THE PROVINCIAL TREASURER OF LEYTE, represented by LORETO BALLAIS v. NATIONAL POWER CORPORATION

REPUBliC OF THE PHiliPPINES Coon of Tax Appeals QUEZON CITY FIRST DIVISION THE PROVINCIAL TREASURER OF CTA AC No. 64 LEYTE ( formerly represented by LORETO BALLAIS and presently by (Civil Case No. 2005-11-124, RODOLFO P. BADIABLE , !CO- Regional Trial Cou rt, 81h Judicial Provincial Treasurer), Region , Branch 6, Tacloban City, Leyte ) Petitioner-Appellee, Members : -versus - ACOSTA, Chairperson UY, and FASON-VICTORINO, JJ. NATIONAL POWER CORPORATION Promulgated: OCT~ ~- Respondent-Appellant. -X X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - DECISION UY, J.. : This is an appeal pursuant to Section 7(a)(3) of Republic Act (R.A.) No. 9282 in relation to Rule 42 of the 1997 Rules on Civil Procedure1 assailing the Decision of the Regional Trial Court (RTC), Branch 6, 8th Judicial Region, Tacloban City dated December 21, 2009 in Civil Case No. 2005-11-124 entitled "National Power Corporation/ Appellant, vs. The Provincial Treasurer of Leyte/ rep. by Loreto Ballais/ Appellee /~ The dispositive portion of the assailed Decision reads: 1 Rule 8, Section 4 (a), Revised Ru les of the Court ofTax Appeals which pertinent ly provides that: "An appeal fro m a decis ion or ruling x x x of the Reg ional Tria l Court in the exerc ise of the ir origina l j urisdiction, shall be take n to the Court by fi ling before it a petition for review as prov ided in Rul e 42 ~ ofthe Ru les of Court. The Court in Division shall act on the appeal. " �~

DEC ISION CTA AC NO. 64 "WHEREFORE, premises considered, Appellants' Appeal is hereby GRANTED. The Letter/Decision of the Provincial Treasurer of Leyte, issued on September 19, 2005, is hereby declared NULL and VOID, and therefore, SET ASIDE. The National Power Corporation is NOT LIABLE for the payment of Franchise Tax assessed under the Notice of Assessment and Demand for Payment, dated July 22, 2005, issued by the Provincial Treasurer of Leyte. SO ORDERED." THE FACTS The significant factual antecedents as culled from the records of this case are as follows: Petitioner-appellee, the Provincial Treasurer of Leyte (to be referred to as the Provincial Treasurer), is an officer of the Province of Leyte, a local government unit, and is responsible for the collection of the Province's local taxes, including but not limited to, franchise tax. Respondent-appellant, National Power Corporation (to be referred to as NPC) is a government-owned and controlled corporation organized pursuant to Republic Act (R.A.) No. 6395, as amended, engaged in the generation and transmission of electricity. It maintains a geothermal power plant within the territorial jurisdiction of the Province of Leyte. NPC received on July 19, 2005 a "Notice of Assessment and Demand for Payment" dated July 11, 20052 from the Provincial Treasurer . In the said Notice of Assessment, NPC was assessed for franchise tax in the amount of 2 Annex "A" , Docket, p. 78

DEC IS ION CTA ACNO. 64 P70,999,230.00, inclusive of surcharges and interest, covering the period from 2000 to 2004 for its operation of Tongonan Geothermal Power Plant. Petitioner sent another "Notice of Assessment and Demand for Payment" dated July 22, 20053, which NPC received on July 28, 2005, assessing and demanding payment of franchise tax in the amount P43,327,580.43 for the period of 2001 to 2004. NPC refused to heed the demand of petitioner, arguing that it is exempt from franchise tax imposed under Section 137 of the Local Government Code (LGC) of 1991 since it is not enjoying a franchise in view of R.A. No. 9136, known as the Electric Power Industry Reform Act (EPIRA), which provides that a franchise is not required for any person or entity engaged in power generation and supply of electricity. On September 15, 2005, the Provincial Treasurer issued the "2nd Notice of Assessment and Demand for Payment" reiterating its demand for immediate payment of the assessed franchi se tax.4 Subsequently, NPC was declared delinquent in the payment of the said franchise tax per "Certificate of Delinquency" dated November 10, 2005.5 On November 29, 2005, NPC filed an "Appeal (With Prayer for Issuance of Temporary Restraining Order/Preliminary Injunction)" before Branch 6, RTC of Tacloban City praying that: (1) A Temporary Restraining Order/Preliminary Injunction be issued enjoining the Provincial treasurer from seizing, levying or selling the Tongonan Geot hermal Plant; (2) The decision of 3 Annex "D-1 ", Docket, p. 81 t 4 Annex "F", Docket, p. 87 5 Annex "G", Docket, pp. 89

