THEORY AND BASIS OF TAXATION

G.R. No. 112024 January 28, 1999

PHILIPPINE BANK OF COMMUNICATIONS, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX
APPEALS and COURT OF APPEALS, respondent.

QUISUMBING, J.:

This petition for review assails the Resolution 1 of the Court of

Appeals dated September 22, 1993 affirming the Decision2 and a
Resolution 3 of the Court Of Tax Appeals which denied the claims of
the petitioner for tax refund and tax credits, and disposing as follows:

IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is

DENIED due course. The Decision of the Court of Tax Appeals dated
May 20, 1993 and its resolution dated July 20, 1993, are hereby
AFFIRMED in toto.

SO ORDERED.4

The Court of Tax Appeals earlier ruled as follows:

WHEREFORE, Petitioner's claim for refund/tax credits of overpaid

income tax for 1985 in the amount of P5,299,749.95 is hereby denied
for having been filed beyond the reglementary period. The 1986
claim for refund amounting to P234,077.69 is likewise denied since
petitioner has opted and in all likelihood automatically credited the
same to the succeeding year. The petition for review is dismissed for
lack of merit.

SO ORDERED.5

The facts on record show the antecedent circumstances pertinent to

this case.
Petitioner, Philippine Bank of Communications (PBCom), a commercial
banking corporation duly organized under Philippine laws, filed its
quarterly income tax returns for the first and second quarters of 1985,
reported profits, and paid the total income tax of P5,016,954.00. The
taxes due were settled by applying PBCom's tax credit memos and
accordingly, the Bureau of Internal Revenue (BIR) issued Tax Debit
Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and
P1,615,253.00, respectively.

Subsequently, however, PBCom suffered losses so that when it filed its

Annual Income Tax Returns for the year-ended December 31, 1986,
the petitioner likewise reported a net loss of P14,129,602.00, and thus
declared no tax payable for the year.

But during these two years, PBCom earned rental income from leased
properties. The lessees withheld and remitted to the BIR withholding
creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.

On August 7, 1987, petitioner requested the Commissioner of

Internal Revenue, among others, for a tax credit of P5,016,954.00
representing the overpayment of taxes in the first and second
quarters of 1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refund of

creditable taxes withheld by their lessees from property rentals in
1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner of Internal

Revenue, petitioner instituted a Petition for Review on November 18,
1988 before the Court of Tax Appeals (CTA). The petition was
docketed as CTA Case No. 4309 entitled: "Philippine Bank of
Communications vs. Commissioner of Internal Revenue."

The losses petitioner incurred as per the summary of petitioner's

claims for refund and tax credit for 1985 and 1986, filed before the
Court of Tax Appeals, are as follows:

1985 1986
——— ———

Net Income (Loss) (P25,317,288.00) (P14,129,602.00)

Tax Due NIL NIL

Quarterly tax.

Payments Made 5,016,954.00 —

Tax Withheld at Source 282,795.50 234,077.69

———————— ———————

Excess Tax Payments P5,299,749.50* P234,077.69

=============== =============

* CTA's decision reflects PBCom's 1985 tax claim as P5,299,749.95. A

forty five centavo difference was noted.

On May 20, 1993, the CTA rendered a decision which, as stated on

the outset, denied the request of petitioner for a tax refund or credit
in the sum amount of P5,299,749.95, on the ground that it was filed
beyond the two-year reglementary period provided for by law. The
petitioner's claim for refund in 1986 amounting to P234,077.69 was
likewise denied on the assumption that it was automatically credited
by PBCom against its tax payment in the succeeding year.

On June 22, 1993, petitioner filed a Motion for Reconsideration of the

CTA's decision but the same was denied due course for lack of merit.
6

Thereafter, PBCom filed a petition for review of said decision and

resolution of the CTA with the Court of Appeals. However on
September 22, 1993, the Court of Appeals affirmed in toto the CTA's
resolution dated July 20, 1993. Hence this petition now before us.

The issues raised by the petitioner are:

I. Whether taxpayer PBCom — which relied in good faith on the
formal assurances of BIR in RMC No. 7-85 and did not immediately
file with the CTA a petition for review asking for the refund/tax credit
of its 1985-86 excess quarterly income tax payments — can be
prejudiced by the subsequent BIR rejection, applied retroactivity, of
its assurances in RMC No. 7-85 that the prescriptive period for the
refund/tax credit of excess quarterly income tax payments is not two
years but ten (10).7

II. Whether the Court of Appeals seriously erred in affirming the

CTA decision which denied PBCom's claim for the refund of
P234,077.69 income tax overpaid in 1986 on the mere speculation,
without proof, that there were taxes due in 1987 and that PBCom
availed of tax-crediting that year.8

Simply stated, the main question is: Whether or not the Court of
Appeals erred in denying the plea for tax refund or tax credits on the
ground of prescription, despite petitioner's reliance on RMC No.
7-85, changing the prescriptive period of two years to ten years?

Petitioner argues that its claims for refund and tax credits are not yet
barred by prescription relying on the applicability of Revenue
Memorandum Circular No. 7-85 issued on April 1, 1985. The circular
states that overpaid income taxes are not covered by the two-year
prescriptive period under the tax Code and that taxpayers may claim
refund or tax credits for the excess quarterly income tax with the BIR
within ten (10) years under Article 1144 of the Civil Code. The
pertinent portions of the circular reads:

REVENUE MEMORANDUM CIRCULAR NO. 7-85

SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS

CORPORATE INCOME TAX RESULTING FROM THE FILING OF THE
FINAL ADJUSTMENT RETURN.

TO: All Internal Revenue Officers and Others Concerned.

Sec. 85 And 86 Of the National Internal Revenue Code provide:

xxx xxx xxx

The foregoing provisions are implemented by Section 7 of Revenue

Regulations Nos. 10-77 which provide;

xxx xxx xxx

It has been observed, however, that because of the excess tax

payments, corporations file claims for recovery of overpaid income tax
with the Court of Tax Appeals within the two-year period from the
date of payment, in accordance with sections 292 and 295 of the
National Internal Revenue Code. It is obvious that the filing of the
case in court is to preserve the judicial right of the corporation to
claim the refund or tax credit.

It should he noted, however, that this is not a case of erroneously or

illegally paid tax under the provisions of Sections 292 and 295 of the
Tax Code.

In the above provision of the Regulations the corporation may request

for the refund of the overpaid income tax or claim for automatic tax
credit. To insure prompt action on corporate annual income tax
returns showing refundable amounts arising from overpaid quarterly
income taxes, this Office has promulgated Revenue Memorandum
Order No. 32-76 dated June 11, 1976, containing the procedure in
processing said returns. Under these procedures, the returns are
merely pre-audited which consist mainly of checking mathematical
accuracy of the figures of the return. After which, the refund or tax
credit is granted, and, this procedure was adopted to facilitate
immediate action on cases like this.

In this regard, therefore, there is no need to file petitions for review in

the Court of Tax Appeals in order to preserve the right to claim refund
or tax credit the two year period. As already stated, actions hereon by
the Bureau are immediate after only a cursory pre-audit of the income
tax returns. Moreover, a taxpayer may recover from the Bureau of
Internal Revenue excess income tax paid under the provisions of
Section 86 of the Tax Code within 10 years from the date of payment
considering that it is an obligation created by law (Article 1144 of the
Civil Code).9 (Emphasis supplied.)

Petitioner argues that the government is barred from asserting a

position contrary to its declared circular if it would result to injustice to
taxpayers. Citing ABS CBN Broadcasting Corporation vs. Court of Tax
Appeals 10 petitioner claims that rulings or circulars promulgated by
the Commissioner of Internal Revenue have no retroactive effect if it
would be prejudicial to taxpayers, In ABS-CBN case, the Court held
that the government is precluded from adopting a position
inconsistent with one previously taken where injustice would result
therefrom or where there has been a misrepresentation to the
taxpayer.

Petitioner contends that Sec. 246 of the National Internal Revenue

Code explicitly provides for this rules as follows:

Sec. 246 Non-retroactivity of rulings— Any revocation, modification or

reversal of any of the rules and regulations promulgated in
accordance with the preceding section or any of the rulings or
circulars promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification or reversal will
be prejudicial to the taxpayers except in the following cases:

a). where the taxpayer deliberately misstates or omits material facts

from his return or in any document required of him by the Bureau of
Internal Revenue;

b). where the facts subsequently gathered by the Bureau of Internal

Revenue are materially different from the facts on which the ruling is
based;

c). where the taxpayer acted in bad faith.

Respondent Commissioner of Internal Revenue, through Solicitor

General, argues that the two-year prescriptive period for filing tax
cases in court concerning income tax payments of Corporations is
reckoned from the date of filing the Final Adjusted Income Tax
Return, which is generally done on April 15 following the close of the
calendar year. As precedents, respondent Commissioner cited cases
which adhered to this principle, to wit ACCRA Investments Corp. vs.
Court of Appeals, et al., 11 and Commissioner of Internal Revenue vs.
TMX Sales, Inc., et al.. 12 Respondent Commissioner also states that
since the Final Adjusted Income Tax Return of the petitioner for the
taxable year 1985 was supposed to be filed on April 15, 1986, the
latter had only until April 15, 1988 to seek relief from the court.
Further, respondent Commissioner stresses that when the petitioner
filed the case before the CTA on November 18, 1988, the same was
filed beyond the time fixed by law, and such failure is fatal to
petitioner's cause of action.

After a careful study of the records and applicable jurisprudence on

the matter, we find that, contrary to the petitioner's contention, the
relaxation of revenue regulations by RMC 7-85 is not warranted as it
disregards the two-year prescriptive period set by law.

Basic is the principle that "taxes are the lifeblood of the nation." The
primary purpose is to generate funds for the State to finance the
needs of the citizenry and to advance the common weal. 13 Due
process of law under the Constitution does not require judicial
proceedings in tax cases. This must necessarily be so because it is
upon taxation that the government chiefly relies to obtain the means
to carry on its operations and it is of utmost importance that the
modes adopted to enforce the collection of taxes levied should be
summary and interfered with as little as possible. 14

From the same perspective, claims for refund or tax credit should be
exercised within the time fixed by law because the BIR being an
administrative body enforced to collect taxes, its functions should not
be unduly delayed or hampered by incidental matters.

Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now
Sec. 229, NIRC of 1997) provides for the prescriptive period for filing
a court proceeding for the recovery of tax erroneously or illegally
collected, viz.:

Sec. 230. Recovery of tax erroneously or illegally collected. — No suit

or proceeding shall be maintained in any court for the recovery of any
national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum
alleged to have been excessive or in any manner wrongfully collected,
until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under protest
or duress.

In any case, no such suit or proceedings shall begun after the

expiration of two years from the date of payment of the tax or penalty
regardless of any supervening cause that may arise after payment;
Provided however, That the Commissioner may, even without a
written claim therefor, refund or credit any tax, where on the face of
the return upon which payment was made, such payment appears
clearly to have been erroneously paid. (Emphasis supplied)

The rule states that the taxpayer may file a claim for refund or credit
with the Commissioner of Internal Revenue, within two (2) years after
payment of tax, before any suit in CTA is commenced. The two-year
prescriptive period provided, should be computed from the time of
filing the Adjustment Return and final payment of the tax for the year.

In Commissioner of Internal Revenue vs. Philippine American Life

Insurance Co., 15 this Court explained the application of Sec. 230 of
1977 NIRC, as follows:

Clearly, the prescriptive period of two years should commence to run

only from the time that the refund is ascertained, which can only be
determined after a final adjustment return is accomplished. In the
present case, this date is April 16, 1984, and two years from this date
would be April 16, 1986. . . . As we have earlier said in the TMX Sales
case, Sections 68. 16 69, 17 and 70 18 on Quarterly Corporate
Income Tax Payment and Section 321 should be considered in
conjunction with it 19

When the Acting Commissioner of Internal Revenue issued RMC 7-85,

changing the prescriptive period of two years to ten years on claims
of excess quarterly income tax payments, such circular created a clear
inconsistency with the provision of Sec. 230 of 1977 NIRC. In so
doing, the BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress.

It bears repeating that Revenue memorandum-circulars are

considered administrative rulings (in the sense of more specific and
less general interpretations of tax laws) which are issued from time to
time by the Commissioner of Internal Revenue. It is widely accepted
that the interpretation placed upon a statute by the executive officers,
whose duty is to enforce it, is entitled to great respect by the courts.
Nevertheless, such interpretation is not conclusive and will be ignored
if judicially found to be erroneous. 20 Thus, courts will not
countenance administrative issuances that override, instead of
remaining consistent and in harmony with the law they seek to apply
and implement. 21

In the case of People vs. Lim, 22 it was held that rules and regulations
issued by administrative officials to implement a law cannot go
beyond the terms and provisions of the latter.

