G.R. No.

144104

The petitioner avers that it is a charitable institution within the context of Section 28(3),
Article VI of the 1987 Constitution. It asserts that its character as a charitable institution is
not altered by the fact that it admits paying patients and renders medical services to them,
leases portions of the land to private parties, and rents out portions of the hospital to private
medical practitioners from which it derives income to be used for operational expenses. The
petitioner points out that for the years 1995 to 1999, 100% of its out-patients were charity
patients and of the hospitals 282-bed capacity, 60% thereof, or 170 beds, is allotted to
charity patients. It asserts that the fact that it receives subsidies from the government
attests to its character as a charitable institution. It contends that the "exclusivity" required
in the Constitution does not necessarily mean "solely." Hence, even if a portion of its real
estate is leased out to private individuals from whom it derives income, it does not lose its
character as a charitable institution, and its exemption from the payment of real estate taxes
on its real property. The petitioner cited our ruling in Herrera v. QC-BAA9 to bolster its pose.
The petitioner further contends that even if P.D. No. 1823 does not exempt it from the
payment of real estate taxes, it is not precluded from seeking tax exemption under the 1987
Constitution.

June 29, 2004

LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and CONSTANTINO
P. ROSAS, in his capacity as City Assessor of Quezon City,respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of
the Decision1 dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which
affirmed the decision of the Central Board of Assessment Appeals holding that the lot owned
by the petitioner and its hospital building constructed thereon are subject to assessment for
purposes of real property tax.
The Antecedents
The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established
on January 16, 1981 by virtue of Presidential Decree No. 1823.2 It is the registered owner of
a parcel of land, particularly described as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located
at Quezon Avenue corner Elliptical Road, Central District, Quezon City. The lot has an area of
121,463 square meters and is covered by Transfer Certificate of Title (TCT) No. 261320 of
the Registry of Deeds of Quezon City. Erected in the middle of the aforesaid lot is a hospital
known as the Lung Center of the Philippines. A big space at the ground floor is being leased
to private parties, for canteen and small store spaces, and to medical or professional
practitioners who use the same as their private clinics for their patients whom they charge
for their professional services. Almost one-half of the entire area on the left side of the
building along Quezon Avenue is vacant and idle, while a big portion on the right side, at the
corner of Quezon Avenue and Elliptical Road, is being leased for commercial purposes to a
private enterprise known as the Elliptical Orchids and Garden Center.

In their comment on the petition, the respondents aver that the petitioner is not a charitable
entity. The petitioners real property is not exempt from the payment of real estate taxes
under P.D. No. 1823 and even under the 1987 Constitution because it failed to prove that it
is a charitable institution and that the said property is actually, directly and exclusively used
for charitable purposes. The respondents noted that in a newspaper report, it appears that
graft charges were filed with the Sandiganbayan against the director of the petitioner, its
administrative officer, and Zenaida Rivera, the proprietress of the Elliptical Orchids and
Garden Center, for entering into a lease contract over 7,663.13 square meters of the
property in 1990 for only P20,000 a month, when the monthly rental should be P357,000 a
month as determined by the Commission on Audit; and that instead of complying with the
directive of the COA for the cancellation of the contract for being grossly prejudicial to the
government, the petitioner renewed the same on March 13, 1995 for a monthly rental of
only P24,000. They assert that the petitioner uses the subsidies granted by the government
for charity patients and uses the rest of its income from the property for the benefit of
paying patients, among other purposes. They aver that the petitioner failed to adduce
substantial evidence that 100% of its out-patients and 170 beds in the hospital are reserved
for indigent patients. The respondents further assert, thus:

