Koron/\Dal Electric Light & Power Co., Inc., et al. vs. The Q L/Jv1i Ssioner of Il'-!Te Rnal Revenue

DECISION -

3. That pursuant to Revenue Memorandum Circular No. 41-68 imolementing Republic Act No. 5431, petitioner filed and paid under pro- test its corporate income taxes for the years 1968 and 1969 in the fcllowing amounts:

CART EUN@EY Date ; Amount ISS 23 19 April 15, 1969 B14,040,00 . LEOVCS5 July 15, 1969 14,040,000 ;

1580&82B April 14, 1970 _47,096,00 Total . . . . B75,176,00 4, That on “April 24, 1970, petitioner filed with respondent a letter dated April 23, .1970 requesting exemption from paymemt of income taxes for the years 1968 and 1969, (pp. 22-23, BIR rec.)}3 Se That on August 18, 1970 a Tax Credit Memo was issued in favor of petitioner cred- iting the amount of P75,176.0C representing er- roneously paid inceme taxes for the year 1968 and the lst half of 1969, under memorandum- decision of the Chief, Appellate Division, dat- ed August 3, 1970, duly approved by the Commis-— sioner of Internsel Revenue (p, 72, BIR rec.);

6. That in a letter dated August 22, 1972, respondent revoked Tax Credit Memo dated August 18, 1370 and demanded the payment of the amount of F75,176.0C as deficiency income taxes for the period 1968 and 1969 (p. 95, BIR rec.);

7. That in a letter of petitioner dated September 30, 1972 and received by respondent on Octcber 5, 1972, petitioner requested for re- consideration of the decision of the Commission- er of Internal Revenue (pp, 99-100, BIR rec.); 8, That in a letter-decisicn dated F,bruary 1€, 1974, the respondent denied the reanuest for reconsideration and demanded the payment of the amount of F75,176.0C, exclusive of interests that, have accrued thereon (pp, 102-104, BIR 9, That both parties reserve the right to Present additicnal evicence te support their respective contentions.

The only additional evidence presented during the trial of this case is the admission by respondent that .

ae petitioner received the letter-decision dated February 18, 1974 on March 2, 1974.

204 ‘sae HY eer mana 4 a For better understanding of the factual setting of the present proceeding, it should be stated, as borne out by the reccrds, that on June 9, 1950, Mr. Jose Catolico was granted a iegigiacives franchise und= er Republic Act No. 466 to construct, maintain and cp- erate an electric licht, heat and power pilecnt to sup- ply electric current to the residents of the Municipal- ity) Bf Ruayah, Cotabato. The company organized under the aforementioned franchise came te he known as "Ycse Catolico Plectric Licht & Fower Co., Inc." Subsequent= ly, in a special meeting of the members of the corpora- tion held on October 2, 1953, a resclution was adopted o3 changing the name cf the company to Koronadal] Flectric Light & Fower Co., Inc. This action was affirmed on June 15, 1954 when Congress approved Republic Aet No. 1118 authorizing the grantee to assign, sell and trans- fer its franchise, thereby paving the way te the form- al amendment of its Articles of Incorporation changing ‘the corporate name to Koronadal .lectric Light & Power Co., Inc. The said amendment was appreved by the Sec-= urities & Uxchange Commissicn on December 10, 1954, (pp. 69-70, BIR Records.)

Appropriate to state here also is that since 1950, ip) the date of approval cf the legislative franchise of petiticner, up to November 15, 1968 when the Bureau cf Internal Revenue issued its Revenue Memerandum Circul- ar No. 41-68 iupidientking Republic Act No. 5431, res- pondent has not subjected petitioner to income tax.

