RE: PROPERTIES EXEMPT. National Power Corporation Vs. Province of Quezon G.R. No. 171586
January 25, 2010
FACTS:
The Province of Quezon assessed Mirant Pagbilao Corporation for unpaid real property taxes in
the amount of P1.5 Billion for the machineries located in its power plant in Pagbilao, Quezon.
Napocor, which entered into a Build-Operate-Transfer (BOT) Agreement (entitled Energy
Conversion Agreement) with Mirant, was furnished a copy of the tax assessment. Napocor (not
Mirant) protested the assessment before the Local Board of Assessment Appeals (LBAA),
claiming entitlement to the tax exemptions provided under Section 234 of the Local
Government Code (LGC), which states: Section 234. Exemptions from Real Property Tax. – The
following are exempted from payment of the real property tax: (c) All machineries and
equipment that are actually, directly, and exclusively used by local water districts and
government-owned or –controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power; (e) Machinery and equipment used for
pollution control and environmental protection. Assuming that it cannot claim the above tax
exemptions, Napocor argued that it is entitled to certain tax privileges, 1. The lower assessment
level of 10% under Section 218(d) of the LGC for government-owned and controlled
corporations engaged in the generation and transmission of electric power, instead of the 80%
assessment level for commercial properties imposed in the assessment letter; and 2. An
allowance for depreciation of the subject machineries under Section 225 of the LGC.
ISSUES:
1. Whether or not NAPOCOR is entitled to claimed tax exemptions and privileges.
2. Whether or not the stipulation in the BOT Agreement that authorized the transfer of
ownership to Napocor after 25 years giving them sufficient legal interest to protest the tax
assessment..
3. Whether or not its authority to control and supervise the construction and operation of the
power plant gives them sufficient legal interest to protest the tax assessment.
4. Whether or not its obligation to pay for all taxes that may be incurred, as provided in the BOT
Agreement gives them sufficient legal interest to protest the tax assessment.
HELD:
1. Napocor is not entitled to any of these claimed tax exemptions and privileges on the basis
primarily of the defective protest filed by the Napocor. We found that Napocor did not file a
valid protest against the realty tax assessment because it did not possess the requisite legal
standing. When a taxpayer fails to question the assessment before the LBAA, the assessment 19
becomes final, executory, and demandable, precluding the taxpayer from questioning the
correctness of the assessment or from invoking any defense that would reopen the question of
its liability on the merits. Under Section 226 of the LGC, any owner or person having legal
interest in the property may appeal an assessment for real property taxes to the LBAA. Since
Section 250 adopts the same language in enumerating who may pay the tax, we equated those
who are liable to pay the tax to the same entities who may protest the tax assessment. A person
legally burdened with the obligation to pay for the tax imposed on the property has the legal
interest in the property and the personality to protest the tax assessment.
2. The legal interest should be one that is actual and material, direct and immediate, not simply
contingent or expectant.
3. We disproved Napocor’s claim of control and supervision under the second argument after
reading the full terms of the BOT Agreement, which, contrary to Napocor’s claims, granted
Mirant substantial power in the control and supervision of the power plant’s construction and
operation.
4. We relied on the Court’s rulings in Baguio v. Busuegoand Lim v. Manila. In these cases, the
Court essentially declared that contractual assumption of tax liability alone is insufficient to
make one liable for taxes. The contractual assumption of tax liability must be supplemented by
an interest that the party assuming the liability had on the property; the person from whom
payment is sought must have also acquired the beneficial use of the property taxed. In other
words, he must have the use and possession of the property – an element that was missing in
Napocor’s case. We further stated that the tax liability must be a liability that arises from law,
which the local government unit can rightfully and successfully enforce, not the contractual
liability that is enforceable only between the parties to the contract. In the present case, the
Province of Quezon is a third party to the BOT Agreement and could thus not exact payment
from Napocor without violating the principle of relativity of contracts. Corollarily, for reasons of
fairness, the local government units cannot be compelled to recognize the protest of a tax
assessment from Napocor, an entity against whom it cannot enforce the tax liability.
