City of Makati vs. Municipality of Bakun and Luzon Hydro Corporation

An office of a business is a "project office" under Section 150 of R.A. No. 7160 only if it is directly involved in production or operations, akin to a factory, plant, or plantation; a mere administrative office where no sales are recorded or undertaken does not qualify and is not entitled to share in the 70% portion of the local business tax. The tax obligation arises from law and not from the parties' agreement, acquiescence, or loose labeling of an office.

Luzon Hydro Corporation (LHC) is a domestic corporation operating a hydroelectric power plant harnessing the Bakun River, with major components such as the power station and switch yard situated in Alilem, Ilocos Sur, and other structures such as the conveyance tunnel, penstock, weir, intakes, and desander located in Bakun, Benguet; LHC also maintained an office in Makati City and designated Alilem as its principal office in its Articles of Incorporation. The City of Makati, the Municipality of Alilem, and the Municipality of Bakun are the local government units asserting competing claims over LHC's local business tax. The statutory backdrop is Section 150 of R.A. No. 7160 (the Local Government Code of 1991), which governs the situs of local business tax and allocates 30% of sales recorded in the principal office to the city or municipality of the principal office and 70% to the city or municipality where the factory, project office, plant, or plantation is located.

Luzon Hydro Corporation (LHC) operates a hydroelectric power plant harnessing the Bakun River, which runs through the Provinces of Ilocos Sur and Benguet. The major components of the facility, such as the power station and switch yard, are situated in Alilem, Ilocos Sur, while other structures, such as the conveyance tunnel, penstock, weir, intakes, and desander, are located in Bakun, Benguet. LHC maintained an office in Makati City and specified Alilem as the location of its principal office in its Articles of Incorporation.

Until 2003, LHC enjoyed a six-year tax holiday as an entity engaged in a pioneer area of investment registered with the Board of Investments. Beginning in 2004, LHC paid local business taxes to Alilem, Bakun, and Makati. It paid Alilem the 30% portion of its local business tax allocated for the site of the principal office, conformably with Section 150 of R.A. No. 7160, given that Alilem was specified as the location of LHC's principal office in its Articles of Incorporation. For three years since 2004, the 70% portion of the local business tax was equally apportioned among Alilem, Bakun, and Makati, such that each local government unit received 23.33% — Alilem and Bakun as power plant sites and Makati as a "project office" site. It was the sharing in the 70% portion that became the bone of contention among the three LGUs.

Via Resolution No. 168-2004 dated September 20, 2004, Bakun questioned the sharing scheme and claimed the entire 70% portion of the local business tax. The matter was submitted to the Bureau of Local Government and Finance (BLGF) for determination. On February 8, 2006, the BLGF opined that only Bakun and Alilem should share in the 70% portion of LHC's local business tax because LHC's Makati office was a mere "administrative office" and not among the sites enumerated in Section 150 of R.A. No. 7160; according to the BLGF, Makati could only collect the mayor's permit fee and other regulatory fees under its existing local tax ordinances. Consequently, Bakun passed Resolution No. 134-2006 requiring LHC to prospectively comply with the BLGF opinion and assessed LHC deficiency taxes for the years 2004 to 2006. Alilem followed suit and issued Resolution No. 07-02, also requiring LHC to comply with the BLGF opinion. Makati, on the other hand, informed LHC that it would still assess the latter's local business tax notwithstanding the BLGF opinion. To resolve the ensuing uncertainty, LHC filed an action for interpleader.

In the interpleader proceedings, the RTC of Makati City found that LHC's Makati office was a "project office," which entitled Makati to an equal share with LHC's power plant sites from the 70% portion of LHC's business tax; in view, however, of Makati's representation on the witness stand that it was willing to have its share in the tax reduced as long as its share was not completely done away with, the RTC reduced its share to 20%. On appeal, the CTA Special First Division found that LHC's Makati office was merely an "administrative office" where none of LHC's sales were recorded or undertaken. The CTA En Banc concurred with the Special First Division's findings and conclusion.

