ORMAT LEYTE COMPANY, LTD. v. PROVINCE OF LEYTE and LORETO B. BALAIS in his Capacity as the Treasurer of The Province of Leyte

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SPECIAL FIRST DIVISION ORMAT LEYTE COMPANY, CTA AC No. 95 LTD., Petitioner, -versus- Members: UY, Chairperson, and FABON-VICTORINO, JJ. PROVINCE OF LEYTE and LORETO B. BALlAS, in his capacity as the Treasurer of the Promulgated : Province of Leyte, X- ---- ------- ----- -- ~~:~~~d-e~~~-- ~-~~- X DECISION UY, ::!_.: This is an appeal by way of Petition for Review filed by petitioner Ormat Leyte Company, Ltd. against respondents Province of Leyte and Loreto B. Balias on August 17, 2012 , seeking to reverse and set aside the Decision dated February 9, 2012 and Resolution dated June 29, 2012 , both rendered by the Regional Trial Court (RTC) Branch 35 , Ormoc City, Leyte in Civil Case Nos. 4561-0 and 4630-0 , entitled Ormat Leyte Company Ltd. , vs. Province of Leyte and Loreto Ballais in his capacity as the Treasurer of the Province of Leyte. The assailed Decision and Resolution sustained the legality of the assessments issued by respondents against petitioner demanding payment for local franchise tax for the years 2002 to 2004 in the amount of P8,298 ,712 .62 and for the year 2005 in the amount of P3 ,077,846.81. ~

DEC ISION CTA ACNO. 95 Page 2 of28 THE FACTS Culled from the records and as found by the court a quo 1 the , facts of this case are as follows: Petitioner Ormat Leyte Company, Ltd . is a partnership duly organized and existing under Philippine laws, with principal office at Ormoc City, Leyte . Petitioner conducts power generation operations in Ormoc City and the Municipality of Kananga , both in the Province of Leyte.2 On the other hand, respondent Province of Leyte is a local government unit while respondent Loreto B. Ballais (Loreto B. Balias in the Petition for Review) is being sued in his official capacity as the Treasurer of the Province of Leyte. Under Section 170 of Republic Act No. 7160 , otherwise known as the Local Government Code of 1991 (LGC), the respondent Treasurer is responsible for the collection of the Province's local taxes. 3 On May 14, 1981, Philippine National Oil Company Energy Development Corporation (PNOC-EDC) , a government-owned and - controlled corporation , entered into a Geothermal Resources Service Contract with the Government of the Republic of the Philippines (represented by then Ministry of Energy) pursuant to Presidential Decree No. 1442 (PO No. 1442), otherwise known as "An Act to Promote the Exploration and Development of Geothermal Resources ".4 In furtherance of P.O. No. 1442 and PNOC-EDC's Geothermal Resources Service Contract, PNOC-EDC engaged contractors that would be interested in constructing and operating geothermal electricity generating plants in the country. Thus , on August 4, 1995, PNOC-EDC entered into a build- operate-transfer agreement (BOT Agreement) with Ormat, Inc. for the financing , design , construction , testing and operation of a geothermal t 1 Decision dated February 9, 20 12, Civi l Case No. 4561-0, RTC Records pp. 791 to 796. 2 Par. 1, Complaint/Appeal (Re: Denial of Tax Protest), Civil Case No. 4561-0, RTC Records, p. 1. ; Par. 3, The Parties, Petition for Review, Docket p. 6 3 Par. 4, The Parties, Petition for Review, Docket p. 6 4 Annex "E", Petition for Review, Docket, pp. 83 to 134; Exhibit "B", Civil Case No. 456 1-0, RTC Records, p. 27 to 78.

DEC ISION CTA ACNO. 95 Page 3 of28 electricity and energy-generating plant (the Leyte Optimization Project), with the latter as the Operator.5 By virtue of the Accession Undertaking6 executed on February 15, 1996, petitioner acceded to the BOT Agreement assuming all rights and obligations of Ormat, Inc. as the Operator. Hence, as the Operator, petitioner shall be responsible for the finance , design , supply, construction , testing , operation and maintenance of the power plant, whose net generated electricity would be delivered to the National Power Corporation (NPC) on behalf of PNOC-EDC during the ten-year cooperation period. At the end of the ten-year period , title to the power plant would transfer to PNOC-EDC . On December 13, 2005, petitioner received a letter dated December 12, 2005 from respondent Treasurer, demanding payment for franchise taxes , including surcharges and interests, for the years 2002 to 2004 in the amount of P8 ,298 ,712.62 .7 Respondents reiterated their demand for payment of the alleged franchise taxes in a letter dated January 23 , 2006 , which petitioner received on January 27 , 2006.8 r Accordingly, pursuant to Section 1959 of the LGC , petitioner filed its Protest10 on February 10, 2006, questioning the legality and 5 Annex "G", Petition for Review, Docket, pp. 139 to 210; Exhibit "C", Civil Case No, 4561-0, RTC Records, pp. 79 to 150. 6 Annex "H", Petition for Review, Docket, pp. 211 to 213; Exhibit "D", Civil Case No, 4561-0, RTC Records, pp. 349 to 351. 7 Exhibit "F" and Exhibit "2", Civil Case No. 4561-0, RTC Records, pp. 150 to 151. 8 Exhibit "G" and Exhibit "3", Civil Case No. 4561-0, RTC Records, pp. 153, Annex "K", Petition for Review, Docket, and p. 220. 9 SECTION 195. Protest of Assessment. - When the local treasurer or his duly authorized representative finds that the correct taxes, fees, or charges have not been paid, he shall issue a notice of assessment stating the nature of the tax, fee, or charge, the amount of deficiency, the surcharges, interests and penalties. Within sixty (60) days from the receipt of the notice of assessment, the taxpayer may file a written protest with the local treasurer contesting the assessment; otherwise, the assessment shall become final and executory. The local treasurer shall decide the protest within sixty (60) days from the time of its filing. If the local treasurer finds the protest to be wholly or partly meritorious, he shall issue a notice cancelling wholly or partially the assessment. However, if the local treasurer finds the assessment to be wholly or partly correct, he shall deny the protest wholly or partly with notice to the taxpayer. The taxpayer shall have thirty (30) days from the receipt of the denial of the protest or from the lapse of the sixty-day (60) period prescribed herein within which to appeal with the court of competent jurisdiction, otherwise the assessment becomes conclusive and unappealable: 10 Exhibit "I", Civil Case No. 4561-0, RTC Records pp. 154 to 165; Annex "L", Petition for Review, Docket, p. 221.