209

DECISION —-

Respcndent's basis is. that portion of Section 1 of Re- public Act No, 466, infra, subjecting the original franchise to the terms and conditicns of the Model Franchise Law (Act 3636), which provides that the fran- chise tax (formerly 2%, befcre the effectivity of Re- public Act Nc. 39 on GCetober 1, 1946) imposed therein “shall be in lieu of any and all taxes of any kind, nature, or description levied, established, or collect- ed by any authority whatsoever x x x." The said prov- ision of the Medel Franchise Agt has been interpreted by the Supreme Court in the case of Carcar Electric & tee Plant Co,, Inc, wSse The Collector of Internel Reavenue, G.R. No. L-9257, Cctcber 17, 1956, 100 Phil. 50, to mean that its incorporaticn in the franchise cf the grantee has the effect of granting said grantee ex- empticn from income tax. (pp. 68-69, BIR Records.)

Parentheticaily, it may be stated that petitioner has been paying the increased franchise tax rate of 5% aS a consequence cf the passage of Republic Act No. 39, effective Cetcber 1, 1946. (p. 69, BIR Records.)

On November 15, 1968, however, the Bureau of In- tecnal Rev. nue ruled under Revenue Memorandum Circular No. 41-68 ‘hat pursuant tc the provisions of Republic Act No, 5431 which amended Section 24 of the Ndticonal iueesnal Revenue Code, “all corporaticns aESvEoKELY exempt from income tax by virtue of general and special laws have lost their exemptions and such being the case,

Cs

the amendment can encompass existing franchises since franchises are also special laws." Pursuant to this 206

DECISION -

alae CTA CASE NG. 2600 ruling, petitioner filed its 1968 and 1969 corverate income tax returns and paid income tax in the respect— ive amount of P28,080,0C and P47,096.,0C, or a total of P75,176.C0C, (See pars. 3 & 4, partial stipulation of © hat Sig?

On June 13, 1969, however, a ruling was issued by the Bureau cf Internal Revenue in the case of Clavecilla Radio System wherein it held that the tex exemption privilege grented to franchise holders is net affected or revoked by the provisions of Republic et Ne, 5431 because said privilege is in the nature of a contract which can net be rescinded unilaterally by either of the parties thereof, Accordingly, grantees who used te enjoy exemption from income tax by virtue of their franchises are te continue enjoying ssid privilege be- céuse Rep blic Act No, 5431, it was reasoned out, did not repeal the provisions of existing franchises on income tax exemption, In short, the ruling of respond-— ent in the Clavecilla case restored the grantees to their former status — that of being exempt from income tax as decided in the Carcar case, supra. (pn. 67, BIR Records. ).

Consequently, upon request cf petiticrer of ex- emption from payment of inceme tax (par, 4, partial stipulation of facts), respondent, on August 18, 1970, issued a Tax Credit Memo in favor of petitioner cred- iting the amount of 75,176.00 representing erroneous ly paid income tax for the year 1968 and the first hart of 1969, (Parn = 5 partial stipulation of facts,) whet next transpired are new stated under paragraphs 6, 7 207 —= 9 oe

DECISION =

CTA CASE NC, 2600 and & cf the partial stipulation cf facts submitted by the parties, Although the parties have presented four quest- ions fer the resolution of the court, the pivetal and: decisive issue in this case is: Whether or not the- imposition of the corporate income tax as prescribed by Republic Act No. 5431 amending S,ction 24(d) of the National Internal Revenue Code on petitioner, in view of the tax exemption prevision of its franchise, would be violative of the constituticnal provision that no The parties are net in dispute on the provisions ef law, revenue rulings, legal principles and computa- tions of income tax payable by, or amount refundable tc petitioner as the case may be, Petitioner submits that as a grantee of sa legis- na lative franchise, it is exempt from income tax by vir- tue of the provision of S,ction 1, Republic «ct No. 466 (its original franchise), as amended by Republic No. L1l1l€, subjecting the same to the terms and conditions of the Medel Franchise Law (Act No. 3636, as amended by Republic Act No. 39) which provides that the fran- chise tax imposed therein "shall be in lieu of any and all taxes cof any kind, nature or description levied, established or collected by any authority whatsoever x x x." This “in lieu of" provision of the Model Fran- chise Act has been interpreted by the Supreme Court in 208 ete ates) : eh es

