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[ G.R. No. 131359. October 4, 1999]
MANILA ELECTRIC CO. vs. PROVINCE OF LAGUNA, et al.
THIRD DIVISION
Gentlemen:
Quoted hereunder, for your information, is a resolution of this Court dated OCT 4, 1999.
G.R. No. 131359 (Manila Electric Company vs. Province of Laguna and Benito R. Balazo, in his capacity as Provincial Treasurer of Laguna.)
On the basis of Republic Act No. 7160 (Local Government Code of 1991), respondent province of Laguna enacted Laguna Provincial Ordinance No. 01-92, effective 01 January 1993, imposing a tax on businesses enjoying a franchise, at a rate of fifty (50%) of one percent (1%) of their annual receipts. Upon demand from respondent Provincial Treasurer, petitioner Manila Electric Company ("MERALCO") paid the tax, then amounting to P19,520,628.42, under protest. A formal claim for refund was forthwith sent by MERALCO. The latter contended that the franchise tax it was paying to the National Government pursuant to P.D. 551 already included the franchise tax imposed under the Provincial Tax Ordinance. MERALCO argued that Laguna Provincial Ordinance No. 01-92 contravened the provisions of Section 1 of P.D. 551, hereunder quoted, thus -
"Section 1. 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 (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 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."
MERALCO's claim for refund was denied by the Province of Laguna. MERALCO thereupon filed with the Regional Trial Court of Sta. Cruz, Laguna, a complaint for refund against the province.
The trial court rendered its decision, dated 30 September 1992, dismissing the complaint of MERALCO and declaring Laguna Provincial Tax Ordinance No. 01-92 valid, binding, reasonable and enforceable. In its petition before this Court, MERALCO brought 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 as the Local Government Code of 1991, has repealed, amended or modified Presidential Decree No. 551.
"3. Whether the doctrine of exhaustion of administrative remedies is applicable in this case." 1 [Rollo, p. 113.]
This Court, in its full-length decision of 05 May 1999, dismissed the petition.
In its instant motion for reconsideration, MERALCO argues that the "in lieu of all taxes" provision found in special franchises does not provide an exemption from taxation but is rather in the nature of a commutative tax and so, as a consequence, there can really be no exemption deemed withdrawn under Sections 137 and 193 of the Local Government Code of 1991.
In a number of cases, this Court had construed the "in lieu of all taxes" provision to be in the nature of an exemption. In Province of Misamis Oriental vs. Cagayan Electric Power and Light Company, Inc.,2 [181 SCRA 38.] the Court has held:
"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." 3 [At. pp. 42-43.]
In the recent case of City Government of San Pablo Laguna, et. al., vs. Hon. Bienvenido Reyes and MERALCO,4 [G.R. No. 127708, 25 March 1999.] the same issue has again been briefly discussed by the Court. Thus -
"Private respondents further argue that the 'in lieu of' provision contained in P.D. 551, Act No. 3648 and R.A. 2340 does not partake of the nature of the nature of an exemption, but is a 'commutative tax.' This contention was raised but was not upheld in Cagayan Electric Power and Light Co., Inc. vs. Commissioner of Internal Revenue (138 SCRA 629 at p. 631) wherein the Supreme Court stated:
"'x x x Congress could impair petitioner's legislative franchise by making it liable for income tax from which heretofore it was exempted by virtue of the exemption provided for in section 3 of its franchise x x x.
"'x x x Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income tax all corporate taxpayers not expressly exempted therein and in section 27 of the Code, had the effect of withdrawing petitioner's exemption from income tax x x x."'
In its motion for reconsideration, petitioner MERALCO additionally alleges that:
"5. There can be no dispute that under Article XII, Section II of the 1987 Constitution no franchise for operation of a public utility shall be granted except under the condition that such privileges shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires. However, the imposition of franchise tax pursuant to Ordinance 01-92 of the Province of Laguna will not be for the common good. Such imposition will inevitably result in the increase of the operational cost of MERALCO which ultimately will be past on to its customers. x x x
"Moreover, this Honorable Division cannot reverse the ruling in Province of Misamis Oriental vs. Cagayan Electric, Court of Appeals 195 SCRA 444 that ' a legislative franchise partakes the nature of a contract' which cannot be impaired without violating the Section 4(3), Article VIII of the Constitution quoted above." 5 [Rollo, p. 148.]
In the recent case of City Government of San Pablo vs. Reyes and MERALCO,6 [Supra.] the foregoing issue has been sufficiently disposed of in this wise, thus:
"Private respondent's invocation of the non-impairment clause of the Constitution is accordingly unavailing. The LGC was enacted in pursuance of the constitutional policy to ensure autonomy to local governments and to enable them to attain fullest development as self-reliant communities. Thus, in Mactan Cebu International Airport Authority vs. Marcos, supra, this Court pointed out, in upholding the withdrawal of the real estate tax exemption previously enjoyed by the Mactan Cebu International Airport Authority, as follows:
"Note that as 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 exemption privileges, especially in light of the general provision on withdrawal of tax exemption privileges in Section 193 and the special provision on withdrawal of exemption from payment of real property taxes in the last paragraph of Section 234. 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 of 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 promulgation 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 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 similarity situated enterprise, 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.'
"The Court therein concluded that:
"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.'
"The power to tax is primarily vested in 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 10 of the Constitution. Thus, Article 10, Section 5 of the Constitution reads:
"Section 5 - Each Local Government unit shall have the power to create its own sources of revenue 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 important legal effect of Section 5 is tat henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will have to resolved in favor of municipal corporations.
"There is further basis for the conclusion that the non-impairment of contract clause cannot be invoked to uphold Meralco's exemption from the local tax. Escudero Electric Co. was originally given the legislative franchise under Act 3648 to operate an electric light and power system in the City of San Pablo and nearby municipalities. The term of the franchise under Act No. 3648 is a period of fifty years from the Act's approval in 1929. The said law provided that the franchise is granted upon the condition that it shall be subject to amendment or repeal by the Congress of the United States. Under the 1935, the 1973 and the 1987 Constitution, no franchise or right shall be amendment, altercation or repeal by the National Assembly when the public interest so requires. With or without reservations clause, franchises are subject to altercations through a reasonable exercise of the police power; they are also subject to altercation by the power to tax, which like police power cannot be contracted away.
"Finally, while the matter is not of controlling significance, the Court notes that whereas the original Escudero franchise exempted the franchise holder from all taxes levied or collected 'now or in the future' this phrase is noticeably omitted in the counterpart provision of P.D. 551: that said omission is intended not to foreclose future taxes may reasonably be deduced by statutory construction."
In the cases of Lim vs. Pacquing and Guingona vs. Reyes,7 [240 SCRA 649.] Associated Development Corporation (ADC), a franchise holder to maintain and operate the jai-alai, has likewise argued that P.D. No. 771, recalling the power of local governments to issue franchises and permits and revoking existing franchises and permits issued by local governments, is unconstitutional for violation of the non-impairment and equal protection clauses of the Constitution. Rejecting this contention, this Court has reminded, among other things, that "a franchise is not in the strict sense a simple contract but rather it is, more importantly, a mere privilege specially in matters which are within the government's power to regulate and even prohibit through the exercise of the police power."
WHEREFORE, the motion for reconsideration is DENIED WITH FINALITY,
Very truly yours,
(Sgd.) JULIETA Y. CARREON
Clerk of Court
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