Title
City of Makati vs. Municipality of Bakun
Case
G.R. No. 225226
Decision Date
Jul 7, 2020
Dispute over local business tax allocation for Luzon Hydro Corp. among Alilem, Bakun, and Makati; SC ruled Makati office administrative, not project office, limiting tax share.
local business tax
tax allocation
legal battle

Case Summary (G.R. No. 225226)

Factual Background

Luzon Hydro Corporation operated a hydroelectric facility utilizing the Bakun River with major components such as the power station and switch yard situated in Alilem, Ilocos Sur, and other structures including the conveyance tunnel, penstock, weir, intakes, and desander situated in Bakun, Benguet, while maintaining an office in Makati City. After a tax holiday that ended in 2003, Luzon Hydro Corporation began paying local business taxes in 2004, recording its principal office in Alilem as per its Articles of Incorporation; by practice thirty percent of sales recorded at the principal office was paid to Alilem under Sec. 150, and the remaining seventy percent was apportioned among Alilem, Bakun, and Makati until Bakun questioned the sharing in September 2004 and referred the issue to the Bureau of Local Government and Finance.

Administrative Determination and Assessments

The Bureau of Local Government and Finance issued an opinion on February 8, 2006 concluding that only Bakun and Alilem should share the seventy percent allocation because the Makati office was a mere administrative office not enumerated in Sec. 150; acting on that view, Bakun passed Resolution No. 134-2006 and assessed deficiency taxes for 2004 to 2006, and Alilem issued Resolution No. 07-02 requiring compliance with the BLGF opinion, while Makati indicated it would still assess local business tax notwithstanding the BLGF opinion.

Procedural History in the RTC

Faced with competing claims, Luzon Hydro Corporation filed a special civil action for interpleader under Rule 62 before the RTC of Makati, Branch 134, to have the contending local government units litigate their claims over the seventy percent allocation. The RTC found that the Makati office was a "project office" entitled to share in the seventy percent portion and, in a decision dated April 20, 2012, allocated the seventy percent among Alilem twenty-five percent, Bakun twenty-five percent, and Makati twenty percent, the latter reduced from thirty percent in light of Makati’s willingness to accept a reduced share; Bakun filed a motion for reconsideration which the RTC denied on September 12, 2012.

Appeal to the Court of Tax Appeals, Special Division

Bakun appealed to the Court of Tax Appeals Special First Division which, upon review, found that the Makati office was merely an administrative office where sales and transactions were not recorded and thus reversed and set aside the RTC decision in a November 8, 2013 decision, declaring that only Bakun and Alilem were entitled to equally share in the seventy percent allocation; motions for reconsideration by Makati and Bakun to the Special Division were denied in a Resolution dated April 30, 2014.

CTA En Banc Proceedings and Decision

Makati elevated the case to the CTA En Banc which, in the assailed Decision dated January 14, 2016, affirmed the Special First Division by denying the petition for lack of merit, and thereafter denied Makati’s motion for reconsideration in the June 8, 2016 Resolution, prompting Makati to file the present petition under Rule 45 before the Supreme Court.

Issues Presented in the Supreme Court

The petition raised multiple assignments of error, chiefly that the CTA En Banc and its Special First Division: (a) ignored the RTC’s factual findings that Luzon Hydro Corporation’s Makati office was a producer or project office and not an administrative office; (b) erred in applying Local Finance Circular No. 3-95 to find that the Makati office was not a project office; (c) wrongly afforded binding effect to the BLGF opinion; (d) erred in ruling for Alilem, which did not appeal the RTC decision; and (e) exceeded its jurisdiction by taking cognizance of an appeal from an interpleader action.

Parties’ Contentions before the Supreme Court

Makati argued that the RTC’s factual findings were entitled to deference because the RTC conducted the hearings and established by clear and convincing evidence that the Makati office functioned as a project office. Bakun maintained that the Makati office was an administrative office and thus not entitled to the seventy percent allocation. Luzon Hydro Corporation contended that the CTA had jurisdiction over the appeal as a local tax case, informed the Court that it had ceased business presence in Makati as of March 31, 2013, and stated that it had consigned with the RTC the local business tax allocations up to 2012.

Jurisdictional and Threshold Determinations

The Supreme Court held that the CTA had exclusive appellate jurisdiction under Sec. 7, paragraph (a)(3) of R.A. No. 1125, as amended by R.A. No. 9282, to review decisions of the Regional Trial Courts in local tax cases decided in the exercise of original jurisdiction; the Court further observed that the mode of pleading as a special civil action for interpleader did not alter the nature of the controversy as a local tax case governed by rules on tax situs and allocation.

Analysis of the Nature of the Makati Office

The Court examined whether the Makati office constituted a "project office" within the meaning of Sec. 150 and whether the CTA erred in its factual conclusion. The Court noted that the CTA did not rest its decision solely on the BLGF opinion but independently examined where Luzon Hydro Corporation’s sales and operations were conducted, finding that sales, invoices, and records were not handled at the Makati office and that the Makati office did not operate aspects of the company’s primary purposes as set out in its Articles of Incorporation; on that factual matrix, the Makati office was a mere administrative office and not equivalent to a factory, project office, plant, or plantation contemplated by Sec. 150.

Use of Department Circular as Guidance

The Court endorsed the CTA’s reliance on Department of Finance-Local Finance Circular No. 3-95 for guidance on the definition of a project office, reasoning that although the circular addressed construction contractors it provided a sound, uniform guide on the situs of business taxation under Sec. 143 and that nothing in existing provisions justified a different application to hydroelectric power production; consequently the circular’s definition of a project office as "equivalent to the factory of a manufacturer" was an appropriate benchmark.

Treatment of the BLGF Opinion and Weight of Evidence

The Court explained that the BLGF is a consultative body providing technical assistance and that its opinion did not bind the courts on questions of fact; the CTA’s independent fact-finding based on where sales and transactions were recorded was therefore decisive. The Court emphasized that obligations to pay taxes arise from law, not from parties’ labels or agr

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