The petitioner accepts paying and non-paying patients. It also renders medical services to
out-patients, both paying and non-paying. Aside from its income from paying patients, the
petitioner receives annual subsidies from the government.
On June 7, 1993, both the land and the hospital building of the petitioner were assessed for
real property taxes in the amount of P4,554,860 by the City Assessor of Quezon
City.3 Accordingly, Tax Declaration Nos. C-021-01226 (16-2518) and C-021-01231 (15-2518A) were issued for the land and the hospital building, respectively.4 On August 25, 1993, the
petitioner filed a Claim for Exemption5 from real property taxes with the City Assessor,
predicated on its claim that it is a charitable institution. The petitioners request was denied,
and a petition was, thereafter, filed before the Local Board of Assessment Appeals of Quezon
City (QC-LBAA, for brevity) for the reversal of the resolution of the City Assessor. The
petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the property
is exempt from real property taxes. It averred that a minimum of 60% of its hospital beds
are exclusively used for charity patients and that the major thrust of its hospital operation is
to serve charity patients. The petitioner contends that it is a charitable institution and, as
such, is exempt from real property taxes. The QC-LBAA rendered judgment dismissing the
petition and holding the petitioner liable for real property taxes. 6

13. That the claims/allegations of the Petitioner LCP do not speak well of its record of
service. That before a patient is admitted for treatment in the Center, first impression is
that it is pay-patient and required to pay a certain amount as deposit. That even if a
patient is living below the poverty line, he is charged with high hospital bills. And,
without these bills being first settled, the poor patient cannot be allowed to leave the
hospital or be discharged without first paying the hospital bills or issue a promissory
note guaranteed and indorsed by an influential agency or person known only to the
Center; that even the remains of deceased poor patients suffered the same fate.
Moreover, before a patient is admitted for treatment as free or charity patient, one must
undergo a series of interviews and must submit all the requirements needed by the
Center, usually accompanied by endorsement by an influential agency or person known
only to the Center. These facts were heard and admitted by the Petitioner LCP during
the hearings before the Honorable QC-BAA and Honorable CBAA. These are the reasons
of indigent patients, instead of seeking treatment with the Center, they prefer to be
treated at the Quezon Institute. Can such practice by the Center be called charitable? 10

The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board of
Assessment Appeals of Quezon City (CBAA, for brevity)7 which ruled that the petitioner was
not a charitable institution and that its real properties were not actually, directly and
exclusively used for charitable purposes; hence, it was not entitled to real property tax
exemption under the constitution and the law. The petitioner sought relief from the Court of
Appeals, which rendered judgment affirming the decision of the CBAA. 8

The Issues
The issues for resolution are the following: (a) whether the petitioner is a charitable
institution within the context of Presidential Decree No. 1823 and the 1973 and 1987
Constitutions and Section 234(b) of Republic Act No. 7160; and (b) whether the real
properties of the petitioner are exempt from real property taxes.

Undaunted, the petitioner filed its petition in this Court contending that:
A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO REALTY
TAX EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING AND IMPROVEMENTS,
SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY DEVOTED
FOR CHARITABLE PURPOSES.

The Courts Ruling

The petition is partially granted.

B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER ITS
CHARTER, PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE EXTENDED UPON
PROPER APPLICATION.

On the first issue, we hold that the petitioner is a charitable institution within the context of
the 1973 and 1987 Constitutions. To determine whether an enterprise is a charitable
1

institution/entity or not, the elements which should be considered include the statute
creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of
administration, the nature of the actual work performed, the character of the services
rendered, the indefiniteness of the beneficiaries, and the use and occupation of the
properties.11

pulmonary diseases and their control; and to collect and publish the findings of such
research for public consumption;
4. To facilitate the dissemination of ideas and public acceptance of information on lung
consciousness or awareness, and the development of fact-finding, information and
reporting facilities for and in aid of the general purposes or objects aforesaid, especially
in human lung requirements, general health and physical fitness, and other relevant or
related fields;

In the legal sense, a charity may be fully defined as a gift, to be applied consistently with
existing laws, for the benefit of an indefinite number of persons, either by bringing their
minds and hearts under the influence of education or religion, by assisting them to establish
themselves in life or otherwise lessening the burden of government. 12 It may be applied to
almost anything that tend to promote the well-doing and well-being of social man. It
embraces the improvement and promotion of the happiness of man.13 The word "charitable"
is not restricted to relief of the poor or sick.14 The test of a charity and a charitable
organization are in law the same. The test whether an enterprise is charitable or not is
whether it exists to carry out a purpose reorganized in law as charitable or whether it is
maintained for gain, profit, or private advantage.

