G.R. No.

199752 February 17, 2015

LUCENA D. DEMAALA, Petitioner,

vs.
COMMISSION ON AUDIT, represented by its Chairperson Commissioner MA.
GRACIA M. PULIDO TAN,Respondent.

FACTS: The Sangguniang Panlalawigan of Palawan enacted Provincial Ordinance No.

332-A, Series of 1995,entitled "An Ordinance Approving and Adopting the Code
Governing the Revision of Assessments, Classification and Valuation of Real Properties
in the Province of Palawan" (Ordinance). Chapter 5, Section 48 of the Ordinance
provides for an additional levy on real property tax for the special education fund at the
rate of 0.5% as follows: Section 48- Additional Levy on Real Property Tax for Special
Education Fund. There is hereby levied an annual tax at the rate of 1/2% of the
assessed value property tax. The proceeds thereof shall exclusively accrue to the
Special Education Fund (SEF).

In conformity with Section 48 of the Ordinance, the Municipality of Narra, Palawan, with
Demaala as mayor, collected from owners of real properties located within its territory an
annual tax as special education fund at the rate of 0.5% of the assessed value of the
property subject to tax. This collection was effected through the municipal treasurer.

On post-audit, Audit Team Leader Nostratis issued Audit Observation Memorandum

(AOM) No. 03-005 dated August 7, 2003 in which he noted supposed deficiencies in the
special education fund collected by the Municipality of Narra. He questioned the levy of
the special education fund at the rate of only 0.5% rather than at 1%, the rate stated in
Section 235 of the LGC.
After evaluating AOM No. 03-005, Regional Cluster Director Sy issued NC No. 2004-04-
101 dated August 30, 2004 in the amount of P1,125,416.56. He held Demaala, the
municipal treasurer of Narra, and all special education fund payors liable for the
deficiency in special education fund collections.

ISSUES: (1) Whether or not respondent committed grave abuse of discretion amounting
to lack or excess of jurisdiction in holding that there was a deficiency in the Municipality
of Narras collection of the additional levy for the special education fund. Whether a
municipality within the Metropolitan Manila Area, a city, or a province may have an
additional levy on real property for the special education fund at the rate of less than 1%.
(2) Assuming that respondent correctly held that there was a deficiency, whether
respondent committed grave abuse of discretion amounting to lack or excess or
jurisdiction in holding petitioner personally liable for the deficiency.

RULING: The Supreme Court ruled in favor of the petitioner.

(1) YES.
The power to tax is an attribute of sovereignty. It is inherent in the state.
Provinces, cities, municipalities, and barangays are mere territorial and political
subdivisions of the state. They act only as part of the sovereign. Thus, they do not have
the inherent power to tax. Their power to tax must be prescribed by law.
 Consistent with the view that the power to tax does not inhere in local
government units, this court has held that a reserved temperament must be adhered to
in construing the extent of a local government units power to tax.

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.

Setting the rate of the additional levy for the special education fund at less than
1% is within the taxing power of local government units. It is consistent with the guiding
constitutional principle of local autonomy. Section 235 of the Local Government Code
allows provinces and cities, as well as municipalities in Metro Manila, to collect, on top of
the basic annual real property tax, an additional levy which shall exclusively accrue to
the special education fund.

There are, in this case, three (3) considerations that illumine the Courts task of
interpretation: (1) the text of Section 235, which, to reiterate, is cast in permissive
language; (2) the seminal purpose of fiscal autonomy; and (3) the jurisprudentially
established preference for weighing the scales in favor of autonomy of local government
units. The Court find it to be in keeping with harmonizing these considerations to
conclude that Section 235s specified rate of 1% is a maximum rate rather than an
immutable edict. Accordingly, it was well within the power of the Sangguniang
Panlalawigan of Palawan to enact an ordinance providing for additional levy on real
property tax for the special education fund at the rate of 0.5% rather than at 1%.

(2) It was an error amounting to grave abuse of discretion for respondent to hold
petitioner personally liable for the supposed deficiency.

Having established the propriety of imposing an additional levy for the special education
fund at the rate of 0.5%, it follows that there was nothing erroneous in the Municipality of
Narras having acted pursuant to Section 48 of the Ordinance. It could thus not be
faulted for collecting from owners of real properties located within its territory an annual
tax as special education fund at the rate of 0.5% of the assessed value subject to tax of
the property. Likewise, it follows that it was an error for respondent to hold petitioner
personally liable for the supposed deficiency in collections.

