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Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. L-45355 January 12, 1990 THE PROVINCE OF MISAMIS ORIENTAL, represented by its PROVINCIAL TREASURER, petitioner, vs. CAGAYAN ELECTRIC POWER AND LIGHT COMPANY, INC. (CEPALCO), respondent. Jaime A. Chaves for petitioner. Quiason, Makalintal, Barot & Torres for respondent.

GRIO-AQUINO, J.: The issue in this case is a legal one: whether or not a corporation whose franchise expressly provides that the payment of the "franchise tax of three per centum of the gross earnings shall be in lieu of all taxes and assessments of whatever authority upon privileges, earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee." (p. 20, Rollo), is exempt from paying a provincial franchise tax. Cagayan Electric Power and Light Company, Inc. (CEPALCO for short) was granted a franchise on June 17, 1961 under Republic Act No. 3247 to install, operate and maintain an electric light, heat and power system in the City of Cagayan de Oro and its suburbs. Said franchise was amended on June 21, 1963 by R.A. No. 3570 which added the municipalities of Tagoloan and Opol to CEPALCO's sphere of operation, and was further amended on August 4, 1969 by R.A. No. 6020 which extended its field of operation to the municipalities of Villanueva and Jasaan. R.A. Nos. 3247, 3570 and 6020 uniformly provide that:
Sec. 3. In consideration of the franchise and rights hereby granted, the grantee shall pay a franchise tax equal to three per centum of the gross earnings for electric current sold under this franchise, of which two per centum goes into the National Treasury and one per centum goes into the treasury of the Municipalities of Tagoloan, Opol, Villanueva and Jasaan and Cagayan de Oro City, as the case may be: Provided, That the said franchise tax of three per centum of the gross earnings shall be in lieu of all taxes and assessments of whatever authority upon privileges earnings , income, franchise, and

poles, wires, transformers, and insulators of the grantee from which taxes and assessments the grantee is hereby expressly exempted. (Emphasis supplied.)

On June 28, 1973, the Local Tax Code (P.D. No. 231) was promulgated, Section 9 of which provides:
Sec. 9. Franchise Tax.Any provision of special laws to the contrary notwithstanding , the province may impose a tax on businesses enjoying franchise , based on the gross receipts realized within its territorial jurisdiction, at the rate of not exceeding one-half of one per cent of the gross annual receipts for the preceding calendar year. In the case of newly started business, the rate shall not exceed three thousand pesos per year. Sixty per cent of the proceeds of the tax shall accrue to the general fund of the province and forty per cent to the general fund of the municipalities serviced by the business on the basis of the gross annual receipts derived therefrom by the franchise holder. In the case of a newly started business, forty per cent of the proceeds of the tax shall be divided equally among the municipalities serviced by the business. (Emphasis supplied.)

Pursuant thereto, the Province of Misamis Oriental (herein petitioner) enacted Provincial Revenue Ordinance No. 19, whose Section 12 reads:
Sec. 12. Franchise Tax.There shall be levied, collected and paid on businesses enjoying franchise tax of one-half of one per cent of their gross annual receipts for the preceding calendar year realized within the territorial jurisdiction of the province of Misamis Oriental. (p. 27, Rollo.)

The Provincial Treasurer of Misamis Oriental demanded payment of the provincial franchise tax from CEPALCO. The company refused to pay, alleging that it is exempt from all taxes except the franchise tax required by R.A. No. 6020. Nevertheless, in view of the opinion rendered by the Provincial Fiscal, upon CEPALCO's request, upholding the legality of the Revenue Ordinance, CEPALCO paid under protest on May 27, 1974 the sum of P 4,276.28 and appealed the fiscal's ruling to the Secretary of Justice who reversed it and ruled in favor of CEPALCO. On June 26, 1976, the Secretary of Finance issued Local Tax Regulation No. 3-75 adopting entirely the opinion of the Secretary of Justice. On February 16, 1976, the Province filed in the Court of First Instance of Misamis Oriental a complaint for declaratory relief praying, among others, that the Court exercise its power to construe P.D. No. 231 in relation to the franchise of CEPALCO (R.A. No. 6020), and to declare the franchise as having been amended by P.D. No. 231. The Court dismissed the complaint and ordered the Province to return to CEPALCO the sum of P4,276.28 paid under protest. The Province has appealed to this Court, alleging that the lower court erred in holding that:

1) CEPALCO's tax exemption under Section 3 of Republic Act No. 6020 was not amended or repealed by P.D. No. 231; 2) the imposition of the provincial franchise tax on CEPALCO would subvert the purpose of P.D. No. 231; 3) CEPALCO is exempt from paying the provincial franchise tax; and 4) petitioner should refund CEPALCO's tax payment of P4,276.28. We find no merit in the petition for review. There is no provision in P.D. No. 231 expressly or impliedly amending or repealing Section 3 of R.A. No. 6020. The perceived repugnancy between the two statutes should be very clear before the Court may hold that the prior one has been repealed by the later, since there is no express provision to that effect (Manila Railroad Co. vs. Rafferty, 40 Phil. 224). The rule is that a special and local statute applicable to a particular case is not repealed by a later statute which is general in its terms, provisions and application even if the terms of the general act are broad enough to include the cases in the special law (id.) unless there is manifest intent to repeal or alter the special law. Republic Acts Nos. 3247, 3570 and 6020 are special laws applicable only to CEPALCO, while P.D. No. 231 is a general tax law. The presumption is that the special statutes are exceptions to the general law (P.D. No. 231) because they pertain to a special charter granted to meet a particular set of conditions and circumstances. The franchise of respondent CEPALCO expressly exempts it from payment of "all taxes of whatever authority" except the three per centum (3%) tax on its gross earnings. In an earlier case, the phrase "shall be in lieu of all taxes and at any time levied, established by, or collected by any authority" found in the franchise of the Visayan Electric Company was held to exempt the company from payment of the 5% tax on corporate franchise provided in Section 259 of the Internal Revenue Code (Visayan Electric Co. vs. David, 49 O.G. [No. 4] 1385). Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name and nature" in the franchise of the Manila Railroad (Subsection 12, Section 1, Act No. 1510) exempts the Manila Railroad from payment of internal revenue tax for its importations of coal and oil under Act No. 2432 and the Amendatory Acts of the Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224). The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No. 1497) justified the exemption of the Philippine Railway Company from payment of the tax on its corporate franchise under Section 259 of the Internal Revenue Code, as amended by R.A. No. 39 (Philippine Railway Co. vs. Collector of Internal Revenue, 91 Phil. 35).

Those magic words: "shall be in lieu of all taxes" also excused the Cotabato Light and Ice Plant Company from the payment of the tax imposed by Ordinance No. 7 of the City of Cotabato (Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231). So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company when it was required to pay the corporate franchise tax under Section 259 of the Internal Revenue Code, as amended by R.A. No. 39 (Carcar Electric & Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No. 4] 1068). This Court pointed out that such exemption is part of the inducement for the acceptance of the franchise and the rendition of public service by the grantee. As a charter is in the nature of a private contract, the imposition of another franchise tax on the corporation by the local authority would constitute an impairment of the contract between the government and the corporation. Recently, this Court ruled that the franchise (R.A. No. 3843) of the Lingayen Gulf Electric Power Company which provided that the company shall pay:
tax equal to 2% per annum of the gross receipts . . . and shall be in lieu of any and all taxes . . . now or in the future . . . from which taxes . . . the grantee is hereby expressly exempted and . . . no other tax . . . other than the franchise tax of 2% on the gross receipts as provided for in the original franchise shall be collected.

exempts the company from paying the franchise tax under Section 259 of the National Internal Revenue Code (Commissioner of Internal Revenue vs. Lingayen Gulf Electric Power Co., Inc., G.R. No. 23771, August 4, 1988). On the other hand, the Balanga Power Plant Company, Imus Electric Company, Inc., Guagua Electric Company, Inc. were subjected to the 5% tax on corporate franchise under Section 259 of the Internal Revenue Code, as amended, because Act No. 667 of the Philippine Commission and the ordinance or resolutions granting their respective franchises did not contain the "in-lieu-of-all-taxes" clause (Balanga Power Plant Co. vs. Commissioner of Internal Revenue, G.R. No. L-20499, June 30, 1965; Imus Electric Co. vs. Court of Tax Appeals, G.R. No. L-22421, March 18, 1967; Guagua Electric Light vs. Collector of Internal Revenue, G.R. No. L-23611, April 24, 1967). Local Tax Regulation No. 3-75 issued by the Secretary of Finance on June 26, 1976, has made it crystal clear that the franchise tax provided in the Local Tax Code (P.D. No. 231, Sec. 9) may only be imposed on companies with franchises that do not contain the exempting clause. Thus it provides:
The franchise tax imposed under local tax ordinance pursuant to Section 9 of the Local Tax Code, as amended, shall be collected from businesses holding franchise but not from business establishments whose franchise contain the "in-lieu-of-all-taxes-proviso".

Manila Electric Company vs. Vera, 67 SCRA 351, cited by the petitioner, is not applicable here because what the Government sought to impose on Meralco in that case was not a franchise tax but a compensating tax on the poles, wires, transformers and insulators which it imported for its use.

WHEREFORE, the petition for review is denied, and the decision of the Court of First Instance is hereby affirmed in toto. No costs. SO ORDERED. Narvasa, Cruz, Gancayco and Medialdea, JJ., concur.

THIRD DIVISION

[G.R. No. 127708. March 25, 1999]


CITY GOVERNMENT OF SAN PABLO, LAGUNA, CITY TREASURER OF SAN PABLO, LAGUNA, and THE SANGGUNIANG PANGLUNSOD OF SAN PABLO, LAGUNA, petitioners, vs. HONORABLE BIENVENIDO V. REYES, in his capacity as Presiding Judge, Regional Trial Court, Branch 29, San Pablo City and the MANILA ELECTRIC COMPANY, respondents. DECISION GONZAGA-REYES, J.: This is a petition under Rule 45 of the Rules of Court to review on a pure question of law the decision of the Regional Trial Court (RTC) of San Pablo City, Branch 29 in Civil Case No. SP4459(96), entitled Manila Electric Company vs. City of San Pablo, Laguna, City Treasurer of San Pablo Laguna, and the Sangguniang Panglunsod of San Pablo City, Laguna. The RTC declared the imposition of franchise tax under Section 2.09 Article D of Ordinance No. 56 otherwise known as the Revenue Code of the City of San Pablo as ineffective and void insofar as the respondent MERALCO is concerned for being violative of Act No. 3648, Republic Act No. 2340 and PD 551. The RTC also granted MERALCOS claim for refund of franchise taxes paid under protest. The following antecedent facts are undisputed: Act No. 3648 granted the Escudero Electric Services Company, a legislative franchise to maintain and operate an electric light and power system in the City of San Pablo and nearby municipalities Section 10 of Act No. 3648 provides: x x x In consideration of the franchise and rights hereby granted, the grantee shall pay unto the municipal treasury of each municipality in which it is supplying electric current to the public under this franchise, a tax equal to two percentum of the gross earnings from electric current sold or supplied under this franchise in each said municipality. Said tax shall be due and payable quarterly and shall be in lieu of any and all taxes of any kind, nature or description levied, established or collected by any authority whatsoever, municipal, provincial or insular, now or in the future, on its poles, wires, insulators, switches, transformers, and structures, installations,

