical facilities for production, the installations and appurtenant service facilities, those which are mobile, self-powered or self-propelled, and those not permanently attached to the real property which are actually, directly, and exclusively used to meet the needs of the particular industry, business or activity and which by their very nature and purpose are designed for, or necessary to its manufacturing, mining, logging, commercial, industrial or agricultural purposes.

 the CBAA held that to be considered a machinery, the subject property must either be a physical facility for production; or a service facility; or one that is actually, directly and exclusively used to meet the needs of the particular industry, business, or activity; and which by its very nature and purpose is designed for, or necessary to a manufacturing, mining, logging, commercial, industrial or agricultural purpose. The subject property does not produce anything nor operate as auxiliary to a production process; thus, it is neither a physical facility for production nor a service facility. It is not even necessary to the mining activity of respondent, because its purpose is merely to contain silt and sediments.[13]

 Moreover, the CBAA noted that based on an ocular inspection it conducted, the subject property had not been actually used for pollution control, for it had been out of operation since 1993.[14]

 Respondent filed a Petition/Motion for Partial Reconsideration,[15] but the CBAA denied the same in its July 27, 2000 Resolution.[16]

 

Respondent appealed[17] to the CA on the sole issue of whether the subject property was tax exempt under Sec. 234(e) of R.A. No. 7160.[18]

 

The CA reversed the LBAA and CBAA in its Decision dated May 30, 2005 herein assailed, the dispositive portion of which reads:

 

THE FOREGOING DISQUISITIONS CONSIDERED, the instant petition for review is hereby GRANTED, the assailed Decision and Resolution of the Central Board of Assessment Appeals, dated December 21, 1998 and July 27, 2000, respectively are REVERSED and SET ASIDE. The petitioner's siltation dam and decant system being exempt from real property tax as it is hereby determined, the Municipal Treasurer of Sta. Cruz, Marinduque, is hereby directed to refund the tax payments made by petitioner under protest, or in lieu thereof, to credit said payments in favor of petitioner for any taxes it will be required to pay in the future.

 

SO ORDERED.[19]

 

The CA held that the concept of machinery under Section 199 of R.A. No. 7160 is broad enough to include a machinery, instrument, apparatus or device consisting of parts which, functioning together, allows a person to perform a task more efficiently, such as the subject property. Not only does it function as a machinery, but it is also actually and directly used for the mining business of petitioner. The CA noted that it was constructed in compliance with a DENR requirement; thus, it is part and parcel of [respondent's] mining operations to protect the environment within which it operates xxx [i]t is a device used for cleaning up after production, in order to clean the water which must necessarily flow into the Mogpog and Boac Rivers.[20]

 

Thus, the CA held that the subject property was exempt from real property taxation under Section 91 of R.A. No. 7942 or the Philippine Mining Act of 1995,[21] viz.:

 

Sec. 91. Incentives for Pollution Control Devices. Pollution control devices acquired, constructed or installed by contractors shall not be considered as improvements on the land or building where they are placed, and shall not be subject to real property and other taxes or assessments: Provided, however, That payment of mine wastes and tailings fees is not exempted. (Emphasis supplied)

 

It qualifies as a pollution control device defined under DENR Administrative Order No. 95-23 as an infrastructure, machinery, equipment, and/or improvement used for impounding, treating or neutralizing, precipitating, filtering, conveying and cleansing mine industrial waste and tailing, as well as eliminating and reducing hazardous effects of solid particles, chemicals, liquids or other harmful by-products and gases emitted from any facility utilized in mining operations for their disposal.[22] The definition extends to all kinds of pollution control devices acquired, constructed, or installed on the land or buildings of the mining corporation.[23]

 

Finally, the CA ruled that, contrary to the view of the CBAA, the non-operational state of the subject property does not remove it from the purview of the clear provisions of R.A. No. 7160 x x x and R.A. No. 7942 x x x [i]n the absence of clear and convincing evidence that the siltation dam and decant system was inutile to achieve its purpose prior to being damaged, and continued to be so x x x.[24]

 

Petitioner filed a Motion for Reconsideration,[25] but the CA denied it in a Resolution[26] dated September 29, 2005.

 

Hence, the present petition, raising two main issues:

 

I. The propriety of the present action for certiorari under Rule 65 of the Rules of Court:

 

i. Whether or not there is available to Petitioner, the remedy of appeal or other plain, speedy and adequate remedy in the ordinary course of law;

 

ii. Whether or not a petition for review on certiorari under Rule 45 of the Rules of Court is the appropriate remedy;

 

iii. Whether or not, if available to the Petitioner, the remedy of appeal or other plain, speedy and adequate remedy in the ordinary course of law were lost through the fault of the Petitioner.

