Petron Corporation vs. Tiangco

Local government units are absolutely prohibited from levying any form of tax, fee, or charge on petroleum products, including business taxes on the sale of diesel fuels, by virtue of the second clause of Section 133(h) of the Local Government Code, which is an unqualified bar distinct from the first clause’s limitation on excise taxes.

Petron Corporation maintained a depot or bulk plant at the Navotas Fishport Complex in Navotas, from which it sold diesel fuels to commercial fishing vessels. The then Municipality of Navotas assessed Petron for deficiency business taxes covering the years 1997 to 2001 based on the gross sales of diesel at the depot, relying on its local revenue code. Petron protested the assessment, invoking a prohibition in the Local Government Code and its implementing rules, but the city’s treasurer and mayor denied the protest and issued a final demand to pay under threat of closure. Petron sued in the Regional Trial Court to cancel the assessment, while the municipality in turn refused to issue Petron’s business permit and later issued a closure order after the trial court ruled against Petron.

• The Assessment: On 1 March 2002, Petron received a letter from the Office of the Mayor of Navotas assessing deficiency business taxes “relative to the figures covering sale of diesel declared by [Petron’s] Navotas Terminal from 1997 to 2001.” The stated amount due was P6,259,087.62, computed from the gross sales of the depot. The attached computation sheets referred to the New Navotas Revenue Code (Ordinance 92-03).
• Petron’s Protest: Petron filed a letter-protest under Section 195 of the Local Government Code, asserting that the assessment violated Article 232(h) of the Implementing Rules of the Code and a 1995 ruling of the Bureau of Local Government Finance that sales of petroleum fuels are not subject to local taxation.
• Denial and Final Demand: The Municipal Treasurer denied the protest on 8 May 2002. The Mayor then sent a “Final Demand to Pay” dated 15 May 2002, requiring payment within five days and threatening to close Petron’s operations in Navotas.
• Proceedings in the Trial Court: Petron filed its complaint for cancellation with prayer for TRO/injunction on 20 May 2002. The RTC did not issue a TRO after respondents stated that no closure would be effected before a decision on the merits. When respondents subsequently refused to issue a business permit to Petron, Petron filed a Supplemental Complaint with prayer for preliminary mandatory injunction.
• RTC Decision: The RTC dismissed the complaint and ordered Petron to pay the assessed amount, which had grown to P10,204,916.17. The court ruled that Section 133(h) only prohibits excise taxes on petroleum products, not business taxes, and declared Article 232(h) of the IRR void for exceeding the Code. Following the decision, the Mayor issued a Closure Order, and the RTC denied Petron’s subsequent applications for a TRO and for reconsideration.
• Supreme Court TRO: On 4 August 2003, the Supreme Court issued a TRO enjoining respondents from closing Petron’s Navotas bulk plant or otherwise interfering in its operations.

• Nature of Tax as Excise: Petitioner argued that the business tax on the sale of diesel fuels is an excise tax — a tax upon the performance, carrying on, or exercise of an activity — and is therefore prohibited under the first clause of Section 133(h), which bars local excise taxes on articles enumerated under the NIRC. Petitioner cited Cordero v. Conda, Allied Thread Co. Inc. v. City Mayor of Manila, and Iloilo Bottlers, Inc. v. City of Iloilo for the definition of excise tax, and pointed out that petroleum products are subject to excise taxes under Section 148 of the NIRC.
• Absolute Prohibition under Section 133(h): Petitioner maintained that the second clause of Section 133(h) — “taxes, fees or charges on petroleum products” — independently and absolutely bars any local tax on petroleum products, including the business tax assessed.
• Validity of the IRR Provision: Petitioner relied on Article 232(h) of the IRR, which explicitly states that any business engaged in the production, manufacture, refining, distribution, or sale of oil, gasoline and other petroleum products shall not be subject to any local business tax, as a binding expression of national policy consistent with the Code.

• Distinction Between Business Tax and Excise Tax: Respondents countered that Section 133(h) only prohibits the imposition of excise taxes on petroleum products, not business taxes. Relying on Philippine Petroleum Corporation v. Municipality of Pililla, they argued that a tax on business is distinct from a tax on the article itself, and that Section 143 of the Code broadly authorizes municipalities to tax businesses, including those selling petroleum products, absent an express exemption.
• Invalidity of the IRR Provision: Respondents contended that Article 232(h) of the IRR is void because it creates an exemption not found in the Local Government Code itself; only Congress, not the Oversight Committee that drafted the IRR, can legislate tax prohibitions or exemptions.
• Deregulation Superseded National Policy: Respondents argued that even assuming a national policy exempting petroleum products from local taxes once existed, Republic Act No. 8180 (the Oil Deregulation Law) superseded that policy and removed the basis for the prohibition.

