National Power Corporation vs. City of Cabanatuan

A 25% surcharge under Section 168 of the Local Government Code is a one-time civil penalty imposed on the amount of taxes not paid on time, not a cumulative yearly penalty on accumulated unpaid taxes, and a writ of execution must conform strictly to the dispositive portion of the judgment it seeks to enforce and may not vary or exceed its terms.

The City of Cabanatuan assessed the National Power Corporation (NAPOCOR) a franchise tax representing 75% of 1% of its gross receipts for 1992, which NAPOCOR refused to pay on the ground that it was exempt from local franchise taxation. Section 168 of Republic Act No. 7160, the Local Government Code of 1991, authorizes local government units to impose a surcharge not exceeding 25% of the amount of taxes, fees, or charges not paid on time, and an interest at the rate not exceeding 2% per month of the unpaid taxes until fully paid, provided the total interest does not exceed 36 months. Prior litigation had established NAPOCOR's liability for franchise tax from 1992 onwards, and the present dispute concerns the proper computation of the 25% surcharge during execution of that final judgment.

The City of Cabanatuan assessed the National Power Corporation (NAPOCOR) a franchise tax amounting to P808,606.41, representing 75% of 1% of its gross receipts for 1992. NAPOCOR refused to pay, asserting that it was exempt from the franchise tax. Consequently, on November 9, 1993, the City filed a complaint before the Regional Trial Court of Cabanatuan City, docketed as Civil Case No. 1659 AF, demanding that NAPOCOR pay the assessed tax plus a 25% surcharge and 2% monthly interest on the unpaid tax, and costs of suit.

The trial court, in its order dated January 25, 1996, dismissed the complaint for lack of merit, declaring that the City could not impose a franchise tax on NAPOCOR. On March 12, 2001, the Court of Appeals reversed the trial court and found NAPOCOR liable to pay the sum of P808,606.41 representing business tax based on gross receipts for 1992, the tax due every year thereafter based on gross receipts earned by NAPOCOR, in all cases a surcharge of 25% of the tax due and unpaid, and P10,000 as litigation expenses. This decision was affirmed by the Supreme Court on April 9, 2003 in G.R. No. 149110, and the motion for reconsideration was denied with finality on August 27, 2003.

After the decision became final, the City filed a motion for execution dated December 1, 2003 to collect P24,030,565.26, inclusive of a 25% surcharge of P13,744,096.69. NAPOCOR, in its comment, prayed that the issuance of the writ be suspended pending resolution of its protest letter filed with the City Treasurer on the computation of the surcharge, and informed the court that it had already paid P12,868,085.71 in satisfaction of the judgment award. The City thereafter filed supplemental and amended motions for execution, claiming that the gross receipts upon which NAPOCOR's franchise tax liabilities should be determined included transactions within the coverage area of Nueva Ecija Electric Cooperative III and sales from various municipalities in Tarlac, Pangasinan, Baler, and Dingalan, Aurora, allegedly transacted at NAPOCOR's sub-station in Cabanatuan City. NAPOCOR opposed, arguing that the supplemental motion raised new factual matters and that the Court of Appeals decision limited the franchise tax to gross receipts from sales to the City's electric cooperative.

On October 25, 2004, the trial court resolved the pending motions. It agreed with NAPOCOR that the decision sought to be executed limited the franchise tax to gross receipts from sales to the City's electric cooperative. However, the trial court sustained the City's computation of the surcharge totalling P13,744,096.69, which was computed by applying the 25% surcharge yearly based on the total unpaid tax for each particular year — that is, the proper tax for the year plus all accumulated unpaid taxes from prior years. NAPOCOR, by contrast, insisted on a one-time application of the 25% surcharge on the total franchise tax due and unpaid from 1992 to 2002 (P10,286,468.57), yielding only P2,571,617.14. The trial court found the City's computation more in accord with the decision, reasoning that since the tax due was computed yearly, the 25% surcharge should also be computed yearly. NAPOCOR assailed this order through a petition for certiorari with the Court of Appeals, which on January 15, 2007 dismissed the petition and affirmed the trial court's order, holding that since the franchise tax was computed yearly, the 25% surcharge should also be computed yearly, and that non-imposition of the surcharge on a cumulative basis would encourage rather than discourage non-payment of taxes. The Court of Appeals denied NAPOCOR's motion for reconsideration on April 3, 2007.

• Statutory Basis of Surcharge: Petitioner argued that Section 168 of Republic Act No. 7160 (the Local Government Code of 1991) provides that the surcharge shall not exceed 25% of the amount of taxes, fees, or charges not paid on time, and that accordingly the surcharge should only be P2,571,617.14, computed by applying the 25% surcharge against the total amount of taxes due from 1992 to 2002 (P10,286,468.57).
• Exceeding the Judgment: Petitioner maintained that in imposing a surcharge of P13,744,096.69 instead of P2,571,617.14, the trial court "varied and/or exceeded the terms of the judgment sought to be executed."

