Case Summary (G.R. No. 171470)
Background and Legal Issue
On January 11, 1993, First Private Power Corporation (FPPC) entered into a Build-Operate-Transfer (BOT) agreement with NAPOCOR to construct and operate a diesel power plant. Under the agreement, the Bauang Private Power Corporation (BPPC) was created to own, operate, and manage the power plant, converting diesel fuel supplied by NAPOCOR into electricity, which BPPC sells exclusively to NAPOCOR. The project was to operate for a period, after which the assets, including machinery and equipment, would be transferred to NAPOCOR without additional compensation.
The main legal question centers on the real property tax implications for the machineries and equipment used in the BOT project. Specifically: (1) whether NAPOCOR, a government-owned and controlled corporation (GOCC) enjoying tax exemption, can be recognized as the actual, direct, and exclusive user of the machinery and equipment for tax exemption purposes; and (2) whether such tax exemption status can be passed on to its BOT partner, BPPC, a private corporation.
BOT Agreement Provisions Regarding Ownership and Operation
The BOT Agreement stipulates:
- NAPOCOR would provide the site at no cost and pay real estate taxes on the land and buildings thereon but not on machinery.
- The contractor (BPPC) directly or indirectly owns the power station and all machinery on site until the transfer date.
- BPPC shall operate and manage the facility and convert fuel supplied by NAPOCOR into electricity.
- NAPOCOR will purchase the electricity generated and pay fees to BPPC.
- Upon expiration of the term, BPPC will transfer the power station and assets to NAPOCOR free of charge.
Administrative and Local Assessment Actions
Initially, Bauang municipal officials issued tax declarations exempting BPPC’s machinery and equipment. However, after inquiry by municipal authorities and elevating the matter to the Bureau of Local Government Finance (BLGF), it was ruled that BPPC’s machineries are subject to real property tax. Subsequently, tax declarations were revised to impose tax assessments totaling approximately P288 million covering 1995 to 1998.
Petition for Tax Exemption and Lower Tribunal Decisions
NAPOCOR filed a petition for tax exemption with the Local Board of Assessment Appeals (LBAA) citing Section 234(c) of the Local Government Code (LGC), which exempts machineries and equipment actually, directly, and exclusively used by GOCCs engaged in power generation and transmission.
The LBAA denied the petition, ruling that:
- BPPC, a private corporation, is the actual and exclusive user, not NAPOCOR.
- The contractual assumption by NAPOCOR of tax payments does not absolve BPPC’s tax liability, as tax liability is determined by law, not contractual arrangements.
The Local Board’s dismissal was upheld by the Central Board of Assessment Appeals (CBAA) for similar reasons, emphasizing:
- “Actual use” requires principal and predominant utilization, which is by BPPC in generating electricity.
- BPPC’s ownership and exclusive operational control of the equipment mean NAPOCOR cannot claim exemption.
- The tax exemption under Section 234(c) applies only to GOCCs, not to BPPC, a private entity.
- Contractual agreements do not confer or transfer tax exemptions.
Court of Tax Appeals Decision
The Court of Tax Appeals (CTA) affirmed the rulings, adding two main considerations:
- BPPC never timely appealed the tax assessment; the petition was filed by NAPOCOR, which was not the registered owner, rendering it an interloper without legal standing to contest the tax.
- On the substantive issue, BPPC owns and exclusively uses the machinery and equipment during the BOT term, thus NAPOCOR’s claim under the exemption law failed.
- Tax exemption cannot be created by contract; it must be expressly provided by the Constitution, statute, or franchise and is a personal privilege not subject to transfer.
- The exemption under the LGC applies only to entities actually exercising direct and exclusive use, which excludes BPPC in this context.
Separate Petitions to the Supreme Court
BPPC separately filed a petition for review, which the Supreme Court denied for failure to show reversible error.
NAPOCOR filed a petition claiming that it is the actual user and beneficial owner of the power plant, pointing to:
- The BOT Agreement as a financing arrangement where BPPC is essentially a contractor recovering costs and that NAPOCOR is the beneficial owner.
- Payment schemes as amortizations consistent with the BOT Law and Section 6 thereof, emphasizing eventual ownership transfer without further compensation.
