Manila Electric Company vs. The City Assessor

Tax exemptions granted under franchises are withdrawn upon the effectivity of the Local Government Code of 1991 unless expressly retained in the Code or subsequent franchises; furthermore, electric transformers, posts, transmission lines, insulators, and meters constitute "machinery" under Section 199(o) of the LGC subject to real property tax even if not permanently attached to real property, provided they are actually, directly, and exclusively used for the electric distribution business.

MERALCO operated in Lucena City under franchises (Resolution No. 108, 1957; Resolution No. 2679, 1972) that granted exemption from real property tax on its poles, wires, transformers, insulators, and electric meters in exchange for paying 5% of gross earnings as franchise tax. The Local Government Code of 1991 (RA 7160) took effect on January 1, 1992, containing provisions withdrawing all tax exemptions unless expressly provided in the Code.

• 1989: MERALCO appealed Tax Declaration No. 019-6500 to the LBAA (LBAA-89-2); LBAA ruled in favor of MERALCO, holding the properties exempt as personal property under the franchise and the 1964 Board of Assessment Appeals v. Manila Electric Company case.
• 1991: CBAA affirmed LBAA (CBAA Case No. 248); City Assessor did not appeal; decision became final.
• 1997: City Treasurer issued collection letter for real property tax delinquency (P17,925,117.34) for 1990–1997 based on Tax Declaration Nos. 019-6500 and 019-7394.
• 1997: MERALCO posted a surety bond and appealed to LBAA (December 23, 1997).
• 1998: LBAA dismissed appeal (June 17, 1998), ruling that the LGC repealed franchise exemptions.
• 2001: CBAA affirmed LBAA but excluded years 1990–1991 (CBAA Case No. L-20-98).
• 2004: CA affirmed CBAA (May 13, 2004) and denied MR (November 18, 2004).
• 2015: SC rendered decision on Petition for Review on Certiorari.

• MERALCO is a private corporation and public utility engaged in electric distribution in Lucena City under franchises including Resolution No. 108 (1957), Resolution No. 2679 (1972), a 1993 Certificate of Franchise from the National Electrification Commission, and RA 9209 (2003).
• Under prior franchises, MERALCO paid 5% of gross earnings "in lieu of any and all taxes" on its poles, wires, transformers, insulators, and meters.
• In 1989, City Assessor issued Tax Declaration No. 019-6500 assessing these facilities as "capital investment" with market value of P81,811,000.00.
• In 1997, City Treasurer demanded payment of P17,925,117.34 for 1990–1997, attaching Tax Declaration No. 019-7394 (increasing market value to P98,173,200.00).
• MERALCO posted a surety bond (P17,925,117.34) instead of cash payment and appealed.
• The assessments lumped all machinery together without individual inventory, description, number of units, or specific valuation per item; Tax Declaration No. 019-6500 listed the properties under "Building and Improvements" with the "Machinery" table blank.

• The properties are personal property under Article 415 of the Civil Code and the 1964 Board of Assessment Appeals v. Manila Electric Company ruling, which held that steel towers (poles) were not attached in a fixed manner and were exempt under the franchise.
• The 1991 CBAA Case No. 248 decision classifying the properties as personal is binding as the law of the case (res judicata).
• The LGC definition of "machinery" in Section 199(o) must be harmonized with the Civil Code; properties must be permanently attached to land to be considered real property for tax purposes.
• The electric posts are not exclusively used by MERALCO (shared with cable/telephone companies), failing the "exclusively used" requirement.
• The 1997 assessment is void for lack of due process: no sworn statement of true value provided, no inventory/list showing actual number of properties, no schedule of values per property type, violating Sections 223, 224, and 225 of the LGC.
• Assessment should take effect only on January 1, 1998, not retroactive to 1992 (Sections 221 and 222).
• No penalties should attach due to good faith reliance on prior rulings exempting the properties.
• Posting a surety bond satisfies the "payment under protest" requirement under Section 252, citing Camp John Hay Development Corporation v. Central Board of Assessment Appeals.

