Metropolitan Waterworks Sewerage System vs. Local Government of Quezon City

A government instrumentality exercising corporate powers is exempt from local real property tax unless the beneficial use of its properties has been granted, for consideration or otherwise, to a taxable person, as provided in Section 133(o) and Section 234(a) of the Local Government Code, with the burden on the taxing local government to allege and prove such grant.

Metropolitan Waterworks and Sewerage System was created under Republic Act No. 6234 on June 19, 1971 to ensure uninterrupted supply of potable water and operation of sewerage systems in Metro Manila, Rizal, and a portion of Cavite. Initially created without capital stock, it was authorized by Presidential Decree No. 425 to have P1,000,000,000.00 capital stock wholly subscribed by the government, and its charter declared it exempt from taxes including realty taxes. Its status became contentious after the Local Government Code granted local governments power to levy real property tax subject to Sections 133(o) and 234, and after its operations were privatized through concessionaires under the National Water Crisis Act of 1995.

Congress created Metropolitan Waterworks and Sewerage System under Republic Act No. 6234 on June 19, 1971 with mandate over waterworks and sewerage systems in Metro Manila, Rizal, and a portion of Cavite. Initially a corporation without capital stock, it was converted by Presidential Decree No. 425 on March 29, 1974 into an entity with P1,000,000,000.00 authorized capital divided into 10,000,000 shares at P100.00 par, to be subscribed only by the government and not transferable or encumbered. In 1997 it underwent privatization, with its properties made subject to concession agreements with private concessionaires.

Sometime in July 2007, the System received several Final Notices of Real Property Tax Delinquency from Quezon City covering various taxable years totaling P237,108,043.83, with warning of warrants of levy upon failure to pay. When payment was not made, the City Treasurer issued Warrants of Levy on August 7, 2007. Thereafter, on September 10, 2007, Quezon City published a Notice of Sale of Delinquent Real Properties setting auction on September 27, 2007, including the System's properties.

On September 26, 2007, the System filed before the Court of Appeals a Petition for Certiorari and Prohibition with prayer for injunctive relief, asserting its properties were exclusively devoted to public use and exempt. The Court of Appeals enjoined the auction and later issued a writ of preliminary injunction, but on October 19, 2010 denied the petition, finding the System was not a municipal corporation entitled to Section 133(o) immunity, performed no purely governmental function, and held properties in proprietary capacity as shown by the 1997 concession agreements. After new warrants of levy issued on November 9, 2010, the System sought relief before the Supreme Court, which restrained collection, including a later threatened July 7, 2011 auction of Lot Nos. 1, 2, and 3 of Block PCS-8998 in Barangay Pasong Putik claimed by the City to be outside the first restraining order.

• Exemption as Government Instrumentality: Petitioner maintained that it is a government instrumentality exempt from real property taxation under Section 133(o) of the Local Government Code, functioning as a regulatory body overseeing its two private concessionaires, Manila Water Company, Inc. and Maynilad Water Services, Inc.
• Charter Exemption and Jurisprudence: Petitioner argued that Republic Act No. 6234, Section 18, as amended by Presidential Decree No. 425, expressly exempts it from real property taxes, and cited Manila International Airport Authority vs. Court of Appeals and Philippine Fisheries Development Authority vs. Central Board of Assessment Appeals to support exemption as an instrumentality holding properties of the public dominion.
• Statutory Classification as GICP: Petitioner pointed out that Republic Act No. 10149, passed July 26, 2010, lists it as one of the government instrumentalities with corporate powers.

• Hierarchy of Courts: Respondents countered that petitioner failed to observe hierarchy of courts by filing directly before the Court of Appeals instead of the Regional Trial Court, which exercises concurrent jurisdiction over petitions for certiorari.
• Proprietary Functions and Withdrawal of Exemption: Respondents maintained that petitioner holds properties in the exercise of proprietary functions susceptible to real property tax, and that the tax exemption in Republic Act No. 6234, Section 18 had been repealed by Section 234 of the Local Government Code.
• Acknowledgment of Liability: Respondents asserted that petitioner had recognized its tax liabilities when it paid a P30,000,000.00 down payment and committed to pay the balance not later than April 2011.

• Hierarchy of Courts: Whether petitioner violated the principle of hierarchy of courts in directly bringing the case to the Court of Appeals instead of the Regional Trial Court.
• Taxability of Government Instrumentality: Whether a local government unit may assess real property taxes on petitioner Metropolitan Waterworks and Sewerage System, a government entity.

