Batangas City vs. Pilipinas Shell Petroleum Corporation

A local government unit is prohibited from imposing any tax, fee, or charge on petroleum products, including business taxes on the privilege of manufacturing and distributing such products, pursuant to Section 133(h) of the Local Government Code, which is a specific limitation that prevails over the general grant of taxing power under Section 143(h).

Pilipinas Shell Petroleum Corporation operated an oil refinery and depot in Tabangao, Batangas City, where it manufactured and distributed petroleum products nationwide. In 2002, the company was paying only about ₱98,964.71 for fees and charges, including a minimal Mayor’s Permit fee. In early 2001, Batangas City, through its City Legal Officer, served a notice of assessment demanding ₱92,373,720.50 as a manufacturer’s tax, ₱312,656,253.04 as a distributor’s tax, and ₱4,299,851.00 as a Mayor’s Permit Fee based on gross sales. The assessment was purportedly grounded on Section 134 of the Local Government Code and the Batangas City Tax Code. Shell protested the assessment, asserting it was not liable for local business tax on petroleum products and that the Mayor’s Permit Fee was confiscatory.

• Nature of the Action: Pilipinas Shell Petroleum Corporation (respondent) sought to nullify the assessment of local business taxes on the manufacture and distribution of petroleum products and a Mayor’s Permit Fee imposed by Batangas City.
• Assessment: In February 2001, Batangas City, through its City Legal Officer, sent a notice of assessment demanding ₱92,373,720.50 as a manufacturer’s tax and ₱312,656,253.04 as a distributor’s tax, plus ₱4,299,851.00 as a Mayor’s Permit Fee based on gross sales. The assessment was purportedly made under Section 134 of the LGC and Section 23 of the Batangas City Tax Code of 2002.
• Protest: Respondent filed a protest on April 17, 2002, arguing that it was not liable for local business tax either as a manufacturer or distributor of petroleum products, and that the Mayor’s Permit Fee was exorbitant, confiscatory, and not commensurable with the cost of issuing a license.
• Denial of Protest: Petitioners denied the protest on May 13, 2002 and declared their power to withhold the issuance of a Mayor’s Permit for respondent’s failure to pay the assessed business taxes.
• RTC Decision: On October 29, 2004, the RTC of Batangas City upheld the validity of the business tax assessments on the manufacture and distribution of petroleum products, ordering respondent to pay ₱405,030,003.54. The RTC revoked the Mayor’s Permit Fee assessment as excessive, without prejudice to its modification by the city.
• Proceedings before CTA: Respondent appealed to the CTA Second Division, which granted the petition and held that respondent was not liable for business taxes on petroleum products because of the express limitation in Section 133(h) of the LGC. The CTA ordered the refund of excessive Mayor’s Permit Fees in the amount of ₱3,870,860.00. The CTA En Banc affirmed the Amended Decision in its entirety.

• Power to Tax Businesses: Petitioners argued that the authority granted to LGUs under Section 143 of the LGC is broad enough to cover any business, including the manufacture and distribution of petroleum products. They posited that Section 143(h) constitutes a catch-all provision permitting the taxation of any business not otherwise specified, even those already subject to excise, VAT, or percentage tax under the NIRC, provided the rate does not exceed two percent of gross sales or receipts.
• Interpretation of Section 133(h): Petitioners maintained that the word “taxes” in Section 133(h) does not include business taxes. They interpreted the provision as prohibiting only excise taxes on articles enumerated under the NIRC, not business taxes on the activity or privilege of manufacturing and distributing petroleum products.
• Distinction Between Taxes on Articles and Taxes on Business: Petitioners asserted that a distinction exists between taxes imposed directly on articles (excise taxes) and taxes imposed on the privilege of engaging in a business. They contended that the prohibition under Section 133(h) applies solely to the former and does not bar local business taxes.

• Prohibition Under Section 133(h): Whether a local government unit is empowered under the Local Government Code to impose business taxes on persons or entities engaged in the business of manufacturing and distribution of petroleum products, in light of the prohibition in Section 133(h) of the same Code.

• Prohibition Under Section 133(h): The imposition of business taxes on the manufacture and distribution of petroleum products is prohibited by Section 133(h) of the Local Government Code. Section 133(h) contains two distinct prohibitions: (1) excise taxes on articles enumerated under the NIRC; and (2) “taxes, fees or charges on petroleum products.” The second prohibition is an unqualified bar against any local levy on petroleum products—whether excise taxes, business taxes, fees, or charges. Section 143(h), which grants LGUs the general power to tax businesses, is a general provision; it cannot override the specific prohibition in Section 133(h). Under the rule of generalia specialibus non derogant, a special and specific provision prevails over a general one. Thus, the specific exemption for petroleum products under Section 133(h) limits the omnibus grant of taxing power under Section 143. Moreover, Article 232(h) of the Implementing Rules and Regulations of the LGC explicitly states that businesses engaged in the production, manufacture, refining, distribution, or sale of oil, gasoline, and other petroleum products shall not be subject to any local tax imposed under that Article. The prohibition extends not only to petroleum products as such but also to the activity or privilege relating to them, such as manufacturing and distribution.

