CIty of Manila vs Judge Colet (Taxation Law)

City of Manila, et al vs. Judge Colet, and Malaysian Airline System 

G.R. No. 120051, December 10, 2014

FACTS:

The case involves 10 consolidated petitions involving several corporations operating as “transportation contractors, persons who transport passenger or freight for hire, and common carriers by land, air or water” with principal offices in Metro Manila, and City of Manila’s Ordinance No. 7807 which amended Sec. 21 (B) of the Manila Revenue Code. Sec.21 (B) imposed business tax on “transportation contractors, persons who transport passenger or freight for hire, and common carriers by land, air or water”; while the subject ordinance amended such by lowering the tax rate from 3% per annum to .5% per annum. The City of Manila, through its City Treasurer, began imposing and collecting the business tax under Section 21(B) of the Manila Revenue Code, as amended, beginning January 1994.

Because they were assessed and/or compelled to pay business taxes pursuant to Section 21(B) of the Manila Revenue Code before they were issued their business permits for 1994, several corporations questioned the constitutionality of Sec. 21 (B) for being contrary to the Constitution and the Local Government Code, and asked for the refund of what they had paid as business tax.

The City of Manila, argued that it was constitutional and valid; and such position was adopted by the RTC and the CA when the case reached the respective fora. The City argued that the enactment of Sec. 21 (B) is based on the exempting clause found at the beginning of Sec. 133, in conjunction with Section 143(h), of the LGC. 

SEC. 133.  Common Limitations on the Taxing Powers of Local Government Units. –

Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following:

x x x x

(j) Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code;

SEC. 143. Tax on Business. – The municipality may impose taxes on the following businesses:

x x x x

(h) On any business, not otherwise specified in the preceding paragraphs, which the sanggunian concerned may deem proper to tax: Provided, That on any business subject to the excise, value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year.

The sanggunian concerned may prescribe a schedule of graduated tax rates but in no case to exceed the rates prescribed herein. (Emphases supplied by the Supreme Court)

ISSUE:

Is Sec. 21 (B) of the Manila Revenue Code, as amended, unconstitutional?

HELD:

Yes. The power to tax is not inherent in LGUs to whom the power must be delegated by Congress and must be exercised within the guidelines and limitations that Congress may provide. 

Sec. 5 of Article X of the Constitution granted LGUs the “power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide...” In conformity with said constitutional provision, the Local Gov’t Code was enacted by Congress.

Sec. 130 of the LGC provides for the fundamental principles governing the taxing powers of LGUs. Sec. 133 provides for the common limitations on the taxing powers of LGUs. Among the common limitations on the taxing power of LGUs is Section 133(j) of the LGC, which states that “unless otherwise provided herein,” the taxing power of LGUs shall not extend to “taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code.”

Section 133(j) of the LGC clearly and unambiguously proscribes LGUs from imposing any tax on the gross receipts of transportation contractors, persons engaged in the transportation of passengers or freight by hire, and common carriers by air, land, or water.  Yet, confusion arose from the phrase “unless otherwise provided herein,” found at the beginning of the said provision, and the City of Manila anchors the validity of Sec. 21 (B) on said phrase.

However, the Court is not convinced with the City’s contention.  Sec. 133(j) of the LGC prevails over Sec. 143(h) of the same Code, and Sec. 21(B) of the Manila Revenue Code, as amended, was manifestly in contravention of the former.

Sec. 133(j) of the LGC is a specific provision that explicitly withholds from any LGU the power to tax the gross receipts of transportation contractors, common carriers, persons engaged in the transportation of passengers or freight by hire, and common carriers by air, land, or water.   In contrast, Sec. 143 of the LGC defines the general power of the municipality (as well as the city, if read in relation to Section 151 of the same Code) to tax businesses within its jurisdiction. 

The succeeding proviso of Section 143(h) of the LGC, viz., “Provided, That on any business subject to the excise, value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year,” is not a specific grant of power to the municipality or city to impose business tax on the gross sales or receipts of such a business.  Rather, the proviso only fixes a maximum rate of imposable business tax in case the business taxed under Section 143(h) of the LGC happens to be subject to excise, value added, or percentage tax under the NIRC.

The omnibus grant of power to municipalities and cities under Section 143(h) of the LGC cannot overcome the specific exception/exemption in Section 133(j) of the same Code. 

In the case at bar, the sanggunian of the municipality or city cannot enact an ordinance imposing business tax on the gross receipts of transportation contractors, persons engaged in the transportation of passengers or freight by hire, and common carriers by air, land, or water, when said sanggunian was already specifically prohibited from doing so. 