DEC ISION CTA ACNO. 95 Page 4 of28 propriety of the assessment, on the ground , among others , that petitioner does not enjoy a franchise and thus may not be held liable for franchise taxes. However, on February 15, 2006, petitioner received from respondent Treasurer a letter dated February 14, 2006 and denominated as "Final Notice of Assessment and Demand for Payment" 11 � The letter stated that "demand is hereby finally given to settle the aforementioned tax liability within ten (1 0) days from receipt hereof, otherwise, we will be constrained to institute appropriate administrative and or judicial remedy provided for by law in order to protect the best interest of the Provincial Government. " In view thereof, petitioner filed a Complaint/Appeal (with Urgent Application for Temporary Restraining Order) before the RTC of Ormoc12 on February 20, 2006, docketed as Civil Case No. 4561 -0. In the Complaint/Appeal, petitioner argued that it is not liable for franchise tax primarily because it does enjoy a franchise and , under Republic Act No. 9136 or the Electric Power Industry Reform Act (EPIRA), is not required to secure a franchise to operate a power plant. Petitioner likewise asserted that, even assuming that it has a franchise , still , it cannot be made liable for franchise taxes because: (a) respondents do not have taxing authority over petitioner; (b) petitioner enjoys exemption from all local taxes in accordance with PO No. 1442, and (c) PNOC-EDC expressly assumed liability for tax (including franchise tax) under the BOT Agreement. On March 8, 2006, respondents filed their Answer to the Complaint/Appeal 13, reiterating , among others, respondents' authority under Section 13714 in relation to Section 13415 of the LGC to levy (' 11 Exhibit "H" and Exhibit "4", Civil Case No. 456 1-0, RTC Records, pp. 166; Annex "M", Petition for Review, Docket, p. 222. 12 Complaint/Appeal [re: Denial ofTax Protest, Civil Case No. 4561-0, RTC Records, pp. 1 to 26. 13 Civil Case No. 4561 -0, RTC Records, pp.237 to 266. 14 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 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, 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, regardl ess 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 here in.

DEC ISION CTA ACNO. 95 Page 5 of28 and collect franchise taxes against petitioner for operating a geothermal power plant and conducting business within the jurisdiction of the Province of Leyte . Thus, respondents prayed for the dismissal of the Complaint/Appeal and a declaration that respondent Province is authorized to collect local franchise taxes from petitioner. In a Repli 6 filed on March 21 , 2006 , petitioner argued that respondents misconstrued provisions of the LGC and EPIRA with respect to their authority to impose franchise taxes on petitioner. On March 29, 2006 , while Civil Case No. 4561-0 was still pending before the RTC of Ormoc, petitioner received a letter dated March 27, 2006 from respondent Treasurer demanding payment for franchises taxes , this time for the year 2005, in the amount of P3,077,846.87. 17 Petitioner filed its Protest18 on May 26 , 2006 , assailing the legality of the new franchise tax assessment for the year 2005. On July 7, 2006 , petitioner received a letter dated July 3, 2006 from respondents denying its Protest. 19 In view of the denial of its Protest, petitioner filed a Complaint/Appeal20 on August 2, 2006 , praying for the cancellation of the respondents' franchise tax assessment for the year 2005. This second complaint was docketed as Civil Case No. 4630-0 and was similarly raffled to the RTC of Ormoc- Branch 35. On August 8, 2006 , petitioner filed a motion to consolidate Civil Case No. 4561-0 with Civil Case No. 4630-021 The RTC of Ormoc~ 15 SEC. 134. Scope ofTaxing Powers. -Except as otherwise provided in this Code, the ~rovince may levy only the taxes, fees , and charges as provided in this Article. 6 Civil Case No. 4561-0, RTC Records, pp.379 to 386. 17 Exhibit "L" and Exhibit "6", Civil Case No. 4561-0, RTC Records, pp. 594 to 595 ; Annex "R", Petition for Review, Docket, p. 257. 18 Exhibit "M", Civil Case No. 4561-0, RTC Records, pp. 596 to 608 ; Annex "T", Petition for Review, Docket, pp. 262 to 263 . 19 Exhibit "N" and Exhibit "7", Civil Case No. 4561-0, RTC Records, pp. 610 to 614; Annex "U", Petition for Review, Docket, p. 275. �2 Complaint/Appeal [re: Denial of Tax Protest] , Civil Case No. 4360-0, RTC Records, f?� 1 to 19. Civil Case No. 4360-0, RTC Records, pp. 206 to 208.

