Capitol Wireless v.

Provincial Treasurer of Batangas (JGN)

Facts:
Capitol Wireless, Inc. (Capwire) is a Philippine corporation providing international telecommunications
services. Capwire entered into agreements with various local and foreign telecommunications companies
for the co-ownership and use of an international network of submarine cable systems.
These systems included the Asia Pacific Cable Network System (APCN), Brunei-Malaysia-Philippines
Cable Network System (BMP-CNS), Philippines-Italy (SEA-ME-WE-3 CNS), and Guam Philippines (GP-
CNS) systems.
Capwire claimed co-ownership only of the "Wet Segment" of the APCN. Capwire also claimed that the
landing stations and Segment E in Nasugbu, Batangas, are allegedly owned by the Philippine Long Distance
Telephone Corporation (PLDT). Capwire also argued that the Wet Segment was laid in international waters
and not within Philippine territory.
Capwire claims that as co-owner, it does not own any particular physical part of the cable system but,
consistent with its financial contributions, it owns the right to use a certain capacity of the said system. This
property right is allegedly reported in its financial books as "Indefeasible Rights in Cable Systems."
On May 15, 2000, for loan restructuring purposes, Capwire claims that "it was required to register the value
of its right," hence, it engaged an appraiser to "assess the market value of the international submarine cable
system and the cost to Capwire. Capwire then submitted a Sworn Statement of True Value of Real Properties
to the Provincial Treasurer's Office in Batangas, listing the market value of the submarine cable systems.
Consequently, the Provincial Assessor of Batangas issued Assessments of Real Property (ARP) against
Capwire, determining that the submarine cable systems were taxable real property.
Capwire contested this determination, arguing that the cable system lay outside Philippine territory. After
receiving a Warrant of Levy and a Notice of Auction Sale, Capwire filed a Petition for Prohibition and
Declaration of Nullity with the Regional Trial Court (RTC) of Batangas City.
The RTC dismissed the petition for failure to comply with the requirements of payment under protest and
appeal to the Local Board of Assessment Appeals (LBAA). Capwire appealed to the Court of Appeals the
CA ruled in favor of the RTC Batangas. Therefore, the petition at hand.
Issue:
1. Whether the case is cognizable by the administrative agencies and covered by the requirements in
Sections 226 and 229 of the Local Government Code which makes the dismissal of Capwire's
petition by the RTC proper?
2. Whether submarine wires or cables used for communications may be taxed like other real estate.

Ruling:

1. Yes.
The petition is denied. No error attended the ruling of the appellate court that the case involves factual
questions that should have been resolved before the appropriate administrative bodies.
In disputes involving real property taxation, the general rule is to require the taxpayer to first avail of
administrative remedies and pay the tax under protest before allowing any resort to a judicial action, except
when the assessment itself is alleged to be illegal or is made without legal authority.
For example, prior resort to administrative action is required when among the issues raised is an allegedly
erroneous assessment, like when the reasonableness of the amount is challenged, while direct court action
is permitted when only the legality, power, validity or authority of the; assessment itself is in question.
Stated differently, the general rule of a prerequisite recourse to administrative remedies applies when
questions of fact are raised, but the exception of direct court action is allowed when purely questions of law
are involved. Verily, what is alleged by Capwire in its petition as "the crux of the controversy," that is,
"whether or not an indefeasible right over a submarine cable system that lies in international waters can be
subject to real property tax in the Philippines," is not the genuine issue that the case presents - as it is already
obvious and fundamental that real property that lies outside of Philippine territorial jurisdiction cannot be
subjected to its domestic and sovereign power of real property taxation - but, rather, such factual issues as
the extent and status of Capwire's ownership of the system, the actual length of the cable/s that lie in
Philippine territory, and the corresponding assessment and taxes due on the same, because the public
respondents imposed and collected the assailed real property tax on the finding that at least a portion or
some portions of the submarine cable system that Capwire owns or co-owns lies inside Philippine territory.
Capwire's disagreement with such findings of the administrative bodies presents little to no legal question
that only the courts may directly resolve. Instead, Capwire argues and makes claims on mere assumptions
of certain facts as if they have been already admitted or established, when they have not, since no evidence
of such have yet been presented in the proper agencies and even in the current petition. As such, it remains
unsettled whether Capwire is a mere co-owner, not full owner, of the subject submarine cable and, if the
former, as to what extent; whether all or certain portions of the cable are indeed submerged in water; and
whether the waters wherein the cable/s is/are laid are entirely outside of Philippine territorial or inland
waters, i.e., in international waters. More simply, Capwire argues based on mere legal conclusions,
culminating on its claim of illegality of respondents' acts, but the conclusions are yet unsupported by facts
that should have been threshed out quasi-judicially before the administrative agencies. It has been held that
"a bare characterization in a petition of unlawfulness, is merely a legal conclusion and a wish of the pleader,
and such a legal conclusion unsubstantiated by facts which could give it life, has no standing in any court
where issues must be presented and determined by facts in ordinary and concise language

