Ae Ic of the Philippines Court of Tax Appeals Quezon City¥ Soo En on Ae | Ae, et al. vs. C.TEA. Case Ho. 1790 Commissioner of Int#Rnal Reveaub, et al.

AE Ic OF THE PHILIPPINES

CouRT OF TAX APPEALS

QUEZON CITY¥

soo en on ae | ae ; , - ~ . TA Biss DEM. TIGLAG, Ine., Petitioner, - Versus - C.TeA. CASE Ho. 1790

COMMISSIONER OF INT#RNAL

REVEAUB,

DECItsioe

Petitioner appealed from the deeisien of respond- ent Commissioner of Internal Aevenue, dated July 7, 1966, holding it liable for deficieney franchise and per- centage taxes ef #17,311.02 for the period from January 1, 1956 to June 30, 1960. ‘ On February 15, 1924, the Municipal Council of Mabalaceat, Pampanga, passed Resolution No. 16 granting ‘petitioner Hijos de M. figleo, Inc. (formerly Mabalacat yGro-Hlectric Ge., Inc.) a municipal franchise to operate and mainteaia ean eleetric light, heat and power service within the municipality of Mabalacat, subjeet to the provisions of Act io, 667 ef the rhilippine Conmis~- sion, as amended. Among the conditions set forth in said franchise are that petitioner sheuld pay a fran- chise tex of 1% on ite gross earnings for the first twenty (20) years ef its existence and 2% thereof for the next fifteen (15) years; and that the said franchise / 164

DECISION «

STA CAZY Woe 1790

2 Shall be subject to amendsent, alteration or repeal by subsequent act of Congress of the United states! (see par. 11, es. wo, 16, supra). the said franchise, how- ‘aver, does uot exeupt petitioner from the payment of a higher rate of taa.

un December 2, 1999, petitioner's franchise under Said Resolution Ww. 16 expired, out before ite expira- tion, petitioner obtained on November 22, 1959 e new one uneer Sesolution Ho, 42 of the same Municips] Council (Pp. 39-95, LIR rece) wiieh was promptly appreved by, the Provincial Doard of vampenga in ite Aesolution tio, 1978, dated November 23, 1959. On December 1, 1959, a peti-~ tion for approvel of this new frenebise wes filed by petitioner with the Pablie Service Commission, On De- cember 2, 1959, pending the approval of said petition, the seid Commission granted petitioner a “probational authority” to continue the operation of ite eleetric ser- Vice. (On May 29, 1961, petitioner's new franchise was approved by the Public Service Commissioner and on duly 12, 1961, it was also approved by the President of the Philippines.

In a letter dateé February 28, 1961, respondent tkePerrea to as s of the Philippines in the petition for review (ps 1, Celeste Pec.) and on petitioner's mamorandum (p. 33, UsTsd. Pec. ).

Deciglos «

CTA GAS Noe 1790

3 assessed ageinst and demanded from petitioner payment of ©39,529.71 as Seficiency franc) ise tex for the period from May 1, 1)%5 to Jume 30, 1960, inclusive of 25% surcharge, oa the groum that Seetion 259 of the Nation- al loternal Aevenue Code, as smended by Sepublie Act ilo. 39 on Vetober 1, 19 :C, which preseribes a franchise tax of 5% om gress earning. of corporate franchine holders, Rad repealed the franchise tax rate of 2% provided in petitioner's franchise, citing the decision of the Su- preme Court in the tases of Loa Hin cco. Ine v, David and Hoa iia Co. Inc., v. Slaquers, @.8. Sot, L-9616 and Lw1765, Gated vay 25, 1959. (See 105 Phil. 783.)

in a letter dated March 24, 1961, petitioner re~ quested the recousideration of the suid ossessment con- tending, among others, that the 25) surcharge should not be imposed anu that the decision of the Supreme Court in the tioa lia cases is not applicable to the case qt bar. Moreover, in oa letter dated August 17, 1961, petitioner questioned the right of respontent to assess the tax in question on the grount of preseription under section 331 of the National intersal ‘evenue Code.

