Jose vs. Tigerway Facilities and Resources, Inc.

A local tax assessment that fails to state the factual and legal basis of the deficiency is void and of no force and effect, and the taxpayer may pursue a refund under Section 196 of the Local Government Code rather than being bound by the 60-day protest period under Section 195, provided the written claim for refund and the judicial action are both initiated within two years from the date of payment.

Tigerway Facilities and Resources, Inc. is a business entity operating in Caloocan City, subject to local business taxes, fees, and charges imposed by the city government through its Business Permit and Licensing Office. The City Treasurer, Lourdes R. Jose, serves as the local taxing authority responsible for issuing assessment notices and collecting local taxes pursuant to the Local Government Code. Sections 195 and 196 of the LGC provide two distinct remedial avenues: Section 195 governs the protest of assessments issued by the local treasurer, requiring a written protest within 60 days from receipt of the notice; Section 196 governs claims for refund or credit of erroneously or illegally collected taxes, requiring a written claim with the local treasurer and a judicial action within two years from the date of payment.

In 2005, Tigerway Facilities and Resources, Inc. applied for renewal of its mayor's permit with the Caloocan City Business Permit and Licensing Office (BPLO). On January 21, 2005, the BPLO issued an Order of Payment requiring Tigerway to pay local business tax and fees amounting to PHP 219,429.80. Tigerway promptly paid the assessed amount and was issued a mayor's permit.

Thereafter, the BPLO issued a Final Demand calling for the payment of deficiency business taxes, fees, and charges amounting to PHP 1,220,720.00, purportedly based on an ocular inspection conducted at Tigerway's establishment on May 27, 2005, which allegedly revealed misrepresentations concerning the nature of Tigerway's business, the number of its employees, and the size of its business area. On July 15, 2005, the BPLO issued a Notice of Deficiency reiterating the earlier demand, followed by a Last and Final Demand on December 2, 2005. Another Order of Payment was issued on December 8, 2005, seeking the same amount and citing a second ocular inspection on June 10, 2005 as basis.

A subsequent Order of Payment issued on December 29, 2005 reduced the amount claimed to PHP 500,000.00, which Tigerway paid on the same day. Tigerway had thus paid a total of PHP 719,429.80 for the year 2005. On December 27, 2007, Tigerway filed a written claim for refund or credit with the City Treasurer, asserting that the additional assessments lacked factual and legal basis and that its actual liability for 2005 should have been only PHP 234,234.79. Given its total payments, Tigerway claimed a refund of PHP 485,195.01. The following day, Tigerway filed a Complaint for Refund or Credit of Local Tax and Fees before the RTC under Section 196 of the LGC.

The City Treasurer countered that Tigerway had lost its right to contest the assessment for failing to protest within 60 days from receipt of the Order of Payment dated December 29, 2005 under Section 195, rendering the assessment final and executory. The RTC ruled in Tigerway's favor, ordering the refund of PHP 485,195.01 plus 6% interest per annum. Both the CTA Third Division and the CTA En Banc affirmed, uniformly finding that the assessment notices were void for lacking factual and legal basis and that Tigerway properly availed of Section 196, having filed both its written claim and judicial complaint within two years from the date of payment. The CTA En Banc likewise noted inconsistencies in the testimony of the City Treasurer's witness, Nestor Cañas, the BPLO Officer-in-Charge who participated in the June 10, 2005 inspection, and declined to give probative value to his testimony.

• Inapplicability of Section 196: Petitioner argued that respondent could not invoke the remedy under Section 196 of the LGC because the contentions in the Complaint before the RTC concerned the empirical basis of the assessment, not the LGU's power of taxation. Petitioner averred that Section 196 is relevant only when the protest revolves around the taxing authority of the LGU, and thus the CTA En Banc should have applied Section 195.
• Section 196 Not a Substitute for Protest: Petitioner emphasized that Section 196 is not a substitute for a lost remedy of protest, implying that respondent's failure to timely protest under Section 195 precluded any alternative recourse.
• Sufficiency of Notice Requirements: Petitioner asserted that Section 195 does not require the inclusion of the factual and legal basis of the assessment in the notice of assessment. According to petitioner, the provision merely requires the notice to state the nature of the taxes, fees, or charges and the amount of deficiency, all of which were sufficiently complied with in the Notice of Deficiency dated July 15, 2005.
• Finality of Assessment: Petitioner maintained that respondent's failure to timely protest within 60 days from receipt of the notice rendered the assessment final and immutable, and thus could no longer be modified by any tribunal or court.

• Lack of Factual and Legal Basis: Respondent asserted that the additional assessments lacked factual and legal basis, maintaining that its actual liability for business taxes, fees, and charges for 2005 should only have been PHP 234,234.79.
• Proper Invocation of Section 196: Respondent invoked Section 196 of the LGC as the proper remedy for refund of erroneously paid taxes, as evidenced by the title of its Complaint before the RTC, and complied with the two-year prescriptive period for both the written claim and the judicial action.

