2nd Indorsement

February 17, 2004 Respectfully returned, to the ICO- Regional Director for Local Government Finance, CARAGA Administrative Region, 2nd Floor Aguilar Building, Pili Drive, Butuan City, his within preceding Indorsement dated January 19, 2004, relative to the letter dated December 9, 2003 of the City Assessor of Bislig City, requesting opinion on whether the taxable assessment made by that office on mobile machineries and equipment owned by PICOP Resources, Inc. (PRI for brevity) is in order. The City Assessor submitted that during the 2002 General Revision of Real Property Assessments, his office declared and assessed the subject mobile machineries as taxable. He contends that these machineries fall under the definition of machinery and therefore considered real property subject to real property tax. PRI on the other hand, in its letter dated November 24, 2003 citing CBAA Case No. M-12 dated August 23, 2002, copy attached, argued that the Journal and Records of the House of Representatives Proceedings and Debates, 4th Regular Session of Congress contain the discussions and deliberations between then Congressmen E. Javier of Antique and A. Aquino of Quezon City, wherein they clarified that mobile machineries like sewing machines, forklifts, cranes, bulldozers and similar equipment could not be classified as real property if they can be mobilized or can be moved from the place of production or from the place of activity. Article 290 (o) of the Implementing Rules and Regulations (IRR) of the Local Government Code (LGC) of 1991 defined machinery as follows: Article 290. Definitions. When used in this Title; the term: x x xx xx

(o) Machinery embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus, which may or may not be attached, permanently or temporarily to the real property. Physical facilities for production, installations and appurtenant service facilities, those which are mobile, self powered, or self propelled and those not permanently attached to the real property shall be classified as real property provided that: (1) They are actually, directly, and exclusively used to meet the needs of the particular industry, business, or activity; and

(2) By their very nature and purpose are designed for, or necessary to manufacturing, mining, logging, commercial, industrial, or agricultural purposes. This Bureau, under its 1st Indorsement dated May 20, 1996, copy attached, in the request of National Power Corporation (NPC) for the exemption from real property tax of its Turbine Barges, rendered the following opinion: Although the above definition of machinery includes those which are mobile, self powered, or self propelled, the subject turbine barges, for practical reasons, could not be considered as real property, in the same manner that other mobile machineries/equipment such as trucks, buses, ships, airplanes, and the like, which requires registration with the proper agency of the government, could not be considered as real property. (Underscoring supplied) In CBAA Case No. M-14 in the case of Taganito Mining Corporation and Hinatuan Mining Corporation vs. the Provincial Assessor of Surigao del Norte and the Local Board of Assessment Appeals (LBAA) of Surigao del Norte, the Central Board of Assessment Appeals (CBAA) held, as follows: Section 199 (o) of R.A. 7160 seems to convey that all things which are actually, directly, and exclusively used to meet the needs of the particular industry, business or activity and which by their very nature and purpose are designed for, or necessary to its manufacturing, mining, logging, commercial, industrial or agricultural purposes should be considered machinery for purposes of the real property tax. On the other hand, Article 415 of the New Civil Code provides that, in order for an apparently movable machinery to be immovable, the intention of the owner thereof to make that machinery immovable must be manifest. Dumptrucks or haulers are similar in nature to delivery trucks and yet the latter are never considered real property for purposes of the real property tax. Not all things which are actually, directly and exclusively used to meet the needs of a particular industry, business or activity are considered real property for purposes of the real property tax. Adding machines and calculators, for example, are always necessary to any kind of business, yet they are not subject to the payment of real property tax.

Centralized airconditioning systems have the same functions as windowtype airconditioning units and yet the latter are never considered as real property for purposes of the real property tax because window-type airconditioning units could be moved from place to place, while centralized airconditioning systems could not be. Respondent Assessor said that subject properties were not among those exempted from payment of the real property tax as enumerated under Section 234 of R.A. 7160. Of course, they are not among those listed as exempted from payment of the real property tax, for the simple reason that they are not real properties in the first place. Respondent Assessor also said that, per verification made by Respondent from the Land Transportation Office, this city, subject machineries were not registered in their office and so, said dumptrucks, etc. cannot be used outside/beyond the companys jobsite. This facts gives us more reason to believe that said machineries are actually, directly and exclusively used right in their area of operation by the herein Petitioner Company. To this, we say that Respondent Assessor himself correctly quoted Sections 3 (a) and 5 of R.A. 4136, otherwise known as the Land Transportation and Traffic Code: only motor vehicles using any public highway of the Philippines shall be registered as such. The vehicles in question could be transferred from place to place on board another conveyance which may be registered with the Land Transportation Office. Besides, non-registration does not convert a personal property, such as a dumptruck, into a real property for purpose of the realty tax. In view of the foregoing, we find for the Petitioners-Appellants. The properties in question are personal in nature and, therefore, not subject to payment of the real property tax. To uphold the contention of Respondent-Appellee Provincial Assessor would be to give him extra wide discretion which could be used as an avenue for graft. This is precisely what the Congress of the Philippines seeked to prevent. WHEREFORE, premises considered, the Order of the Local Board of Assessment Appeals of May 30, 2001 is hereby SET ASIDE; and the Respondent-Appellee Provincial Assessor of Surigao del Norte is hereby ORDERED to cancel, as void ab initio, Tax Declaration Nos. 8255 to 8330 for TAGANITO MINING CORPORATIONs dumptrucks, bulldozers, payloaders, etc., at Taganito, Claver, Surigao del Norte, x xx

Relatedly, under Local Finance Circular No. 001-2002, dated April 25, 2002, the Department of Finance made the following clarification: Machinery that is not permanently attached to real estate is: a. Subject to the real property tax if it is an essential and principal element of an industry, work or activity without which such industry, work or activity cannot function; and b. Not subject to the real property tax if it is not an essential and principal element of an industry, work or activity. Based on the above discussion, and applying the abovequoted CBAA Decision to the instant case, this Bureau holds the view that the subject mobile machineries owned by PICOP Resources, Inc. do not fall within the definition of machineries which can be considered real property subject to real property tax. Accordingly, the herein machineries should be dropped from the roll of taxable properties and entered instead in the roll of exempt properties. Be guided accordingly.

MA. PRESENTACION R. MONTESA Executive Director

MNS/jo CCS#024-04 PRI-CARAGA