City of Makati v. Trans-Asia Power Generation Corp. Petitioners' Arguments 30 Respondent's Counter-Arguments 31

EN BANC [C.T.A. EB CASE NO. 1570. March 21, 2018.] (C.T.A. AC No. 144) THE CITY OF MAKATI AND THE CITY TREASURER OF MAKATI CITY , petitioners , vs. TRANS-ASIA POWER GENERATION CORPORATION , respondent . DECISION BAUTISTA , J p : This is a Petition for Review (En Banc) 1 filed by petitioners City of Makati and City Treasurer of Makati City praying for the reversal of the Decision 2 promulgated on July 29, 2016 (the "Assailed Decision") and the Resolution 3 issued on December 2, 2016 (the "Assailed Resolution") of the Court of Tax Appeals ("CTA") Second Division ("Court in Division"), 4 which affirmed the Decision 5 promulgated on February 18, 2015 and the Order 6 issued on June 9, 2015 of the Regional Trial Court of Makati City, Branch 134 ("RTC") in the case entitled Trans-Asia Power Generation Corporation v. The City of Makati and Nelia Barlis, in her capacity as the City Treasurer of Makati City 7 granting the tax protest filed by respondent Trans-Asia Power Generation Corporation ("TAPGC") and cancelling and withdrawing the Notice of Assessment dated October 27, 2009 in the amount of Php686,300.53 representing deficiency taxes, fees, and charges for calendar years ("CYs") 2005 to 2007. 8 The Parties 9 Petitioner City of Makati is a duly created and existing local government unit ("LGU") empowered under the Local Government Code of 1991, as amended (the "1991 LGC") 10 to assess and collect local business taxes ("LBT") through petitioner City Treasurer of Makati City, Nelia Barlis. Respondent TAPGC is a domestic corporation duly registered with the Securities and Exchange Commission and with principal business address at Level 11, Phinma Plaza, 39 Plaza Drive, Rockwell Center, Makati City. It is primarily engaged in the business of building, constructing, erecting, owning, equipping, installing, operating, maintaining, selling, leasing power generation plants, facilities, machineries, equipment; selling any electricity generated by such power plants; and purchasing, importing, acquiring, owning, leasing or letting power generation, transmission, telecommunications, transportation and other kinds of equipment, materials and facilities. The Facts For CY 1996 to the second quarter of CY 2006, petitioners classified TAPGC as a "Producer" for purposes of LBT. Accordingly, TAPGC paid the corresponding business tax based on such classification. 11 On June 14, 2006, petitioners issued an order of payment and reclassified TAPGC from "Producer" to "Services-Other Co." 12 Thereafter, petitioners issued the Notice of Assessment dated October 27, 2009 assessing TAPGC for alleged deficiency taxes, fees, and charges covering CYs 2005 to 2007 in the amount of Php686,300.53. 13 TAPGC filed a protest letter dated December 22, 2009 wherein it requested that it should be classified as a "Manufacturer" or "Producer" for purposes of LBT, and that the assessment be cancelled and withdrawn. 14 Claiming petitioners' inaction, on March 29, 2010, TAPGC filed a Complaint or Protest of Assessment of Business Tax before the RTC. 15 On February 18, 2015, the RTC promulgated the Decision granting TAPGC's protest. The dispositive portion of the RTC's Decision reads: WHEREFORE, in view of the foregoing, the tax protest filed by the plaintiff is hereby GRANTED and the Notice of Assessment dated October 27, 2009 in the amount of [Php]686,300.53 is ordered CANCELLED and WITHDRAWN. SO ORDERED. 16 In its Decision, the RTC held that TAPGC is engaged in the business of transforming fuel into electricity and the sale of such electricity to the end user. According to the RTC, TAPGC's business operation falls within the scope of manufacturer/producer, and not under the term "contractor." Petitioners moved for the reconsideration of the RTC's Decision. 17 However, the RTC issued the Order dated June 9, 2015 denying petitioner's Motion for Reconsideration. The dispositive portion of the RTC's Order reads: AcICHD WHEREFORE, premises considered, the defendant's Motion for Reconsideration is hereby DENIED. SO ORDERED. 18 In its Order, the RTC opined that petitioners merely rehashed the issues and discussions upon which the RTC's Decision was based. Thus, finding no new and cogent grounds to warrant the reconsideration or modification of the RTC's Decision, the RTC ruled that its Decision must stay. Undaunted, petitioners filed on July 8, 2015 the Petition for Review 19 with the Court in Division, which was docketed as CTA AC No. 144. On July 29, 2016, the Court in Division promulgated the Assailed Decision affirming the RTC's Decision and Order. The dispositive portion of the Assailed Decision reads: WHEREFORE , premises considered, the instant Petition for Review is hereby DENIED for lack of merit. Accordingly, the Decision dated February 18, 2015 and the Order dated June 9, 2015, both rendered by Branch 134 of the Regional Trial Court of Makati City in Civil Case No. 10-312 entitled "Trans-Asia Power Generation Corporation vs. The City of Makati and Nelia Barlis, in her capacity as the City Treasurer of Makati City," are hereby AFFIRMED . SO ORDERED . 