DEC ISION CTA AC NO. 64 the Provincial Treasurer of Leyte dated September 19, 2005 be NULLIFIED AND SET ASIDE; (3) Subsequently, NPC be declared NOT LIABLE for payment of Franchise Tax assessed under the Notice of Assessment and Demand for Payment dated July 22, 2005 from the period 2001 to 2004. 6 In response to the summons issued by the RTC/ the Provincial Treasurer filed his Answer on April 28, 2006, praying for the dismissal of the appeal and that the Province of Leyte be declared as entitled to collect the local franchise tax. 8 During the pre-trial conference held on November 9, 2007 at the RTC, the parties agreed that the issues involved are purely questions of law, and in view thereof, the court a quo directed the parties to submit their respective memorandum in support of the summary judg ment.9 After the parties filed their respective Memorandum,10 the RTC rendered the assailed Decision11 on December 21, 2009, granting the appeal and declaring respondent not liable to pay the assessed franchise tax. It stated that the EPIRA cl early provides fo r the withd rawal of the requirement for the procurement of a franchise for NPC, and without a franchise, it cannot be held liable to pay the fran chise tax. It likewise rul ed that petitioner's reliance on National Power Corporation vs. City of Cabanatuad 2 (Cabanatuan case) is misplaced becau se that case wa s instituted before the enactment of 6 Docket, pp. 91- 103 . 7 RTC Records, p. 27. 8 RTC Records, pp. 45-64. 9 RTC Records, p. 129. 10 RTC Records, pp. 15 1 and 177. 11 Docket, pp. 36-42 ; RTC Record s, pp. 184- 190. 12 G.R. No . 149 110, April9 , 2003.

DECISION CTA AC NO. 64 the EPIRA. In that case, NPC still has a franchise, a government corporation, and a "power generating and distribution agency"; while in the appealed case, NPC is already divested of its franchise and had already been transformed into a mere power generating agency. Aggrieved, the Provincial Treasurer fil ed the instant Petition for Review on March 8, 201013, ascribing the following errors allegedly committed by the court a quo: "1. With all due and insurmountable respect, the Regional Trial Court committed reversible error in holding that, because the National Power Corporation is no longer required to secure a franchise, it follows that it is no longer liable for the payment of franchise tax. 2. With all due and insurmountable respect, the Regional Trial Court committed reversible error in holding that, the enactment of the EPIRA LAW makes the Cabanatuan Doctrine inapplicable in the issue of whether or not NPC is liable to pay franchise tax." After NPC filed its Commentl4 on August 4, 2010, the Petition for Review was given due course in a Resoluti on15 dated August 17, 2010. In the same Resolution, the Court ordered the parties to file their respective Memorandum. The Provincial Trea surer posted a "Manifestation in Lieu of Memorandum" on November 2, 2010, man ifesting that the instant Petition is comprehensive and inclusive of all the arg uments to merit the grant of his prayer16 (which was noted by this Court in the Order dated November 17, 13 Docket, pp. 17-34. 14 Docket, pp. 16 1-1 70. 15 Docket, p. 174. 16 Docket, pp. 195-198 .

DECISION CTA AC NO . 64 2010)17, while respondent filed its "Memorandum" on November 18, 2010. 18 Thereafter, this case was submitted for decision on April 12, 2011. 19 PETITIONER-APPELLEE'S ARGUMENTS The Provincial Treasurer argues that NPC is a "business enjoying franchise" liable to franchise tax because it completely satisfies the requirements laid down in the National Power Corporation v. City of Cabanatuari0 (Cabanatuan case), namely, that it has a secondary or special franchise, and that it is exercising its rights or privileges under this franchise within the territory of the Province of Leyte. He contends that the ruling in the Cabanatuan case is applicable in view of the fact that the said ruling was reiterated in 2006 in the case of National Power Corporation vs. Province of Jsabel#-1 (Jsabela case), five years after the effectivity of the EPIRA. Accordingly, if the intention of the Supreme Court was to make the doctrine in the Cabanatuan case inapplicable by reason of the passage of the EPIRA, it should have been expressly done in the Isabela case. He asserts that what is mentioned under the EPIRA is not a local franchise but a nationa l franch ise. These two kinds of franchises are separate and distinct from ea ch other as the former is covered under the LGC. Reference is made to the records of the del iberations of the drafters of the LGC as bereft of any indicati on that the existence of a national franchise is 17 Docket, p. 200. 18 Docket, pp. 201-213 . 19 Docket, p. 237. 20 G.R. No . 149110, April 9, 2003 21 G.R. No. 165827, June 16, 2006.

