CTA Case No. 2009 (Decision)

'.I I (J:i;.f"UBLIC OF TBE PHILIPPlNl!.f COURT OF TAX APPEALI � ~UEZON CITY .. VMC RURAL ELECTRIC SERVICE COOPERATIVE , INC ., Petitioner , versus C. T.A. CASE NO . 2009 COMrviiSSIONER OF INTERNAL REVENUE , Respondent . X- - - - -- - X DEC I S I 0 N This is an appeal ~rom the decision of re- spondent as s essing petitioner the amount of ~ 1 4 7 327 . 65 as deficiency franchise tax and sur- charge for the period from July 1 , 1966 to Novem- b� er 30 , 1967 � The facts of this case are not disputed . Petitioner V.M. C. Rural Electric Service Coop- erative , Inc . , is a non- agricultural cooperative with net assets of not more than P500 7 000 , organized under the provisions of Republic Act 2023 which became effective on June 22 , 1957 . It is authorized to operate electric light , heat and power service in the Municipalities of Victorias and Hanapla, and the City of Cadiz, all in the province of Occidental Negros by virtue of mun-

. DECISION - CTA CASE NO . 2009 2 icipal franchises granted to it on September 10, � 1964. The franchises contain a ~revision that same are subject to the conditions of Act 3636 a.nd Sec- tion 10 thereof further providesas follows: The grantee , in consideration of the franchise hereby granted, shall pay quarterly into the Pro- vincial Treasury of Occidental Ne- gros , five per centmn (5%) of the gross revenues obtained thru this privilege as required by Section 7 - of Republic Act No . 39 ���� . Upon audit and examination of the books and other . records of accounts by an auditor of the General Auditing Office , it was ascertained that the peti- tioner , during the period from July 1, 1966 to N_ovember 30 , 1967 , \1/as selling electric light, heat and power not only to its members but also to non- members and had gross receipts of ~229 , 242 . 47 (pp . 22- 26 , BIR rec . ) . Based on the opinion of the General Auditing Office that petitioner is subject to 5% franchise tax on its gross recei pts in accordance with Sec- tion 259 of the National Internal Revenue Code , as amended , the BIR Regional Director of Bacolod City issued a le t t~r -assessment dated June 20 , 1968 , against petitioner, assessing the latter. the amount of ~14 , 327 . 65 as deficiency franchise tax and surcharge for the period from July 1, 1966 to �

DECISIOl~ - CTA CAS~ NO. 2009 3. November 30, 1967. " On July 15, 1968, petitioner contested the validity of the assessment, claiming exemption from franchise tax under Section 66 of Republic Act 2023 for b~ing a non- agricultural cooperative duly reg'istered with the Cooperatives Administration Of:fice, which claim vJas denied by the BIH Regional Director in his letter dated August 13, 1968 . On September 5, � 1968, petitioner filed, this time with respondent Comrni.ssioner of Internal Revenue, another req?est for reconsideration, vlhich was denied by the� latter on January 31, 1969 . Hence, this appeal. The appeal is, in the main, based on Section 66 of Republic Act 2023 which reads as foliows: SEC . 66 . Exemptigns . - Co- operatives �;registered under this Act shall, notwithstanding the provisions � of existing law to the contrary, en- joy the follm-1ing exemptions: (1) Cooperatives with net assets of not more than five hundred thousand pesos shall be exempt from all taxes and government fees of whatever name and �nature except those provided for under this Act: � � � Petitioner contends that Act 3636 , as amended, is a general' law while RepuQlic Act 2023 is a special law and its provisions should prevail over those of the former . On the other hand, respon- dent asserts the contrary, insisting that the