Appellant contends that Section 2 of FAO No. 37-1 is void because it

is not only inconsistent with but is contrary to the provisions and spirit
of Act. No 4003 as amended, because whereas the prohibition
prescribed in said Fisheries Act was for any single period of time not
exceeding five years duration, FAO No 37-1 fixed no period, that is to
say, it establishes an absolute ban for all time. This discrepancy
between Act No. 4003 and FAO No. 37-1 was probably due to an
oversight on the part of Secretary of Agriculture and Natural
Resources. Of course, in case of discrepancy, the basic Act prevails,
for the reason that the regulation or rule issued to implement a law
cannot go beyond the terms and provisions of the
latter. . . . In this connection, the attention of the technical men in the
offices of Department Heads who draft rules and regulation is called
to the importance and necessity of closely following the terms and
provisions of the law which they intended to implement, this to avoid
any possible misunderstanding or confusion as in the present case.23

Further, fundamental is the rule that the State cannot be put in

estoppel by the mistakes or errors of its officials or agents. 24 As
pointed out by the respondent courts, the nullification of RMC No.
7-85 issued by the Acting Commissioner of Internal Revenue is an
administrative interpretation which is not in harmony with Sec. 230 of
1977 NIRC. for being contrary to the express provision of a statute.
Hence, his interpretation could not be given weight for to do so
would, in effect, amend the statute.

It is likewise argued that the Commissioner of Internal Revenue, after

promulgating RMC No. 7-85, is estopped by the principle of non-
retroactively of BIR rulings. Again We do not agree. The
Memorandum Circular, stating that a taxpayer may recover the excess
income tax paid within 10 years from date of payment because this is
an obligation created by law, was issued by the Acting Commissioner
of Internal Revenue. On the other hand, the decision, stating that the
taxpayer should still file a claim for a refund or tax credit and
corresponding petition fro review within the
two-year prescription period, and that the lengthening of the period
of limitation on refund from two to ten years would be adverse to
public policy and run counter to the positive mandate of Sec. 230,
NIRC, - was the ruling and judicial interpretation of the Court of Tax
Appeals. Estoppel has no application in the case at bar because it
was not the Commissioner of Internal Revenue who denied
petitioner's claim of refund or tax credit. Rather, it was the Court of
Tax Appeals who denied (albeit correctly) the claim and in effect,
ruled that the RMC No. 7-85 issued by the Commissioner of Internal
Revenue is an administrative interpretation which is out of harmony
with or contrary to the express provision of a statute (specifically Sec.
230, NIRC), hence, cannot be given weight for to do so would in
effect amend the statute.25

Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or

interpreting statutes as part of the legal system of the country. But
administrative decisions do not enjoy that level of recognition. A
memorandum-circular of a bureau head could not operate to vest a
taxpayer with shield against judicial action. For there are no vested
rights to speak of respecting a wrong construction of the law by the
administrative officials and such wrong interpretation could not place
the Government in estoppel to correct or overrule the same. 27
Moreover, the non-retroactivity of rulings by the Commissioner of
Internal Revenue is not applicable in this case because the nullity of
RMC No. 7-85 was declared by respondent courts and not by the
Commissioner of Internal Revenue. Lastly, it must be noted that, as
repeatedly held by this Court, a claim for refund is in the nature of a
claim for exemption and should be construed in strictissimi juris
against the taxpayer.28

On the second issue, the petitioner alleges that the Court of Appeals
seriously erred in affirming CTA's decision denying its claim for refund
of P234,077.69 (tax overpaid in 1986), based on mere speculation,
without proof, that PBCom availed of the automatic tax credit in 1987.

Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides
that any excess of the total quarterly payments over the actual income
tax computed in the adjustment or final corporate income tax return,
shall either (a) be refunded to the corporation, or (b) may be credited
against the estimated quarterly income tax liabilities for the quarters
of the succeeding taxable year.

The corporation must signify in its annual corporate adjustment return

(by marking the option box provided in the BIR form) its intention,
whether to request for a refund or claim for an automatic tax credit for
the succeeding taxable year. To ease the administration of tax
collection, these remedies are in the alternative, and the choice of
one precludes the other.

As stated by respondent Court of Appeals:

Finally, as to the claimed refund of income tax over-paid in 1986 —

the Court of Tax Appeals, after examining the adjusted final corporate
annual income tax return for taxable year 1986, found out that
petitioner opted to apply for automatic tax credit. This was the basis
used (vis-avis the fact that the 1987 annual corporate tax return was
not offered by the petitioner as evidence) by the CTA in concluding
that petitioner had indeed availed of and applied the automatic tax
credit to the succeeding year, hence it can no longer ask for refund,
as to [sic] the two remedies of refund and tax credit are alternative. 30
That the petitioner opted for an automatic tax credit in accordance
with Sec. 69 of the 1977 NIRC, as specified in its 1986 Final Adjusted
Income Tax Return, is a finding of fact which we must respect.
Moreover, the 1987 annual corporate tax return of the petitioner was
not offered as evidence to contovert said fact. Thus, we are bound by
the findings of fact by respondent courts, there being no showing of
gross error or abuse on their part to disturb our reliance thereon. 31

WHEREFORE, the, petition is hereby DENIED, The decision of the

Court of Appeals appealed from is AFFIRMED, with COSTS against
the petitioner.1âwphi1.nêt

SO ORDERED.

Bellosillo, Puno, Mendoza, and Buena, JJ., concur.

G.R. No. 149110 April 9, 2003

NATIONAL POWER CORPORATION, petitioner,

vs.
CITY OF CABANATUAN, respondent.

PUNO, J.:

This is a petition for review1 of the Decision2 and the Resolution3 of

the Court of Appeals dated March 12, 2001 and July 10, 2001,
respectively, finding petitioner National Power Corporation (NPC)
liable to pay franchise tax to respondent City of Cabanatuan.

Petitioner is a government-owned and controlled corporation created

under Commonwealth Act No. 120, as amended.4 It is tasked to
undertake the "development of hydroelectric generations of power
and the production of electricity from nuclear, geothermal and other
sources, as well as, the transmission of electric power on a nationwide
basis."5 Concomitant to its mandated duty, petitioner has, among
others, the power to construct, operate and maintain power plants,
auxiliary plants, power stations and substations for the purpose of
developing hydraulic power and supplying such power to the
inhabitants.6

For many years now, petitioner sells electric power to the residents of
Cabanatuan City, posting a gross income of P107,814,187.96 in
1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the
respondent assessed the petitioner a franchise tax amounting to
P808,606.41, representing 75% of 1% of the latter's gross receipts for
the preceding year.9

Petitioner, whose capital stock was subscribed and paid wholly by the
Philippine Government,10 refused to pay the tax assessment. It
argued that the respondent has no authority to impose tax on
government entities. Petitioner also contended that as a non-profit
organization, it is exempted from the payment of all forms of taxes,
charges, duties or fees11 in accordance with sec. 13 of Rep. Act No.
6395, as amended, viz:

"Sec.13. Non-profit Character of the Corporation; Exemption from all

Taxes, Duties, Fees, Imposts and Other Charges by Government and
Governmental Instrumentalities.- The Corporation shall be non-profit
and shall devote all its return from its capital investment, as well as
excess revenues from its operation, for expansion. To enable the
Corporation to pay its indebtedness and obligations and in
furtherance and effective implementation of the policy enunciated in
Section one of this Act, the Corporation is hereby exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges, costs
and service fees in any court or administrative proceedings in which it
may be a party, restrictions and duties to the Republic of the
Philippines, its provinces, cities, municipalities and other government
agencies and instrumentalities;

(b) From all income taxes, franchise taxes and realty taxes to be paid
to the National Government, its provinces, cities, municipalities and
other government agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales
tax, and wharfage fees on import of foreign goods required for its
operations and projects; and

(d) From all taxes, duties, fees, imposts, and all other charges
imposed by the Republic of the Philippines, its provinces, cities,
municipalities and other government agencies and instrumentalities,
on all petroleum products used by the Corporation in the generation,
transmission, utilization, and sale of electric power."12

The respondent filed a collection suit in the Regional Trial Court of

Cabanatuan City, demanding that petitioner pay the assessed tax
due, plus a surcharge equivalent to 25% of the amount of tax, and 2%
monthly interest.13 Respondent alleged that petitioner's exemption
from local taxes has been repealed by section 193 of Rep. Act No.
7160,14 which reads as follows:

"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise

provided in this Code, tax exemptions or incentives granted to, or
presently enjoyed by all persons, whether natural or juridical,
including government owned or controlled corporations, except local
water districts, cooperatives duly registered under R.A. No. 6938,
non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code."

On January 25, 1996, the trial court issued an Order15 dismissing the
case. It ruled that the tax exemption privileges granted to petitioner
subsist despite the passage of Rep. Act No. 7160 for the following
reasons: (1) Rep. Act No. 6395 is a particular law and it may not be
repealed by Rep. Act No. 7160 which is a general law; (2) section 193
of Rep. Act No. 7160 is in the nature of an implied repeal which is not
favored; and (3) local governments have no power to tax
instrumentalities of the national government. Pertinent portion of the
Order reads:

"The question of whether a particular law has been repealed or not

by a subsequent law is a matter of legislative intent. The lawmakers
may expressly repeal a law by incorporating therein repealing
provisions which expressly and specifically cite(s) the particular law or
laws, and portions thereof, that are intended to be repealed. A
declaration in a statute, usually in its repealing clause, that a particular
and specific law, identified by its number or title is repealed is an
express repeal; all others are implied repeal. Sec. 193 of R.A. No.
7160 is an implied repealing clause because it fails to identify the act
or acts that are intended to be repealed. It is a well-settled rule of
statutory construction that repeals of statutes by implication are not
favored. The presumption is against inconsistency and repugnancy for
the legislative is presumed to know the existing laws on the subject
and not to have enacted inconsistent or conflicting statutes. It is also
a well-settled rule that, generally, general law does not repeal a
special law unless it clearly appears that the legislative has intended
by the latter general act to modify or repeal the earlier special law.
Thus, despite the passage of R.A. No. 7160 from which the
questioned Ordinance No. 165-92 was based, the tax exemption
privileges of defendant NPC remain.

Another point going against plaintiff in this case is the ruling of the
Supreme Court in the case of Basco vs. Philippine Amusement and
Gaming Corporation, 197 SCRA 52, where it was held that:

'Local governments have no power to tax instrumentalities of the

National Government. PAGCOR is a government owned or controlled
corporation with an original charter, PD 1869. All of its shares of
stocks are owned by the National Government. xxx Being an
instrumentality of the government, PAGCOR should be and actually is
exempt from local taxes. Otherwise, its operation might be burdened,
impeded or subjected to control by mere local government.'

Like PAGCOR, NPC, being a government owned and controlled

corporation with an original charter and its shares of stocks owned by
the National Government, is beyond the taxing power of the Local
Government. Corollary to this, it should be noted here that in the
NPC Charter's declaration of Policy, Congress declared that: 'xxx (2)
the total electrification of the Philippines through the development of
power from all services to meet the needs of industrial development
and dispersal and needs of rural electrification are primary objectives
of the nations which shall be pursued coordinately and supported by
all instrumentalities and agencies of the government, including its
financial institutions.' (underscoring supplied). To allow plaintiff to
subject defendant to its tax-ordinance would be to impede the
avowed goal of this government instrumentality.

Unlike the State, a city or municipality has no inherent power of

taxation. Its taxing power is limited to that which is provided for in its
charter or other statute. Any grant of taxing power is to be construed
strictly, with doubts resolved against its existence.

From the existing law and the rulings of the Supreme Court itself, it is
very clear that the plaintiff could not impose the subject tax on the
defendant."16

On appeal, the Court of Appeals reversed the trial court's Order17 on

the ground that section 193, in relation to sections 137 and 151 of the
LGC, expressly withdrew the exemptions granted to the petitioner.18
It ordered the petitioner to pay the respondent city government the
following: (a) the sum of P808,606.41 representing the franchise tax
due based on gross receipts for the year 1992, (b) the tax due every
year thereafter based in the gross receipts earned by NPC, (c) in all
cases, to pay a surcharge of 25% of the tax due and unpaid, and (d)
the sum of P 10,000.00 as litigation expense.19

On April 4, 2001, the petitioner filed a Motion for Reconsideration on

the Court of Appeal's Decision. This was denied by the appellate
court, viz:

"The Court finds no merit in NPC's motion for reconsideration. Its

arguments reiterated therein that the taxing power of the province
under Art. 137 (sic) of the Local Government Code refers merely to
private persons or corporations in which category it (NPC) does not
belong, and that the LGC (RA 7160) which is a general law may not
impliedly repeal the NPC Charter which is a special law—finds the
answer in Section 193 of the LGC to the effect that 'tax exemptions or
incentives granted to, or presently enjoyed by all persons, whether
natural or juridical, including government-owned or controlled
corporations except local water districts xxx are hereby withdrawn.'
The repeal is direct and unequivocal, not implied.
IN VIEW WHEREOF, the motion for reconsideration is hereby
DENIED.

SO ORDERED."20

In this petition for review, petitioner raises the following issues:

"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT

NPC, A PUBLIC NON-PROFIT CORPORATION, IS LIABLE TO PAY A
FRANCHISE TAX AS IT FAILED TO CONSIDER THAT SECTION 137
OF THE LOCAL GOVERNMENT CODE IN RELATION TO SECTION
131 APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS
ENJOYING A FRANCHISE.

