Primary Holding

The Supreme Court denied Capwire's petition, affirming the dismissal of its appeal. The Court held that Capwire should have exhausted administrative remedies before resorting to court action because factual issues were involved, and that submarine communication cables are considered taxable real property.

Background

Capwire, a telecommunications company, claimed co-ownership of the "Wet Segment" of submarine cable systems laid internationally and reported "Indefeasible Rights in Cable Systems" as property. For loan restructuring, Capwire assessed the value of its right and submitted a sworn statement for real properties. The Provincial Assessor of Batangas then issued real property tax assessments on these cable systems. Capwire contested the assessments, arguing the cables were in international waters and not taxable in the Philippines.

Facts

• 1. Capwire is a Philippine telecommunications company co-owning the "Wet Segment" of international submarine cable systems.
• 2. Capwire reported "Indefeasible Rights in Cable Systems" as property.
• 3. For loan restructuring, Capwire assessed and declared the value of its rights over these systems.
• 4. The Provincial Assessor of Batangas assessed real property taxes on Capwire's submarine cable systems located in Nasugbu, Batangas.
• 5. Capwire argued that the cable systems were in international waters and not taxable Philippine real property and did not avail administrative remedies.
• 6. The Provincial Assessor contended that portions of the cables are within Philippine territorial jurisdiction and thus taxable.
• 7. The systems interconnect at PLDT Landing Station in Nasugbu, Batangas.

Arguments of the Petitioners

• 1. The submarine cable system is located in international waters, outside Philippine territory, and therefore not subject to real property tax in the Philippines.
• 2. Only a pure question of law is involved - the taxability of property in international waters - making administrative remedies unnecessary.
• 3. Recourse to the Local Board of Assessment Appeals and payment under protest are inapplicable because the issue is not the reasonableness of the assessment, but the assessor's authority to tax.

Arguments of the Respondents

• 1. The case involves factual questions, such as the extent and location of the submarine cable system within Philippine territorial jurisdiction and the nature of Capwire’s property rights, requiring administrative determination.
• 2. Capwire failed to exhaust administrative remedies by not appealing to the LBAA and CBAA, and by not paying taxes under protest as required by the Local Government Code.
• 3. Submarine cable systems are taxable real property within the taxing jurisdiction of local governments.

Issues

• 1. Is the case cognizable by administrative agencies and covered by the exhaustion of administrative remedies doctrine under Sections 226 and 229 of the Local Government Code, making the RTC’s dismissal proper?
• 2. Can submarine communication cables be classified as taxable real property by local governments?

Ruling

• 1. The Supreme Court ruled in favor of the Respondents, denying Capwire's petition.
• 2. The Court found that the case involves factual questions needing resolution by administrative bodies like the LBAA before judicial intervention. The location and extent of the cables within Philippine jurisdiction and the nature of Capwire's rights are factual matters.
• 3. The Court held that Capwire prematurely resorted to judicial action without exhausting administrative remedies and paying taxes under protest.
• 4. The Court further ruled that submarine communication cables are akin to electric transmission lines and are considered taxable real property under the Local Government Code, specifically as "machinery" under Article 415(5) of the Civil Code, and also considered immovable property under Article 415(8) of the Civil Code as they are in or on waters.
• 5. The Court also noted that a portion of the cable system is within Philippine territorial waters, making it subject to local taxing jurisdiction.
• 6. Capwire failed to prove any tax exemption granted by law or treaty.

Doctrines

• 1. Exhaustion of Administrative Remedies: Taxpayers must first pursue all available administrative remedies before resorting to court action, especially when factual issues are involved, except in purely legal questions or assessments made without authority.
• 2. Primary Jurisdiction of Administrative Agencies: Administrative agencies are primarily responsible for resolving factual issues in their area of expertise before judicial intervention.
• 3. Taxation as an attribute of sovereignty: Taxation is a fundamental power of the state, delegated to local governments for real property within their jurisdiction.
• 4. Strict Construction of Tax Exemptions: Tax exemptions are not presumed and are strictly construed against the taxpayer. The burden of proving exemption rests on the claimant.
• 5. Immovable Property (Real Property) Definition for Taxation: Includes machinery attached to land or used for industry on the land (Article 415(5), Civil Code) and objects in or on immovable waters (Article 415(8), Civil Code) for taxation purposes.