DECISION = :

Carcar Electric & Ice Flant Co., Inc., supra, to mean that its incorporation in the franchise of the grantee has the effect of granting such grantee exemption from inceme tax. Since the franchise of petitioner consti- tutes a contract between the State and petitioner, and the latter accepted the franchise solely upon ne terms and conditions thereof, petiticner argues that the remcval or withdrawal of its income tax exemption under the franchise would naturally diminish the value 3 of it:

t franchise and, consequently, a clear violation of the constitutional previsicon that no law impairing the oblig#tion of contracts shall be passed.

/ This argument at once loses potency on the face of Section 8, Article Ray of the 1935 Constitution, under whose authority the franchise of petitioner was granted, which prevides that "No franchise or right shall be granted to any individual, firm, or corpora- tion, except under the cendition that it shall be suh- ject to amencment, alteration, or repeal by Congress when the public interest so requires." Stated other- wise, the power of Congress te amend the franchise, as provided in the Constitution, is deemed to be a 2 ~ part of said franchise, (Hoa Hin vs. David, 105 Phil.

c 783; Lealda Electric Co., Inc. vs. Commissioner cf In- ternal Revenue, L-16428, april 3C, 1963, 7 SCRA 728; Imus Electric Co. vs. Court of Tax Appeals, 4+-22421, March 18, 1967, 19 SCRA 612; Guagua Flectrie Light vs. Collectcr cf Internal R,venue, Le23611, April 24,

DECISION = a

L967, 19 SCRA 790.) Indeed, Section 1 cf petitioner's franchise, Republic Act 466, explicitly provides:

And sPreyone it d la "Section Ll. Subject to the terms and - eonditions established in Act Numbered Thirtv-six hundred and thirty-six, as amend- ed by Commonwealth Agt Numbered One hundred and thirty-two, and to the provisions of the °| Constitution, there is granted to Jose Catoli- co, for a period of twenty-five vears from the approval of this Aet, the riaht, privilege ana authority te construct, maintain, and ope- réte an electric light, heat and power plant for the purpose of generating and distributing electric light, heat and/or power for sale within the Municipality of Buayan, Province of Cotabato: Provided, That the holder of the franchise herein gr granted shall start the ope-~ raticn thereof within one and half years from approval of said franchise," in section 12 of said Act No. 3636, which tock ef- on December 7, 1929, it prevides the followina:

"Sec, 12. This franchise is granted sub- ject tc the prcevisicns of Act Numbered Three theusend one huncred and eight, as amended, and with the understanding and Mpon.the con= dition that it shall be e_ subject to_ amendment, alteration, c¢r. repeal by the Natio onal Assem-~ bly or by the Congress of the va States, and that it shall be subject in all respects to the limitaticns upon corporaticns and the grant- ing cf franchises contained in. the. Constitution of the Philippines, and also subject to the prove isions of Act. Numbered Fourteen hundred and fif- ty-nine of the Philippine Legislature, as amend- ed, (Act Ne. 3636, Permanent and General Ste- tutes, Vol. I, p. 682, 1971 ed.; emphasis sup- plied,’ ~ Accordingly, when petitioner accepted its franchise id sc with the understanding thst the constitution-— nd statutcry reservations of the right of Congress, or the Naticnal Assembly, to amend, alter, modify or repeal petitioner's franchise when public interest so ti ‘recuires became an unwritten condition thereof. Such ——