.. �I ' DECISION CTA CASE NO . 2009 4 .former is a special ~aw and should. prevail as an exception to , or a qualification of the latter . In this respect , the premises of the parties are not entirely correct . The � municipal franchises of the petitioner rest on Act 667 that authorizes municipalities to grant fra.nchises . If Act 3636 is referred to in the franchises in question, it is merely because the municipal grants made the provisions of said Act as the pattern of the con- ditions of petitioner ' s franchises . i;lith these observations we will proceed -to consider the merits of this petition. To our mind, the question as to 1>1hich law is a special -law, is beside the point . Nowhere in t he provisions of Republic Act 2023 can we find anything from which we can reas-onably infer that it has any bearing with Act 667 or -Act 3636 or Republ~c Act 39 , all of which solely deal �with the franchises and taxes of public utility com- panies engaged in the production and sale of elec- tric pov1er and current . Republic Act 2023 was not intended to bring within the protective embrace of its provisions : cooperatives that choose to obtain franchises for public utility services . The cooperatives envis- aged. by said law are essentially those designed

DECISION - ... . CTA CASE NO . 2009 �: 5 11for the mutual benefits of its members 11 and for services to its members (Section 9, ~ Republic Act 2023) . Section 10 thereof emphasizes that 11 the object of every cooperative shall be to provide maximum service to its members , 11 while Section 58 � of the same lavT expressly restricts the bulk of its allovJable busi-ness with non-members . These characteristics obviously go against the very grain of the concept of public utility companies which are essentially for compulsory service to the general public without discrimination as to person , subject to particular regul~tions because of its public nature ( New State Ice Co . v. Lieb- mann, 285� u.s . 262, 76 L ed 747, 52 s . Ct . 371; California v . Central P.R. Co . 127 u.s . 1, 32 Led 150, 8 S . Ct . 1073). Clearly the �avowed functions of one are hardly compatible with those of the other. Needless to say , a cooperative that ob- tains a franchise to be a public utility company clearly goes beyond the borders of its defined activities for which the protective provisi0ns of Republic Act 2023 were designed . A~ain , a franchise has been defined as the privilege of doing that which does not belong to citizens or public generally by common rights (Griffin v . Oklahoma National Gas Corporation,

DECISION - C1~ CASE NO. 2009 6 37 Fed L2d/ 545, 547; Dwarken v . Apartment House Owners Ass 1 n of Cleveland , 175 N.E . 577 , 578 , 38 Ohio App . 265) . It is essentia.l that a franchise should be created by a grant from the sove-reign authority (Denver & Swansea Ry . Co . v . Denver City \ Ry . Co . , 2 Colo . 673 , 682) , that is , through grants by the legislature or any of its properly constituted .instrumentalities nvalla \'lalla v . Walla ' \�lalla Water Co . 172 U. S. 1, 43 L ed 341, 19 S. Ct . 77; Wright v . _Nagle , 101 U. S. 791, _25 L. ed 921)o The grant is at the same time a contract between the� sovereign power and private citizens , made upon valuable consideration , for purposes of public benefit , as well as private advanta ge (Hen- derson National Bank v . City of Hendersory , 39 S . ~tl . 1030 , 19 Ky . Law Rep . 728 , 742) . Being i n the nature of a contract , it stands upon a different footing from a general law (Philippine Railway Company v . Collector of Internal Revenue , G. R. No . 3859, March 23 , 1952) . Having chosen to obtain franchises for public utility services , petitioner is bound by the term and tenor of the resulting con- tracts (Grand Trunk i/lestern R. Co . v . South Bend , 277 u.s-. 544, 57 L. ed 633, 33 s . ct . 303 ; Philip- pine Railway Co. v . Coll . of Int . Rev ., swr�..) . Having reached the foregoing conclusions , we

DECISION - CTA CASE NO . 2009 7 deem it unnecessary to pass upon the other issues ,. raised by the parties . ~REFORE , the decision of respondent is hereby affirmed with costs . SO ORDERED . Quezon City , pril 21 , 1971 . ~ 'j~- RAMON L. V NCE - A ssociate Judge WE. CONCUR: t ifisiAO R. tVAREZ ssociate Judge ..