The Court of Tax Appeals (CTA) has cancelled and set aside the P48.5 million in local franchise taxes assessed for collection by the Cagayan provincial government against Smart Communications, Inc. for the years 2011 to 2015.

“We find that petitioner’s (Smart Communications) franchise operations are outside respondent Province’s territorial jurisdiction,” ruled the CTA's Second Division in a 13-page decision penned by Associate Justice Maria Rowena Modesto-San Pedro and promulgated last Feb. 27.

"Accordingly, the assessment made by respondents (Cagayan province and provincial treasurer) against petitioner for alleged local franchise taxes for the years 2011 to 2015 in the total amount of Forty-Eight Million Five Hundred Eighty-Seven Thousand Four Hundred Ninety-Seven and 20/100 Pesos (P48,587,497.20) is hereby cancelled and set aside," the CTA ruled.

“Consequently, respondents are enjoined and prohibited from collecting the said amount against petitioner," it added.

The case stemmed from the letter dated April 29, 2016 of then Officer-In-Charge Provincial Treasurer Lilia M. Lacambara demanding from Smart Communications the payment of franchise tax from calendar years 2011 to 2015. Smart received the letter on May 13, 2016.

Smart Communications filed an appeal before the Regional Trial Court (RTC) after Lacambara failed to act on the firm’s protest to the letter.

It raised the case before the CTA after the RTC issued rulings that denied Smart Communications’ appeal due to the court’s lack of jurisdiction.

In its decision, the CTA cited “Section 137 of the LGC (Local Government Code) authorizes the province to impose a tax on businesses enjoying a franchise at a rate not exceeding 50% of 1% of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction.”

The tax court pointed out that Smart Communications' local franchise in the province is based in Tuguegarao City.

It cited that “Article 266(b) of the LGC ‘s IRR (Implementing Rules and Regulations) clarified that the province shall not impose the tax on business enjoying franchise operating within the territorial jurisdiction of any city located within the province.”

At the same time, the CTA said the local franchise tax assessment for the year 2011 has already been prescribed.

“Since local taxes for the year 2011 became due for payment on January 20, 2011, in accordance with Section 167 of the LGC, respondent had until January 20, 2016 to assess the same,” it explained.

“Respondent’s power to assess local franchise tax for the year 2011, however, had already prescribed when petitioner received the demand letter on May 13, 2016,” it added.

It also said that the tax assessment should be void since no examination of Smart Communications’ books were conducted and the respondents were not authorized to use the manner of computation called Presumptive Level Income Assessment Approach (PLIAA).

“While respondent, as a government authority, enjoys the presumption of regularity in the performance of its duties and that tax assessments are prima facie correct, the same does not apply to an assessment that is without foundation or are arbitrary and capricious,” the CTA stressed in its decision.