conductors, and accessories place in and over and under all public property, including public streets and highways, provincial roads, bridges and public squares, and on its franchise, rights, privileges, receipts, revenues and profits from which taxes the grantee is hereby expressly exempted. Escuderos franchise was transferred to the plaintiff (herein respondent) MERALCO under Republic Act No. 2340. Presidential Decree No. 551 was enacted on September 11, 1974. Section 1 thereof provides the following: Section 1. Any provision of law or local ordinance to the contrary notwithstanding, the franchise tax payable by all grantees of franchise to generate, distribute and sell electric current for light, heat and power shall be two percent (2%) of their gross receipts received from the sale of electric current and from transactions incident to the generation, distribution and sale of electric current. Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly authorized representative on or before the twentieth day of the month following the end of each calendar quarter or month as may be provided in the respective franchise or pertinent municipal regulation and shall, any provision of the Local Tax Code or any other law to the contrary notwithstanding, be in lieu of all taxes and assessments of whatever nature imposed by any national or local authority on earnings, receipts, income and privilege of generation, distribution and sale of electric current. Republic Act No. 7160, otherwise known as the Local Government Code of 1991 (hereinafter referred to as the LGC) took effect on January 1, 1992. The said Code authorizes the province/city to impose a tax on business enjoying a franchise at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year realized within its jurisdiction. On October 5, 1992, the Sangguniang Panglunsod of San Pablo City enacted Ordinance No. 56, otherwise known as the Revenue Code of the City of San Pablo. The said Ordinance took effect on October 30, 1992:i[1] Section 2.09 Article D of said Ordinance provides: Sec. 2.09. Franchise Tax There is hereby imposed a tax on business enjoying a franchise, at a rate of fifty percent (50%) of one percent (1%) of the gross annual receipts, which shall include both cash sales and sales on account realized during the preceding calendar year within the city. Pursuant to the above-quoted Section 2.09, the petitioner City Treasurer sent to private respondent a letter demanding payment of the aforesaid franchise tax. From 1994 to 1996, private respondent paid under protest a total amount of P1,857,711.67.ii[2]

The private respondent subsequently filed this action before the Regional Trial Court to declare Ordinance No. 56 null and void insofar as it imposes the franchise tax upon private respondent MERALCOiii[3] and to claim for a refund of the taxes paid. The Court ruled in favor of MERALCO and upheld its argument that the LGC did not expressly or impliedly repeal the tax exemption/incentive enjoyed by it under its charter. The dispositive portion of the decision reads: WHEREFORE, the imposition of a franchise tax under Sec. 2.09 Article D of Ordinance No. 56 otherwise known as the Revenue Code of the City of San Pablo, is declared ineffective and null and void insofar as the plaintiff MERALCO is concerned for being violative of Republic Act No. 2340, PD 551, and Republic Act No. 7160 and the defendants are ordered to refund to the plaintiff the amount of ONE MILLION EIGHT HUNDRED FIFTY SEVEN THOUSAND SEVEN HUNDRED ELEVEN & 67/100 (P1,857,711.67) and such other amounts as may have been paid by the plaintiff under said Revenue Ordinance No. 56 after the filing of the complaint.iv
[4]

SO ORDERED. Its motion for reconsideration having been denied by the trial courtv[5] the petitioners filed the instant petition with this Court raising pure questions of law based on the following grounds: I. RESPONDENT JUDGE GRAVELY ERRED IN HOLDING THAT ACT NO. 3648, REPUBLIC ACT NO. 2340 AND PRESIDENTIAL DECREE NO. 551 AS AMENDED, INSOFAR AS THEY GRANT TAX INCENTIVES, PRIVILEGES AND IMMUNITIES TO PRIVATE RESPONDENT, HAVE NOT BEEN REPEALED BY REPUBLIC ACT NO. 7160. II. RESPONDENT JUDGE GRAVELY ERRED IN RULING THAT SECTION 193 OF REPUBLIC ACT NO. 7160 HAS NOT WITHDRAWN THE TAX INCENTIVES, PRIVILEGES AND IMMUNITIES BEING ENJOYED BY THE PRIVATE RESPONDENT UNDER ACT NO. 3648, REPUBLIC ACT NO. 2340 AND PRESIDENTIAL DECREE NO. 551, AS AMENDED. III. RESPONDENT JUDGE GRAVELY ERRED IN HOLDING THAT THE FRANCHISE TAX IN QUESTION CONSTITUTES AN IMPAIRMENT OF THE CONTRACT BETWEEN THE GOVERNMENT AND THE PRIVATE RESPONDENT. Petitioners position is the RA 7160 (LGC) expressly repealed Act No. 3648, Republic Act No. 2340 and Presidential Decree 551 and that pursuant to the provisions of Sections 137 and 193 of the LGC, the province or city now has the power to impose a franchise tax on a business enjoying a franchise. Petitioners rely on the ruling in the case of Mactan Cebu International Airport Authority vs. Marcosvi[6] where the Supreme Court held that the exemption from real property tax granted to Mactan Cebu International Airport Authority under its charter has been withdrawn upon the effectivity of the LGC.

In addition, the petitioners cite in their Memorandum dated December 8, 1997 an administrative interpretation made by the Bureau of Local Government Finance of the Department of Finance in its 3 indorsement dated February 15, 1994 to the effect that the earlier ruling of the Department of Finance that holders of franchise which contain the phrase in lieu of all taxes proviso are exempt from the payment of any kind of tax is no longer applicable upon the effectivity of the LGC in view of the withdrawal of tax exemption privileges as provided in Sections 193 and 234 thereof.
rd

We resolve to reverse the court a quo. The pivotal issue is whether the City of San Pablo may impose a local franchise tax pursuant to the LGC upon the Manila Electric Company which pays a tax equal to two percent of its gross receipts in lieu of all taxes and assessments of whatever nature imposed by any national or local authority on savings or income. It is necessary to reproduce the pertinent provisions of the LGC. Section 137 Franchise Tax Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on business enjoying a franchise, at a rate not exceeding fifty percent 50% of one percent 1% of the gross annual receipts for the preceding calendar year based on the incoming receipts, or realized, within its territorial jurisdiction. xxx Section 151 Scope of Taxing Powers Except as otherwise provided in this Code, the city, may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this Code. The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes. Section 193 Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under R.A. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. Section 534 (f) Repealing Clause All general and special laws, acts, city charters, decrees, executive orders, proclamations and administrative regulations, or part or parts thereof which are inconsistent with any of the provisions of this code are hereby repealed or modified accordingly. Section 534 (f), the repealing clause of the LGC, provides that all general and special laws, acts, city charters, decrees, executive orders, proclamations and administrative regulations or parts thereof which are inconsistent with any of the provisions of the Code are hereby repealed or modified accordingly.

This clause partakes of the nature of a general repealing clause.vii[7] It is certainly not an express repealing clause because it fails to designate the specific act or acts identified by number or title, that are intended to be repealed.viii[8] Was there an implied repeal by Republic Act No. 7160 of the MERALCO franchise insofar as the latter impose a 2% tax in lieu of all taxes and assessments of whatever nature? We rule affirmatively. We are mindful of the established rule that repeals by implication are not favored as laws are presumed to be passed with deliberation and full knowledge of all laws existing on the subject. A general law cannot be construed to have repealed a special law by mere implication unless the intent to repeal or alter is manifestix[9] and it must be convincingly demonstrated that the two laws are so clearly repugnant and patently inconsistent that they cannot co-exist.x[10] It is our view that petitioners correctly rely on the provisions of Section 137 and 193 of the LGC to support their position that MERALCOs tax exemption has been withdrawn. The explicit language of Section 137 which authorizes the province to impose franchise tax notwithstanding any exemption granted by any law or other special laws" is all-encompassing and clear. The franchise tax is imposable despite any exemption enjoyed under special laws. Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that unless otherwise provided in this Code, tax exemptions or incentives granted to or presently enjoyed by all persons whether natural or juridical, including government-owned or controlled corporations except 1) local water districts, 2) cooperatives duly registered under R.A. 6938, (3) non-stock and non-profit hospitals and educational institutions, are withdrawn upon the effectivity of this code, the obvious import is to limit the exemptions to the three enumerated entities. It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est exlcusio alterius.xi[11] In the absence of any provision of the Code to the contrary, and we find no other provision of the Code to the contrary, and we find no other provision in point, any existing tax exemption or incentive enjoyed by MERALCO under existing law was clearly intended to be withdrawn. Reading together Sections 137 and 193 of the LGC, we conclude that under the LGC the local government unit may now impose a local tax at a rate not exceeding 50% of 1% of the gross annual receipts for the preceding calendar year based on the incoming receipts realized within its territorial jurisdiction. The legislative purpose to withdraw tax privileges enjoyed under existing law or charter is clearly manifested by the language used in Section 137 and 193 categorically withdrawing such exemption subject only to the exceptions enumerated. Since it would be not only tedious and impractical to attempt to enumerate all the existing statutes providing for special tax exemptions or privileges, the LGC provided for an express, albeit general, withdrawal of such exemptions or privileges. No more unequivocal language could have been used. It is true that the phrase in lieu of all taxes found in special franchises has been held in several cases to exempt the franchise holder from payment of tax on its corporate franchise imposed by

the Internal Revenue Code, as the charter is in the nature of a private contract and the exemption is part of the inducement for the acceptance of the franchise, and that the imposition of another franchise tax by the local authority would constitute an impairment of contract between the government and the corporation.xii[12] But these magic words contained in the phrase shall be in lieu of all taxes.xiii[13] Have to give way to the peremptory language of the LGC specifically providing for the withdrawal of such exemption privileges. Accordingly in Mactan Cebu International Airport Authority vs. Marcos,xiv[14] this Court held that Section 193 of the LGC prescribes the general rule, viz., the tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons are withdrawn upon the effectivity of the LGC except with respect to those entities expressly enumerated. In the same vein We must hold that the express withdrawal upon effectivity of the LGC of all exemptions only as provided therein, can no longer be invoked by Meralco to disclaim liability for the local tax. Private respondents further argue that the in lieu of provision contained in PD 551, Act No. 3648 and RA 2340 does not partake of the nature of an exemption, but is a commutative tax. This contention was raised but was not upheld in Cagayan Electric Power and Light Co. Inc. vs. Commissioner of Internal Revenuexv[15] wherein the Supreme Court stated: xxx Congress could impair petitioners legislative franchise by making it liable for income tax from which heretofore it was exempted by virtue of the exemption provided for in section 3 of its franchise xxx xxx Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income tax all corporate tax payers not expressly exempted therein and in section 27 of the Code, had the effect of withdrawing petitioners exemption from income tax xxx Private respondents invocation of the non-impairment clause of the Constitution is accordingly unavailing. The LGC was enacted in pursuance of the constitutional policy to ensure autonomy to local governmentsxvi[16] and to enable them to attain fullest development as self-reliant communities.xvii[17] Thus in Mactan Cebu International Airport Authority vs. Marcos, supra, this Court pointed out, in upholding the withdrawal of the real estate tax exemption previously enjoyed by the Mactan Cebu International Airport Authority, as follows: Note that as reproduced in Section 234(a) the phrase and any government owned or controlled corporation so exempt by its charter was excluded. The justification for this restricted exemption in Section 234(a) seems obvious: to limit further tax exemption privileges especially in light of the general provision on withdrawal of tax exemption privileges in Section 193 and the special provision on withdrawal of exemption from payment of real property taxes in the last paragraph of Section 234. These policy considerations are consistent with the State policy to ensure autonomy to local governments and the objective of the LGC that they enjoy genuine and meaningful local autonomy to enable them to attain their fullest development as self-reliant communities and make them effective partners in attainment of national goals. The power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities of local government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people. It may

also be relevant to recall that the original reasons for the withdrawal of tax exemption privileges granted to government-owned or controlled corporations and all other units of government were that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises, and there was a need for these entities to share in the requirements of development, fiscal or otherwise, by paying the taxes and other charges due from them.xviii[18] The Court therein concluded that: nothing can prevent Congress from decreeing that even instrumentalities or agencies of the Government performing governmental functions may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt its wisdom.xix[19] The power to tax is primarily vested in Congress. However, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution.xx[20] Thus Article X, Section 5 of the Constitution reads: Section 5 Each Local Government unit shall have the power to create its own sources of revenue and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the Local Governments. The important legal effect of Section 5 is that henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will have to be resolved in favor of municipal corporations.xxi [21] There is further basis for the conclusion that the non-impairment of contract clause cannot be invoked to uphold Meralco's exemption from the local tax. Escudero Electric Co. was originally given the legislative franchise under Act. 3648 to operate an electric light and power system in the City of San Pablo and nearby municipalities. The term of the franchise under Act No. 3648 is a period of fifty years from the Acts approval in 1929. The said law provided that the franchise is granted upon the condition that it shall be subject to amendment, or repeal by the Congress of the United States.xxii[22] Under the 1935,xxiii[23] the 1973xxiv[24] and the 1987xxv[25] Constitutions, no franchise or right shall be granted except under the condition that it shall be subject to amendment, alteration or repeal by the National Assembly when the public interest so requires. With or without the reservation clause, franchises are subject to alterations through a reasonable exercise of the police power; they are also subject to alteration by the power to tax, which like police power cannot be contracted away.xxvi[26] Finally, while the matter is not of controlling significance, the Court notes that whereas the original Escudero franchise exempted the franchise holder from all taxes levied or collected now or in the futurexxvii[27] this phrase is noticeably omitted in the counterpart provision of P.D. 551 that said omission is intended not to foreclose future taxes may reasonably be deduced by statutory construction.

WHEREFORE, the instant petition is GRANTED. The decision of the Regional Trial Court of San Pablo City, appealed from is hereby reversed and set aside and the complaint of MERALCO is hereby DISMISSED. No pronouncement as to costs. SO ORDERED. Romero, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.

i[1] Petitioner for review, p. 3 ii[2] Ibid., p. 4 and Respondents Memorandum, p. 3. iii[3] Petition for Review, p. 4 and Respondents Memorandum, p. 4. iv[4] Ibid v[5] Order of January 10, 1996, p. 41, Rollo vi[6] 261 SCRA 667, (1996). vii[7] Ty vs. Trampe, 250 SCRA 500 at 512 (1995). viii[8] Mecano vs. Commission on Audit, 216 SCRA 500 at 504 [1992]; Berces Sr., vs. Guingona, Jr., 241 SCRA 539 at 544 [1995]. ix[9] Laguna Lake Development Authority vs. Court of Appeals, 251 SCRA 42 at 56 (1995). x[10] Villegas vs. Subido, 41 SCRA 190 at 197 (1971); Mecano vs. Commission on Audit, Supra. xi[11] Commissioner of Customs vs. Court of Tax Appeals, 224 SCRA 665 at pp. 669-670, (1993) xii[12] Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231; Commissioner of Internal Revenue vs. Lingayen Gulf Electric Power Co. 164 SCRA 27 at 34 (1988), Province of Misamis Oriental vs. Cagayan Electric Power and Light Co., Inc., 181 SCRA 38 at 43 (1990). xiii[13] Province of Misamis Oriental vs. Cagayan Electric Power and Light Co. Inc. supra, at p. 42. xiv[14] Supra. xv[15] 138 SCRA 629 at p. 631. xvi[16] Section 25, Art. II and 2, Art. X Constitution. xvii[17] 2(a) Local Government Code of 1991. xviii[18] Mactan Cebu International Airport Authority vs. Marcos, p. 690. xix[19] Ibid., p. 692. xx[20] Isagani A. Cruz, Constitutional Law, (1991), at p. 84. xxi[21] Bernas, The Constitution of the Philippines, 1st ed. p. 381. xxii[22] Act No. 3648, 12. xxiii[23] Article XIV, 8.

xxiv[24] Article XIV, 5. xxv[25] Article XII, 11. xxvi[26] Bernas, Supra, p. 341. xxvii[27] 10, Act No. 3648.

THIRD DIVISION

[G.R. No. 131359. May 5, 1999]


MANILA ELECTRIC COMPANY, petitioner vs. PROVINCE OF LAGUNA and BENITO R. BALAZO, in his capacity as Provincial Treasurer of Laguna, respondents. DECISION
VITUG, J.:

On various dates, certain municipalities of the Province of Laguna including, Bian, Sta Rosa, San Pedro, Luisiana, Calauan and Cabuyao, by virtue of existing laws then in effect, issued resolutions through their respective municipal councils granting franchise in favor of petitioner Manila Electric Company (MERALCO) for the supply of electric light, heat and power within their concerned areas. On 19 January 1983, MERALCO was likewise granted a franchise by the National Electrification Administration to operate an electric light and power service in the Municipality of Calamba, Laguna. On 12 September 1991, Republic Act No. 7160, otherwise known as the Local Government Code of 1991, was enacted to take effect on 01 January 1992 enjoining local government units to create their own sources of revenue and to levy taxes, fees and charges, subject to the limitations expressed therein, consistent with the basic policy of local autonomy. Pursuant to the provisions of the Code, respondent province enacted Laguna Provincial Ordinance No. 01-92, effective 01 January 1993, providing, in part, as follows: Sec. 2.09. Franchise Tax. There is hereby imposed a tax on businesses enjoying a franchise, at a rate of fifty percent (50%) of one percent (1%) of the gross annual receipts, which shall include both cash sales and sales on account realized during the preceding calendar year within this province, including the territorial limits on any city located in the province[1]

On the basis of the above ordinance, respondent Provincial Treasurer sent a demand letter to MERALCO for the corresponding tax payment. Petitioner MERALCO paid the tax, which then amounted to P19,520,628.42, under protest. A formal claim for refund was thereafter sent by MERALCO to the Provincial Treasurer of Laguna claiming that the franchise tax it had paid and continued to pay to the National Government pursuant to P.D. 551 already included the franchise tax imposed by the Provincial Tax Ordinance. MERALCO contended that the imposition of a franchise tax under Section 2.09 of Laguna Provincial Ordinance No. 01-92, insofar as it concerned MERALCO, contravened the provisions of Section 1 of P.D. 551 which read: Any provision of law or local ordinance to the contrary notwithstanding, the franchise tax payable by all grantees of franchises to generate, distribute and sell electric current for light, heat and power shall be two per cent (2%) of their gross receipts received from the sale of electric current and from transactions incident to the generation, distribution and sale of electric current. Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly authorized representative on or before the twentieth day of the month following the end of each calendar quarter or month, as may be provided in the respective franchise or pertinent municipal regulation and shall, any provision of the Local Tax Code or any other law to the contrary notwithstanding, be in lieu of all taxes and assessments of whatever nature imposed by any national or local authority on earnings, receipts, income and privilege of generation, distribution and sale of electric current. On 28 August 1995, the claim for refund of petitioner was denied in a letter signed by Governor Jose D. Lina. In denying the claim, respondents relied on a more recent law, i.e., Republic Act No. 7160 or the Local Government Code of 1991, than the old decree invoked by petitioner. On 14 February 1996, petitioner MERALCO filed with the Regional Trial Court of Sta Cruz, Laguna, a complaint for refund, with a prayer for the issuance of a writ of preliminary injunction and/or temporary restraining order, against the Province of Laguna and also Benito R. Balazo in his capacity as the Provincial Treasurer of Laguna. Aside from the amount of P19,520,628.42 for which petitioner MERALCO had priority made a formal request for refund, petitioner thereafter likewise made additional payments under protest on various dates totaling P27,669,566.91. The trial court, in its assailed decision of 30 September 1997, dismissed the complaint and concluded: WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS, JUDGMENT is hereby rendered in favor of the defendants and against the plaintiff, by: 1. Ordering the dismissal of the Complaint; and

2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid, binding, reasonable and enforceable.[2] In the instant petition, MERALCO assails the above ruling and brings up the following issues; viz: 1. Whether the imposition of a franchise tax under Section 2.09 of Laguna Provincial Ordinance No. 01-92, insofar as petitioner is concerned, is violative of the non-impairment clause of the Constitution and Section 1 of Presidential Decree No. 551.

2. Whether Republic Act. No. 7160, otherwise known as the Local Government Code of 1991, has repealed, amended or modified Presidential Decree No. 551. 3. Whether the doctrine of exhaustion of administrative remedies is applicable in this case.[3]

The petition lacks merit. Prefatorily, it might be well to recall that local governments do not have the inherent power to tax[4] except to the extent that such power might be delegated to them either by the basic law or by statute. Presently, under Article X of the 1987 Constitution, a general delegation of that power has been given in favor of local government units. Thus: Sec. 3. The Congress shall enact a local government code which shall provide for a more responsive and accountable local government structure instituted through a system of decentralization with effective mechanisms of recall, initiative, and referendum, allocate among the different local government units their powers, responsibilities, and resources, and provide for the qualifications, election, appointment and removal, term, salaries, powers and functions, and duties of local officials, and all other matters relating to the organization and operation of the local units. x x x x x x xxx

Sec. 5. Each local government shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments. The 1987 Constitution has a counterpart provision in the 1973 Constitution which did come out with a similar delegation of revenue making powers to local governments.[5] Under the regime of the 1935 Constitution no similar delegation of tax powers was provided, and local government units instead derived their tax powers under a limited statutory authority. Whereas, then, the delegation of tax powers granted at that time by statute to local governments was confined and defined (outside of which the power was deemed withheld), the present constitutional rule (starting with the 1973 Constitution), however, would broadly confer such tax powers subject only to specific exceptions that the law might prescribe. Under the now prevailing Constitution, where there is neither a grant nor a prohibition by statute, the tax power must be deemed to exist although Congress may provide statutory limitations and guidelines. The basic rationale for the current rule is to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax powers. Nevertheless, the fundamental law did not intend the delegation to be absolute and unconditional; the constitutional objective obviously is to ensure that, while the local government units are being strengthened and made more autonomous,[6] the legislature must still see to it that (a) the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions; (b) each local government unit will have its fair share of available resources; (c) the resources of the national government will not be unduly disturbed; and (d) local taxation will be fair, uniform, and just.