• Hierarchy of Courts: No. Direct resort to the Court of Appeals was properly allowed, the issue presented being a pure question of law within its discretion to give due course.
• Taxability of Government Instrumentality: No. As a Government Instrumentality with Corporate Powers, petitioner is exempt from Quezon City real property tax, except for portions alleged and proven to have been leased to taxable persons.

• Hierarchy of Courts: The policy restrains direct resort to the Supreme Court where relief can be obtained below, to preserve it as a court of last resort, with concurrent jurisdiction over certiorari shared with the Regional Trial Court and Court of Appeals. The enumerated exceptions for immediate resort to the Supreme Court are tailored to its functions, and doubt was expressed whether the Court of Appeals applies the same rationale. Because the Court of Appeals has full discretion whether to give due course to a petition directly filed before it, and it did so on the ground that only a pure question of law was involved, no error was ascribed for resolving the merits.
• Taxability of Government Instrumentality: Under Section 232, provinces, cities, and Metro Manila municipalities may levy annual ad valorem tax on real property not specifically exempted, limited by Section 133(o) barring levies on the National Government, its agencies and instrumentalities unless otherwise provided, and by Section 234 exempting Republic-owned property except when beneficial use is granted to a taxable person. Applying Manila International Airport Authority vs. Court of Appeals, an instrumentality is a national agency not integrated in the department framework, vested with special functions, endowed with corporate powers, administering special funds, and enjoying operational autonomy, exempt absent express legislative intent to tax, while a government-owned or -controlled corporation organized as stock or non-stock corporation meeting the common-good and economic-viability test lost prior exemptions under the last paragraph of Section 234. Although petitioner's power to acquire, sell, lease, mortgage, and dispose of property and its privatized, economically viable concession operations resembled a government-owned or -controlled corporation like National Power Corporation, the Executive through Executive Order No. 596 and Congress through Republic Act No. 10149 had categorized it with Manila International Airport Authority and Philippine Fisheries Development Authority as a Government Instrumentality with Corporate Powers/Government Corporate Entity. Hence its charter exemption under Republic Act No. 6234 remained valid, the withdrawal proviso applying only to government-owned or -controlled corporations, and liability could arise only upon allegation and proof that beneficial use was extended to a taxable person, which respondents failed to make.

• Government Instrumentality vs. Government-Owned or -Controlled Corporation — An instrumentality under Section 2(10) of the Administrative Code is an agency not integrated within the department framework, vested with special functions, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy usually through a charter; a government-owned or -controlled corporation under Section 2(13) and Article XII, Section 16 of the Constitution is organized as a stock or non-stock corporation created by special charter in the interest of the common good and subject to economic viability. The former is exempt under Section 133(o) absent express intent to tax, while the latter's prior real property tax exemptions were withdrawn by Section 234 of the Local Government Code except for machinery and equipment actually, directly, and exclusively used in water distribution or power generation/transmission.
• Beneficial-Use Exception to Republic-Owned Property Exemption — Under Section 234(a) of the Local Government Code, real property owned by the Republic or its political subdivisions is exempt except when beneficial use has been granted, for consideration or otherwise, to a taxable person; grant to a non-taxable instrumentality preserves exemption, while lease to private entities renders those portions taxable, as illustrated by hangars leased by Manila International Airport Authority and portions of Iloilo Fishing Port Complex leased to private entities, though public-dominion property itself cannot be sold at public auction to satisfy delinquency.
• Hierarchy of Courts — Direct resort to the Supreme Court is restrained when relief may be obtained from lower courts sharing concurrent jurisdiction over extraordinary writs, to prevent docket congestion and preserve the Supreme Court as a court of last resort; immediate resort may be allowed on grounds including genuine constitutional issues requiring immediate resolution, transcendental importance, novelty, time sensitivity, lack of plain speedy remedy, public welfare, patent nullity, or inappropriate appeal, while the Court of Appeals retains full discretion to give due course to petitions filed directly before it, particularly on pure questions of law.

