Metropolitan Waterworks and Sewerage System vs. Central Board of Assessment Appeals

A government instrumentality vested with corporate powers, such as MWSS, is exempt from real property taxes under Sections 133(o) and 234(a) of the Local Government Code, but this exemption ceases when the beneficial use of its real property is alleged and proved to have been granted to a taxable person, in which case personal liability for the tax rests on the taxable beneficial user. Corollarily, the rule on exhaustion of administrative remedies does not apply where the controversy involves a pure question of law, such as the authority of a local government to assess and collect real property taxes from a government entity.

MWSS was created on June 19, 1971 by Republic Act No. 6234 "to insure an uninterrupted and adequate supply and distribution of potable water for domestic and other purposes and the proper operation and maintenance of sewerage systems," and was vested with the power to exercise supervision and control over all waterworks and sewerage systems within Metro Manila, Rizal, and a portion of Cavite. In 1997, pursuant to Republic Act No. 8041, the National Water Crisis Act of 1995, MWSS entered into a concessionaire agreement with Maynilad Water Services, Inc. to service the West Zone of the Metropolitan Area, which includes Pasay City. The statutory backdrop to the exemption claim includes Executive Order No. 596, which classified MWSS as a "government instrumentality vested with corporate powers" under the jurisdiction of the Office of the Government Corporate Counsel, and Republic Act No. 10149, the GOCC Governance Act of 2011, which adopted the same categorization and expressly listed MWSS among Government Instrumentalities with Corporate Powers/Government Corporate Entities. MWSS's position rested on Manila International Airport Authority vs. CA, which had declared MIAA a government instrumentality exercising corporate powers and therefore exempt from real property taxes under Sections 133(o) and 234(a) of the Local Government Code of 1991.

Metropolitan Waterworks and Sewerage System (MWSS) was created on June 19, 1971 by Republic Act No. 6234 to insure an uninterrupted and adequate supply and distribution of potable water for domestic and other purposes and the proper operation and maintenance of sewerage systems, and was vested with the power to exercise supervision and control over all waterworks and sewerage systems within Metro Manila, Rizal, and a portion of Cavite. In 1997, pursuant to Republic Act No. 8041, the National Water Crisis Act of 1995, MWSS entered into a concessionaire agreement with Maynilad Water Services, Inc. (Maynilad) to service the West Zone of the Metropolitan Area, which includes Pasay City.

On February 21, 2008, MWSS received Real Property Tax Computations from the Pasay City Treasurer for taxable year 2008, demanding payment of real property taxes in the total amount of P166,629.36. Allegedly on the same day, MWSS filed a Protest Letter dated February 3, 2008 addressed to then Pasay City Mayor Wenceslao Peewee Trinidad, arguing that it is a public utility and a government instrumentality whose properties and facilities are exempt from real property tax, consistent with its position in a Petition for Certiorari and Prohibition it had filed against the local government of Quezon City, docketed as CA-G.R. SP No. 100733. The claim was anchored on Manila International Airport Authority vs. CA, which declared MIAA a government instrumentality exercising corporate powers and thus exempt from real property taxes under Section 133(o) and Section 234(a) of Republic Act No. 7160, the Local Government Code of 1991.

Because the Pasay City Treasurer did not act on the protest, MWSS appealed to the Local Board of Assessment Appeals. The LBAA observed that MWSS had not complied with Section 252 of the LGC, its failure to file a protest with the city treasurer having rendered the assessment final and not appealable, but it nonetheless resolved the substantive issue. It ruled that MWSS is a government-owned or controlled corporation rather than a government instrumentality, so that the tax exemption doctrine enunciated in MIAA did not apply, and it further pointed out that when MWSS entered into the concessionaire agreement with Maynilad, the actual use of its real properties was turned over to a taxable person, rendering the assessment of real property taxes against MWSS "reasonable and collectible."

