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EUFEMIA ALMEDA and ROMEL ALMEDA v. BATHALA MARKETING INDUSTRIES

FACTS:

The case involves a dispute between respondent Bathala Marketing Industries, Inc. (respondent) and petitioners Eufemia and Romel Almeda (petitioners) regarding the interpretation of their contract of lease. The contract, which was renewed in May 1997, contained provisions for rental rate adjustment in case of increased assessment or taxes on the property, as well as a provision for rental adjustment in the event of extraordinary inflation or devaluation of the Philippine currency.

After the lessor, Ponciano L. Almeda, passed away, petitioners took over and demanded the payment of Value Added Tax (VAT) and an increase in rental from respondent. However, respondent opposed these demands and continued to pay the stipulated amount in the contract. Failing to reach an agreement, respondent filed an action for declaratory relief seeking the correct interpretation of the lease contract provisions.

In response, petitioners filed an action for ejectment, rescission, and damages against respondent. However, they later dismissed this action and refiled it before a different court. The trial court ruled in favor of respondent, declaring that respondent was not liable for VAT and rental adjustment. The trial court also ordered petitioners to refund the amount of VAT paid by respondent.

The Court of Appeals affirmed the trial court's decision, although it deleted the order for refund. Dissatisfied with the ruling, petitioners appealed to the Supreme Court, raising several issues, including whether declaratory relief was proper, whether respondent was liable for VAT, and whether rental adjustment was justified.

ISSUES:

  1. Whether the action for declaratory relief is proper.

  2. Whether respondent is liable to pay 10% VAT pursuant to Republic Act (RA) 7716.

  3. Whether the amount of rentals due to the petitioners should be adjusted by reason of extraordinary inflation or devaluation.

  4. Whether the lessor can pass on the 10% VAT to the lessee.

  5. Whether the lessee is liable for rental adjustment due to extraordinary inflation or devaluation.

RULING:

  1. The action for declaratory relief is proper. The requisites of an action for declaratory relief are present in the case. There is a deed (contract of lease) whose terms and validity are doubtful and require judicial construction. There is also an actual justiciable controversy between the parties whose interests are adverse. Moreover, there is no breach of the contract at the time the petition was filed and there is no other adequate relief available to the parties.

  2. The respondent is not liable to pay 10% VAT. The court affirms the finding of the appellate court that the lessor is primarily liable for the payment of VAT and may choose to pass it on to the lessee or absorb it. The actual shifting of the tax burden to the lessee is optional and the word "may" in the statute denotes that it is directory and permissive in nature. Therefore, the respondent is not automatically liable to pay 10% VAT.

  3. The court agrees with the trial court and the appellate court that there is no merit in petitioners' claim for rental adjustment due to extraordinary inflation or devaluation. There is no showing of extraordinary inflation or devaluation that would warrant an adjustment in the rental amount.

  4. The lessor is not allowed to pass on the 10% VAT to the lessee. Despite the fact that the lessor had the option to charge the lessee with the 10% VAT, the lessor did not collect the VAT from the lessee after the execution of the new contract of lease. As a result, the lessor is estopped from shifting the burden of paying the VAT to the lessee.

  5. The lessee is not liable for rental adjustment due to extraordinary inflation or devaluation. The provision in the contract states that the lessee can only be held liable for new taxes imposed after the effectivity of the contract and only if they pertain to the leased premises. Since the VAT was not considered a "new tax" in May 1997, it does not fall within the coverage of the provision. Additionally, the factual circumstances do not constitute extraordinary inflation or devaluation that would justify a rental adjustment.

PRINCIPLES:

  • An action for declaratory relief is proper when the subject matter of the controversy is a deed, will, contract, or other written instrument, and the terms and validity of said document are doubtful and require judicial construction. There must be no breach of the document and an actual justiciable controversy between parties whose interests are adverse. Adequate relief must not be available through other means or forms of action or proceeding.

  • The lessor is primarily liable for the payment of 10% VAT and may choose to pass it on to the lessee or absorb it. The shifting of the tax burden to the lessee is optional and is not automatically imposed by law.

  • Rental adjustment due to extraordinary inflation or devaluation requires a showing of such extraordinary circumstances that would warrant an adjustment in the rental amount.

  • Estoppel - The lessor is estopped from shifting the burden of paying the VAT to the lessee since the lessor did not actually collect the VAT from the lessee despite having the option to do so.

  • Contract interpretation - The intention of the parties must be ascertained in construing the terms of a contract. When multiple provisions seem to be conflicting, they should be read in harmony with each other and with relevant legal provisions.

  • Extraordinary inflation or deflation - Article 1250 of the Civil Code provides for the basis of payment in the event of extraordinary inflation or deflation. Extraordinary inflation refers to a sharp increase in the value of the currency that could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation.