FACTS:

This case involves the dispute over the imposition of franchise tax on the petitioner, Bacolod City Water District. The City Treasurer assessed the petitioner the payment of franchise tax for the years 1994 to 2002. The petitioner argued that it should be exempt from the franchise tax as it is a governmental entity performing a governmental function. The Regional Trial Court ruled in favor of the petitioner, but the Court of Appeals reversed the decision and held that the petitioner is liable to pay the franchise tax. Dissatisfied with the decision, the petitioner filed a petition for review with the Supreme Court.

ISSUES:

1. Whether the 25% surcharge for non-payment of franchise tax should be imposed yearly from the due date until full payment.

2. Whether the 2% monthly interest should be awarded in addition to the surcharge.

3. Whether the surcharge and interest must be expressly provided for in the final judgment in order to be valid.

4. Whether the trial court can include the payment of compound interest in a judgment that only ordered the payment of simple interest.

5. Whether the failure to appeal or seek clarification from the judgment prevents the imposition of the 2% monthly interest.

6. Whether the surcharge and interest imposed by the local government are in accordance with Section 168 of the Local Government Code.

7. Whether the court has the power to modify the penalty imposed by law.

8. Whether the computation of the surcharge on the total tax due is oppressive and unconscionable

9. Whether the surcharge imposed exceeded the prescribed ceiling for interest

RULING:

1. The request for the imposition of the 25% surcharge did not specify that it should be charged yearly from the due date until full payment. As such, the appellate court should have stated it expressly in its decision if that was its intention. The surcharge should be imposed as an addition to the proper franchise tax due and unpaid for each year.

2. The 2% monthly interest should not be awarded as the penalty of 25% surcharge is meant to substitute for the indemnity for damages and payment of interest in case of non-compliance.

3. The surcharge and interest must be expressly provided for in the final judgment in order to be valid.

4. The trial court cannot include the payment of compound interest in a judgment that only ordered the payment of simple interest.

5. The failure to appeal or seek clarification from the judgment does not prevent the imposition of the 2% monthly interest.

6. The surcharge and interest imposed by the local government are in accordance with Section 168 of the Local Government Code.

7. The court does not have the power to modify the penalty imposed by law.

8. The computation of the surcharge on the total tax due is oppressive and unconscionable. The imposition of the 25% surcharge yearly resulted in an aggregate penalty that is way higher than the taxpayer's basic tax liabilities. It also exceeded the prescribed 72% ceiling for interest under Section 168 of the Local Government Code. The computation of the surcharge was deemed oppressive and unconscionable because it effectively exceeded the 72% ceiling imposed by law.

9. The surcharge imposed exceeded the prescribed ceiling for interest. The Local Government Code allows the local government to collect an interest on unpaid taxes not exceeding 2% per month. However, the total interest on the unpaid amount or portion thereof should not exceed thirty-six (36) months or three (3) years. In this case, the respondent applied the 25% cumulative surcharge for more than three years, which exceeded the 72% ceiling imposed by law. Hence, the computation of the surcharge was ruled oppressive and unconscionable.

PRINCIPLES:

• The specific language of the decision's dispositive portion is controlling and its meaning is construed in light of applicable laws.

• The conjunction "and" is used to denote a joinder or union, relating the one to the other. When a taxpayer does not pay the tax due for a particular year, a 25% surcharge is applied on the full amount of the tax due. If the taxpayer makes a partial payment, the surcharge is applied only on the remaining unpaid balance.

• Article 1226 of the Civil Code, which states that a penalty shall substitute indemnity for damages and payment of interest in case of non-compliance, refers to penalties prescribed in contracts, not to penalties embodied in a judgment.

• The execution of a judgment cannot exceed the scope of the judgment itself.

• The final judgment determines the rights and obligations of the parties and must be the basis for any execution. The execution must conform to the judgment it seeks to enforce and cannot vary or go beyond its terms.

• Execution must be in accordance with the dispositive portion of the judgment and cannot amend or add to it, except for clerical errors or omissions.

• The interpretation and application of the law should be based on its plain terms and literal application, with interpretation only necessary when literal application is impossible.

• Tax statutes are construed strictly against the government and in favor of the taxpayer. Tax burdens should not be imposed beyond what the statute expressly and clearly imports.

• The court does not have the power to modify the penalty imposed by law.

• Taxes and its surcharges and penalties cannot be construed in such a way as to become oppressive and confiscatory.

• Taxes should not be construed to drive businesses into insolvency.

• A reasonable surcharge provides an incentive to pay, while an unreasonable one delays payment and engages the government in unnecessary litigation and expense.