 

II. Whether or not the Respondent court committed grave abuse of discretion amounting to lack or excess of jurisdiction when it rendered the Decision and its subsequent Resolution, exempting the siltation dam and decant system of Respondent Marcopper from the real property tax imposed by the Provincial Government of Marinduque.

 

i. Respondent Court of Appeals committed grave abuse of discretion amounting to lack or excess of jurisdiction when it whimsically, arbitrarily and capriciously disregarded by treating as though non-existent, the established and undisputed fact that the Siltation Dam Decant System of Respondent Marcopper was damaged and has not been in operation since 1993 up to, at the very least, the ocular inspection conducted by the CBAA in November 1996, if not up to the present, given the failure of Respondent Marcopper to claim otherwise;

 

ii. Respondent Court of Appeals committed grave abuse of discretion amounting to lack or excess of jurisdiction when it whimsically, arbitrarily and capriciously disregarded, by treating as though non-existent, the established and undisputed fact that Respondent Marcopper does not have a certificate of tax exemption from the DENR under the provisions of the Philippine Mining Act of 1995 so as to entitle it to exemption from the realty tax imposed by the local government of Marinduque.

 

iii. Respondent Court of Appeals committed grave abuse of discretion amounting to lack or excess of jurisdiction when, inspite of the non-operation during the relevant years of the Siltation Dam and Decant System, the lack of certificate of tax exemption therefor and the clear and unambiguous provisions of the Local Government Code and the Philippine Mining Act of 1995, it declared the aforesaid real property as a machinery and equipment or a pollution control device that is exempt from realty tax.[27] (Emphasis supplied)

 

Petitioner posits that the CA committed not only a reversible error in holding that the subject property is tax exempt under Sec. 234(e) of R.A. No. 7160, but also a grave abuse of discretion in discarding key factual findings of both the LBAA and the CBAA regarding the nature of the subject property -- which factual findings respondent did not even controvert. Petitioner points out that the CBAA found that the subject property had not been used for pollution control because it had been out of operation since 1993;[28] and respondent admitted this in its Petition for Review before the CA where it categorically stated that [w]hat is not denied, however, which even thebarangay resolutions state was that the siltation dam was damaged in 1993 when a typhoon hit Marinduque. This naturally affected the environment in the area for which reason Marcopper specifically wanted to repair the dam.[29] Yet, petitioner argues, the CA completely ignored such undisputed fact by holding that there is absence of clear and convincing evidence that the siltation dam and decant system was inutile to achieve its purpose prior to being damaged, and continued to be so x x x.[30]

 

Petitioner further cites the finding of the CBAA that respondent did not obtain from the DENR a certification of the tax exempt classification of the subject properties. This CBAA finding was not controverted by respondent in its pleadings before the CA; yet, said court completely glossed over this matter and declared the subject properties tax exempt.[31]

 

On the other hand, respondent contends that petitioner's mode of appeal from the CA Decision should have been a Petition for Review on Certiorari under Rule 45 of the Rules of Court filed within fifteen (15) days from October 13, 2005, the day petitioner received notice of the CA Resolution denying its motion for reconsideration. That petitioner filed instead a Petition for Certiorari on December 12, 2005 -- the 60th day from receipt of the CA Resolution -- indicates that it resorted to a special civil action for certiorari as a substitute for the appeal it had lost;[32] worse, petitioner raised factual issues which the Court cannot resolve for it is no trier of facts.[33]

The petition has merit.

 

On the proper mode of appeal

 

Previously, under Section 36 of Presidential Decree (P.D.) No. 464 or the Real Property Tax Code, the proper mode of appeal from a decision rendered by the CBAA was by special civil action for certiorari filed directly with the Court.[34] However, with the passage of R.A. No. 7902,[35] granting the CA exclusive appellate jurisdiction over decisions of boards and commissions, the Court issued Revised Administrative Circular No. 1-95[36] which provides under paragraphs 1[37] and 5[38] that appeal from a decision of the CBAA shall be by Petition for Review with the CA. Thus, from the final judgment of the CA, appeal to the Court on questions of law is by Petition for Review on Certiorari under Rule 45 of the Rules of Court.[39] The availability of such remedy bars recourse to a special civil action for certiorari even if one of the grounds invoked is grave abuse of discretion.[40]