- The public nature of BOT projects and the legislative intent to extend tax exemptions for such government undertakings.
- Harmonization of relevant statutes (LGC, NAPOCOR Charter, and BOT Law) should support tax exemption.
Supreme Court’s Analysis and Ruling
The Supreme Court found NAPOCOR's arguments meritless and held:
- The LGC’s Section 234(c) exemption is clear: exemption applies only to machineries and equipment actually, directly, and exclusively used by GOCCs in power generation or transmission.
- NAPOCOR admits BPPC’s ownership of the machinery and equipment, confirmed by the BOT Agreement.
- The nature of BOT agreements is well-established in law: the project proponent (BPPC), not NAPOCOR, constructs, owns, operates, and manages the facility during the fixed term and recovers investments through fees.
- Ownership and beneficial use during the term rest with BPPC, which operates independently, takes risks, and manages operations, while NAPOCOR merely purchases electricity.
- The agreement does not transform BPPC’s ownership or use into that of NAPOCOR before t
Case Syllabus (G.R. No. 171470)
Facts and Background of the Case
- On January 11, 1993, First Private Power Corporation (FPPC) entered into a Build-Operate-Transfer (BOT) agreement with National Power Corporation (NAPOCOR) for the construction of the 215 Megawatt Bauang Diesel Power Plant in Bauang, La Union.
- The BOT Agreement led to the creation of Bauang Private Power Corporation (BPPC), which would own, manage, and operate the power plant, and assume FPPC’s obligations under the BOT contract.
- BPPC would operate the power plant to convert diesel fuel supplied by NAPOCOR into electricity, for delivery back to NAPOCOR, which pays fees under the agreement.
- The contract specifies that NAPOCOR makes the site available at no cost and is responsible for payment of real estate taxes and assessments on the site and buildings.
- Ownership of the power station, including machinery and equipment supplied or financed by BPPC, remains with BPPC until the transfer date when these are to be transferred to NAPOCOR without compensation.
- The municipal assessor initially declared BPPC’s machinery and equipment tax-exempt, but upon recomputation and after question by local officials, the tax exemption was revoked and taxes assessed totaling over PHP 288 million for 1995-1998.
- NAPOCOR filed a petition for tax exemption claiming the machinery and equipment should be exempt under Section 234(c) of Republic Act No. 7160 (Local Government Code), which exempts machinery actually, directly, and exclusively used by GOCCs engaged in power generation and transmission.
Legal Issues Presented
- Whether, under the BOT agreement, NAPOCOR can be considered the actual, direct, and exclusive user of BPPC’s machinery and equipment for purposes of real property tax exemption.
- Whether NAPOCOR’s tax-exempt status can be passed on or extended to BPPC, a private entity, through the BOT agreement.
- Whether BPPC properly filed a protest or appeal against the real property tax assessments.
- Whether the machinery and equipment are subject to classification for lower real property assessment rates under the Local Government Code.
- The propriety and limits of tax exemption claims under Philippine law, particularly in context of BOT projects and government-owned vs. private ownership/use.
Summary of Lower Tribunal Findings
Local Board of Assessment Appeals (LBAA)
- Denied NAPOCOR’s petition for exemption, ruling that Section 234(c) applies only if the GOCC (NAPOCOR) owns and actually uses the machinery and equipment.
- Since BPPC owns, operates, and maintains the equipment, and NAPOCOR merely purchases generated electricity, it does not qualify.
- Responsibility for the real estate tax payment is determined by law, not by contractual agreements between parties.
Central Board of Assessment Appeals (CBAA)
- Affirmed LBAA’s ruling: BPPC is the actual, direct, and exclusive user of machinery; it is a private entity and not entitled to GOCC tax exemption.
- Clarified that “actual use” means principal or predominant utilization by the possessor.
- Recognized that although NAPOCOR assumed payment responsibilities under the contract, this does not affect tax liability as per law.
Court of Tax Appeals (CTA)
- Dismissed NAPOCOR’s petition challenging CBAA ruling.
- Found BPPC did not timely file a protest; only NAPOCOR filed an appeal which the CTA held improper since NAPOCOR is not the registered owner or user of the machinery during the assessed period.
- Confirmed BPPC’s ownership and direct use of the power plant machinery during the BOT period.