Key Excerpts

• 1. "In disputes involving real property taxation, the general rule is to require the taxpayer to first avail of administrative remedies and pay the tax under protest before allowing any resort to a judicial action, except when the assessment itself is alleged to be illegal or is made without legal authority."
• 2. "Submarine or undersea communications cables are akin to electric transmission lines which this Court has recently declared in Manila Electric Company v. City Assessor and City Treasurer of Lucena City, as 'no longer exempted from real property tax' and may qualify as 'machinery' subject to real property tax under the Local Government Code."
• 3. "Tax exemptions are strictly construed against the taxpayer because taxes are considered the lifeblood of the nation."

Precedents Cited

• 1. Cosmos Bottling Corporation v. Nagrama, Jr.: Used to differentiate between questions of law and fact, crucial in determining if administrative remedies must be exhausted.
• 2. Ramos v. Pepsi-Cola Bottling Co. of the P.I.: Further clarified the distinction between questions of law and fact using the "doubt dichotomy."
• 3. Republic v. Sandiganbayan: Explained the "law application and calibration dichotomy" to distinguish questions of law and fact.
• 4. Manila Electric Company v. City Assessor and City Treasurer of Lucena City: Established that electric transmission lines and similarly, submarine cables, are taxable real property and no longer exempt. This case is central to the ruling on the taxability of submarine cables.
• 5. City of Lapu-Lapu v. Philippine Economic Zone Authority, Camp John Hay Development Corporation v. Central Board of Assessment Appeals, National Power Corporation v. Province of Quezon, National Power Corporation v. Municipal Government of Navotas: Cited to support the general rule of exhaustion of administrative remedies in tax disputes.
• 6. Standard Oil Co. of New York v. Jaramillo and Callex (Phil.) Inc. v. Central Board of Assessment Appeals: Cited in relation to classifying property as real property for taxation purposes.
• 7. Prof. Magallona v. Hon. Ermita: Used to define Philippine internal waters and sovereignty, relevant to the location of the cables and Philippine jurisdiction.
• 8. City of Manila v. Colet: Cited for the principle of strict construction of tax exemptions.
• 9. Petty v. Dayton Musicians' Association and Vergel de Dios v. Bristol Laboratories Phils., Inc.: Cited to support the requirement of presenting factual issues in plain and concise language, reinforcing the need for administrative proceedings first.
• 10. Compagnie Financiere Sucres El Denrees, v. Commissioner of Internal Revenue and Commissioner of Internal Revenue v. Solidbank Corp.: Cited to support the principle that taxation is an attribute of sovereignty.
• 11. The City Government of Quezon City v. Bayan Telecommunications, Inc.: Cited concerning the delegation of taxing authority to local governments for real property.
• 12. Camp John Hay Development Corporation v. Central Board of Assessment Appeals: Cited for the requirement of proof of exemption from real property tax and citing the relevant section of the Local Government Code.

Statutory and Constitutional Provisions

• 1. Rule 45 of the Rules of Court: Governs petitions for review on certiorari to the Supreme Court.
• 2. Sections 226, 229, and 252 of Republic Act (R.A.) No. 7160 (Local Government Code): Relate to administrative remedies in local tax assessments, including appeals to the LBAA and payment under protest.
• 3. Sections 193 and 234 of the Local Government Code: Provisions on withdrawal of tax exemption privileges and exemptions from real property tax, respectively.
• 4. Article 415(5) and 415(8) of the Civil Code: Define immovable property, including machinery and waters, relevant to the classification of submarine cables as real property.
• 5. Article I of the Constitution: Defines the national territory of the Philippines.
• 6. Article 49 and 79 of the UNCLOS (United Nations Convention on the Law of the Sea): Define archipelagic waters, territorial sea, and jurisdiction over submarine cables and pipelines, relevant to Philippine sovereignty and jurisdiction.
• 7. Section 131(r) of the Local Government Code: Defines "municipal waters."
• 8. Section 206 of the Local Government Code: Requires proof of exemption from real property tax.
• 9. Section 13-A of RA 4387 (as amended by RA 2037): Capwire's legislative franchise, relevant for potential tax exemptions, though ultimately found withdrawn by the Local Government Code.
• 10. Section 138 and 149 of the Local Government Code: Refer to local taxation powers, although less directly relevant to the core issue of taxability of submarine cables and exhaustion of remedies.