B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT

NPC'S EXEMPTION FROM ALL FORMS OF TAXES HAS BEEN
REPEALED BY THE PROVISION OF THE LOCAL GOVERNMENT
CODE AS THE ENACTMENT OF A LATER LEGISLATION, WHICH IS
A GENERAL LAW, CANNOT BE CONSTRUED TO HAVE REPEALED A
SPECIAL LAW.

C. THE COURT OF APPEALS GRAVELY ERRED IN NOT

CONSIDERING THAT AN EXERCISE OF POLICE POWER THROUGH
TA X E X E M P T I O N S H O U L D P R E VA I L O V E R T H E L O C A L
GOVERNMENT CODE."21

It is beyond dispute that the respondent city government has the

authority to issue Ordinance No. 165-92 and impose an annual tax on
"businesses enjoying a franchise," pursuant to section 151 in relation
to section 137 of the LGC, viz:

"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted

by any law or other special law, the province may impose a tax on
businesses enjoying a franchise, at a rate not exceeding fifty percent
(50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized,
within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed one-
twentieth (1/20) of one percent (1%) of the capital investment. In the
succeeding calendar year, regardless of when the business started to
operate, the tax shall be based on the gross receipts for the
preceding calendar year, or any fraction thereof, as provided
herein." (emphasis supplied)

x x x

Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in

this Code, the city, may levy the taxes, fees, and charges which the
province or municipality may impose: Provided, however, That the
taxes, fees and charges levied and collected by highly urbanized and
independent component cities shall accrue to them and distributed in
accordance with the provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum
rates allowed for the province or municipality by not more than fifty
percent (50%) except the rates of professional and amusement taxes."

Petitioner, however, submits that it is not liable to pay an annual

franchise tax to the respondent city government. It contends that
sections 137 and 151 of the LGC in relation to section 131, limit the
taxing power of the respondent city government to private entities
that are engaged in trade or occupation for profit.22

Section 131 (m) of the LGC defines a "franchise" as "a right or

privilege, affected with public interest which is conferred upon private
persons or corporations, under such terms and conditions as the
government and its political subdivisions may impose in the interest
of the public welfare, security and safety." From the phraseology of
this provision, the petitioner claims that the word "private" modifies
the terms "persons" and "corporations." Hence, when the LGC uses
the term "franchise," petitioner submits that it should refer specifically
to franchises granted to private natural persons and to private
corporations.23 Ergo, its charter should not be considered a
"franchise" for the purpose of imposing the franchise tax in question.
On the other hand, section 131 (d) of the LGC defines "business" as
"trade or commercial activity regularly engaged in as means of
livelihood or with a view to profit." Petitioner claims that it is not
engaged in an activity for profit, in as much as its charter specifically
provides that it is a "non-profit organization." In any case, petitioner
argues that the accumulation of profit is merely incidental to its
operation; all these profits are required by law to be channeled for
expansion and improvement of its facilities and services.24

Petitioner also alleges that it is an instrumentality of the National

Government,25 and as such, may not be taxed by the respondent city
government. It cites the doctrine in Basco vs. Philippine Amusement
and Gaming Corporation26 where this Court held that local
governments have no power to tax instrumentalities of the National
Government, viz:

"Local governments have no power to tax instrumentalities of the

National Government.

PAGCOR has a dual role, to operate and regulate gambling casinos.

The latter role is governmental, which places it in the category of an
agency or instrumentality of the Government. Being an
instrumentality of the Government, PAGCOR should be and actually is
exempt from local taxes. Otherwise, its operation might be burdened,
impeded or subjected to control by a mere local government.

'The states have no power by taxation or otherwise, to retard,

impede, burden or in any manner control the operation of
constitutional laws enacted by Congress to carry into execution the
powers vested in the federal government. (MC Culloch v. Maryland, 4
Wheat 316, 4 L Ed. 579)'

This doctrine emanates from the 'supremacy' of the National

Government over local governments.

'Justice Holmes, speaking for the Supreme Court, made reference to

the entire absence of power on the part of the States to touch, in that
way (taxation) at least, the instrumentalities of the United States
(Johnson v. Maryland, 254 US 51) and it can be agreed that no state
or political subdivision can regulate a federal instrumentality in such a
way as to prevent it from consummating its federal responsibilities, or
even seriously burden it from accomplishment of them.' (Antieau,
Modern Constitutional Law, Vol. 2, p. 140, italics supplied)

Otherwise, mere creatures of the State can defeat National policies

thru extermination of what local authorities may perceive to be
undesirable activities or enterprise using the power to tax as ' a tool
regulation' (U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the 'power
to destroy' (Mc Culloch v. Maryland, supra) cannot be allowed to
defeat an instrumentality or creation of the very entity which has the
inherent power to wield it."27

Petitioner contends that section 193 of Rep. Act No. 7160,

withdrawing the tax privileges of government-owned or controlled
corporations, is in the nature of an implied repeal. A special law, its
charter cannot be amended or modified impliedly by the local
government code which is a general law. Consequently, petitioner
claims that its exemption from all taxes, fees or charges under its
charter subsists despite the passage of the LGC, viz:

"It is a well-settled rule of statutory construction that repeals of

statutes by implication are not favored and as much as possible, effect
must be given to all enactments of the legislature. Moreover, it has to
be conceded that the charter of the NPC constitutes a special law.
Republic Act No. 7160, is a general law. It is a basic rule in statutory
construction that the enactment of a later legislation which is a
general law cannot be construed to have repealed a special law.
Where there is a conflict between a general law and a special statute,
the special statute should prevail since it evinces the legislative intent
more clearly than the general statute."28

Finally, petitioner submits that the charter of the NPC, being a valid
exercise of police power, should prevail over the LGC. It alleges that
the power of the local government to impose franchise tax is
subordinate to petitioner's exemption from taxation; "police power
being the most pervasive, the least limitable and most demanding of
all powers, including the power of taxation."29

The petition is without merit.

Taxes are the lifeblood of the government,30 for without taxes, the
government can neither exist nor endure. A principal attribute of
sovereignty,31 the exercise of taxing power derives its source from
the very existence of the state whose social contract with its citizens
obliges it to promote public interest and common good. The theory
behind the exercise of the power to tax emanates from necessity;32
without taxes, government cannot fulfill its mandate of promoting the
general welfare and well-being of the people.

In recent years, the increasing social challenges of the times

expanded the scope of state activity, and taxation has become a tool
to realize social justice and the equitable distribution of wealth,
economic progress and the protection of local industries as well as
public welfare and similar objectives.33 Taxation assumes even
greater significance with the ratification of the 1987 Constitution.
Thenceforth, the power to tax is no longer vested exclusively on
Congress; local legislative bodies are now given direct authority to
levy taxes, fees and other charges34 pursuant to Article X, section 5
of the 1987 Constitution, viz:

"Section 5.- Each Local Government unit shall have the power to
create its own sources of revenue, to levy taxes, fees and charges
subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such
taxes, fees and charges shall accrue exclusively to the Local
Governments."

This paradigm shift results from the realization that genuine

development can be achieved only by strengthening local autonomy
and promoting decentralization of governance. For a long time, the
country's highly centralized government structure has bred a culture
of dependence among local government leaders upon the national
leadership. It has also "dampened the spirit of initiative, innovation
and imaginative resilience in matters of local development on the part
of local government leaders."35 The only way to shatter this culture
of dependence is to give the LGUs a wider role in the delivery of
basic services, and confer them sufficient powers to generate their
own sources for the purpose. To achieve this goal, section 3 of Article
X of the 1987 Constitution mandates Congress to enact a local
government code that will, consistent with the basic policy of local
autonomy, set the guidelines and limitations to this grant of taxing
powers, viz:

"Section 3. The Congress shall enact a local government code which

shall provide for a more responsive and accountable local
government structure instituted through a system of decentralization
with effective mechanisms of recall, initiative, and referendum,
allocate among the different local government units their powers,
responsibilities, and resources, and provide for the qualifications,
election, appointment and removal, term, salaries, powers and
functions and duties of local officials, and all other matters relating to
the organization and operation of the local units."

To recall, prior to the enactment of the Rep. Act No. 7160,36 also
known as the Local Government Code of 1991 (LGC), various
measures have been enacted to promote local autonomy. These
include the Barrio Charter of 1959,37 the Local Autonomy Act of
1959,38 the Decentralization Act of 196739 and the Local
Government Code of 1983.40 Despite these initiatives, however, the
shackles of dependence on the national government remained. Local
government units were faced with the same problems that hamper
their capabilities to participate effectively in the national development
efforts, among which are: (a) inadequate tax base, (b) lack of fiscal
control over external sources of income, (c) limited authority to
prioritize and approve development projects, (d) heavy dependence
on external sources of income, and (e) limited supervisory control over
personnel of national line agencies.41

Considered as the most revolutionary piece of legislation on local

autonomy,42 the LGC effectively deals with the fiscal constraints
faced by LGUs. It widens the tax base of LGUs to include taxes which
were prohibited by previous laws such as the imposition of taxes on
forest products, forest concessionaires, mineral products, mining
operations, and the like. The LGC likewise provides enough flexibility
to impose tax rates in accordance with their needs and capabilities. It
does not prescribe graduated fixed rates but merely specifies the
minimum and maximum tax rates and leaves the determination of the
actual rates to the respective sanggunian.43

One of the most significant provisions of the LGC is the removal of

the blanket exclusion of instrumentalities and agencies of the national
government from the coverage of local taxation. Although as a
general rule, LGUs cannot impose taxes, fees or charges of any kind
on the National Government, its agencies and instrumentalities, this
rule now admits an exception, i.e., when specific provisions of the
LGC authorize the LGUs to impose taxes, fees or charges on the
aforementioned entities, viz:

"Section 133. Common Limitations on the Taxing Powers of the Local

Government Units.- Unless otherwise provided herein, the exercise of
the taxing powers of provinces, cities, municipalities, and barangays
shall not extend to the levy of the following:

x x x

(o) Taxes, fees, or charges of any kind on the National Government, its
agencies and instrumentalities, and local government
units." (emphasis supplied)

In view of the afore-quoted provision of the LGC, the doctrine in

Basco vs. Philippine Amusement and Gaming Corporation44 relied
upon by the petitioner to support its claim no longer applies. To
emphasize, the Basco case was decided prior to the effectivity of the
LGC, when no law empowering the local government units to tax
instrumentalities of the National Government was in effect. However,
as this Court ruled in the case of Mactan Cebu International Airport
Authority (MCIAA) vs. Marcos,45 nothing prevents Congress from
decreeing that even instrumentalities or agencies of the government
performing governmental functions may be subject to tax.46 In
enacting the LGC, Congress exercised its prerogative to tax
instrumentalities and agencies of government as it sees fit. Thus, after
reviewing the specific provisions of the LGC, this Court held that
MCIAA, although an instrumentality of the national government, was
subject to real property tax, viz:

"Thus, reading together sections 133, 232, and 234 of the LGC, we
conclude that as a general rule, as laid down in section 133, the
taxing power of local governments cannot extend to the levy of inter
alia, 'taxes, fees and charges of any kind on the national government,
its agencies and instrumentalities, and local government units';
however, pursuant to section 232, provinces, cities and municipalities
in the Metropolitan Manila Area may impose the real property tax
except on, inter alia, 'real property owned by the Republic of the
Philippines or any of its political subdivisions except when the
beneficial use thereof has been granted for consideration or
otherwise, to a taxable person as provided in the item (a) of the first
paragraph of section 12.'"47

In the case at bar, section 151 in relation to section 137 of the LGC
clearly authorizes the respondent city government to impose on the
petitioner the franchise tax in question.

In its general signification, a franchise is a privilege conferred by

government authority, which does not belong to citizens of the
country generally as a matter of common right.48 In its specific sense,
a franchise may refer to a general or primary franchise, or to a special
or secondary franchise. The former relates to the right to exist as a
corporation, by virtue of duly approved articles of incorporation, or a
charter pursuant to a special law creating the corporation.49 The right
under a primary or general franchise is vested in the individuals who
compose the corporation and not in the corporation itself.50 On the
other hand, the latter refers to the right or privileges conferred upon
an existing corporation such as the right to use the streets of a
municipality to lay pipes of tracks, erect poles or string wires.51 The
rights under a secondary or special franchise are vested in the
corporation and may ordinarily be conveyed or mortgaged under a
general power granted to a corporation to dispose of its property,
except such special or secondary franchises as are charged with a
public use.52
In section 131 (m) of the LGC, Congress unmistakably defined a
franchise in the sense of a secondary or special franchise. This is to
avoid any confusion when the word franchise is used in the context of
taxation. As commonly used, a franchise tax is "a tax on the privilege
of transacting business in the state and exercising corporate
franchises granted by the state."53 It is not levied on the corporation
simply for existing as a corporation, upon its property54 or its income,
55 but on its exercise of the rights or privileges granted to it by the
government. Hence, a corporation need not pay franchise tax from
the time it ceased to do business and exercise its franchise.56 It is
within this context that the phrase "tax on businesses enjoying a
franchise" in section 137 of the LGC should be interpreted and
understood. Verily, to determine whether the petitioner is covered by
the franchise tax in question, the following requisites should concur:
(1) that petitioner has a "franchise" in the sense of a secondary or
special franchise; and (2) that it is exercising its rights or privileges
under this franchise within the territory of the respondent city
government.

