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G.R. No. 155491 September 16, 2008

SMART COMMUNICATIONS, INC. vs. THE CITY OF DAVAO,
represented Mayor DUTERTE, and the SANUNIAN
!AN"UNSOD
On March 27, 1992, Smart obtained it !e"i!ati#e $ranchie %nder R.&.
No. 7294. Sec. 9 o$ aid !a' pro#ide that ()he "rantee, it %cceor or
ai"n ha!! be !iab!e to pa* the ame ta+e on their rea! etate b%i!din"
and perona! propert*, e+c!%i#e o$, thi $ranchie, a other peron or
corporation 'hich are no' or herea$ter ma* be re-%ired b* !a' to
pa*. .n addition thereto, the "rantee, it %cceor or ai"n ha!! pa* a
$ranchie ta+ e-%i#a!ent to three percent /012 o$ a!! "ro receipt o$ the
b%ine tranacted %nder thi $ranchie b* the "rantee, it %cceor or
ai"n and the aid percenta"e ha!! be in lieu of all taxes on thi
$ranchie or earnin" thereo$3 Provided, )hat the "rantee, it %cceor or
ai"n ha!! contin%e to be !iab!e $or income ta+e pa*ab!e %nder )it!e ..
o$ the Nationa! .nterna! Re#en%e 4ode p%r%ant to Section 2 o$ 5+ec%ti#e
Order No. 72 %n!e the !atter enactment i amended or repea!ed, in
'hich cae the amendment or repea! ha!! be app!icab!e thereto.

)he "rantee ha!! $i!e the ret%rn 'ith and pa* the ta+ d%e thereon to the
4ommiioner o$ .nterna! Re#en%e or hi d%!* a%thori6ed repreentati#e
in accordance 'ith the Nationa! .nterna! Re#en%e 4ode and the ret%rn
ha!! be %b7ect to a%dit b* the 8%rea% o$ .nterna! Re#en%e. /5mphai
%pp!ied.29
On :an%ar* 1, 1992, the ;oca! Go#ernment 4ode /R.&. No. 71602 too<
e$$ect. Section 107, in re!ation to Section 151 o$ R.&. No. 7160, a!!o'ed
the impoition o$ $ranchie ta+ b* the !oca! "o#ernment %nit.

R.&. No. 7716 or the =&) ;a' 'a enacted 'hich peci$ica!!* e+preed
%nder Section 20, repea!in" pro#iion o$ a!! pecia! !a' /that inc!%de
the !e"i!ati#e $ranchie R.&. No. 7294, a pecia! !a'2 re!ati#e to the rate
o$ $ranchie ta+e. .t a!o repea!ed, amended, or modi$ied a!! other !a',
order, i%ance, r%!e and re"%!ation, or part thereo$ 'hich are
inconitent 'ith it.

.t i in e$$ect, rendered ine$$ecti#e the (in !ie% o$ a!!
ta+e9 c!a%e in R.&. No. 7294.
)a+ 4ode o$ the 4it* o$ >a#ao, Section 1, &rtic!e 10 thereo$, pro#ide3
(Not'ithtandin" an* e+emption "ranted b* an* !a' or other pecia! !a',
there i hereb* impoed a ta+ on b%inee en7o*in" a $ranchie, at a rate
o$ e#ent*?$i#e percent /7512 o$ one percent /112 o$ the "ro ann%a!
receipt $or the precedin" ca!endar *ear baed on the income or receipt
rea!i6ed 'ithin the territoria! 7%ridiction o$ >a#ao 4it*.