DECISION CTA ACNO. 64 intended to be made a co nd ition sine qua non for the applicability of local franchise tax. It is his opi nion that the loca l franchise tax can be collected independent of the existence of a national franchise. All egedly, the EPIRA simply provides t hat "power generation shall not be considered a public utility" and that "any person or entity engaged in power generation" shall not be required to secure a national franchise, and that it does not provide that any one of the four sectors of the electric power industry, namely: generation, transmission, distribution, and supply, is exempt or not liable from the payment of local franchi se tax. Allegedly, any doubt as to the liability to pay franchise tax should be resolved in favor of the local government unit as mandated in Section S(a ) of the LGC and pursuant to the direct-authority principle stated in the Constitution . Finally, the Provincial Treasurer stresses the rul e that tax exemptions are highly disfavored and con strued strictissimi juris agai nst the taxpayer and liberally in fa vor of the taxi ng power, and that the burden of proof rests upon the party claiming exemption. RESPONDENT-APPELLAN T'S COUNTER-ARGUMENTS NPC cou nter-a rg ues that franchise tax may only be imposed on a "business enjoying a franchise" and considering t hat under the EPIRA its transmission function has been transferred to the National Transmission Corporation (TRANSCO) and it is now transformed into a mere power generation com pany which is not required to secure a franchise, it is not liable to pay franch ise tax.

DEC ISION CTA AC NO . 64 Page 8 of I6 NPC points out that the rulings in the Cabanatuan and Isabe/a cases cannot be applied in the instant case because those cases involve franchise taxes which became due to the local government unit concerned prior to the effectivity of the EPIRA; and that the issue of exemption from payment of franchise tax under the EPIRA was not discussed in the said cases of Cabanatuan and Isabe/a. Lastly, NPC asserts that while taxes are the lifeblood of the government, the imposition thereof must not be done arbitrarily and that a taxpayer should not be rendered helpless in the face of an apparent illegal act. THE ISSUE "Whether or not respondent is liable to pay the assessed franchise tax imposed under Section 137 of the LGC by virtue of the effectivity of the EPIRA." THE COURT'S RULING The power of the province to impose a franchise tax is sanctioned by Section 137 of the LGC, which provides: "SECTION 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 the 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, with in its territorial jurisdiction." Based from the foregoing provision of the LGC, a province may impose a franchise tax on "business enjoying a franchise", as correctly argued by respondent. In line with this, it is settled that a taxpayer may be covered by this imposition when the two requisites are present:

DECISION CTA AC NO. 64 (1) [it] has a "franch ise" in the sense of a secondary or special franchise; and (2) it is exercising its rights or privi leges under this franchise within the territory of th e local government concerned. 22 As stated earlier, the Provincial Trea surer believes that the foregoing requisites are present in thi s case; hence, NPC is liable to pay the assessed franchise tax. The appealed Decision of the court a quo, however, ruled that NPC is not liable for franchi se tax because the EPIRA clearly provides for the withdrawal of the req uirement for the procurement of a franchise for NPC, and without a franchise, it cannot be held liable to pay the franchise tax. The court a quo, t herefore, has sustained the stand of NPC that under the EPIRA, it is now tra nsformed into a mere power generation company not required to secure a fra nchise because its transmission function was already transferred to TRANSCO. The court a quo fail ed to consider the fact that the EPIRA took effect only on June 26, 2001. It likewise failed to observe that under paragraph 2 of Section 8 of the EPIRA, it is provided t hat the transmission and subtransmissi on facilities of NPC and all other assets related to transmission operations, including the nationwide franchi se of NPC for the operation of the transmission system and the grid shall be transferred to TRANSCO within six (6) months from the effectivity of the sai d law. Certainly, NPC not only performed its generation fu nction in the yea r 2001 (which period is also being assessed of franchise tax), but also its transmission function since the transfer 22 National Power Corporation vs. The Provincial Government of Bukidnon and Luis L. Oro, in his capacity as Provincial Treasurer of Bukidnon, CTA AC No. 57, August 10, 2010 and Amended ..~ Decis ion dated Decem ber 13, 20 10. ~~