2. Yes.

Submarine or undersea communications cables are akin to electric transmission lines which this Court has
recently declared in Manila Electric Company v. City Assessor and City Treasurer of Lucena City, 37 as "no
longer exempted from real property tax" and may qualify as "machinery" subject to real property tax under
the Local Government Code. To the extent that the equipment's location is determinable to be within the
taxing authority's jurisdiction, the Court sees no reason to distinguish between submarine cables used for
communications and aerial or underground wires or lines used for electric transmission, so that both pieces
of property do not merit a different treatment in the aspect of real property taxation. Both electric lines and
communications cables, in the strictest sense, are not directly adhered to the soil but pass through posts,
relays or landing stations, but both may be classified under the term "machinery" as real property under
Article 415(5)38 of the Civil Code for the simple reason that such pieces of equipment serve the owner's
business or tend to meet the needs of his industry or works that are on real estate.
Even objects in or on a body of water may be classified as such, as "waters" is classified as an immovable
under Article 415(8)39 of the Code. A classic example is a boathouse which, by its nature, is a vessel and,
therefore, a personal property but, if it is tied to the shore and used as a residence, and since it floats on
waters which is immovable, is considered real property.40 Besides, the Court has already held that "it is a
familiar phenomenon to see things classed as real property for purposes of taxation which on general
principle might be considered personal property."41

Thus, absent any showing from Capwire of any express grant of an exemption for its lines and cables from
real property taxation, then this interpretation applies and Capwire's submarine cable may be held subject
to real property tax.

Minadano Bus Company v. The City Assessor

Facts:

The petitioner is Mindanao Bus Company. The City Assessor assessed the maintenance and repair
equipment of Mindanao Bus Company at P4,400, classifying them as real property subject to real estate
tax. The petitioner contested this assessment, arguing the equipment should not be considered real property.

The equipment includes a Hobart Electric Welder Machine, Storm Boring Machine, Lathe Machine with
Motor, Black and Decker Grinder, PEMCO Hydraulic Press, Battery Charger, and D-Engine Waukesha-
M-Fuel.

These machines are placed on cement or wooden platforms and are used in the company's repair shop.

The petitioner argued the machines are not real property and should not be subject to real estate tax but The
Board of Tax Appeals upheld the City Assessor's decision. The petitioner sought a review from the Court
of Tax Appeals, which also sustained the assessment.

Hence, the petition at hand.

Issue:

Whether or not the subject equipment/machineries used in the company’s repair shop may be considered
as real property.

Ruling:

No.

Respondents contend that said equipments, tho movable, are immobilized by destination, in accordance
with paragraph 5 of Article 415 of the New Civil Code which provides:

Art. 415. — The following are immovable properties:

xxx xxx xxx

(5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an
industry or works which may be carried on in a building or on a piece of land, and which tend directly to
meet the needs of the said industry or works. (Emphasis ours.)

