G.R. No. 203754 and G.R. No. 204418, October 15, 2019
Film Development Council of the Philippines, Petitioner, vs. Colon Heritage Realty Corporation, Operator of Oriente Group of Theaters, Represented by Isidoro A. Canizares, Respondent. [and] Film Development Council of the Philippines, Petitioner, vs. City of Cebu and SM Prime Holdings, Inc., Respondents.

FACTS

The City of Cebu passed City Ordinance No. LXIX, requiring proprietors, lessees, or operators of theaters and other places of amusement to pay a 30% amusement tax on gross receipts to the city. Subsequently, Congress passed Republic Act No. 9167 , creating the Film Development Council of the Philippines (FDCP). Sections 13 and 14 of RA 9167 provided that the amusement tax on certain graded films, which would otherwise accrue to cities like Cebu City, must be deducted and withheld by cinema operators and remitted to the FDCP for reward to film producers. Cebu City insisted on its entitlement to the amusement taxes, prompting cinema operators within its jurisdiction to remit taxes to the city instead of the FDCP. Consequently, the FDCP sent demand letters for unpaid amusement taxes, including surcharges, to cinema proprietors and operators, including respondents Colon Heritage Realty Corporation (CHRC) and SM Prime Holdings, Inc. (SMPHI). Cebu City and CHRC filed separate petitions for declaratory relief before the Regional Trial Court (RTC) of Cebu City, seeking to declare Sections 13 and 14 of RA 9167 invalid and unconstitutional. The RTCs ruled in favor of Cebu City and CHRC, declaring the said provisions unconstitutional. The FDCP filed petitions for review before the Supreme Court. In a Decision dated June 16, 2015 (Main Decision), the Supreme Court affirmed the RTCs’ rulings, declaring Sections 13 and 14 of RA 9167 invalid and unconstitutional for violating the principle of local fiscal autonomy. However, applying the doctrine of operative fact as a matter of equity and fair play, the Court held that: (1) the FDCP and film producers need not return amounts already received; (2) amounts retained by cinema operators due to the FDCP at the time should be remitted to the FDCP, and Cebu City was ordered to turn over to the FDCP the amount of P76,836,807.08 received from SMPHI; and (3) cinema proprietors and operators within Cebu City should not be held liable for any surcharge. Dissatisfied, the FDCP, CHRC, and Cebu City filed motions for reconsideration.

ISSUE

The primary issue for resolution is the proper application of the doctrine of operative fact in relation to the declaration of unconstitutionality of Sections 13 and 14 of RA 9167, specifically concerning: (a) the FDCP’s motion seeking the imposition of surcharges on delinquent taxpayers; (b) CHRC’s motion claiming it had fully remitted taxes to Cebu City and should not be required to remit again to the FDCP to avoid double taxation; and (c) Cebu City’s motion arguing against the application of the operative fact doctrine and, alternatively, that it should not be ordered to remit the amount received from SMPHI as it had already utilized the funds for public services.

RULING

The Supreme Court denied all motions for reconsideration and affirmed its Main Decision with clarifications.
1. On the FDCP’s Motion for Surcharges: The Court denied the FDCP’s plea to impose surcharges. It held that the doctrine of operative fact was applied to prevent an undue burden on those who relied on the invalid law. Cinema operators were caught between complying with the city ordinance or RA 9167, and their honest belief and good faith in their uncertainty over the proper remittance justified the mitigation or dispensation of the penalty. The surcharge, being penal in nature, should not be imposed under these equitable circumstances.
2. On CHRC’s Motion Against Double Taxation: The Court found CHRC’s claim of double payment to be a factual issue not proper for resolution in a motion for reconsideration. The Court’s ruling in the Main Decision was based on the legal effects of the operative fact doctrine, which recognized that the unconstitutional law produced legal consequences prior to its nullification. The Court clarified that its order for remittance referred to amounts “withheld” or “retained” by cinema operators due to the FDCP at the time the law was operative. If CHRC had indeed fully remitted all taxes to Cebu City and retained nothing for the FDCP, then it had no further obligation to remit to the FDCP. The Court denied the alternative prayer to remand the case for factual determination, as the Main Decision had already become final and executory regarding the unconstitutionality of the law.
3. On Cebu City’s Motion Against Remittance: The Court rejected Cebu City’s arguments. It reiterated that the doctrine of operative fact is an equitable doctrine applied to recognize the consequences of an unconstitutional law prior to its annulment. The Court’s order for Cebu City to remit the specific amount received from SMPHI was precisely an application of this doctrine. The fact that Cebu City had already spent the funds did not negate its obligation, as the doctrine aims to balance the equities among all parties who acted under the presumed validity of the law. The Court emphasized that its disposition was a judicious exercise of equity to settle the rights of all parties involved, preventing Cebu City from unjustly enriching itself at the expense of the FDCP, which had a legal right to the funds under the operative law at the time.