FELS Energy, Inc. vs. Province of Batangas

A motion for reconsideration filed before the local assessor is not a remedy sanctioned by Section 226 of the Local Government Code and does not toll the 60-day period to appeal to the Local Board of Assessment Appeals; upon the taxpayer's failure to appeal within that period, the assessment becomes final, executory, and demandable, and the right of the local government to collect the tax becomes absolute. The Court further held that res judicata applies through substantial identity of parties arising from privity of interest, and that power barges moored at a fixed location are real property subject to real property tax, with the private owner — not the government-owned and controlled corporation operating them — being the taxable entity.

NPC entered into an Energy Conversion Agreement with Polar Energy, Inc. over 3x30 MW diesel engine power barges moored at Balayan Bay in Calaca, Batangas, for a period of five years. Under Article 10.1 of the Agreement, NPC assumed responsibility for the payment of all real estate taxes and assessments on the power barges, while Polar retained ownership and operation of the barges under Article 2.11. Polar subsequently assigned its rights under the Agreement to FELS Energy, Inc. The Province of Batangas, through its Provincial Assessor, thereafter assessed real property taxes on the barges, precipitating the dispute over their classification, taxability, and the proper administrative remedy for contesting the assessment.

On January 18, 1993, NPC entered into a lease contract with Polar Energy, Inc. over 3x30 MW diesel engine power barges moored at Balayan Bay in Calaca, Batangas, denominated as an Energy Conversion Agreement, for a period of five years. Under Article 10.1, NPC assumed responsibility for the payment of all real estate taxes and assessments on the power barges, while Article 2.11 stipulated that Polar would own and operate the barges, converting NPC-supplied fuel into electricity. Polar subsequently assigned its rights under the Agreement to FELS Energy, Inc.

On August 7, 1995, FELS received from Provincial Assessor Lauro C. Andaya an assessment of real property taxes on the power barges, covering taxes due for 1994, amounting to ₱56,184,088.40 per annum. The notice of assessment expressly advised FELS that it could, within sixty (60) days from receipt, appeal to the Board of Assessment Appeals of the province. FELS referred the matter to NPC, reminding it of its obligation under the Agreement to pay all real estate taxes, and gave NPC the full power and authority to represent it in any conference regarding the real property assessment.

Instead of appealing to the LBAA as instructed in the notice, NPC sought reconsideration of the Provincial Assessor's decision by letter dated September 7, 1995. The motion was denied on September 22, 1995, and the Provincial Assessor advised NPC to pay the assessment. NPC then filed a petition with the LBAA for the setting aside of the assessment and the declaration of the barges as non-taxable. The LBAA denied the petition on August 26, 1996, ruling that the barges, though movable, were real property for taxation purposes because they were installed at a specific location with a character of permanency, and that the petition had been filed out of time. The LBAA ordered FELS to pay ₱56,184,088.40 for 1994.

FELS appealed to the CBAA. Meanwhile, on August 28, 1996, the Provincial Treasurer issued a Notice of Levy and Warrant by Distraint over the power barges, seeking to collect real property taxes amounting to ₱232,602,125.91 as of July 31, 1996, which was served on FELS on November 8, 1996. The CBAA lifted the levy on November 15, 1996. NPC filed a Motion for Intervention in the CBAA proceedings, which was approved on September 22, 1998. On April 6, 2000, the CBAA reversed the LBAA and found the power barges exempt from real property tax under Section 234(c) of the LGC, reasoning that the barges belonged to NPC and were actually, directly, and exclusively used by it. However, on July 31, 2001, the CBAA reversed itself and affirmed the LBAA resolution and the assessment on FELS. Motions for reconsideration were denied on October 19, 2001.

FELS and NPC separately filed petitions for review before the CA. The CA denied both petitions on the ground of prescription, holding that the right to question the assessment had been lost when FELS failed to appeal to the LBAA within the 60-day period prescribed by law. NPC had earlier filed a petition for review before the Supreme Court (G.R. No. 165113) assailing the CA decision in CA-G.R. SP No. 67490, but this was denied on November 8, 2004, and the motion for reconsideration was denied with finality on January 19, 2005. FELS and NPC thereafter filed the present consolidated petitions.