Petitioner fulfills the first requisite. Commonwealth Act No. 120, as

amended by Rep. Act No. 7395, constitutes petitioner's primary and
secondary franchises. It serves as the petitioner's charter, defining its
composition, capitalization, the appointment and the specific duties
of its corporate officers, and its corporate life span.57 As its
secondary franchise, Commonwealth Act No. 120, as amended, vests
the petitioner the following powers which are not available to ordinary
corporations, viz:

"x x x

(e) To conduct investigations and surveys for the development of

water power in any part of the Philippines;

(f) To take water from any public stream, river, creek, lake, spring or
waterfall in the Philippines, for the purposes specified in this Act; to
intercept and divert the flow of waters from lands of riparian owners
and from persons owning or interested in waters which are or may be
necessary for said purposes, upon payment of just compensation
therefor; to alter, straighten, obstruct or increase the flow of water in
streams or water channels intersecting or connecting therewith or
contiguous to its works or any part thereof: Provided, That just
compensation shall be paid to any person or persons whose property
is, directly or indirectly, adversely affected or damaged thereby;

(g) To construct, operate and maintain power plants, auxiliary plants,

dams, reservoirs, pipes, mains, transmission lines, power stations and
substations, and other works for the purpose of developing hydraulic
power from any river, creek, lake, spring and waterfall in the
Philippines and supplying such power to the inhabitants thereof; to
acquire, construct, install, maintain, operate, and improve gas, oil, or
steam engines, and/or other prime movers, generators and machinery
in plants and/or auxiliary plants for the production of electric power;
to establish, develop, operate, maintain and administer power and
lighting systems for the transmission and utilization of its power
generation; to sell electric power in bulk to (1) industrial enterprises,
(2) city, municipal or provincial systems and other government
institutions, (3) electric cooperatives, (4) franchise holders, and (5) real
estate subdivisions x x x;

(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage,

encumber and otherwise dispose of property incident to, or
necessary, convenient or proper to carry out the purposes for which
the Corporation was created: Provided, That in case a right of way is
necessary for its transmission lines, easement of right of way shall only
be sought: Provided, however, That in case the property itself shall be
acquired by purchase, the cost thereof shall be the fair market value
at the time of the taking of such property;

(i) To construct works across, or otherwise, any stream, watercourse,

canal, ditch, flume, street, avenue, highway or railway of private and
public ownership, as the location of said works may require xxx;

(j) To exercise the right of eminent domain for the purpose of this Act
in the manner provided by law for instituting condemnation
proceedings by the national, provincial and municipal governments;

x x x
(m) To cooperate with, and to coordinate its operations with those of
the National Electrification Administration and public service entities;

(n) To exercise complete jurisdiction and control over watersheds

surrounding the reservoirs of plants and/or projects constructed or
proposed to be constructed by the Corporation. Upon determination
by the Corporation of the areas required for watersheds for a specific
project, the Bureau of Forestry, the Reforestation Administration and
the Bureau of Lands shall, upon written advice by the Corporation,
forthwith surrender jurisdiction to the Corporation of all areas
embraced within the watersheds, subject to existing private rights,
the needs of waterworks systems, and the requirements of domestic
water supply;

(o) In the prosecution and maintenance of its projects, the

Corporation shall adopt measures to prevent environmental pollution
and promote the conservation, development and maximum utilization
of natural resources xxx "58

With these powers, petitioner eventually had the monopoly in the

generation and distribution of electricity. This monopoly was
strengthened with the issuance of Pres. Decree No. 40,59
nationalizing the electric power industry. Although Exec. Order No.
21560 thereafter allowed private sector participation in the
generation of electricity, the transmission of electricity remains the
monopoly of the petitioner.

Petitioner also fulfills the second requisite. It is operating within the

respondent city government's territorial jurisdiction pursuant to the
powers granted to it by Commonwealth Act No. 120, as amended.
From its operations in the City of Cabanatuan, petitioner realized a
gross income of P107,814,187.96 in 1992. Fulfilling both requisites,
petitioner is, and ought to be, subject of the franchise tax in question.

Petitioner, however, insists that it is excluded from the coverage of the

franchise tax simply because its stocks are wholly owned by the
National Government, and its charter characterized it as a "non-
profit" organization.
These contentions must necessarily fail.

To stress, a franchise tax is imposed based not on the ownership but

on the exercise by the corporation of a privilege to do business. The
taxable entity is the corporation which exercises the franchise, and not
the individual stockholders. By virtue of its charter, petitioner was
created as a separate and distinct entity from the National
Government. It can sue and be sued under its own name,61 and can
exercise all the powers of a corporation under the Corporation Code.
62

To be sure, the ownership by the National Government of its entire

capital stock does not necessarily imply that petitioner is not engaged
in business. Section 2 of Pres. Decree No. 202963 classifies
government-owned or controlled corporations (GOCCs) into those
performing governmental functions and those performing proprietary
functions, viz:

"A government-owned or controlled corporation is a stock or a non-

stock corporation, whether performing governmental or proprietary
functions, which is directly chartered by special law or if organized
under the general corporation law is owned or controlled by the
government directly, or indirectly through a parent corporation or
subsidiary corporation, to the extent of at least a majority of its
outstanding voting capital stock x x x." (emphases supplied)

Governmental functions are those pertaining to the administration of

government, and as such, are treated as absolute obligation on the
part of the state to perform while proprietary functions are those that
are undertaken only by way of advancing the general interest of
society, and are merely optional on the government.64 Included in
the class of GOCCs performing proprietary functions are "business-
like" entities such as the National Steel Corporation (NSC), the
National Development Corporation (NDC), the Social Security System
(SSS), the Government Service Insurance System (GSIS), and the
National Water Sewerage Authority (NAWASA),65 among others.

Petitioner was created to "undertake the development of

hydroelectric generation of power and the production of electricity
from nuclear, geothermal and other sources, as well as the
transmission of electric power on a nationwide basis."66 Pursuant to
this mandate, petitioner generates power and sells electricity in bulk.
Certainly, these activities do not partake of the sovereign functions of
the government. They are purely private and commercial
undertakings, albeit imbued with public interest. The public interest
involved in its activities, however, does not distract from the true
nature of the petitioner as a commercial enterprise, in the same
league with similar public utilities like telephone and telegraph
companies, railroad companies, water supply and irrigation
companies, gas, coal or light companies, power plants, ice plant
among others; all of which are declared by this Court as ministrant or
proprietary functions of government aimed at advancing the general
interest of society.67

A closer reading of its charter reveals that even the legislature treats
the character of the petitioner's enterprise as a "business," although
it limits petitioner's profits to twelve percent (12%), viz:68

"(n) When essential to the proper administration of its corporate

affairs or necessary for the proper transaction of its business or to
carry out the purposes for which it was organized, to contract
indebtedness and issue bonds subject to approval of the President
upon recommendation of the Secretary of Finance;

(o) To exercise such powers and do such things as may be reasonably

necessary to carry out the business and purposes for which it was
organized, or which, from time to time, may be declared by the Board
to be necessary, useful, incidental or auxiliary to accomplish the said
purpose xxx."(emphases supplied)

It is worthy to note that all other private franchise holders receiving at

least sixty percent (60%) of its electricity requirement from the
petitioner are likewise imposed the cap of twelve percent (12%) on
profits.69 The main difference is that the petitioner is mandated to
devote "all its returns from its capital investment, as well as excess
revenues from its operation, for expansion"70 while other franchise
holders have the option to distribute their profits to its stockholders
by declaring dividends. We do not see why this fact can be a source
of difference in tax treatment. In both instances, the taxable entity is
the corporation, which exercises the franchise, and not the individual
stockholders.

We also do not find merit in the petitioner's contention that its tax
exemptions under its charter subsist despite the passage of the LGC.

As a rule, tax exemptions are construed strongly against the claimant.

Exemptions must be shown to exist clearly and categorically, and
supported by clear legal provisions.71 In the case at bar, the
petitioner's sole refuge is section 13 of Rep. Act No. 6395 exempting
from, among others, "all income taxes, franchise taxes and realty
taxes to be paid to the National Government, its provinces, cities,
municipalities and other government agencies and instrumentalities."
However, section 193 of the LGC withdrew, subject to limited
exceptions, the sweeping tax privileges previously enjoyed by private
and public corporations. Contrary to the contention of petitioner,
section 193 of the LGC is an express, albeit general, repeal of all
statutes granting tax exemptions from local taxes.72 It reads:

"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise

provided in this Code, tax exemptions or incentives granted to, or
presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations, except local
water districts, cooperatives duly registered under R.A. No. 6938,
non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code." (emphases
supplied)

It is a basic precept of statutory construction that the express mention

of one person, thing, act, or consequence excludes all others as
expressed in the familiar maxim expressio unius est exclusio alterius.
73 Not being a local water district, a cooperative registered under
R.A. No. 6938, or a non-stock and non-profit hospital or educational
institution, petitioner clearly does not belong to the exception. It is
therefore incumbent upon the petitioner to point to some provisions
of the LGC that expressly grant it exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly
states that the LGUs can impose franchise tax "notwithstanding any
exemption granted by any law or other special law." This particular
provision of the LGC does not admit any exception. In City
Government of San Pablo, Laguna v. Reyes,74 MERALCO's
exemption from the payment of franchise taxes was brought as an
issue before this Court. The same issue was involved in the
subsequent case of Manila Electric Company v. Province of Laguna.75
Ruling in favor of the local government in both instances, we ruled
that the franchise tax in question is imposable despite any exemption
enjoyed by MERALCO under special laws, viz:

"It is our view that petitioners correctly rely on provisions of Sections

137 and 193 of the LGC to support their position that MERALCO's tax
exemption has been withdrawn. The explicit language of section 137
which authorizes the province to impose franchise tax
'notwithstanding any exemption granted by any law or other special
law' is all-encompassing and clear. The franchise tax is imposable
despite any exemption enjoyed under special laws.

Section 193 buttresses the withdrawal of extant tax exemption

privileges. By stating that unless otherwise provided in this Code, tax
exemptions or incentives granted to or presently enjoyed by all
persons, whether natural or juridical, including government-owned or
controlled corporations except (1) local water districts, (2)
cooperatives duly registered under R.A. 6938, (3) non-stock and non-
profit hospitals and educational institutions, are withdrawn upon the
effectivity of this code, the obvious import is to limit the exemptions
to the three enumerated entities. It is a basic precept of statutory
construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim
expressio unius est exclusio alterius. In the absence of any provision
of the Code to the contrary, and we find no other provision in point,
any existing tax exemption or incentive enjoyed by MERALCO under
existing law was clearly intended to be withdrawn.

Reading together sections 137 and 193 of the LGC, we conclude that
under the LGC the local government unit may now impose a local tax
at a rate not exceeding 50% of 1% of the gross annual receipts for the
preceding calendar based on the incoming receipts realized within its
territorial jurisdiction. The legislative purpose to withdraw tax
privileges enjoyed under existing law or charter is clearly manifested
by the language used on (sic) Sections 137 and 193 categorically
withdrawing such exemption subject only to the exceptions
enumerated. Since it would be not only tedious and impractical to
attempt to enumerate all the existing statutes providing for special
tax exemptions or privileges, the LGC provided for an express, albeit
general, withdrawal of such exemptions or privileges. No more
unequivocal language could have been used."76 (emphases
supplied).

It is worth mentioning that section 192 of the LGC empowers the

LGUs, through ordinances duly approved, to grant tax exemptions,
initiatives or reliefs.77 But in enacting section 37 of Ordinance No.
165-92 which imposes an annual franchise tax "notwithstanding any
exemption granted by law or other special law," the respondent city
government clearly did not intend to exempt the petitioner from the
coverage thereof.

Doubtless, the power to tax is the most effective instrument to raise

needed revenues to finance and support myriad activities of the local
government units for the delivery of basic services essential to the
promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. As this Court observed in the
Mactan case, "the original reasons for the withdrawal of tax
exemption privileges granted to government-owned or controlled
corporations and all other units of government were that such
privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises."78 With the added burden
of devolution, it is even more imperative for government entities to
share in the requirements of development, fiscal or otherwise, by
paying taxes or other charges due from them.

IN VIEW WHEREOF, the instant petition is DENIED and the assailed

Decision and Resolution of the Court of Appeals dated March 12,
2001 and July 10, 2001, respectively, are hereby AFFIRMED.

SO ORDERED.
Panganiban, Sandoval-Gutierrez, Corona, and Carpio-Morales, JJ.,
concur.