Even if a contrary ruling were to be had on the propriety of collecting at a rate less than
1%, it would still not follow that petitioner is personally liable for deficiencies.

CITY OF MAKATI, petitioner

vs.
TRANS-ASIA GENERATION CORPORATION, respondent
FACTS:

For the years 1996 to 2005, petitioner classified respondent as 'PRODUCER' for
Local Business Tax (LBT) purposes and respondent paid the corresponding business
tax. For the first two quarters of 2006, petitioner also paid LBT as a 'PRODUCER'.

In the Order of Payment dated June 14, 2006, petitioner changed respondent's
classification from 'PRODUCER' to 'SERVICES-OTHER CO'. Consequently, the third
quarter LBT payment was increased from Php453,910.35 to Php648,443.35, and the
additional amount of P389,066.00 LBT for the first and second quarters was imposed.

On July 17, 2006, respondent paid under protest the business tax of Php648,443
.35 for the 3rd Quarter of 2006 and Php389,066.00 deficiency business taxes for the 1st
and 2nd quarters of 2006, all in the total amount of Php1,039,196.85 (inclusive of
garbage fees of P1,687.50).

On October 13, 2006, or within the reglementary period of two (2) years from
payment of taxes, respondent requested a return from its former classification of
business from 'SERVICES-OTHER CO' to 'PRODUCER' and a refund of
Php583,599.00, representing erroneously and illegally collected excess local business
taxes for the first, second and third quarters of 2006.

As the protest letter remained unresolved, respondent filed a civil action for
Protest of Assessment of Business Tax with Claim for Refund against petitioner on
October 16, 2006 before Branch 134 of the RTC of Makati City. The case entitled Trans-
Asia Power Generation Corporation vs. City of Makati, represented by the City Mayor,
the Hon. Jejomar C. Binay, the OIC City Treasurer, Nelia A.Barlis, and the OIC of the
Business Tax Division, Felito A. Manrique' was docketed as Civil Case No. 06-880.

After the exchange of various pleadings and trial, the Court a quo rendered a
decision in favor of the plaintiff Trans-Asia Power Generation Corporation and against
defendant City of Makati. It ordered the defendant to change back the classification of
plaintiff to Producer or Manufacturer as provided in the Makati Revenue Code for local
business tax purposes; To issue tax credit to plaintiff in the total amount of Php583,599 .
00 representing excess local business tax for the first, second, and third quarters of
2006; To refund subsequent business tax payment made in excess of 52.5/o of 1 /o
that may have been paid by plaintiff under protest and; To pay attorney's fees in the
amount of Php20,000.00. Petitioner moved for reconsideration but it was denied.

The Special First Division of this Court promulgated a Decision affirming the
Decision and Order of the RTC of Makati City. Petitioner thereafter filed a "Motion for
Reconsideration which was denied by the Court a quo in a Resolution.

ISSUE: Whether petitioner correctly reclassified respondent as "Contractor" for local

business tax purposes.

RULING: The definitions of "Contractor" and "Manufacturer" provided under Section 131
(h) and (o):
"Contractor" includes persons, natural or juridical, not subject to professional tax under
Section 139 of this Code, whose activity consists essentially of the sale of all kinds of
services for a fee, regardless of whether or not the performance of the service calls for
the exercise or use of the physical or mental faculties of such contractor or his
employees.

"Manufacturer" includes every person who, by physical or chemical process, alters the
exterior texture or form or inner substance of any raw material or manufactured or
partially manufactured product in such manner as to prepare it for special use or uses as
to which it could not have been put in its original condition, or who by any such process
alters the quality of any raw material or manufactured or partially manufactured products
so as to reduce it to marketable shape or prepare it for any of the use of industry, or who
by any such process combines any such raw material or manufactured or partially
manufactured products with other materials or products of the same or of different kinds
and in such manner that the finished products of such process or manufacture can be
put to a special use or uses to which such raw material or manufactured or partially
manufactured products in their original condition could not have been put, and who in
addition alters such raw material or manufactured or partially manufactured products, or
combines the same to produce such finished products for the purpose of their sale or
distribution to others and not for his own use or consumption.
The Court affirmed the findings of the Special First Division of this Court in the assailed
Decision that respondent's nature of business falls within the category of
"manufacturer/producer" and not "contractor" of electricity.