• Tolling of Appeal Period: FELS argued that when NPC moved to have the assessment reconsidered on September 7, 1995, the running of the 60-day period to appeal to the LBAA was tolled. NPC posited that the 60-day period should be reckoned from its receipt of the denial of its motion for reconsideration.
• Classification of Power Barges: Petitioners maintained that power barges, being floating and movable, are personal properties and therefore not subject to real property tax.
• Tax Exemption: Petitioners argued that assuming the barges are real property, they are exempt from real estate tax under Section 234(c) of the LGC because they are actually, directly, and exclusively used by NPC, a government-owned and controlled corporation engaged in the generation and transmission of electric power.
• Party Liable for Tax: Petitioners contended that assuming the barges are subject to real estate tax, NPC should be the one made to pay under the law.
• Depreciation: Petitioners argued that assuming the barges are real properties, they should be subject to depreciation just like any other personal property.
• Imprescriptibility: Petitioners asserted that the right to question a patently null and void real property tax assessment on personal properties is imprescriptible.
• Res Judicata and Forum Shopping: FELS maintained that res judicata does not apply because it was not a party to NPC's petition in G.R. No. 165113, and that no forum shopping was committed since the elements of litis pendentia or res judicata are not present.

• Res Judicata: The Provincial Assessor asserted that the instant petitions are barred by res judicata, the final and executory judgment in G.R. No. 165113 — where the issue of prescription was finally determined — effectively precluding the claims herein.
• Forum Shopping: The Provincial Assessor argued that the filing of the instant petitions after an adverse judgment in G.R. No. 165113 constitutes forum shopping.

• Prescription of Appeal: Whether the appeal to the LBAA was filed within the 60-day period prescribed by Section 226 of the LGC, or whether NPC's motion for reconsideration before the Provincial Assessor tolled the running of that period.
• Res Judicata: Whether the prior final judgment in G.R. No. 165113 bars the present petitions under the doctrine of res judicata, notwithstanding FELS's claim that it was not a party to that proceeding.
• Forum Shopping: Whether the filing of the present petitions constitutes forum shopping.
• Classification of Power Barges: Whether power barges moored at a fixed location are real property subject to real property tax.
• Tax Exemption: Whether the power barges are exempt from real property tax under Section 234(c) of the LGC.
• Party Liable for Tax: Whether FELS or NPC is the taxable entity liable for the real property tax on the power barges.

• Prescription of Appeal: No. The 60-day period to appeal to the LBAA was not tolled by NPC's motion for reconsideration before the Provincial Assessor, a remedy not sanctioned by Section 226 of the LGC; the appeal was filed out of time, rendering the assessment final, executory, and demandable.
• Res Judicata: Yes. The prior final judgment in G.R. No. 165113 is binding on FELS under the principle of privity of interest, FELS having given NPC full power and authority to represent it in proceedings regarding the assessment, making them substantially identical parties.
• Forum Shopping: Yes. Petitioners engaged in forum shopping by filing the present petitions after the adverse judgment in G.R. No. 165113, seeking a favorable disposition in another forum on the same cause.
• Classification of Power Barges: Yes, they are real property. Power barges are immovable property by destination under Article 415(9) of the Civil Code, being docks and structures which, though floating, are intended to remain at a fixed place on a coast.
• Tax Exemption: No. FELS, as the private owner of the barges, cannot invoke the exemption under Section 234(c) of the LGC, which applies only to machinery actually, directly, and exclusively used by a government-owned or controlled corporation; the privilege is personal to NPC and not extendable to FELS.
• Party Liable for Tax: FELS is the taxable entity. The owner of the taxable properties is FELS, which is the entity being taxed by the local government; NPC's contractual undertaking to pay the taxes does not bind the Province of Batangas, which is not privy to the Agreement.

• Prescription of Appeal: Section 226 of the LGC provides that any owner or person having legal interest in property who is not satisfied with the assessor's assessment may, within sixty (60) days from receipt of the written notice of assessment, appeal to the Board of Assessment Appeals. The notice of assessment sent to FELS on August 7, 1995, expressly so advised. Instead of appealing, NPC filed a motion for reconsideration before the Provincial Assessor — a remedy not sanctioned by law. Citing Callanta vs. Office of the Ombudsman, the Court held that the last action of the local assessor on a particular assessment is the notice of assessment itself; it is this action that gives the owner the right to appeal to the LBAA. The procedure does not permit the remedy of a motion for reconsideration before the local assessor, as allowing it would invite corruption and graft-prone situations. The 60-day period runs without interruption from receipt of the notice of assessment. Because the taxpayer failed to appeal in due course, the right of the local government to collect the taxes became absolute, and the assessment became final, executory, and demandable, precluding the taxpayer from questioning its correctness or invoking any defense on the merits.

• Res Judicata: The doctrine of res judicata requires: (1) a former judgment that is final; (2) a court with jurisdiction over the subject matter and the parties; (3) a judgment on the merits; and (4) identity of parties, subject matter, and causes of action. Absolute identity of parties is not required; substantial identity suffices, which exists when there is community of interest or privity of interest between a party in the first and a party in the second case. FELS gave NPC full power and authority to represent it in proceedings regarding the assessment. When NPC filed G.R. No. 165113, it did so not only on its behalf but also on behalf of FELS. Moreover, the assailed decision in G.R. No. 165113 was the CA decision in CA-G.R. SP No. 67490, in which FELS was the petitioner. Thus, the decision in G.R. No. 165113 is binding on FELS under privity of interest, making FELS and NPC substantially identical parties warranting application of res judicata.

