CTA Case No. 5124 (Decision)

\'1 .~� REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SAN FERNANDO ELECTRIC LIGHT AND POWER CO., INC., Petitioner, - versus C.T.A. CASE NO. 5124� Pl~omul gated: AMANCIO a. SASR and the COMMISSIONER OF INTERNAL REVENUE, )( - - - - Respondent. DECISION This refers to an assessment in the a�ount of P&,257,133.28 as unpaid income tax for 1990 issued by the Bureau of Internal Revenue against San Fernando Electric Light and Power Co., Inc. Petitioner is a registered do�estic corporation, with pl~i nci pal address and doing business in San Fernando, Pampanga. It was granted a municipal franchise for an electric light, heat and power system by the municipal council of San Fernando, Pampanga sometime in 1927, pursuant to the provisions of Republic Act No.b&7, as amended. This aunicipal franchise was later amended by a legislative franchise, with the approval of R. A. 3&&0,

DECISION - C.T.A. Case No. 5124 - 2- which took effect on June 22, 1963, and val1d for fifty (50> years, or until June 21, 2013. In a lett el~ dated Uecember 14., 1993 <Exh. "B", Pet.; p. 9, CTA records>, t~espondent informed petitioner that upon investigation of its inco�e/business tax return for 1990, it was found out that there was still due from the latter the amount of P6,035,614.95 as deficiency income tax for the said year. This proposed assessment was objected to by petitioner in its letter of December 20., 1993, received by the B.l.R. on December 23, 1993. Petitioner invoked Section 2-A of R. A. 3660, its legislative franchise, which provides that: " xxx Effective upon the date the original franchise was granted, no other ta:�e upon its capital stock, franchise, right of way, earnings and all other property owned or operated by the grantee under this concession shall be levied or assessed on the herein grantee except the franchise tax of two per centum of the gross earnings �entioned in the said original franchise." Respondent, in his letter of January 18, 1994 (Exh. "B-1 ", Pet.>, controverted petitioner's ground, Section 2-A of R.A. 3660, by maintaining that Sections 2 and 3 of Executive Order No. 72 dated November 25, 1986 expressly provide that: "All provision of general or special law to the contrary notwithstanding, all grantees of franchise shall be subject to inco�e ta:�e levied under Section 24

DECISION - C.T.A. Case No. 5124 - 3- Title II of the National Internal Revenue Code, as amended, and the pertinent provision of the charters of franchise and all other laws, orders, issuances, rules and regulations of inconsistent with this E><ecutive Ordel~ are repealed or modified accordingly.� In response to the above argument, petitioner, in its letter of January 26, 1994, <E><h. ncn' Pet. ) , assailed the applicability of E.O. 72 as it will i mpait~ the obligation In this connection, petitioner cited the decision of the Supreme Court of the United States in the case of �Darmouth College vs. Woodward", 4 Wheat, 578, to wit: "A municipal franchise once granted is a contract and cannot be altered or amended e><cept by mutual consent of the parties concerned.� In a letter dated June l ' 1994 <E><h. "D", Pet.>, respondent argued that although the iaposition of an income ta>< will iapair the obligation of a contract, nevet~thel ess, unde�~ E. 0. No.72 promulgated on November 25, 1986, pursuant to the emergency powers- of the then President Aquino, �under the so called �Freedo11 Constit1..ation", petitioner is subject to the payment of income ta>< .. fot~ 199().

