RADIO COMMUNICATIONS OF THE PHILIPPINES, INC. (RCPI), PETITIONER, VS. PROVINCIAL ASSESOR OF SOUTH COTABATO, PROVINCIAL TREASURER OF SOUTH COTABATO, MUNICIPAL ASSESSOR OF TUPI, S…

Radio Communications of the Philippines versus Provincial Assessor of South Cotabato

The Case

This is a petition for review brought by Radio Communications of the Philippines, Incorporated, which I will call RCPI, against the Provincial Assessor of South Cotabato, the Provincial Treasurer of South Cotabato, the Municipal Assessor of Tupi, and the Municipal Treasurer of Tupi. RCPI asks the Supreme Court to set aside the decision of the Court of Appeals which held it liable for real property tax on its radio station building, its machinery shed, and its relay station tower, while exempting its radio equipment and machinery mounted on that tower. The case matters because it is the Court's clearest statement that an "in lieu of all taxes" clause in a franchise does not erase the very same section's express command that the grantee pay real estate tax, and because it gathers the rules on strict construction of tax exemptions and on depreciation allowance for machinery.

Procedural History

The municipal treasurer of Tupi, South Cotabato assessed RCPI for real property taxes from 1981 to 1985 and demanded payment. RCPI protested before the Local Board of Assessment Appeals of Koronadal, South Cotabato. The Local Board affirmed the assessments as valid, holding that the properties were real property for purposes of real property taxation and that the "in lieu of all taxes" clause did not exempt them. RCPI appealed to the Central Board of Assessment Appeals, which dismissed the appeal and affirmed the Local Board. RCPI then filed a petition for review before the Court of Appeals, which modified the ruling: it declared RCPI exempt from tax on its machinery and radio equipment mounted as accessories to the relay tower, but affirmed the tax on the radio station building, the machinery shed, and the relay station tower. RCPI filed a partial motion for reconsideration, which the appellate court denied. RCPI then came to the Supreme Court by petition for review under Rule 45.

Facts

In 1957, Republic Act Number 2036 granted RCPI a fifty-year franchise to establish radio stations for domestic telecommunications. In 1964, Republic Act Number 4054 amended the franchise. Section 14 of the amended franchise contains, in one breath, two apparently opposing commands: the grantee shall pay the same taxes as others on real estate, buildings, and other personal property, yet the grantee is exempt from taxes on radio equipment, machinery, and spare parts needed in its business, and a franchise tax of one and one-half percent of gross receipts is paid "in lieu of any and all taxes" of any kind levied by any authority.

On 10 June 1985, the municipal treasurer of Tupi assessed RCPI for real property taxes from 1981 to 1985, demanding 166,810 pesos based on four tax declarations: the radio station building in Barangay Kablon, the machinery shed, the radio relay station tower and accessories one hundred feet high, and two units of machinery described as a lister generating set.

RCPI protested, arguing that the assessed properties were personal property and exempt; that even if real property, they were not used for manufacturing, commercial, mining, industrial, or agricultural purposes as the law on machinery required; that its franchise exempted it from all taxes other than the franchise tax; that any deviation would violate the non-impairment clause; and that the assessed values ignored depreciation since acquisition in the 1960s. The provincial assessor opposed on all points. RCPI submitted no evidence of acquisition date, cost, or condition to support depreciation.

Issues

• Whether or not the "in lieu of all taxes" clause in RCPI's franchise exempts its radio relay station tower, radio station building, and machinery shed from real property tax.
• Whether or not the tax declarations and assessments are void for failure to include a depreciation allowance.

Applicable Provisions

Section 14 of Republic Act Number 2036, as amended by Republic Act Number 4054, provides:

Sec. 14. In consideration of the franchise and rights hereby granted and any provision of law to the contrary notwithstanding, the grantee shall pay the same taxes as are now or may hereafter be required by law from other individuals, copartnerships, private, public or quasi-public associations, corporations or joint stock companies, on real estate, buildings and other personal property except radio equipment, machinery and spare parts needed in connection with the business of the grantee, which shall be exempt from customs duties, tariffs and other taxes, as well as those properties declared exempt in this section. In consideration of the franchise, a tax equal to one and one-half per centum of all gross receipts from the business transacted under this franchise by the grantee shall be paid to the Treasurer of the Philippines each year, within ten days after the audit and approval of the accounts as prescribed in this Act. Said tax shall be in lieu of any and all taxes of any kind, nature or description levied, established or collected by any authority whatsoever, municipal, provincial or national, from which taxes the grantee is hereby expressly exempted.

This is the provision at the heart of the case: its first sentence imposes real estate tax, its "in lieu of all taxes" sentence seems to remove it, and the Court must reconcile the two.

Section 29 of Presidential Decree Number 464, the Real Property Tax Code, provides:

Depreciation Allowance for Machinery. - For purposes of assessment, a depreciation allowance shall be made for machinery at a rate not exceeding ten per cent of its original cost or its replacement or reproduction cost (new), as the case may be, for each year of use: Provided, That the remaining value for all kinds of machinery shall be fixed at not less than twenty per cent of such original or replacement cost for so long as the machinery is useful and in operation.

This provision confines depreciation allowance to machinery, which defeats RCPI's claim that its building, shed, and tower were voidly assessed without depreciation.

Ruling

On the first issue, the Court held that RCPI is liable for real property tax on the tower, the building, and the shed. The Court gave effect to both sentences of Section 14: the first sentence expressly states that RCPI "shall pay the same taxes as are now or may hereafter be required by law from other individuals, copartnerships, private, public or quasi-public associations, corporations or joint stock companies, on real estate, buildings and other personal property." The "in lieu of all taxes" clause cannot negate the first sentence of the same section; real estate tax is the exception to that clause. The Court also noted that the Local Government Code of 1991 withdrew existing tax exemptions as to local taxes, and that later telecommunications franchises uniformly impose real estate tax, so RCPI cannot invoke the equality of treatment clause without standing out as the only exempt telecommunications company. Exemptions, the Court stressed, are strictly construed against the taxpayer and liberally in favor of the taxing authority; the taxpayer must justify the exemption by words too plain to be mistaken and too categorical to be misinterpreted.

On the second issue, the Court held that even if it considered the depreciation argument, depreciation allowance under the Real Property Tax Code applies only to machinery and not to real property. The building, shed, and tower are not machinery, so no depreciation allowance was required.

Doctrine

First, an "in lieu of all taxes" clause in a franchise does not exempt the franchisee from real estate tax where the same section of the franchise expressly requires the grantee to pay the same taxes as others on real estate and buildings; the Court must give effect to both, and the real estate tax stands as an exception to the clause. Second, tax exemptions are strictly construed against the taxpayer and liberally in favor of the taxing authority; the taxpayer must justify the exemption by words too plain to be mistaken and too categorical to be misinterpreted. Third, depreciation allowance for assessment purposes applies only to machinery, not to buildings or other real property.

Disposition

The Supreme Court denied the petition and affirmed the decision of the Court of Appeals; RCPI lost and remained liable for real property tax on its radio station building, machinery shed, and relay station tower, while its radio equipment and machinery mounted on the tower stayed exempt.

Remember This

Memorize this line: the "in lieu of all taxes" clause cannot negate the first sentence of the same section imposing real estate tax, so real estate tax is the exception. Examiners use this case to test strict construction of tax exemptions, the reconciliation of conflicting clauses within one franchise provision, and the rule that depreciation allowance covers machinery only.