• Forum Shopping: Forum shopping exists when, as a result of an adverse judgment in one forum, a party seeks another and possibly favorable judgment in another forum other than by appeal or certiorari. It also exists when a party institutes two or more actions grounded on the same cause, gambling that one court would make a favorable disposition. The elements are: (a) identity of parties or parties representing the same interests; (b) identity of rights asserted and relief prayed for, founded on the same facts; and (c) identity such that any judgment in one case would amount to res judicata in the other. All three elements are present: FELS and NPC are substantially identical parties, the rights and reliefs sought are the same, and any judgment would amount to res judicata in the other. Petitioners went from one court to another seeking a favorable decision, vexing the courts and degrading the administration of justice.

• Classification of Power Barges: The factual findings of the LBAA, CBAA, and CA that the power barges are real property are binding and conclusive, the Court finding no reason to depart from the rule that factual findings of administrative bodies with expertise in their field are generally accorded respect. Tax assessments are presumed correct and made in good faith, with the taxpayer bearing the burden of proving otherwise. Article 415(9) of the Civil Code provides that "docks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake, or coast" are considered immovable property. The power barges are immovable property by destination, being machinery and implements intended by the owner for an industry or work carried on in a building or on a piece of land and tending directly to meet the needs of that industry. The Court cited Consolidated Edison Company of New York, Inc. vs. The City of New York, where the New York Supreme Court held that barges on which gas turbine power plants were mounted, together with fuel oil barges and accessory equipment, were subject to real property taxation.

• Tax Exemption: Section 234(c) of the LGC exempts machinery and equipment actually, directly, and exclusively used by government-owned or controlled corporations engaged in the generation and transmission of electric power. However, the owner of the taxable properties is FELS, a private corporation, as stipulated in Article 2.11 of the Agreement, which provides that Polar (FELS's predecessor) shall own the power barges and all fixtures, fittings, machinery, and equipment. Moreover, Article 5.5 of the Agreement provides that Polar/FELS undertakes to operate the power barges until the end of the lease period. The law requires that the machinery be actually, directly, and exclusively used by the government-owned or controlled corporation — here, NPC. Since FELS owns and operates the barges, it cannot invoke the exemption. Taxation is the rule and exemption is the exception; tax exemptions are strictly construed, and doubts are resolved in favor of the taxing authority. The entity seeking exemption must justify it by words too plain to be mistaken and too categorical to be misinterpreted.

• Party Liable for Tax: The mere undertaking of NPC under Article 10.1 of the Agreement to be responsible for the payment of all real estate taxes does not justify FELS's exemption. The privilege granted to NPC cannot be extended to FELS. The covenant is between FELS and NPC and does not bind the Province of Batangas, which is not a party thereto. Obligations arising from contracts have the force of law only between the contracting parties; they cannot prejudice third persons. FELS is the taxable entity because it is the owner of the barges, and the Province of Batangas is not bound by the private stipulation between FELS and NPC allocating tax liability.

• Strict Construction of Tax Exemptions — Taxation is the rule and exemption is the exception. The law does not look with favor on tax exemptions, and the entity that would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted. Doubts should be resolved in favor of the taxing authority. In this case, FELS could not invoke the exemption under Section 234(c) of the LGC because it is a private corporation and not the government-owned or controlled corporation actually, directly, and exclusively using the machinery.

• Finality of Assessment Upon Failure to Appeal — Under Section 226 of the LGC, the 60-day period to appeal to the LBAA runs from receipt of the written notice of assessment. A motion for reconsideration before the local assessor is not a sanctioned remedy and does not toll this period. If the taxpayer fails to appeal in due course, the right of the local government to collect the tax becomes absolute, and the assessment becomes final, executory, and demandable, precluding the taxpayer from questioning its correctness or invoking any defense on the merits.

• Res Judicata — Substantial Identity of Parties — Res judicata requires: (1) a final former judgment; (2) jurisdiction over the subject matter and parties; (3) judgment on the merits; and (4) identity of parties, subject matter, and causes of action. Absolute identity of parties is not required; substantial identity suffices, which exists when there is community of interest or privity of interest between a party in the first and a party in the second case. In this case, FELS gave NPC full power and authority to represent it, and the assailed decision in G.R. No. 165113 was the CA decision in a case where FELS was the petitioner, making the prior judgment binding on FELS through privity of interest.

