National Power Corporation vs. Central Board of Assessment Appeals

A government-owned or controlled corporation's real property tax exemption under Section 234(c) of the Local Government Code cannot extend to machineries and equipment owned, operated, and used by a private-sector BOT project proponent, because the exemption requires that the GOCC itself be the actual, direct, and exclusive user of the properties, and tax exemption is a personal privilege that is not transferable through contract.

NAPOCOR is a government-owned and controlled corporation (GOCC) engaged in the generation and transmission of electric power, mandated to carry out the total electrification of the country. On January 11, 1993, First Private Power Corporation (FPPC) entered into a Build-Operate-Transfer (BOT) agreement with NAPOCOR for the construction of a 215-megawatt diesel power plant in Bauang, La Union. Under an Accession Undertaking, Bauang Private Power Corporation (BPPC) was created to own, manage, and operate the power plant and assume FPPC's obligations under the BOT agreement. The BOT framework, as defined in Republic Act No. 6957 as amended by Republic Act No. 7718, authorizes a private-sector project proponent to construct, finance, operate, and maintain an infrastructure facility for a fixed term, recovering its investment through tolls, fees, and charges, before transferring the facility to the government agency without additional cost. Section 234(c) of the Local Government Code exempts from real property tax all machineries and equipment actually, directly, and exclusively used by GOCCs engaged in the generation and transmission of electric power.

On January 11, 1993, First Private Power Corporation (FPPC) entered into a Build-Operate-Transfer (BOT) agreement with NAPOCOR for the construction of a 215-megawatt diesel power plant in Payocpoc, Bauang, La Union. Under an Accession Undertaking, Bauang Private Power Corporation (BPPC) was created to own, manage, and operate the power plant and to assume FPPC's obligations under the BOT agreement. For a fee, BPPC would convert NAPOCOR's supplied diesel fuel into electricity and deliver the product to NAPOCOR. The BOT agreement provided that NAPOCOR would make the site available to BPPC at no cost and would be responsible for payment of all real estate taxes and assessments on the site, buildings, and improvements. Until the Transfer Date, BPPC would own the power station and all fixtures, machinery, and equipment, and would operate and manage the station for the purpose of converting NAPOCOR's fuel into electricity. NAPOCOR would supply all fuel at its own cost and take all electricity generated, paying BPPC fees as provided in the agreement. On the Transfer Date, the power station would be transferred to NAPOCOR without payment of any compensation.

The Officer-in-Charge of the Municipal Assessor's Office of Bauang initially issued Declarations of Real Property Nos. 25016 and 25022 to 25029 declaring BPPC's machineries and equipment as tax-exempt. The municipality questioned this before the Bureau of Local Government Finance (BLGF), whose Deputy Executive Director ruled that the machineries and equipment were subject to real property tax and directed the Assessors' Office to take appropriate action. Revised Tax Declaration Nos. 30026 to 30033 and 30337 were thereupon issued, cancelling the earlier declarations. On August 7, 1998, BPPC's Vice-President and Plant Manager received a Notice of Assessment and Tax Bill assessing the machineries and equipment in the total sum of ₱288,582,848.00 for the 1995–1998 period, exclusive of two percent interest on unpaid amounts.

On October 5, 1998, NAPOCOR filed a petition with the Local Board of Assessment Appeals (LBAA) seeking to declare the machineries exempt from real property tax retroactive to 1995 under Section 234(c) of the Local Government Code, and to have them dropped from the assessment roll pursuant to Section 206 of the same Code. The LBAA denied the petition on October 26, 2001, finding that BPPC, a non-government entity, owned, maintained, and operated the machineries and equipment, and that the contractual assumption of tax liability between NAPOCOR and BPPC could not determine liability to the government. NAPOCOR appealed to the Central Board of Assessment Appeals (CBAA), where BPPC moved to intervene. The CBAA dismissed the appeal, applying dictionary definitions of "actually," "directly," and "exclusively" to conclude that BPPC was the actual, direct, and exclusive user of the machineries and equipment.