In his reply of July 19, 1962, respondent conceded that his right to assess the franchise tax prior to January, 1956 het already prescribed and, therefore, re- spondent demanded apon petitioner payment of P21,635.78, instead of $39,529.71, os ceficiency franchise and per-

UBISICK «-

CTA CASE No. 1790 4 Sentage taxes from January 1, 1956 to June 39, 1760, computed as follows:

Total gross receipts per audit ...8640,353.25 le secel ts fron ~~ 1, 1959 @veeeeresere . 542, 552.45

5. franchise tax due thereon Cec ee aR eHOHE SEE HOD #27 9827 057

2. seceipts from Jan. 1, 1960 to Jane 30, 1960 Seeovnvnesevevea f 97 ,801.30 3% percentage tax due thereon ove esevetseceeesen ~*~ 25934.05 Total franchise and oercentage alae loteatetted taxes @eeuveeeeoeooeeotneeeneeveeeors 730,061.62 Lesss Amount Pp rrrrrrrrrrrir i. tt Balance e@esceoeorvreeneestraeseeeoseeeee + > AGA, 25H surcharge .sscssccccveecs TOTAL amount DUS Peeceeoveoceenesnenn ee Respoment imposed the 3» tax on petitioner's gross re- eeipts from January 1, 1960 to June 30, 1960 because, after the expiration of petitioner's original franchise, elty subject to the reseribea in Je¢tion 191 of the Tex Code.

Still Glissatisfied with the revised assessment, petitioner requested the reconsideration of the reduced assessment. Thereafter, responient further reduced the ssessment to #17,311.02 by eliminating the 25! sur- charge. .

The principal issues to be resolved in this appeal are as follows;

» 167 ONC isIoN « CTA CASE Ho. 1790 5

(1) whether petitionér is subject to the 2% fronchise tax prescribed in its Charter or to the 9% tex provided in Sec- tion 259 of the National Internal Kevenue Code, a8 amended, on its gross receipts from January 1, 1956 to Deceaber 31, 1959; and

(2) Whether or not petitioner is subject to the 3% tax on ite gross receipts fron January 1, 1960 to June 30, 1960, imposed by Section 191 of the Tax Code.

first Issue Hesponient contended that Section 259 of the Sation- al Internal Nevenwe Code, os amenied by Aepublic Act Wes. 39 and 418, has repealed petitioner's franchise insofar as the rate of tax to be paid by At is concerred because petitioner's franchise is sabject to amendment, alteration or rapeal by an act of Congress and that it @ontalas no provision which precludes the imposition of e higher rate of tax. In support of his stand, respond- ent cited the Supreme Court decision in the Hoa Min CeSCs, gupta, wherein it was held, among othes, as follows:

While toe then Philippine Commission figzed the yearly tax to paid te the Government by original grantee, his successors and assigns at the rate of one- half of 1 per cent of the gross derived from the operation of the slipway of Barine railway, the grantor reserved ite right to assess and colleet other busioess or income tax on the grantce's busiaess. Section 259 of the Nationsl Intoraul Sevenue Code, aS amended Vides that “whichever is higher" be

Peetoi «

CYA Case do. 1790 the rate impooed hy the special charter of the grentee and the Metionsal Internal Neve- nuc Code, shall apply to and be ed nd paid by tee of the fran @ The mate by section 257 of Wational Internal Revenue Code, as the petitioner, because in the grantee's ee Stee franchises there is « provision that “Such annual ts, when tly ami fully made by the grantee, seil in Liew of ol) taxes of every nate and aature - municipal, provincial or central - upon ite Capitel stock, franchises, right of way, earnings, enfi all other owned or ted by the erantee under © conces- sion or franchise.’ Me petitioner's franchise, Act No. 1256, does not embody such exemption clause.