• Section 231 mandates that appeal does not suspend collection; MERALCO should have paid cash, not merely posted a bond.
• The 1964 case and prior CBAA ruling are inapplicable because decided under the old Real Property Tax Code (PD 464), now repealed by the LGC.
• Under Section 199(o) of the LGC, the properties are "machinery" subject to real property tax regardless of attachment to land.
• Sections 193 and 534(f) of the LGC withdrew all franchise tax exemptions; Section 234 contains an exclusive enumeration of exemptions not including MERALCO.
• The assessment properly retroacts only to 1992 (within 10 years under Section 222), not 1990.
• MERALCO failed to file a sworn declaration of property values under Section 202, justifying the assessor's lump-sum assessment under Section 204.

• Procedural Issues:
  • Whether posting a surety bond satisfies the "payment under protest" requirement under Section 252 of the LGC to perfect an appeal.
  • Whether the 1997 assessment complied with due process and statutory requirements under Sections 223, 224, and 225 of the LGC.
• Substantive Issues:
  • Whether MERALCO's transformers, electric posts, transmission lines, insulators, and electric meters constitute "machinery" subject to real property tax under Section 199(o) of the LGC.
  • Whether MERALCO's tax exemption under its franchises survived the enactment of the LGC (Sections 193 and 234).
  • Whether the assessment can retroact to 1992 under Section 222 of the LGC.

• Procedural:
  • Posting a surety bond substantially complies with Section 252. The bond guarantees payment of the tax due, satisfying the condition sine qua non for appeal. Citing Camp John Hay Development Corporation v. Central Board of Assessment Appeals, G.R. No. 169234 (2013).
  • The 1997 assessment is null and void for violation of due process. The Notice of Assessment and Tax Declarations failed to specify individual property values, descriptions, inventories, or depreciation schedules as required by Sections 224 and 225. The lump-sum assessment of all machinery without individual appraisal violates statutory mandates. The City Assessor should have made the declaration himself under Section 204 when MERALCO failed to file, but was still required to assess according to the specific requirements of the LGC.
• Substantive:
  • The properties constitute "machinery" under Section 199(o) of the LGC. The definition includes machines, equipment, and apparatus that "may or may not be attached, permanently or temporarily to the real property," including mobile and self-propelled units, provided they are actually, directly, and exclusively used for the particular industry. This is distinct from Article 415 of the Civil Code.
  • The LGC prevails over the Civil Code for tax classification purposes. Under lex specialis derogat generali, the special law (LGC) governs real property taxation over the general law (Civil Code).
  • MERALCO's tax exemption was withdrawn by the LGC. Section 193 withdraws all exemptions upon effectivity of the Code unless expressly provided. Section 234 enumerates exclusive exemptions; MERALCO (a private corporation) is not included. The general repealing clause (Section 534(f)) repealed inconsistent franchise provisions. Subsequent franchises (1993 Certificate, RA 9209) contain no exemption clauses.
  • Tax exemptions are strictly construed against the taxpayer. MERALCO failed to point to any express exemption in the LGC or subsequent franchises. The exemption under Section 234(c) applies only to government-owned/controlled corporations engaged in power generation/transmission, not private utilities like MERALCO.

• Withdrawal of Tax Exemptions under the LGC — Sections 193 and 234 of the LGC constitute a sweeping withdrawal of all tax exemptions previously granted to natural or juridical persons, including government-owned or controlled corporations, unless expressly retained in the Code. The enumeration of exemptions in Section 234 is exclusive (expressio unius est exclusio alterius).
• Definition of Machinery under the LGC — Under Section 199(o), machinery is real property for taxation purposes if: (a) it consists of machines, equipment, mechanical contrivances, instruments, appliances or apparatus; (b) it may or may not be attached permanently or temporarily to real property (may be mobile); and (c) it is actually, directly, and exclusively used to meet the needs of the particular industry, business or activity. This definition is independent of Article 415 of the Civil Code.
• Lex Specialis Derogat Generali — A special law (LGC) prevails over a general law (Civil Code) on the same subject matter. For real property tax purposes, the LGC's definition of machinery controls over the Civil Code's definition of immovable property.
• Due Process in Tax Assessment — The power of taxation constitutes deprivation of property; due process requires strict compliance with statutory assessment procedures. A valid notice of assessment must specify the value of specific property subject to tax and the legal basis thereof (Section 223). Machinery must be individually appraised based on acquisition cost, remaining economic life, estimated economic life, replacement cost, and depreciation (Sections 224-225).
• Strict Construction of Tax Exemptions — Tax exemptions must be clear and unequivocal; any doubt is resolved against the taxpayer. The claimant must point to a specific provision conferring the exemption in clear and plain terms.