Smart $i!ed a pecia! ci#i! action $or dec!arator* re!ie$ $or the
acertainment o$ it ri"ht and ob!i"ation %nder the )a+ 4ode o$ the 4it*
o$ >a#ao and contend that it te!ecenter in >a#ao 4it* i e+empt $rom
pa*ment o$ $ranchie ta+ to the 4it*, on the $o!!o'in" "ro%nd3
the i%ance o$ it $ranchie %nder Rep%b!ic &ct /R.&.2 No. 7294,
%be-%ent to R.&. No. 7160 ho' the c!ear !e"i!ati#e intent to
e+empt it $rom the pro#iion o$ R.&. 7160
that the (in !ie% o$ a!! ta+e9 c!a%e in Section 9 o$ it
$ranchie e+empt it $rom a!! ta+e, both !oca! and
nationa!, e+cept the nationa! $ranchie ta+ /no' =&)2,
income ta+, and rea! propert* ta+
Section 107 o$ R.&. No. 7160 can on!* app!* to e+emption
a!read* e+itin" at the time o$ it e$$ecti#it* and not to $%t%re
e+emption@
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not co#ered bec. )he $ranchie 'a "ranted a$ter the
e$$ecti#it* o$ the ;G4
the po'er o$ the 4it* o$ >a#ao to impoe a $ranchie ta+ i
%b7ect to tat%tor* !imitation %ch a the # in lieu of all taxes
clause $o%nd in Section 9 o$ R.&. No. 7294@ and
on!* ta+e it ma* be made to bear %nder it $ranchie
are the nationa! $ranchie ta+ /no' =&)2, income ta+,
and rea! propert* ta+
e+empt $rom the !oca! $ranchie ta+ beca%e the (in
!ie% o$ ta+e9 c!a%e in it $ranchie doe not
ditin"%ih bet'een nationa! and !oca! ta+e.
the impoition o$ $ranchie ta+ b* the 4it* o$ >a#ao 'o%!d
amo%nt to a #io!ation o$ the contit%tiona! pro#iion a"aint
impairment o$ contract.
$ranchie i in the nat%re o$ a contract bet'een the
"o#ernment and Smart.

Repondent in#o<ed it po'er "ranted b* the 4ontit%tion to !oca!
"o#ernment %nit to create their o'n o%rce o$ re#en%e.

R)4 denied the petition on the "ro%nd that petitioner $ai!ed to pro#e that
it i e+empt $rom ta+ app!*in" strictissimi juris a"aint the ta+pa*er and
!ibera!!* in $a#or o$ the ta+in" a%thorit*. On the i%e o$ #io!ation o$ the
non?impairment c!a%e o$ the 4ontit%tion, it cited Mactan Cebu
International Airport Authority v. Marcos and dec!ared that the cit*A
po'er to ta+ i baed not mere!* on a #a!id de!e"ation o$ !e"i!ati#e
po'er b%t on the direct a%thorit* "ranted to it b* the $%ndamenta!
!a'. )hat 'hi!e %ch po'er ma* be %b7ect to retriction or condition
impoed b* 4on"re, an* %ch !e"i!ated !imitation m%t be conitent
'ith the baic po!ic* o$ !oca! a%tonom*.

ISSUES$
5+emption $rom Branchie )a+ %nder Section 9, R& 7294 'hich
contain (in !ie% o$ ta+e9 c!a%e
(.n !ie% o$ ta+e9 c!a%e app!ie to nationa! ta+e or !oca! ta+e or
bothC
=io!ation to the 4ontit%tiona! prohibition a"aint (impairment o$
contract9
HE"D$ Detition i denied.
On (.n !ie% o$ a!! ta+e( 4!a%e in R& 72943
R.&. No. 7294 i not de$inite in "rantin" e+emption to Smart $rom !oca!
ta+ation. Section 9 o$ R.&. No. 7294 impoe on Smart a $ranchie ta+
e-%i#a!ent to three percent /012 o$ a!! "ro receipt o$ the b%ine
tranacted %nder the $ranchie and the aid percenta"e ha!! be in !ie% o$
a!! ta+e on the $ranchie or earnin" thereo$. R.&. No 7294 doe not
e+pre!* pro#ide 'hat <ind o$ ta+e Smart i e+empted $rom. .t i not
c!ear 'hether the (in !ie% o$ a!! ta+e9 pro#iion in the $ranchie o$ Smart
'o%!d inc!%de e+emption $rom !oca! or nationa! ta+ation. Ehat i c!ear i
that Smart ha!! pa* $ranchie ta+ e-%i#a!ent to three percent /012 o$ a!!
"ro receipt o$ the b%ine tranacted %nder it $ranchie. 8%t 'hether
the $ranchie ta+ e+emption 'o%!d inc!%de e+emption $rom e+action b*
both the !oca! and the nationa! "o#ernment i not %ne-%i#oca!.

