National Power Corporation vs. Province of Quezon and Municipality of Pagbilao

A contractual assumption of another's tax liability, without actual, direct, and exclusive use and possession of the property, does not confer the legal interest required to protest a real property tax assessment; and a claim for tax exemption does not obviate the necessity of prior payment under protest.

The Province of Quezon assessed Mirant Pagbilao Corporation (Mirant) ₱1.5 Billion in unpaid real property taxes for machineries in its Pagbilao power plant. Napocor, which had entered into a Build-Operate-Transfer (BOT) Agreement with Mirant, protested the assessment before the Local Board of Assessment Appeals (LBAA), claiming tax exemptions under Sections 234(c) and (e) of the Local Government Code (LGC) and alternative tax privileges. The LBAA dismissed the protest for failure to pay the tax under protest. The Central Board of Assessment Appeals (CBAA) dismissed the appeal on the merits, finding no entitlement to the exemptions, although it agreed with Napocor that payment under protest was unnecessary for exemption claims. The Court of Tax Appeals (CTA) en banc affirmed the CBAA. In a July 15, 2009 Decision, the Supreme Court denied Napocor's petition, ruling that Napocor lacked legal standing to protest the assessment because it was neither the owner nor the beneficial user of the machineries. Napocor filed the present motion for reconsideration, asserting beneficial ownership and reiterating its exemption claims, while the Philippine Independent Power Producers Association, Inc. (PIPPA) sought to intervene.

• The Tax Assessment: The Province of Quezon assessed Mirant ₱1.5 Billion in unpaid real property taxes for machineries located in its power plant in Pagbilao, Quezon. Napocor, not Mirant, protested the assessment before the LBAA.
• The BOT Agreement: Napocor and Mirant entered into a Build-Operate-Transfer (BOT) Agreement (Energy Conversion Agreement). Under this agreement, Mirant provided the funds for construction, owned the machineries, and operated the power plant. Napocor was authorized to supervise construction and operation, was obligated to pay all taxes incurred, and would acquire ownership of the plant after 25 years.
• Administrative and Judicial Appeals: The LBAA dismissed Napocor's protest for failure to pay the tax under protest as required by Section 252 of the LGC. The CBAA affirmed the dismissal on the merits, finding that Napocor failed to meet the requirements for tax exemption under Section 234 of the LGC, although it agreed with Napocor that payment under protest was unnecessary when claiming exemption. The CTA en banc affirmed the CBAA.
• Supreme Court Decision: In its July 15, 2009 Decision, the Supreme Court denied Napocor's petition, holding that Napocor lacked legal interest to protest the assessment because it did not have actual, direct, and exclusive use of the machineries, and its contractual assumption of tax liability did not make it principally liable for the tax enforceable by the local government unit.
• Motion for Reconsideration: Napocor filed a motion for reconsideration, arguing it was the beneficial owner of the machineries and that Mirant only held naked title as security. It also moved to refer the case to the Court En Banc. PIPPA sought to intervene, claiming that the decision would affect its members who had executed similar BOT agreements with Napocor.

• Beneficial Ownership: Petitioner argued that it is the beneficial owner of the subject machineries, with Mirant retaining merely a naked title to secure certain obligations. Petitioner likened the BOT Agreement to a financing arrangement under Article 1503 of the Civil Code, where the seller's retention of ownership is deemed merely a security interest.
• Contractual Assumption of Liability: Petitioner maintained that its contractual assumption of tax liability under the BOT Agreement vests it with sufficient legal interest because it is actually, directly, and materially affected by the assessment.
• Referral to the En Banc: Petitioner argued that the issues raised have far-reaching consequences in the power industry and the country’s economy, warranting the attention of the Court En Banc.
• Exemption from Payment Under Protest: (As adopted by the CBAA and CTA) Petitioner contended that Section 252 of the LGC requiring payment under protest applies only when questioning the reasonableness or excessiveness of an assessment, not when claiming exemption from tax.

• Legal Interest to Protest: Whether Napocor possesses the requisite legal interest to protest the real property tax assessment given its BOT Agreement with Mirant.
• Payment Under Protest: Whether a taxpayer claiming tax exemption must comply with the requirement of payment under protest under Section 252 of the LGC before appealing to the LBAA.