• Characterization of the Tax: Whether the business tax on the sale of diesel fuels constitutes an excise tax prohibited under the first clause of Section 133(h) of the Local Government Code.
• Scope of the Prohibition on Petroleum Products: Whether the second clause of Section 133(h), which prohibits “taxes, fees or charges on petroleum products,” precludes local government units from imposing business taxes on the sale of petroleum products.
• Effect of Article 232(h) of the IRR: Whether Article 232(h) of the Implementing Rules validly bars local business taxes on petroleum products and, if so, whether it applies to the assessment against Petron.

• Characterization of the Tax: The business tax on the sale of diesel fuels is not an excise tax within the meaning of the first clause. The current National Internal Revenue Code defines excise taxes as specific or ad valorem taxes applicable to certain manufactured, produced, or imported goods, not as taxes on the performance of an activity. The traditional American Jurisprudence definition of excise tax — a tax upon the performance, carrying on, or exercise of an activity — has been superseded by the 1986 and 1997 NIRC amendments, which treat excise taxes as taxes on property. The prohibition on local “excise taxes on articles enumerated under the NIRC” therefore refers only to taxes directly on the articles themselves and does not extend to business taxes. The passing reference to the old definition in Province of Bulacan v. Court of Appeals was unnecessary to that decision and does not revive a concept inconsistent with the current statutory scheme.
• Scope of the Prohibition on Petroleum Products: The phrase “taxes, fees or charges on petroleum products” in Section 133(h) constitutes an absolute, unqualified prohibition that covers all kinds of local taxes on petroleum products, including business taxes. Unlike the first clause, which is limited to excise taxes, the second clause does not restrict the type of tax; it simply forbids the levy of any “taxes, fees or charges” on petroleum products. To interpret the clause otherwise would render it redundant, as excise taxes on petroleum products were already barred by the first clause. The earlier rule in Philippine Petroleum Corp. v. Municipality of Pililla — distinguishing a tax on business from a tax on the article — was decided under a different statutory environment that lacked an express prohibition like Section 133(h). Where the law does not distinguish, courts should not distinguish. While local fiscal autonomy is constitutionally favored, it does not override explicit statutory limitations, and tax ordinances must be strictly construed against the local government and liberally in favor of the taxpayer under Section 5(b) of the Code.
• Effect of Article 232(h) of the IRR: Article 232(h) of the IRR merely restates the prohibition already found in Section 133(h) and is not itself an independent source of the exemption. The RTC’s declaration that it was invalid was therefore erroneous and unnecessary; even without the IRR provision, the Code independently bars the imposition of business taxes on petroleum products. The argument that the Oil Deregulation Law superseded the national policy underlying the exemption is immaterial because the prohibition is statutory, not contingent on any particular national oil policy. The special treatment of petroleum products is justified by the pervasive impact of oil price increases on the national economy, a reality repeatedly acknowledged in jurisprudence.

• Current Definition of “Excise Tax” under the NIRC — Under the National Internal Revenue Code, as amended, “excise taxes” are taxes applicable to specified goods manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition, and to things imported. They are classified as either specific (based on weight, volume, or physical unit) or ad valorem (based on selling price or specified value). This definition, which treats excise taxes as taxes on property, has superseded the older American Jurisprudence definition of an excise tax as a tax on the performance of an activity. Accordingly, the first clause of Section 133(h) of the Local Government Code, which prohibits local “excise taxes on articles enumerated under the NIRC,” does not bar business taxes on those articles; it only bars the exact excise tax impositions prescribed by the NIRC.

• Absolute Prohibition on Local Taxes on Petroleum Products under Section 133(h) — Section 133(h) contains two distinct limitations on local taxing power: (1) a narrow prohibition against local excise taxes on all articles subject to excise taxation under the NIRC; and (2) an unqualified, blanket prohibition against all “taxes, fees or charges on petroleum products.” The second clause is absolute and does not distinguish among kinds of taxes; it covers business taxes, privilege taxes, direct taxes, and any other form of imposition. The earlier doctrine in Philippine Petroleum Corporation v. Municipality of Pililla that a tax on business is distinct from a tax on the article, and that business taxes on petroleum products were permissible, is no longer controlling because the Local Government Code now expressly forbids all local taxes on petroleum products.