• Yearly Computation of Surcharge: Respondent contended that the surcharge should be computed yearly based on the total unpaid tax for each particular year, consistent with the yearly computation of the franchise tax.
• Substitution of Interest by Surcharge: Respondent argued that the Court of Appeals did not award the 2% monthly interest, and the only probable reason was Article 1226 of the Civil Code, which states that the penalty shall substitute the indemnity for damages and the payment of interest in case of non-compliance. Hence, without the monthly interest, a one-time imposition of the surcharge regardless of the number of years of delay would be a great transgression of the City's right.
• Deterrent Function: Respondent reasoned that non-imposition of the surcharge on a cumulative basis would encourage rather than discourage non-payment of taxes.

• Proper Computation of Surcharge: Whether the phrase "in all cases, to pay a surcharge of 25% of the tax due and unpaid" in the dispositive portion of the Court of Appeals' decision means a one-time 25% surcharge on each year's unpaid tax or a cumulative yearly surcharge on accumulated unpaid taxes.
• Validity of Execution: Whether the trial court's order of execution, as affirmed by the Court of Appeals, exceeded the judgment sought to be executed and contravened Section 168 of the Local Government Code.

• Proper Computation of Surcharge: No. The 25% surcharge is a one-time civil penalty imposed on the amount of tax not paid on time, not a cumulative yearly penalty on accumulated unpaid taxes. The phrase "tax due and unpaid" means the tax owing for a particular year that was not paid, and the surcharge is applied once to that amount.
• Validity of Execution: No. The trial court's order of execution, as affirmed by the Court of Appeals, exceeded the judgment sought to be executed and contravened Section 168 of the Local Government Code. Execution cannot be wider in scope or exceed the judgment on which it is based.

• Proper Computation of Surcharge: The dispositive portion of the Court of Appeals' decision ordered NAPOCOR to pay "in all cases, to pay a surcharge of 25% of the tax due and unpaid." The conjunction "and" in "tax due and unpaid" denotes a joinder or union, binding the words "tax due" and "unpaid" together inseparably. When a taxpayer does not pay its tax due for a particular year, a surcharge is applied on the full amount of the tax due; when a partial payment is made, the surcharge applies only on the balance remaining unpaid. The surcharge under Section 168 of the Local Government Code is a civil penalty imposed once for late payment of a tax. This is distinguished from the interest provision in the same section, which is imposable at a rate not exceeding 2% per month until fully paid — the fact that interest is proportionate to the period of delay while the surcharge is not reveals the legislative intent for different modes of application. The surcharge is imposed to hasten tax payments and punish evasion or neglect, while interest compensates the State for the delay and the concomitant use of funds that should be in government hands. Respondent's computation, which applied the 25% surcharge cumulatively on accumulated unpaid taxes for each year, effectively imposed the 25% penalty for every year of default — for example, the 1992 franchise tax was effectively subjected to 25% multiplied by 11 years. Nothing in the Court of Appeals' decision justified interpreting the statutory penalty as a yearly charge from due date until full payment. Had that been the intention, the appellate court should have expressly stated it in the dispositive portion.

• Validity of Execution: It is a fundamental rule that execution cannot be wider in scope or exceed the judgment or decision on which it is based; otherwise, it has no validity. The final judgment determines and stands as the source of the rights and obligations of the parties. In Collector of Internal Revenue vs. Gutierrez, the Court did not allow collection of a 5% surcharge and 1% monthly interest because the decision sought to be executed did not expressly provide for them. In The Philippine American Accident Insurance Co., Inc. vs. Hon. Flores, the Court set aside an order directing issuance of an alias writ of execution for compound interest when the judgment ordered only simple interest. Respondent should have appealed the judgment or sought clarification regarding the omission of the 2% monthly interest; instead, it erroneously presumed the surcharge was to be applied yearly. With the finality of the Court of Appeals' judgment, all issues between the parties were deemed resolved, and neither the trial court nor the Supreme Court could amend the dispositive portion. Furthermore, respondent's computation was oppressive and unconscionable: the aggregate surcharge of P13,744,096.69 exceeded NAPOCOR's basic tax liabilities of P10,286,468.57, and the cumulative application effectively exceeded the 72% ceiling for total interest under Section 168 (2% per month for a maximum of 36 months). Tax statutes are construed strictly against the government and in favor of the taxpayer, and a penalty for non-payment of tax greater than what the law provides cannot be imposed, as it would amount to a deprivation of property without due process of law. Since NAPOCOR had already paid P12,868,085.71, the judgment was fully satisfied.

• Execution Must Conform to Judgment — A writ of execution must conform to the judgment which is to be executed; it may not vary the terms of the judgment it seeks to enforce, nor go beyond them. Where execution is not in harmony with the judgment and exceeds it, it has pro tanto no validity. Applied here to hold that the trial court's order adopting the City's cumulative surcharge computation varied and exceeded the dispositive portion of the final judgment, which ordered only a 25% surcharge on the tax due and unpaid.