G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

CRUZ, J.:

Taxes are the lifeblood of the government and so should be collected

without unnecessary hindrance On the other hand, such collection
should be made in accordance with law as any arbitrariness will
negate the very reason for government itself. It is therefore necessary
to reconcile the apparently conflicting interests of the authorities and
the taxpayers so that the real purpose of taxation, which is the
promotion of the common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal
Revenue correctly disallowed the P75,000.00 deduction claimed by
private respondent Algue as legitimate business expenses in its
income tax returns. The corollary issue is whether or not the appeal of
the private respondent from the decision of the Collector of Internal
Revenue was made on time and in accordance with law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a
domestic corporation engaged in engineering, construction and other
allied activities, received a letter from the petitioner assessing it in the
total amount of P83,183.85 as delinquency income taxes for the years
1958 and 1959.1 On January 18, 1965, Algue flied a letter of protest
or request for reconsideration, which letter was stamp received on the
same day in the office of the petitioner. 2 On March 12, 1965, a
warrant of distraint and levy was presented to the private respondent,
through its counsel, Atty. Alberto Guevara, Jr., who refused to receive
it on the ground of the pending protest. 3 A search of the protest in
the dockets of the case proved fruitless. Atty. Guevara produced his
file copy and gave a photostat to BIR agent Ramon Reyes, who
deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was
finally informed that the BIR was not taking any action on the protest
and it was only then that he accepted the warrant of distraint and levy
earlier sought to be served.5 Sixteen days later, on April 23, 1965,
Algue filed a petition for review of the decision of the Commissioner
of Internal Revenue with the Court of Tax Appeals.6

The above chronology shows that the petition was filed seasonably.
According to Rep. Act No. 1125, the appeal may be made within
thirty days after receipt of the decision or ruling challenged.7 It is true
that as a rule the warrant of distraint and levy is "proof of the finality
of the assessment" 8 and renders hopeless a request for
reconsideration," 9 being "tantamount to an outright denial thereof
and makes the said request deemed rejected." 10 But there is a
special circumstance in the case at bar that prevents application of
this accepted doctrine.

The proven fact is that four days after the private respondent received
the petitioner's notice of assessment, it filed its letter of protest. This
was apparently not taken into account before the warrant of distraint
and levy was issued; indeed, such protest could not be located in the
office of the petitioner. It was only after Atty. Guevara gave the BIR a
copy of the protest that it was, if at all, considered by the tax
authorities. During the intervening period, the warrant was premature
and could therefore not be served.

As the Court of Tax Appeals correctly noted," 11 the protest filed by

private respondent was not pro forma and was based on strong legal
considerations. It thus had the effect of suspending on January 18,
1965, when it was filed, the reglementary period which started on the
date the assessment was received, viz., January 14, 1965. The period
started running again only on April 7, 1965, when the private
respondent was definitely informed of the implied rejection of the
said protest and the warrant was finally served on it. Hence, when the
appeal was filed on April 23, 1965, only 20 days of the reglementary
period had been consumed.
Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00

was properly disallowed because it was not an ordinary reasonable or
necessary business expense. The Court of Tax Appeals had seen it
differently. Agreeing with Algue, it held that the said amount had
been legitimately paid by the private respondent for actual services
rendered. The payment was in the form of promotional fees. These
were collected by the Payees for their work in the creation of the
Vegetable Oil Investment Corporation of the Philippines and its
subsequent purchase of the properties of the Philippine Sugar Estate
Development Company.

Parenthetically, it may be observed that the petitioner had Originally

claimed these promotional fees to be personal holding company
income 12 but later conformed to the decision of the respondent
court rejecting this assertion.13 In fact, as the said court found, the
amount was earned through the joint efforts of the persons among
whom it was distributed It has been established that the Philippine
Sugar Estate Development Company had earlier appointed Algue as
its agent, authorizing it to sell its land, factories and oil manufacturing
process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo
Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked
for the formation of the Vegetable Oil Investment Corporation,
inducing other persons to invest in it.14 Ultimately, after its
incorporation largely through the promotion of the said persons, this
new corporation purchased the PSEDC properties.15 For this sale,
Algue received as agent a commission of P126,000.00, and it was
from this commission that the P75,000.00 promotional fees were paid
to the aforenamed individuals.16

There is no dispute that the payees duly reported their respective

shares of the fees in their income tax returns and paid the
corresponding taxes thereon.17 The Court of Tax Appeals also found,
after examining the evidence, that no distribution of dividends was
involved.18
The petitioner claims that these payments are fictitious because most
of the payees are members of the same family in control of Algue. It is
argued that no indication was made as to how such payments were
made, whether by check or in cash, and there is not enough
substantiation of such payments. In short, the petitioner suggests a
tax dodge, an attempt to evade a legitimate assessment by involving
an imaginary deduction.

We find that these suspicions were adequately met by the private

respondent when its President, Alberto Guevara, and the accountant,
Cecilia V. de Jesus, testified that the payments were not made in one
lump sum but periodically and in different amounts as each payee's
need arose. 19 It should be remembered that this was a family
corporation where strict business procedures were not applied and
immediate issuance of receipts was not required. Even so, at the end
of the year, when the books were to be closed, each payee made an
accounting of all of the fees received by him or her, to make up the
total of P75,000.00. 20 Admittedly, everything seemed to be informal.
This arrangement was understandable, however, in view of the close
relationship among the persons in the family corporation.

We agree with the respondent court that the amount of the

promotional fees was not excessive. The total commission paid by the
Philippine Sugar Estate Development Co. to the private respondent
was P125,000.00. 21 After deducting the said fees, Algue still had a
balance of P50,000.00 as clear profit from the transaction. The
amount of P75,000.00 was 60% of the total commission. This was a
reasonable proportion, considering that it was the payees who did
practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar
Estate properties. This finding of the respondent court is in accord
with the following provision of the Tax Code:

SEC. 30. Deductions from gross income.--In computing net income

there shall be allowed as deductions —

(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business,
including a reasonable allowance for salaries or other compensation
for personal services actually rendered; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services.--Among the ordinary

and necessary expenses paid or incurred in carrying on any trade or
business may be included a reasonable allowance for salaries or other
compensation for personal services actually rendered. The test of
deductibility in the case of compensation payments is whether they
are reasonable and are, in fact, payments purely for service. This test
and deductibility in the case of compensation payments is whether
they are reasonable and are, in fact, payments purely for service. This
test and its practical application may be further stated and illustrated
as follows:

Any amount paid in the form of compensation, but not in fact as the
purchase price of services, is not deductible. (a) An ostensible salary
paid by a corporation may be a distribution of a dividend on stock.
This is likely to occur in the case of a corporation having few
stockholders, Practically all of whom draw salaries. If in such a case
the salaries are in excess of those ordinarily paid for similar services,
and the excessive payment correspond or bear a close relationship to
the stockholdings of the officers of employees, it would seem likely
that the salaries are not paid wholly for services rendered, but the
excessive payments are a distribution of earnings upon the stock. . . .
(Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the
regular employ of Algue nor were they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the
taxpayer to prove the validity of the claimed deduction. In the present
case, however, we find that the onus has been discharged
satisfactorily. The private respondent has proved that the payment of
the fees was necessary and reasonable in the light of the efforts
exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve
themselves in a new business requiring millions of pesos. This was no
mean feat and should be, as it was, sufficiently recompensed.

It is said that taxes are what we pay for civilization society. Without
taxes, the government would be paralyzed for lack of the motive
power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the
taxing authorities, every person who is able to must contribute his
share in the running of the government. The government for its part,
is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral
and material values. This symbiotic relationship is the rationale of
taxation and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of

taxation, it is a requirement in all democratic regimes that it be
exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and
the courts will then come to his succor. For all the awesome power of
the tax collector, he may still be stopped in his tracks if the taxpayer
can demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision
of the petitioner was filed on time with the respondent court in
accordance with Rep. Act No. 1125. And we also find that the claimed
deduction by the private respondent was permitted under the
Internal Revenue Code and should therefore not have been
disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is

AFFIRMED in toto, without costs.

SO ORDERED.

Teehankee, C.J., Narvasa, Gancayco and Griño-Aquino, JJ., concur.

G.R. No. 131359 May 5, 1999

MANILA ELECTRIC COMPANY, petitioner,

vs.
PROVINCE OF LAGUNA and BENITO R. BALAZO, in his capacity
as Provincial Treasurer of Laguna, respondents.

VITUG, J.:

On various dates, certain municipalities of the Province of Laguna,

including, Biñan, Sta. Rosa, San Pedro, Luisiana, Calauan and
Cabuyao, by virtue of existing laws then in effect, issued resolutions
through their respective municipal councils granting franchise in favor
of petitioner Manila Electric Company ("MERALCO") for the supply of
electric light, heat and power within their concerned areas. On 19
January 1983, MERALCO was likewise granted a franchise by the
National Electrification Administration to operate an electric light and
power service in the Municipality of Calamba, Laguna.

On 12 September 1991, Republic Act No. 7160, otherwise known as

the "Local Government Code of 1991," was enacted to take effect on
01 January 1992 enjoining local government units to create their own
sources of revenue and to levy taxes, fees and charges, subject to the
limitations expressed therein, consistent with the basic policy of local
autonomy. Pursuant to the provisions of the Code, respondent
province enacted Laguna Provincial Ordinance No. 01-92, effective 01
January 1993, providing, in part, as follows:

Sec. 2.09. Franchise Tax. — There is hereby imposed a tax on

businesses enjoying a franchise, at a rate of fifty percent (50%) of one
percent (1%) of the gross annual receipts, which shall include both
cash sales and sales on account realized during the preceding
calendar year within this province, including the territorial limits on
any city located in the province.
On the basis of the above ordinance, respondent Provincial Treasurer
sent a demand letter to MERALCO for the corresponding tax
payment. Petitioner MERALCO paid the tax, which then amounted to
P19,520.628.42, under protest. A formal claim for refund was
thereafter sent by MERALCO to the Provincial Treasurer of Laguna
claiming that the franchise tax it had paid and continued to pay to the
National Government pursuant to P.D. 551 already included the
franchise tax imposed by the Provincial Tax Ordinance. MERALCO,
contended that the imposition of a franchise tax under Section 2.09 of
Laguna Provincial Ordinance No. 01-92, insofar as it concerned
MERALCO, contravened the provisions of Section 1 of P.D. 551 which
read:

Any provision of law or local ordinance to the contrary

notwithstanding, the franchise tax payable by all grantees of
franchises to generate, distribute and sell electric current for light,
heat and power shall be two per cent (2%) of their gross receipts
received from the sale of electric current and from transactions
incident to the generation, distribution and sale of electric current.

Such franchise tax shall be payable to the Commissioner of Internal

Revenue or his duly authorized representative on or before the
twentieth day of the month following the end of each calendar
quarter or month, as may be provided in the respective franchise or
pertinent municipal regulation and shall, any provision of the Local
Tax Code or any other law to the contrary notwithstanding, be in lieu
of all taxes and assessments of whatever nature imposed by any
national or local authority on earnings, receipts, income and privilege
of generation, distribution and sale of electric current.

On 28 August 1995, the claim for refund of petitioner was denied in a

letter signed by Governor Jose D. Lina relied on a more recent law,
i.e. Republic Act No. 7160 or the Local Government Code of 1991,
than the old decree invoked by petitioner.

On 14 February 1996, petitioner MERALCO filed with the Regional

Trial Court of Sta. Cruz, Laguna, a complaint for refund, with a prayer
for the issuance of a writ of preliminary injunction and/or temporary
restraining order, against the Province of Laguna and also Benito R.
Balazo in his capacity as the Provincial Treasurer of Laguna. Aside
from the amount of P19,520,628.42 for which petitioner MERALCO
had priorly made a formal request for refund, petitioner thereafter
likewise made additional payments under protest on various dates
totaling P27,669,566.91.

The trial court, in its assailed decision of 30 September 1997,

dismissed the complaint and concluded:

WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING

CONSIDERATIONS, JUDGMENT is hereby rendered in favor of the
defendants and against the plaintiff, by:

1. Ordering the dismissal of the Complaint; and

2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid,

binding, reasonable and enforceable. 2

In the instant petition, MERALCO assails the above ruling and brings
up the following issues; viz:

1. Whether the imposition of a franchise tax under Section 2.09 of

Laguna Provincial Ordinance No. 01-92, insofar as petitioner is
concerned, is violative of the non-impairment clause of the
Constitution and Section 1 of Presidential Decree No. 551.

2. Whether Republic Act No. 7160, otherwise known Local

Government Code of 1991, has repealed, amended or modified
Presidential Decree No. 551.

3. Whether the doctrine of administrative remedies is applicable in

this case. 3

The petition lacks merit.

Prefatorily, it might be well to recall that local governments do not

have the inherent power to tax 4 except to the extent that such power
might be delegated to them either by the basic law or by statute.
Presently, under Article X of the 1987 Constitution, a general
delegation of that power has been given in favor of local government
units. Thus:

Sec. 3. The Congress shall enact a local government code which

shall provide for a more responsive and accountable local
government structure instituted through a system of decentralization
with effective mechanisms of recall, initiative, and referendum,
allocate among the different local government units their powers,
responsibilities, and resources, and provide for the qualifications,
election, appointment and removal, term, salaries, powers and
functions, and duties of local officials, and all other matters relating to
the organization and operation of the local units.

xxx xxx xxx

Sec. 5. Each local government unit shall have the power to create
its own sources of revenues and to levy taxes, fees, and charges
subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to the local
governments.