NAPOCOR and BPPC filed separate petitions for review with the Court of Tax Appeals (CTA), which were consolidated. The CTA dismissed both petitions on February 13, 2006, holding that NAPOCOR lacked legal personality to question the assessment because it was not the registered owner of the machineries, that BPPC's intervention was procedurally defective for failure to post an appeal bond, and that BPPC was the actual, direct, and exclusive user of the machineries under the BOT agreement. The CTA further ruled that tax exemption cannot be agreed upon by contract and is not transferable, being a personal privilege that must be strictly construed. BPPC's separate petition to the Supreme Court (G.R. No. 173811) was denied by the First Division on October 4, 2006, and became final on April 3, 2007. NAPOCOR's petition (G.R. No. 171470) is the present case. In the interim, the machineries and equipment were sold at public auction to the Provincial Government of La Union, prompting NAPOCOR to file a Supplemental Petition raising concerns about the public interest implications of the sale.

• Beneficial Ownership and Actual Use: NAPOCOR argued that the BOT agreement is a financing arrangement where it is the beneficial owner and actual, direct, and exclusive user of the power plant, while BPPC is merely the lender or financier that retains legal ownership until full payment; any BPPC activity is undertaken on NAPOCOR's behalf as a contractor.
• Payment Scheme as Consistent with Beneficial Ownership: NAPOCOR maintained that its payment of energy fees, fixed operating fees, and other infrastructure fees to BPPC is not inconsistent with its claimed beneficial ownership and actual use, since the collection of fees is the repayment scheme prescribed by Section 6 of Republic Act No. 6957, as amended by Republic Act No. 7718, and its amortizations over the 15-year cooperation period constitute full payment warranting transfer of ownership without additional compensation; it further cited Republic Act No. 9136, which booked the power plant as NAPOCOR's asset for privatization purposes.
• Applicability of Tax Exemption to BOT Projects: NAPOCOR contended that its tax exemption should apply to a BOT project, given the conditions that gave rise to the BOT law and its own mandate to provide electricity nationwide; BOT projects are government projects where the private sector participates to provide heavy initial financial requirements, and Congress specifically considered NAPOCOR's situation in granting tax exemption to machineries and equipment used in power generation and distribution.
• Harmonious Statutory Construction: NAPOCOR argued that in interpreting Section 234(c) of the LGC, related statutes must be considered and harmonized; specifically, Section 234(c) was enacted to restore NAPOCOR's real property tax exemption so it can perform its public function, while the BOT law authorized NAPOCOR to enter into BOT contracts, and the tax exemption must be given effect as the only legal and cogent way of harmonizing these laws.
• Lower Assessment Level: NAPOCOR asserted that, assuming the power plant is taxable, the machineries and equipment should be classified as "special" under Section 216 of the LGC, subject to a 10% assessment level under Section 218(d), rather than as commercial or industrial properties subject to an 80% assessment rate.
• Public Interest and Beneficial Ownership (Supplemental Petition): NAPOCOR argued that as a government instrumentality whose foreign and domestic indebtedness are guaranteed by the national government, it is the beneficial owner of the power plant and thus exempt from real property taxes, and that the CTA's dismissal led to the sale of the power plant to the Provincial Government of La Union, seriously violating NAPOCOR's statutory mandate to carry out total electrification.

• NAPOCOR as Interloper: Respondent local government units claimed that NAPOCOR is an interloper in the issue of BPPC's real estate tax liabilities, as it is not the registered owner of the machineries and equipment and has no legal right, title, or interest over these properties until the Transfer Date.
• BPPC as Actual User: Respondents maintained that BPPC, a private entity and not a GOCC, is the actual, direct, and exclusive user of the machineries and equipment, having employed them to generate electricity sold to NAPOCOR, and that the exemption under Section 234(c) of the LGC therefore does not apply.