The Local Government Code of 1991 has incorporated and adopted, by and large the provisions of the now repealed Local Tax Code, which had been in effect since 01 July 1973, promulgated into law by Presidential Decree No. 231[7] pursuant to the then provisions of Section 2, Article XI, of the 1973 Constitution. The 1991 Code explicitly authorizes provincial governments, notwithstanding any exemption granted by any law or other special law, x x x (to) impose a tax on businesses enjoying a franchise. Section 137 thereof provides: Sec. 137. Franchise Tax Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction. In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the business started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereof, as provided herein. (Underscoring supplied for emphasis) Indicative of the legislative intent to carry out the Constitutional mandate of vesting broad tax powers to local government units, the Local Government Code has effectively withdrawn under Section 193 thereof, tax exemptions or incentives theretofore enjoyed by certain entities. This law states: Section 193 Withdrawal of Tax Exemption Privileges Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. (Underscoring supplied for emphasis) The Code, in addition, contains a general repealing clause in its Section 534; thus: Section 534. Repealing Clause. x x x. (f) All general and special laws, acts, city charters, decrees, executive orders, proclamations and administrative regulations, or part or parts thereof which are inconsistent with any of the provisions of this Code are hereby repealed or modified accordingly. (Underscoring supplied for emphasis)[8] To exemplify, in Mactan Cebu International Airport Authority vs. Marcos,[9] the Court upheld the
withdrawal of the real estate tax exemption previously enjoyed by Mactan Cebu International Airport Authority. The Court ratiocinated:

x x x These policy considerations are consistent with the State policy to ensure autonomy to local governments and the objective of the LGC that they enjoy genuine and meaningful local autonomy to enable them to attain their fullest development as self-reliant communities and make them effective partners in the attainment of national goals. The power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities of local government units for the delivery of basic service essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people. It may also be relevant to recall that the original reasons for the withdrawal of tax exemption privileges granted to government-owned and controlled corporations and all other units of government were that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises, and there was a need for these entities

to share in the requirements of development, fiscal or otherwise, by paying the taxes and other charges due from them.[10] Petitioner in its complaint before the Regional Trial Court cited the ruling of this Court in Province of Misamis Oriental vs. Cagayan Electric Power and Light Company, Inc.;[11] thus: In an earlier case, the phrase shall be in lieu of all taxes and at any time levied, established by, or collected by any authority found in the franchise of the Visayan Electric Company was held to exempt the company from payment of the 5% tax on corporate franchise provided in Section 259 of the Internal Revenue Code (Visayan Electric Co. vs. David, 49 O.G. [No. 4] 1385) Similarly, we ruled that the provision: shall be in lieu of all taxes of every name and nature in the franchise of the Manila Railroad (Subsection 12, Section 1, Act No. 1510) exempts the Manila Railroad from payment of internal revenue tax for its importations of coal and oil under Act No. 2432 and the Amendatory Acts of the Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224). The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No. 1497) justified the exemption of the Philippine Railway Company from payment of the tax on its corporate franchise under Section 259 of the Internal Revenue Code, as amended by R.A. No. 39 (Philippine Railway Co vs. Collector of Internal Revenue, 91 Phil. 35). Those magic words, shall be in lieu of all taxes also excused the Cotabato Light and Ice Plant Company from the payment of the tax imposed by Ordinance No. 7 of the City of Cotabato (Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231). So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company when it was required to pay the corporate franchise tax under Section 259 of the Internal Revenue Code as amended by R.A. No. 39 (Carcar Electric & Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No. 4] 1068). This Court pointed out that such exemption is part of the inducement for the acceptance of the franchise and the rendition of public service by the grantee.[12] In the recent case of the City Government of San Pablo, etc., et al. vs. Hon. Bienvenido V. Reyes, et al., [13] the Court has held that the phrase in lieu of all taxes have to give way to the peremptory language of the Local Government Code specifically providing for the withdrawal of such exemptions, privileges, and that upon the effectivity of the Local Government Code all exemptions except only as provided therein can no longer be invoked by MERALCO to disclaim liability for the local tax. In fine, the Court has viewed its previous rulings as laying stress more on the legislative intent of the amendatory law whether the tax exemption privilege is to be withdrawn or not rather than on whether the law can withdraw, without violating the Constitution, the tax exemption or not. While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as being in the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked

without impairing the obligations of contracts.[14] These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution.[15] Indeed, Article XII, Section 11, of the 1987 Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no franchise for the operation of a public utility shall be granted except under the condition that such privilege shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires. WHEREFORE, the instant petition is hereby DISMISSED. No costs. SO ORDERED. Romero, Panganiban, Purisima, and Gonzaga-Reyes, JJ., concur.

EN BANC [G.R. No. 143867. March 25, 2003] PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, INC., petitioner, vs. CITY OF DAVAO and ADELAIDA B. BARCELONA, in her capacity as the City Treasurer of Davao, respondents. RESOLUTION Mendoza, J.:

Petitioner seeks a reconsideration of the decision of the Second Division in this case. Because the decision bears directly on issues involved in other cases brought by petitioner before other Divisions of the Court, the motion for reconsideration was referred to the Court en banc for resolution.[1] The parties were heard in oral arguments by the Court en banc on January 21, 2003 and were later granted time to submit their memoranda. Upon the filing of the last memorandum by the City of Davao on February 10, 2003, the motion was deemed submitted for resolution. To provide perspective, it will be helpful to restate the basic facts. Petitioner PLDT paid a franchise tax equal to three percent (3%) of its gross receipts. The franchise tax was paid in lieu of all taxes on this franchise or earnings thereof pursuant to R.A. No. 7082 amending its charter, Act. No. 3436. The exemption from all taxes on this franchise or earnings thereof was subsequently withdrawn by R.A. No. 7160 (Local Government Code of 1991), which at the same time gave local government units the power to tax businesses enjoying a franchise on the basis of income received or earned by them within their territorial jurisdiction. The Local Government Code (LGC) took effect on January 1, 1992. The pertinent provisions of the LGC state: Sec. 137. Franchise Tax. Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction. . . . Sec. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or -controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. Pursuant to these provisions, the City of Davao enacted Ordinance No. 519, Series of 1992, which in pertinent part provides: Notwithstanding any exemption granted by any law or other special law, there is hereby imposed a tax on businesses enjoying a franchise, at a rate of Seventy-five percent (75%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the income or receipts realized within the territorial jurisdiction of Davao City. Subsequently, Congress granted in favor of Globe Mackay Cable and Radio Corp. (Globe)[2] and Smart Information Technologies, Inc. (Smart)[3] franchises which contained in lieu of all taxes provisos. In 1995, it enacted R.A. No. 7925 (Public Telecommunications Policy of the Philippines), 23 of which provides that Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchises and shall be accorded immediately and unconditionally to the grantees of such franchises. The law took effect on March 16, 1995. In January 1999, when PLDT applied for a mayors permit to operate its Davao Metro Exchange, it was required to pay the local franchise tax for the first to the fourth quarter of 1999 which then had

amounted to P3,681,985.72. PLDT challenged the power of the city government to collect the local franchise tax and demanded a refund of what it had paid as local franchise tax for the year 1997 and for the first to the third quarters of 1998. For this reason, it filed a petition in the Regional Trial Court of Davao. However, its petition was dismissed and its claim for exemption under R.A. No. 7925 was denied. The trial court ruled that the LGC had withdrawn tax exemptions previously enjoyed by persons and entities and authorized local government units to impose a tax on businesses enjoying franchises within their territorial jurisdictions, notwithstanding the grant of tax exemption to them. Petitioner, therefore, brought this appeal. In its decision of August 22, 2001, this Court, through its Second Division, held that R.A. No. 7925, 23 cannot be so interpreted as granting petitioner exemption from local taxes because the word exemption, taking into consideration the context of the law, does not mean tax exemption. Hence this motion for reconsideration. The question is whether, by virtue of R.A. No. 7925, 23, PLDT is again entitled to exemption from the payment of local franchise tax in view of the grant of tax exemption to Globe and Smart. Petitioner contends that because their existing franchises contain in lieu of all taxes clauses, the same grant of tax exemption must be deemed to have become ipso facto part of its previously granted telecommunications franchise. But the rule is that tax exemptions should be granted only by clear and unequivocal provision of law expressed in a language too plain to be mistaken.[4] If, as PLDT contends, the word exemption in R.A. No. 7925 means tax exemption and assuming for the nonce that the charters of Globe and of Smart grant tax exemptions, then this runabout way of granting tax exemption to PLDT is not a direct, clear and unequivocal way of communicating the legislative intent. But the best refutation of PLDTs claim that R.A. No. 7925, 23 grants tax exemption is the fact that after its enactment on March 16, 1995, Congress granted several franchises containing both an equality clause similar to 23 and an in lieu of all taxes clause. If the equality clause automatically extends the tax exemption of franchises with in lieu of all taxes clauses, there would be no need in the same statute for the in lieu of all taxes clause in order to extend its tax exemption to other franchises not containing such clause. For example, the franchise of Island Country Telecommunications, Inc., granted under R.A. No. 7939 and which took effect on March 22, 1995, contains the following provisions: Sec. 8. Equality Clause. If any subsequent franchise for telecommunications service is awarded or granted by the Congress of the Philippines with terms, privileges and conditions more favorable and beneficial than those contained in this Act, then the same privileges or advantages shall ipso facto accrue to the herein grantee and be deemed part of this Act. Sec. 10. Tax Provisions. The grantee shall be liable to pay the same taxes on their real estate, buildings and personal property exclusive of this franchise, as other persons or telecommunications entities are now or hereafter may be required by law to pay. In addition hereto, the grantee, its successors or assigns, shall pay a franchise tax equivalent to three percent (3%) of all gross receipts transacted under this franchise, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof; Provided, That the grantee shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code. The grantee shall file the return with and pay the taxes due thereon to the Commissioner of Internal Revenue or his duly authorized representatives in