• Legal Interest to Protest: The protest was invalid because Napocor lacked the requisite legal interest. A BOT agreement is sui generis and not a mere financing arrangement under Article 1503 of the Civil Code; the private sector proponent (Mirant) owns and operates the facility to recover costs and earn profits. Mirant has actual, direct, and exclusive ownership and use, while Napocor's interest is merely contingent. Furthermore, contractual assumption of tax liability does not confer legal interest enforceable against the local government unit, which is a stranger to the BOT contract under the principle of relativity of contracts.
• Payment Under Protest: Payment under protest is mandatory even when claiming tax exemption. A claim for exemption questions the correctness of the assessment, not the assessor's authority to assess. Sections 252 and 226 of the LGC provide successive administrative remedies; an appeal to the LBAA under Section 226 is premature without prior payment under protest and denial by the local treasurer under Section 252.

• Legal Interest in Real Property Taxation — Defined as an interest in property or a claim cognizable at law, equivalent to that of a legal owner who has legal title to the property. A mere contractual assumption of another's tax liability, without actual, direct, and exclusive use and possession of the property, does not constitute legal interest sufficient to protest a tax assessment.
• Nature of Build-Operate-Transfer (BOT) Agreements — A BOT agreement is sui generis, distinct from ordinary financing arrangements or contracts of sale. The private sector proponent constructs, operates, and manages the project at its own cost, assuming risks and incurring costs for its own account, with complete ownership (both legal and beneficial) during the agreed period. The government agency's interest is contingent until the transfer date.
• Payment Under Protest Requirement — A claim for tax exemption does not question the assessor's authority but merely the correctness of the assessment. Therefore, the taxpayer must first pay the tax under protest before appealing to the LBAA. Sections 252 and 226 of the LGC are successive remedies; the "action" of the assessor appealable to the LBAA refers to the denial of the protest filed under Section 252.

• "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."
• "The rights and obligations arising from the BOT Agreement between Napocor and Mirant were of no legal interest to the tax collector – the Province of Quezon – which is charged with the performance of independent duties under the LGC."
• "Like Olivarez, Napocor, by claiming exemption from realty taxation, is simply raising a question of the correctness of the assessment. A claim for tax exemption, whether full or partial, does not question the authority of local assessor to assess real property tax."

• Napocor v. CBAA, G.R. No. 171470, January 30, 2009 — Followed. Defined the sui generis nature of BOT agreements, establishing that the private proponent is the actual, direct, and exclusive owner-user of the machineries during the BOT period.
• Tatad v. Garcia, 313 Phil. 296 (1995) — Followed. Declared that under BOT agreements, the private corporations/investors are the owners of the facility or machinery concerned.
• Ty v. Trampe, 321 Phil. 81 (1995) — Distinguished. Held that payment under protest is not required when the taxpayer questions the very authority or validity of the assessor's action (a legal question), not merely the correctness of the assessment.
• Olivarez v. Marquez, G.R. No. 155591, September 22, 2004 — Followed. Held that claims involving the correctness of assessments (including exemptions) are questions of fact that must be brought to the LBAA, requiring prior payment under protest.
• Baguio v. Busuego, 188 Phil. 218 (1980) — Followed. Contractual assumption of tax liability alone is insufficient to make one liable for taxes; it must be supplemented by an interest in and beneficial use of the property.
• Lim v. Manila, G.R. No. 90639, February 21, 1990 — Followed. Same principle as Baguio v. Busuego regarding contractual assumption of tax liability.

• Section 226, Local Government Code — Governs appeals to the Local Board of Assessment Appeals. Limits the right to appeal to the "owner or person having legal interest in the property." Read in conjunction with Section 252(d); the "action" appealable to the LBAA is the denial of the protest by the local treasurer.
• Section 234(c) and (e), Local Government Code — Exempts machineries actually, directly, and exclusively used by GOCCs engaged in electric power generation/transmission, and machinery used for pollution control, from real property tax. Napocor failed to satisfy the actual, direct, and exclusive use requirement.
• Section 252, Local Government Code — Requires payment under protest before a protest is entertained. Applied to Napocor's claim for exemption, as such a claim questions the correctness of the assessment, not the assessor's authority.
• Article 1503, Civil Code — Reserves ownership to the seller until conditions are fulfilled. Held inapplicable to BOT agreements, which are sui generis and not mere contracts of sale.
• Article 1311, Civil Code — Principle of relativity of contracts. Applied to bar the Province of Quezon from enforcing the BOT Agreement's tax assumption clause, as it is a third party to the contract.

Conchita Carpio Morales, Teresita J. Leonardo-De Castro, Roberto A. Abad, Jose P. Perez