• Disregard of the RTC's Factual Findings: Makati argued that the CTA En Banc and its Special First Division gravely erred in ignoring the findings of fact of the RTC of Makati City, Branch 134, which conducted the hearings and trials, wherein it was allegedly established by clear and convincing evidence that LHC's Makati office is a producer/power generation office or "project office," not a mere administrative office.
• Misapplication of Local Finance Circular No. 03-95: Makati maintained that the CTA gravely erred in applying Department of Finance-Local Finance Circular No. 03-95, entitled "Prescribing Guidelines Governing the Power of Cities and Municipalities to Impose Business Tax on Construction Contractors Pursuant to Section 143(e), Republic Act No. 7160," dated May 22, 1995, to support its ruling that LHC's Makati office is not a project office.
• Binding Effect of the BLGF Opinion: Makati raised the question of whether the BLGF Opinion dated March 8, 2006 has no binding and mandatory effect.
• Benefit of Bakun's Appeal to Alilem: Makati contended that the CTA gravely erred in ruling in favor of the Municipality of Alilem, which did not even file an appeal before the CTA, and that as far as Alilem was concerned, the RTC's April 20, 2012 Decision should have become final and executory.
• CTA's Appellate Jurisdiction: Makati argued that the CTA En Banc and its Special First Division gravely erred in taking cognizance of the appeal from a special civil action for interpleader, which is allegedly not within the appellate jurisdiction of the CTA.

• Nature of the Makati Office: Bakun, in its Comment, reiterated that LHC's Makati office was a mere "administrative office" and consequently not entitled to share in LHC's local business tax allocation.
• CTA Jurisdiction and Full Tax Settlement: LHC, in its Comment, maintained that the CTA had jurisdiction over the case, involving as it did an appeal from a decision of the RTC in a local tax case; it also informed the Court that it ceased any business presence in Makati as of March 31, 2013, and that it had consigned its local business tax allocations up to 2012 with the RTC of Makati City, asserting that it had fully settled its local business taxes from 2004 up to the present, either directly paid to the LGUs or consigned with the RTC.

• Nature of the Makati Office: Whether the CTA En Banc and its Special First Division gravely erred in ignoring the RTC's findings of fact that LHC's Makati office is a producer/power generation office or "project office," not a mere administrative office.
• Application of Local Finance Circular No. 03-95: Whether the CTA En Banc and its Special First Division gravely erred in applying Local Finance Circular No. 03-95 to support its ruling that LHC's Makati office is not a project office.
• Binding Effect of the BLGF Opinion: Whether the BLGF Opinion dated March 8, 2006 has no binding and mandatory effect.
• Benefit of Bakun's Appeal to Alilem: Whether the CTA En Banc and its Special First Division gravely erred in ruling in favor of the Municipality of Alilem, which did not file an appeal, such that as far as Alilem is concerned the RTC Decision should have become final and executory.
• CTA's Appellate Jurisdiction: Whether the CTA En Banc and its Special First Division gravely erred in taking cognizance of the appeal from a special civil action for interpleader, which is not within the appellate jurisdiction of the CTA.

• Nature of the Makati Office: No. The CTA correctly found that LHC's Makati office was a mere administrative office, not a project office, because no sales were recorded or undertaken there and it did not operate any aspect or primary purpose of LHC; the RTC's contrary conclusion rested on loose references and prior treatment that do not carry tax implications.
• Application of Local Finance Circular No. 03-95: No error. The circular's definition of a project office as "equivalent to the factory of a manufacturer" is a sound guide for parity of reasoning, and its application to a power producer is warranted since both activities are covered by local taxation on business and its rules on tax situs.
• Binding Effect of the BLGF Opinion: The CTA did not rely on the BLGF opinion; it made an independent determination of the nature of the Makati office based on where LHC's sales, transactions, and operations were undertaken. The BLGF is not an administrative agency whose findings on questions of fact are given weight and deference in the courts.
• Benefit of Bakun's Appeal to Alilem: No error. Bakun and Alilem share a commonality of interest, and the appeal of one is deemed the vicarious appeal of the other, so Alilem may benefit from the judgment favoring Bakun.
• CTA's Appellate Jurisdiction: Yes. The CTA has exclusive appellate jurisdiction to review by appeal the decisions of the RTC in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction, and the interpleader mode does not detract from the case's nature as a local tax case.