• Strict Construction of Local Tax Ordinances — While the Constitution and the Local Government Code enshrine a policy of local fiscal autonomy and liberal interpretation of municipal fiscal powers, Section 5(b) of the Code mandates that any tax ordinance or revenue measure shall be construed strictly against the local government unit enacting it and liberally in favor of the taxpayer. Thus, any doubt as to the power of a local government unit to impose a particular tax must be resolved against the tax imposition, and the prohibition in Section 133(h) must be given effect according to its plain terms.

• “The language of Section 133(h) makes plain that the prohibition with respect to petroleum products extends not only to excise taxes thereon, but all ‘taxes, fees and charges.’” — Core ratio defining the unqualified scope of the second clause.
• “While Section 133(h) does not generally bar the imposition of business taxes on articles burdened by excise taxes under the NIRC, it specifically prohibits local government units from extending the levy of any kind of ‘taxes, fees or charges on petroleum products.’” — Distinguishing the two clauses and their different effects.
• “A tax on business is distinct from a tax on the article itself. However, such distinction is immaterial insofar as the latter part of Section 133(h) is concerned, for the phrase ‘taxes, fees or charges on petroleum products’ does not qualify the kind of taxes, fees or charges that could withstand the absolute prohibition imposed by the provision.” — Clarifying why the Pililla distinction no longer applies.
• “Where the law does not distinguish, we should not distinguish.” — Canon applied to the prohibition’s language.
• “[O]il [is] a commodity whose supply and price affect the ebb and flow of the lifeblood of the nation. Its shortage of supply or a slight, upward spiral in its price shakes our economic foundation.” — Explanation of the special legislative concern over petroleum products.

• Philippine Petroleum Corporation v. Municipality of Pililla, G.R. No. 90776, 3 June 1991 — Distinguished. The earlier ruling that allowed business taxes on petroleum products because a tax on business is distinct from a tax on the article was issued under a legal framework that lacked an express statutory prohibition like Section 133(h). The enactment of the Local Government Code, with its absolute bar, has superseded the relevance of that decision.
• Province of Bulacan v. Court of Appeals, 359 Phil. 779 (1998) — Discussed and distinguished. The Court explained that the passing reference in Bulacan to the Am Jur definition of excise tax was unnecessary to the resolution of that case and cannot be relied upon to revive a definition of excise tax that has been superseded by the current NIRC.
• City Government of San Pablo v. Reyes, 364 Phil. 842 (1999) — Cited for the principle that doubts in interpreting statutory provisions on municipal fiscal powers should be resolved in favor of municipal corporations, but qualified by Section 5(b) of the Code, which requires strict construction of tax ordinances against the local government and in favor of the taxpayer.

• Section 133(h), Local Government Code (Republic Act No. 7160) — The central provision. Interpreted as containing two independent prohibitions: one barring local excise taxes on any article subject to excise taxation under the NIRC, and another absolutely barring all taxes, fees, or charges on petroleum products. The second clause was held to invalidate the business tax on Petron’s sale of diesel.
• Section 143, Local Government Code — Grants municipalities the power to impose taxes on various businesses, but subject to the limitations in Section 133. The broad grant does not authorize business taxes on petroleum products because Section 133(h) carves them out.
• Section 5(b), Local Government Code — Mandates that any tax ordinance or revenue measure shall be construed strictly against the local government unit enacting it and liberally in favor of the taxpayer. Applied to resolve any doubt in favor of Petron.
• Article 232(h), Implementing Rules and Regulations of the Local Government Code — Provides that any business engaged in the production, manufacture, refining, distribution, or sale of oil, gasoline and other petroleum products shall not be subject to any local business tax. The Court ruled that this provision merely reiterates the statutory prohibition in Section 133(h) and is not an independent source of exemption.
• Section 129, National Internal Revenue Code of 1997 — Defines excise taxes as taxes applicable to goods manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition, and to things imported. The Court relied on this definition to distinguish excise taxes from business taxes and to conclude that the first clause of Section 133(h) does not cover business taxes.
• Section 148, National Internal Revenue Code of 1997 — Imposes excise taxes on petroleum products. The Court noted that petroleum products are among the articles subject to excise tax under the NIRC, making the absolute prohibition in the second clause of Section 133(h) all the more significant.
• Section 5, Article X, 1987 Constitution — Empowers local government units to create their own sources of revenue and levy taxes, fees, and charges, but subject to such guidelines and limitations as Congress may provide. Section 133(h) is a valid exercise of Congress’s power to impose such a limitation.

Associate Justice Leonardo A. Quisumbing (Chairperson), Associate Justice Conchita Carpio Morales, Associate Justice Presbitero J. Velasco, Jr., Associate Justice Arturo D. Brion.