Province of Misamis Oriental vs. Cagayan Electric Power and Light Company, Inc.

A special statutory franchise containing an "in lieu of all taxes" clause is not implicitly repealed by a subsequent general law granting local government units the power to impose franchise taxes; such tax exemption, being part of a contractual undertaking between the government and the franchisee, remains valid and enforceable against the local taxing authority.

The dispute arose from the conflict between the traditional fiscal incentives granted to public utilities through special franchise laws and the decentralization of taxing powers to local government units under martial law era legislation. Specifically, the issue centered on whether the Local Tax Code, which generally empowered provinces to levy franchise taxes, superseded the specific tax exemption provisions contained in legislative franchises granted to electric power companies, which were intended to serve as inducements for the provision of essential public services in developing areas.

• CEPALCO was granted a legislative franchise on June 17, 1961 under Republic Act No. 3247 to install, operate, and maintain an electric light, heat, and power system in Cagayan de Oro City and its suburbs, which was subsequently amended by R.A. No. 3570 on June 21, 1963 to include Tagoloan and Opol, and further amended by R.A. No. 6020 on August 4, 1969 to include Villanueva and Jasaan.
• Section 3 of these franchise laws uniformly imposed a franchise tax equal to three percentum of gross earnings and contained the critical provision 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," expressly exempting CEPALCO from all other taxes.
• On June 28, 1973, Presidential Decree No. 231, known as the Local Tax Code, was promulgated, with Section 9 authorizing provinces to impose a franchise tax on businesses enjoying franchises at a rate not exceeding one-half of one percent of gross annual receipts realized within the province's territorial jurisdiction.
• Acting under P.D. No. 231, the Province of Misamis Oriental enacted Provincial Revenue Ordinance No. 19, whose Section 12 levied a franchise tax of one-half of one percent on gross annual receipts realized within the province.
• The Provincial Treasurer of Misamis Oriental demanded payment of this provincial franchise tax from CEPALCO, which refused to pay based on its statutory exemption, but subsequently paid the sum of P4,276.28 under protest on May 27, 1974 while appealing the Provincial Fiscal's adverse ruling to the Secretary of Justice.
• The Secretary of Justice reversed the Provincial Fiscal's opinion and ruled in favor of CEPALCO, determining that the provincial tax could not be imposed on a franchise containing an "in lieu of all taxes" clause, and the Secretary of Finance adopted this interpretation in Local Tax Regulation No. 3-75 issued on June 26, 1976.
• The Province filed a complaint for declaratory relief in the Court of First Instance of Misamis Oriental on February 16, 1976, seeking a judicial construction that P.D. No. 231 amended or repealed the exemption in CEPALCO's franchise and a declaration that the exemption was no longer valid.
• The Court of First Instance dismissed the Province's complaint and ordered the return of the P4,276.28 paid under protest, leading to the instant appeal to the Supreme Court.

• The Province argued that the tax exemption granted to CEPALCO under Section 3 of Republic Act No. 6020 was implicitly amended or repealed by the enactment of P.D. No. 231, contending that the general taxing authority granted to provinces under the Local Tax Code should prevail over the special exemption in the franchise.
• The Province maintained that the imposition of the provincial franchise tax on CEPALCO would not subvert the purpose of P.D. No. 231, asserting that the legislative intent of the Local Tax Code was to establish a uniform system of local taxation applicable to all franchise holders without exception.
• The Province contended that CEPALCO is not exempt from paying the provincial franchise tax and that the Court of First Instance committed reversible error in holding otherwise and in ordering the Province to refund the P4,276.28 paid under protest.

• CEPALCO argued that the exemption clause providing that the three percent franchise tax shall be "in lieu of all taxes" remains valid and enforceable, and that P.D. No. 231 contains no provision expressly or impliedly amending or repealing this exemption.
• CEPALCO maintained that under established principles of statutory construction, a special and local statute (the franchise) applicable to a particular case is not repealed by a later statute which is general in its terms and application unless there is a manifest intent to repeal the special law.
• CEPALCO asserted that its franchise is in the nature of a private contract between the government and the corporation, and that the imposition of another franchise tax by the local authority would constitute an impairment of the obligation of contracts.

• Procedural Issues: Whether the Court of First Instance properly dismissed the complaint for declaratory relief and correctly ordered the refund of the tax payment made under protest.
• Substantive Issues: Whether the tax exemption provision in Section 3 of Republic Act No. 6020, which states that the three percent franchise tax shall be "in lieu of all taxes and assessments of whatever authority," was amended or repealed by Section 9 of Presidential Decree No. 231 (the Local Tax Code), thereby authorizing the Province of Misamis Oriental to impose a provincial franchise tax on CEPALCO.