20 In the Assailed Decision, the Court in Division held that the letter issued by the Board of Investments ("BOI") in favor of TAPGC stating that the latter is registered as a "New Operator of Power Generating Plant for Exclusive Supply to Hi-Cement Corporation"; and its General Terms and Conditions stating, among others, that TAPGC is directed to report to the BOI's "Infrastructure and Service-Oriented Industries Department" only proves the fact of TAPGC's registration with the BOI and that it is required to report to the said department of the BOI. The documents fail to establish the nature of TAPGC's business activities, which is the true test of whether one falls under the category of "manufacturer/producer" or a "contractor" within the contemplation of law. The Court in Division further held that TAPGC falls squarely within the coverage of the term "producer/manufacturer" based on the activities it engages in. Thereafter, petitioners moved for the reconsideration of the Assailed Decision. 21 However, the Court in Division issued the Assailed Resolution dated December 2, 2016 denying petitioners' Motion for Reconsideration (of the Decision dated 29 July 2016). The dispositive portion of the Assailed Resolution reads: WHEREFORE , in view of the foregoing, petitioners' Motion for Reconsideration (of the Decision dated 29 July 2016) is DENIED for lack of merit. SO ORDERED . 22 In the Assailed Resolution, the Court in Division held that based on its primary purpose, TAPGC is a generation company engaged in the production and sale of electricity. It is a "manufacturer" engaged in the production and sale of electricity to its end user. Consequently, petitioners filed the present Petition for Review (En Banc) with the Court En Banc on December 22, 2016 praying for the reversal and setting aside of the Assailed Decision and the Assailed Resolution, and for the Notice of Assessment dated October 27, 2009 issued against respondent be declared valid and legal. 23 On March 1, 2017, respondent filed its Comment on/Opposition to (Re: Petitioner's Petition for Review dated 21 December 2016). 24 The Court En Banc resolved to give due course to the Petition for Review in a Resolution 25 dated March 21, 2017. TAIaHE On May 15, 2017, the case was submitted for decision 26 in view of the filing of the petitioners' Memorandum on May 3, 2017 27 and Memorandum (for the Respondent) on May 4, 2017. 28 The Issues Based on the Petition for Review (En Banc) , the following are the issues to be resolved by the Court En Banc : WHETHER THE RTC AND THE COURT IN DIVISION GRAVELY ERRED WHEN THEY DECLARED THAT PETITIONERS ERRED IN CHANGING THE BUSINESS CLASSIFICATION OF RESPONDENT FROM PRODUCER/MANUFACTURER TO CONTRACTOR/SERVICES; WHETHER THE RTC AND THE COURT IN DIVISION GRAVELY ERRED IN CANCELLING AND WITHDRAWING PETITIONERS' NOTICE OF ASSESSMENT DATED OCTOBER 27, 2009 IN THE AMOUNT OF PHP686,300.53. 29 Ultimately, the main issue to be resolved by the Court En Banc is whether TAPGC should be classified as a "Producer/Manufacturer" or as "Services-Other Co and/or Contractor" for purposes of imposing LBT. Petitioners' Arguments 30 On one hand, petitioners argue that they were correct in changing TAPGC's business classification from producer/manufacturer to contractor/services. According to petitioners, the very documents TAPGC presented ( i.e. , BOI Certificate of Registration, TAPGC General Terms and Conditions, Energy Regulatory Commission Certificate of Compliance) clearly show that TAPGC is a contractor and should be held liable for payment of taxes therefor. Further, the very fact that TAPGC undertakes services for a fee is sufficient for it to be considered a contractor. Finally, petitioners posit that other than TAPGC's self-serving allegations that it should be classified as a power producer/manufacturer, TAPGC failed to prove the same through its pleadings and evidence. Respondent's Counter-Arguments 31 On the other hand, TAPGC counters that its nature of business falls squarely under the definition and classification of a manufacturer/producer; and that the process by which TAPGC, through its power plant, produces electricity falls under the definition of "manufacturer." TAPGC posits that, in fact, the authority and license issued by the Energy Regulatory Commission ("ERC") is in itself proof