National Power Corporation vs. Province of Pangasinan

A government-owned and controlled corporation (GOCC) cannot claim real property tax exemptions under Sections 234(c) and 216 of Republic Act No. 7160 (Local Government Code) for machinery and equipment that it neither owns nor actually, directly, and exclusively uses, even if it has contractually assumed tax payment obligations under a Build-Operate-Transfer (BOT) arrangement. The privilege of tax exemption strictly applies only to the entity meeting all statutory requirements and cannot be extended to or exercised for the benefit of a private entity that is the actual owner and user of the subject properties.

The case arises from the implementation of the Sual Coal-Fired Thermal Power Plant through a public-private partnership under the Build-Operate-Transfer (BOT) scheme. The National Power Corporation (NPC), a GOCC mandated to generate and transmit electricity, engaged a private contractor to construct, operate, and maintain the power plant. This arrangement raised fundamental issues regarding the application of real property tax exemptions granted to GOCCs under the Local Government Code when the actual ownership, operation, and beneficial use of the generating facilities remain with the private contractor during the cooperation period prior to transfer to the government.

• National Power Corporation (NPC) is a government-owned and controlled corporation created under Republic Act No. 6395, mandated to undertake electricity production and transmission nationwide.
• On May 20, 1994, NPC entered into an Energy Conversion Agreement (ECA) with CEPA Pangasinan Electric Limited (later Mirant Sual Corporation/Team Energy), a private corporation, for the construction, operation, and maintenance of the Sual Coal-Fired Thermal Power Plant under a Build-Operate-Transfer (BOT) arrangement.
• Under the ECA, Mirant agreed to supply a coal-fired thermal power station to NPC on a BOT basis, with Mirant owning the power station, fixtures, fittings, machinery, and equipment until the Transfer Date, when ownership would be transferred to NPC without compensation; Article 5 of the ECA provided that Mirant had the responsibility to manage, operate, and maintain the power plant until the Transfer Date.
• Paragraph 11.1, Article 11 of the ECA stipulated that NPC shall be responsible for the payment of all real estate taxes and assessments on the site, buildings, improvements, infrastructure, and power station.
• On December 3, 1994, NPC entered into a Memorandum of Agreement (MOA) with Pangasinan Electric Corporation, the Province of Pangasinan, the Municipality of Sual, and Barangay Pangascasan, wherein NPC agreed to conform with the Local Government Code regulations on the payment of realty tax upon project site acquisition.
• The private contractor started operating the power plant in 1998, and NPC paid real property taxes from 1998 up to the first quarter of 2003 for the land, buildings, machinery, and equipment declared in the name of Mirant under Tax Declaration No. 3694.
• In the second quarter of 2003, NPC stopped paying real property taxes, invoking exemption under Section 234(c) of R.A. No. 7160 and claiming that the machinery and equipment were actually, directly, and exclusively used for power generation, or alternatively, that the properties be classified as special under Section 216 with a lower assessment level of ten percent instead of eighty percent.
• The Municipal Treasurer of Sual issued a Notice of Assessment dated September 10, 2003 demanding payment of real property taxes, prompting NPC to file administrative protests claiming exemption under Sections 234(c) and 234(e), special classification under Section 216, and depreciation allowance under Section 225 of R.A. No. 7160.
• The records established that during the subject taxable period, Mirant was the actual, direct, exclusive, and beneficial owner and user of the power station, machineries, and equipment, operating and maintaining the facility pursuant to the BOT arrangement, while NPC merely purchased the electricity generated for distribution to consumers without operating or maintaining the facilities itself.

• NPC argued that it possesses legal interest and personality to question the assessment and claim exemptions as the project owner under the ECA, asserting that beneficial use—not merely ownership—creates tax liability and legal standing under Section 217 of R.A. No. 7160, which states that real property is assessed based on actual use regardless of ownership.
• NPC contended that the machinery and equipment were actually, directly, and exclusively used for the generation and transmission of electric power, thereby qualifying for exemption under Section 234(c) of R.A. No. 7160 as a GOCC engaged in essential public service.
• NPC claimed entitlement to special classification under Section 216 of R.A. No. 7160, which provides for a lower assessment level of ten percent for properties owned and used by GOCCs rendering essential public services in power generation and transmission.
• NPC asserted that it was entitled to the depreciation allowance under Section 225 of R.A. No. 7160 for the machinery and equipment subject of the assessment.
• NPC argued that respondents were estopped from denying its legal interest because the MOA acknowledged NPC's tax responsibilities and the Province had previously accepted tax payments from NPC from 1998 to 2003.
• NPC maintained that Mirant was merely a service contractor employed to construct and operate the power plant to implement NPC's mandate, and that NPC was the beneficial user of the generated electricity for transmission to customers, distinguishing the BOT arrangement from one of independent private ownership.