• Surcharge as One-Time Civil Penalty — Under Section 168 of the Local Government Code, the 25% surcharge is a civil penalty imposed once for late payment of a tax, distinct from the 2% monthly interest which is proportionate to the period of delay. The surcharge is imposed to hasten tax payments and punish evasion or neglect, while interest compensates the State for the delay in paying the tax and the concomitant use of funds. The fact that the interest charge is made proportionate to the period of delay, whereas the surcharge is not, reveals the legislative intent for different modes of application.

• Strict Construction of Tax Statutes Against the Government — Tax statutes are construed strictly against the government and in favor of the taxpayer. Tax burdens are not to be imposed nor presumed to be imposed beyond what the statutes expressly and clearly import. A penalty for non-payment of a tax greater than what the law provides cannot be imposed, as it would amount to a deprivation of property without due process of law.

• Immutability of Final Judgments — With the finality of a judgment, all issues between the parties are deemed resolved and laid to rest. Neither the trial court nor even the Supreme Court can amend or add to the dispositive portion of a decision that has attained finality, except for clerical errors or omissions.

• Non-Confiscatory Nature of Taxes — Taxes and their surcharges and penalties cannot be construed in such a way as to become oppressive and confiscatory. A healthy balance should be maintained so that tax burdens do not amount to a confiscatory outcome. Taxes are not and should not be construed to drive businesses into insolvency.

• "The surcharge is a civil penalty imposed once for late payment of a tax." — This sentence defines the nature of the surcharge under Section 168 of the Local Government Code, distinguishing it from the monthly interest provision, and forms the core of the Court's ruling on proper computation.

• "It is a fundamental rule that the execution cannot be wider in scope or exceed the judgment or decision on which it is based; otherwise, it has no validity." — This passage articulates the controlling doctrine on the limits of execution, grounding the Court's reversal of the trial court's order and the Court of Appeals' affirmance.

• "Taxes and its surcharges and penalties cannot be construed in such a way as to become oppressive and confiscatory." — This statement encapsulates the constitutional dimension of the ruling, linking the statutory construction of Section 168 to the due process protection against confiscatory taxation.

• "Generally, tax statutes are construed strictly against the government and in favor of the taxpayer." — This formulation of the canon of strict construction in tax law underpins the Court's refusal to adopt the City's cumulative surcharge computation, which would have imposed a penalty greater than what the law expressly provides.

• Collector of Internal Revenue vs. Gutierrez, 108 Phil. 215 (1960) — Controlling precedent on the rule that execution must conform to judgment. The Court did not allow collection of a 5% surcharge and 1% monthly interest because the decision sought to be executed did not expressly provide for their payment. Followed in this case to hold that the trial court's writ of execution could not vary the terms of the final judgment.

• The Philippine American Accident Insurance Co., Inc. vs. Hon. Flores, 186 Phil. 563 (1980) — Followed. The Court set aside a trial court's order directing an alias writ of execution for compound interest when the judgment ordered only simple interest, illustrating that execution must conform to the dispositive portion of the decision.

• Commissioner of Internal Revenue vs. Japan Air Lines, Inc., 279 Phil. 499 (1991) — Cited for the computation of the 25% surcharge as a one-time penalty, supporting the Court's interpretation of the surcharge's nature.

• Philippine Refining Company vs. CA, 326 Phil. 680 (1996) — Cited for the proposition that surcharges are imposed to hasten tax payments and to punish evasion or neglect of duty.

• Paper Industries Corporation of the Philippines (PICOP) vs. Court of Appeals, 321 Phil. 1 (1995) — Cited for the principle that the authority to impose civil penalties consisting of additions to the tax due must be expressly given in the enabling statute, in language too clear to be mistaken.

• Republic vs. Luzon Industrial Corporation, 102 Phil. 189 (1957) — Cited for the holding that the court cannot equitably modify a statutory surcharge penalty, as Article 1154 of the Civil Code refers to penalties in contracts, not penalties embodied in law.

• Section 168, Republic Act No. 7160 (Local Government Code of 1991) — Authorizes the sanggunian to impose a surcharge not exceeding 25% of the amount of taxes, fees, or charges not paid on time, and an interest at the rate not exceeding 2% per month of the unpaid taxes, fees, or charges including surcharges, until fully paid, provided the total interest does not exceed 36 months. Applied to hold that the surcharge is a one-time penalty on taxes not paid on time, while interest is the component proportionate to the period of delay, and that the City's cumulative surcharge computation effectively exceeded the 72% ceiling on total interest.

• Article 1226, Civil Code of the Philippines — Provides that in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interest in case of non-compliance, if there is no stipulation to the contrary. The Court rejected the City's invocation of this provision, holding that it refers to penalties prescribed in contracts, not to penalties embodied in a judgment, and that the specific language of the fallo is controlling.

Carpio (Chairperson), Brion, Del Castillo, and Mendoza, JJ., concurred.