Such construction gives effect to both Sections 133(j) and 143(h) of the LGC.  Also, Sec. 5(b) of the LGC itself, on Rules of Interpretation, provides that in case of doubt, any tax ordinance shall be construed strictly against the LGU enacting it, and liberally in favor of the taxpayer. Furthermore, such a construction is pursuant to the legislative intent to exclude from the taxing power of the LGU the imposition of business tax against common carriers to prevent a duplication of the so-called “common carrier’s tax.”

Nature, Effects, and Basis of Assessment (Taxation Law)

CIR vs. Sony Phils., Inc. (2010)

- An invalid Letter of Authority or an authorized revenue officer going beyond such authority results to an invalid assessment. A Letter of Authority should cover a period not exceeding one taxable year. If the audit of a taxpayer shall include more than one taxable period, either (a) the other periods or years shall be specifically indicated in the LoA or (b) the CIR must issue another LoA covering such period.

CIR vs. Pascor Realty and Dvpt. Corp. (1999)

- An assessment (FLDAN – Formal Letter of Demand and Assessment Notice) contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It MUST STATE the facts, the law, rules and regulations, or jurisprudence on which the assessment id based, otherwise the FLDAN shall be void.

- It is a notice duly sent to a taxpayer, and signals the time when penalties and remedies (protest; prescription) begin to accrue against or for the latter. Thus, due process requires that it must be served on and received by the taxpayer, and that the latter must be certain that the document constitutes an assessment.

- An affidavit, which was executed by revenue officers stating a computation of the taxpayer’s tax liabilities and attached to a criminal complaint for tax evasion, cannot be deemed an assessment that can be questioned before the CTA.

CIR vs. Hantex Trading (2005)

-       The principle of “best evidence obtainable” envisaged in Sec. 6(B)of the 1997 NIRC includes:

a) corporate and accounting records of the taxpayer who is is the subject of the assessment process;

b) accounting records of other taxpayers engaged in the same line of business, including their gross profit and net profit sales;

c) data, record, paper, document or any evidence gathered by internal revenue officers from other taxpayers who had personal transactions with or from whom the subject taxpayer received any income;

d) record, data, document and information secured from government offices or agencies (ex. SEC, Central Bank, Bureau of Customs, Tariff and Customs Commission)

- The law allows the BIR access to all relevant or material records and data in the person of the taxpayer, in whatever form they may be kept. The standard is not the form but where it might shed light on the accuracy of the taxpayer’s return.

- Generally, administrative agencies such as the BIR are not bound by technical rules of evidence. Hence, it can accept documents, which cannot be admitted in a judicial proceeding where the Rules of Court are strictly observed (ex. hearsay evidence). It can choose to give weight or disregard such evidence, depending on their trustworthiness.

- However, this principle does NOT include photocopies of records or documents. Such photocopies have no probative value if offered as proof of the contents thereof nor as basis for any deficiency income or business taxes against a taxpayer.

- General Rule: in the absence of accounting records of a taxpayer, his tax liability may be determined by estimation. The BIR is not required to compute such tax liabilities with mathematical exactness, and to rule otherwise will be tantamount to ruling that skillful concealment is an invincible barrier to proof.

Exception: where the estimation is arrived at arbitrarily and capriciously

Sy Po vs. CTA and BIR (1988)

- The rule on the “best evidence obtainable” applies when a tax report required by law for the purpose of assessment is not available or when the tax return required by law is incomplete or fraudulent. In this case, the persistent failure of the petitioners to present their books of accounts for examination for the taxable years involved left the CIR no other legal option except to resort to the power conferred upon him under Sec. 6 (B) of the NIRC.

Bache and Co. (Phil.), Inc. vs. Judge Ruiz (1971)

-  Exception to the rule on “best evidence obtainable”: Notwithstanding the powers of the CIR, the taxpayers are still entitled to their constitutional right against illegal searches and seizures. Evidence obtained through illegal searches and seizures, when made the basis of an assessment, will render such assessment invalid.

-  In this case, the warrants sanctioning the seizure of all records of the petitioners, whatever their nature, contravened the explicit command of the Bill or Rights that the things to be seized must be particularly described. The language used in the warrants was all-embracing as to include all conceivable records of the petitioner corporation, which, if seized, could possibly render its business inoperative.

Fitness By Design, Inc. vs CIR

-  Consent of the taxpayer is not necessary for the procurement of his books of accounts in the exercise of the CIR’s access power provided in Sec.5 of the NIRC. To require such consent would defeat the law’s intent to help the BIR to assess and collect the correct amount of taxes.

-   In this case, Sablan, a colleague of petitioner’s former bookkeeper, became an informer to the CIR regarding the tax liability of petitioner. Petitioner alleges that Sablan illegally took custody of its accounting records, and submitted the same to the BIR without petitioner’s consent.