The 1987 Constitution has a counterpart provision in the 1973

Constitution which did come out with a similar delegation of revenue
making powers to local governments. 5

Under regime of the 1935 Constitution no similar delegation of tax

powers was provided, and local government units instead derived
their tax powers under a limited statutory authority. Whereas, then,
the delegation of tax powers granted at that time by statute to local
governments was confined and defined (outside of which the power
was deemed withheld), the present constitutional rule (starting with
the 1973 Constitution), however, would broadly confer such tax
powers subject only to specific exceptions that the law might
prescribe.

Under the now prevailing Constitution, where there is neither a grant

nor a prohibition by statute, the tax power must be deemed to exist
although Congress may provide statutory limitations and guidelines.
The basic rationale for the current rule is to safeguard the viability and
self-sufficiency of local government units by directly granting them
general and broad tax powers. Nevertheless, the fundamental law did
not intend the delegation to be absolute and unconditional; the
constitutional objective obviously is to ensure that, while the local
government units are being strengthened and made more
autonomous, 6 the legislature must still see to it that (a) the taxpayer
will not be over-burdened or saddled with multiple and unreasonable
impositions; (b) each local government unit will have its fair share of
available resources; (c) the resources of the national government will
not be unduly disturbed; and (d) local taxation will be fair, uniform,
and just.

The Local Government Code of 1991 has incorporated and adopted,

by and large, the provisions of the now repealed Local Tax Code,
which had been in effect since 01 July 1973, promulgated into law by
Presidential Decree
No. 2317 pursuant to the then provisions of Section 2, Article XI, of
the 1973 Constitution. The 1991 Code explicitly authorizes provincial
governments, notwithstanding "any exemption granted by any law or
other special law, . . . (to) impose a tax on businesses enjoying a
franchise." Section 137 thereof provides:

Sec. 137. Franchise Tax — Notwithstanding any exemption granted

by any law or other special law, the province may impose a tax on
businesses enjoying a franchise, at a rate not exceeding fifty percent
(50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized,
within its territorial jurisdiction. In the case of a newly started business,
the tax shall not exceed one-twentieth (1/20) of one percent (1%) of
the capital investment. In the succeeding calendar year, regardless of
when the business started to operate, the tax shall be based on the
gross receipts for the preceding calendar year, or any fraction thereof,
as provided herein. (Underscoring supplied for emphasis)

Indicative of the legislative intent to carry out the Constitutional

mandate of vesting broad tax powers to local government units, the
Local Government Code has effectively withdrawn under Section 193
thereof, tax exemptions or incentives theretofore enjoyed by certain
entities. This law states:

Sec. 193. Withdrawal of Tax Exemption Privileges — Unless

otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under R.A.
No. 6938, non-stock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the effectivity of this Code.
(Underscoring supplied for emphasis)

The Code, in addition, contains a general repealing clause in its

Section 534; thus:

Sec. 534. Repealing Clause. — . . .

(f) All general and special laws, acts, city charters, decrees,
executive orders, proclamations and administrative regulations, or
part or parts thereof which are inconsistent with any of the provisions
of this Code are hereby repealed or modified accordingly.
(Underscoring supplied for emphasis) 8

To exemplify, in Mactan Cebu International Airport Authority vs.

Marcos, 9 the Court upheld the withdrawal of the real estate tax
exemption previously enjoyed by Mactan Cebu International Airport
Authority. The Court ratiocinated:

. . . These policy considerations are consistent with the State policy to

ensure autonomy to local governments and the objective of the LGC
that they enjoy genuine and meaningful local autonomy to enable
them to attain their fullest development as self-reliant communities
and make them effective partners in the attainment of national goals.
The power to tax is the most effective instrument to raise needed
revenues to finance and support myriad activities if local government
units for the delivery of basic services essential to the promotion of
the general welfare and the enhancement of peace, progress, and
prosperity of the people. It may also be relevant to recall that the
original reasons for the withdrawal of tax exemption privileges
granted to government-owned and controlled corporations and all
other units of government were that such privilege resulted in serious
tax base erosion and distortions in the tax treatment of similarity
situated enterprises, and there was a need for these entities to share
in the requirements of development, fiscal or otherwise, by paying the
taxes and other charges due from them. 10

Petitioner in its complaint before the Regional Trial Court cited the
ruling of this Court in Province of Misamis Oriental vs. Cagayan
Electric Power and Light Company, Inc.; 11 thus:

In an earlier case, the phrase "shall be in lieu of all taxes and at any
time levied, established by, or collected by any authority" found in
the franchise of the Visayan Electric Company was held to exempt the
company from payment of the 5% tax on corporate franchise
provided in Section 259 of the Internal Revenue Code (Visayan
Electric Co. vs. David, 49 O.G. [No. 4] 1385)

Similarly, we ruled that the provision: "shall be in lieu of all taxes of

every name and nature" in the franchise of the Manila Railroad
(Subsection 12, Section 1, Act No. 1510) exempts the Manila Railroad
from payment of internal revenue tax for its importations of coal and
oil under Act No. 2432 and the Amendatory Acts of the Philippine
Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).

The same phrase found in the franchise of the Philippine Railway Co.
(Sec. 13, Act No. 1497) justified the exemption of the Philippine
Railway Company from payment of the tax on its corporate franchise
under Section 259 of the Internal Revenue Code, as amended by R.A.
No. 39 (Philippine Railway Co vs. Collector of Internal Revenue, 91
Phil. 35).

Those magic words, "shall be in lieu of all taxes" also excused the
Cotabato Light and Ice Plant Company from the payment of the tax
imposed by Ordinance No. 7 of the City of Cotabato (Cotabato Light
and Power Co. vs. City of Cotabato, 32 SCRA 231).

So was the exemption upheld in favor of the Carcar Electric and Ice
Plant Company when it was required to pay the corporate franchise
tax under Section 259 of the Internal Revenue Code, as amended by
R.A. No. 39 (Carcar Electric & Ice Plant vs. Collector of Internal
Revenue, 53 O.G. [No. 4]. 1068). This Court pointed out that such
exemption is part of the inducement for the acceptance of the
franchise and the rendition of public service by the grantee. 2

In the recent case of the City Government of San Pablo, etc., et al. vs.
Hon. Bienvenido V. Reyes, et al., 13 the Court has held that the
phrase in lieu of all taxes "have to give way to the peremptory
language of the Local Government Code specifically providing for the
withdrawal of such exemptions, privileges," and that "upon the
effectivity of the Local Government Code all exemptions except only
as provided therein can no longer be invoked by MERALCO to
disclaim liability for the local tax." In fine, the Court has viewed its
previous rulings as laying stress more on the legislative intent of the
amendatory law — whether the tax exemption privilege is to be
withdrawn or not — rather than on whether the law can withdraw,
without violating the Constitution, the tax exemption or not.

While the Court has, not too infrequently, referred to tax exemptions
contained in special franchises as being in the nature of contracts and
a part of the inducement for carrying on the franchise, these
exemptions, nevertheless, are far from being strictly contractual in
nature. Contractual tax exemptions, in the real sense of the term and
where the non-impairment clause of the Constitution can rightly be
invoked, are those agreed to by the taxing authority in contracts, such
as those contained in government bonds or debentures, lawfully
entered into by them under enabling laws in which the government,
acting in its private capacity, sheds its cloak of authority and waives its
governmental immunity. Truly, tax exemptions of this kind may not be
revoked without impairing the obligations of contracts. 14 These
contractual tax exemptions, however, are not to be confused with tax
exemptions granted under franchises. A franchise partakes the nature
of a grant which is beyond the purview of the non-impairment clause
of the Constitution.15 Indeed, Article XII, Section 11, of the 1987
Constitution, like its precursor provisions in the 1935 and the 1973
Constitutions, is explicit that no franchise for the operation of a public
utility shall be granted except under the condition that such privilege
shall be subject to amendment, alteration or repeal by Congress as
and when the common good so requires.

WHEREFORE, the instant petition is hereby DISMISSED. No costs.

1âwphi1.nêt

SO ORDERED.

Romero, Panganiban, Purisima and Gonzaga-Reyes, JJ., concur.

G.R. No. 120082 September 11, 1996

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY,

petitioner,
vs.
HON. FERDINAND J. MARCOS, in his capacity as the Presiding
Judge of the Regional Trial Court, Branch 20, Cebu City, THE CITY
OF CEBU, represented by its Mayor HON. TOMAS R. OSMEÑA,
and EUSTAQUIO B. CESA, respondents.

DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court on a pure question of

law are the decision of 22 March 19951 of the Regional Trial Court
(RTC) of Cebu City, Branch 20, dismissing the petition for declaratory
relief in Civil Case No. CEB-16900 entitled "Mactan Cebu
International Airport Authority vs. City of Cebu", and its order of 4,
May 19952 denying the motion to reconsider the decision.

We resolved to give due course to this petition for its raises issues
dwelling on the scope of the taxing power of local government-
owned and controlled corporations.

The uncontradicted factual antecedents are summarized in the instant

petition as follows:
Petitioner Mactan Cebu International Airport Authority (MCIAA) was
created by virtue of Republic Act No. 6958, mandated to "principally
undertake the economical, efficient and effective control,
management and supervision of the Mactan International Airport in
the Province of Cebu and the Lahug Airport in Cebu City, . . . and
such other Airports as may be established in the Province of Cebu . . .
(Sec. 3, RA 6958). It is also mandated to:

a) encourage, promote and develop international and domestic air

traffic in the Central Visayas and Mindanao regions as a means of
making the regions centers of international trade and tourism, and
accelerating the development of the means of transportation and
communication in the country; and

b) upgrade the services and facilities of the airports and to

formulate internationally acceptable standards of airport
accommodation and service.

Since the time of its creation, petitioner MCIAA enjoyed the privilege
of exemption from payment of realty taxes in accordance with Section
14 of its Charter.

Sec. 14. Tax Exemptions. — The authority shall be exempt from

realty taxes imposed by the National Government or any of its
political subdivisions, agencies and instrumentalities . . .

On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-

Charge, Office of the Treasurer of the City of Cebu, demanded
payment for realty taxes on several parcels of land belonging to the
petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A, 989-A, 474,
109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-
A), located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City,
in the total amount of P2,229,078.79.

Petitioner objected to such demand for payment as baseless and

unjustified, claiming in its favor the aforecited Section 14 of RA 6958
which exempt it from payment of realty taxes. It was also asserted that
it is an instrumentality of the government performing governmental
functions, citing section 133 of the Local Government Code of 1991
which puts limitations on the taxing powers of local government units:

Sec. 133. Common Limitations on the Taxing Powers of Local

Government Units. — Unless otherwise provided herein, the exercise
of the taxing powers of provinces, cities, municipalities, and barangay
shall not extend to the levy of the following:

a) ...

xxx xxx xxx

o) Taxes, fees or charges of any kind on the National Government,

its agencies and instrumentalities, and local government units.
(Emphasis supplied)

Respondent City refused to cancel and set aside petitioner's realty tax
account, insisting that the MCIAA is a government-controlled
corporation whose tax exemption privilege has been withdrawn by
virtue of Sections 193 and 234 of the Local Governmental Code that
took effect on January 1, 1992:

Sec. 193. Withdrawal of Tax Exemption Privilege. — Unless otherwise

provided in this Code, tax exemptions or incentives granted to, or
presently enjoyed by all persons whether natural or juridical, including
government-owned or controlled corporations, except local water
districts, cooperatives duly registered under RA No. 6938, non-stock,
and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code. (Emphasis supplied)

xxx xxx xxx

Sec. 234. Exemptions from Real Property taxes. — . . .

(a) ...

xxx xxx xxx

(c) ...
Except as provided herein, any exemption from payment of real
property tax previously granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or
controlled corporations are hereby withdrawn upon the effectivity of
this Code.

As the City of Cebu was about to issue a warrant of levy against the
properties of petitioner, the latter was compelled to pay its tax
account "under protest" and thereafter filed a Petition for Declaratory
Relief with the Regional Trial Court of Cebu, Branch 20, on December
29, 1994. MCIAA basically contended that the taxing powers of local
government units do not extend to the levy of taxes or fees of any
kind on an instrumentality of the national government. Petitioner
insisted that while it is indeed a government-owned corporation, it
nonetheless stands on the same footing as an agency or
instrumentality of the national government. Petitioner insisted that
while it is indeed a government-owned corporation, it nonetheless
stands on the same footing as an agency or instrumentality of the
national government by the very nature of its powers and functions.

Respondent City, however, asserted that MACIAA is not an

instrumentality of the government but merely a government-owned
corporation performing proprietary functions As such, all exemptions
previously granted to it were deemed withdrawn by operation of law,
as provided under Sections 193 and 234 of the Local Government
Code when it took effect on January 1, 1992.3

The petition for declaratory relief was docketed as Civil Case No.
CEB-16900.

In its decision of 22 March 1995,4 the trial court dismissed the

petition in light of its findings, to wit:

A close reading of the New Local Government Code of 1991 or RA

7160 provides the express cancellation and withdrawal of exemption
of taxes by government owned and controlled corporation per
Sections after the effectivity of said Code on January 1, 1992, to wit:
[proceeds to quote Sections 193 and 234]
Petitioners claimed that its real properties assessed by respondent
City Government of Cebu are exempted from paying realty taxes in
view of the exemption granted under RA 6958 to pay the same (citing
Section 14 of RA 6958).