NOwever, petitioner Gainteins the contrary view am asserts thet: (1) section 259 of the Kevenue Code is not applicable, citing the opinion of the Secretary of Justice (Ops Ko. 172, Ade. 12, 1953) and the cases of Philippine Aailway Co, vs. Collector of internal roed Co. vo. Safferty, +0 rnil. 22%, and Visayan Slec- tric Go. vs, David, 49 Osds 13655 (2) the decision in the fos lia eases is anconstitutional as i1¢ would im peir Ves ted or property right already acquired under 169.

Dmelsiou -

GTA CASE So. 1790 7 ites enarter; (3) the ‘Dilippine Legislature or Congress of the Philippices cannot amend or repesi its franchise because such authority is oxpressly vested ia Congress of the United States; and (+) the deelsion in the loa Hin cases cannet be given retroactive effect siace jedi- Cial decisions huve only prospective operation, siting the ease of Willian Pomeroy, et al., 107 Phil. 52.

we find respomient's «tana well taken. in the boa | Him eases, the provisions of Section 259 or the nevenue Code, as amanted by “epubiic act ho. 39, were applied by the Supreme Court inasmuch as the original charter of petitioner therein (act So. 1256) contealaed aa ex- press provision that “it is subject to amendment, gl- by c of the United States. “ The franchises, however, ef the grantees in the cases of Philippine Sailway Co. ve. Collector of Internal Revenue, sunrg; Yenila Seilroad Co. vs. Safferty, gore; on’ Visayan “ieetric Co. we. Onvid, guora, ald got enbody an ex-mption clause tc the effect that the franchise tax therein preseribed "shall be ip dieu ef all taxes of every nome and nature - wuniclgad, pres vineiel of contra)."( veetuslly, therefore, no waterial difference exists between the cases of Hoa Hin and the @nre et ter, ‘The franchise of petitioner here is sub- ject to amendment, alteration or repeal by Congress and DECISION .

CTA CASE New 1790

it does net contain an exemption elause which precludes the imposition of al] texes of every name or nature. Consequently, we adopt and. apply here the doctrine laid down by the Supreme Court in the Hoa Hin cases, whieh was consistently followed in subsequent cases involving anal- \ ogous facts and similar issues. / (See lealda Electric Coc, Inc. v. Comm. of Int. Rev., and Court of Tax Ap- Plant Co., Inc. v. Comm. of Int. Rev., GR. Wo. L-20499, dane 30, 1965, lmus Electric Co., Inc. v. Court of Tax Guagua Glectris Light Pleat Co., Inc. v. The Coll. ef Int. dev., and Court of Tax Appeals, U.K. le, 1-23611, April 2, 196/.) | in the ease of Sulafiges gupta, Wherein the taxpayer asveiled the constitutionality of Sectioa 259 of the Tax Code, ap amended, our ~apreme Court said: The fesue raised in the lower court, as well «s before us, is whether the franchise hon 08 previtel 18 Section ap of Se

Nationel Internal Revenue Code (Commonwealth

et No. 466, as amended), the pertinent part of which reads:

There shall be eellected in re- spect to all existing and future franchises, upon the gross earn- ings or receipts from the business covered by the law granting the \ Sreneaiee a Sis a ive 2 a kum or such texes, charges, ;

percentages af are spec in the

DSwision -

+ speanee charters of the grantees upon uch franchises are <a te wane moar mee | ie higher, unless the p visions thersef preeludes ine inpesi- Stan of & tha tae xxx y be applied to pest eeer herein, without vivlatias tha constitational Llajunetion A copa impairment of contractual eT ee much as some of the aunicipal achises +3 the potitioner iupose thereto s .ronchise tex of 2% of ite gross cursin Se The Court of Tax Appeals cecided the question in the af- firaative, apon the ground toat seid muniel- pal franchises do not provide that said 2% tat @iiels be dm liew of all other taxes; thet come of said municipal franchises wore granted uncer tia general ame t. Vested 2 municizal corporations by act 667 of the — Commission, Section 5 of wbiois pte- ass svery franchise granted noere- under shall contain a provisien thet it is granted “Sie to the power of Cengress to al modify or repeol the sane in accordance with the Aet of Congress entitled ‘An het temporarily te provide fer the a istration of the affairs of civil governuent io the Philip- pine islands, coo for other pur- poses,” sopreved Jaly SEEGS, nitie- teen hundred and two.