• Applicability of Section 195 vs. Section 196: Whether Section 195 or Section 196 of the Local Government Code applies given the assessment notices issued by the City Treasurer.
• Validity of Assessment Notices: Whether the assessment notices issued by the City Treasurer were valid and sufficient to trigger the protest mechanism under Section 195.
• Entitlement to Refund: Whether Tigerway is entitled to a refund of PHP 485,195.01 under Section 196 of the LGC.
• Award of Legal Interest: Whether the award of 6% legal interest per annum on the tax refund was proper.

• Applicability of Section 195 vs. Section 196: Section 196 applies. Because the assessment notices were void for lacking factual and legal basis, no valid assessment existed to trigger the protest mechanism under Section 195, making Section 196 the proper remedy.
• Validity of Assessment Notices: No, the assessment notices were void. Section 195 requires the notice of assessment to state the nature of the tax, the amount of deficiency, surcharges, interests, and penalties; the notices here failed to provide the factual and legal basis for the assessment, violating due process.
• Entitlement to Refund: Yes. Tigerway satisfied both procedural requisites under Section 196: it filed a written claim for refund with the local treasurer and initiated judicial proceedings within two years from the date of payment on December 29, 2005.
• Award of Legal Interest: No. Interest on tax refunds is permissible only when authorized by law or when the tax collection was attended by arbitrariness; neither condition was present.

• Applicability of Section 195 vs. Section 196: The Court clarified that the key factor in determining which provision applies is whether a valid tax assessment was issued. Section 195 presupposes the existence of a valid assessment notice and prescribes a 60-day protest period; Section 196 applies where no valid assessment exists and the taxpayer claims erroneous or illegal collection. Drawing on City of Manila vs. Cosmos Bottling Corporation and International Container Terminal Services, Inc. vs. City of Manila, the Court explained that where an assessment is issued and the taxpayer pays it, the taxpayer must administratively assail the assessment within 60 days and bring suit within 30 days from the local treasurer's decision or inaction. However, this framework presupposes a valid assessment. Where the assessment is void, Section 195 cannot apply, and the taxpayer may proceed under Section 196 without a prior protest. The Court found that the CTA En Banc correctly held Tigerway was free to choose its remedy and properly invoked Section 196.

• Validity of Assessment Notices: Section 195 explicitly requires the notice of assessment to indicate the nature of the tax, fee, or charge, the amount of deficiency, the surcharges, interests, and penalties. The Court, citing Yamane vs. BA Lepanto Condominium Corporation and National Power Corporation vs. Province of Pampanga, emphasized that the notice must be sufficiently informative to apprise the taxpayer of the legal and factual basis of the assessment, consonant with the constitutional mandate of due process. The courts a quo uniformly found that the Notice of Deficiency dated July 15, 2005, the Last and Final Demand dated December 2, 2005, and the Orders of Payment dated December 8 and December 29, 2005 contained no factual or legal basis apart from the bare allegation that ocular inspections were conducted. There was no explanation of how the figures were computed, and the City Treasurer failed to establish that the additional documents submitted were received by Tigerway. The Court also noted inconsistencies in the testimony of the City Treasurer's witness, Nestor Cañas, which undermined the evidentiary support for the assessment. Petitioner's argument that the July 15, 2005 Notice of Deficiency complied with Section 195 was rejected, as that notice did not reflect the reduced amount actually paid by respondent and thus lost relevance. Tax assessments issued in violation of due process are void and of no force and effect.

• Entitlement to Refund: With Section 195 inapplicable due to the absence of a valid assessment, Section 196 governed. Two procedural requisites must coincide: (1) a written claim for refund or credit filed with the local treasurer, and (2) a judicial action initiated within two years from the date of payment. Tigerway paid the tax on December 29, 2005, filed its written claim on December 27, 2007, and filed its complaint before the RTC the next day, both within the two-year prescriptive period. Given Tigerway's admission of its actual tax liability of PHP 234,234.79 and its total payments of PHP 719,429.80, the refund of PHP 485,195.01 was appropriate.

• Award of Legal Interest: Interest on tax refunds is permissible only when authorized by law or when the tax collection was attended by arbitrariness, defined as inexcusable or obstinate disregard of legal provisions. The Court found neither a legal basis for imposing interest nor any indication of arbitrariness in the collection, noting that an action is not arbitrary when exercised honestly and upon due consideration where there is room for two opinions. The imposition of interest was therefore set aside.

• Validity of Local Tax Assessments — Factual and Legal Basis Requirement — A notice of assessment under Section 195 of the Local Government Code must state the nature of the tax, fee, or charge, the amount of deficiency, surcharges, interests, and penalties, and must be sufficiently informative to apprise the taxpayer of the factual and legal basis of the assessment. Failure to provide the factual and legal basis renders the assessment void and of no force and effect, as it violates the taxpayer's constitutional right to due process. The purpose of the written notice requirement is to aid the taxpayer in making a reasonable protest; merely notifying the taxpayer of tax liabilities without details or particulars is insufficient.

