G.R. No. 109791 - Philippine Ports Authority vs. City of Iloilo

The City of Iloilo (respondent), a public corporation, filed a case against the Philippine Ports Authority (PPA) (petitioner), a government corporation created by P.D. 857, seeking to collect real property and business taxes covering the period from the last quarter of 1984 up to the fourth quarter of 1988.
The City of Iloilo alleged that PPA was engaged in the business of arrastre and stevedoring services and leasing real estate, for which it should pay business taxes. The City further alleged that PPA was the declared and registered owner of a warehouse used in its operations, subjecting it to real property tax.
The City demanded payment totaling P510,888.86 comprising real property tax and business tax arrears including interests and penalties.

PPA filed a motion to dismiss which the trial court denied. A motion for reconsideration was also denied. PPA subsequently filed its answer.
During pre-trial, factual and legal issues were identified:

Factual: Whether PPA is engaged in business and accuracy of tax assessments amounting to P180,953.93 (real property tax) and P329,934.93 (business tax).
Legal: Whether PPA is exempt from real property and business taxes; effect of motion to dismiss on admission of complaint allegations; whether leasing is considered business activities for tax purposes.

During trial, the City presented two witnesses; PPA did not present evidence but opted to file a memorandum asserting the issues were purely legal and it was not liable to pay any taxes.

The trial court ruled PPA liable for real property taxes from the last quarter of 1984 to December 1986, and for business taxes related to leasing of real estate from the last quarter of 1984 to 1988.
The trial court exempted PPA from business taxes on arrastre and stevedoring services as these pertained to its governmental functions.

PPA challenged the imposition of real property taxes on its port property, claiming it was property of public dominion immune from taxation.
It also contended that as a government instrumentality, it was not engaged in business and should be exempt from business taxes despite leasing to private entities.
PPA introduced a new theory based on Article 420 of the Civil Code defining “properties of public dominion,” which it had not raised at trial.

The City of Iloilo argued PPA could not change its theory on appeal as the factual basis of PPA’s new claim was not presented before the trial court, violating fair play and due process.
The City further maintained that PPA admitted ownership of the warehouse in its pleadings and had not questioned ownership during pre-trial, depriving them of opportunity to contest PPA’s new theory.

Whether PPA’s claim that its port warehouse is property of public dominion and immune from real property tax can be raised for the first time on appeal.
Whether PPA is exempt from payment of real property taxes on the warehouse for the period covering 1984 to 1988.
Whether PPA is engaged in “business” for purposes of business tax liability, particularly with respect to leasing its real estate to private persons or entities.
Whether PPA may be held liable for business taxes despite claiming it performs governmental functions and that leasing is not motivated by profit.
Whether PPA’s admissions in pleadings bind it against claiming otherwise for ownership or tax exemption.