MWSS appealed to the Central Board of Assessment Appeals. In its Decision dated August 30, 2012, the CBAA affirmed the finality of the assessment, not for failure to comply with Section 252 of the LGC but for failure to question the legality of the assessment before the city assessor in accordance with Section 226, and it declined to discuss the merits of the case as moot and academic. On reconsideration, the CBAA acknowledged in an Order dated February 27, 2013 that MWSS is a government instrumentality recognized under Republic Act No. 10149, the GOCC Governance Act of 2011, and as such cannot be subjected to local taxes, fees, and charges under Section 133(o) of the LGC; it held, however, that this was not relevant because the collections involved were real property taxes, to which Section 40(a) of Presidential Decree No. 464, as embodied in Section 234(a) of the LGC, applied. The CBAA ruled that MWSS's tax exemption under Section 18 of its charter, RA No. 6234, had already been withdrawn by Section 234 of the LGC.

MWSS then elevated the matter to the Court of Appeals, which dismissed the petition for failure to exhaust administrative remedies under Sections 206 and 252 of the LGC, requiring proof of exemption and payment under protest; reconsideration was denied. On the pivotal factual matter of beneficial use, the records contained only an allegation that the beneficial use of MWSS's properties in Pasay had been given to Maynilad by virtue of the concession agreement. That allegation was not proved and rested on a sweeping conclusion that the mere execution of the concession agreement had effectively turned over all of MWSS's properties to the concessionaires for their operations, leaving the Court without sufficient evidence on record to make a judicious determination of the factual matter.

• Government Instrumentality and Tax Exemption: MWSS maintained that it is a public utility and a government instrumentality, and that its properties and facilities are exempt from real property tax, invoking Manila International Airport Authority vs. CA, which had declared MIAA a government instrumentality exercising corporate powers and therefore exempt under Section 133(o) and Section 234(a) of the Local Government Code.
• Inapplicability of Exhaustion of Administrative Remedies: MWSS argued that the Court of Appeals erred in dismissing its appeal for failure to exhaust administrative remedies, because it was not challenging the reasonableness or correctness of the City Assessor's assessment nor asserting error in the City Treasurer's computation of the assessed tax, but was instead assailing the very authority of the city assessor and treasurer to assess and collect real property taxes against it.
• Pure Question of Law: MWSS posited that the issue of whether a local government is authorized to assess and collect real property taxes from a government entity is a pure question of law, which is beyond the jurisdiction of the LBAA and the CBAA and for which a judicial action is the proper recourse.

• Exhaustion of Administrative Remedies: Whether the Court of Appeals erred in dismissing MWSS's appeal for failure to exhaust administrative remedies under the Local Government Code.
• Authority to Assess and Collect Real Property Taxes: Whether Pasay City is authorized to assess and collect real property taxes from MWSS.
• Refund of Real Property Taxes Erroneously Paid: Whether MWSS's claim for refund of real property taxes erroneously paid based on void assessments may issue automatically.

• Exhaustion of Administrative Remedies: No. The Court of Appeals palpably erred, since exhaustion of administrative remedies does not apply where the controversy involves a pure question of law, such as the authority of the assessor and treasurer to impose and collect the tax.
• Authority to Assess and Collect Real Property Taxes: No. MWSS, as a government instrumentality with corporate powers, is exempt from real property taxes under Sections 133(o) and 234(a) of the Local Government Code; the exemption ceases only when beneficial use is alleged and proved to have been granted to a taxable person, in which case the taxable beneficial user is liable.
• Refund of Real Property Taxes Erroneously Paid: No. Entitlement to a refund is not automatic; the amount is a factual matter to be threshed out with certainty in the normal course and in accordance with the administrative procedure under Section 253 of the Local Government Code.