• Actual, Direct, and Exclusive Use: Whether NAPOCOR is the actual, direct, and exclusive user of the machineries and equipment in the Bauang diesel power plant for purposes of claiming real property tax exemption under Section 234(c) of the LGC.
• Transferability of Tax Exemption: Whether NAPOCOR's tax-exempt status can be passed on to its BOT partner, BPPC, through the BOT agreement.
• Statutory Harmonization: Whether Section 234(c) of the LGC must be construed in harmony with NAPOCOR's charter and the BOT Law to uphold the claimed exemption.
• Assessment Level: Whether the machineries and equipment should be classified as "special" subject to a 10% assessment level under Sections 216 and 218(d) of the LGC, rather than as commercial or industrial properties subject to an 80% assessment rate.
• Public Interest Considerations: Whether practical consequences and public interest concerns warrant a different treatment of the tax exemption claim.

• Actual, Direct, and Exclusive Use: No. BPPC, not NAPOCOR, is the actual, direct, and exclusive user of the machineries and equipment during the BOT cooperation period, as BPPC owns, operates, and manages the power plant and employs the machineries to generate electricity for sale to NAPOCOR.
• Transferability of Tax Exemption: No. Tax exemption is a personal privilege that is not transferable and cannot be agreed upon by mere contract between parties; it must be expressly granted by the Constitution, statute, or franchise, and the contractual undertaking between NAPOCOR and BPPC does not bind the local government unit.
• Statutory Harmonization: No. Section 234(c) of the LGC is clear and unambiguous, and the BOT law's concept of a BOT arrangement confirms that the private-sector proponent owns, operates, and uses the project facilities during the cooperation period; no harmonization can override the express requirement of actual, direct, and exclusive use by a GOCC.
• Assessment Level: No. The basis for the 10% assessment level under Sections 216 and 218(d) is the same as the claimed tax exemption—actual, direct, and exclusive use by a GOCC—and since that basis was not established, the lower assessment level does not apply.
• Public Interest Considerations: No. Practical consequences and non-legal considerations cannot override the application of clear provisions of law and settled jurisprudence; local government units have their own constitutional interests in collecting real property taxes.

• Actual, Direct, and Exclusive Use: The exemption under Section 234(c) of the LGC requires three elements: (a) machineries and equipment; (b) actually, directly, and exclusively used by; (c) a GOCC engaged in the generation and transmission of electric power. NAPOCOR itself admitted BPPC's ownership of the machineries and equipment, as confirmed by Section 2.08 of the BOT agreement. The critical issue was therefore use, not ownership. NAPOCOR characterized the BOT agreement as a mere financing arrangement where it was the actual user and BPPC was the financier. This characterization was belied by the BOT law's definition of a build-operate-and-transfer arrangement, under which the project proponent undertakes construction including financing, operates and maintains the facility over a fixed term, charges appropriate fees to recover its investment, and transfers the facility to the government agency at the end of the term. The parties' BOT agreement fully conformed to this concept: BPPC provided the funds, constructed the power plant, operated and managed it, used its machineries and equipment, and received payment under a defined compensation scheme. BPPC was also responsible for any defect in the machineries and equipment. A BOT arrangement is sui generis and different from a simple financing arrangement where funds are advanced to a borrower who owns the project, or from an arrangement where a government agency borrows funds and commissions the lender to run the project as its agent. BPPC's ownership and use were actual, direct, and immediate, while NAPOCOR's was contingent and, at this stage of the BOT agreement, insufficient to support the claimed exemption. The deviation in cost recovery—selling electricity to NAPOCOR rather than to facility users—was dictated by the structure of the power industry and did not change the BOT nature of the transaction.

• Transferability of Tax Exemption: The CTA correctly ruled that tax exemption cannot be agreed upon by mere contract between the parties, as it must be expressly granted by the Constitution, statute, or franchise. A tax exemption, when granted, is a personal privilege that is not transferable and must be strictly construed. The contractual undertaking in the BOT agreement whereby NAPOCOR assumed responsibility for BPPC's real property taxes is an arrangement between the parties that cannot bind the local government unit, which is not privy to the contract. This principle was established in FELS Energy, Inc. vs. The Province of Batangas, where the Court held that the covenant between NAPOCOR and its contract partner does not bind a third person not privy thereto.