DECISION CTA ACNO. 64 of its transmission facil ities to TRANSCO ha ppened only in the latter part of the year, at the time of the effectivity of the EPIRA. It must be noted that even during the effectivity of the EPIRA, NPC may still be held liable tor th e assessed franchise tax covering the period from 2002 to 2004 because it cannot be considered as exclusively operating as a generation company. In the case of National Power Corporation vs. The Provincial Government of Bukidnon and Luis L. Oro, in his capacity as Provincial Treasurer of Bukidnon23, the Cou rt of Tax Appeals' Specia l Second Division had an occasion to make the following extensive discussion: "We look into the perti nent provisions of RA No. 9136, to wit: 'Section 5. Orga nization. - The electric power industry shall be divided into four (4) sectors, namely: generation; transmission; distribution and supply.' 'Section 6. Generat ion Sector. Generation of electric power shall be competitive and open. XXX XXX XXX Any law to the contra ry notwithstanding, power generation shall not be considered a public utility operation. For this purpose, any person or entity engaged or which sha ll engage in power generation and supply of electricity shall not be required to secure a local or nati onal franchise. ' 'Section 8. Creation of the National Transmission Company. - There is hereby created a National Transmi ssion Corporation, hereinafter referred to as TRANSCO, which shall 23 Supra. t

DECISION CTA AC NO. 64 Page II of 16 assume the electrical tran smission function of the National Power Corporation, and have the powers and functions hereinafter granted. The TRANSCO shall assume the authority and responsibility of NPC for the planning, construction and centralized operation and maintenance of its high voltage transmission fac ilities, including grid interconnections and ancillary services.' Although Section 8 of the EPI RA Law provides that TRANSCO shall assume the electrical transmission function of the NPC, We do not ag ree with petitioner that its remaining business activity is the generation of power, which allegedly does not req uire national or loca l franc hise pursuant to Section 6 of the EPIRA law. In fact, this assertion is belied in the ruling of the Supreme Court in the case of National Power Corporation vs. City of Cabanatuan, which also involves herein petitioner, wh erein th e High Cou rt ruled that: 'As its secondary franchise, Commonwealth Act No. 120, as amended, vests the petitioner the following powers which are not available to ordinary corporations, viz.: XXX XXX XXX (e) To conduct investigations and surveys for the development of water power in any part of the Philippines; (f) To ta ke water from any public stream, river, creek, lake, spring or waterfall in the Phi lippines, for the pu rposes specified in this Act; to intercept and divert t he flow of waters fro m lands of ripari an owners and from person s owning or interested in waters which are or may be necessary for said purposes, upon payment of just compensation therefor; to alter, straig hten, obstruct or increase the flow of water in streams or water channels intersecting or con necting therewith or contig uous to its works or any part thereof: Provided, That just com pensation shall be paid to any person or persons whose property is directly or indirectly, adversely affected or da maged the reby;

DECISION CTA AC NO. 64 (g) To con stru ct, operate and maintain power plants, auxi liary plants, dams, reservoirs, pipes, mains, transmission lines, power stations and substations, and other works for the purpose of developing hyd raulic power from any river, creek, lake, spri ng and waterfall in the Philippines and supplying such power to the in habitants thereof; to acquire, construct, install, mai ntai n, operate, and improve gas, oil, or steam engi nes, and/or other prime movers, generators and machinery in plants and/or auxiliary pla nts fo r the prod uction of electric power; to esta blish, develop, operate, maintain and ad minister powe r and lig hti ng systems for th e transmissi on and utilization of its power generation ; to sell electric powe r in bulk to (1) industrial enterp rises, (2) city, municipal or provinci al systems and other government institutions, (3) electric cooperatives, (4) franchise holders, and (5) real estate subdivisions... ; (h) To acqui re, promote, hold, transfer, sell, lease, rent, mortgage, encumber and otherwise dispose of property incident to, or necessary, convenient or proper to carry out th e purposes for which the Corporation was created: Provided, That in ca se a right of way is necessary for its tra nsmission lines, easement of ri ght of way shal l only be sought: Provid ed, however, That in case the property itself shall be acquired by purchase, the cost th ereof sh all be the fair market value at the ti me of the taki ng of such property; (i) To construct works across, or otherwise, any stream, watercourse, ca na l, ditch, flume, street, avenue, highway or rai lway of private and public ownership, as the location of said works may req uire.. .; (j) To exerci se the right of em inent domain for the pu rpose of th is Act in the manner provided by law for instituting condemnation