• "The evident intent of the Local Government Code is to withdraw/repeal all exemptions from local taxes, unless otherwise provided by the Code."
• "The machinery subject to real property tax under the Local Government Code 'may or may not be attached, permanently or temporarily to the real property,' and in fact, such machinery may even be 'mobile.'"
• "As between the Civil Code, a general law governing property and property relations, and the Local Government Code, a special law granting local government units the power to impose real property tax, then the latter shall prevail."
• "The exercise of the power of taxation constitutes a deprivation of property under the due process clause, and the taxpayer's right to due process is violated when arbitrary or oppressive methods are used in assessing and collecting taxes."

• Board of Assessment Appeals v. Manila Electric Company, 119 Phil. 328 (1964) — Distinguished; held that steel towers were "poles" exempt under MERALCO's franchise and were personal property under the Civil Code, but no longer applicable because the LGC changed the definition of machinery and withdrew franchise exemptions.
• Camp John Hay Development Corporation v. Central Board of Assessment Appeals, G.R. No. 169234, October 2, 2013 — Followed; held that posting a surety bond substantially complies with the "payment under protest" requirement under Section 252 of the LGC.
• Caltex (Philippines), Inc. v. Central Board of Assessment Appeals, 114 SCRA 296 (1982) — Cited; acknowledged that things may be classed as real property for taxation purposes which might be considered personal property under general principles.
• City Government of San Pablo, Laguna v. Reyes, 305 SCRA 353 (1999) — Cited; held that Section 193 of the LGC withdraws all tax exemptions unless expressly enumerated therein.
• Mactan Cebu International Airport Authority v. Marcos, 330 Phil. 392 (1996) — Cited; discussed the constitutional policy of local autonomy and the LGC's objective to broaden the tax base of local government units.

• Local Government Code of 1991 (RA 7160):
  • Section 193 — Withdrawal of tax exemption privileges upon effectivity of the Code.
  • Section 199(o) — Definition of machinery for real property tax purposes.
  • Section 202 — Declaration of real property by owner.
  • Section 204 — Declaration by assessor when owner fails to declare.
  • Section 221 — Date of effectivity of assessment or reassessment.
  • Section 222 — Assessment of property subject to back taxes (10-year limit).
  • Section 223 — Notification of new or revised assessment.
  • Section 224 — Appraisal and assessment of machinery (acquisition cost, economic life).
  • Section 225 — Depreciation allowance for machinery.
  • Section 231 — Effect of appeal on collection (does not suspend).
  • Section 232 — Power to levy real property tax.
  • Section 234 — Exclusive enumeration of exemptions from real property tax.
  • Section 252 — Payment under protest required for appeal.
  • Section 534(f) — General repealing clause for inconsistent laws.
• Civil Code:
  • Article 415 — Definition of immovable property (distinguished from LGC definition for tax purposes).
• Franchises:
  • Resolution No. 108 (1957) and Resolution No. 2679 (1972) — Old franchises with tax exemption clauses (repealed by LGC).
  • PD 551 — Lowering franchise tax (repealed by LGC Section 534(f)).
  • RA 9209 (2003) — New franchise silent on tax exemptions.

• N/A (Sereno, C.J., Bersamin, Perez, and Perlas-Bernabe, JJ., concurred without separate opinions).