Facts:

The case revolves around Balanga Power Plant Co., Inc. (hereinafter referred to as "petitioner") and the Commissioner of Internal Revenue (respondent). The petitioner, a Filipino corporation operating in Balanga, Bataan, was granted six municipal franchises by the councils of various municipalities in the province (Balanga, Orion, Abucay, Pilar, Orani, and Samal) for the operation of an electric power plant. The franchises were issued during the late 1920s and early 1930s, with those for Balanga and Samal being granted under Act No. 667 of the Philippine Commission. According to the franchises, the tax rate imposed was one percent (1%) of the gross earnings for the first twenty years and two percent (2%) for the following fifteen years.

A demand for a deficiency franchise tax amounting to ₱12,892.91 was first issued on November 17, 1958 for the period from October 1, 1953, to June 30, 1957. This amount was subsequently revised to ₱26,253.04 based on an audit report, a

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Facts:

Party Identities and Franchise Grants

• Petitioner:
• Balanga Power Plant Co., Inc., a Filipino corporation organized under Philippine laws with offices in Balanga, Bataan.
• Holds municipal franchises to operate an electric power plant granted by various municipal councils in the Province of Bataan.
• Respondent:
• The Commissioner of Internal Revenue, head of the Bureau of Internal Revenue.

Municipal Franchises and Corresponding Dates

• Petitioner is the grantee of six municipal franchises covering the following municipalities and dates:
• Balanga – granted on November 5, 1928.
• Orion – granted on September 20, 1929.
• Abucay – granted on July 16, 1930.
• Pilar – granted on July 10, 1930.
• Orani – granted on September 20, 1930.
• Samal – granted on April 8, 1932.

Franchise Tax Provisions in the Municipal Charters

• For the municipalities of Balanga and Samal:
• These franchises were granted under the authority of Act No. 667 of the Philippine Commission.
• The tax rate stipulated in these franchises is structured as follows:
• One per cent (1%) of the petitioner’s press earnings for the first twenty (20) years.
• Two per cent (2%) for the subsequent fifteen (15) years.
• Specific language quoted in the franchises reflects this dual rate, thereby indicating its contractual basis.

Assessment History and Audit Reports

• Original Franchise Tax Demand:
• An original demand of P12,892.91 was made for the period from October 1, 1953, to June 30, 1957 (initiated on November 17, 1958).
• Amended Assessment:
• Following an audit report by the General Auditing Office dated November 3, 1960, the deficiency was amended to P26,253.04.
• Payment of this amended demand was sought on January 12, 1961.
• Prior Payment by Petitioner:
• The petitioner had already remitted P14,228.57 based on the franchise tax amount computed at the originally provided 2% rate.

Nature of the Tax Dispute

• Core Question on Applicable Tax Rate:
• Whether the petitioner is subject to the 2% franchise tax as stipulated in its municipal franchise agreements, or
• Whether Section 259 of the National Internal Revenue Code (Commonwealth Act No. 466, as amended) – prescribing a tax rate of 5% (or the higher of the two rates) – is applicable.
• Legislative and Contractual Considerations:
• Petitioner argues that the municipal franchise embodies a property right, implying that the rate fixed (2%) should control.
• The opposing view, which the lower court and the appellate decision ultimately adopt, is premised on the explicit reservation of the legislative power to alter franchise terms.

Reference to Precedents and Supporting Evidence

• The tax assessment relies on prior Supreme Court cases (Hoa Hin Co., Inc. vs. Saturnino David and Silverio Blaquera vs. Hoa Hin Co., Inc.) which discuss the application of Section 259.
• The petitioner submitted additional evidence as necessary for a comprehensive determination of the issue.

Issue:

Central Issue

• Whether the Balanga Power Plant Co., Inc. is subject to a franchise tax computed at 2% as provided in its municipal franchises, or at 5% as mandated by Section 259 of the National Internal Revenue Code.

Sub-Issues

• Interpretation of the contractual obligations:
• Whether the municipal franchise agreements, which fix a 2% tax rate, preclude the imposition of a higher tax rate by statutory provision.
• Constitutional Considerations:
• Whether applying Section 259 (with its higher tax rate) violates the constitutional prohibition against impairment of contractual obligations.
• Precedent Applicability:
• Whether the doctrine laid down in the Hoa Hin cases, which involved legislative franchises, is applicable to municipal franchises.

Ruling:

• (Subscriber-Only)

Ratio:

• (Subscriber-Only)

Doctrine:

• (Subscriber-Only)