FELS Energy, Inc. vs.

The Province of Batangas

(G.R. No. 168557; Feb. 16, 2007)

Facts:

The National Power Corp. (NPC) entered into a lease contract with Polar Energy, Inc.
(POLAR) over a 3x30 MW diesel engine power barges moored in a bay in Batangas. Art. 10 of
the denominated Energy Conversion Agreement (Agreement) stated that taxes imposed including
all real estate taxes and assessments and other charges in respect of the charges shall be the
responsibility of NAPOCOR. POLAR subsequently assigned its rights in the Agreement to FELS
Energy, Inc. (FELS).

Sometime in 1995, FELS received an assessment of real property taxes on the power
barges from Provincial Assessor of Batangas. FELS then referred the matter to NPC reminding it
of its obligation under the Agreement to pay Real Estate Taxes and gave the latter full power and
authority to represent regarding said assessment by the Provincial Assessor. A month after, NPC
sought for a Motion for Reconsideration of the Provincial Assessors decision. It was denied thus
prompted NPC to file a petition with the Local Board of Assessment Appeals (LBAA) and it
even subsequently filed a Manifestation informing LBAA that the DOF had rendered an opinion
where it is clearly stated that power barges are not real property subject to real property
assessment. LBAA denied the petition. LBAA ruled that the power plant facilities, while they
may be classified as movable or personal property, are nevertheless considered real
property for taxation purposes because they are installed at a specific location with a
character of permanency. The LBAA also pointed out that the owner of the barges-FELS, a
private corporation-is the one being taxed, not NPC. A mere agreement making NPC liable for
said taxes will not justify the exemption of FELS for such privilege can only be granted to NPC
and cannot be extended to FELS.

Aggrieved, FELS appealed to the Central Board of Assessment (CBAA). In the

meantime, the Provincial Treasurer of Batangas issued a Notice of Levy and Warrant by Distraint
over the power barges seeking to collect said real property taxes. FELS filed a motion to lift levy
which was subsequently approved by the CBAA in order not to pre-empt nor render nugatory
any judgment the board would issue. In 2000, CBAA issued a decision finding the barges exempt
from real property taxes by reason that the power barges belong to NPC and since it is actually,
directly and exclusively used by it then it is covered under the exemption under Sec. 234 (C) of
the LGC. However, in a subsequent change of opinion, CBAA issued a resolution reversing its
earlier decision finding FELS liable for said tax. MR filed but denied.

Dissatisfied, FELS and NPC filed a separate Petition for Review with the CA which was
subsequently consolidated. Subsequently, the Twelfth Division of the CA rendered a judgment on
one of the petitions on the ground of prescription. The other petition was also dismissed holding
that the right to question the assessment of the Provincial Assessor had already prescribed
upon the failure of FELS to appeal the disputed assessment to the LBAA within the period
prescribed by law. Since FELS had lost the right to question the assessment, the right of the
Provincial Government to collect the tax was already absolute.
ISSUES:
(1) WON the right of the petitioner to question said real property assessments have
already prescribed.

(2) WON the power barges are personal properties NOT subject to Real Property taxes.

(3) Who has ownership of the power barges.

HELD:

(1) YES, the right of the petitioner to question said assessment have already prescribed.
Sec. 226 of R.A. 7160 (LGC) provides that any owner or person having legal interest
in the property who is not satisfied with the action of the provincial, city or municipal
assessor in the assessment of his property may, within sixty (60) days from the date
of receipt of the written notice of assessment, appeal to the Board of Assessment
Appeals of the province or city by filing a petition under oath in the form prescribed
for the purpose. Instead of appealing to the Board of Assessment Appeals (as
stated in the notice), NPC opted to file a motion for reconsideration of the
Provincial Assessor's decision, a remedy not sanctioned by law. It only means that
if the taxpayer fails to appeal in due course, the right of the local government to
collect the taxes due with respect to the taxpayer's property becomes absolute upon
the expiration of the period to appeal. It also bears stressing that the taxpayer's failure
to question the assessment in the LBAA renders the assessment of the local assessor
final, executory and demandable, thus, precluding the taxpayer from questioning the
correctness of the assessment, or from invoking any defense that would reopen the
question of its liability on the merits. Elementary is the rule that the perfection of
an appeal within the period therefor is both mandatory and jurisdictional, and
failure in this regard renders the decision final and executory.

(2) No, said power barges are REAL PROPERTY which are therefore subject Real
Property tax. The Supreme Court cited Consolidated Edison Company of New York,
Inc., et al. v. The City of New York, et al. a foreign case whereby the Supreme Court
of New York held that fuel oil barges which supplied fuel oil to the power plant
barges, and the accessory equipment mounted on the barges were subject to real
property taxation. Moreover, Supreme Court cited Art. 415 (9) of the NCC providing
that [d]ocks and structures which, though floating, are intended by their nature
and object to remain at a fixed place on a river, lake, or coast" are considered
immovable property. Thus, power barges are categorized as immovable property
by destination, being in the nature of machinery and other implements intended by
the owner for an industry or work which may be carried on in a building or on a
piece of land and which tend directly to meet the needs of said industry or work.
(3) FELS (as assignee of POLAR) owns the power barges and NOT NPC, therefore are
liable for RPT. Sec. 2.11, Art. 2 of the Agreement provides that:

OWNERSHIP OF POWER BARGES. POLAR shall own the Power Barges

and all the fixtures, fittings, machinery and equipment on the Site used in
connection with the Power Barges which have been supplied by it at its own
cost. POLAR shall operate, manage and maintain the Power Barges for the
purpose of converting Fuel of NAPOCOR into electricity.

Moreover, Sec. 5.5 Of Art. 5 of the Agreement provides that it shall POLAR who
shall undertake to OPERATE THE POWER BARGES. It is a basic rule that
obligations arising from a contract have the force of law between the parties. Not
being contrary to law, morals, good customs, public order or public policy, the parties
to the contract are bound by its terms and conditions. The mere undertaking of
petitioner NPC under Section 10.1 of the Agreement, that it shall be responsible
for the payment of all real estate taxes and assessments, does not justify the
exemption. The privilege granted to petitioner NPC cannot be extended to FELS. The
covenant is between FELS and NPC and does not bind a third person not privy
thereto, in this case, the Province of Batangas. The law does not look with favor on
tax exemptions and the entity that would seek to be thus privileged must justify it by
words too plain to be mistaken and too categorical to be misinterpreted.Thus,
applying the rule of strict construction of laws granting tax exemptions, and the
rule that doubts should be resolved in favor of provincial corporations, we hold that
FELS is considered a taxable entity. This consideration is consistent with the State
policy to guarantee the autonomy of local governments and the objective of the
Local Government Code that they enjoy genuine and meaningful local autonomy to
empower them to achieve their fullest development as self-reliant communities.