DECISION CTA ACNO. 64 proceedings by th e national, provincial and munici pal governments; XXX XXX XXX (m) To cooperate with, and to coordinate its operations with those of the National Electrification Administration and public service entities; (n) To exercise com plete j urisdiction and control over watersheds su rrounding the reservoirs of plants and/or projects constructed or proposed to be constructed by the Corporation. Upon determ ination by the Corporation of the areas required for watersheds for a specific project, the Bureau of Forestry, the Reforestation Adm inistration and the Bu rea u of Land s shal l, upon written advice by t he Corporation, forthwith surrender jurisdiction to the Corporati on of all areas em braced with in the watersheds, subject to existing private rights, the needs of waterworks system s, and the requirements of domestic water su pply; (o) In the prosecuti on and maintenance of its projects, the Corporation shal l adopt measures to prevent environmental pollution and promote the conservatio n, development and maximum utilization of natural resources... ' Apparently, petitioner fai led to appreciate the fact that its existence is not based on pu re power generation and electrical transmission. Th e above-enumerated powers of petitioner, by virtue of its secondary franchi se, have not been entirely divested to TRAN SCO. Moreover, We note that petitioner has not specifica lly pointed out which of the said powers mentioned in its special fran chise under RA No. 6395 have been impliedly repealed and withdrawn by the EPIRA Law. Add itional ly, Section 2 (a) of Part I, Rule 3 of the 'Rules and Regul ations Implementing RA 9136' categorically provides:

DECISION CTA ACNO. 64 ' RULE 3. RESPONSIBILITIES OF TH E DOE, ERC, NPC, NEA AND PSALM XXX XXX XXX Secti on 2. Responsibilities of the NPC. - (a) Pu rsuant to Section 70 of the Act, notwithstanding the divestment and/or Privatization of NPC assets, I PP contract and spun-off corporations, NPC shall remain as a National Government-owned and controlled corporation to perform the m1ss1onary electrification function through the Small Power Utilities Group (SPUG) and shall be responsible for pro viding power generation and its associated p ower delivery systems in areas that are not connected to the transmission system. The m1ss1onary electrifi cation function sha ll be funded from the revenues from sales in missionary areas and fro m th e Universal Charge to be co llected from all electri city End-users as determi ned by the ERC.' (Emphasis supplied) In t his connection thereto, Ru le 4 (a) of the same implementing rul es and regulations provides: 'RU LE 4. DEFINITIO N OF TE RMS As used in t hese Rules, th e foll owing terms sha ll have the following respective mea nings: XXX XXX XXX ddd) 'Missionary Electrification refers to the provision of basic electricity service in Unviable Areas with the ultimate aim of bringi ng the operations in these areas to viabil ity levels;' Pursuant to the above-cited provisions, petitioner shall remain to be a National Government-owned and controlled corporation to perform the missionary electrification function through th e Small Power Utilities Gro up (SPUG) and shall be responsibl e for providing power generation and its associated

DECISION CTA AC NO. 64 power delivery systems in areas that are not connected to the transmission system . Therefore, even with the passage of the EPIRA law, petitioner cannot be considered to be exclusively operating as a generation company." Based on the above-quoted ru ling of the Court, it is clear that respondent's existence is not based on pu re power generation and electrical transmission since its Charter has vested it with certain powers, which are not available to ordinary corporations. Even though NPC's franchise has been modified by virtue of the transfer of its electric transmission function to TRANSCO; it may sti ll be held liable for the subject franchise tax since the law has given it a missionary electrification function. It is possible that this function may have been exercised by NPC in the Province of Leyte during the period in question. The Court, however, could not determine wh ether NPC has exercised its rights or privileges under its fran chise, including the missionary electrification fun ction, within the territo ry of the Province of Leyte during the subject period . The records of the case show that the RTC decided the case by summary judg ment in view of the fa ct that both parties believed that the issue involved in the case is purely a question of law. Consequently, the issue of whether responde nt performed its function/powers, including the missionary electrification fu nction, in the Province of Leyte was not ventilated . Hence, We have no other recourse but to remand the case to the court a quo for further proceedings subject to and in accordance with the pronouncements in this Decision.

DECISION CTAACNO. 64 WHEREFORE, t he instant Petition for Review is hereby GRANTED. Accordingly, the assail ed decision of the RTC, Branch 6 of Tacloban City is hereby REVERSE D and SET ASIDE. The records of this case are hereby REMANDED to the court a quo for further proceedings in accordance with the pronouncements in this Deci sion. SO ORDERED . WE CONCUR: (----""� o~ ERNESTO D. ACOSTA Presiding Justice Associ at CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above decision were reached in consultation before th e case was assigned to the writer of the opinion of the Court. Q--.A-. e. ~ ERNESTO D. ACOSTA Presiding Justice