• Exhaustion of Administrative Remedies: A careful reading of MWSS's arguments and allegations shows that it is neither challenging the reasonableness or correctness of the City Assessor's assessment nor asserting error on the part of the City Treasurer's computation of the assessed tax; it is plainly assailing the authority of the city assessor and treasurer to assess and collect real property taxes against it. The issue of whether a local government is authorized to assess and collect real property taxes from a government entity is a pure question of law, which is beyond the LBAA and CBAA's jurisdiction. Ty vs. Hon. Trampe settled that the rule on exhaustion of administrative remedies does not apply when the controversy does not involve questions of fact but only of law. The protest contemplated under Section 252 of the LGC is required when there is a question as to the reasonableness or correctness of the amount assessed, while an appeal to the LBAA under Section 226 is fruitful only where questions of fact are involved. Accordingly, when the very authority and power of the assessor to impose the assessment, and of the treasurer to collect real property taxes, are in question, the proper recourse is a judicial action. Thus, despite the alleged non-exhaustion of administrative remedies, the Court gave due course to the petition on the ground that the controversy involves only a question of law.

• Authority to Assess and Collect Real Property Taxes: The 2018 MWSS Case, which reviewed the CA Decision in CA-G.R. SP No. 100733, has already settled with finality that MWSS is a government instrumentality vested with corporate powers and, as such, exempt from payment of real property taxes. With the issuance of Executive Order No. 596 and the passage of RA No. 10149, the Executive and Legislative Branches explicitly classified MWSS as a government instrumentality with corporate powers, and the proviso of Section 234 of the Local Government Code is applicable only to government-owned or controlled corporations; hence, MWSS's real property tax exemption under RA No. 6234 remains valid. Sections 133(o) and 234(a) of the LGC are clear as to a government instrumentality's tax exemption, a limitation that recognizes the basic principle that local governments cannot tax the national government, which merely delegated to local governments the power to tax. While the 1987 Constitution now includes taxation as one of the powers of local governments, local governments may exercise such power only "subject to such guidelines and limitations as the Congress may provide," so that when local governments invoke their power to tax on government instrumentalities, such power is construed strictly against local governments. The tax exemption under Section 234(a), however, ceases when the beneficial use of the real properties is alleged and proved to have been granted, for a consideration or otherwise, to a taxable person. Beneficial use means actual use or possession of the property, and actual use refers to the purpose for which the property is principally or predominantly utilized by the person in possession thereof. In this case, the allegation that the beneficial use of MWSS's properties in Pasay was given to Maynilad by virtue of the concession agreement was not proved and was merely based on a sweeping conclusion that the execution of the concession agreement effectively turned over all of MWSS's properties to the concessionaires for their operations; the Court could not make a judicious determination of such factual matter due to the insufficiency of evidence on record. At any rate, the tax-exempt status of a government instrumentality is not lost when it grants the beneficial use of its real property to a taxable person; only the exemption of the real property ceases. Section 205(d) of the LGC leaves no room for interpretation on the corresponding liability of the taxable beneficial user, providing that real property owned by the Republic, its instrumentalities and political subdivisions, the beneficial use of which has been granted to a taxable person, shall be listed, valued, and assessed in the name of the possessor, grantee, or of the public entity if such property has been acquired or held for resale or lease. It is a fundamental principle in real property taxation that the assessment of real property shall be based on its actual use, and while liability for taxes generally rests on the owner, personal liability for real property taxes may also expressly rest on the entity with the beneficial use of the real property at the time the tax accrues. City of Baguio vs. Busuego held the taxable person who purchased in installment property belonging to a tax-exempt person liable for real property taxes from the time possession was transferred to him despite the tax-exempt person's retention of ownership and title pending full payment, and National Power Corp. vs. Province of Quezon made the rule explicit. In sum, MWSS is not liable to the local government of Pasay City for real property taxes, its tax exemption ceases when the beneficial or actual use is alleged and proven to have been extended to a taxable person, and all assessments issued in the name of MWSS should thus be declared void. Pasay City is not precluded from availing of the appropriate remedies under the law to assess and collect real property taxes from the private entities to whom MWSS may have granted the beneficial use of its properties.

