City of Pasig vs. Manila Electric Company

A municipal ordinance imposing a franchise tax is void ab initio for lack of statutory authority, and its nullity is not cured by the subsequent conversion of the municipality into a city which possesses such taxing power.

MERALCO is a grantee of a legislative franchise authorized to construct, maintain, and operate an electric light, heat, and power system in Manila and its suburbs, including Pasig. Under the Local Government Code of 1991, the power to impose franchise tax belongs exclusively to provinces and cities, not municipalities. On December 26, 1992, when Pasig was still a municipality, its Sangguniang Bayan enacted Ordinance No. 25, imposing a franchise tax on businesses within its jurisdiction. Pasig was later converted into a highly urbanized city by R.A. No. 7829, effective January 25, 1995.

On December 26, 1992, the Sangguniang Bayan of the Municipality of Pasig enacted Ordinance No. 25, which, under Article 3, Section 32, imposed a franchise tax on all business ventures operating through a franchise within the municipality at a rate of fifty percent of one percent of gross receipts. At that time, the Local Government Code did not authorize municipalities to levy franchise taxes; such power was reserved for provinces and cities. MERALCO, a grantee of a legislative franchise to operate an electric power system in Pasig, was subjected to this tax.

On January 25, 1995, R.A. No. 7829 converted the Municipality of Pasig into the highly urbanized City of Pasig. On August 24, 2001, the Treasurer’s Office of the City Government of Pasig informed MERALCO that it was liable to pay taxes for the period 1996 to 1999 pursuant to Municipal Ordinance No. 25. The City subsequently demanded payment amounting to ₱435,332,196.00, exclusive of penalties. MERALCO protested the demand, citing prior DOJ and RTC rulings that declared Section 32 of Ordinance No. 25 void ab initio for contravening Section 142 of the LGC, which was affirmed by the CA and dismissed by the Supreme Court.

Due to the Treasurer's inaction, MERALCO filed an action for annulment of the demand before the RTC. The RTC ruled in favor of the City of Pasig, validating the demand. MERALCO appealed to the CA, which reversed the RTC, holding that the conversion of Pasig into a city did not rectify the defect of the ordinance enacted while it was a municipality.

• Authority to Levy Franchise Tax: Petitioner argued that its conversion into a city vested it with the authority to levy franchise taxes, curing any defect in the ordinance.
• Curative Effect of Cityhood Law: Petitioner maintained that Section 45 of R.A. No. 7829 gave curative effect to Ordinance No. 25 by allowing existing municipal ordinances to continue in force after conversion.
• Statutory Construction and Local Autonomy: Petitioner argued that any doubt in the application of the statute should be resolved in favor of legislative intent and the constitutional principle of local autonomy.

• Validity of the Tax Demand: Whether the CA was correct in ruling that the City of Pasig had no valid basis for its imposition of franchise tax for the period 1996 to 1999.

• Validity of the Tax Demand: Yes. The CA correctly ruled that the City of Pasig had no valid basis, as the ordinance was void ab initio and its nullity was not cured by the municipality's conversion into a city.

• Validity of the Tax Demand: Under the LGC, municipalities are prohibited from levying taxes specifically allocated to provinces, such as the franchise tax. Section 32 of Municipal Ordinance No. 25 was enacted when Pasig was a municipality lacking the authority to impose a franchise tax, rendering it void ab initio. The conversion of Pasig into a city did not remove the original infirmity of the ordinance. A void ordinance produces no legal effect and cannot be enforced. Furthermore, Section 45 of R.A. No. 7829, which allowed existing municipal ordinances to continue in force, contemplates valid and legal ordinances. A void ordinance cannot legally exist and thus falls outside the provision's scope. The invocation of local autonomy fails because local fiscal autonomy is not absolute and is subject to limitations imposed by Congress. Any ambiguity in granting taxing powers must be resolved against the local government unit.

• Void ab initio ordinances — An ordinance enacted without statutory authority is void from the beginning and produces no legal effect. The conversion of the local government unit into one possessing the requisite authority does not cure the defect or breathe life into the void ordinance.
• Local Fiscal Autonomy — The constitutional policy of local fiscal autonomy is not absolute and does not provide unfettered authority to tax. Congress may provide limitations on the exercise of taxing powers, and any ambiguity in granting such powers must be resolved against the local government unit.

• "A franchise tax levied by a municipality is, thus, null and void. The nullity is not cured by the subsequent conversion of the municipality into a city." — This passage from the opening paragraph succinctly states the core ruling of the case.
• "A void ordinance, or provision thereof, is what it is - a nullity that produces no legal effect. It cannot be enforced; and no right could spring forth from it." — This defines the legal effect of a void ordinance in the context of local taxation.

• San Miguel Corporation vs. Municipal Council — Cited to support the doctrine that the conversion of a municipality into a city does not remove the original infirmity of a void ordinance.
• Arabay, Inc. vs. Court of First Instance of Zamboanga del Norte — Followed to establish that taxes paid under a void municipal ordinance cannot be retained even after the municipality's conversion into a city, and a refund was ordered.
• Demaala vs. Commission on Audit — Cited for the principle that ambiguity in laws concerning local taxing powers may be resolved in favor of fiscal autonomy, but also that ambiguity in granting taxing powers must be resolved against the local government unit.
• Icard vs. City Council of Baguio — Cited to support the rule that doubts or ambiguities in the grant of taxation powers must be resolved against the local government unit.

• Section 137, Local Government Code of 1991 — Authorizes provinces to impose a franchise tax on businesses enjoying a franchise.
• Section 142, Local Government Code of 1991 — Prohibits municipalities from levying taxes, fees, and charges otherwise levied by provinces.
• Section 151, Local Government Code of 1991 — Empowers cities to levy taxes, fees, and charges which provinces or municipalities may impose.
• Section 45, Republic Act No. 7829 — Provides that existing municipal ordinances shall continue to be in force within the City of Pasig until the Sangguniang Panlungsod provides otherwise; interpreted to apply only to valid ordinances.
• Article 5, Civil Code — Provides that acts executed against the provisions of mandatory or prohibitory laws shall be void.
• Article X, Section 5, 1987 Constitution — Grants local government units the power to create their own sources of revenue and levy taxes subject to guidelines and limitations provided by Congress.

Presbitero J. Velasco, Jr., Lucas P. Bersamin, Marvic M.V.F. Leonen, Alexander G. Gesmundo