• Nature of the Makati Office: The subject tax is a tax on business, particularly one expressly imposed on gross sales recorded. Under Section 150 of R.A. No. 7160, the rules on tax allocation in relation to tax situs come into play when a business subject to it does not operate a branch or sales office outside its principal office where all sales are recorded, but has a factory, project office, plant, or plantation situated in different localities, whether or not sales are made in these localities. Thus, even if no sales were recorded or undertaken at LHC's Makati office, Makati would have been entitled to share in the 70% portion if it could be shown that the Makati office was a project office akin to a factory. The enumeration itself — factory, project office, plant, or plantation — reveals the character of the office contemplated by the provision: these are offices directly involved in production or operations. Because invoices or records of all sales were not handled by LHC's Makati office, and because it did not operate any aspect or primary purpose of LHC as provided in its Articles of Incorporation, the inescapable conclusion is that the Makati office was a mere administrative office. The RTC's conclusion that it was a project office was based on loose reference to the Makati office as such in various communications and in LHC's pleadings, as well as prior treatment of it as a project office; these are immaterial, given LHC's willingness to pay the business tax in full to any or all of the claimants. The obligation to pay taxes arises from law and not from agreement or acquiescence of the parties or contending claimants, and the mere label of a project office does not convert a mere administrative office into one if the term is used in such a way that carries tax implications. The question was submitted to the tax court, which ruled on the matter based on its technical expertise, and no reversible error was found in its application of the laws and rules within its competence.
• Application of Local Finance Circular No. 03-95: In tackling what constitutes a project office, it was not erroneous for the CTA to cite Department of Finance-Local Finance Circular No. 3-95 dated May 22, 1995. On the situs of tax, Section 5(a)(3) of the circular defines a project office as "equivalent to the factory of a manufacturer." While the circular concerned applies to construction contractors, it was nonetheless addressed to all Treasurers of LGUs, clarifying the imposition of business taxes under Section 143 of R.A. No. 7160 for a uniform application. Although the circular addressed a different economic activity from that of hydroelectric power generation, its definition of a project office is a sound guide for parity of reasoning; a distinction is not even called for, since both activities are covered by local taxation on business and its rules on tax situs, and nothing in the provisions supports a less than uniform application between construction contractors and power producers. In the present case, LHC's Makati office could not be viewed as equivalent to a factory or a project office.
• Binding Effect of the BLGF Opinion: A careful reading of the assailed decision does not yield the conclusion that the CTA relied on the BLGF's opinion in ascertaining the nature of LHC's Makati office, as Bakun and Alilem had done when they claimed a greater share in the 70% portion of the business tax as power plant sites. Instead, the CTA took into account where LHC's sales, transactions, and operations were undertaken; having noted that these did not take place at the Makati office, the tax court concluded that it was a mere administrative office. In view of the CTA having made an independent determination on the matter, there was no need to resolve whether the BLGF's opinion carries a binding effect. The BLGF is not an administrative agency whose findings on questions of fact are given weight and deference in the courts; it 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. The authorities cited by Makati 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.
• Benefit of Bakun's Appeal to Alilem: Bakun and Alilem share a commonality of interest in the case. The fact that only Bakun appealed from the RTC's decision in the interpleader case does not preclude Alilem from benefiting in a judgment favoring Bakun. The site of LHC's hydroelectric power plant straddles both Alilem and Bakun, and the controversy involved the same question of law. While the general rule is that one party's appeal from a judgment will not inure to the benefit of a co-party who failed to appeal, an exception stands out: where both parties have a commonality of interests, the appeal of one is deemed to be the vicarious appeal of the other. To insist that the court's determination that only Bakun and Alilem are legally entitled to share in the 70% portion should not benefit Alilem for failing to appeal borders on the ridiculous; if Alilem had lost its claim, neither Bakun nor LHC would have any greater right over the amount that would have gone to Alilem but which was consigned with the RTC, and much less would Makati have any rightful claim to it, because the application of the tax situs sharing scheme over local business taxes is a matter of law, whether or not a party-claimant ceases to pursue it.
• CTA's Appellate Jurisdiction: The CTA has appellate jurisdiction over local tax cases decided by the RTC in the exercise of the latter's original jurisdiction. Section 7, paragraph (a)(3) of R.A. No. 1125, as amended by R.A. No. 9282, confers on the CTA exclusive appellate jurisdiction to review by appeal the decisions, orders, or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction. That the case filed before the RTC was in the mode of a special civil action for interpleader does not detract from its nature as a local tax case, involving as it does the application of the rules on situs on the payment of local business taxes. There is no need to distinguish it from other local tax cases considering that the law expressly confers on the CTA, the tribunal with the specialized competence over tax and tariff matters, the role of judicial review over local tax cases without mention of any other court that may exercise such power.