Note that the stipulation expressly states that the equipment are placed on wooden or cement platforms.
They can be moved around and about in petitioner's repair shop. In the case of B. H. Berkenkotter vs. Cu
Unjieng, 61 Phil. 663, the Supreme Court said:

Article 344 (Now Art. 415), paragraph (5) of the Civil Code, gives the character of real property to
"machinery, liquid containers, instruments or implements intended by the owner of any building or land for
use in connection with any industry or trade being carried on therein and which are expressly adapted to
meet the requirements of such trade or industry."

If the installation of the machinery and equipment in question in the central of the Mabalacat Sugar Co.,
Inc., in lieu of the other of less capacity existing therein, for its sugar and industry, converted them into real
property by reason of their purpose, it cannot be said that their incorporation therewith was not permanent
in character because, as essential and principle elements of a sugar central, without them the sugar central
would be unable to function or carry on the industrial purpose for which it was established. Inasmuch as
the central is permanent in character, the necessary machinery and equipment installed for carrying on the
sugar industry for which it has been established must necessarily be permanent. (Emphasis ours.)

So that movable equipments to be immobilized in contemplation of the law must first be "essential and
principal elements" of an industry or works without which such industry or works would be "unable to
function or carry on the industrial purpose for which it was established." We may here distinguish, therefore,
those movable which become immobilized by destination because they are essential and principal
elements in the industry for those which may not be so considered immobilized because they are merely
incidental, not essential and principal. Thus, cash registers, typewriters, etc., usually found and used in
hotels, restaurants, theaters, etc. are merely incidentals and are not and should not be considered
immobilized by destination, for these businesses can continue or carry on their functions without these
equity comments. Airline companies use forklifts, jeep-wagons, pressure pumps, IBM machines, etc. which
are incidentals, not essentials, and thus retain their movable nature. On the other hand, machineries of
breweries used in the manufacture of liquor and soft drinks, though movable in nature, are immobilized
because they are essential to said industries; but the delivery trucks and adding machines which they usually
own and use and are found within their industrial compounds are merely incidental and retain their movable
nature.

Similarly, the tools and equipments in question in this instant case are, by their nature, not essential and
principle municipal elements of petitioner's business of transporting passengers and cargoes by motor
trucks. They are merely incidentals — acquired as movables and used only for expediency to facilitate
and/or improve its service. Even without such tools and equipments, its business may be carried on, as
petitioner has carried on, without such equipments, before the war. The transportation business could be
carried on without the repair or service shop if its rolling equipment is repaired or serviced in another shop
belonging to another.

The law that governs the determination of the question at issue is as follows:

Art. 415. The following are immovable property:

(5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an
industry or works which may be carried on in a building or on a piece of land, and which tend directly to
meet the needs of the said industry or works; (Civil Code of the Phil.)

Aside from the element of essentiality the above-quoted provision also requires that the industry or works
be carried on in a building or on a piece of land. Thus in the case of Berkenkotter vs. Cu Unjieng, supra,
the "machinery, liquid containers, and instruments or implements" are found in a building constructed on
the land. A sawmill would also be installed in a building on land more or less permanently, and the sawing
is conducted in the land or building.

But in the case at bar the equipments in question are destined only to repair or service the transportation
business, which is not carried on in a building or permanently on a piece of land, as demanded by the law.
Said equipments may not, therefore, be deemed real property.

Resuming what we have set forth above, we hold that the equipments in question are not absolutely essential
to the petitioner's transportation business, and petitioner's business is not carried on in a building, tenement
or on a specified land, so said equipment may not be considered real estate within the meaning of Article
415 (c) of the Civil Code.

WHEREFORE, the decision subject of the petition for review is hereby set aside and the equipment in
question declared not subject to assessment as real estate for the purposes of the real estate tax. Without
costs.