• Statutory Harmonization: Section 234(c) of the LGC is clear and unambiguous in its terms. The strictissimi juris standard of construction applicable to tax exemptions requires that the claimant show beyond doubt, with clear and convincing evidence, the factual basis for the claim. Taxation is the rule and exemption is the exception; the law does not look with favor on tax exemptions, and the entity seeking to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted. The BOT law's own definition of a BOT arrangement confirms that the private-sector proponent owns, operates, and uses the project facilities during the cooperation period. No harmonization of Section 234(c) with NAPOCOR's charter or the BOT law can override the express statutory requirement that the GOCC itself be the actual, direct, and exclusive user.

• Assessment Level: The basis for applying the 10% assessment level under Sections 216 and 218(d) of the LGC is the same as the basis for the claimed tax exemption—actual, direct, and exclusive use by a GOCC engaged in the generation and transmission of electric power. Since that basis was not established, there is no ground to apply the lower assessment level. The lower tribunals correctly found that BPPC, as a private entity and not a GOCC, is not entitled to the 10% assessment level.

• Public Interest Considerations: NAPOCOR's supplemental petition raised concerns about the sale of the machineries and equipment at public auction and the alleged detriment to the public interest if the levy, sale, and transfer were completed. While these concerns were recognized, they are not relevant to the disposition of the legal issues. The case involves the application of clear provisions of law and settled jurisprudence, and should not be treated differently solely because of non-legal or practical considerations. Local government real property taxation has constitutional underpinnings based on Section 5, Article X of the Constitution, which guarantees the power of local government units to create their own sources of revenue and levy taxes. The right of local government units to collect taxes due must be upheld to avoid severe tax erosion. The Judiciary's role is limited to interpreting the law; the other branches of government, including NAPOCOR and the respondent local government unit, are better positioned to address feared practical consequences.

• Strict Construction of Tax Exemptions (Strictissimi Juris) — Taxation is the rule and exemption is the exception. The law does not look with favor on tax exemptions, and the entity seeking exemption must justify it by words too plain to be mistaken and too categorical to be misinterpreted. The claimant must show beyond doubt, with clear and convincing evidence, the factual basis for the claim. Doubts are resolved in favor of taxing government units. In this case, NAPOCOR failed to meet this standard because it was not the actual, direct, and exclusive user of the machineries and equipment as required by Section 234(c) of the LGC.

• Non-Transferability of Tax Exemption — A tax exemption is a personal privilege that is not transferable. It cannot be agreed upon by mere contract between parties and must be expressly granted by the Constitution, statute, or franchise. A contractual undertaking between a tax-exempt GOCC and a private corporation, whereby the GOCC assumes the private corporation's tax liability, does not bind the local government unit, which is not privy to the contract. In this case, NAPOCOR could not pass its tax-exempt status to BPPC through the BOT agreement.

• Sui Generis Nature of BOT Arrangements — A BOT arrangement is sui generis and different from a simple financing arrangement. Under a BOT agreement, the private-sector project proponent constructs the project at its own cost, operates and manages it over a fixed term to recover its investment and earn profits, and transfers ownership to the government agency at the end of the term without additional compensation. The private-sector proponent goes into business for itself, assuming risks and incurring costs for its own account. This is distinct from a loan arrangement where the borrower owns the project from the beginning and the lender merely holds collateral security, or from an arrangement where a government agency commissions a lender to run a project as its agent. In this case, the BOT agreement's terms confirmed BPPC's complete ownership—both legal and beneficial—of the project during the cooperation period.

• "The mere undertaking of petitioner NPC under Section 10.1 of the Agreement, that it shall be responsible for the payment of all real estate taxes and assessments, does not justify the exemption. The privilege granted to petitioner NPC cannot be extended to FELS. The covenant is between FELS and NPC and does not bind a third person not privy thereto, in this case, the Province of Batangas." — This passage, quoted from FELS Energy, Inc. vs. The Province of Batangas, articulates the principle that a contractual assumption of tax liability between a GOCC and a private partner cannot bind the local government unit and cannot serve as the basis for tax exemption.