5. To encourage the training of physicians, nurses, health officers, social workers and
medical and technical personnel in the practical and scientific implementation of services
to lung patients;
6. To assist universities and research institutions in their studies about lung diseases, to
encourage advanced training in matters of the lung and related fields and to support
educational programs of value to general health;
7. To encourage the formation of other organizations on the national, provincial and/or
city and local levels; and to coordinate their various efforts and activities for the purpose
of achieving a more effective programmatic approach on the common problems relative
to the objectives enumerated herein;

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject
to the provisions of the decree, is to be administered by the Office of the President of the
Philippines with the Ministry of Health and the Ministry of Human Settlements. It was
organized for the welfare and benefit of the Filipino people principally to help combat the
high incidence of lung and pulmonary diseases in the Philippines. The raison detre for the
creation of the petitioner is stated in the decree, viz:

8. To seek and obtain assistance in any form from both international and local
foundations and organizations; and to administer grants and funds that may be given to
the organization;
9. To extend, whenever possible and expedient, medical services to the public and, in
general, to promote and protect the health of the masses of our people, which has long
been recognized as an economic asset and a social blessing;

Whereas, for decades, respiratory diseases have been a priority concern, having been
the leading cause of illness and death in the Philippines, comprising more than 45% of
the total annual deaths from all causes, thus, exacting a tremendous toll on human
resources, which ailments are likely to increase and degenerate into serious lung
diseases on account of unabated pollution, industrialization and unchecked cigarette
smoking in the country;lavvph!l.net

10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and maladies
of the people in any and all walks of life, including those who are poor and needy, all
without regard to or discrimination, because of race, creed, color or political belief of the
persons helped; and to enable them to obtain treatment when such disorders occur;

Whereas, the more common lung diseases are, to a great extent, preventable, and
curable with early and adequate medical care, immunization and through prompt and
intensive prevention and health education programs;

11. To participate, as circumstances may warrant, in any activity designed and carried
on to promote the general health of the community;

Whereas, there is an urgent need to consolidate and reinforce existing programs,

strategies and efforts at preventing, treating and rehabilitating people affected by lung
diseases, and to undertake research and training on the cure and prevention of lung
diseases, through a Lung Center which will house and nurture the above and related
activities and provide tertiary-level care for more difficult and problematical cases;

12. To acquire and/or borrow funds and to own all funds or equipment, educational
materials and supplies by purchase, donation, or otherwise and to dispose of and
distribute the same in such manner, and, on such basis as the Center shall, from time to
time, deem proper and best, under the particular circumstances, to serve its general
and non-profit purposes and objectives;lavvphil.net

Whereas, to achieve this purpose, the Government intends to provide material and
financial support towards the establishment and maintenance of a Lung Center for the
welfare and benefit of the Filipino people.15

13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose of
properties, whether real or personal, for purposes herein mentioned; and
14. To do everything necessary, proper, advisable or convenient for the accomplishment
of any of the powers herein set forth and to do every other act and thing incidental
thereto or connected therewith.16

The purposes for which the petitioner was created are spelled out in its Articles of
Incorporation, thus:
SECOND: That the purposes for which such corporation is formed are as follows:

Hence, the medical services of the petitioner are to be rendered to the public in general in
any and all walks of life including those who are poor and the needy without discrimination.
After all, any person, the rich as well as the poor, may fall sick or be injured or wounded and
become a subject of charity.17

1. To construct, establish, equip, maintain, administer and conduct an integrated

medical institution which shall specialize in the treatment, care, rehabilitation and/or
relief of lung and allied diseases in line with the concern of the government to assist and
provide material and financial support in the establishment and maintenance of a lung
center primarily to benefit the people of the Philippines and in pursuance of the policy of
the State to secure the well-being of the people by providing them specialized health
and medical services and by minimizing the incidence of lung diseases in the country
and elsewhere.