accordance with the National Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue. (Emphasis added) Similar provisions (in lieu of all taxes and equality clauses) are also found in the franchises of Cruz Telephone Company, Inc.,[5] Isla Cellular Communications, Inc.,[6] and Islatel Corporation.[7] We shall now turn to the other points raised in the motion for reconsideration of PLDT. First. Petitioner contends that the legislative intent to promote the development of the telecommunications industry is evident in the use of words as development, growth, and financial viability, and that the way to achieve this purpose is to grant tax exemption or exclusion to franchises belonging in this industry. Furthermore, by using the words advantage, favor, privilege, exemption, and immunity and the terms ipso facto, immediately, and unconditionally, Congress intended to automatically extend whatever tax exemption or tax exclusion has been granted to the holder of a franchise enacted after the LGC to the holder of a franchise enacted prior thereto, such as PLDT. The contention is untenable. The thrust of the law is to promote the gradual deregulation of entry, pricing, and operations of all public telecommunications entities and thus to level the playing field in the telecommunications industry. An intent to grant tax exemption cannot even be discerned from the law. The records of Congress are bereft of any discussion or even mention of tax exemption. To the contrary, what the Chairman of the Committee on Transportation, Rep. Jerome V. Paras, mentioned in his sponsorship of H.B. No. 14028, which became R.A. No. 7925, were equal access clauses in interconnection agreements, not tax exemptions. He said: There is also a need to promote a level playing field in the telecommunications industry. New entities must be granted protection against dominant carriers through the encouragement of equitable access charges and equal access clauses in interconnection agreements and the strict policing of predatory pricing by dominant carriers. Equal access should be granted to all operators connecting into the interexchange network. There should be no discrimination against any carrier in terms of priorities and/or quality of service.[8] Nor does the term exemption in 23 of R.A. No. 7925 mean tax exemption. The term refers to exemption from certain regulations and requirements imposed by the National Telecommunications Commission (NTC). For instance, R.A. No. 7925, 17 provides: The Commission shall exempt any specific telecommunications service from its rate or tariff regulations if the service has sufficient competition to ensure fair and reasonable rates or tariffs. Another exemption granted by the law in line with its policy of deregulation is the exemption from the requirement of securing permits from the NTC every time a telecommunications company imports equipment.[9] Second. PLDT says that the policy of the law is to promote healthy competition in the telecommunications industry.[10] According to PLDT, the LGC did not repeal the in lieu of all taxes provision in its franchise but only excluded from it local taxes, such as the local franchise tax. However, some franchises, like those of Globe and Smart, which contain in lieu of all taxes provisions were subsequently granted by Congress, with the result that the holders of franchises granted prior to January 1, 1992, when the LGC took effect, had to pay local franchise tax in view of the withdrawal of their local tax exemption. It is argued that it is this disparate situation which R.A. No. 7925, 23 seeks to rectify.

One can speak of healthy competition only between equals. For this reason, the law seeks to break up monopoly in the telecommunications industry by gradually dismantling the barriers to entry and granting to new telecommunications entities protection against dominant carriers through equitable access charges and equal access clauses in interconnection agreements and through the strict policing of predatory pricing by dominant carriers.[11] Interconnection among carriers is made mandatory to prevent a dominant carrier from delaying the establishment of connection with a new entrant and to deter the former from imposing excessive access charges.[12] That is also the reason there are franchises[13] granted by Congress after the effectivity of R.A. No. 7925 which do not contain the in lieu of all taxes clause, just as there are franchises, also granted after March 16, 1995, which contain such exemption from other taxes.[14] If, by virtue of 23, the tax exemption granted under existing franchises or thereafter granted is deemed applicable to previously granted franchises (i.e., franchises granted before the effectivity of R.A. No. 7925 on March 16, 1995), then those franchises granted after March 16, 1995, which do not contain the in lieu of all taxes clause, are not entitled to tax exemption. The in lieu of all taxes provision in the franchises of Globe and Smart, which are relatively new entrants in the telecommunications industry, cannot thus be deemed applicable to PLDT, which had virtual monopoly in the telephone service in the country for a long time,[15] without defeating the very policy of leveling the playing field of which PLDT speaks. Third. Petitioner argues that the rule of strict construction of tax exemptions does not apply to this case because the in lieu of all taxes provision in its franchise is more a tax exclusion than a tax exemption. Rather, the applicable rule should be that tax laws are to be construed most strongly against the government and in favor of the taxpayer. This is contrary to the uniform course of decisions[16] of this Court which consider in lieu of all taxes provisions as granting tax exemptions. As such, it is a privilege to which the rule that tax exemptions must be interpreted strictly against the taxpayer and in favor of the taxing authority applies. Along with the police power and eminent domain, taxation is one of the three necessary attributes of sovereignty. Consequently, statutes in derogation of sovereignty, such as those containing exemption from taxation, should be strictly construed in favor of the state. A state cannot be stripped of this most essential power by doubtful words and of this highest attribute of sovereignty by ambiguous language.
[17]

Indeed, both in their nature and in their effect there is no difference between tax exemption and tax exclusion. Exemption is an immunity or privilege; it is freedom from a charge or burden to which others are subjected.[18] Exclusion, on the other hand, is the removal of otherwise taxable items from the reach of taxation, e.g., exclusions from gross income and allowable deductions.[19] Exclusion is thus also an immunity or privilege which frees a taxpayer from a charge to which others are subjected. Consequently, the rule that tax exemption should be applied in strictissimi juris against the taxpayer and liberally in favor of the government applies equally to tax exclusions. To construe otherwise the in lieu of all taxes provision invoked is to be inconsistent with the theory that R.A. No. 7925, 23 grants tax exemption because of a similar grant to Globe and Smart. Petitioner cites Cagayan Electric Power & Light Co., Inc. v. Commissioner of Internal Revenue[20] in support of its argument that a tax exemption is restored by a subsequent law re-enacting the tax exemption. It contends that by virtue of R.A. No. 7925, its tax exemption or exclusion was restored by the grant of tax exemptions to Globe and Smart. Cagayan Electric Power & Light Co., Inc., however, is not in point. For there, the re-enactment of the exemption was made in an amendment to the charter

of Cagayan Electric Power and Light Co. Indeed, petitioners justification for its claim of tax exemption rests on a strained interpretation of R.A. No. 7925, 23. For petitioners claim for exemption is not based on an amendment to its charter but on a circuitous reasoning involving inquiry into the grant of tax exemption to other telecommunications companies and the lack of such grant to others,[21] when Congress could more clearly and directly have granted tax exemption to all franchise holders or amend the charter of PLDT to again exempt it from tax if this had been its purpose. The fact is that after petitioners tax exemption by R.A. No. 7082 had been withdrawn by the LGC,[22] no amendment to re-enact its previous tax exemption has been made by Congress. Considering that the taxing power of local government units under R.A. No. 7160 is clear and is ordained by the Constitution, petitioner has the heavy burden of justifying its claim by a clear grant of exemption.[23] Tax exemptions should be granted only by clear and unequivocal provision of law on the basis of language too plain to be mistaken.[24] They cannot be extended by mere implication or inference. Thus, it was held in Home Insurance & Trust Co. v. Tennessee[25] that a law giving a corporation all the powers, rights reservations, restrictions, and liabilities of another company does not give an exemption from taxation which the latter may possess. In Rochester R. Co. v. Rochester,[26] the U.S. Supreme Court, after reviewing cases involving the effect of the transfer to one company of the powers and privileges of another in conferring a tax exemption possessed by the latter, held that a statute authorizing or directing the grant or transfer of the privileges of a corporation which enjoys immunity from taxation or regulation should not be interpreted as including that immunity. Thus: We think it is now the rule, notwithstanding earlier decisions and dicta to the contrary, that a statute authorizing or directing the grant or transfer of the privileges of a corporation which enjoys immunity from taxation or regulation should not be interpreted as including that immunity. We, therefore, conclude that the words the estate, property, rights, privileges, and franchises did not embrace within their meaning the immunity from the burden of paving enjoyed by the Brighton Railroad Company. Nor is there anything in this, or any other statute, which tends to show that the legislature used the words with any larger meaning than they would have standing alone. The meaning is not enlarged, as faintly suggested, by the expression in the statute that they are to be held by the successor fully and entirely, and without change and diminution, words of unnecessary emphasis, without which all included in estate, property, rights, privileges, and franchises would pass, and with which nothing more could pass. On the contrary, it appears, as clearly as it did in the Phoenix Fire Insurance Company Case, that the legislature intended to use the words rights, franchises, and privileges in the restricted sense. . . .[27] Fourth. It is next contended that, in any event, a special law prevails over a general law and that the franchise of petitioner giving it tax exemption, being a special law, should prevail over the LGC, giving local governments taxing power, as the latter is a general law. Petitioner further argues that as between two laws on the same subject matter which are irreconcilably inconsistent, that which is passed later prevails as it is the latest expression of legislative will. This proposition flies in the face of settled jurisprudence. In City Government of San Pablo, Laguna v. Reyes,[28] this Court held that the phrase in lieu of all taxes found in special franchises should give way to the peremptory language of 193 of the LGC specifically providing for the withdrawal of such exemption privileges. Thus, the rule that a special law must prevail over the provisions of a later

general law does not apply as the legislative purpose to withdraw tax privileges enjoyed under existing laws or charters is apparent from the express provisions of 137 and 193 of the LGC. As to the alleged inconsistency between the LGC and R.A. No. 7925, this Court has already explained in the decision under reconsideration that no inconsistency exists and that the rule that the later law is the latest expression of the legislature does not apply. The matter need not be further discussed. In any case, it is contended, the ruling of the Bureau of Local Government Finance (BLGF) that petitioners exemption from local taxes has been restored is a contemporaneous construction of 23 and, as such, it is entitled to great weight. The ruling of the BLGF has been considered in this case. But unlike the Court of Tax Appeals, which is a special court created for the purpose of reviewing tax cases, the BLGF was created merely to provide consultative services and technical assistance to local governments and the general public on local taxation and other related matters.[29] Thus, the rule that the Court will not set aside conclusions rendered by the CTA, which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority[30] cannot apply in the case of BLGF. WHEREFORE, the motion for reconsideration is DENIED and this denial is final. SO ORDERED. Davide, Jr., C.J., Quisumbing, Corona, Carpio-Morales, Callejo, Sr., and Azcuna, JJ., concur. Bellosillo, Ynares-Santiago, Sandoval-Gutierrez, and Austria-Martinez, JJ., join the dissent of J. Puno. Puno, J., please see dissent. Vitug, J., I concur; a statute effectively limiting the constitutionally-delegated tax powers of LGUs can only be done in a clear and express manner. Panganiban, J., no part. Same reason given in original decision. Carpio, J., see separate opinion.