DEC ISION CTA ACNO. 95 Page 6 of28 granted the consolidation of the two cases in an Order dated August 14, 2006. 22 On September 5, 2006 , respondents filed their Answer23 asking for the dismissal of petitioner's second Complaint/Appeal. Afterwards, trial proceeded , giving both parties the opportunity to present their respective documentary and testimonial evidence. On February 9, 2012, the RTC of Ormoc promulgated its assailed Decision24 denying petitioner's Complaint/Appeal and ordering petitioner to pay respondents the assessed franchise tax for the years 2002 to 2005. The dispositive portion of the assailed Decision reads: "WHEREFORE, premises considered plaintiff is ordered to : 1. Pay defendant the assessed franchise tax for the years 2000-2004 in the sum of P8,298 ,712.62 and for the year 2005 the amount of P3 ,077 ,846.87 ; 2. Pay applicable interests and surcharges that accrued from the time of assessment in accordance with the provision of Section 168 of the Local Government Code. SO ORDERED ." Undaunted , f:etitioner moved for the reconsideration of the assailed Decision. 5 However, in the Resolution dated June 29 , 201226 , the RTC of Ormoc denied petitioner's Motion for Reconsideration as follows : "WHEREFORE, premises considered , plaintiff's March 6, 2012 Motion for Reconsideration is hereby DENIED. SO ORDERED." 22 Civil Case No. 4561-0, RTC Records, p. 431. 23 Civil Case No. 4360-0, RTC Records, pp. 211 to 229. 24 Civil Case No . 4561-0, RTC Records, pp. 791 to 796; Annex "A", Petition for Review, Docket, pp. 44 to 49. 25Civil Case No. 4561-0, RTC Records, pp. 798 to 811 ; Annex " GG", Petition for Review, Docket, pp. 389 to 396. 26 Annex "B", Petition for Review, Docket, pp. 50 to 54.

DECISION CTA ACNO. 95 Page 7 of28 Aggrieved, petitioner filed the instant Petition for Review27 on August 17, 2012 praying that judgment be rendered, as follows : (1) reversing the assailed Decision and Resolution; (2) cancelling the respondents' franchise tax assessments against petitioner; and (3) permanently enjoining respondents from issuing similar franchise tax assessments against petitioner. On October 29, 2012, respondents filed, through registered mail their Comment (To the Petition for Review)28 , which was received by this Court on November 9, 2012. After giving due course to the Petition for Review, both parties were directed to file their respective memoranda. 29 Petitioner filed its Memorandum on January 7, 201330 , while respondents' Memorandum was filed on February 4, 201331 . Consequently, the case was submitted for Decision on February 25 , 201332. Hence, this Decision. THE ISSUE Whether or not petitioner is liable to pay the assessed local franchise tax imposed under Section 137 of the LGC for the years 2000-2004 in the amount of P8 ,298,712 .62 and for the year 2005 in the amount of P3 ,077,846.87. Petitioner's Arguments Petitioner advances that it is not liable for payment of local franchise tax based on contract or applicable laws. According to petitioner, local franchise taxes, as contemplated under the LGC , may only be imposed upon entities operating as public utilities and which possess the required secondary or special franchise for their operation. A franchise , as interpreted by the Supreme Court, refers to a special privilege which is legislative in nature. Accordingly, r petitioner's BOT Agreement with the PNOC-EDC, not being a 27 Petition for Review, Docket, pp. 5 to 37. 28 Comment (To the Petition for Review), Docket, pp. 704 to 714. 29 Resolution dated November 19, 2012, Docket p. 720. 30 Docket pp. 733 to 766. 31 Docket pp. 789 to 798. 32 Resolution dated February 25, 20 13, Docket, p. 801.

DECISION CTA ACNO. 95 Page 8 of28 legislative grant, is not a franchise as technically defined by law and relevant jurisprudence. Moreover, petitioner contends that under the EPIRA, power generation companies are not considered public utilities, and thus, are not required to secure a national franchise for their operation . The Philippine Government itself confirms , in an Opinion rendered by the Bureau of Local Government Finance on November 29, 2011 (BLGF Opinion), that a company engaged in electric power generation (like petitioner) does not require and does not have a franchise as that term is legally defined . Accordingly, since petitioner is not a public utility, does not hold and is not legally required to hold a franchise , it is not liable to pay respondents the assessed local franchise taxes for the operation of the geothermal power plant. Lastly, petitioner submits that even if petitioner was a franchise holder for purposes of Section 137 of the LGC , still , it cannot be made liable to pay the assessed franchise taxes because: (1) Section 4(d) of PO No. 1442 in relation to Section 12 of Presidential Decree No. 87 (PO No. 87) exempts petitioner from local taxes , including franchise tax, and (2) respondents have impliedly admitted that any liability for franchise taxes ultimately pertain to PNOC-EDC , which has expressly assumed such liability under the BOT Agreement. Respondents' Counter-Arguments Respondents, on the other hand , posit that petitioner is a business enjoying a franchise within the meaning of Section 137 of the LGC and is thus liable for franchise tax, notwithstanding any exemption granted by any law or other special law. According to respondents , petitioner's secondary or special franchise is the fact that it has the exclusive privilege, by virtue of its contract with PNOC- EDC, to participate in harnessing and generating geothermal resources in the specified concession area stated in the service contract. Respondents maintain that, for purposes of Section 137 of the LGC , a legislative grant is not necessary for an entity to be considered as a franchise holder. In fact, respondents argue that there is nothing in Section 137 of the LGC or relevant jurisprudence r which require a taxable entity to be a public utility for it to be considered as a "business enjoying a franchise" liable for local franchise tax.

DEC ISION CTA ACNO. 95 Page 9 of28 In addition , respondents contend that the RTC of Ormoc was correct in ruling that opinions rendered by administrative agencies do not bind the courts. Thus, the BLGF Opinion relied upon by petitioner is at best advisory for it is the courts that finally determine what the law means. As regards petitioner's assertion of its non-liability under the BOT Agreement, respondents argue that the Province of Leyte is not privy to said contract; and thus, the terms and conditions in the BOT Agreement are not binding upon the province. If indeed petitioner is not liable for local franchise tax, its recourse is not against respondents but against PNOC-EDC , from which it may seek reimbursement for whatever amount of taxes it paid the national or local government. Finally, citing the case of Quezon City, et a/. vs. ABS-CBN Broadcasting Corporation33 , respondents accentuate that "in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations." THE COURT'S RULING We find the instant Petition for Review meritorious. Before discussing the crux of the controversy, it is imperative to discuss the nature of PNOC-EDC's contract with the government and petitioner's contract with PNOC-EDC. PNOC-EDC's contract with the government is a geothermal service contract while petitioner's relation with PNOC-EDC is based on a BOT Agreement. Relevant to the discussion are Presidential Decree No. 144234 , Republic Act No. 951335, and Republic Act No. 695736, as amended by Republic Act r 7718 37 . 33 G.R. No. 166408, October 6, 2008 . 34 An Act To Promote The Exploration And Development Of Geothermal Resources, June11 , 1978. 35 An Act Promoting The Development, Utilization And Commercialization Of Renewable Energy Resources And For Other Purposes, December 16, 2008. 36 An Act Authorizing The Financing, Construction, Operation And Maintenance Of Infrastructure Projects By The Private Sector, And For Other Purposes, July 9, 1990. 37 An Act Amending Certain Sections Of Republic Act No . 6957, Entitled "An Act Authorizing The Financing, Construction, Operation And Maintenance Of Infrastructure Projects By The Private Sector, And For Other Purposes, May 4, 1994.