DECISION =

constitutional and statutory provisicns constitute part of the cbhligation of contracts. As aptly ob- served by respondent, it is clear from the above- qGucted provisicons that Congress reserved the right te amend, alter, modify or repeal petiticner's fran- chise, Since the franchise was accepted by petiticn-~ ‘er with full knowledge of the reservation clause, there can be no impairment of the chligation of econ tracts within the meaning cf the Const Leutien, where the grentee cf a franchise accepted it, subject to tie right of the grantor to alter, amend, modify or rereal the same. (Balanga Fower Plant Co., Inc., vs. Commissioner of Internal Ravenue, CTA Case No, 975, September 19, 1976; G.R. No, L-2049°, Tyne 30, 1965, 14 SCRA 604, cited in Visayan Electric Co. VS. Con- missioner cf Internal R,venue, CTA Case No, 1165, May 29, 1963; Escudero tlectric Service Co. vs. Benjamin Takios, as Commissicner cf Internal Revenue, CTA Case No. 1026, G.R. No. L-23014, June 30, 1970, 33 SCPA a 547; Manila Electric Co., Ine. vs. Commissioner of In- ternal Révenue, L-29987 & L-23647, October 22, 1975, a7 . A 67 SChA 351-352.) The impesition of the corporate in- come tax as prescribed by Republic ct Wo. 5431, amend- ing Sgction 24(d) of the Naticnal Internal Revenue Code, upon petiticner is net, therefore, violative of ‘the constitutional provision that no law impairing the obligation cf contracts shall rs Tee A Petitioner claims, however, that Republic Act No, 211 a a --#e a

— (Ae)

5431 did net repeal or revcke its exemption from in- come tax because the franchise tax provided in its franchise is a commutative tax, ccmpounding or com- muting fcr a just equivalent all other taxes, includ- ing the income tax, payable by it, in view of the “in lieu of eny and 11 taxes" provisicn of its special charter, Hence, payment of the franchise tax includes payment cf its income tax, Section 24(d) of the National Internal Revenue Code, as amended by Republic Act No. 5431, textually reads:

"Sec. 24. Rates of x on Corporations.

(a) The provisions of existing special or general laws to the contrary nctwithstanding, all corporate taxpayers not specifically ex- empt under Sections twenty-four(c) (1) and twenty seven of this Code shall pay the rates provided in this section. Ali corporations, agencies, or instrumentalities owned or con- trolled by the Government, including the Go- vernment Service Insurance System and the Social Security System but excluding educa- tional instituions, shall pay such rate of tsx upon their taxable net income as are im- posed by this section upon associations or corporations engaged in a similar business or industry."

- “Te

7 \ cy’ Assuming that the liability of petiticner for in- , come tax is epbertied by its franchise or special char- ter because the franchise tax payable by it includes v -|___ the payment of its income tax, it is quite apparent and explicit under the terms cf the amendatory law that all corporate taxpayers whose liability or non- liability for inccme tax is governed by general or -Bpecial laws, unless specifically exempt under Sec- tions 24(c) (1) and 27 of the Nationel Internal Reve- nue Code, are now required to pay the rates of in- .-.

u

DECISION

CTA CASE NO . 2600 - 11 - .l come ed by t ax specified in Sec tion 24 of the Code as amend- Rep ~ b lic Act No . 5431.

The amendato ry law em- ploys the \vo rds "all corporate t axpaye rs n o t s pecifi- cally exempt under Sectio ns · 24 (c) . ( 1) and 27 of thi s Code"- v1ithout more.

No t hing there said s peaks of the exemption of corporations pay ing a commutative t ax o r not pay ing any i ncome tax pri o r to the enactment of Republic Act No . 543 1 .

No justification c a n b e found , therefore , fo r r eadi ng i nto t he l aw ah exemption whi ch is not t he-r e .

He cannot ignore t.r:c principle t hut. ex- p ress mentio n in a statute of an exemption precludes reading o t hc ~ rs i nto it.