that TAPGC falls under the category of a manufacturer/producer of electricity. TAPGC also argues that the doctrine of stare decisis compels a similar conclusion that TAPGC should be classified as a "manufacturer/producer." In City of Makati v. TAPGC (the "City of Makati case" ), 32 the Supreme Court affirmed the CTA's finding that TAPGC's nature of business falls within the category of "manufacturer/producer" and not "contractor." Considering there is no strong and compelling reason for the Court En Banc to rule otherwise, the doctrine of stare decisis compels a similar conclusion. In addition, TAPGC makes the following arguments: that the issue of its proper classification is ultimately a question of law that has long been settled; that judicial notice should be taken relative to the generation of electricity; and that TAPGC's classification as a "service contractor" is without factual and legal basis. The Ruling of the Court En Banc The Court En Banc rules in favor of respondent TAPGC for purposes of imposing LBT, TAPGC is a "Producer/Manufacturer." Insofar as the probative value of TAPGC's documents are concerned, the Court En Banc confirms the Court in Division's findings that the same merely prove TAPGC's registration with the BOI and obligation to report to the relevant BOI department. These documents do not sufficiently establish whether TAPGC's business activities, which is the basis for the imposition of LBT, can be classified as that of a contractor or a manufacturer. To determine the classification of a local business taxpayer, the nature of the business activity sought to be subjected to LBT must be taken into consideration. Section 131 (h) 33 of the 1991 LGC 34 and Section 3A.01 (t) 35 of the Revised Makati Revenue Code 36 define contractors while Section 131 (o) 37 of the 1991 LGC and Section 3A.01 (ll) 38 of the Revised Makati Revenue Code define manufacturers. Following the definitions provided under the aforementioned laws, the definitions of a contractor and a manufacturer can be simplified, thus: a contractor is one who is not subject to professional tax and whose activity consists essentially of the sale of services for a fee, and a manufacturer is one who, through a physical or chemical process, alters or combines a raw material for the purpose of sale or distribution to others. In both definitions, the performance of a service is essential. However, while a contractor is a more general term for any person who sells a service for a fee, a manufacturer is more specific and pertains to a person who performs the service which consists of altering or combining a raw material to develop a new product for sale or distribution to others. As applied to TAPGC, the Court En Banc upholds the finding of the Court in Division that the business activity of TAPGC consists of the following: . . . A careful perusal of the records would show that respondent accumulates bunker fuel as its raw material; that the said bunker fuel is fed into the diesel engine and is ignited by activating the diesel engine; that by activating the engine, the bunker fuel is converted into electricity by means of a chemical process referred to as combustion, thereby preparing the electricity for any specific uses of industry; and that the electricity produced was sold to Holcim Philippines, Inc. and the excess electricity was sold to the Wholesale Electricity Spot Market (WESM), which certainly, is not for respondent's own use or consumption. Also, without the chemical process of combustion, the bunker fuel could not, in their original form, perform the uses of electricity. . . 39 cDHAES Considering TAPGC alters the bunk fuel through combustion to create electricity which is then sold to Holcim Philippines, Inc. and to the Wholesale Electricity Spot Market, the Court En Banc holds that the Court in Division correctly classified TAPGC as a manufacturer. Accordingly, petitioners' subsequent reclassification of TAPGC from "Producer" to "Services-Other Co." has no basis in law and in fact. Petitioners' assessment for deficiency taxes, fees, and charges covering CYs 2005 to 2007 must thus fail. In view of the foregoing, the Court En Banc finds no cogent reason to set aside the findings and conclusions of the RTC and the Court in Division. WHEREFORE , the instant Petition for Review is DENIED for lack of Merit. The Decision promulgated on July 29, 2016 and the Resolution promulgated on December 2, 2016 by the Second Division are hereby AFFIRMED . TCAScE SO ORDERED. (SGD.) LOVELL R. BAUTISTA Associate Justice Roman G. del Rosario, P.J., Juanito C. Castaeda, Jr., Erlinda P. Uy, Caesar A. Casanova, Esperanza R. Fabon-Victorino, Cielito N. Mindaro-Grulla, Ma. Belen M. Ringpis-Liban and Catherine T. Manahan, JJ. , concur. Footnotes 1. Rollo , CTA EB No. 1570, Petition for Review (En Banc) ("PFR") , pp. 8-50, with annexes. 