• The Province of Pangasinan and the Provincial Assessor argued that NPC lacked legal personality to claim exemptions because the subject machinery and equipment were owned by Mirant, a private corporation, and were actually, directly, and exclusively used by Mirant for power generation, not NPC.
• Respondents contended that the BOT arrangement clearly vested ownership and operational control in Mirant until the Transfer Date, making Mirant the actual and beneficial owner, while NPC merely purchased the output (electricity) without using the facilities itself.
• Respondents asserted that NPC's contractual undertaking to pay real property taxes under the ECA and MOA did not create or justify tax exemptions, citing precedent that allowing an exempt entity to use its privilege to favor a non-exempt entity would debase the tax system and circumvent tax laws.
• Respondents argued that NPC was estopped from claiming exemption due to its failure to file a claim within 30 days from the date of declaration under Section 206 of R.A. No. 7160, coupled with its voluntary payment of taxes from 1998 to the first quarter of 2003.
• Respondents maintained that the subject properties could not be classified as special class under Section 216 because they were not owned by a GOCC, and that NPC could not claim the depreciation allowance under Section 225 or the pollution control exemption under Section 234(e) as it was not the owner of the facilities.

• Procedural Issues: Whether the Supreme Court could undertake factual determinations regarding the actual, direct, and exclusive use of the properties for pollution control under Section 234(e) in a petition for review on certiorari under Rule 45 when such endeavor is limited to reviewing errors of law and the evidence presented was insufficient for the Court to make an accurate factual conclusion.
• Substantive Issues: Whether NPC had the legal personality and interest to claim real property tax exemptions under Sections 234(c) and 234(e) of R.A. No. 7160; whether the subject machinery and equipment qualified for special classification and lower assessment under Section 216 of R.A. No. 7160; and whether NPC was entitled to the depreciation allowance under Section 225 of R.A. No. 7160.

• Procedural: The Supreme Court declined to engage in factual determinations regarding the actual use of the properties for pollution control purposes under Section 234(e), noting that such examination of evidence and assessment of probative value is not allowed under a petition for review on certiorari under Rule 45, and that there was a lack of necessary evidence for the Court to make an accurate, valid, and judicious conclusion on the matter.
• Substantive: The Court ruled that NPC lacked legal personality to claim exemptions under Sections 234(c) and 234(e) and privileges under Sections 216 and 225 of R.A. No. 7160 because NPC was neither the owner nor the actual, direct, and exclusive user of the subject machinery and equipment during the taxable period. The BOT arrangement clearly vested ownership, operation, and maintenance in the private contractor (Mirant) until the Transfer Date, making Mirant the beneficial owner and user while NPC merely purchased the generated electricity. The Court held that contractual undertakings to pay taxes do not justify exemptions, and that tax exemptions are strictly construed against the claimant; the privilege of exemption granted to a GOCC cannot be extended to a private entity as this would circumvent tax laws and debase the tax system. The Court affirmed the uniform rulings of the LBAA, CBAA, and CTA denying NPC's claims, emphasizing that taxation is the rule and exemption is the exception, and that the power to tax must be upheld to avoid severe tax erosion and support local government autonomy.

• Taxation is the Rule, Exemption is the Exception — This fundamental principle of taxation mandates that tax exemptions are construed strictly against the claimant and liberally in favor of the taxing authority; the Court applied this doctrine to reject NPC's expansive interpretation of exemptions that would effectively benefit a private contractor, noting that protracted litigation resulting in deprivation of local government revenues must be avoided.
• Strict Construction of Tax Exemptions — Statutory exemptions from taxation must be clear and unambiguous to be recognized, and any doubt must be resolved in favor of the state and against the taxpayer; the Court applied this to determine that NPC failed to satisfy the specific requirements of Sections 234(c) and 216 of R.A. No. 7160, which require the GOCC to be the actual user.
• Actual, Direct, and Exclusive Use Test for GOCC Exemptions — To qualify for exemptions under Sections 234(c) and 216 of the Local Government Code, a GOCC must be the entity that actually, directly, and exclusively uses the real properties for the specified public service (generation and transmission of electric power); mere contractual relationships or beneficial use through purchase of output does not satisfy this test, as the exempted machinery must be the one used by the GOCC itself.
• Build-Operate-Transfer (BOT) Arrangement Characteristics — Under a BOT agreement, the private project proponent constructs the facility at its own cost, owns and operates it during the cooperation period to recover investment and earn profits, and transfers it to the government only after the fixed term; the Court distinguished this from service contracting, emphasizing that ownership and actual use remain with the private proponent during the operational phase, and the government entity is merely a purchaser of the output.
• Beneficial Use Theory in Real Property Taxation — Real property tax liability rests on the owner or the person with beneficial use and possession of the property; while NPC argued this theory to establish standing, the Court found that NPC was not the beneficial user under the BOT arrangement—the private contractor was, as it owned, operated, and maintained the facilities for its own account, assuming risks and incurring costs.

