Title
National Power Corporation vs. City of Cabanatuan
Case
G.R. No. 149110
Decision Date
Apr 9, 2003
NPC, a government corporation, challenged Cabanatuan City's franchise tax, claiming tax exemption under its charter. The Supreme Court ruled NPC liable, holding that the Local Government Code repealed its exemption, affirming local taxing authority.
franchise tax
tax exemption
local taxation

Case Summary (G.R. No. 149110)

Factual Background

National Power Corporation was created by Commonwealth Act No. 120 and later amended by Rep. Act No. 6395 to undertake the generation, transmission, and sale of electric power nationwide. The charter conferred extensive powers to construct, operate and maintain power plants, take water for power development, exercise eminent domain for projects, and sell electric power in bulk to various classes of buyers. For 1992, NPC posted gross receipts of P107,814,187.96 from its operations within the City of Cabanatuan.

Ordinance and Assessment

Pursuant to Section 37 of Ordinance No. 165-92, the City of Cabanatuan imposed an annual franchise tax of 0.75% of gross receipts on businesses enjoying a franchise. Relying on that ordinance, the City assessed National Power Corporation a franchise tax of P808,606.41 for 1992, computed as seventy-five percent of one percent of the corporation's gross receipts for the preceding year.

Petitioner's Refusal and Exemption Claim

National Power Corporation refused to pay the assessed tax and disputed the City's authority to impose it. NPC relied on Rep. Act No. 6395, Sec. 13, which characterized the corporation as non-profit and purported to exempt it from all taxes, including income and franchise taxes, payable to the national government and to provinces, cities and municipalities. NPC further invoked the principle that local governments lack power to tax instrumentalities of the national government.

Trial Court Proceedings and Ruling

The City of Cabanatuan filed a collection action in the Regional Trial Court seeking payment of the assessment plus statutory penalties. The trial court dismissed the complaint on January 25, 1996. It concluded that NPC's tax-exemption privileges survived the enactment of the Local Government Code for three reasons: (1) Rep. Act No. 6395 is a special law and was not expressly repealed by the later, general Rep. Act No. 7160; (2) Sec. 193 of the LGC constituted an implied repeal, which the court disfavored; and (3) local governments had no power to tax national instrumentalities, relying on Basco v. Philippine Amusement and Gaming Corporation.

Court of Appeals Reversal

On appeal, the Court of Appeals reversed the trial court. The appellate court held that Sec. 193 of the Local Government Code, read together with Secs. 137 and 151, expressly withdrew existing tax exemptions enjoyed by persons and juridical entities, including government-owned or controlled corporations, except for limited enumerated exceptions. The Court of Appeals ordered NPC to pay the assessed franchise tax, to pay future taxes on gross receipts realized within the city's jurisdiction, to pay a surcharge of twenty-five percent for unpaid taxes, and awarded P10,000.00 as litigation expenses. The Court of Appeals denied NPC's motion for reconsideration.

Issues Presented to the Supreme Court

In its petition for review, National Power Corporation urged three principal contentions: first, that Secs. 137 and 151 of the Local Government Code, in relation to Sec. 131, applied only to private persons or corporations and thus did not cover NPC; second, that the LGC being a general law could not impliedly repeal the NPC charter, a special law, and that Sec. 193 did not repeal the charter's tax exemption; and third, that even if tax authority existed, the exercise of police power through tax exemption embodied in NPC's charter should prevail over the LGC.

Constitutional and Statutory Framework

The Court recounted the constitutional and statutory foundations for local taxing power under the 1987 Constitution. Art. X, Sec. 5 vests local government units with the power to create sources of revenue and to levy taxes, fees and charges within guidelines and limitations set by Congress. Art. X, Sec. 3 directed Congress to enact a Local Government Code to implement decentralization and to allocate powers and resources among local units. Congress complied by enacting Rep. Act No. 7160, which broadened LGU taxing authority and provided specific exceptions and limitations, including Sec. 133 (general limitations) and the withdrawal of tax exemptions in Sec. 193.

The Court's View on Taxation and Local Autonomy

The Supreme Court emphasized the centrality of taxation to government functions and the constitutional shift toward local fiscal autonomy. The Court explained that the LGC was intended to address LGU fiscal constraints and to widen their tax base. The Code removed blanket immunities that previously insulated national instrumentalities and GOCCs from local taxation, subject to the exceptions expressly provided.

Nature of a Franchise Tax and Its Application

The Court analysed the nature of a franchise tax as levied on the exercise of privileges to transact business, not merely on corporate existence, property, or income. It distinguished a primary franchise (the right to exist under a charter) from a secondary or special franchise (specific privileges to use public ways or exercise particular business rights). The Court observed that Sec. 131(m) of the LGC defines franchise in the sense of a secondary franchise for taxation purposes. Two requisites must concur for a franchise tax to apply: that the entity possess a secondary or special franchise and that it exercise that franchise within the taxing LGU's territory.

Application of the Requisites to NPC

The Court found that National Power Corporation satisfied both requisites. NPC's charter, Commonwealth Act No. 120, as amended, constituted both primary and secondary franchises by granting special powers to undertake water resource appropriation, construct transmission facilities, sell electricity in bulk, and exercise other privileges unavailable to ordinary corporations. NPC exercised those franchise powers within the territorial jurisdiction of the City of Cabanatuan, as evidenced by its significant gross receipts from sales there in 1992. Hence NPC was subject to the franchise tax as a taxable entity exercising a corporate franchise.

Character of NPC and Proprietary Function

The Court rejected NPC's argument that ownership by the national government or its non-profit characterization exempted it from taxation. Citing Pres. Decree No. 2029, the Court noted the classification of GOCCs into those performing governmental and those performing proprietary functions. The Court concluded that NPC's generation and sale of electricity were proprietary, business-like activities undertaken to advance the general interest and not sovereign functions. The charter itself contemplated corporate business operations, including borrowing, issuing bonds, and conducting activities described as its business purposes. Thus NPC was a separate juridical entity engaged in taxable proprietary operations.

Repeal and Exemption Analysis under the LGC

The Court addressed NPC's claim that Rep. Act No. 6395, Sec. 13 preserved tax exemptions. It held that tax exemptions are construed strictly against claimants and must be clearly established. The Court concluded that Sec. 193 of the Local Government Code operates as an express withdrawal of tax exemptions and incentives previously enjoyed by persons and juridical entities, including GOCCs, except for the narrowly enumerated exceptions. The Court applied the maxim expressio unius est exclusio alterius to interpret the exceptions. The Court further relied on Sec. 137, which authorizes provinces to impose a franchise tax "notwithstanding any exemption granted by any law or other special law," and on precedents—such as the decisions involving MERALCO and Mactan Cebu International Airport Authority v. Marcos—to uphold the withdrawal of exemptions and the validity of local taxation over entities formerly exempt.

Rejection of Basco Precedent as Controlling

The Court e

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