 

Indeed, petitioner erred in its mode of appeal by Petition for Certiorari under Rule 65.[41] Nonetheless, in its Resolution[42] of July 5, 2006, the Court gave due course to the petition for it involves not only the power of taxation of a local government unit but also its stewardship of the environment. The higher interest of public welfare dictates that the Court suspend its rules pro hac vice in order to resolve the merits of the petition.[43]

 

On whether the subject property is exempt from real property taxation

 

It should be borne in mind that the protest and appeals filed by respondents before the LBAA, CBAA, and CA refer to the Assessment Notice dated March 28, 1994 and effective January 1, 1995.[44] No other assessment notice is under question.

 

The disputed assessment notice having taken effect on January 1, 1995, its validity is determined by the provisions of Title II (Real Property Taxation) of R.A. No. 7160, effective January 1, 1992. R.A. No. 7942 has no bearing on the matter, for this law came into effect only on April 14, 1995. Hence, reference to R.A. No. 7942 by the CA and the respondent are all out of place.

 

Title II of R.A. No. 7160 governs the administration, appraisal, assessment, levy and collection of real property tax. Section 234 thereof grants exemption from real property taxation based on ownership, character or usage. As the Court explained in Mactan Cebu International Airport Authority v. Marcos,[45] to wit: 

Section 234 of the LGC provides for the exemptions from payment of real property taxes and withdraws previous exemptions therefrom granted to natural and juridical persons, including government-owned and controlled corporations, except as provided therein.

 

x x x x

 

These exemptions are based on the ownership, character, and use of the property. Thus:

 

(a) Ownership Exemptions. Exemptions from real property taxes on the basis of ownership are real properties owned by: (i) the Republic, (ii) a province, (iii) a city, (iv) a municipality, (v) a barangay, and (vi) registered cooperatives.

 

(b) Character Exemptions. Exempted from real property taxes on the basis of their character are: (i) charitable institutions, (ii) houses and temples of prayer like churches, parsonages or convents appurtenant thereto, mosques, and (iii) non-profit or religious cemeteries.

 

(c) Usage exemptions. Exempted from real property taxes on the basis of the actual, direct and exclusive use to which they are devoted are: (i) all lands, buildings and improvements which are actually directly and exclusively used for religious, charitable or educational purposes; (ii) all machineries and equipment actually, directly and exclusively used by local water districts or by government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; and (iii) all machinery and equipment used for pollution control and environmental protection.

 

To help provide a healthy environment in the midst of the modernization of the country, all machinery and equipment for pollution control and environmental protection may not be taxed by local governments. (Emphasis supplied)

 

As held in Mactan, the exemption granted under Sec. 234(e) of R.A. No. 7160 to [m]achinery and equipment used for pollution control and environmental protection is based on usage. The term usage means direct, immediate and actual application of the property itself to the exempting purpose.[46] Section 199 of R.A. No. 7160 defines actual use as the purpose for which the property is principally or predominantly utilized by the person in possession thereof. It contemplates concrete, as distinguished from mere potential, use. Thus, a claim for exemption under Sec. 234(e) of R.A. No. 7160 should be supported by evidence that the property sought to be exempt is actually, directly and exclusively used for pollution control and environmental protection.[47]

 

The records yield no allegation or evidence by respondent that the subject property was actually, directly and exclusively used for pollution control and environmental protection during the period covered by the assessment notice under protest. Rather, the finding of the CBAA that said property apparently out of commission and not apt to its function as would control pollution and protect the environment[48] stands undisputed; such finding is even admitted by respondent when, to repeat, in its Petition for Review before the CA, it categorically stated that [w]hat is not denied, however, which even the barangay resolutions state was that the siltation dam was damaged in 1993 when a typhoon hit Marinduque. This naturally affected the environment in the area for which reason Marcopper specifically wanted to repair the dam.[49]

 Moreover, Sec. 206 prescribes the evidentiary requirements for exemption from real property taxation, viz.: Sec. 206. Proof of Exemption of Real Property from Taxation. - Every person by or for whom real property is declared, who shall claim tax exemption for such property under this Title shall file with the provincial, city or municipal assessor within thirty (30) days from the date of the declaration of real property sufficient documentary evidence in support of such claim including corporate charters, title of ownership, articles of incorporation, bylaws, contracts, affidavits, certifications and mortgage deeds, and similar documents. If the required evidence is not submitted within the period herein prescribed, the property shall be listed as taxable in the assessment roll. However, if the property shall be proven to be tax exempt, the same shall be dropped from the assessment roll. (Emphasis supplied) The burden is upon the taxpayer to prove, by clear and convincing evidence, that his claim for exemption has legal and factual basis.