DEC ISION CTA ACNO . 95 Page 10 of28 P.O. No. 1442 allowed the use of service contracts for financial , technical , management or other forms of assistance with qualified domestic and foreign entities, for the exploration , development, exploitation , or utilization of the country's geothermal resources. Section 1 of Presidential Decree No. 1442 states: "SECTION 1. Exploration of and Development of Geothermal Resources by the Government. - Subject to existing private rights, the Government may directly explore for, exploit and develop geothermal resources. It may also indirectly undertake the same under service contracts awarded through public bidding or concluded through negotiation, with a domestic or foreign contractor who must be technically and financially capable of undertaking the operations required in the service contract; Provided, that if the service contractor shall furnish the necessary services, technology and financing , the service contractor may be paid a fee not exceeding forty per centum (40%) of the balance of the gross value of the geothermal operations after deducting the necessary expenses incurred in the operations ; Provided, further, that the execution of the activities and operations subject of the service contract, including the implementation of the work program and accounting procedures agreed upon , shall at all times be subject to direct supervision of the Government, through the Bureau of Energy Development. Service contracts as above authorized shall be subject to approval of the Secretary of Energy. Geothermal resources mean (a) all products of geothermal processes, embracing indigenous steam , hot water and hot brines ; (b) steam and other gases, hot water and hot brines resulting from water, gas, or other fluids artificially introduced into geothermal formations ; (c) heat or other associated energy found in geothermal formations ; and (d) any by-product derived from them ." The foregoing provision was amended by RA No. 9513 , which allowed the Department of Energy (DOE) to enter into service t agreements with a renewable energy developer for the exploration and development of a particular renewable energy area. Section 4 of RA No. 9513 defines a renewable energy service contract as:

DEC ISION CTA ACNO. 95 Page II of28 "SECTION 4. Definition of Terms. - As used in this Act, the following terms are herein defined : XXX XXX XXX (tt) 'Renewable Energy Service (Operating) Contract (RE Contract)' refers to the service agreement between the Government, through the DOE, and RE Developer over a period in which the RE Developer has the exclusive right to a particular RE area for exploration and development. The RE Contract shall be divided into two (2) stages: the pre-development stage and the development/commercial stage. The preliminary assessment and feasibility study up to financial closing shall refer to the pre-development stage. The construction and installation of facilities up to operation phase shall refer to the development stage;" In the case of La Bugai-B'Iaan Tribal Association, Inc., eta/. vs. Secretary of Department of Environment and Natural Resources (DENR), eta/. 38, the Supreme Court provided an insightful discussion about the characteristics of a service contract in this wise: "PRESIDENTIAL DECREE NO. 87, THE 1973 CONSTITUTION AND THE SERVICE CONTRACT SYSTEM The promulgation on December 31 , 1972 of Presidential Decree No. 87 , otherwise known as THE OIL EXPLORATION AND DEVELOPMENT ACT OF 1972 signaled such a transformation . P.O. No. 87 permitted the government to explore for and produce indigenous petroleum through 'service contracts.' 'Service contracts' is a term that assumes varying meanings to different people, and it has carried many names in different countries, like 'work contracts' in Indonesia, 'concession agreements' in Africa , 'production- sharing agreements' in the Middle East, and 'participation r agreements' in Latin America. A functional definition of 38 G.R. No. 127882, January 27, 2004.

DEC ISION CTA ACNO. 95 Page 12 of28 'service contracts' in the Philippines is provided as follows: A service contract is a contractual arrangement for engaging in the exploitation and development of petroleum, mineral, energy, land and other natural resources by which a government or its agency, or a private person granted a right or privilege by the government authorizes the other party (service contractor) to engage or participate in the exercise of such right or the enjoyment of the privilege, in that the latter provides financial or technical resources, undertakes the exploitation or production of a given resource, or directly manages the productive enterprise, operations of the exploration and exploitation of the resources or the disposition of marketing or resources. In a service contract under P.O. No. 87, service and technology are furnished by the service contractor for which it shall be entitled to the stipulated service fee . The contractor must be technically competent and financially capable to undertake the operations required in the contract. Financing is supposed to be provided by the Government to which all petroleum produced belongs. In case the Government is unable to finance petroleum exploration operations, the contractor may furnish services, technology and financing , and the proceeds of sale of the petroleum produced under the contract shall be the source of funds for payment of the service fee and the operating expenses due the contractor. The contractor shall undertake, manage and execute petroleum operations, subject to the government overseeing the management of the operations. The contractor provides all necessary services and technology and the requisite financing , performs the exploration work obligations, and assumes all exploration risks such that if no petroleum is produced , it will not be entitled to reimbursement. Once petroleum in commercial quantity is ~