• Situs of Local Business Tax and the "Project Office" Requirement (Sec. 150, R.A. No. 7160) — Under Section 150 of the Local Government Code, when a business subject to local business tax does not operate a branch or sales office outside its principal office where all sales are recorded, but has a factory, project office, plant, or plantation situated in different localities, 30% of all sales recorded in the principal office is taxable by the city or municipality where the principal office is located, and 70% is taxable by the city or municipality where the factory, project office, plant, or plantation is located. The Court held that the enumeration — factory, project office, plant, or plantation — reveals the character of the office contemplated: these are offices directly involved in production or operations. A mere administrative office where no sales are recorded or undertaken, and which does not operate any aspect or primary purpose of the business, is not a project office and cannot share in the 70% portion.
• Tax Liability Arises from Law, Not Agreement or Label — The obligation to pay taxes arises from law and not from agreement or acquiescence of the parties or contending claimants. The mere label of a "project office" does not convert a mere administrative office into one if the term is used in such a way that carries tax implications. The Court applied this principle in rejecting the RTC's reliance on loose references to the Makati office as a project office in communications and pleadings, and on prior treatment of it as such.
• Non-Binding Effect of BLGF Opinions — The Bureau of Local Government and Finance is not an administrative agency whose findings on questions of fact are given weight and deference in the courts. It 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. By contrast, the Court of Tax Appeals is a highly specialized court which performs judicial functions as it was created for the review of tax cases. In this case, the CTA did not rely on the BLGF opinion but made an independent determination of the nature of the Makati office.
• Commonality of Interests Exception to the Rule on Appeals — As a general rule, one party's appeal from a judgment will not inure to the benefit of a co-party who failed to appeal, and as against the latter, the judgment will continue to run its course until it becomes final and executory. The exception is where both parties have a commonality of interests, in which case the appeal of one is deemed to be the vicarious appeal of the other. The Court applied this exception to hold that Alilem could benefit from Bakun's appeal, since the power plant straddles both municipalities and the controversy involved the same question of law.
• CTA's Exclusive Appellate Jurisdiction over Local Tax Cases — Under Section 7, paragraph (a)(3) of R.A. No. 1125, as amended by R.A. No. 9282, the CTA exercises exclusive appellate jurisdiction to review by appeal the decisions, orders, or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction. The mode by which the case is filed — here, a special civil action for interpleader — does not detract from its nature as a local tax case where it involves the application of the rules on situs on the payment of local business taxes.