(Mani l a El e c tric Company v s . Mis ae l Vera, L- 2998 7 , and Manil a El e c tri c Company v s . Benj ami n Tabios , .L- 23847 , Oc tober 2 2 , 1975 , 6 7 SCRA 351, ci ting Ho a rd vs . Sears , Roebuck & Co ., 122 Co nn . H l s I

1 9 3 I

1 tl f5 f A 0 2 6 g ) / On this po int , r espon~ent correc t l y argues , quat- i ng the opinion of the S 0 cretary (now Minister) of Justice , conta i ned in his 3rd Indorsement to the Sec- ret a ry (now Mi n i ster) of Financ e , dated March 28 , 1 969 , that:

" The c ontention thut. Hepubl ic Ac t. No . 5431 mere l y i n t ende d to c hange the existing ra te s of corporate tax applicab l e to c orpor- ations a l ready subject to income t a x and pot t o l i f t the t ax exemptions g r anted by s pecia l l aw, is without meri t , j ust as the argument th a t t he t e r m ' cc.rpo.rate t axpayer • should be cons t r ued as referring only to those corpor- ations alr eady subj e ct to t a x a t the time of the amendment.

For in providing for the gen- eral app l ication of th e new t a x rates a nd e xpress l y exc l uding therefrom ' al l corpor a t e t a.xpayers 1 no t spec)-..fical1 ~~ exempt under Sec ti o n • ••• 27 cf t his Code ' which sig- nificant l y refer to entities wholly exempt f r cm e

= Pic

income tax, Section 24(d) was evidently meant to be applicable even to corporations enjoying income tax exemption before the enactment of R.A. 5431. Otherwise, there would have been no need fer said exclusion. The resulting con- clusion is that outside of these referred to in Section 24(c) (1) and 27 cf the Tax Code, all corporations whcse liability for income tax was before coverned by genéral Laws or Special Statutes applicable to designated 'elasses Or Groups Cf corporate entities, are ncw subject to the rates prescribed in R,4. 543" (underscoring ours; p, 11, CTA Records.)

.

Not much need be said on petitioner's other point, citing the cases of Manila Railroad Company vs. Rafferty, 40 Phil, 224, and Philippine Railway Company vs, Col~ lector of Internal Revenue, 91 Phil. 35, that a spec- ial law or charter may not be amended, altered, or re- pealed, by general law, by implication. While it is a canon cf statutory construction that a later stat-— ute, general in its terms and not expressly repealing cy \a pricr special statute, will ordinarily not affect the rl » ; _— ;

& special provisions cf such earlier statute, the clean- vo.

vo

Ay

-

Ny

up phrase "The provisions of existing special cr gen- eral laws to the contrary notwithstanding" employed in Republic Act No, 5431 is so clear, express, expli- cit and manifest that it indubitably includes within its broad sweep the franchise or special charter of petitioner, In granting cvetiticner a legislative fran- chise to cperate an electric light, heat and power sys- tem in -the municipality cf Buayan (now General Santos City), province cf South Cotabato, Congress might.

Have considered and made provision for all the circums— tances of the particular case, but the power of Cong- ress to amend, alter or repeal when public interest

8. § @=" Re 2S ener eerraees FOP ual eer a rs re aire ti OTOL oe cee ?

; ose ene Oe eee eee

DECISION —

CTA CASE MEP 2600

-~ 13 - so requires, as provided in the Constitution and in the franchise of petitioner, is also a part of petit- itioner's charter, It cannot, therefore,-be said that Congress, by adopting Republic Act No, 5431 prescrib- ing the rates of income tax to be paid by corporations, unless specifically exempt under Sections 24 (¢) (1) and_ 27 of the Tax Code, has not included petitioner whose liability for income tax is governed by its special charter, otherwise the clear~cut proviso- “The provis- ions of existing special or general laws to the contra~ ry notwithstanding" - found in the law would make lit- tle sense.

We are not to indulge, therefore, in statutory construction because the law is clear. Our duty is only to apply the law as it is written. So applying, we rule that since petitioner accepted its franchise with the understanding of the right of Congress to alter, amend, modify cr repeal the same, and it (pet- itioner) is not specifically exempt under Sections 24(c) (1) and 27 of the National Internal Revenue Code, the imposition cf the income tax as prescribed by Re- public Act Now 5431 amending Section 24(d) of the Tax Code does not violate the non-impairment clause of the Constitution, With this conclusion, it follows that petiticner is liable to pay income tax in accord- ance with the rates prescribedunder the provisions of . Section 24(d) of the Tax Code as amended by Republic Act No. 5431.