• Distinction Between Section 195 and Section 196 of the LGC — Section 195 applies when a valid tax assessment is issued by the local treasurer, presupposing the existence of a valid assessment notice; the taxpayer must file a written protest within 60 days from receipt and, if denied or if the treasurer fails to act, appeal to a court of competent jurisdiction within 30 days. Section 196 applies when no valid assessment exists and the taxpayer claims to have erroneously paid a tax or that the tax was illegally collected; the taxpayer must file a written claim for refund with the local treasurer and initiate judicial action within two years from the date of payment. The applicability of Section 196 does not depend on the existence of an assessment notice.

• Two Conditions for Refund When an Assessment Is Issued — Where a valid assessment is issued and the taxpayer pays the assessed tax, two conditions must be satisfied to successfully prosecute an action for refund: (1) pay the tax and administratively assail the assessment within 60 days before the local treasurer, whether in a letter-protest or a claim for refund; and (2) bring an action in court within 30 days from the decision or inaction of the local treasurer, whether denominated as an appeal from the assessment and/or a claim for refund.

• Interest on Tax Refunds — Interest on tax refunds is permissible only when authorized by law or when the tax collection was attended by arbitrariness, which presupposes inexcusable or obstinate disregard of legal provisions. An action is not arbitrary when exercised honestly and upon due consideration where there is room for two opinions, however much it may be believed that an erroneous conclusion was reached.

• "Section 195 finds application in cases where a tax assessment is issued to the taxpayer, thereby presupposing the existence of a valid tax assessment. On the other hand, Section 196 assumes relevance in instances where no such assessment exists." — This passage articulates the controlling test for determining which remedial provision of the Local Government Code applies, hinging on the validity of the assessment notice.

• "Tax assessments issued in violation of the due process rights of a taxpayer are void and of no force and effect." — This formulation, reiterated from National Power Corporation vs. Province of Pampanga, states the doctrinal consequence of an assessment that fails to inform the taxpayer of the factual and legal basis of the deficiency.

• "Taxpayers' obligation for deficiency taxes cannot depend on a guessing game." — This passage underscores the due process rationale behind the notice requirement, emphasizing that taxpayers must be informed of what taxes they owe, under what authority, how much, and for what period, to prepare an intelligent appeal.

• City of Manila vs. Cosmos Bottling Corporation, 834 Phil. 371 (2018) — Controlling precedent comprehensively discussing the distinction between Sections 195 and 196 of the LGC, establishing the framework for determining which remedy applies based on whether a valid assessment was issued. Followed and applied in this case.

• International Container Terminal Services, Inc. vs. City of Manila, 842 Phil. 173 (2018) — Followed. Reiterated the guidelines from Cosmos on the alternative remedies available to a taxpayer facing an assessment, clarifying that where no assessment notice is issued, Section 196 applies.

• Yamane vs. BA Lepanto Condominium Corporation, 510 Phil. 750 (2005) — Followed. Clarified that while Section 195 does not expressly require citation of the specific ordinance provision, the notice must still state the nature of the tax and the amount of deficiency sufficiently to apprise the taxpayer of the legal basis, especially where the local revenue code provides multiple provisions on business taxes at varying rates.

• National Power Corporation vs. Province of Pampanga, G.R. No. 230648, October 6, 2021 — Followed. Elucidated the taxing authority's duty to adequately inform the taxpayer of the factual and legal basis for the assessment, grounded in the constitutional right to due process. The Court echoed its pronouncement that taxpayers' obligations cannot depend on a guessing game.

• Section 195, Local Government Code (Protest of Assessment) — Requires the local treasurer to issue a notice of assessment stating the nature of the tax, fee, or charge, the amount of deficiency, surcharges, interests, and penalties. The taxpayer may file a written protest within 60 days from receipt; otherwise, the assessment becomes final and executory. The local treasurer must decide the protest within 60 days. The taxpayer has 30 days from receipt of the denial or lapse of the 60-day period to appeal to a court of competent jurisdiction. Applied to determine that the assessment notices were void for non-compliance with the content requirements, rendering the protest mechanism inapplicable.

• Section 196, Local Government Code (Claim for Refund of Tax Credit) — Requires a written claim for refund or credit filed with the local treasurer before maintaining any court proceeding for recovery of erroneously or illegally collected taxes. No case or proceeding may be entertained after two years from the date of payment or from the date the taxpayer is entitled to a refund or credit. Applied as the proper remedy because no valid assessment existed, and Tigerway complied with both the written-claim and judicial-action requirements within the two-year prescriptive period.

• Article III, Section 1, Constitution (Due Process) — No person shall be deprived of life, liberty, or property without due process of law. Invoked as the constitutional foundation for the requirement that assessment notices must inform the taxpayer of the factual and legal basis of the assessment, and for the principle that tax assessments issued in violation of due process are void.

Leonen, SAJ. (Chairperson), Lazaro-Javier, M. Lopez, and Kho, Jr., JJ., concurred.