CALTEX (PHILIPPINES) INC., PETITIONER, VS. CENTRAL BOARD OF ASSESSMENT APPEALS AND CITY ASSESSOR OF PASAY, RESPONDENTS.

Caltex versus Central Board of Assessment Appeals

The Case

This is a petition for certiorari filed by Caltex (Philippines) Inc. against the Central Board of Assessment Appeals and the City Assessor of Pasay. Caltex asks the Supreme Court to set aside the Board's ruling that the machinery and equipment it installed in its gasoline stations are taxable real property. The case matters because it draws the line between personal property and real property for purposes of the realty tax, and it tells us that the Civil Code definitions of real and personal property do not control when the Real Property Tax Code speaks.

Procedural History

The City Assessor of Pasay City characterized the gas station equipment and machinery as taxable realty, with the realty tax amounting to 4,541 pesos and 10 centavos annually. The city board of tax appeals ruled that the items are personalty. The assessor appealed to the Central Board of Assessment Appeals. The Board, in its decision of June 3, 1977, held that the machines and equipment are real property under the Real Property Tax Code, Presidential Decree No. 464, and that the Civil Code definitions of real and personal property do not apply. The Board denied Caltex's motion for reconsideration in its resolution of January 12, 1978, a copy of which was received by its lawyer on April 2, 1979. On May 2, 1979, Caltex filed this certiorari petition. The Supreme Court noted that the Real Property Tax Code does not provide for review of the Board's decision by the Court, so the only remedy is the special civil action of certiorari.

Facts

Caltex installed machinery and equipment in its gas stations located on leased land. These consist of underground tanks, elevated tanks, water tanks, gasoline pumps, computing pumps, water pumps, car washers, car hoists, truck hoists, air compressors, and tireflators. The underground tank is dug about six feet deep, a few meters from the shed, to prevent conflagration. It is connected by a steel pipe to the gasoline pump, and the pump is affixed to a cement pad embedded in the pavement under the shed.

Caltex loans these machines and equipment to gas station operators under a lease agreement. The operators must return them on demand in good condition, ordinary wear and tear excepted. Caltex retains ownership during the term of the lease, and the lessor of the land does not become owner of the equipment.

The City Assessor of Pasay treated the equipment as taxable realty. The city board of tax appeals ruled they were personalty, but the Central Board of Assessment Appeals reversed and held them to be real property under the Real Property Tax Code.

Issues

• Whether or not the pieces of gas station equipment and machinery are subject to realty tax.
• Whether or not the Court of Tax Appeals has exclusive appellate jurisdiction over the case.

Applicable Provisions

Section 38 of the Real Property Tax Code provides:

SEC. 38. Incidence of Real Property Tax. - There shall be levied, assessed and collected in all provinces, cities and municipalities an annual ad valorem tax on real property, such as land, buildings, machinery and other improvements affixed or attached to real property not hereinafter specifically exempted.

This is the taxing provision under which the assessor imposed the realty tax on Caltex's equipment.

Section 3, paragraph k of the Real Property Tax Code provides:

k) Improvements - is a valuable addition made to property or an amelioration in its condition, amounting to more than mere repairs or replacement of waste, costing labor or capital and intended to enhance its value, beauty or utility or to adapt it for new or further purposes.

This defines the improvements that fall within the realty tax.

Section 3, paragraph m of the Real Property Tax Code provides:

m) Machinery - shall embrace machines, mechanical contrivances, instruments, appliances and apparatus attached to the real estate. It includes the physical facilities available for production, as well as the installations and appurtenant service facilities, together with all other equipment designed for or essential to its manufacturing, industrial or agricultural purposes.

This defines machinery as attached to the real estate, which is the core of the dispute.

Ruling

On the first issue, the Court held that the equipment and machinery are taxable improvements and machinery. They are appurtenances to the gas station building or shed owned by Caltex, which is itself subject to realty tax. They are fixtures necessary to the operation of the gas station, for without them the gas station would be useless, and they have been attached or affixed permanently to the gas station site or embedded therein.

Caltex invoked the rule that machinery movable in its nature only becomes immobilized when placed in a plant by the owner of the property or plant, but not when placed by a tenant or one with only a temporary right, unless acting as agent of the owner. The Court held that this ruling interprets paragraph 5 of Article 415 of the Civil Code on machinery that becomes real property by destination, and that it does not govern here. The question here is whether equipment permanently affixed by Caltex to its gas station and pavement, which are indubitably taxable realty, should be subject to the realty tax. The Court noted that improvements on land are commonly taxed as realty even though for some purposes they might be considered personalty.

On the second issue, the Court held that the Court of Tax Appeals does not have exclusive appellate jurisdiction. When the Tax Court was created in 1954, there was as yet no Central Board of Assessment Appeals. The Tax Court's jurisdiction over decisions of provincial or city boards of assessment appeals referred to the local boards, not the Central Board, which under the Real Property Tax Code has appellate jurisdiction over the local boards and is therefore in the same category as the Tax Court. Since the Code does not provide for review of the Board's decision by the Court, the only remedy is certiorari.

Doctrine

For purposes of the realty tax, machinery and equipment permanently affixed to a taxable real property, and necessary to the operation of the business conducted thereon, are taxable improvements and machinery under the Real Property Tax Code. The definitions of real and personal property in the Civil Code do not control realty taxation. The rule in Davao Saw Mill versus Castillo, that machinery placed by a lessee on leased land remains personalty, applies to the Civil Code concept of real property by destination and not to the tax treatment of improvements affixed by the owner to its own taxable realty. The remedy to review a decision of the Central Board of Assessment Appeals is a petition for certiorari, because the Real Property Tax Code provides no appeal to the Supreme Court.

Disposition

The Supreme Court affirmed the decision and resolution of the Central Board of Assessment Appeals and dismissed the petition for certiorari for lack of merit, without costs.

Remember This

The single line to memorize: improvements and machinery permanently affixed to taxable realty, and essential to the business, are taxable as real property even if movable in nature. Examiners use this case to test the distinction between the Civil Code definitions of real property and the tax definitions under the Real Property Tax Code, and to test the proper remedy from a Central Board of Assessment Appeals ruling.