.n thi cae, the do%bt m%t be reo!#ed in $a#or o$ the 4it* o$ >a#ao.
)he (in !ie% o$ a!! ta+e9 c!a%e app!ie on!* to nationa! interna! re#en%e
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ta+e and not to !oca! ta+e. .t i c!ear that the (in !ie% o$ a!! ta+e9 c!a%e
app!* on!* to ta+e %nder the N.R4 and not to !oca! ta+e. .t i not e#en
app!ied to income ta+, a ho'n in the pro#iion ite!$, to 'it3
pro#io in the $irt para"raph o$ Section 9, Smart, $ranchie
tate that the "rantee ha!! Fcontin%e to be !iab!e $or income
ta+e pa*ab!e %nder )it!e .. o$ the Nationa! .nterna! Re#en%e
4ode.F
econd para"raph o$ Section 9, pea< o$ ta+ ret%rn $i!ed and
ta+e paid to the F4ommiioner o$ .nterna! Re#en%e or hi
d%!* a%thori6ed repreentati#e in accordance 'ith the Nationa!
.nterna! Re#en%e 4ode.F
ame para"raph, dec!are that the ta+ ret%rn Fha!! be %b7ect
to a%dit b* the 8%rea% o$ .nterna! Re#en%e.F
.$ 4on"re intended the Fin !ie% o$ a!! ta+eF c!a%e in Smart, $ranchie
to a!o app!* to !oca! ta+e, 4on"re 'o%!d ha#e e+pre!* mentioned
the e+emption $rom m%nicipa! and pro#incia! ta+e.
.t ho%!d be noted that the (in !ie% o$ a!! ta+e9 c!a%e in R.&. No. 7294
ha become functus officio 'ith the abo!ition o$ the $ranchie ta+ on
te!ecomm%nication companie. 4%rrent!*, Smart a!on" 'ith other
te!ecomm%nication companie pa* the %ni$orm 101 #a!%e?added ta+.
)he =&) on a!e o$ er#ice o$ te!ephone $ranchie "rantee i e-%i#a!ent
to 101 o$ "ro receipt deri#ed $rom the a!e or e+chan"e o$ er#ice, a
pro#ided in R.&. No. 7716, a amended b* the Expanded Value Added
Tax a! /R.&. No. 82412.
On the b%rden o$ "rant to )a+ e+emption3
)a+ e+emption are ne#er pre%med and are trict!* contr%ed
a"aint the ta+pa*er and !ibera!!* in $a#or o$ the ta+in" a%thorit*. )he*
can on!* be "i#en $orce 'hen the "rant i c!ear and cate"orica!. .$ the
intention o$ the !e"i!at%re i open to do%bt, then the intention o$ the
!e"i!at%re m%t be reo!#ed in $a#or o$ the State.

On impairment o$ contract3
)here i no #io!ation o$ &rtic!e ..., Section 10 o$ the 1987 Dhi!ippine
4ontit%tion. )he $ranchie o$ Smart doe not e+pre!* pro#ide $or
e+emption $rom !oca! ta+e. &bent the e+pre pro#iion on %ch
e+emption %nder the $ranchie, 'e are contrained to r%!e a"aint it. >%e
to thi ambi"%it* in the !a', the do%bt m%t be reo!#ed a"aint the "rant
o$ ta+ e+emption.
4ontract 4!a%e ha ne#er been tho%"ht a a !imitation on the e+ercie o$
the StateA po'er o$ ta+ation a#e on!* 'here a ta+ e+emption ha been
"ranted $or a #a!id conideration.