G.R. No. 34674 - Cruz vs. Youngberg

Case Summary (G.R. No. 34674)

Background and Subject Matter of the Case

The City Council of Cagayan de Oro enacted Ordinance No. 9503-2005 on January 10, 2005, imposing a ten percent (10%) tax on the lease or rental of electric and telecommunication posts, poles, or towers by pole owners to other pole users. The ordinance took effect on February 19, 2005, following its publication. CEPALCO, as a pole owner engaged in such leasing business, was subjected to this tax. CEPALCO challenged the ordinance’s validity, claiming that the tax was essentially an income tax, which the city was barred from imposing under Section 133(a) of the Local Government Code (LGC), and that it was exempt from the ordinance under provisions of its own franchise law, Republic Act No. 9284. CEPALCO also sought exemplary damages, alleging malice and bad faith by the city.

Procedural History

CEPALCO filed a petition for declaratory relief before the Regional Trial Court (Branch 18, Misamis Oriental) on September 30, 2005. The trial court ruled in favor of the City of Cagayan de Oro on January 8, 2007, upholding the ordinance’s validity, rejecting CEPALCO's claimed exemption, and dismissing its petition due to non-exhaustion of administrative remedies and prescription. The Court of Appeals affirmed this decision on May 28, 2009, and denied CEPALCO’s motions for reconsideration. CEPALCO then elevated the case to the Supreme Court by filing a petition for review under Rule 45 of the Rules of Court.

Issues Presented

Whether Ordinance No. 9503-2005 is valid and within the taxing authority of the City of Cagayan de Oro.
Whether CEPALCO is exempt from the tax imposed by the ordinance under its franchise laws.
Whether CEPALCO’s petition is barred by failure to exhaust administrative remedies and prescription.
Whether the tax rate imposed complies with limitations set by Sections 151, 137, and 143(h) of the Local Government Code.

Failure to Exhaust Administrative Remedies and Prescription

The Local Government Code, through Section 187, mandates that any challenge to the constitutionality or legality of tax ordinances or revenue measures must first be appealed to the Secretary of Justice within thirty (30) days from the ordinance’s effectivity. The Secretary must rule within sixty (60) days, after which an aggrieved party may initiate judicial proceedings within thirty (30) days. Ordinance No. 9503-2005 took effect on February 19, 2005. CEPALCO, however, filed its petition directly with the trial court on September 30, 2005, without first appealing to the Secretary of Justice. The Supreme Court noted that such failure is fatal to CEPALCO’s cause as it constitutes non-exhaustion of administrative remedies and barred the action by prescription. This procedural requirement is strict to prevent delays and promote orderly, speedy judicial processes. Nonetheless, the Court relaxed this procedural bar to address substantive issues due to their importance.

City's Authority to Impose the Tax and Definition of Taxable Activity

Under Section 5, Article X of the 1987 Constitution, local government units have the power to create sources of revenue and impose taxes, subject to guidelines and limitations set by Congress and consistent with local autonomy. The LGC further confirms this authority, allowing cities to levy taxes, fees, and charges, including on businesses not otherwise enumerated, provided such taxes are not unjust or contrary to national policy (Sections 143, 151, 186).

The Court agreed with the trial and appellate courts that the tax imposed by Ordinance No. 9503-2005 is a business tax on the privilege of leasing poles and towers, not an income tax. The lease activity qualifies as a "business" under Section 131(d) of the LGC because it involves a trade or commercial activity engaged in for profit. Therefore, the tax is on the business privilege, expressly allowed under Sections 143(h) and 186 of the LGC.

Tax Exemption Claim under CEPALCO’s Franchise Law

CEPALCO invoked tax exemptions under its old franchise laws (R.A. Nos. 3247, 3570, and 6020), which provided a three percent franchise tax “in lieu of all taxes and assessments,” explicitly exempting CEPALCO from other taxes, including taxes on poles, wires, insulators, and income. However, the Court found that the current franchise law governing CEPALCO, Republic Act No. 9284, does not contain a similar comprehensive exemption clause. Instead, Section 9 of R.A. 9284 subjects CEPALCO to the payment of taxes applicable under the National Internal Revenue Code, the LGC, and other laws, while preserving specific exemptions granted by other laws but only if clearly stated. Given the general withdrawal of tax exemptions under Section 193 of the LGC, CEPALCO’s claim of exemption was rejected.

The Court emphasized the settled doctrine that tax exemptions are strictly construed against the claimant. Tax exemptions must rest on clear, unequivocal, and specific legal provisions. Any ambiguity or implied exemptions do not benefit the taxpayer.

Compliance of Ordinance No. 9503-2005 with Tax Rate Limitations in the Local Government Code

CEPALCO argued that the ten percent (10%) tax rate imposed by the ordinance far exceeds the maximum rates allowed for business taxes under Sections 137, 143(h), and 151 of the LGC. According to CEPALCO, the following are the appropriate limits:

Section 137: Franchise tax by provinces on businesses enjoying a franchise not exceeding 50% of 1% (or 0.5%) of gross annual receipts.
Section 151: Cities may levy taxes exceeding provincial or municipal rates by not more than 50%, effectively allowing up to 0.75% for cities.
Section 143(h): On businesses subject to excise, value-added, or percentage tax, the LGC limits local taxes to not exceeding 2% of gross sales or receipts.

Applying these limitations to CEPALCO’s tax base, the tax on annual rental income cannot exceed 2% under Section 143(h), making the 10% tax rate excessive and illegal. CEPALCO illustrated that the ordinance’s 10% rate exceeds by multiple folds the maximum allowed rates under existing law.