DECISION - C.T.A. Case No. 5124 - 4- As a reply to the above-mentioned letter, petitioner cited in its letter of June G, dec1s1ons in the cases of Visayan Electric Company, Carcar Company and the Lingayen Gulf Electric Company, as well as this Court's decisions in CTA Case Nos.1300 and 1561, which decisions were all in favor of petitioner/franchise grantees. On June 22, 1994, without awaiting for the respond~nt's action or decision on its written request for reconsideration, petitioner filed the instant appeal. As borne by the records, in a letter dated June 27, 1994 respondent expressly denied petitioner's protest and advised the latte�~ to contest the subject assessment to t h i s Com~t. Answer to the petition was filed by respondent on August 17, 1994. The following were raised as special and affirmative defenses: 1. Petitione�~ was assessed fol~ undel~ deficiency income tax for the year 1990 in the Assessment Notice No.021-25-000010-90/94 total amount of P&,257,133.28; 2. Pursuant to Executive Order No.72 dated November 25, 198&, all grantees of franchises are subject to income tax pertinent portion of which is quoted herein- "Section 2. Any provision of genel~al or special law to the contrary notwithstanding, all grantees of franchises shall be subject to income tax

DECISION - C.T.R. Case No. 5124 - 5- levied under Title II of the National Internal Revenue Code, as amended." 3. It is well settled that e~emptions are never presumed, the burden is on a claimant to establish clearly his right to e~emption, and an alleged grant of e~emption will be strictly construed and cannot be �ade out by influence or i�plication but must be beyond reasonable doubt <2 Cooley, p.1404>; 4. All fJ~anchise oJ~ right g�~ant ed to any individual, firm, or corporation are S\.tbject to amendment, alteration or repeal when the public so .~equi res <Article Xl V, Phi 1. Constitution); and 5. Ta~ assessments are presumed correct and made in good faith, the burden of proof is on the ta~payer to show the contraJ~y <Interpl~ovincial Autobus Co., Inc., vs. CIR, 98 Phil. 290; CIR vs. Construction Resources of Asia, Inc., 145 SCRA 671). Issues having been joined, petitioner presented its case by offering and/or submitting documentary evidence consisting of the following: E~h. "A"- Petitioner's legislative franchise, R.A. 3660 approved on June 22, 1963; E~h. "A-1"-Paragraph 2 of R.A. 3660; E~h. "B"- Demand 1 et t er dated Decem bel~ 14, 1993; E~h. "B-1 "-Lett eJ~ dated January 18, 1994 of respondent's District Officer, Solon Alcantara; E~h. "C"- Lettet~ dated January 26, 1994 of petitioner; E~h. "D"- Letter dated June 1, 1994 of respondent's Regional Director,

DECISION - C.T.A. Case No. 5124 -G A11ancio Saga; EKh. "E"- Letter dated June G, 1'3'34 of petitioner; Exh. "F"- Certification dated October 20~ 1'3'34 issued and signed by Solon Alcantara; and Exh. "F-1"-Certification dated Octobe�~ 27, 1994 also issued and signed by Solon Alcantara. After the �ark1ng of above-mentioned exhibits, petitioner proceeded to formally all said documentary evidence. No testimonial evidence was presented and petitioner as a �atter of pl~ocedure .~ested its case. On the of respondent's counsel and documentary evidence were offered to support his case. Believing that the case involves legal issue, he merely submitted his case based on the pleadings and records available <Minutes of February 28, 1995 hearing, p. 79, CTA records>. Both parties' argument revolve around tt1e lone issue as to whether or not Executive Order <E.O.) No.72 revoked Republic Act <R. A. > No. 3E.E.O. Respondent's view is in the affirmative while petitioner naturally, is on the negative side. The Court finds for the respondent. Sections 2 and 3 of E.O. No.72~ provisions of which are again quoted hereunder for easier reference,