• Local Government Units’ Power to Tax is Delegated and Limited: The power to tax is inherent in the State, not in local government units. LGUs derive their taxing power from a congressional delegation and must exercise it subject to the guidelines and limitations Congress may provide, as mandated by Section 5, Article X of the 1987 Constitution. Any doubt in the construction of the taxing power must be resolved strictly against the LGU (strictissimi juris). (Citing Pelizloy Realty Corporation v. The Province of Benguet and Icard v. City Council of Baguio)
• Specific Prohibition Prevails Over General Grant (Generalia Specialibus Non Derogant): Where a statute contains both a general grant of power and a specific exception or limitation, the specific provision must prevail, regardless of their relative positions in the law. Section 133(h) is a specific limitation on the taxing power of LGUs; Section 143(h) is a general grant. The specific prohibition on taxing petroleum products therefore overrides the general authority to tax businesses.
• Section 133(h) of the Local Government Code — Two Distinct Prohibitions: Section 133(h) imposes two separate limitations on LGUs: (a) they cannot levy excise taxes on any article already subject to excise tax under the NIRC (e.g., alcohol, tobacco, automobiles, jewelry); and (b) they cannot levy any tax, fee, or charge—of whatever kind—on petroleum products. The prohibition on petroleum products is absolute and extends to business taxes on the privilege of manufacturing, distributing, or dealing in such products. The IRR reinforces this by categorically exempting businesses engaged in petroleum production, manufacture, refining, distribution, or sale from any local tax under the business tax article.

• “Indisputably, the power of LGUs to impose business taxes derives from Section 143 of the LGC. However, the same is subject to the explicit statutory impediment provided for under Section 133(h) of the same Code which prohibits LGUs from imposing ‘taxes, fees or charges on petroleum products.’ It can, therefore, be deduced that although petroleum products are subject to excise tax, the same is specifically excluded from the broad power granted to LGUs under Section 143(h) of the LGC to impose business taxes.”
• “Section 133(h) of the LGC makes plain that the prohibition with respect to petroleum products extends not only to excise taxes thereon, but all ‘taxes, fees or charges.’ … [A] specific prohibition is imposed barring the levying of any other type of taxes with respect to petroleum products.”
• “Strictly speaking, as long as the subject matter of the taxing powers of the LGUs is the petroleum products per se or even the activity or privilege related to the petroleum products, such as manufacturing and distribution of said products, it is covered by the said limitation and thus, no levy can be imposed.”

• City of Manila, et al. v. Hon. Colet, et al. (consolidated cases), G.R. Nos. 120051, 121613, 121675, 121704, 121720-28, 121847-55, 122333, 122335, 122349, and 124855, December 10, 2014 — Followed as authority for the rule that LGUs’ taxing power is subject to the limitations in Section 133 of the LGC, and for the canon of statutory construction that specific provisions prevail over general ones.
• Petron Corporation v. Mayor Tiangco, et al., 574 Phil. 620 (2008) — Relied upon to support the interpretation that Section 133(h) prohibits not only excise taxes but all taxes, fees, and charges on petroleum products, including business taxes.
• Pelizloy Realty Corporation v. The Province of Benguet — Cited for the principle that the power to tax inheres in the State and is merely delegated to LGUs, which must exercise it within congressional limitations.
• Icard v. City Council of Baguio — Cited for the rule that the taxing power of a municipal corporation must be constituted in strictissimi juris, with any doubt resolved against the municipality.

• Section 5, Article X, 1987 Constitution — Provides that each LGU 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 Congress may provide. Applied to underscore that the taxing power of LGUs is not plenary but constrained by legislative restrictions.
• Section 133(h), Republic Act No. 7160 (Local Government Code of 1991) — Enumerates common limitations on LGU taxing powers, expressly prohibiting the levy of “excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products.” Interpreted to bar any local business tax on the manufacture and distribution of petroleum products.
• Section 143, Local Government Code — Grants municipalities the power to impose taxes on businesses, including manufacturers, distributors, and any business not otherwise specified. Held that this general power is subject to the specific limitation in Section 133(h).
• Article 232(h), Implementing Rules and Regulations of the Local Government Code — Clarifies that any business engaged in the production, manufacture, refining, distribution, or sale of oil, gasoline, and other petroleum products shall not be subject to any local tax imposed under the article on business taxes. Reinforces the statutory prohibition.

Associate Justice Teresita J. Leonardo-De Castro, Associate Justice Martin S. Villarama, Jr., Associate Justice Jose Portugal Perez, and Associate Justice Estela M. Perlas-Bernabe concurred. Chief Justice Maria Lourdes P.A. Sereno certified the decision.