• "Taxation is the rule and exemption is the exception." — The guiding principle reiterated by the Court in resolving the tax exemption claims raised by NPC.
• "The privilege granted to NPC cannot be extended to Mirant. To rule otherwise would be to allow the circumvention of our law on exemptions and grant of privileges." — The Court's rationale for rejecting NPC's claim that its contractual assumption of tax liabilities entitled it to exemptions that would benefit the private contractor.
• "It is important to emphasize that the government-owned and controlled corporation claiming exemption and entitlement to the privilege must be the entity actually, directly, and exclusively using the real properties, and the use must be devoted to the generation and transmission of electric power." — The Court's explanation of the statutory requirements under Sections 234(c) and 216 of R.A. No. 7160.
• "The power to tax is the most potent instrument to raise the 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." — The Court's statement emphasizing the importance of upholding the right of local government units to collect taxes due to avoid severe tax erosion.
• "In a BOT arrangement, the private entity constructs and buys the necessary assets to put up the project and thereafter, operates and manages it during an agreed period that would allow it to recover its basic costs and earn profits until the project's transfer to the government or government-owned and controlled entity. In other words, the private sector proponent goes into business for itself, assuming risks and incurring costs for its account." — The Court's distinction between BOT arrangements and service contracts.

• FELS Energy, Inc. v. The Province of Batangas, 545 Phil. 92 (2007) — Cited as controlling precedent establishing that NPC cannot claim tax exemptions for facilities it does not actually, directly, and exclusively use, and that contractual tax assumptions do not justify exemptions for private contractors.
• National Power Corporation v. Central Board of Assessment Appeals, 597 Phil. 413 (2009) — Cited for the principle that in a BOT arrangement, the private contractor is the actual user of machineries and equipment, and NPC's ownership and use are contingent and insufficient to support tax exemption claims at the operational stage.
• National Power Corporation v. Province of Quezon, 624 Phil. 738 (2010) — Cited for the doctrine that contractual undertakings to pay real property taxes are essentially wrong if used to extend exemption privileges to non-exempt entities, as this would debase the tax system.
• Provincial Assessor of Marinduque v. Hon. Court of Appeals, 605 Phil. 357 (2009) — Cited for the requirement that claims for exemption under Section 234(e) for pollution control equipment must be supported by evidence of actual, direct, and exclusive use for such purposes during the assessment period.
• Carbonell v. Carbonell-Mendes, 762 Phil. 529 (2015) — Cited for the procedural rule that a petition for review on certiorari under Rule 45 does not allow for factual determinations or examination of evidence and assessment of probative value.

• Section 234(c) of Republic Act No. 7160 (Local Government Code of 1991) — Exempts all machineries and equipment 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; the Court strictly construed this provision to require that the claiming GOCC itself be the actual user of the exempted machinery.
• Section 234(e) of Republic Act No. 7160 — Exempts machinery and equipment used for pollution control and environmental protection; the Court noted that NPC lacked evidence and legal personality to claim this exemption as it was not the actual user of the facilities.
• Section 216 of Republic Act No. 7160 — Classifies as special those lands, buildings, and improvements actually, directly and exclusively used for hospitals, cultural, or scientific purposes, or owned and used by local water districts and GOCCs rendering essential public services in water supply or power generation; the Court ruled that ownership and actual use by the GOCC are prerequisites for the lower assessment level.
• Section 217 of Republic Act No. 7160 — Provides that real property shall be classified, valued, and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it; NPC invoked this to argue that beneficial use creates tax liability and standing, but the Court found NPC was not the beneficial user under the BOT arrangement.
• Section 218 of Republic Act No. 7160 — Provides that special classes of real property shall be assessed at a level not exceeding ten percent; cited in relation to Section 216 claims.
• Section 225 of Republic Act No. 7160 — Provides for a depreciation allowance for machinery at a rate not exceeding five percent of original cost per year of use; the Court denied this claim as NPC was not the owner entitled to the allowance.
• Section 206 of Republic Act No. 7160 — Requires claimants of tax exemption to file sufficient documentary evidence within 30 days from the date of declaration; cited by respondents regarding NPC's procedural failure to timely claim exemption.
• Republic Act No. 6395, as amended — The charter of the National Power Corporation; cited to establish NPC's mandate and status as a GOCC engaged in power generation and transmission.
• Republic Act No. 7718 (Build-Operate-Transfer Law) — Defines the BOT contractual arrangement; cited by the Court to explain the nature of the agreement between NPC and Mirant, emphasizing that the private proponent owns, finances, operates, and maintains the facility until transfer.