• "In this sense, a BOT arrangement is sui generis and is different from the usual financing arrangements where funds are advanced to a borrower who uses the funds to establish a project that it owns, subject only to a collateral security arrangement to guard against the nonpayment of the loan." — This passage defines the essential character of a BOT arrangement and distinguishes it from ordinary financing, establishing that the private-sector proponent owns and operates the project for its own account during the cooperation period.

• "The power to tax is the most potent instrument to raise the needed revenues to finance and support myriad activities of the 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." — This passage underscores the constitutional dimension of local government taxation and the Court's sensitivity to the interests of local government units in collecting real property taxes.

• FELS Energy, Inc. vs. The Province of Batangas, G.R. No. 168557, February 16, 2007, 516 SCRA 186 — Controlling precedent followed. The Court held that NAPOCOR was not the actual, direct, and exclusive user of a barge used by FELS Energy to generate electricity under an agreement with NAPOCOR, and that NAPOCOR's contractual undertaking to pay FELS's real estate taxes did not justify exemption and could not bind the Province of Batangas. The same reasoning was applied to the present case.

• NAPOCOR vs. City of Cabanatuan, G.R. No. 149110, April 9, 2003, 401 SCRA 259 — Cited for the strictissimi juris standard of construction applicable to tax exemptions, requiring the claimant to show beyond doubt, with clear and convincing evidence, the factual basis for the claimed exemption.

• Velez vs. Locsin, 55 SCRA 152 — Cited by the CBAA for the definition of "use" as meaning "to employ for the attainment of some purpose or end," applied to determine whether BPPC or NAPOCOR was the actual user of the machineries and equipment.

• Section 234(c), Republic Act No. 7160 (Local Government Code) — Exempts from real property tax all machineries and equipment that are actually, directly, and exclusively used by local water districts and GOCCs engaged in the supply and distribution of water and/or generation and transmission of electric power. Applied to deny NAPOCOR's claim because BPPC, a private corporation, was the actual, direct, and exclusive user of the machineries and equipment.

• Section 206, Republic Act No. 7160 — Provides the procedure for claiming tax exemption, requiring the filing of sufficient documentary evidence with the provincial, city, or municipal assessor within thirty days from the date of declaration of real property. Cited by the CTA to hold that exemption is an evidentiary matter for the assessors, not for the LBAA, and that NAPOCOR bypassed available administrative remedies.

• Section 216, Republic Act No. 7160 — Classifies as "special" real property those lands, buildings, and improvements actually, directly, and exclusively used by local water districts and GOCCs rendering essential public services in the supply and distribution of water and/or generation and transmission of electric power. Applied to deny the 10% assessment level because the same requirement of actual, direct, and exclusive use by a GOCC was not met.

• Section 218(d), Republic Act No. 7160 — Fixes the assessment level for special classes of real property at 10% for GOCCs engaged in the supply and distribution of water and/or generation and transmission of electric power. Applied in conjunction with Section 216; the lower assessment level was denied for the same reason as the tax exemption claim.

• Section 226, Republic Act No. 7160 — Provides the remedy from an assessment, allowing any owner or person having legal interest in the property to appeal to the Board of Assessment Appeals within sixty days from receipt of the written notice of assessment. Applied by the CTA to hold that NAPOCOR was not the proper party to file the appeal and that its petition was an inappropriate remedy.

• Section 6, Republic Act No. 6957, as amended by Republic Act No. 7718 (BOT Law) — Defines the repayment scheme for BOT projects, authorizing the project proponent to charge and collect reasonable tolls, fees, and rentals. Cited by NAPOCOR to argue that its payment of fees to BPPC was consistent with its claimed beneficial ownership; the Court rejected this argument as inconsistent with the BOT concept.

• Section 5, Article X, 1987 Constitution — Guarantees each local government unit the power to create its own sources of revenue and levy taxes, fees, and charges, consistent with the basic policy of local autonomy. Cited to underscore the constitutional dimension of local government real property taxation and the Court's obligation to uphold the right of local government units to collect taxes.

Leonardo A. Quisumbing (Associate Justice, Chairperson), Renato C. Corona (Associate Justice, designated additional member per Special Order No. 558 dated January 15, 2009), Conchita Carpio Morales (Associate Justice), and Dante O. Tinga (Associate Justice).