ani that, this case fells within the lew of the doetrine leic down in Hoa Hin Ine. vs. Levid ead lag USera VEse LOG in to., Inte (G. &. Nos. i= 9616 and 1-11783, fey 25, i959), x x x x A oa a x “ In urging ea review of the appeaied deci- Slot, petitioner stresses the p te ted sy that « franchise is ~e gg Fe @aintains — that the Hoa Hin eases are not controlling dn the one et ber because Hoa Lin Bec @ legisiative franchise, whereas petitioner hes municipal rranchise; the consti tu-

DeeIslIa «

CTa CASE No, 1790 190 tionality of Section 299 of our Setional In- ternal Kevenue Code was not psssed n the lice fin cases; sant the government ageinst Hin certain defenses (prescription of action and absence of a demand for refund) not available in the case at bar.

At the outset it should be aoted that the status of ; ttioner' 's mankeipal fran- chises as property and pe eg t is uependent ~ or guaelifi the noture and limitations of the authority under which seld franchises were granteé by the sunici- pal corporations concerned. <<nittedly, such authority, af regards the franchises for Salafige and Gamal, emanated from Act WO» oor» ursuant te whieh grt ad grantea reunter shall be ect to the power of Congress 'to alter y or re- peal the same." 22 ster, that Sec- tion 259 of our National Interna! Aevenue | Code ic inconsisteat with the rate of i fixed in sala oe franchises - ami the theory that said Leetion 259 a8 applied to petitioner herein is unconstitutional, .«- ceosarily lies such inconsistency <- it is oes t, for all intents and pur- Sald legal provision alters the ai ‘es provisions of said franchises.

effecting such alteration, our legislative department hus merely exereised, however, a = expressly reserved thereto by eaid reachises, ami has ac'ed, therefore, in caaracaa therewith, not in violation of Sions thereof or to the detrinent of the ab thereby vested in petitioner hereia. is well ettiod thets A reservation to tite legis- lature, either by constitation, statute, or in the charter it- self of the pouse te alter, or withdraw any franchize . or anood or vi granted in a cor- porate charter, in force when such charter is granted, files such a grant so that a sab- Seguent exercise of such reserved

DeCISION «

OTA CASE fo. 1790 11 power is not within the prahibition | (C.JeSey Vol. 16, p. 757.)

Petitioner assalls the retroactive application of the Supreme Court decision in the boa Hin cases which was promulgated on May 25, 1959. bat said de- cision merely affirmed respondent's stana involving eollection of the higher rate of franchise tex under Section 259 of the Tax Code, ss amended by Republic Act Mos. 39 and “AS. In short, it is not the decision of the Supreme Court in the Hoa Hin cases which was given retroactive effect, but the provisions of Repub- Lie Act Nos. 39 and 429 whieh took effect on October 1, 1946 and June 18, 1949, respectively.

( In ite reply semorandun, petitioner Claims that its franchise is subject to repesl cr smondment by Congress of the United States and not by Congress of the Philippines smi, therefore, ovr Congress cannot validly legislate a chance in its charter, ‘he literal interpretation given by petitioner's counsel is un- tenable because, ofter the recognition of Philippine independence, the special legislative powers of Con-.

gress of the United States over the Philippines was assumed by Congress of the Philippines. in any event, to accede to petitioner's theory would be to uphold the irrepealability of laws passed by the Philippine Conm- mission which is not sanctioned by oer Constitution.