DECISION CTA ACNO. 95 Page 13 of28 discovered , the contractor shall operate the field on behalf of the government. P.O. No. 87 prescribed m1n1mum terms and conditions for every service contract. It also granted the contractor certain privileges, including exemption from taxes and payment of tariff duties, and permitted the repatriation of capital and retention of profits abroad . Ostensibly, the service contract system had certain advantages over the concession regime . It has been opined , though , that, in the Philippines , our concept of a service contract, at least in the petroleum industry, was basically a concession regime with a production-sharing element. On January 17, 1973, then President Ferdinand E. Marcos proclaimed the ratification of a new Constitution . Article XIV on the National Economy and Patrimony contained provisions similar to the 1935 Constitution with regard to Filipino participation in the nation's natural resources . Section 8, Article XIV thereof provides: "SEC. 8. All lands of the public domain , waters , minerals, coal , petroleum and other mineral oils, all forces of potential energy, fisheries , wildlife, and other natural resources of the Philippines belong to the State. With the exception of agricultural, industrial or commercial , residential and resettlement lands of the public domain , natural resources shall not be alienated , and no license, concession , or lease for the exploration , development, exploitation , or utilization of any of the natural resources shall be granted for a period exceeding twenty-five years, renewable for not more than twenty-five years, except as to water rights for irrigation , water supply, fisheries , or industrial uses other than the development of water power, in which cases beneficial use may be the measure and the limit of the grant.

DEC IS ION CTA ACNO. 95 Page 14 of28 While Section 9 of the same Article maintained the Filipino-only policy in the enjoyment of natural resources , it also allowed Filipinos, upon authority of the Batasang Pambansa , to enter into service contracts with any person or entity for the exploration or utilization of natural resources. SEC. 9. The disposition , exploration , development, exploitation , or utilization of any of the natural resources of the Philippines shall be limited to citizens, or to corporations or associations at least sixty per centum of which is owned by such citizens . The Batasang Pambansa, in the national interest, may allow such citizens, corporations or associations to enter into service contracts for financial, technical, management, or other forms of assistance with any person or entity for the exploration, or utilization of any of the natural resources. Existing valid and binding service contracts for financial , technical , management or other forms of assistance are hereby recognized as such . [Emphasis supplied .] The concept of service contracts, according to one delegate, was borrowed from the methods followed by India, Pakistan and especially Indonesia in the exploration of petroleum and mineral oils. The provision allowing such contracts, according to another, was intended to 'enhance the proper development of our natural resources since Filipino citizens lack the needed capital and technical know-how which are essential in the proper exploration , development and exploitation of the natural resources of the country.' The original idea was to authorize the government, not private entities, to enter into service contracts with foreign entities. As finally approved , however, a citizen or private entity could be allowed by the National Assembly to enter into such service contract. The prior approval of the National Assembly was deemed sufficient to protect the national interest. Notably, none of the laws allowing serv1ce contracts were passed by the Batasang

DEC IS ION CTA AC NO. 95 Page 15 of28 Pambansa. Indeed , all of them were enacted by presidential decree. On March 13, 1973, shortly after the ratification of the new Constitution , the President promulgated Presidential Decree No. 151. The law allowed Filipino citizens or entities which have acquired lands of the public domain or which own , hold or control such lands to enter into service contracts for financial , technical , management or other forms of assistance with any foreign persons or entity for the exploration , development, exploitation or utilization of said lands. Presidential Decree No. 463, also known as THE MINERAL RESOURCES DEVELOPMENT DECREE OF 1974, was enacted on May 17, 1974. Section 44 of the decree, as amended , provided that a lessee of a mining claim may enter into a service contract with a qualified domestic or foreign contractor for the exploration , development and exploitation of his claims and the processing and marketing of the product thereof. Presidential Decree No. 704 (THE FISHERIES DECREE OF 1975), approved on May 16, 1975, allowed Filipinos engaged in commercial fishing to enter into contracts for financial , technical or other forms of assistance with any foreign person , corporation or entity for the production , storage , marketing and processing of fish and fishery/aquatic products. Presidential Decree No. 705 (THE REVISED FORESTRY CODE OF THE PHILIPPINES), approved on May 19, 1975, allowed 'forest products licensees, lessees, or permitees to enter into service contracts for financial , technical , management, or other forms of assistance . .. with any foreign person or entity for the exploration , development, exploitation or utilization of the forest resources .' Yet another law allowing service contracts, this time for geothermal resources, was Presidential t Decree No. 1442, which was signed into law on June 11, 1978. Section 1 thereof authorized the Government to enter into service contracts for the

DECIS ION CTA ACNO. 95 Page 16of28 exploration, exploitation and development of geothermal resources with a foreign contractor who must be technically and financially capable of undertaking the operations required in the service contract. " (Emphasis supplied; citations omitted) On the other hand , PNOC-EDC's contract with petitioner is based on a BOT Agreement dated August 4, 1995, where on behalf of PNOC-EDC , petitioner would generate power and supply the same exclusively to the National Power Corporation (NPC). Republic Act No. 6957, as amended by Republic Act 7718 , defines a BOT agreement as follows: (b) Build-operate-and-transfer - A contractual arrangement whereby the project proponent undertakes the construction , including financing , of a given infrastructure facility, and the operation maintenance thereof. The project proponent operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees , rentals , and charges not exceeding those proposed in its bid or as negotiated and incorporated in the contract to enable the project proponent to recover its investment, and operating and maintenance expenses in the project. The project proponent transfers the facility to the government agency or local government unit concerned at the end of the fixed term which shall not exceed fifty (50) years: Provided , That in case of an infrastructure or development facility whose operation requires a public utility franchise , the proponent must be Filipino or, if a corporation , must be duly registered with the Securities and Exchange Commission and owned up to at least sixty percent (60%) by Filipinos. The build-operate-and-transfer shall include a supply-and-operate situation which is a contractual arrangement whereby the supplier of equipment and machinery for a given infrastructure facility, if the interest of the Government so requires , operates the facility providing in the process technology transfer and training to Filipino nationals39 (Emphasis supplied). r 39 Section 2(b), Republic Act 77 18, May 4, 1994.