In finding ne merit in petiticner's cause, ler Court cannot overlook the well-settled rule that one 215

DECISION ~

~~ 14 = who claims to be exempt from the payment of a parti- cular tax must do so under clear and unmistakable terms found in the statute, Tax exemptions are strict- ly construed against the taxpayer, they being highly disfavored and may almost be said "to be odious to the law." He who claims an exemption must be able . ‘ to point to some positive provision of law creating the right; it cannot be allowed to exist upon a mere vague implicaticn or inference. (Asiatic Petroleum vs. Llanes, 49 Phil. 466,471; Union Garment Co., ine. vs. Court of Tax Appeals, -L-16809, January 31, 1962, 4 SCRA 304; Philippine Acetylene Co., Ine. vs. Commis-= sioner of Internal Revenue, L-19707, August 17, 1967, 20 SCRA 1056; Republic Flour Mil'’s, Ipc. vs. Commission- er of Internal Revenue, L-25602, February 18, 1976, 31 SCRA 520; Commissioner of Customs vs. Philippine Ace- tylene Co, & Court cof Tax Appeals, L-22443, May 29, 1971, 39 SCRA 71; Davao Li ht and Power Co., Inc. vs. Commissio er of Customs, L-28902, March 29, 1972, 44 SCRA 122.) ‘The right of taxation will not Be held to have been surrendered unless the intention to sur- render is munifested by words too plain to be mistaken (Ohio Life Insurance & Trust Co. vs. Debolt, 60 Howard, 416), for the state cannot strip itself of the most essential power of taxation by doubtful words; it can- not, by ambiguous language, be deprived of this high- “emt attribute of sovereignty (Erie Railway Co. vs. .

Commonwealth of Pennsylvania, 21 Wallane, 492, 499), i) 16 oo arias a ; AE WeteS

~ I5 -

SO, when esenp eee is Claimed, it must be shown indubitably to exist, for every oseSuMpties is’ against it, and a.well-founded doubt is fatal to the claim (Farrington vs. Tennessee & County of Shel- by, 95 U.S. 679,686} (Asiatic Petroleum Co. vs. |. Llanes, 49 Phil. 466,471; Manila Electric Company vs, Commissioner ef aieeknal Revenus L.29987 & L-23844, October 22, 1975, .67 SCRA 351.) In the same manner, Claims for refund are construed strictly against claimants since a claim for refund is in the nature of an exemption from taxation. (Commissioner cf In- ternal Revenue vs. Ledesma, L-17509, January 30, 1970, 31 SCRA 95.)

Leuedingty, ne error was committed by respondent in’ revoking on August 22, 1972 the Tax Credit Memo dated August 18, 1970 issued by him in favor of pete itioner crediting the amount of P75,176,00 represent— ing erroneously paid income tax for the year.196€ and the Ist half of 1969, Since petitioner had already fully applied the tax credit in the amount of FP75,176.00, in payment of its internal revenue tax liabilities, the decision of respondent dated February 18, 1974 denying petitioner's request for reconsideration of the revo-~ cation of its tax credit memo and demanding payment of the aves tute of P75,176.0C, exclusive of interest thet have accrued thereon must be sustained. Consequently, petitioner Koronadal Electric Light & Power Co., Inc., is hereby crdered to pay respondent Commissioner cf Internal Revenue the amount of P75,176.00, exclusive 217 sonnel eel — te —_ eee ae et ee kt 8 oe etisen ree k meget SE ESR IE ek mero Sach Sor Sr then pee Neer Sen be IF

DECISION =

of interest that have accrued thereon,

WHEREFORE, the decision appealed from is hereby affirmed at petitioner's co

I CONCUR:

CONSTANTE C./ROAQUIN

Associate Judge

ra

Ped

218

CLhiranihe :

GWILLER

Acting Presiding Judge