DECISION «

CTA CASE No, 1790 12 Moreover, in the cases ‘of Moa Hin ond Lealda llectric, Suara, “oe franchises of the grantees therain eontained similar provisions te the effect that they shell be subject to alteration or repeal by Congress of the United States. Gur Supreme Court, however, declared that said franchises were amended by seetion 259 of the Tax Code, as amended by “epublic act Nos. 39 and 418, which were passed by Congress of the Philippines. decessarily, the Supreme Court decision implies that Congress of the Philippines ean legally ani validly effect such change or amendment. ‘) the decisions eited by petitioner ta support of ite stand are not applicable to the facts and eircun- stances of the case at bar. Petitioner, therefore, is subject to the 5% franchise tax imposed by Section 259 of the Sevenue Code, as amended, —

Second Issue:

| o@ bold that petitioner's gress reeeipts frou January 1, 1960 to June 30, 1960 are subject to the 3% tax preseribeca in section 191 of the Revenue Code. : After Decewber 2, 1959, when petitioner's origingl fran- ehise (les. No. 16, supra) expired, petitioner contiaaed to operate aii supply electric light, heat ani power within the magicipality ef Mabalacat ander the probe- tional authority granted by the rublic Lervice Commis- fF 4175 NBilsio, - ' OTA Case AG, 1790- 13 Sion pending approval of its new frenchise. The said probational authority alia not exten! toe term of pati- tioner's original francnise, ) An examination of secelutien lO» be, dated Novem= ber 22, 1°95) of the Municipal Council of labalncat, Pempanga, shows toat toe electric franchise granted to toe herein petitioner was made ancer jct fo, 667. of “the Philippine Commission, es amended by Act No. 1022, subject to the approval cf the Provincial Scart of vampanga, the Ppablic Service Comuigsion and the President of the Republic of the Philippines, (STA rec. ps J3-) ‘The records show that -etitioner's new franchise was approved by the Provincial Hoard of San- panga, the Public Lervice Comission, ano the President of the Philippines on November 23, 1959, Nay 29, 1961, and July 12, 1961, respectively, On Zentember 125 1:91, petitioner addres sec a formal letter to the Secrotary of public Works: and Communications, accepting unecon- ditionally the sald new franchise, ( etitioner's Meno, Pe 105 CTA rec., pe *2,) It was on the latter date, September 12, 1961, when ,etitioner's sew fracchise became operative, in line with the provisions of. act @. 667 of tne Phi}ippiae Jommission which, emoag others, read as follows:

the municipal council is authorized te accept the o ition of the ei tatan es tioner upon certa tein fixed conditions, as a | ad on

DSCISION ~ :

CTA CaSE WO. 1790

Lb

follows, to wit: | x ¥. x x Beventh. iat no franchise untill the sane spat} ve fn approved, first by the muni- Gipal council, secouwly by the provincial beard, anf finally by the Civil Governor.

(Row President of the /Lilip»iues.)

a # z x 2 Tenth, That no franchise for any purpose ua the Same 3 accepted in writing by the grantee thereof ant the acceptance :

filed in the office of the Secre of ee and Police. (Now Secretary of Publie Works and Communications.) x x x It is clear from the foregoing recital of facts and the pertinent provisions cf Act ilo, 667 that peti- tioner was not possessea of a valid and effective fran- chise fron January 1 to Jane 30, 1960 and, therefore, petitioner's gross receipts during the said period are taxable under gection 191 of the Tax Code.

Ik VIdw OF TEE FORSGOING COMSIDENATIONS, the Geeision of responient Commissicner of [nternal HKevenue appealed from is hereby affirmed, Petitioner is, therefore, ordered to pay responient or bis duly authorized Collection Agent the amoust of 017,311.02 Pepresenting deficiency franchise and percentags ‘axes 177

DECISTOw «

from January 1, 1956 to June 30, 1960, with costes against petitioner. | SO OubDlad.

yaeszon Cily, May 50, 1970.

associate Judge

Wk CONCURSs

iy ROMAN M.

Presicing Judge

RAMON lhe AVANCIRAA associate Judge