However, RA 7160 expressly provides that "All general and special

laws, acts, city charters, decress [sic], executive orders, proclamations
and administrative regulations, or part or parts thereof which are
inconsistent with any of the provisions of this Code are hereby
repealed or modified accordingly." ([f], Section 534, RA 7160).

With that repealing clause in RA 7160, it is safe to infer and state that
the tax exemption provided for in RA 6958 creating petitioner had
been expressly repealed by the provisions of the New Local
Government Code of 1991.

So that petitioner in this case has to pay the assessed realty tax of its
properties effective after January 1, 1992 until the present.

This Court's ruling finds expression to give impetus and meaning to

the overall objectives of the New Local Government Code of 1991,
RA 7160. "It is hereby declared the policy of the State that the
territorial and political subdivisions of the State shall enjoy genuine
and meaningful local autonomy to enable them to attain their fullest
development as self-reliant communities and make them more
effective partners in the attainment of national goals. Towards this
end, the State shall provide for a more responsive and accountable
local government structure instituted through a system of
decentralization whereby local government units shall be given more
powers, authority, responsibilities, and resources. The process of
decentralization shall proceed from the national government to the
local government units. . . .5

Its motion for reconsideration having been denied by the trial court in
its 4 May 1995 order, the petitioner filed the instant petition based on
the following assignment of errors:
I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE
PETITIONER IS VESTED WITH GOVERNMENT POWERS AND
FUNCTIONS WHICH PLACE IT IN THE SAME CATEGORY AS AN
INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT.

II RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS

LIABLE TO PAY REAL PROPERTY TAXES TO THE CITY OF CEBU.

Anent the first assigned error, the petitioner asserts that although it is
a government-owned or controlled corporation it is mandated to
perform functions in the same category as an instrumentality of
Government. An instrumentality of Government is one created to
perform governmental functions primarily to promote certain aspects
of the economic life of the people.6 Considering its task "not merely
to efficiently operate and manage the Mactan-Cebu International
Airport, but more importantly, to carry out the Government policies of
promoting and developing the Central Visayas and Mindanao regions
as centers of international trade and tourism, and accelerating the
development of the means of transportation and communication in
the country,"7 and that it is an attached agency of the Department of
Transportation and Communication (DOTC),8 the petitioner "may
stand in [sic] the same footing as an agency or instrumentality of the
national government." Hence, its tax exemption privilege under
Section 14 of its Charter "cannot be considered withdrawn with the
passage of the Local Government Code of 1991 (hereinafter LGC)
because Section 133 thereof specifically states that the taxing powers
of local government units shall not extend to the levy of taxes of fees
or charges of any kind on the national government its agencies and
instrumentalities."

As to the second assigned error, the petitioner contends that being

an instrumentality of the National Government, respondent City of
Cebu has no power nor authority to impose realty taxes upon it in
accordance with the aforesaid Section 133 of the LGC, as explained in
Basco vs. Philippine Amusement and Gaming Corporation;9

Local governments have no power to tax instrumentalities of the

National Government. PAGCOR is a government owned or controlled
corporation with an original character, PD 1869. All its shares of stock
are owned by the National Government. . . .

PAGCOR has a dual role, to operate and regulate gambling casinos.

The latter joke is governmental, which places it in the category of an
agency or instrumentality of the Government. Being an
instrumentality of the Government, PAGCOR should be and actually is
exempt from local taxes. Otherwise, its operation might be burdened,
impeded or subjected to control by a mere Local government.

The states have no power by taxation or otherwise, to retard, impede,

burden or in any manner control the operation of constitutional laws
enacted by Congress to carry into execution the powers vested in the
federal government. (McCulloch v. Maryland, 4 Wheat 316, 4 L Ed.
579).

This doctrine emanates from the "supremacy" of the National

Government over local government.

Justice Holmes, speaking for the Supreme Court, make references to

the entire absence of power on the part of the States to touch, in that
way (taxation) at least, the instrumentalities of the United States
(Johnson v. Maryland, 254 US 51) and it can be agreed that no state
or political subdivision can regulate a federal instrumentality in such a
way as to prevent it from consummating its federal responsibilities, or
even to seriously burden it in the accomplishment of them. (Antieau
Modern Constitutional Law, Vol. 2, p. 140)

Otherwise mere creature of the State can defeat National policies thru
extermination of what local authorities may perceive to be
undesirable activities or enterprise using the power to tax as "a toll
for regulation" (U.S. v. Sanchez, 340 US 42). The power to tax which
was called by Justice Marshall as the "power to destroy" (McCulloch
v. Maryland, supra) cannot be allowed to defeat an instrumentality or
creation of the very entity which has the inherent power to wield it.
(Emphasis supplied)

It then concludes that the respondent Judge "cannot therefore

correctly say that the questioned provisions of the Code do not
contain any distinction between a governmental function as against
one performing merely proprietary ones such that the exemption
privilege withdrawn under the said Code would apply to all
government corporations." For it is clear from Section 133, in relation
to Section 234, of the LGC that the legislature meant to exclude
instrumentalities of the national government from the taxing power of
the local government units.

In its comment respondent City of Cebu alleges that as local a

government unit and a political subdivision, it has the power to
impose, levy, assess, and collect taxes within its jurisdiction. Such
power is guaranteed by the Constitution10 and enhanced further by
the LGC. While it may be true that under its Charter the petitioner
was exempt from the payment of realty taxes,11 this exemption was
withdrawn by Section 234 of the LGC. In response to the petitioner's
claim that such exemption was not repealed because being an
instrumentality of the National Government, Section 133 of the LGC
prohibits local government units from imposing taxes, fees, or
charges of any kind on it, respondent City of Cebu points out that the
petitioner is likewise a government-owned corporation, and Section
234 thereof does not distinguish between government-owned
corporation, and Section 234 thereof does not distinguish between
government-owned corporation, and Section 234 thereof does not
distinguish between government-owned or controlled corporations
performing governmental and purely proprietary functions.
Respondent city of Cebu urges this the Manila International Airport
Authority is a governmental-owned corporation, 12 and to reject the
application of Basco because it was "promulgated . . . before the
enactment and the singing into law of R.A. No. 7160," and was not,
therefore, decided "in the light of the spirit and intention of the
framers of the said law.

As a general rule, the power to tax is an incident of sovereignty and is

unlimited in its range, acknowledging in its very nature no limits, so
that security against its abuse is to be found only in the responsibility
of the legislature which imposes the tax on the constituency who are
to pay it. Nevertheless, effective limitations thereon may be imposed
by the people through their Constitutions.13 Our Constitution, for
instance, provides that the rule of taxation shall be uniform and
equitable and Congress shall evolve a progressive system of taxation.
14 So potent indeed is the power that it was once opined that "the
power to tax involves the power to destroy."15 Verily, taxation is a
destructive power which interferes with the personal and property for
the support of the government. Accordingly, tax statutes must be
construed strictly against the government and liberally in favor of the
taxpayer.16 But since taxes are what we pay for civilized society,17 or
are the lifeblood of the nation, the law frowns against exemptions
from taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayers and liberally in favor
of the taxing authority.18 A claim of exemption from tax payment
must be clearly shown and based on language in the law too plain to
be mistaken.19 Elsewise stated, taxation is the rule, exemption
therefrom is the exception.20 However, if the grantee of the
exemption is a political subdivision or instrumentality, the rigid rule of
construction does not apply because the practical effect of the
exemption is merely to reduce the amount of money that has to be
handled by the government in the course of its operations.21

The power to tax is primarily vested in the Congress; however, in our

jurisdiction, it may be exercised by local legislative bodies, no longer
merely by virtue of a valid delegation as before, but pursuant to direct
authority conferred by Section 5, Article X of the Constitution.22
Under the latter, the exercise of the power may be subject to such
guidelines and limitations as the Congress may provide which,
however, must be consistent with the basic policy of local autonomy.

There can be no question that under Section 14 of R.A. No. 6958 the
petitioner is exempt from the payment of realty taxes imposed by the
National Government or any of its political subdivisions, agencies,
and instrumentalities. Nevertheless, since taxation is the rule and
exemption therefrom the exception, the exemption may thus be
withdrawn at the pleasure of the taxing authority. The only exception
to this rule is where the exemption was granted to private parties
based on material consideration of a mutual nature, which then
becomes contractual and is thus covered by the non-impairment
clause of the Constitution.23
The LGC, enacted pursuant to Section 3, Article X of the constitution
provides for the exercise by local government units of their power to
tax, the scope thereof or its limitations, and the exemption from
taxation.

Section 133 of the LGC prescribes the common limitations on the

taxing powers of local government units as follows:

Sec. 133. Common Limitations on the Taxing Power of Local

Government Units. — Unless otherwise provided herein, the exercise
of the taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:

(a) Income tax, except when levied on banks and other financial
institutions;

(b) Documentary stamp tax;

(c) Taxes on estates, "inheritance, gifts, legacies and other

acquisitions mortis causa, except as otherwise provided herein

(d) Customs duties, registration fees of vessels and wharfage on

wharves, tonnage dues, and all other kinds of customs fees charges
and dues except wharfage on wharves constructed and maintained by
the local government unit concerned:

(e) Taxes, fees and charges and other imposition upon goods
carried into or out of, or passing through, the territorial jurisdictions of
local government units in the guise or charges for wharfages, tolls for
bridges or otherwise, or other taxes, fees or charges in any form
whatsoever upon such goods or merchandise;

(f) Taxes fees or charges on agricultural and aquatic products when

sold by marginal farmers or fishermen;

(g) Taxes on business enterprise certified to be the Board of

Investment as pioneer or non-pioneer for a period of six (6) and four
(4) years, respectively from the date of registration;
(h) Excise taxes on articles enumerated under the National Internal
Revenue Code, as amended, and taxes, fees or charges on petroleum
products;

(i) Percentage or value added tax (VAT) on sales, barters or

exchanges or similar transactions on goods or services except as
otherwise provided herein;

(j) Taxes on the gross receipts of transportation contractor and

person engage in the transportation of passengers of freight by hire
and common carriers by air, land, or water, except as provided in this
code;

(k) Taxes on premiums paid by ways reinsurance or retrocession;

(l) Taxes, fees, or charges for the registration of motor vehicles and
for the issuance of all kinds of licenses or permits for the driving of
thereof, except, tricycles;

(m) Taxes, fees, or other charges on Philippine product actually

exported, except as otherwise provided herein;

(n) Taxes, fees, or charges, on Countryside and Barangay Business

Enterprise and Cooperatives duly registered under R.A. No. 6810 and
Republic Act Numbered Sixty nine hundred thirty-eight (R.A. No.
6938) otherwise known as the "Cooperative Code of the Philippines;
and

(o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE NATIONAL

GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES, AND
LOCAL GOVERNMENT UNITS. (emphasis supplied)

Needless to say the last item (item o) is pertinent in this case. The
"taxes, fees or charges" referred to are "of any kind", hence they
include all of these, unless otherwise provided by the LGC. The term
"taxes" is well understood so as to need no further elaboration,
especially in the light of the above enumeration. The term "fees"
means charges fixed by law or Ordinance for the regulation or
inspection of business activity,24 while "charges" are pecuniary
liabilities such as rents or fees against person or property.25

Among the "taxes" enumerated in the LGC is real property tax, which
is governed by Section 232. It reads as follows:

Sec. 232. Power to Levy Real Property Tax. — A province or city or a

municipality within the Metropolitan Manila Area may levy on an
annual ad valorem tax on real property such as land, building,
machinery and other improvements not hereafter specifically
exempted.

Section 234 of LGC provides for the exemptions from payment of real
property taxes and withdraws previous exemptions therefrom granted
to natural and juridical persons, including government owned and
controlled corporations, except as provided therein. It provides:

Sec. 234. Exemptions from Real Property Tax. — The following are
exempted from payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of

its political subdivisions except when the beneficial use thereof had
been granted, for reconsideration or otherwise, to a taxable person;

(b) Charitable institutions, churches, parsonages or convents

appurtenants thereto, mosques nonprofits or religious cemeteries and
all lands, building and improvements actually, directly, and exclusively
used for religious charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and
exclusively used by local water districts and government-owned or
controlled corporations engaged in the supply and distribution of
water and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as

provided for under R.A. No. 6938; and;

(e) Machinery and equipment used for pollution control and

environmental protection.
Except as provided herein, any exemptions from payment of real
property tax previously granted to or presently enjoyed by, all persons
whether natural or juridical, including all government owned or
controlled corporations are hereby withdrawn upon the effectivity of
his Code.

These exemptions are based on the ownership, character, and use of

the property. Thus;

(a) Ownership Exemptions. Exemptions from real property taxes

on the basis of ownership are real properties owned by: (i) the
Republic, (ii) a province, (iii) a city, (iv) a municipality, (v) a barangay,
and (vi) registered cooperatives.

(b) Character Exemptions. Exempted from real property taxes

on the basis of their character are: (i) charitable institutions, (ii) houses
and temples of prayer like churches, parsonages or convents
appurtenant thereto, mosques, and (iii) non profit or religious
cemeteries.