DEC IS ION CTA ACNO. 95 Page 17 of28 The pertinent portions of the BOT Agreement between PNOC- EDC and petitioner are as follows : "ARTICLE 2 PROJECT 2.1 POWER FACILITY The Operator shall be responsible for the finance , design , supply, construction , testing operation and maintenance of four (4) Plants with an aggregate gross capacity of approximately 51 .00 MW to be installed on the Site, whose net generation (exclusive of the Steamfield Power) shall be delivered to NAPOCOR on behalf of PNOC-EDC during the Cooperation Period . The Power Plant shall be located on the Site which shall be made available by PNOC-EDC at no cost to the Operator and subject to the provisions of Subsection 4.3. 2.2 ENERGY CONVERSION PNOC-EDC , at no cost to the Operator, shall supply and deliver all Geothermal Fluid and receive all Geothermal Fluid in conformity to the Geothermal Fluid Specifications needed by the Operator for each Plant to generate the electric capacity and energy required by NAPOCOR and PNOC-EDC for Steamfield Power up to the Nominated Capacity. The Operator shall convert such Geothermal Fluid and, on behalf of PNOC-EDC, deliver all electrical capacity and energy generated by the Power Plant to NAPOCOR less (i) energy required by the Operator for auxiliary purposes; and (ii) the Steamfield Power. PNOC-EDC shall pay the Operator conversion fees as provided in Section 5.4 or Article 8, as the case may be. It is the intention of the Parties, without creating a contractual obligation under this Agreement, that PNOC-EDC shall exercise its best effort to increase the Geothermal Fluid inlet pressure to Plants 1, 2 and 3 as per Geothermal Fluid Specifications to allow, to the extent possible, an increase in the Contracted Capacity of the Power \ Plant. ~

DEC ISION CTA ACNO. 95 Page 18 of28 2.3 OWNERSHIP (a) From the Effectivity Date until the Transfer Date, the Operator shall own the Power Plant and all the fixtures, fittings , machinery and equipment on the Site and used in connection with the Power Plant which have been supplied by it or at its cost, and the Operator shall operate and manage the Power Plant for the purpose of converting the Geothermal Fluid delivered by PNOC-EDC in accordance with this Agreement into electric capacity and energy. (b) On the Transfer Date, ownership, management and operation of the Power Plant shall be transferred by the Operator to PNOC-EDC in accordance with Article 9 or 13 or 15, as applicable. (c) Ownership of the Site shall remain with PNOC- EDC at all times during the term of this Agreement. "40 Thus , it is evident that petitioner is engaged in the generation and supply of geothermal power, on behalf of PNOC-EDC , delivering the same exclusively to NPC by virtue of the BOT Agreement and Geothermal Resources Service Contract. In light of the foregoing discussion, the Court now proceeds to determine whether petitioner is liable for the assessed local franchise taxes . Petitioner does not enjoy a franchise as contemplated under the LGC. The authority of Respondent Province to impose a franchise tax is anchored on Section 137 of the LGC, which reads : SEC. 137. Franchise Tax. - Notwithstanding any ~ exemption granted by any law or other special law, the ~ 40 Annex "G", Petition for Review, Docket, pp. 153 to 154; Exhibit "C", Civil Case No. 456 1-0, RTC Records, pp.93 to 94.

DECIS ION CTA AC NO . 95 Page 19 of28 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, 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 thereon , as provided herein ." (Emphasis and underscoring supplied) 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 subdivision may impose in the interest of public welfare, security and safety. " Parenthetically, in the case of National Power Corporation vs. City of Cabanatuan41 (Cabanatuan Case), the Supreme Court clarified the power of LGUs to impose and collect franchise taxes on "businesses enjoying a franchise" in this wise: (l)n 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. The right under a primary or general franchise is vested in the individuals who compose the corporation and not in the corporation itself. 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. 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. XXX XXX XXX 41 G.R. No . 149110, April 9, 2003.

DECISION CTA ACNO. 95 Page 20 of28 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.' It is not levied on the corporation simply for existing as a corporation , upon its property or its income, 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 . 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." (Emphasis Supplied) Thus, to determine whether petitioner is covered by the franchise tax, the following requisites must 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 LGU . Respondents believe that petitioner fulfilled the requirements laid down in the Cabanatuan case because petitioner (1 ) has a franchise in the sense of a secondary or special franchise , wh ich refers to the right or privileges conferred upon it such as the right to use the streets of a municipality, to lay pipes of tracks, erect poles or string wires; and (2) is exercising its right or privileges under this franchise within the territory of the Province of Leyte, particularly in the City of Ormoc and the Municipality of Kanaga . In the assailed Decision , the RTC of Ormoc sustained respondents' position and held that petitioner's franchise is in the f form of the privilege by virtue of its contract to participate in harnessing and generating geothermal resources in the specified

DECISION CTA ACNO. 95 Page 2 I of28 concession area in the service contract. Succinctly put, the trial court regarded petitioner's BOT Agreement with PNOC-EDC as the special or secondary franchise referred to by the Supreme Court in the Cabanatuan case. We do not agree. A franchise , as it is legally defined , refers to the "special privilege to do certain things conferred by government on an individual or corporation , and which does not belong to citizens generally of common right. "42 In a plethora of cases, the Supreme Court specifically defined a franchise as: xxx a special privilege conferred upon a corporation or individual by a government duly empowered legally to grant it. It is a privilege of public concern which cannot be exercised at will and pleasure , but should be reserved for public control and administration , either by the government directly, or by public agents , under such conditions and regulations as the government may impose on them in the interest of the public. A franchise thus emanates from a sovereign power and the grant is inherently a legislative power. It may, however, be derived indirectly from the state through an agency to which the power has been clearly and validly delegated . In such cases, Congress prescribes the conditions on which the grant of a franchise may be made.43 (Emphasis and underscoring supplied; citations omitted). *** *** *** xxx a legislative grant to operate a public utility.44 (Emphasis and underscoring supplied) . *** *** *** xxx basically a legislative grant of a special privilege to a person. Particularly, the term , franchise , includes not only authorizations issuing directly from Congress in the form t of statute, but also those granted by administrative 42 LTO v. City of Butuan, G.R. No. 131512, January 20, 2000 citing Black's Law Dictionary, Sixth edition, p. 1286. 43 Del Mar vs. Philippine Amusement and Gaming Corporation, eta!., G.R. No. 138298, November 29, 2000. 44 Commissioner of Internal Revenue vs. Philippine Airlines, G.R. No. 160528, October 9, 2006.