Conversely, the City of Cagayan de Oro contended that the limitations do not apply straightforwardly. They argued that:

The ten percent (10%) tax is imposed specifically on the lease or rental income derived from poles, which they deem distinct and smaller in tax base than “gross annual receipts” under Sections 137 and 143(h).
Section 151’s permissible increase applies only to businesses enumerated under Section 143, and the lease of poles is a new taxable business under Section 186.
The ordinance complies with procedural requirements, including public hearings, and the tax is neither unjust nor oppressive.
CEPALCO’s lease operations differ from other lessors because they enjoy a monopoly and special advantages, justifying a separate tax classification and rate.

Supreme Court’s Analysis on Tax Rate and Ordinance Validity

The Supreme Court rejected the City’s interpretation that Sections 143 and 151 limitations do not apply to the tax ordinance. It held that for different lines of business, the LGC prescribes different tax rates, and the lease of poles constitutes a separate line of business subject to Section 143(h). The imposition of a separate business permit requirement by the City confirms this classification.

Moreover, Section 143(h) expressly limits the tax on businesses subject to national excise, value-added, or percentage taxes to a maximum of 2% of gross sales or receipts. Lease of poles qualifies as such business activity, being subject to VAT under the National Internal Revenue Code as a commercial leasing transaction. Therefore, the 10% tax rate clearly violates the LGC’s 2% cap.

The Court distinguished between the tax rate and the tax base, clarifying that the ordinance’s tax base—the "annual rental income" from pole leasing—is a part of CEPALCO’s gross receipts from such leasing business, making the ordinance subject to the statutory tax rate limits.

Due to the ordinance’s failure to

Case Syllabus (G.R. No. 34674)

Background and Procedural History

This case involves a petition for review filed by Cagayan Electric Power and Light Co., Inc. (CEPALCO) assailing the Court of Appeals’ decision dated 28 May 2009 and resolution dated 24 March 2010.
The appellate court had affirmed the decision dated 8 January 2007 of the Regional Trial Court (Branch 18, Misamis Oriental), which upheld the validity of Ordinance No. 9503-2005 passed by the City of Cagayan de Oro.
Ordinance No. 9503-2005 imposed a 10% tax on the lease or rental of electric and/or telecommunication posts, poles, or towers rented by pole owners to other users.
CEPALCO challenged the ordinance, claiming exempt status under its franchise and arguing the tax was essentially an illegal income tax prohibited by the Local Government Code (R.A. 7160).
The trial court denied CEPALCO's claims, finding the ordinance valid and the tax a business tax, not an income tax, and declared CEPALCO’s exemption claim invalid.
The appellate court later affirmed these findings, which CEPALCO appealed to the Supreme Court.

Facts of the Case

On 10 January 2005, the Cagayan de Oro City Council enacted Ordinance No. 9503-2005, imposing a tax on the lease or rental of posts, poles, or towers at a 10% rate of the annual rental income.
The City Council notified CEPALCO of the ordinance via letter on 15 March 2005.
CEPALCO filed a petition for declaratory relief on 30 September 2005, contesting the ordinance’s validity based on alleged illegality as an income tax and asserted exemption under R.A. 9284 which granted its current franchise.
CEPALCO also sought exemplary damages, alleging malice and bad faith in the passage of the ordinance.
The City of Cagayan de Oro answered, defending the ordinance’s validity, contesting CEPALCO’s exemption claim, and alleging procedural bar due to non-exhaustion of administrative remedies and prescription.

Ordinance No. 9503-2005: Key Provisions

Tax imposed: 10% of the annual rental income from leasing poles, posts, or towers by pole owners to users.
Definitions included in the ordinance clarify electric companies, telecommunication companies, pole owners, and pole users.
The ordinance prohibited passing the tax to pole users through increased rental fees.
Required pole owners engaged in leasing to secure a separate business permit.
The ordinance took effect after 15 days from publication in a local newspaper for three consecutive issues.

Trial Court's Ruling and Rationale

The trial court ruled in favor of the City of Cagayan de Oro, declaring Ordinance No. 9503-2005 valid.
It resolved three issues: validity of the ordinance, CEPALCO’s exemption claim, and whether the action was barred by prescription and non-exhaustion of remedies.
The court held the tax was not an income tax but a business tax on the privilege of leasing poles.
It cited Sections 143(h) and 151 of R.A. 7160, which authorize cities to impose taxes on businesses not expressly prohibited.
The exemption claim failed as CEPALCO’s franchise laws (R.A. Nos. 3247, 3570, 6020) with “in lieu of all taxes” clauses do not apply to its current franchise under R.A. 9284, which lacks an exemption clause.
The petition was also barred by prescription, as CEPALCO failed to file a timely appeal to the Secretary of Justice within 30 days from the ordinance's effectivity.

Appellate Court’s Decision

The Court of Appeals affirmed the trial court’s decision.
It emphasized CEPALCO’s failure to exhaust administrative remedies via Secretary of Justice appeal within the prescribed period.
The appellate court agreed that the tax was a license tax imposed as a valid business regulation.
It rejected CEPALCO’s strained interpretation of its franchise exemption under R.A. 9284.
CEPALCO’s motions for reconsideration were denied for lack of merit and untimeliness.

Issues on Petition for Review

CEPALCO raised three main issues:
1. The ordinance was patently illegal as it was passed in excess of the City Council’s taxing powers.
2. The requirement to exhaust administrative remedies before judicial relief was unwarranted in a pure question of law.
3. Newly enacted legislation affirming CEPALCO’s tax exemption was disregarded.

Supreme Court’s Examination of Essential Points

Failure to Exhaust Administrative Remedies

The Local Government Code mandates appeal of questions on tax ordinance validity to the Secretary of Justice within 30 days from effect