• Procedural: The Supreme Court denied the petition for review and affirmed the decision of the Court of First Instance in toto, holding that the lower court correctly dismissed the complaint for declaratory relief and properly ordered the Province to refund the P4,276.28 paid under protest.
• Substantive: The Court ruled that P.D. No. 231 did not expressly or impliedly repeal the tax exemption in Section 3 of R.A. No. 6020, applying the principle that repeal by implication is not favored and that a special statute (the franchise) is not repealed by a general statute (the Local Tax Code) unless there is manifest incompatibility or clear legislative intent to repeal; the Court held that the "in lieu of all taxes" clause is a valid contractual exemption that protects CEPALCO from the provincial franchise tax, as the franchise constitutes a contract whose impairment is not permitted.

• Implied Repeal — Repeal of statutes by implication is not favored by the courts; to establish that a prior special law has been repealed by a later general law, the repugnancy or incompatibility between the two statutes must be clear and irreconcilable, absent which both statutes must be allowed to stand.
• Special Law versus General Law — A special statute applicable to a particular person or entity is treated as an exception to the general law and is not repealed by the general law unless the legislature evinces a manifest intent to repeal or alter the special statute; the special law continues to govern the particular case while the general law applies to all other cases.
• Franchise as Contract — A legislative franchise granted to a public utility is in the nature of a private contract between the sovereign and the grantee, and the constitutional prohibition against the impairment of the obligation of contracts bars the government, including its local subdivisions, from imposing additional burdens such as taxes beyond those stipulated in the franchise agreement.
• "In Lieu of All Taxes" Clause — A statutory provision in a franchise stating that a specific tax shall be "in lieu of all taxes and assessments of whatever authority" operates as a comprehensive exemption from all other taxes, including subsequent taxes of any nature or authority, and serves as an inducement for the acceptance of the franchise and the rendition of public service.

• "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."
• "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 unless there is manifest intent to repeal or alter the special law."
• "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."
• "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."

• Manila Railroad Co. vs. Rafferty (40 Phil. 224) — Cited as the foundational precedent establishing that repeal by implication is not favored and that a special statute is not repealed by a general statute unless there is manifest intent to repeal.
• Visayan Electric Co. vs. David (49 O.G. [No. 4] 1385) — Cited for upholding the exemption of a franchised corporation from the 5% corporate franchise tax under the Internal Revenue Code based on an "in lieu of all taxes" clause.
• Philippine Railway Co. vs. Collector of Internal Revenue (91 Phil. 35) — Cited for the ruling that an "in lieu of all taxes" provision exempts the franchisee from the corporate franchise tax under Section 259 of the Internal Revenue Code.
• Cotabato Light and Power Co. vs. City of Cotabato (32 SCRA 231) — Cited as precedent upholding exemption based on the "magic words" "shall be in lieu of all taxes" against a municipal tax ordinance.
• Carcar Electric & Ice Plant vs. Collector of Internal Revenue (53 O.G. [No. 4] 1068) — Cited for the principle that tax exemption in a franchise is part of the inducement for public service and that the franchise is a contract.
• Commissioner of Internal Revenue vs. Lingayen Gulf Electric Power Co., Inc. (G.R. No. 23771, August 4, 1988) — Cited as recent precedent affirming exemption under an "in lieu of all taxes" clause from the franchise tax under the National Internal Revenue Code.
• 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 13, 1967), and Guagua Electric Light vs. Collector of Internal Revenue (G.R. No. L-23611, April 24, 1967) — Cited to illustrate the converse rule that exemption is denied where the franchise does not contain the "in-lieu-of-all-taxes" clause.
• Manila Electric Company vs. Vera (67 SCRA 351) — Distinguished as inapplicable because it involved a compensating tax on imported poles, wires, and equipment, not a franchise tax.

• Republic Act No. 3247, Section 3; Republic Act No. 3570, Section 3; Republic Act No. 6020, Section 3 — Cited as the statutory basis for CEPALCO's franchise and the tax exemption clause providing that the 3% franchise tax shall be "in lieu of all taxes and assessments of whatever authority."
• Presidential Decree No. 231 (Local Tax Code), Section 9 — Cited as the general law authorizing provinces to impose franchise taxes on businesses enjoying franchises, which the Province argued had repealed CEPALCO's exemption.
• Provincial Revenue Ordinance No. 19, Section 12 — Cited as the specific tax legislation enacted by the Province of Misamis Oriental imposing the 0.5% franchise tax on gross annual receipts.
• Local Tax Regulation No. 3-75 — Cited as the administrative interpretation by the Secretary of Finance clarifying that Section 9 of P.D. No. 231 applies only to franchises without the "in-lieu-of-all-taxes" proviso.