[50]

 

As aptly pointed out by petitioner, there is no allegation nor evidence in respondent's pleadings that it had complied with the procedural requirement under Sec. 206. There is nothing in the records that would indicate that, within 30 days from its filing of Tax Declaration No. 05-35697 on November 17, 1993,[51] respondent filed with the provincial assessor an application for exemption or any documentary evidence of the exempt status of the subject property.What respondent submitted along with its appeal before the LBAA are Affidavit of Esquieres,[52] the project design of the subject property,[53] as well as a Certification[54] dated May 24, 1994 issued by Carlos J. Magno, Regional Technical Director of DENR Regional Office No. IV.But far from proving that the subject property is tax exempt, the documents classify the subject property as anything but machinery or equipment. The DENR Certification classifies the subject property as a structure intended primarily for pollution control of silted materials in order to protect the environmental degredation of Maguila-guila, Mangamu-Mogpog Riversystem from getting turbid.[55] That the subject property is a structure is further underscored by the project design which describes the subject property as a zoned earth siltation dam[56] composed of a clay core consisting of clayey materials or impervious fill, a random fill made up of heavily to intensely fractured metarock, and filters comprised of course tailings, river sand deposits and course filter gravels.[57]

It is described in greater detail by respondents Chief Mining Engineer Ricardo Esquieres, Jr. in an October 11, 1994 Affidavit[58] attached to respondents appeal[59] before the LBAA, thus:

 7. The siltation dam and decant system was constructed sometime in August 1992. It is not only a specialized combination of essential impervious earth materials which provide adequate strength and detention of turbid streamwater. It also has special provisions like spillway and diversion canal which also promote its integrity by providing a safe outlet of the impounded streamwater. Basically, the zoned-earth dam is composed of a clay core, random fill and filter drains. 

1. Clay core impervious central portion of the dam to be inclined with a width to heat ratio greater than 1.0 and designed to be thick thick enough to reduce seepage. 2. Random fill relatively more permeable than the clay core and of greater strength. Placed at the upstream face of the dam (to serve as armor or ballast against slope stablity).3. Filters designed to ensure that the dam structure is always in its full drained state, thus, relieving any pore pressure that may develop behind the dam.[60]

 Therefore, by design, composition and function, the subject property is a structure adhered to the soil, and has neither a mechanical contrivance, instrument, tool, implement, appliances, apparatus, nor paraphernalia that produces a mechanical effect or performs a mechanical work of any kind.[61] It meets none of the following features of a machinery as described in Section 199(o) of R.A. No. 7160:

 (o) Machinery embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus which may or may not be attached, permanently or temporarily, to the real property. It includes the physical facilities for production, the installations and appurtenant service facilities, those which are mobile, self-powered or self-propelled and those not permanently attached to the real property which are actually, directly, and exclusively used to meet the needs of the particular industry, business or activity and which by their very nature and purpose are designed for, or necessary to its manufacturing, mining, logging, commercial, industrial or agricultural purposes.

 That a structure such as the subject property does not qualify as a machinery or equipment used for pollution control as contemplated under R.A. No. 7160 is evident from the adoption of an expanded definition of pollution control device in R.A. No. 7942. Under Section 3 (am) thereof, a pollution control device now also refers to infrastructure or improvement, and not just to machinery or equipment. This new concept, however, cannot benefit respondent, for the assessment notice under review pertains to real property tax assessed prior to the amendment of Sec. 234 (e) of R.A. No. 7160 by Sec. 91 in relation to Sec. 3 (am) of R.A. No. 7942. It is settled that tax laws are prospective in application, unless expressly provided to apply retroactively.[62] R.A. No. 7942 does not provide for the retroactive application of its provisions. In sum, the CA committed grave abuse of discretion in ignoring irrefutable evidence that the subject property is not a machinery used for pollution control, but a structure adhering to the soil and intended for pollution control, but has not been actually applied for that purpose during the period under assessment. WHEREFORE, the petition is GRANTED. The Decision dated May 30, 2005 and Resolution dated September 29, 2005 are REVERSED and SET ASIDE. The Assessment Notice dated March 28, 1994 is declaredVALID under the then applicable Republic Act No. 7160. 

No costs. 

SO ORDERED.