Philippine Petroleum Corporation vs. Municipality of Pililla, Rizal

Where the Local Tax Code does not provide a specific prescriptive period for the collection of local taxes, Article 1143 of the Civil Code governs, imposing a ten-year limitation period for obligations created by law; municipalities may levy business taxes on manufacturers of petroleum products subject to specific tax under the National Internal Revenue Code because a tax on the business privilege is distinct from a tax on the article itself; and storage permit fees cannot be collected where the storage facilities are owned by the taxpayer and not the municipality, as such fees must constitute charges for actual services rendered by the local government.

The controversy arose following the enactment of Presidential Decree No. 231 (the Local Tax Code) in 1973, which granted municipalities taxing powers including the authority to impose taxes on business. The Secretary of Finance subsequently issued circulars suspending the collection of local taxes on petroleum products subject to specific tax under the National Internal Revenue Code. Meanwhile, the Municipality of Pililla enacted Municipal Tax Ordinance No. 1 in 1974, imposing various taxes and fees. The conflict centered on whether these taxes could be enforced against PPC, a petroleum manufacturer, years after the assessment periods accrued, and whether the applicable prescriptive period was five or ten years.

• Philippine Petroleum Corporation (PPC) is a business enterprise engaged in the manufacture of lubricated oil basestock, a petroleum product, operating a refinery plant and maintaining forty-nine storage tanks in Malaya, Pililla, Rizal, within the territorial jurisdiction of the respondent municipality.
• Under Section 142 of the National Internal Revenue Code of 1939, manufactured oils and fuels are subject to specific tax.
• On June 28, 1973, Presidential Decree No. 231 (Local Tax Code) was promulgated, with Sections 19 and 19(a) authorizing municipalities to impose taxes on businesses, including manufacturers, importers, or producers of articles of commerce.
• The Secretary of Finance issued Provincial Circular No. 26-73 (December 27, 1973) and No. 26 A-73 (January 9, 1974), directing local treasurers to refrain from collecting taxes on petroleum businesses subject to specific tax under the National Internal Revenue Code.
• On June 14, 1974, the Municipality of Pililla enacted Municipal Tax Ordinance No. 1, Series of 1974 (The Pililla Tax Code of 1974), effective July 1, 1974, which imposed taxes on business under Section 9(A) (mirroring Section 19(a) of the Local Tax Code), storage permit fees under Section 10 for flammable substances, and mayor's permit and sanitary inspection fees.
• Presidential Decree No. 426 (March 30, 1974) amended the Local Tax Code, retaining Sections 19 and 19(a) with adjusted rates but without exempting petroleum products.
• Presidential Decree No. 436 (April 13, 1974) increased specific taxes on petroleum products and granted local government units shares in such taxes in lieu of local taxes on petroleum products, but did not amend the general business tax provisions.
• Provincial Circular No. 6-77 (March 13, 1977) was issued directing treasurers to refrain from collecting storage fees on flammable materials, characterizing them as revenue measures rather than service charges.
• On April 4, 1986, the Municipality filed a complaint to collect business taxes for 1979-1986, storage permit fees for 1975-1986, and mayor's permit and sanitary inspection fees for 1975-1984 (noting PPC had paid the latter two fees starting 1985).

• Provincial Circulars Nos. 26-73 and 26-A-73, which suspended the collection of local taxes on petroleum products subject to specific tax, remain effective and have not been revoked, making any collection effort illegal and unauthorized.
• Presidential Decree No. 436 prohibits the imposition of local taxes on petroleum products by granting local governments a share in specific taxes in lieu thereof.
• The trial court erred in ordering payment of business tax under Section 9(A) of the tax ordinance in light of the Provincial Circulars and P.D. No. 436.
• The trial court erred in holding PPC liable for storage permit fees considering the issuance of Provincial Circular No. 6-77 and the fact that the storage tanks are owned by PPC, not the municipality.
• The computation of tax liability by the Municipality has absolutely no basis.
• The trial court erred in ordering payment of mayor's permit and sanitary inspection fees because the Mayor had validly and legally waived these fees.
• The trial court erred in failing to hold that taxes and duties not collected prior to the five-year period from the filing of the case on April 4, 1986 have already prescribed.

• Municipal Tax Ordinance No. 1 is valid, particularly Section 9(A) which is a literal reproduction of Section 19(a) of the Local Tax Code as amended by P.D. No. 426, and thus conforms with the mandate of the law.
• P.D. No. 426 effectively repealed Provincial Circulars 26-73 and 26-A-73 by carrying over Sections 19 and 19(a) without providing exemptions for manufacturers of petroleum products.
• A tax on business is distinct from a tax on the article itself; P.D. No. 436 did not amend Sections 19 and 19(a) of the Local Tax Code, and the grant of a share in specific taxes does not preclude the imposition of business taxes.
• The power to tax includes the power to exempt, which is a legislative prerogative; the Mayor, as an executive officer, cannot unilaterally waive taxes or fees imposed by ordinance.
• Tax exemptions must be strictly construed against the taxpayer and liberally in favor of the taxing authority.

• Procedural Issues: Whether the action for collection of local taxes has prescribed, and what is the applicable prescriptive period—five years as contended by the petitioner, or ten years under the Civil Code.
• Substantive Issues: Whether the municipality may validly impose taxes on the business of manufacturing petroleum products subject to specific tax under the National Internal Revenue Code, despite Provincial Circulars 26-73 and 26-A-73; whether storage permit fees may be collected where the storage tanks are owned by the taxpayer; and whether the Mayor may validly waive the payment of mayor's permit and sanitary inspection fees.