• Refund of Real Property Taxes Erroneously Paid: As the real property tax assessments issued in the name of MWSS are declared void, MWSS's claim for refund of the real property taxes erroneously paid based on void assessments cannot be ignored. This entitlement to a tax refund, however, is not automatic; the amount is a factual matter that must be threshed out with certainty in the normal course and in accordance with the administrative procedure provided under the LGC. Section 253 of the LGC provides the procedure in claiming a real property tax refund, requiring a written claim for refund or credit for taxes and interests with the provincial or city treasurer within two years from the date the taxpayer is entitled to such reduction or adjustment. MWSS's claim for tax refund should therefore be filed with the city treasurer within two years from the finality of the Decision, as it is only then that the invalidity of the Pasay City assessment is finally settled.

• Tax Exemption of Government Instrumentalities with Corporate Powers — Section 133(o) of the Local Government Code bars local governments from levying taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, while Section 234(a) exempts real property owned by the Republic or any of its political subdivisions from the real property tax, except when the beneficial use thereof has been granted to a taxable person. The Court applied these provisions to MWSS, holding that as a government instrumentality with corporate powers — as classified by Executive Order No. 596 and Republic Act No. 10149 — it is exempt from real property taxes, and that the proviso of Section 234 withdrawing exemptions applies only to government-owned or controlled corporations, leaving MWSS's exemption under Section 18 of RA No. 6234 intact.
• Cessation of Exemption Upon Grant of Beneficial Use to a Taxable Person — The tax-exempt status of a government instrumentality is not lost when it grants the beneficial use of its real property to a taxable person; only the exemption of the real property ceases, and personal liability for the tax devolves on the taxable beneficial user. Section 205(d) of the LGC requires such property to be listed, valued, and assessed in the name of the possessor, grantee, or of the public entity if acquired or held for resale or lease. The Court applied the doctrine by declaring MWSS's Pasay properties exempt except when beneficial use is alleged and proved granted to taxable entities, and by declaring void all assessments issued in MWSS's name while leaving Pasay City free to pursue the private beneficial users.
• Beneficial Use and Actual Use — Beneficial use means actual use or possession of the property, and actual use refers to the purpose for which the property is principally or predominantly utilized by the person in possession thereof. Real property shall be classified, valued, and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it. The Court applied the doctrine by refusing to sustain the bare allegation that the concession agreement had turned over MWSS's Pasay properties to Maynilad, the allegation being unproved and resting only on a sweeping conclusion.
• Exhaustion of Administrative Remedies — Pure Question of Law Exception — The rule on exhaustion of administrative remedies does not apply when the controversy does not involve questions of fact but only of law. A protest under Section 252 of the LGC is required only when there is a question as to the reasonableness or correctness of the amount assessed, while an appeal to the LBAA under Section 226 is fruitful only where questions of fact are involved. When the very authority and power of the assessor to impose the assessment and of the treasurer to collect real property taxes are in question, the proper recourse is a judicial action. The Court applied the exception to give due course to MWSS's petition notwithstanding its alleged failure to exhaust administrative remedies.
• Refund of Real Property Taxes Under a Void Assessment — A claim for refund of real property taxes paid under a void assessment is not automatically granted; the amount is a factual matter that must be threshed out with certainty in the normal course and in accordance with the administrative procedure under Section 253 of the LGC, which requires a written claim for refund or credit with the provincial or city treasurer within two years from the date the taxpayer is entitled to the reduction or adjustment. The Court applied the rule by directing MWSS to file its claim with the city treasurer within two years from the finality of the Decision.
• Construction of the Local Government's Taxing Power — While the 1987 Constitution includes taxation as one of the powers of local governments, local governments may exercise such power only "subject to such guidelines and limitations as the Congress may provide." When local governments invoke their power to tax on government instrumentalities, such power is construed strictly against local governments.