THIRD DIVISION [G.R. No. 149179. July 15, 2005] PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, INC., petitioner, vs. CITY OF BACOLOD, FLORENTINO T. GUANCO, in his capacity as the City Treasurer of Bacolod City, and ANTONIO G. LACZI, in his capacity as the City Legal Officer of Bacolod City, respondents. DECISION GARCIA, J.: In this appeal by way of a petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Philippine Long Distance Telephone Company (PLDT), seeks the reversal and setting aside of the July 23, 2001 decision[1] of the Regional Trial Court at Bacolod City, Branch 42, dismissing its petition in Civil Case No. 99-10786, an action to declare petitioner as exempt from the payment of franchise and business taxes sought to be imposed and collected by the respondent City of Bacolod. The material facts are not at all disputed: PLDT is a holder of a legislative franchise under Act No. 3436, as amended, to render local and international telecommunications services. On August 24, 1991, the terms and conditions of its franchise were consolidated under Republic Act No. 7082,[2] Section 12 of which embodies the socalled in-lieu-of-all-taxes clause, whereunder PLDT shall pay a franchise tax equivalent to three percent (3%) of all its gross receipts, which franchise tax shall be in lieu of all taxes. More specifically, the provision pertinently reads: SEC. 12. xxx In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee, its successors or assigns, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof. xxx (Italics ours). Meanwhile, or on January 1, 1992, Republic Act No. 7160, otherwise known as the Local Government Code, took effect. Section 137 of the Code, in relation to Section 151 thereof, grants cities and other local government units the power to impose local franchise tax on businesses enjoying a franchise, thus: SEC. 137. Franchise Tax. Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction. xxx xxx xxx

SEC. 151. Scope of Taxing Powers. Except as otherwise provided in this Code, the city, may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees, and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this Code. The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes. By Section 193 of the same Code, all tax exemption privileges then enjoyed by all persons, whether natural or juridical, save those expressly mentioned therein, were withdrawn, necessarily including those taxes from which PLDT is exempted under the in-lieu-of-all-taxes clause in its charter. We quote Section 193: SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under R.A. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. Aiming to level the playing field among telecommunication companies, Congress enacted Republic Act No. 7925, otherwise known as the Public Telecommunications Policy Act of the Philippines, which took effect on March 16, 1995. To achieve the legislative intent, Section 23 thereof, also known as the most-favored- treatment clause, provides for an equality of treatment in the telecommunications industry, thus: SEC. 23. Equality of Treatment in the Telecommunications Industry Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted shall ipso facto become part of previously granted telecommunications franchises and shall be accorded immediately and unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the life span of the franchise, or the type of the service authorized by the franchise. In August 1995, the City of Bacolod, invoking its authority under Section 137, in relation to Section 151 and Section 193, supra, of the Local Government Code, made an assessment on PLDT for the payment of franchise tax due the City. Complying therewith, PLDT began paying the City franchise tax from the year 1994 until the third quarter of 1998, at which time the total franchise tax it had paid the City already amounted to P2,770,696.37. On June 2, 1998, the Department of Finance through its Bureau of Local Government Finance (BLGF), issued a ruling to the effect that as of March 16, 1995, the effectivity date of the Public Telecommunications Policy Act of the Philippines (Rep. Act. No. 7925), PLDT, among other telecommunication companies, became exempt from local franchise tax. Pertinently, the BLGF ruling reads:

It appears that RA 7082 further amending ACT No. 3436 which granted to PLDT a franchise to install, operate and maintain a telephone system throughout the Philippine Islands was approved on August 3, 1991. Section 12 of said franchise, likewise, contains the in lieu of all taxes proviso. In this connection, Section 23 of RA 7925, quoted hereunder, which was approved on March 1, 1995 provides for the equality of treatment in the telecommunications industry: xxx xxx xxx

On the basis of the aforequoted Section 23 of RA 7925, PLDT as a telecommunications franchise holder becomes automatically covered by the tax exemption provisions of RA 7925, which took effect on March 16, 1995. Accordingly, PLDT shall be exempt from the payment of franchise and business taxes imposable by LGUs under Sections 137 and 143, respectively, of the LGC [Local Government Code], upon the effectivity of RA 7925 on March 16, 1995. However, PLDT shall be liable to pay the franchise and business taxes on its gross receipts realized from January 1, 1992 up to March 15, 1995, during which period PLDT was not enjoying the most favored clause proviso of RA 7025 [sic].[3] Invoking the aforequoted ruling, PLDT then stopped paying local franchise and business taxes to Bacolod City starting the fourth quarter of 1998. The controversy came to a head-on when, sometime in 1999, PLDT applied for the issuance of a Mayors Permit but the City of Bacolod withheld issuance thereof pending PLDTs payment of its franchise tax liability in the following amounts: (1) P358,258.30 for the fourth quarter of 1998; and (b) P1,424,578.10 for the year 1999, all in the aggregate amount of P1,782,836.40, excluding surcharges and interest, about which PLDT was duly informed by the City Treasurer via a 5th Indorsement dated March 16, 1999 for PLDTs appropriate action.[4] In time, PLDT filed a protest[5] with the Office of the City Legal Officer, questioning the assessment and at the same time asking for a refund of the local franchise taxes it paid in 1997 until the third quarter of 1998. In a reply-letter dated March 26, 1999,[6] City Legal Officer Antonio G. Laczi denied the protest and ordered PLDT to pay the questioned assessment. Hence, on May 14, 1999, in the Regional Trial Court at Bacolod City, PLDT filed its petition[7] in Civil Case No. 99-10786, therein praying for a judgment declaring it as exempt from the payment of local franchise and business taxes; ordering the respondent City to henceforth cease and desist from assessing and collecting said taxes; directing the City to issue the Mayors Permit for the year 1999; and requiring it to refund the amount of P2,770,606.37, allegedly representing overpaid franchise taxes for the years 1997 and 1998 with interest until fully paid. In time, the respondent City filed its Answer/Comment to the petition,[8] basically maintaining that Section 137 of the Local Government Code remains as the operative law despite the enactment of the Public Telecommunications Policy Act of the Philippines (Rep. Act No. 7925), and accordingly prayed for the dismissal of the petition.

In the ensuing pre-trial conference, the parties manifested that they would not present any testimonial evidence, and merely requested for time to file their respective memoranda, to which the trial court acceded. Eventually, in the herein assailed decision dated July 23, 2001,[9] the trial court dismissed PLDTs petition, thus: WHEREFORE, premises considered, the petition should be, as it is hereby DISMISSED. No costs. SO ORDERED. Therefrom, PLDT came to this Court via the present recourse, imputing the following errors on the part of the trial court: 5.01.a. THE LOWER COURT ERRED IN SUSTAINING RESPONDENTS POSITION THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE, WHICH, IN RELATION TO SECTION 151 THEREOF, ALLOWS RESPONDENT CITY TO IMPOSE THE FRANCHISE TAX, IS APPLICABLE IN THIS CASE. 5.01.b. THE LOWER COURT ERRED IN NOT HOLDING THAT UNDER PETITIONERS FRANCHISE (REPUBLIC ACT NO. 7082), AS AMENDED AND EXPANDED BY SECTION 23 OF REPUBLIC ACT NO. 7925 (PUBLIC TELECOMMUNICATIONS POLICY ACT), TAKING INTO ACCOUNT THE FRANCHISES OF GLOBE TELECOM, INC., (GLOBE) (REPUBLIC ACT NO. 7229) AND SMART COMMUNICATIONS, INC. (SMART) (REPUBLIC ACT NO. 7294), WHICH WERE ENACTED SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, NO FRANCHISE TAXES MAY BE IMPOSED ON PETITIONER BY RESPONDENT CITY. 5.01.c. THE LOWER COURT ERRED IN NOT GIVING WEIGHT TO THE RULING OF THE DEPARTMENT OF FINANCE, THROUGH ITS BUREAU OF LOCAL GOVERNMENT FINANCE, THAT PETITIONER IS EXEMPT FROM THE PAYMENT OF FRANCHISE AND BUSINESS TAXES IMPOSABLE BY LOCAL GOVERNMENT UNITS UNDER THE LOCAL GOVERNMENT CODE. 5.01.d. THE LOWER COURT ERRED IN DISMISSING THE PETITION BELOW.

As we see it, the only question which commends itself for our resolution is, whether or not Section 23 of Rep. Act No. 7925, also called the most-favored-treatment clause, operates to exempt petitioner PLDT from the payment of franchise tax imposed by the respondent City of Bacolod. Contrary to petitioners claim, the issue thus posed is not one of first impression insofar as this Court is concerned. For sure, this is not the first time for petitioner PLDT to invoke the jurisdiction of this Court on the same question, albeit involving another city. In PLDT vs. City of Davao,[10] this Court has had the occasion to interpret Section 23 of Rep. Act No. 7925. There, we ruled that Section 23 does not operate to exempt PLDT from the payment of franchise tax imposed upon it by the City of Davao:

In sum, it does not appear that, in approving 23 of R.A. No. 7925, Congress intended it to operate as a blanket tax exemption to all telecommunications entities. Applying the rule of strict construction of laws granting tax exemptions and the rule that doubts should be resolved in favor of municipal corporations in interpreting statutory provisions on municipal taxing powers, we hold that 23 of R.A. No. 7925 cannot be considered as having amended petitioner's franchise so as to entitle it to exemption from the imposition of local franchise taxes. Consequently, we hold that petitioner is liable to pay local franchise taxes in the amount of P3,681,985.72 for the period covering the first to the fourth quarter of 1999 and that it is not entitled to a refund of taxes paid by it for the period covering the first to the third quarter of 1998.[11] Explains this Court in the same case: To begin with, tax exemptions are highly disfavored. The reason for this was explained by this Court in Asiatic Petroleum Co. v. Llanes, in which it was held: . . . Exemptions from taxation are highly disfavored, so much so that they may almost be said to be odious to the law. He who claims an exemption must be able to point to some positive provision of law creating the right. . . As was said by the Supreme Court of Tennessee in Memphis vs. U. & P. Bank (91 Tenn., 546, 550), The right of taxation is inherent in the State. It is a prerogative essential to the perpetuity of the government; and he who claims an exemption from the common burden must justify his claim by the clearest grant of organic or statute law. Other utterances equally or more emphatic come readily to hand from the highest authority. In Ohio Life Ins. and Trust Co. vs. Debolt (16 Howard, 416), it was said by Chief Justice Taney, that the right of taxation will not be held to have been surrendered, unless the intention to surrender is manifested by words too plain to be mistaken. In the case of the Delaware Railroad Tax (18 Wallace, 206, 226), the Supreme Court of the United States said that the surrender, when claimed, must be shown by clear, unambiguous language, which will admit of no reasonable construction consistent with the reservation of the power. If a doubt arises as to the intent of the legislature, that doubt must be solved in favor of the State. In Erie Railway Company vs. Commonwealth of Pennsylvania (21 Wallace, 492, 499), Mr. Justice Hunt, speaking of exemptions, observed that a State cannot strip itself of the most essential power of taxation by doubtful words. It cannot, by ambiguous language, be deprived of this highest attribute of sovereignty. In Tennessee vs. Whitworth (117 U.S., 129, 136), it was said: In all cases of this kind the question is as to the intent of the legislature, the presumption always being against any surrender of the taxing power. In Farrington vs. Tennessee and County of Shelby (95 U.S., 379, 686), Mr. Justice Swayne said: . . . When exemption is claimed, it must be shown indubitably to exist. At the outset, every presumption is against it. A well-founded doubt is fatal to the claim. It is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition can be supported. The tax exemption must be expressed in the statute in clear language that leaves no doubt of the intention of the legislature to grant such exemption. And, even if it is granted, the exemption must be interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. xxx xxx xxx

The fact is that the term exemption in 23 is too general. A cardinal rule in statutory construction is that legislative intent must be ascertained from a consideration of the statute as a whole and not merely of a particular provision. For, taken in the abstract, a word or phrase might easily convey a meaning which is different from the one actually intended. A general provision may actually have a limited

application if read together with other provisions. Hence, a consideration of the law itself in its entirety and the proceedings of both Houses of Congress is in order. xxx xxx xxx