DECISION - C.T.A�. Case No. 5124 - 7- declare that all franchise holders are now subject to income tax. "Section 2. Any provision of genel~al or special law to the contrary notwithstanding, all grantees of franchises shall be subject to income tax levied under Title II of the National Internal Revenue Code, as amended." <Underscoring supplied) "Section 3. Section 1 of Republic Act No.2889, Section 1 of Presidential Decree No.551, as amended, Section 5<1> of Presidential Decree No.1445, the pertinent provisions of the charters of franchise grantees, and all other laws, OJ~ders, issuances, rules and regulations or parts thereof, inconsistent with this Executive Order are hereby repealed or modified accordingly." <Underscoring prov1ded> Section 3 of E.O. 72 as above-cited, revoked portion of Section 2-A of R.A. 3GGO which states: "><><X no other tax upon its capital stock, franchise, right of way, earnings and all other property owned or operated by the grantee under this concession or franchise shall be levied or assessed on the herein grantee except the franchise tax of two per centu� of the gross earnings mentioned in the said original fl~anchise." <UnderscoJ~ing Provided) The above-quoted provision of Section 2-A of R.A. 3GGO is clearly inconsistent with Section 2 of E.O. 72. Consequently, the former is deemed repealed by the latter and by virtue of this repeal, petitioner became subject to income tax. ThJ..IS, petitioner is rightfully assessed

DECISION - C.T.R. Case No. 5124 - 8- by respondent for deficiency income tax for the taxable year 1990. impairment of obligation of contract to speak of as E.O. 72 was passed by then President Corazon Aquino in the exercise of her police power. Well-settled is the rule that: "As long as the contract affects the publ1c welfare one way or another so as to require the interference of the State, then must the police power be asserted, and prevail over the impairmerit clause." <Juarez vs. Court of Appeals, 214 SCRA 475; Underscoring supplied) In another case, it has also been held that "the non-impairment clause must yield to the police power of the state.'' (Oposa vs. Factoran, Jr. 224 SCRA 792) Moreover, under Section 2, Article IV, Proclamation No.3/Provisional Constitution of the Republic of the Philippines, it was expressly provided that: "Section 2. The Pt~esident may review all contracts, concessions, per�its, or other for�s of privileges for the exploration, development, exploitation, or utilization of natural resources entered into, granted, issued or acquired before the date of this Proclamation and when the national interest requires, a�end, modify, or revoke them.n The above-mentioned Proclamation was promulgated on March 25, 198& which was prior to NovembeJ~ 25, 198&, date of the pro�ulgation of E.O. 72. That then President Aquino

DECISION - C.T.A. Case No. 5124 - 9- had the power to pass E.O. 72 was supported by Sect1on 1 of Article II, ~~ovisional Constitution, which reads: "Section 1. Until a legislature is elected and convened under a new Constitution, the President shall continue to exerc1se legislative powel~." All of the above undoubtedly reveal that E.O. 72 was of President Aquino's valid exercise of her police and legislative powers vested upon her by the Provisional Constitution or the so-called not being unconstitutional, Constitution. E. o. 72, therefol~e validly revoked or withdrew petitioner's exemption from payment of 1ncome tax. Unless and unt i 1 it is revoked or repealed by a new law, it re�ains valid, operative and binding even under the New Constitution which was ratified on February 2, 1987. WHEREFORE, finding the assessment as valid and in i ~! accordance with 1 aw, the Cot..~rt AFFIRMS the decision appealed from and petitioner is to pay to respondent the amo1.mt of P6,257,133.28 as petitioner's deficiency income tax for 1990 plus 20~ interest per annum until fully paid, and in addition to interest 25" surcharge on the basic deficiency tax pursuant to Section 248 and 249 of the Tax Code, as amended.

..-. ....... - ~--~,,.,.,,.,.,..,_'~"'-a,!"'<''\>l_$_1(~*'""'.....-..- .-~--.~~ �~-1 ~ DECISION - C.T.A. Case No. 5124 - 10 - SO ORDERED. ~ ~wI ~~ RAMON 0. DE A?:osoc i ate J\tdge WE CONCUR: v/ ~ ~OSTA ERNESTOleD-. -.... -0/ l Associ at J a.ad g e CERTIFICATION 1 hereby certify that this decision was reached after due consultation among the aembers of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. I I I ' ~~ ERNESTO D. ACOSTA PJ~esiding Ja.adge