2. Records, CTA AC No. 144, Decision , pp. 165-178; penned by Associate Justice Juanito C. Castaeda, Jr., with Associate Justices Caesar A. Casanova and Amelia R. Cotangco-Manalastas concurring. 3. Id. , Resolution , pp. 197-207, penned by Associate Justice Juanito C. Castaeda, Jr., with Associate Justice Caesar A. Casanova concurring. 4. Rollo , PFR , Prayer , p. 20. 5. Records, PFR, Annex "B," RTC Decision , pp. 34-41; penned by Presiding Judge Perpetua Atal-Pao. 6. Records, Petition for Review, Annex "D," RTC Order , p. 50. 7. Docketed as Civil Case No. 10-312. 8. Records, PFR, Annex "B," RTC Decision , p. 41. 9. Records, Decision, Statement of Facts , p. 166. 10. An Act Providing for a Local Government Code of 1991, Republic Act No. 7160 (1991). 11. Records, Decision, Statement of Facts , p. 166. 12. Records, Decision, Statement of Facts , p. 166. 13. Id . 14. Id. at 166-167. 15. Id. at 167. 16. Id. , Petition for Review, Annex "B," RTC Decision, Dispositive Portion , p. 41. 17. Id. , Annex "C," Motion for Reconsideration , pp. 42-49. 18. Records, Petition for Review, Annex "D," RTC Order, Dispositive Portion , p. 50. 19. Id. , Petition for Review , pp. 8-64, with annexes. 20. Id., Decision, Dispositive Portion , p. 177; emphases retained. 21. Records, Motion for Reconsideration (of the Decision dated 29 July 2016) , pp. 179-187. 22. Id. , Assailed Resolution, Dispositive Portion , pp. 206-207; emphases retained. 23. Rollo , PFR, Prayer , p. 20. 24. Id. , Comment on/Opposition to (Re: Petitioner's Petition for Review dated 21 December 2016) , pp. 54-88, with annexes. 25. Rollo , Resolution , pp. 90-91. 26. Id. , Resolution , pp. 120-121. 27. Id. , Petitioners' Memorandum , pp. 92-105. 28. Id. , Memorandum (for the Respondent) , pp. 106-141. 29. Id. , PFR, Assignment of Errors , p. 14. 30. Id. , Petitioners' Memorandum, Arguments and Discussions , pp. 98-103. 31. Rollo , Respondent's Memorandum (for the Respondent), Arguments and Discussion , pp. 115-139. 32. G.R. No. 220001. See Rollo, Comment on/Opposition to (Re: Petitioner's Petition for Review dated 21 December 2016), Annex "B," Resolution , p. 69; Rollo, Comment on/Opposition to (Re: Petitioner's Petition for Review dated 21 December 2016), Annex "A," Resolution , p. 68. 33. The relevant provision reads: Sec. 131. Definition of Terms . When used in this Title, the term: xxx xxx xxx (h) "Contractor" includes persons, natural or juridical, not subject to professional tax under Section 139 of this Code, whose activity consists essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractor or his employees. As used in this Section, the term "contractor" shall include general engineering, general building and specialty contractors as defined under applicable laws; filling, demolition and salvage works contractors; proprietors or operators of mine drilling apparatus; proprietors or operators of dockyards; persons engaged in the installation of water system, and gas or electric light, heat, or power; proprietors or operators of smelting plants, engraving, plating, and plastic lamination establishments; proprietors or operators of establishments for repairing, repainting, upholstering, washing or greasing of vehicles, heavy equipment, vulcanizing, recapping and battery charging; proprietors or operators of furniture shops and establishments for planting or surfacing and recutting of lumber, and sawmills under contract to saw or cut logs belonging to others; proprietors or operators of dry cleaning or dyeing establishments, steam laundries, and laundries using washing machines; proprietors or owners of shops for the repair of any kind of mechanical and electrical devices, instruments, apparatus, or furniture and shoe repairing by machine or any mechanical contrivance; proprietors or operators of establishments or lots for parking purposes; proprietors or operators of tailor shops, dress shops, milliners and hatters, beauty parlors, barbershops, massage clinics, sauna, Turkish and Swedish baths, slenderizing and building salons and similar establishments; photographic studios; funeral parlors; proprietors or operators of hotels, motels, and lodging houses; proprietors or operators of arrastre and stevedoring, warehousing, or forwarding establishments; master plumbers, smiths, and house or sign painters; printers, bookbinders, lithographers; publishers except those engaged in the publication or printing of any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication and advertisements; business agents, private detective or watchman agencies, commercial and immigration brokers, and cinematographic film owners, lessors and distributors. 