• "Administrative remedies are inapplicable when the issue presented is a pure question of law." — This is the Court's ratio on the threshold procedural issue, disposing of the CA's dismissal of the petition for non-exhaustion and establishing that the authority of a local assessor and treasurer to tax a government entity may be challenged directly in a judicial action.
• "In sum, we hold that MWSS is not liable to the local government of Pasay City for real property taxes. The tax exemption of its properties, however, ceases when the beneficial or actual use is alleged and proven to have been extended to a taxable person. All the assessments issued in the name of MWSS should thus, be declared void." — This passage states the Court's central holding, coupling the government instrumentality's exemption with the beneficial-use exception and the resulting nullity of the assessments.
• "Beneficial use means actual use or possession of the property. Actual use refers to the purpose for which the property is principally or predominantly utilized by the person in possession thereof." — This is the canonical definition of beneficial use and actual use for real property taxation purposes, and it supplied the standard against which the unproved allegation concerning Maynilad was measured.
• "The liability for taxes generally rests on the owner of the real property owner at the time the tax accrues. This is a necessary consequence that proceeds from the fact of ownership. However, personal liability for realty taxes may also expressly rest on the entity with the beneficial use of the real property, such as the tax on property owned by the government but leased to private persons or entities, or when the tax assessment is made on the basis of the actual use of the property." — Quoted by the Court from National Power Corp. vs. Province of Quezon, this passage anchors the rule that personal liability for real property taxes may rest on the taxable beneficial user rather than the owner.

• Manila International Airport Authority vs. CA, 528 Phil. 181 (2006) — Controlling precedent. Declared MIAA a government instrumentality exercising corporate powers and therefore exempt from real property taxes under Sections 133(o) and 234(a) of the Local Government Code; the doctrine supplied the framework applied to MWSS and the basis of the strict-construction rule against local governments.
• Metropolitan Waterworks Sewerage System vs. The Local Government of Quezon City, G.R. No. 194388, November 7, 2018, 884 SCRA 493 — Controlling precedent, followed. Settled with finality that MWSS is a government instrumentality vested with corporate powers and exempt from real property taxes, and held that the proviso of Section 234 of the LGC applies only to government-owned or controlled corporations, so that MWSS's exemption under RA No. 6234 remains valid.
• Ty vs. Hon. Trampe, 321 Phil. 81 (1995) — Followed. Held that the rule on exhaustion of administrative remedies does not apply when the controversy does not involve questions of fact but only of law; the Court relied on it to give due course to the petition despite the alleged non-exhaustion.
• National Power Corp. vs. Province of Quezon, 610 Phil. 456 (2009) — Followed. Held that while liability for taxes generally rests on the owner of the real property at the time the tax accrues, personal liability for realty taxes may expressly rest on the entity with the beneficial use of the property.
• National Power Corp. vs. Municipal Government of Navotas, 747 Phil. 744 (2014) — Cited. Supports the rule that when the very authority and power of the assessor to impose and of the treasurer to collect are in question, the proper recourse is a judicial action.
• City of Baguio vs. Busuego, 188 Phil. 218 (1980) — Followed. Held the taxable person who purchased in installment property belonging to a tax-exempt person liable for real property taxes from the time possession was transferred to him, notwithstanding the tax-exempt person's retention of ownership and title pending full payment of the purchase price.
• Herarc Realty Corp. vs. The Provincial Treasurer of Batangas, G.R. No. 210736, September 5, 2018 — Cited. Source of the definition of beneficial use as actual use or possession and of actual use as the purpose for which the property is principally or predominantly utilized by the person in possession.
• Allied Banking Corp. vs. The Quezon City Government, 533 Phil. 409 (2006) — Cited. Supports the requirement that the amount of the refund be threshed out with certainty in the normal course and in accordance with the administrative procedure under the LGC.
• Republic of the Phil. vs. City of Parañaque, 691 Phil. 476 (2012) — Cited. Supports the rule that the local government's power to tax government instrumentalities is construed strictly against the local government.
• Testate of Concordia Lim vs. City of Manila, 261 Phil. 602 (1990) — Cited. Supports the rule that personal liability for real property taxes may rest on the entity with the beneficial use of the property.