R.A. No. 7925 is thus a legislative enactment designed to set the national policy on telecommunications and provide the structures to implement it to keep up with the technological advances in the industry and the needs of the public. The thrust of the law is to promote gradually the deregulation of the entry, pricing, and operations of all public telecommunications entities and thus promote a level playing field in the telecommunications industry. There is nothing in the language of 23 nor in the proceedings of both the House of Representatives and the Senate in enacting R.A. No. 7925 which shows that it contemplates the grant of tax exemptions to all telecommunications entities, including those whose exemptions had been withdrawn by the LGC. What this Court said in Asiatic Petroleum Co. v. Llanes applies mutatis mutandis to this case: When exemption is claimed, it must be shown indubitably to exist. At the outset, every presumption is against it. A well-founded doubt is fatal to the claim. It is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition can be supported. In this case, the word exemption in 23 of R.A. No. 7925 could contemplate exemption from certain regulatory or reporting requirements, bearing in mind the policy of the law. It is noteworthy that, in holding Smart and Globe exempt from local taxes, the BLGF did not base its opinion on 23 but on the fact that the franchises granted to them after the effectivity of the LGC exempted them from the payment of local franchise and business taxes. As in City of Davao, supra, petitioner presently argues that because Smart Communications, Inc. (SMART) and Globe Telecom (GLOBE) under whose respective franchises granted after the effectivity of the Local Government Code, are exempt from franchise tax, it follows that petitioner is likewise exempt from the franchise tax sought to be collected by the City of Bacolod, on the reasoning that the grant of tax exemption to SMART and GLOBE ipso facto applies to PLDT, consistent with the most-favored-treatment clause found in Section 23 of the Public Telecommunications Policy Act of the Philippines (Rep. Act No. 7925). Again, there is nothing novel in petitioners contention. In fact, this Court in City of Davao, even adverted to PLDTs argument therein, thus: Finally, it [PLDT] argues that because Smart and Globe are exempt from the franchise tax, it follows that it must likewise be exempt from the tax being collected by the City of Davao because the grant of tax exemption to Smart and Globe ipso facto extended the same exemption to it. In rejecting PLDTs contention, this Court ruled in City of Davao as follows: The acceptance of petitioners theory would result in absurd consequences. To illustrate: In its franchise, Globe is required to pay a franchise tax of only one and one-half percentum (1/2% [sic] ) of all gross receipts from its transactions while Smart is required to pay a tax of three percent (3%) on all gross receipts from business transacted. Petitioners theory would require that, to level the playing field, any advantage, favor, privilege, exemption, or immunity granted to Globe must be extended to all telecommunications companies, including Smart. If, later, Congress again grants a franchise to another telecommunications company imposing, say, one percent (1%) franchise tax, then all other

telecommunications franchises will have to be adjusted to level the playing field so to speak. This could not have been the intent of Congress in enacting Section 23 of Rep. Act 7925. Petitioners theory will leave the Government with the burden of having to keep track of all granted telecommunications franchises, lest some companies be treated unequally. It is different if Congress enacts a law specifically granting uniform advantages, favor, privilege, exemption or immunity to all telecommunications entities. On PLDTs motion for reconsideration in Davao, the Court added in its en banc Resolution of March 25, 2003,[12] that even as it is a state policy to promote a level playing field in the communications industry, Section 23 of Rep. Act No. 7925 does not refer to tax exemption but only to exemption from certain regulations and requirements imposed by the National Telecommunications Commission: xxx. The records of Congress are bereft of any discussion or even mention of tax exemption. To the contrary, what the Chairman of the Committee on Transportation, Rep. Jerome V. Paras, mentioned in his sponsorship of H.B. No. 14028, which became R.A. No. 7925, were equal access clauses in interconnection agreements, not tax exemptions. He said: There is also a need to promote a level playing field in the telecommunications industry. New entities must be granted protection against dominant carriers through the encouragement of equitable access charges and equal access clauses in interconnection agreements and the strict policing of predatory pricing by dominant carriers. Equal access should be granted to all operators connecting into the interexchange network. There should be no discrimination against any carrier in terms of priorities and/or quality of services. Nor does the term exemption in 23 of R.A. No. 7925 mean tax exemption. The term refers to exemption from certain regulations and requirements imposed by the National Telecommunications Commission (NTC). For instance, R.A. No. 7925, 17 provides: The Commission shall exempt any specific telecommunications service from its rate or tariff regulations if the service has sufficient competition to ensure fair and reasonable rates or tariffs. Another exemption granted by the law in line with its policy of deregulation is the exemption from the requirement of securing permits from the NTC every time a telecommunications company imports equipment.[13] In the same en banc Resolution, the Court even rejected PLDTs contention that the in-lieu-of-alltaxes clause does not refer to tax exemption but to tax exclusion and hence, the strictissimi juris rule does not apply, explaining that these two terms actually mean the same thing, such that the rule that tax exemption should be applied in strictissimi juris against the taxpayer and liberally in favor of the government applies equally to tax exclusions. Thus: Indeed, both in their nature and in their effect there is no difference between tax exemption and tax exclusion. Exemption is an immunity or privilege; it is freedom from a charge or burden to which others are subjected. Exclusion, on the other hand, is the removal of otherwise taxable items from the reach of taxation, e.g., exclusions from gross income and allowable deductions. Exclusion is thus also an immunity or privilege which frees a taxpayer from a charge to which others are subjected. Consequently, the rule that tax exemption should be applied in strictissimi juris against the taxpayer and liberally in favor of the government applies equally to tax exclusions. To construe otherwise the in lieu of all taxes provision invoked is to be inconsistent with the theory that R.A. No. 7925, 23 grants tax exemption because of a similar grant to Globe and Smart.[14]

PLDT likewise argued in said case that the RTC at Davao City erred in not giving weight to the ruling of the BLGF which, according to petitioner, is an administrative agency with technical expertise and mastery over the specialized matters assigned to it. But then again, we held in Davao: To be sure, the BLGF is not an administrative agency whose findings on questions of fact are given weight and deference in the courts. The authorities cited by petitioner pertain to the Court of Tax Appeals, a highly specialized court which performs judicial functions as it was created for the review of tax cases. In contrast, the BLGF was created merely to provide consultative services and technical assistance to local governments and the general public on local taxation, real property assessment, and other related matters, among others. The question raised by petitioner is a legal question, to wit, the interpretation of 23 of R.A. No. 7925. There is, therefore, no basis for claiming expertise for the BLGF that administrative agencies are said to possess in their respective fields.[15] We note, quite interestingly, that apart from the particular local government unit involved in the earlier case of PLDT vs. Davao, the arguments presently advanced by petitioner on the issue herein posed are but a mere reiteration if not repetition of the very same arguments it has already raised in Davao. For sure, the errors presently assigned are substantialy the same as those in Davao, all of which have been adequately addressed and passed upon by this Court in its decision therein as well as in its en banc resolution in that case. WHEREFORE, the instant petition is DENIED and the assailed decision dated July 23, 2001 of the lower court AFFIRMED. Costs against petitioner. SO ORDERED. Sandoval-Gutierrez, Corona, and Carpio-Morales, JJ., concur. Panganiban, (Chairman), no part, former counsel of the party.

[1] [2]

Rollo, pp. 110-116.

An Act Further Amending Act No. 3436, as amended, xxx Consolidating the Terms and Conditions of the Franchise Granted to the [PLDT], And Extending the Said Franchise by Twenty-Five (25) Years from the Expiration Thereof xxx.
[3] [4] [5] [6]

Rollo, p. 80. Rollo, p. 85. Rollo, pp. 86-88. Rollo, pp. 89-90.

[7] [8] [9]

Rollo, pp. 67-71. Rollo, pp. 94-108. Rollo, pp. 110-116. G.R. No. 143867; 415 Phil. 769 [2001]. Id., p. 780. 447 Phil. 571 [2003]. Id., pp. 580-581. Id., p. 584. Supra, pp. 779-780. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

[10] [11] [12] [13] [14] [15]

G.R. No. 167260

February 27, 2009

The CITY OF ILOILO, Mr. ROMEO V. MANIKAN, in his capacity as the Treasurer of Iloilo City, Petitioners, vs. SMART COMMUNICATIONS, INC. (SMART) Respondent. DECISION BRION, J.: Before this Court is the appeal by certiorari filed by the City of Iloilo (petitioner) under Rule 45 of the Rules of Court seeking to set aside the decision of the Regional Trial Court (RTC) of Iloilo City, Branch 28, which declared that respondent SMART Communications, Inc. (SMART) is exempt from the payment of local franchise and business taxes. BACKGROUND FACTS The facts of the case are not in dispute. SMART received a letter of assessment dated February 12, 2002 from petitioner requiring it to pay deficiency local franchise and business taxes (in the amount of P764,545.29, plus interests and surcharges) which it incurred for the years 1997 to 2001. SMART protested the assessment by sending a letter dated February 15, 2002 to the City Treasurer. It claimed exemption from payment of local franchise and business taxes based on Section 9 of its legislative

franchise under Republic Act (R.A.) No. 7294 (SMARTs franchise). Under SMARTs franchise, it was required to pay a franchise tax equivalent to 3% of all gross receipts, which amount shall be in lieu of all taxes. SMART contends that the "in lieu of all taxes" clause covers local franchise and business taxes. SMART similarly invoked R.A. No. 7925 or the Public Telecommunications Policy Act (Public Telecoms Act) whose Section 23 declares that any existing privilege, incentive, advantage, or exemption granted under existing franchises shall ipso facto become part of previously grantedtelecommunications franchise. SMART contends that by virtue of Section 23, tax exemptions granted by the legislature to other holders of telecommunications franchise may be extended to and availed of by SMART. Through a letter dated April 4, 2002, petitioner denied SMARTs protest, citing the failure of SMART to comply with Section 252 of R.A. No. 7160 or the Local Government Code (LGC) before filing the protest against the assessment. Section 252 of the LGC requires payment of the tax before any protest against the tax assessment can be made. SMART objected to the petitioners denial of its protest by instituting a case against petitioner before the RTC of Iloilo City.1 The trial court ruled in favour of SMART and declared the telecommunications firm exempt from the payment of local franchise and business taxes;2 it agreed with SMARTs claim of exemption under Section 9 of its franchise and Section 23 of the Public Telecoms Act.3 From this judgment, petitioner files this petition for review on certiorari raising the sole issue of whether SMART is exempt from the payment of local franchise and business taxes. THE COURTS RULING SMART relies on two provisions of law to support its claim for tax exemption: Section 9 of SMARTs franchise and Section 23 of the Public Telecoms Act. After a review of pertinent laws and jurisprudence particularly of SMART Communications, Inc. v. City of Davao,4 a case which, except for the respondent, involves the same set of facts and issues we find SMARTs claim for exemption to be unfounded. Consequently, we find the petition meritorious.1awphi1 The basic principle in the construction of laws granting tax exemptions has been very stable. As early as 1916, in the case of Government of the Philippine Islands v. Monte de Piedad,5 this Court has declared that he who claims an exemption from his share of the common burden of taxation must justify his claim by showing that the Legislature intended to exempt him by words too plain to be beyond doubt or mistake. This doctrine was repeated in the 1926 case of Asiatic Petroleum v. Llanes,6 as well as in the case of Borja v. Commissioner of Internal Revenue (CIR)7 decided in 1961. Citing American jurisprudence, the Court stated in E. Rodriguez, Inc. v. CIR:8 The right of taxation is inherent in the State. It is a prerogative essential to the perpetuity of the government; and he who claims an exemption from the common burden, must justify his claim by the clearest grant of organic or statute law xxx When exemption is claimed, it must be shown indubitably to exist. At the outset, every presumption is against it. A well-founded doubt is fatal to the claim; it is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition can be supported.