• "That the case filed before the RTC was in the mode of a special civil action for interpleader does not detract from its nature as a local tax case, involving as it does the application of the rules on situs on the payment of local business taxes." — This passage establishes the basis for the CTA's appellate jurisdiction over the interpleader, holding that the procedural mode of filing does not alter the substantive character of the controversy as a local tax case.
• "The enumeration itself - factory, project office, plant, or plantation — reveals the character of the office contemplated by the provision. These are offices directly involved in production or operations; hence, the inescapable conclusion that LHC's Makati office was a mere administrative office." — This is the ratio decidendi on the core substantive issue, defining the character of a "project office" under Section 150 of R.A. No. 7160 and applying it to exclude a mere administrative office from the 70% tax allocation.
• "The obligation to pay taxes is one that arises from law and not from agreement or acquiescence of the parties or contending claimants." — This passage articulates the principle that tax liability cannot be created or altered by the parties' labeling, agreement, or prior practice, and it underlies the rejection of the RTC's factual conclusion resting on loose references to the Makati office as a project office.
• "To this general rule, however, one exception stands out: where both parties have a commonality of interests, the appeal of one is deemed to be the vicarious appeal of the other." — This passage states the commonality-of-interests exception to the rule that an appeal does not inure to the benefit of a non-appealing co-party, and it supports the holding that Alilem may benefit from Bakun's appeal.

• City of Lapu-Lapu vs. Philippine Economic Zone Authority, 748 Phil. 481-482, 530 (2014) — Cited to support the proposition that the law expressly confers on the CTA, the tribunal with specialized competence over tax and tariff matters, the role of judicial review over local tax cases without mention of any other court that may exercise such power.
• Philippine Long Distance Telephone Company, Inc. vs. City of Davao, 415 Phil. 768, 779-780 (2001) — Cited to support the holding that the BLGF is not an administrative agency whose findings on questions of fact are given weight and deference in the courts, in contrast to the CTA, a highly specialized court created for the review of tax cases.
• Maricalum Mining Corporation vs. Remington Industrial Sales Corporation, 568 Phil. 219-220, 228 (2008) — Cited as the source of the rule that while one party's appeal will not inure to the benefit of a co-party who failed to appeal, an exception lies where both parties have a commonality of interests, in which case the appeal of one is deemed the vicarious appeal of the other.

• Section 7, paragraph (a)(3), R.A. No. 1125, as amended by R.A. No. 9282 — Confers on the Court of Tax Appeals exclusive appellate jurisdiction to review by appeal the decisions, orders, or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction. Applied to uphold the CTA's jurisdiction over the appeal from the RTC's decision in the interpleader, which was in substance a local tax case.
• Section 150, R.A. No. 7160 (Local Government Code of 1991) — Governs the situs of local business tax. Under paragraph (b), 30% of all sales recorded in the principal office is taxable by the city or municipality where the principal office is located, and 70% is taxable by the city or municipality where the factory, project office, plant, or plantation is located. Applied to hold that LHC's Makati office, being a mere administrative office and not a project office akin to a factory, was not entitled to share in the 70% portion.
• Section 143, R.A. No. 7160 — The provision imposing local business tax, referenced in connection with the clarification of business tax imposition for uniform application under Local Finance Circular No. 3-95.
• Section 5(a)(3), Department of Finance-Local Finance Circular No. 3-95 (May 22, 1995) — Defines a project office as "equivalent to the factory of a manufacturer." Although the circular applies to construction contractors, the Court held it was addressed to all Treasurers of LGUs and its definition of a project office is a sound guide for parity of reasoning, applied by analogy to a hydroelectric power producer.

Peralta, C.J. (chairperson); Caguioa (working chairperson); Reyes, J. Jr.; Lazaro-Javier; and Lopez, JJ. concurred.