DECISION CTA ACNO. 95 Page 22 of28 agencies to which the power to grant franchise has been delegated by Congress. The power to authorize and control a public utility is admittedly a prerogative that stems from the Legislature.45 (Emphasis and under- Scoring supplied; citations omitted) It is manifest in the foregoing jurisprudential pronouncements that the term franchise partakes of a technical meaning. The conferment of special privileges by virtue of a franchise necessarily requires a legislative grant issued either by Congress through a statute or by a political subdivision or administrative agency to which the power to grant a franchise has been delegated. In this case, records show that no secondary franchise was granted by the government or its agency to petitioner. The rights or privileges petitioner enjoys with respect to the exploitation of geothermal resources within respondents territorial jurisdiction was entirely based on its BOT Agreement with PNOC-EDC. Indubitably, a BOT Agreement is not a franchise as contemplated under Section 137 of the LGC and explained by the Supreme Court in the Cabanatuan Case. It would be patently erroneous, much less contrary to law and settled jurisprudence, to regard a BOT Agreement or a service contract as tantamount to a franchise. To be sure, "tax statutes are construed most strongly against the government and in favor of the taxpayer because burdens are not to be imposed, nor presumed to be imposed , beyond what the statute expressly and clearly import."46 Accordingly, the trial court erred in considering petitioner's BOT Agreement with PNOC-EDC as a special or secondary franchise for purposes of the imposition of local franchise tax. The EPIRA Law explicitly provides that petitioner is not required to secure a franchise. Petitioner further argues that it is not subject to local franchise tax because it is not legally required to secure a franchise for the operation of the power plant. Petitioner contends that Section 6 of 45 Francisco vs. Toll Regulatory Board et a!. , G.R. Nos. 166910, 166917, 173630 & 183599, October 19,20 10. 46 Manila Railroad Company v . Collector of Customs , G.R. No. L-30264, March 12, 1929; See Batangas Transportation Co. v. Provincial Treasurer, G. R. No. L-28863, October 11 , 1928.

DEC ISION CTA ACNO. 95 Page 23 of28 Republic Act No. 9136 (EPIRA Law), explicitly exempts power generation companies from securing a national franchise . Section 6 of the EPIRA Law provides: SECTION 6. Generation Sector. - Generation of electric power, a business affected with public interest, shall be competitive and open. Upon the effectivity of this Act, any new generation company shall , before it operates, secure from the Energy Regulatory Commission (ERC) a certificate of compliance pursuant to the standards set forth in this Act, as well as health, safety and environmental clearances from the appropriate government agencies under existing laws. Any law to the contrary notwithstanding , power generation shall not be considered a public utility operation. For this purpose, any person or entity engaged or which shall engage in power generation and supply of electricity shall not be required to secure a national franchise. " (Emphasis supplied) On the contrary, respondents maintain that petitioner cannot raise the mantle of protection under the EPI RA Law because the same can only apply prospectively. Respondents further contend that even assuming that the EPIRA Law applies, nowhere in Section 137 of the LGC can it be inferred that a national franchise is necessary before the local franchise tax may be imposed . Respondents assert that the franchise tax being collected by the national government is independent of the local franchise tax that is being collected by a province. Respondents are clearly mistaken . It bears reiterating that the existence of a secondary or specia l franchise is indispensable before local franchise tax may be imposed . Necessarily, an entity that does not hold a national franchise or is not required to secure one cannot be subject to local franchise tax. This is the clear import of Congress in drafting the LGC . Of note is the excerpt of the Congressional Deliberations cited by petitioner as~ follows :

DECISION CTA ACNO. 95 Page 24 of28 "MR. ANTONINO. Mr. Speaker, I asked that because in Book II we are going to grant the local government units franchise taxes and a share of some forest, mineral , and other related taxes which are now being solely collected by the national government. May I take it that the franchise tax here is in lieu of the national franchise tax being collected now by the government? MR. JAVIER (E.). Mr. Speaker, the franchise tax which will be collected by a province will be in addition to the franchise tax imposed under the Internal Revenue Code or under the respective charters of these franchise holders. MR. ANTONINO . So what the sponsor is saying is that the national government imposes a franchise tax. We are now going to burden businesses again with another franchise tax by the local government units. Am I correct, Mr. Speaker? MR. JAVIER (E .). That is correct, Mr. Speaker. For example, if we have a transportation company operating in a province, Mr. Speaker, that transportation company pays a franchise tax or a common carrier's tax to the national government. But that transportation company uses the road of that province and subjects the road of that province to wear and tear. That transportation company also enjoys the protection of that province so it must also pay a tax to the province, Mr. Speaker. MR. ANTONINO . In that case , Mr. Speaker, the bus company will not only be paying a national franchise tax and a common carrier's tax but it will also be paying a provincial tax on any province it passes . It will be paying a business tax or a truck tax. MR. JAVIER (E .). That is correct, Mr. Speaker."47 (Emphasis supplied) It is clear from the above-quoted excerpt that Congress intended that the franchise tax which will be collected by a provin ce f 47 Petition for Review, Docket, p. 28 to 29; Exhibit "J", Civil Case No . 4561-0, RTC Records, p. 172 to 176.