(c) Usage exemptions. Exempted from real property taxes on the

basis of the actual, direct and exclusive use to which they are devoted
are: (i) all lands buildings and improvements which are actually,
directed and exclusively used for religious, charitable or educational
purpose; (ii) all machineries and equipment actually, directly and
exclusively used or by local water districts or by government-owned
or controlled corporations engaged in the supply and distribution of
water and/or generation and transmission of electric power; and (iii)
all machinery and equipment used for pollution control and
environmental protection.

To help provide a healthy environment in the midst of the

modernization of the country, all machinery and equipment for
pollution control and environmental protection may not be taxed by
local governments.

2. Other Exemptions Withdrawn. All other exemptions previously

granted to natural or juridical persons including government-owned
or controlled corporations are withdrawn upon the effectivity of the
Code.26

Section 193 of the LGC is the general provision on withdrawal of tax

exemption privileges. It provides:

Sec. 193. Withdrawal of Tax Exemption Privileges. — Unless

otherwise provided in this code, tax exemptions or incentives granted
to or presently enjoyed by all persons, whether natural or juridical,
including government-owned, or controlled corporations, except local
water districts, cooperatives duly registered under R.A. 6938, non
stock and non profit hospitals and educational constitutions, are
hereby withdrawn upon the effectivity of this Code.

On the other hand, the LGC authorizes local government units to

grant tax exemption privileges. Thus, Section 192 thereof provides:

Sec. 192. Authority to Grant Tax Exemption Privileges. — Local

government units may, through ordinances duly approved, grant tax
exemptions, incentives or reliefs under such terms and conditions as
they may deem necessary.

The foregoing sections of the LGC speaks of: (a) the limitations on the
taxing powers of local government units and the exceptions to such
limitations; and (b) the rule on tax exemptions and the exceptions
thereto. The use of exceptions of provisos in these section, as shown
by the following clauses:

(1) "unless otherwise provided herein" in the opening paragraph of

Section 133;

(2) "Unless otherwise provided in this Code" in section 193;

(3) "not hereafter specifically exempted" in Section 232; and

(4) "Except as provided herein" in the last paragraph of Section 234

initially hampers a ready understanding of the sections. Note, too,

that the aforementioned clause in section 133 seems to be
inaccurately worded. Instead of the clause "unless otherwise provided
herein," with the "herein" to mean, of course, the section, it should
have used the clause "unless otherwise provided in this Code." The
former results in absurdity since the section itself enumerates what are
beyond the taxing powers of local government units and, where
exceptions were intended, the exceptions were explicitly indicated in
the text. For instance, in item (a) which excepts the income taxes
"when livied on banks and other financial institutions", item (d) which
excepts "wharfage on wharves constructed and maintained by the
local government until concerned"; and item (1) which excepts taxes,
fees, and charges for the registration and issuance of license or
permits for the driving of "tricycles". It may also be observed that
within the body itself of the section, there are exceptions which can
be found only in other parts of the LGC, but the section
interchangeably uses therein the clause "except as otherwise
provided herein" as in items (c) and (i), or the clause "except as
otherwise provided herein" as in items (c) and (i), or the clause
"excepts as provided in this Code" in item (j). These clauses would be
obviously unnecessary or mere surplus-ages if the opening clause of
the section were" "Unless otherwise provided in this Code" instead of
"Unless otherwise provided herein". In any event, even if the latter is
used, since under Section 232 local government units have the power
to levy real property tax, except those exempted therefrom under
Section 234, then Section 232 must be deemed to qualify Section
133.

Thus, reading together Section 133, 232 and 234 of the LGC, we
conclude that as a general rule, as laid down in Section 133 the taxing
powers of local government units cannot extend to the levy of inter
alia, "taxes, fees, and charges of any kind of the National
Government, its agencies and instrumentalties, and local government
units"; however, pursuant to Section 232, provinces, cities,
municipalities in the Metropolitan Manila Area may impose the real
property tax except on, inter alia, "real property owned by the
Republic of the Philippines or any of its political subdivisions except
when the beneficial used thereof has been granted, for consideration
or otherwise, to a taxable person", as provided in item (a) of the first
paragraph of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by
natural or juridical persons, including government-owned and
controlled corporations, Section 193 of the LGC prescribes the
general rule, viz., they are withdrawn upon the effectivity of the LGC,
except upon the effectivity of the LGC, except those granted to local
water districts, cooperatives duly registered under R.A. No. 6938, non
stock and non-profit hospitals and educational institutions, and unless
otherwise provided in the LGC. The latter proviso could refer to
Section 234, which enumerates the properties exempt from real
property tax. But the last paragraph of Section 234 further qualifies
the retention of the exemption in so far as the real property taxes are
concerned by limiting the retention only to those enumerated there-
in; all others not included in the enumeration lost the privilege upon
the effectivity of the LGC. Moreover, even as the real property is
owned by the Republic of the Philippines, or any of its political
subdivisions covered by item (a) of the first paragraph of Section 234,
the exemption is withdrawn if the beneficial use of such property has
been granted to taxable person for consideration or otherwise.

Since the last paragraph of Section 234 unequivocally withdrew, upon

the effectivity of the LGC, exemptions from real property taxes
granted to natural or juridical persons, including government-owned
or controlled corporations, except as provided in the said section, and
the petitioner is, undoubtedly, a government-owned corporation, it
necessarily follows that its exemption from such tax granted it in
Section 14 of its charter, R.A. No. 6958, has been withdrawn. Any
claim to the contrary can only be justified if the petitioner can seek
refuge under any of the exceptions provided in Section 234, but not
under Section 133, as it now asserts, since, as shown above, the said
section is qualified by Section 232 and 234.

In short, the petitioner can no longer invoke the general rule in

Section 133 that the taxing powers of the local government units
cannot extend to the levy of:

(o) taxes, fees, or charges of any kind on the National Government,

its agencies, or instrumentalities, and local government units.
I must show that the parcels of land in question, which are real
property, are any one of those enumerated in Section 234, either by
virtue of ownership, character, or use of the property. Most likely, it
could only be the first, but not under any explicit provision of the said
section, for one exists. In light of the petitioner's theory that it is an
"instrumentality of the Government", it could only be within be first
item of the first paragraph of the section by expanding the scope of
the terms Republic of the Philippines" to embrace . . . . . .
"instrumentalities" and "agencies" or expediency we quote:

(a) real property owned by the Republic of the Philippines, or any of

the Philippines, or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person.

This view does not persuade us. In the first place, the petitioner's
claim that it is an instrumentality of the Government is based on
Section 133(o), which expressly mentions the word
"instrumentalities"; and in the second place it fails to consider the
fact that the legislature used the phrase "National Government, its
agencies and instrumentalities" "in Section 133(o),but only the phrase
"Republic of the Philippines or any of its political subdivision "in
Section 234(a).

The terms "Republic of the Philippines" and "National Government"

are not interchangeable. The former is boarder and synonymous with
"Government of the Republic of the Philippines" which the
Administrative Code of the 1987 defines as the "corporate
governmental entity though which the functions of the government
are exercised through at the Philippines, including, saves as the
contrary appears from the context, the various arms through which
political authority is made effective in the Philippines, whether
pertaining to the autonomous reason, the provincial, city, municipal or
barangay subdivision or other forms of local government."27 These
autonomous regions, provincial, city, municipal or barangay
subdivisions" are the political subdivision.28

On the other hand, "National Government" refers "to the entire

machinery of the central government, as distinguished from the
different forms of local Governments."29 The National Government
then is composed of the three great departments the executive, the
legislative and the judicial.30

An "agency" of the Government refers to "any of the various units of

the Government, including a department, bureau, office
instrumentality, or government-owned or controlled corporation, or a
local government or a distinct unit therein;"31 while an
"instrumentality" refers to "any agency of the National Government,
not integrated within the department framework, vested with special
functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying
operational autonomy; usually through a charter. This term includes
regulatory agencies, chartered institutions and government-owned
and controlled corporations".32

If Section 234(a) intended to extend the exception therein to the

withdrawal of the exemption from payment of real property taxes
under the last sentence of the said section to the agencies and
instrumentalities of the National Government mentioned in Section
133(o), then it should have restated the wording of the latter. Yet, it
did not Moreover, that Congress did not wish to expand the scope of
the exemption in Section 234(a) to include real property owned by
other instrumentalities or agencies of the government including
government-owned and controlled corporations is further borne out
by the fact that the source of this exemption is Section 40(a) of P.D.
No. 646, otherwise known as the Real Property Tax Code, which
reads:

Sec 40. Exemption from Real Property Tax. — The exemption shall
be as follows:

(a) Real property owned by the Republic of the Philippines or any of

its political subdivisions and any government-owned or controlled
corporations so exempt by is charter: Provided, however, that this
exemption shall not apply to real property of the above mentioned
entities the beneficial use of which has been granted, for
consideration or otherwise, to a taxable person.
Note that as a reproduced in Section 234(a), the phrase "and any
government-owned or controlled corporation so exempt by its
charter" was excluded. The justification for this restricted exemption
in Section 234(a) seems obvious: to limit further tax exemption
privileges, specially in light of the general provision on withdrawal of
exemption from payment of real property taxes in the last paragraph
of property taxes in the last paragraph of Section 234. These policy
considerations are consistent with the State policy to ensure
autonomy to local governments33 and the objective of the LGC that
they enjoy genuine and meaningful local autonomy to enable them to
attain their fullest development as self-reliant communities and make
them effective partners in the attainment of national goals.34 The
power to tax is the most effective instrument to raise needed
revenues to finance and support myriad activities of local government
units for the delivery of basic services essential to the promotion of
the general welfare and the enhancement of peace, progress, and
prosperity of the people. It may also be relevant to recall that the
original reasons for the withdrawal of tax exemption privileges
granted to government-owned and controlled corporations and all
other units of government were that such privilege resulted in serious
tax base erosion and distortions in the tax treatment of similarly
situated enterprises, and there was a need for this entities to share in
the requirements of the development, fiscal or otherwise, by paying
the taxes and other charges due from them.35

The crucial issues then to be addressed are: (a) whether the parcels of
land in question belong to the Republic of the Philippines whose
beneficial use has been granted to the petitioner, and (b) whether the
petitioner is a "taxable person".

Section 15 of the petitioner's Charter provides:

Sec. 15. Transfer of Existing Facilities and Intangible Assets. — All

existing public airport facilities, runways, lands, buildings and other
properties, movable or immovable, belonging to or presently
administered by the airports, and all assets, powers, rights, interests
and privileges relating on airport works, or air operations, including all
equipment which are necessary for the operations of air navigation,
acrodrome control towers, crash, fire, and rescue facilities are hereby
transferred to the Authority: Provided however, that the operations
control of all equipment necessary for the operation of radio aids to
air navigation, airways communication, the approach control office,
and the area control center shall be retained by the Air Transportation
Office. No equipment, however, shall be removed by the Air
Transportation Office from Mactan without the concurrence of the
authority. The authority may assist in the maintenance of the Air
Transportation Office equipment.

The "airports" referred to are the "Lahug Air Port" in Cebu City and
the "Mactan International AirPort in the Province of Cebu",36 which
belonged to the Republic of the Philippines, then under the Air
Transportation Office (ATO).37

It may be reasonable to assume that the term "lands" refer to "lands"

in Cebu City then administered by the Lahug Air Port and includes
the parcels of land the respondent City of Cebu seeks to levy on for
real property taxes. This section involves a "transfer" of the "lands"
among other things, to the petitioner and not just the transfer of the
beneficial use thereof, with the ownership being retained by the
Republic of the Philippines.

This "transfer" is actually an absolute conveyance of the ownership

thereof because the petitioner's authorized capital stock consists of,
inter alia "the value of such real estate owned and/or administered by
the airports."38 Hence, the petitioner is now the owner of the land in
question and the exception in Section 234(c) of the LGC is
inapplicable.

Moreover, the petitioner cannot claim that it was never a "taxable

person" under its Charter. It was only exempted from the payment of
real property taxes. The grant of the privilege only in respect of this
tax is conclusive proof of the legislative intent to make it a taxable
person subject to all taxes, except real property tax.

Finally, even if the petitioner was originally not a taxable person for
purposes of real property tax, in light of the forgoing disquisitions, it
had already become even if it be conceded to be an "agency" or
"instrumentality" of the Government, a taxable person for such
purpose in view of the withdrawal in the last paragraph of Section 234
of exemptions from the payment of real property taxes, which, as
earlier adverted to, applies to the petitioner.

Accordingly, the position taken by the petitioner is untenable.

Reliance on Basco vs. Philippine Amusement and Gaming
Corporation39 is unavailing since it was decided before the effectivity
of the LGC. Besides, nothing can prevent Congress from decreeing
that even instrumentalities or agencies of the government performing
governmental functions may be subject to tax. Where it is done
precisely to fulfill a constitutional mandate and national policy, no one
can doubt its wisdom.

WHEREFORE, the instant petition is DENIED. The challenged

decision and order of the Regional Trial Court of Cebu, Branch 20, in
Civil Case No. CEB-16900 are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Narvasa, C.J., Melo, Francisco and Panganiban, JJ., concur.