• Section 133(o), Republic Act No. 7160 (Local Government Code of 1991) — Common limitations on the taxing powers of local government units; the exercise of such powers shall not extend to the levy of taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, and local government units. Applied to hold that MWSS, as a government instrumentality, cannot be subjected to local taxes, fees, and charges.
• Section 234(a), Republic Act No. 7160 — Exempts from real property tax real property owned by the Republic of the Philippines or any of its political subdivisions, except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. Applied to declare MWSS's Pasay properties exempt, subject to the beneficial-use exception.
• Section 206, Republic Act No. 7160 — Requires every person claiming tax exemption to file sufficient documentary evidence in support of the claim with the assessor within thirty days from the declaration of real property. Cited by the CA as a ground for dismissal; held inapplicable because the controversy involved a pure question of law.
• Section 252, Republic Act No. 7160 — Payment under Protest. Cited by the CA as a ground for dismissal; held to be required only when there is a question as to the reasonableness or correctness of the amount assessed.
• Section 226, Republic Act No. 7160 — Local Board of Assessment Appeals. Held to be a fruitful remedy only where questions of fact are involved, and thus unavailable where the authority to assess is itself challenged.
• Section 205(d), Republic Act No. 7160 — Provides that real property owned by the Republic, its instrumentalities and political subdivisions, the beneficial use of which has been granted to a taxable person, shall be listed, valued, and assessed in the name of the possessor, grantee, or of the public entity if such property has been acquired or held for resale or lease. Applied to place the corresponding tax liability on the taxable beneficial user.
• Section 253, Republic Act No. 7160 — Repayment of Excessive Collections; requires a written claim for refund or credit for taxes and interests with the provincial or city treasurer within two years from the date the taxpayer is entitled to the reduction or adjustment, and prescribes the procedure upon denial. Applied to require MWSS to pursue its refund with the city treasurer within two years from the finality of the Decision.
• Sections 198(b) and 217, Republic Act No. 7160 — Provide that real property shall be classified, valued, and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it. Applied to support assessment based on actual use.
• Section 199(b), Republic Act No. 7160 — Definition of actual use, cited together with Herarc Realty Corp. as the source of the standard applied to the beneficial-use question.
• Section 40(a), Presidential Decree No. 464 (Real Property Tax Code of 1974) — Exempts real property owned by the Republic or any of its political subdivisions and any government-owned corporation so exempt by its charter, provided the exemption does not apply where beneficial use has been granted to a taxable person. Cited by the CBAA and addressed by the Court in resolving the exemption issue.
• Section 18, Republic Act No. 6234 — MWSS's charter tax exemption. Held still valid, the proviso of Section 234 of the LGC withdrawing exemptions being applicable only to government-owned or controlled corporations.
• Section 1, Republic Act No. 6234 — Created MWSS to insure an uninterrupted and adequate supply and distribution of potable water for domestic and other purposes and the proper operation and maintenance of sewerage systems.
• Executive Order No. 596 (2006) — Defined and included "government instrumentality vested with corporate powers" or "government corporate entities" under the jurisdiction of the Office of the Government Corporate Counsel as principal law office, expressly listing MWSS among them. Cited as the Executive Branch's classification of MWSS as a government instrumentality with corporate powers.
• Republic Act No. 10149 (GOCC Governance Act of 2011) — Adopted the same categorization and explicitly listed MWSS among Government Instrumentalities with Corporate Powers/Government Corporate Entities. Cited as the Legislative Branch's confirmation of MWSS's status.
• Article X, Section 5, 1987 Constitution — Local governments may exercise the power to tax subject to such guidelines and limitations as Congress may provide. Cited to support the strict construction of the local government's taxing power against it.

Perlas-Bernabe (Senior Associate Justice, Chairperson), Gesmundo, Lazaro-Javier, and Rosario, JJ.