34. An Act Providing for a Local Government Code of 1991, Republic Act No. 7160 (1991). 35. The relevant provision reads: Sec. 3A.01. Definitions . When used in this Article: xxx xxx xxx (t) Contractor includes persons, natural or juridical, not subject to professional tax whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractor or his employees. As used in this Article, the term contractor shall include general engineering, general building and speciality contractors as defined under applicable laws; filling, demolition and salvage works contractors; proprietors or operators of mine drilling apparatus; proprietors or operators of computer services/rental; proprietors or operators or dockyards; persons engaged in the installation of water system, and gas or electric light, heat, or power; proprietors or operators of smelting plants; engraving, plating, and plastic lamination establishments; proprietors or operators of establishments for repairing, repainting, upholstering, washing or greasing of vehicles, heavy equipment, vulcanizing, recapping and battery charging; proprietors or operators of furniture shops and establishments for planting or surfacing and recutting of lumber, sawmills under contract to saw or cuts logs belonging to others; proprietors or operators of dry-cleaning or dyeing establishments, steam laundries, and laundries using washing machines; proprietors or owners of shops for the repair of any kind of mechanical and electrical devices, instruments, apparatus, or furniture and shoe repairing by machine or any mechanical contrivance; proprietors or operators of establishments or lots for parking purposes; proprietors or operator of tailor shops, dress shops, milliners and hatters, beauty parlors, barbershops, massage clinics, sauna Turkish and Swedish baths, slenderizing and building salons and similar establishments; photographic studios; funeral parlors; proprietors or operators of arrastre and stevedoring, warehousing, or forwarding establishments; master plumbers, smiths, and house or sign painters; printers, bookbinders, lithographers, publishers except those engaged in the publication or printing of any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of advertisements; business agents, private detective or watchman agencies, commercial and immigration brokers, and cinematographic film owners, lessors and distributors. 36. An Ordinance Adopting the Revised Makati Revenue Code, Makati City Ordinance No. 025-A-04 (2005). 37. The relevant provision reads: Sec. 131. Definition of Terms . When used in this Title, the term: xxx xxx xxx (o) "Manufacturer" includes every person who, by physical or chemical process, alters the exterior texture or form or inner substance of any raw material or manufactured or partially manufactured product in such manner as to have been put in its original condition, or who by any such process alters the quality of any such raw material or manufactured or partially manufactured products so as to reduce it to marketable shape or prepare it for any of the use of industry, or who by any such process combines any such raw material or manufactured or partially manufactured products with other materials or products of the same or of different kinds and in such manner that the finished products of such process or manufacture can be put to a special use or uses to which such raw material or manufactured or partially manufactured products in their original condition could not have been put, and who in addition alters such raw material or manufactured or partially manufactured products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and not for his own use or consumption. 38. The relevant provision reads: Sec. 3A.01. Definitions . When used in this Article: xxx xxx xxx (II) Manufacturer includes every person who, for the purpose of sale or distribution to others and not for his own use or consumption, by physical or chemical process: (1) alter the exterior texture of form, or inner substance of any raw material or manufactured or partially manufactured product in such manner as to prepare it for a special use or uses to which it could not have been put in its original condition; (2) alters the quality of any such raw material or manufactured or partially manufactured product so as to reduce it to marketable shape or prepare it for any use of industry; or (3) combines any raw material or manufactured or partially manufactured product with other materials or products of the same or different kind in such manner that the finished product of such process or manufacture can be put to a special use or uses to which such material, or manufactured or partially manufactured product in its original condition could not have been put. 39. Records , Decision , p. 174.