DECISION CTA ACNO. 95 Page 25 of28 will be in addition to the franchise tax imposed under the Internal Revenue Code or under the respective charters of these franchise holders. Congress goes as far as expressly stating that the franchise tax imposed in the LGC constitutes an additional burden to companies already paying taxes to the national government by virtue of their franchises . Hence, to this Court, the mandate is clear. The LGC allows respondents to impose franchise tax exclusively upon entities possessing or are mandated to possess a national franchise. Appropriately, We find petitioner's reliance on Section 6 of the EPIRA Law meritorious. Section 6 of the EPIRA Law is explicit. Power generation is not considered a public utility operation and thus entities engaged or shall engage in such activity are not required to secure a national franchise . As discussed, the BOT Agreement requires petitioner to "convert such Geothermal Fluid and , on behalf of PNOC-EDC , deliver all electrical capacity and energy generated by the Power Plant to NAPOCOR". Basically, petitioner's principal operation involves generation and supply of electricity. As such , it is not required to secure a national franchise for this purpose and consequently cannot be subject to local franchise taxes. However, in the assailed Decision , the trial court ruled that petitioner cannot invoke the privileges under the EPIRA Law because the Accession Undertaking that petitioner has agreed to, was executed in the year 1996, years before the EPIRA Law became effective. Rights and obligations of the parties have been established in that contract which should not be impaired by the passage of the EPIRA Law. To do otherwise would mean that plaintiffs will acquire better rights which were never existent in their contracts/agreements. This Court finds it untenable that the EPIRA Law should not be applied to this case on the ground of non-impairment of contracts. The trial court's ratio decidendi stands on two opposite poles. The trial court ruled that (1) petitioner's contract serves as a franchise and therefore subject to the respondent province's local franchise tax and (2) that the EPIRA does not apply to petitioner's case on the ground of non-impairment of contracts. Both arguments are antithetic to each other. r For one, applying the EPIRA Law does not result in an impairment of petitioner's rights or privileges under the BOT

I' DEC ISION CTA ACNO. 95 Page 26 of28 Agreement. In fact, as the trial court itself stated , applying provisions of the EPIRA Law would mean that petitioner will acquire better rights which were never existent in their contracts/agreement. More importantly, a franchise , being a mere privilege, is within the government's power to regulate through the exercise of its police power. Thus, the constitutional guarantee of non-impairment of contracts48 yields to the sovereign power of the State to regulate and control franchises. The Supreme Court, speaking through Justice Laurel , in the case of Pangasinan Transportation Co., Inc. vs. The Public Service Commission49, emphasized that non-impairment of contracts is not absolute and must bow down to the sovereign police power of the state, to wit: "Upon the other hand , statutes enacted for the regulation of public utilities, being a proper exercise by the state of its police power, are applicable not only to those public utilities coming into existence after its passage, but likewise to those already established and in operation. " Hence, it is inconsistent for the trial court to rule that petitioner holds a franchise but nonetheless maintain that the EPIRA Law cannot be applied on the ground of non-impairment of contracts. As regards the prospective application of the EPIRA Law, the trial court is similarly mistaken. The trial court failed to consider that Section 6 of the EPIRA Law provides for a special rule on power generation companies. To recall , Section 6 expressly states that "[f]or this purpose, any person or entity engaged or which shall engage in power generation and supply of electricity shall not be required to secure a national franchise ." To be sure, the aforecited phrase covers not only entities which will engage in power generation activities but also those which are or were already engaged in power generation even before the EPIRA Law took effect. At this juncture, it should be noted that "where there is in the same statute a particular enactment and also a general one wh ich is embraced in the former, the particular enactment must be operative , and the general enactment must be taken to effect only such cases within its general t 48 Section 10, Article III, 1987 Philippine Constitution. 49 G.R. No. 47065, June 26, 1940.

DEC ISION CTA ACNO. 95 Page 27 of28 language as are not within the provisions of the particular enactment. "50 Opinions issued by the Bureau of Local Government Finance are not conclusive upon the courts. With respect to the BLGF Opinion relied upon by petitioner, the trial court held that the same is not binding upon the court. Pertinent portion of the assailed Resolution reads: Finally, this Court is not bound by the November 29 , 2011 Opinion of the Department of Finance as the Judiciary is an independent and separate department of government from the Executive under which the Department of Finance falls. The Constitution likewise provides that while the Legislature (the third co-equal department of government) enacts laws, the Judiciary interprets, and the Executive implements. It is not therefore within the scope of its powers and authority to interpret a law although its op1n1on may vary every now and then be sought for convenience purposes. We are in agreement with the trial court. The BLGF Opinion cited by petitioner, though may have been consistent with the findings of this Court, is not given weight and deference in the courts.51 Finally, as regards the exemption from local taxes which petitioner allegedly enjoys under PO No. 1442 and the BOT Agreement, We find it unnecessary to determine the merit of such arguments in view of Our finding that petitioner is not subject to local franchise taxes. WHEREFORE , premises considered , the instant Petition for Review is hereby GRANTED. Accordingly, the assailed Decision of the Regional Trial Court of Ormoc-Branch 35 dated February 9, 2012 and the Resolution dated June 29, 2012 in Civil Case Nos. 4561 -0 and 4630-0 are hereby REVERSED and SET ASIDE. The Notice of~ 50 Manila Road Company v. Insular Collector ofCustoms, G.R. No. L-30264, March 12, 1929. 51 Smart Communication, Inc. v. The City ofDavao, G.R. No. 155491, September 16, 2008.

DECISION CTA ACNO. 95 Page 28 of28 Assessments dated December 12, 2005, January 23, 2006, and February 14, 2006 , for the years 2000-2004 in the sum of P8 ,298, 712.62 and March 27, 2006 , for the year 2005 in the amount of P3 ,077,846.87, issued by the Treasurer of the Province of Leyte, assessing petitioner for deficiency local franchise tax are hereby SET ASIDE and NULLIFIED for lack of legal and factual bases. SO ORDERED. ... ER~.UY Associate Justice I CONCUR: ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division . ER~. UY Associate Justice Chairperson CERTIFICATION Pursuant to Article VIII , Section 13 of the Constitution , and the Division Chairperson's Attestation , it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. Presiding Justice