In the recent case of Digital Telecommunications, Inc. v. City Government of Batangas, et al.,9 we adhered to the same principle when we said: A tax exemption cannot arise from vague inference...Tax exemptions must be clear and unequivocal. A taxpayer claiming a tax exemption must point to a specific provision of law conferring on the taxpayer, in clear and plain terms, exemption from a common burden. Any doubt whether a tax exemption exists is resolved against the taxpayer. The burden therefore is on SMART to prove that, based on its franchise and the Public Telecoms Act, it is entitled to exemption from the local franchise and business taxes being collected by the petitioner. Claim for Exemption under SMARTs franchise Section 9 of SMARTs franchise states: Section 9. Tax provisions. The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate buildings and personal property, exclusive of' this franchise, as other persons or corporations which are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue. [Emphasis supplied.] The petitioner posits that SMARTs claim for exemption under its franchise is not equivocal enough to prevail over the specific grant of power to local government units to exact taxes from businesses operating within its territorial jurisdiction under Section 137 in relation to Section 151 of the LGC. More importantly, it claimed that exemptions from taxation have already been removed by Section 193 of the LGC: Section 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under RA No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. [Emphasis supplied.] The petitioner argues, too, that SMARTs claim for exemption from taxes under Section 9 of its franchise is not couched in plain and unequivocal language such that it restored the withdrawal of tax exemptions under Section 193 above. It claims that "if Congress intended that the tax exemption privileges withdrawn by Section 193 of RA 7160 [LGC] were to be restored in respondents [SMARTs] franchise, it would have so expressly provided therein and not merely [restored the

exemption] by the simple expedient of including the in lieu of all taxes provision in said franchise."10 We have indeed ruled that by virtue of Section 193 of the LGC, all tax exemption privileges then enjoyed by all persons, save those expressly mentioned, have been withdrawn effective January 1, 1992 the date of effectivity of the LGC.11 The first clause of Section 137 of the LGC states the same rule.12 However, the withdrawal of exemptions, whether under Section 193 or 137 of the LGC, pertains only to those already existing when the LGC was enacted. The intention of the legislature was to remove all tax exemptions or incentives granted prior to the LGC.13 As SMARTs franchise was made effective on March 27, 1992 after the effectivity of the LGC Section 193 will therefore not apply in this case. But while Section 193 of the LGC will not affect the claimed tax exemption under SMARTs franchise, we fail to find a categorical and encompassing grant of tax exemption to SMART covering exemption from both national and local taxes: R.A. No 7294 does not expressly provide what kind of taxes SMART is exempted from. It is not clear whether the "in lieu of all taxes" provision in the franchise of SMART would include exemption from local or national taxation. What is clear is that SMART shall pay franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under its franchise. But whether the franchise tax exemption would include exemption from exactions by both the local and the national government is not unequivocal. The uncertainty in the "in lieu of all taxes" clause in R.A. No. 7294 on whether SMART is exempted from both local and national franchise tax must be construed strictly against SMART which claims the exemption. [Emphasis supplied.]14 Justice Carpio, in his Separate Opinion in PLDT v. City of Davao,15 explains why: The proviso in the first paragraph of Section 9 of Smarts franchise states that the grantee shall "continue to be liable for income taxes payable under Title II of the National Internal Revenue Code." Also, the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code." Moreover, the same paragraph declares that the tax returns "shall be subject to audit by the Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes. The clear intent is for the "in lieu of all taxes" clause to apply only to taxes under the National Internal Revenue Code and not to local taxes. Nonetheless, even if Section 9 of SMARTs franchise can be construed as covering local taxes as well, reliance thereon would now be unavailing. The "in lieu of all taxes" clause basically exempts SMART from paying all other kinds of taxes for as long as it pays the 3% franchise tax; it is the franchise tax that shall be in lieu of all taxes, and not any other form of tax.16 Franchise taxes on telecommunications companies, however, have been abolished by R.A. No. 7716 or the Expanded Value-Added Tax Law (E-VAT Law), which was enacted by Congress on January 1, 1996.17 To replace the franchise tax, the E-VAT Law imposed a 10%18 value-added tax on telecommunications companies under Section 108 of the National Internal Revenue Code.19 The "in lieu of all taxes" clause in the legislative franchise of SMART has thus become functus officio, made inoperative for lack of a franchise tax.20 SMARTs claim for exemption from local business and franchise taxes based on Section 9 of its franchise is therefore unfounded.

Claim for Exemption Under Public Telecoms Act SMART additionally invokes the "equality clause" under Section 23 of the Public Telecoms Act: SECTION 23. Equality of Treatment in the Telecommunications Industry. Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchise and shall be accorded immediately and unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the life span of the franchise, or the type of service authorized by the franchise. [Emphasis supplied.] As in the case of SMART v. City of Davao,21 SMART posits that since the franchise of telecommunications companies granted after the enactment of its franchise contained provisions exempting these companies from both national and local taxes, these privileges should extend to and benefit SMART, applying the "equality clause" above. The petitioner, on the other hand, believes that the claimed exemption under Section 23 of the Public Telecoms Act is similarly unfounded. We agree with the petitioner. Whether Section 23 of the cited law extends tax exemptions granted by Congress to new franchise holders to existing ones has been answered in the negative in the case of PLDT v. City of Davao.22 The term "exemption" in Section 23 of the Public Telecoms Act does not mean tax exemption; rather, it refers to exemption from certain regulatory or reporting requirements imposed by government agencies such as the National Telecommunications Commission. The thrust of the Public Telecoms Act is to promote the gradual deregulation of entry, pricing, and operations of all public telecommunications entities, and thus to level the playing field in the telecommunications industry. The language of Section 23 and the proceedings of both Houses of Congress are bereft of anything that would signify the grant of tax exemptions to all telecommunications entities.23 Intent to grant tax exemption cannot therefore be discerned from the law; the term "exemption" is too general to include tax exemption and runs counter to the requirement that the grant of tax exemption should be stated in clear and unequivocal language too plain to be beyond doubt or mistake. Surcharge and Interests Since SMART cannot validly claim any tax exemption based either on Section 9 of its franchise or Section 23 of the Public Telecoms Act, it follows that petitioner can impose and collect the local franchise and business taxes amounting to P764,545.29 it assessed against SMART. Aside from these, SMART should also be made to pay surcharge and interests on the taxes due.lawphil.net The settled rule is that good faith and honest belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax laws are sufficient justification to delete the imposition of surcharges and interest.24 In refuting liability for the local franchise and business taxes, we do not believe SMART relied in good faith in the findings and conclusion of the Bureau of Local Government and Finance (BLGF).

In a letter dated August 13, 1998, the BLGF opined that SMART should be considered exempt from the franchise tax that the local government may impose under Section 137 of the LGC.25 SMART, relying on the letter-opinion of the BLGF, invoked the same in the administrative protest it filed against petitioner on February 15, 2002, as well as in the petition for prohibition that it filed before the RTC of Iloilo on April 30, 2002. However, in the 2001 case of PLDT v. City of Davao,26 we declared that we do not find BLGFs interpretation of local tax laws to be authoritative and persuasive. The BLGFs function is merely to provide consultative services and technical assistance to the local governments and the general public on local taxation, real property assessment, and other related matters.27 Unlike the Commissioner of Internal Revenue who has been given the express power to interpret the Tax Code and other national tax laws,28 no such power is given to the BLGF. SMARTs dependence on BLGFs interpretation was thus misplaced. WHEREFORE, we hereby GRANT the petition and REVERSE the decision of the RTC dated January 19, 2005 in Civil Case No. 02-27144 and find SMART liable to pay the local franchise and business taxes amounting to P764,545.29, assessed against it by petitioner, plus the surcharges and interest due thereon. SO ORDERED. ARTURO D. BRION Associate Justice WE CONCUR: LEONARDO A. QUISUMBING Associate Justice Chairperson CONCHITA CARPIO MORALES Associate JusticePRESBITERO J. VELASCO, JR. Associate JusticeANTONIO EDUARDO B. NACHURA* Associate Justice ATTESTATION I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. LEONARDO A. QUISUMBING Associate Justice Chairperson CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO Chief Justice

Footnotes
*

Designated additional member of the Second Division per Special Order No. 571 dated February 12, 2009.
1

Civil Case No. 02-27144. Decision dated January 19, 2005, penned by Judge Loida J. Diestro-Maputol; rollo, pp. 35-39. Id., p. 37. G.R. No. 155491, September 16, 2008. 35 Phil. 42 (1916). 49 Phil. 466 (1926).

G.R. No. L-12134, November 30, 1961, 3 SCRA 591, citing House v. Posadas, 53 Phil. 338 (1929) and CIR v. Manila Jockey Club, Inc., 98 Phil. 670 (1956).
8

G.R. No. L-23041 , July 31, 1969, 28 SCRA 1119, citing Memphis v. U & P Bank, 91 Tenn. 546, 550, and Farrington v. Tennessee and County of Shelby, 95 U.S. 679, 686.
9

G.R. No. 156040, December 11, 2008. Rollo, p. 20.

10

11

Philippine Long Distance Telephone Company, Inc. (PLDT) v. City of Bacolod, et al., G.R. No. 149179, July 15, 2005, 463 SCRA 528; Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, September 11, 1986, 261 SCRA 667.
12

Section 137. Franchise Tax. Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at the rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized within its territorial jurisdiction. x x x. [Emphasis supplied.]
13

SMART v. City of Davao, supra note 4. Id. G.R. No. 143867, March 25, 2003, 399 SCRA 442.

14

15

16

Id. Amended by R.A. No. 9337 or the Revised Value-Added Tax Law (R-VAT Law). The tax rate is now 12% per R-VAT Law.

17

18

19

Radio Communications of the Philippines, Inc. (RCPI) v. Provincial Assessor of South Cotabato, et al., G.R. No. 144486, April 13, 2005, 456 SCRA 1.
20

Digital Telecommunications Philippines, Inc. v. Province of Pangasinan, G.R. No. 152534, February 23, 2007, 516 SCRA 541.
21

Supra note 15. G.R. No. 143867, August 22, 2001, 363 SCRA 522; see also note 15. SMART v. City of Davao, supra note 4.

22

23

24

Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, G.R. No. 166786, September 11, 2006, 501 SCRA 450, citing Connell Bros. Co. (Phil.) v. Collector of Internal Revenue, 119 Phil. 40 (1963).
25

Rollo, p. 48. Supra note 22; see also note 15. ADMINISTRATIVE CODE, Title II, Chapter 4, Section 33 (4)

26

27

28

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Cases. The power to interpret the provisions of this Code [NIRC] and other tax laws shall be under the exclusive and original jurisdictions of the Commissioner, subject to review by the Secretary of Finance. xxx.