G.R. No. 166102, August 05, 2015
MANILA ELECTRIC COMPANY, PETITIONER, VS. THE CITY ASSESSOR AND CITY TREASURER OF LUCENA CITY, RESPONDENTS.

FACTS

Manila Electric Company (MERALCO) is a public utility engaged in electric distribution in Lucena City under successive franchises. On February 20, 1989, MERALCO received Tax Declaration No. 019-6500 from the City Assessor of Lucena, covering its transformers, electric posts, transmission lines, insulators, and electric meters, with a market value of P81,811,000.00 and an assessed value of P65,448,800.00, and subjecting them to real property tax as of 1985. MERALCO appealed this before the Local Board of Assessment Appeals (LBAA), which, in a Decision dated July 5, 1989, ruled that under its franchise, MERALCO was required to pay a tax equal to 5% of its gross earnings in lieu of all taxes on its poles, wires, insulators, transformers, and structures. The LBAA cited the 1964 MERALCO case, where the Supreme Court held that steel towers were personal property and fell within the term “poles” exempted from tax. The LBAA ordered that the tax declaration remain but be stamped “exempt” and that MERALCO pay the franchise tax. The City Assessor appealed to the Central Board of Assessment Appeals (CBAA), which affirmed the LBAA Decision in a Decision dated April 10, 1991. This became final.
Six years later, on October 16, 1997, MERALCO received a letter from the City Treasurer of Lucena assessing real property tax delinquency on its machineries (covered by Tax Declaration Nos. 019-6500 and a new one, 019-7394) beginning 1990, totaling P17,925,117.34. MERALCO appealed to the LBAA. The LBAA, in a Decision dated June 17, 1998, ruled that Sections 234 and 534(f) of the Local Government Code repealed the tax exemption provisions in MERALCO’s franchise and Presidential Decree No. 551. It refused to apply res judicata from the 1989 case, stating it involved different tax periods and that the LBAA is an administrative body. It dismissed MERALCO’s appeal and ordered payment of realty tax based on the 1991 Schedule of Market Values, less depreciation.
MERALCO appealed to the CBAA, which affirmed the LBAA in a Decision dated May 3, 2001. The CBAA held that the Local Government Code provided a broadened concept of “machinery,” which now included MERALCO’s equipment, and that the exclusive enumeration of exemptions in Section 234 meant MERALCO’s previous exemptions were withdrawn. The Court of Appeals affirmed the CBAA Decision in a Decision dated May 13, 2004. MERALCO filed the present Petition for Review.

ISSUE

Whether MERALCO’s transformers, electric posts (poles), transmission lines, insulators, and electric meters are subject to real property tax under the Local Government Code.

RULING

Yes. The Supreme Court denied the petition and affirmed the Court of Appeals Decision. The Court held that the properties in question are machineries subject to real property tax under the Local Government Code. Section 199(o) of the Code defines “machinery” to include mechanical contrivances, instruments, appliances, and apparatus that are actually, directly, and exclusively used to meet the needs of the business. MERALCO’s equipment, while movable, falls under this definition as they are directly and exclusively used for its electric distribution business. The Court further ruled that the principle of res judicata does not apply because the 1989 case involved tax liabilities for a different period (1985-1989) and the applicable law (the Local Government Code, effective 1992) had changed. The tax exemptions under MERALCO’s franchise were deemed revoked by Section 234 of the Local Government Code, which provides an exclusive list of properties exempt from real property tax, and MERALCO’s properties are not included. The Court also noted that tax exemptions are strictly construed against the taxpayer and in favor of the taxing authority.