• Procedural: The Supreme Court held that since the Local Tax Code (P.D. No. 231) does not provide a specific prescriptive period for the collection of local taxes, Article 1143 of the Civil Code applies, which provides that actions upon obligations created by law prescribe within ten years from the time the right of action accrues. Consequently, the Municipality may enforce collection of taxes accruing from 1976 to 1986 (within ten years from the filing on April 4, 1986), but taxes accruing prior to 1976 have prescribed and are not collectible.
• Substantive: The Court upheld the validity of the business tax imposed under Section 9(A) of the Municipal Tax Ordinance, holding that P.D. No. 426 effectively repealed Provincial Circulars 26-73 and 26-A-73 by carrying over the general taxing provisions without exempting petroleum products, and that a tax on business is distinct from a tax on the article itself. However, the Court held that storage permit fees cannot be collected because Provincial Circular No. 6-77 enjoins such collection, and where the storage tanks are owned by PPC rather than the municipality, the fee does not constitute a charge for service rendered by the municipality under Section 37 of the Local Tax Code. The Court also held that the Mayor cannot validly waive mayor's permit and sanitary inspection fees because the power to exempt is a legislative prerogative inherent in the power to tax, and such waivers partake of the nature of exemptions strictly construed against the taxpayer.

• Tax on Business vs. Tax on Article — A tax imposed on the privilege of doing business is distinct and separate from a tax imposed on the article itself; the former may be validly levied even when the latter is subject to specific tax under the National Internal Revenue Code.
• Administrative Regulations Yield to Law — Administrative regulations and circulars must be in harmony with the provisions of the law, and in case of discrepancy, the basic law prevails over implementing rules or regulations.
• Prescriptive Period for Local Taxes (Silence of Local Tax Code) — Where the Local Tax Code does not provide a specific prescriptive period for the collection of local taxes, Article 1143 of the Civil Code applies, establishing a ten-year prescriptive period for obligations created by law.
• Strictissimi Juris on Tax Exemptions — Exemptions from taxation are construed strictly against the taxpayer and liberally in favor of the taxing authority; tax exemptions are looked upon with disfavor and must be expressly granted.
• Legislative Prerogative on Tax Exemptions — The power to tax includes the power to exempt, which is essentially a legislative function that cannot be exercised unilaterally by the executive branch, such as a municipal mayor.

• "Well-settled is the rule that administrative regulations must be in harmony with the provisions of the law. In case of discrepancy between the basic law and an implementing rule or regulation, the former prevails."
• "The exercise by local governments of the power to tax is ordained by the present Constitution. To allow the continuous effectivity of the prohibition set forth in PC No. 26-73 (1) would be tantamount to restricting their power to tax by mere administrative issuances."
• "However, since the Local Tax Code does not provide the prescriptive period for collection of local taxes, Article 1143 of the Civil Code applies. Said law provides that an action upon an obligation created by law prescribes within ten (10) years from the time the right of action accrues."
• "Since the power to tax includes the power to exempt thereof which is essentially a legislative prerogative, it follows that a municipal mayor who is an executive officer may not unilaterally withdraw such an expression of a policy thru the enactment of a tax."
• "It is an ancient rule that exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority."

• Shell Philippines, Inc. v. Central Bank of the Philippines, 162 SCRA 628 (1988) — Cited for the doctrine that administrative regulations must conform to the law, and the law prevails over administrative rules in cases of conflict.
• Esso Standard Eastern, Inc. v. Acting Commissioner of Customs, 18 SCRA 488 (1966) — Cited for the principle that tax exemptions are construed strictly against the taxpayer and liberally in favor of the taxing authority (in strictissimi juris).
• Western Minolco Corp. v. Commissioner of Internal Revenue, 124 SCRA 121 (1983) — Cited for the principle that tax exemptions are looked upon with disfavor.

• Article 1143 of the Civil Code — Provides that actions upon obligations created by law prescribe within ten years from the time the right of action accrues; applied as the governing prescriptive period for local tax collection where the Local Tax Code is silent.
• Section 5, Article X of the 1987 Constitution — Mandates that local government units have the power to create their own sources of revenues and to levy taxes, fees, and charges subject to guidelines and limitations as Congress may provide, emphasizing that only Congress can limit local taxing power.
• Presidential Decree No. 231 (Local Tax Code), Sections 19, 19(a), 22(b), 36, and 37 — Sections 19 and 19(a) authorize municipal business taxes; Section 22(b) addresses non-imposition of taxes on articles subject to specific tax; Sections 36 and 37 govern permit fees and service charges.
• Presidential Decree No. 426 — Amended the Local Tax Code and effectively repealed Provincial Circulars 26-73 and 26-A-73 by retaining general business tax provisions without exempting petroleum products.
• Presidential Decree No. 436 — Increased specific taxes on petroleum products and granted local government units shares in such taxes in lieu of local taxes on the products themselves, but did not amend the business tax provisions of the Local Tax Code.
• Provincial Circular No. 26-73, Provincial Circular No. 26 A-73, and Provincial Circular No. 6-77 — Finance Department circulars that sought to suspend the collection of local taxes and storage fees on petroleum products, which the Court held were superseded by or inconsistent with the prevailing law.