• "A government instrumentality exercising corporate powers is not liable for the payment of real property taxes on its properties unless it is alleged and proven that the beneficial use of its properties been extended to a taxable person." — States the controlling ratio on exemption and the condition that triggers taxability, allocating the burden to allege and prove grant to a taxable person.
• "There is . . . no point in national and local governments taxing each other, unless a sound and compelling policy requires such transfer of public funds from one government pocket to another." — Articulates the policy basis for Section 133(o) immunity and the requirement of express legislative language to tax national instrumentalities.
• "Properties of public dominion, being for public use, are not subject to levy, encumbrance or disposition through public or private sale. Any encumbrance, levy on execution or auction sale of any property of public dominion is void for being contrary to public policy." — Defines the consequence of public-dominion character, voiding levy and auction sale that would interrupt essential public services.
• "Except as provided herein, any exemption from payment of real property tax previously granted to, or presently enjoyed by, all persons, whether natural or juridical, including all government-owned or - controlled corporations are hereby withdrawn upon the effectivity of this Code." — States the withdrawal rule whose limited scope preserves charter exemptions of instrumentalities with corporate powers.

• Manila International Airport Authority vs. Court of Appeals, 528 Phil. 181 (2006) — Controlling precedent establishing the instrumentality vs. government-owned or -controlled corporation parameters, Section 133(o) exemption, public-dominion character of airport lands, and beneficial-use exception for leased portions; followed to classify petitioner.
• Philippine Fisheries Development Authority vs. Court of Appeals, 555 Phil. 661 (2007) — Followed for holding the Authority an exempt instrumentality as to Iloilo Fishing Port Complex except leased portions, and for the rule that public-domain property cannot be sold at auction to satisfy delinquency.
• Government Service Insurance System vs. City Treasurer of Manila, 623 Phil. 964 (2009) — Applied Manila International Airport Authority vs. Court of Appeals to hold Government Service Insurance System an instrumentality holding Republic-owned property in trust, supporting exemption analysis.
• Mactan-Cebu International Airport Authority vs. City of Lapu-Lapu, 759 Phil. 296 (2015) — Reaffirmed Manila International Airport Authority vs. Court of Appeals to exempt a similarly situated airport authority except portions leased to taxable persons.
• National Power Corporation vs. City of Cabanatuan, 449 Phil. 233 (2003) — Cited for the contrasting view that ownership of entire capital by government does not preclude business character and that power generation and sale are proprietary commercial undertakings; used to illustrate the government-owned or -controlled corporation analysis.
• Aala vs. Uy, G.R. No. 202781, January 10, 2017 — Cited for hierarchy-of-courts policy and the ten grounds allowing immediate resort to the Supreme Court.
• Diocese of Bacolod vs. Commission on Elections, G.R. No. 205728, January 21, 2015 — Cited for respective roles of trial courts, Court of Appeals, and Supreme Court in fact-finding and constitutional adjudication underlying hierarchy.

• Section 133(o), Local Government Code — Bars local government levy of taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, unless otherwise provided; applied as general exemption for petitioner as instrumentality.
• Section 232, Local Government Code — Grants provinces, cities, and Metro Manila municipalities power to levy annual ad valorem tax on real property not specifically exempted; cited as source of Quezon City's asserted power.
• Section 234(a) and (c) and withdrawal proviso, Local Government Code — Exempts Republic-owned property except when beneficial use granted to taxable person, and machinery/equipment actually, directly, and exclusively used by water districts and corporations engaged in water supply/distribution; withdraws all other prior exemptions including government-owned or -controlled corporations; applied to preserve petitioner's exemption except leased portions.
• Section 18, Republic Act No. 6234, as amended by Presidential Decree No. 425 — Declares the System non-profit and exempt from all taxes including income, franchise, and realty taxes to national and local governments; held still valid for petitioner as Government Instrumentality with Corporate Powers.
• Section 2(10) and 2(13), Administrative Code; Article XII, Section 16, Constitution — Define instrumentality and government-owned or -controlled corporation and impose common-good and economic-viability requirements; used to test petitioner's classification.
• Section 1, Executive Order No. 596 (2006); Section 3(n), Republic Act No. 10149 — List Metropolitan Waterworks and Sewerage System with Manila International Airport Authority, Philippine Ports Authority, and others as government instrumentality vested with corporate powers/government corporate entity; relied upon as Executive and Legislative categorization entitling petitioner to same privileges.

Peralta (Chairperson) and Hernando, JJ., concur. Gesmundo and J. Reyes, Jr., JJ., on wellness leave.