• Forum Shopping — Forum shopping exists when a party, as a result of an adverse judgment in one forum, seeks another and possibly favorable judgment in another forum other than by appeal or certiorari. The elements are: (a) identity of parties or parties representing the same interests; (b) identity of rights asserted and relief prayed for, founded on the same facts; and (c) identity such that any judgment in one case would amount to res judicata in the other. Filing multiple petitions constitutes abuse of court processes and degrades the administration of justice.

• Presumption of Correctness of Tax Assessments — Tax assessments by tax examiners are presumed correct and made in good faith, with the taxpayer bearing the burden of proving otherwise. Factual findings of administrative bodies with expertise in their field are generally binding and conclusive upon the Court, and where the judicial mind is left in doubt, it is sound policy to leave the assessment undisturbed.

• "To reiterate, if the taxpayer fails to appeal in due course, the right of the local government to collect the taxes due with respect to the taxpayer's property becomes absolute upon the expiration of the period to appeal." — This passage articulates the ratio decidendi on prescription: the consequence of failing to appeal an assessment within the statutory period, rendering the local government's right to collect absolute.

• "It also bears stressing that the taxpayer's failure to question the assessment in the LBAA renders the assessment of the local assessor final, executory and demandable, thus, precluding the taxpayer from questioning the correctness of the assessment, or from invoking any defense that would reopen the question of its liability on the merits." — This defines the doctrinal consequence of failing to appeal: the assessment becomes unassailable on the merits, foreclosing any further challenge to its correctness or to the taxpayer's underlying liability.

• "There is substantial identity of parties when there is community of interest or privity of interest between a party in the first and a party in the second case even if the first case did not implead the latter." — This is the canonical formulation of substantial identity of parties for purposes of res judicata, applied here to bind FELS to the prior judgment against NPC by virtue of the authority FELS had conferred on NPC.

• "Time and again, the Supreme Court has stated that taxation is the rule and exemption is the exception. The law does not look with favor on tax exemptions and the entity that would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted." — This is the frequently cited formulation of the strict construction doctrine for tax exemptions, applied to deny FELS's claim to NPC's statutory privilege.

• Callanta vs. Office of the Ombudsman, G.R. Nos. 115253-74, January 30, 1998, 285 SCRA 648 — Controlling precedent on the remedy available to a property owner aggrieved by a local assessor's assessment. The Court held that the last action of the local assessor is the notice of assessment, from which the owner may appeal to the LBAA; a motion for reconsideration before the assessor is not sanctioned by law, as it would invite corruption in the appraisal system. Followed and applied to hold that NPC's motion for reconsideration did not toll the 60-day appeal period.

• Heirs of Trinidad De Leon Vda. de Roxas vs. Court of Appeals, G.R. No. 138660, February 5, 2004, 422 SCRA 101 — Cited for the elements of res judicata and the principle that substantial identity of parties suffices, requiring only community of interest or privity of interest. Followed to bind FELS to the prior judgment in G.R. No. 165113.

• Consolidated Edison Company of New York, Inc. vs. The City of New York, 80 Misc.2d 1065 (1975) — Foreign precedent cited for the proposition that barges on which power plants are mounted, together with fuel oil barges and accessory equipment, are subject to real property taxation. Applied by analogy to support the classification of the power barges as real property.

• Manila Electric Company vs. Barlis, G.R. No. 114231, June 29, 2004, 433 SCRA 11 — Cited for the rule that if the taxpayer fails to appeal in due course, the right of the local government to collect taxes becomes absolute upon expiration of the appeal period. Followed.

• Section 226, Republic Act No. 7160 (Local Government Code of 1991) — Provides that any owner or person with legal interest in property who is not satisfied with the assessor's assessment may, within sixty (60) days from receipt of the written notice of assessment, appeal to the Board of Assessment Appeals. Applied to hold that the 60-day period was not tolled by NPC's motion for reconsideration before the Provincial Assessor, as that remedy is not sanctioned by law.

• Section 234(c), Republic Act No. 7160 — Exempts from real property tax all machineries and equipment that are actually, directly, and exclusively used by local water districts and government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power. Applied to deny FELS's claim to exemption, as FELS is a private corporation that owns and operates the barges, not the government-owned or controlled corporation (NPC) that the statute requires to be the actual, direct, and exclusive user.

• Article 415(9), New Civil Code — Classifies as immovable property "[d]ocks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake, or coast." Applied to classify the power barges as real property, being immovable by destination, in the nature of machinery intended for an industry or work carried on on a piece of land.

• Section 206, Republic Act No. 7160 — Cited by the CBAA in its initial decision for the proposition that prescription did not preclude NPC from pursuing its claim for tax exemption; the Court ultimately did not rely on this provision, having found prescription to be a bar.

Consuelo Ynares-Santiago, Ma. Alicia Austria-Martinez, and Minita V. Chico-Nazario concurred. No separate concurring opinions were issued.