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether outpatient, or confined in the hospital, or receives subsidies from the government, so long as
the money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons managing or
operating the institution.18 In Congregational Sunday School, etc. v. Board of Review,19 the
State Supreme Court of Illinois held, thus:

2. To promote the noble undertaking of scientific research related to the prevention of

lung or pulmonary ailments and the care of lung patients, including the holding of a
series of relevant congresses, conventions, seminars and conferences;

[A]n institution does not lose its charitable character, and consequent exemption from
taxation, by reason of the fact that those recipients of its benefits who are able to pay
are required to do so, where no profit is made by the institution and the amounts so
received are applied in furthering its charitable purposes, and those benefits are refused

3. To stimulate and, whenever possible, underwrite scientific researches on the

biological, demographic, social, economic, eugenic and physiological aspects of lung or
2

to none on account of inability to pay therefor. The fundamental ground upon which all
exemptions in favor of charitable institutions are based is the benefit conferred upon the
public by them, and a consequent relief, to some extent, of the burden upon the state to
care for and advance the interests of its citizens.20

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides
that the petitioner shall enjoy the tax exemptions and privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation
organized primarily to help combat the high incidence of lung and pulmonary diseases in
the Philippines, all donations, contributions, endowments and equipment and supplies to
be imported by authorized entities or persons and by the Board of Trustees of the Lung
Center of the Philippines, Inc., for the actual use and benefit of the Lung Center, shall be
exempt from income and gift taxes, the same further deductible in full for the purpose
of determining the maximum deductible amount under Section 30, paragraph (h), of the
National Internal Revenue Code, as amended.

As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association
of South Dakota v. Baker:21
[T]he fact that paying patients are taken, the profits derived from attendance upon
these patients being exclusively devoted to the maintenance of the charity, seems
rather to enhance the usefulness of the institution to the poor; for it is a matter of
common observation amongst those who have gone about at all amongst the suffering
classes, that the deserving poor can with difficulty be persuaded to enter an asylum of
any kind confined to the reception of objects of charity; and that their honest pride is
much less wounded by being placed in an institution in which paying patients are also
received. The fact of receiving money from some of the patients does not, we think, at
all impair the character of the charity, so long as the money thus received is devoted
altogether to the charitable object which the institution is intended to further.22

The Lung Center of the Philippines shall be exempt from the payment of taxes, charges
and fees imposed by the Government or any political subdivision or instrumentality
thereof with respect to equipment purchases made by, or for the Lung Center.29
It is plain as day that under the decree, the petitioner does not enjoy any property tax
exemption privileges for its real properties as well as the building constructed thereon. If the
intentions were otherwise, the same should have been among the enumeration of tax
exempt privileges under Section 2:

The money received by the petitioner becomes a part of the trust fund and must be devoted
to public trust purposes and cannot be diverted to private profit or benefit.23

It is a settled rule of statutory construction that the express mention of one person,
thing, or consequence implies the exclusion of all others. The rule is expressed in the
familiar maxim, expressio unius est exclusio alterius.

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not
lose its character as a charitable institution simply because the gift or donation is in the form
of subsidies granted by the government. As held by the State Supreme Court of Utah
in Yorgason v. County Board of Equalization of Salt Lake County:24

The rule of expressio unius est exclusio alterius is formulated in a number of ways. One
variation of the rule is the principle that what is expressed puts an end to that which is
implied. Expressium facit cessare tacitum. Thus, where a statute, by its terms, is
expressly limited to certain matters, it may not, by interpretation or construction, be
extended to other matters.

Second, the government subsidy payments are provided to the project. Thus, those
payments are like a gift or donation of any other kind except they come from the
government. In both Intermountain Health Care and the present case, the crux is the
presence or absence of material reciprocity. It is entirely irrelevant to this analysis that
the government, rather than a private benefactor, chose to make up the deficit resulting
from the exchange between St. Marks Tower and the tenants by making a contribution
to the landlord, just as it would have been irrelevant in Intermountain Health Care if the
patients income supplements had come from private individuals rather than the
government.

...
The rule of expressio unius est exclusio alterius and its variations are canons of
restrictive interpretation. They are based on the rules of logic and the natural workings
of the human mind. They are predicated upon ones own voluntary act and not upon
that of others. They proceed from the premise that the legislature would not have made
specified enumeration in a statute had the intention been not to restrict its meaning and
confine its terms to those expressly mentioned.30

Therefore, the fact that subsidization of part of the cost of furnishing such housing is by
the government rather than private charitable contributions does not dictate the denial
of a charitable exemption if the facts otherwise support such an exemption, as they do
here.25

The exemption must not be so enlarged by construction since the reasonable presumption is
that the State has granted in express terms all it intended to grant at all, and that unless the
privilege is limited to the very terms of the statute the favor would be intended beyond what
was meant.31

In this case, the petitioner adduced substantial evidence that it spent its income, including
the subsidies from the government for 1991 and 1992 for its patients and for the operation
of the hospital. It even incurred a net loss in 1991 and 1992 from its operations.

Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly and exclusively used for religious, charitable or
educational purposes shall be exempt from taxation.32

Even as we find that the petitioner is a charitable institution, we hold, anent the second
issue, that those portions of its real property that are leased to private entities are not
exempt from real property taxes as these are not actually, directly and exclusively used for
charitable purposes.

The tax exemption under this constitutional provision covers property taxes only.33 As Chief
Justice Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission,
explained: ". . . what is exempted is not the institution itself . . .; those exempted from real
estate taxes are lands, buildings and improvements actually, directly and exclusively used for
religious, charitable or educational purposes."34

The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.
Taxation is the rule and exemption is the exception. The effect of an exemption is equivalent
to an appropriation. Hence, a claim for exemption from tax payments must be clearly shown
and based on language in the law too plain to be mistaken. 26 As held in Salvation Army v.
Hoehn:27

Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act

No. 7160 (otherwise known as the Local Government Code of 1991) as follows:

An intention on the part of the legislature to grant an exemption from the taxing power
of the state will never be implied from language which will admit of any other
reasonable construction. Such an intention must be expressed in clear and unmistakable
terms, or must appear by necessary implication from the language used, for it is a well
settled principle that, when a special privilege or exemption is claimed under a statute,
charter or act of incorporation, it is to be construed strictly against the property owner
and in favor of the public. This principle applies with peculiar force to a claim of
exemption from taxation . 28

SECTION 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
...
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries and all lands, buildings, and
3

improvements actually, directly, andexclusively used for religious, charitable or

educational purposes.35

------------------------------------------------------------------------------------------------------------

We note that under the 1935 Constitution, "... all lands, buildings, and improvements used
exclusively for charitable purposes shall be exempt from taxation." 36 However, under
the 1973 and the present Constitutions, for "lands, buildings, and improvements" of the
charitable institution to be considered exempt, the same should not only be "exclusively"
used for charitable purposes; it is required that such property be used "actually" and
"directly" for such purposes.37

G.R. No. 120082

September 11, 1996

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs. HON.

FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional Trial
Court, Branch 20, Cebu City, THE CITY OF CEBU, represented by its Mayor HON.
TOMAS R. OSMEA, and EUSTAQUIO B. CESA, respondents.
DAVIDE, JR., J.:

In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely on
our ruling in Herrera v. Quezon City Board of Assessment Appeals which was promulgated on
September 30, 1961 before the 1973 and 1987 Constitutions took effect.38 As this Court held
in Province of Abra v. Hernando:39

For review under Rule 45 of the Rules of Court on a pure question of law are the decision of
22 March 1995 1 of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the
petition for declaratory relief in Civil Case No. CEB-16900 entitled "Mactan Cebu International
Airport Authority vs. City of Cebu", and its order of 4, May 1995 2 denying the motion to
reconsider the decision.

Under the 1935 Constitution: "Cemeteries, churches, and parsonages or convents

appurtenant thereto, and all lands, buildings, and improvements used exclusively for
religious, charitable, or educational purposes shall be exempt from taxation." The
present Constitution added "charitable institutions, mosques, and non-profit cemeteries"
and required that for the exemption of "lands, buildings, and improvements," they
should not only be "exclusively" but also "actually" and "directly" used for religious or
charitable purposes. The Constitution is worded differently. The change should not be
ignored. It must be duly taken into consideration. Reliance on past decisions would have
sufficed were the words "actually" as well as "directly" not added. There must be proof
therefore of the actual and direct use of the lands, buildings, and improvements for
religious or charitable purposes to be exempt from taxation.

We resolved to give due course to this petition for its raises issues dwelling on the scope of
the taxing power of local government-owned and controlled corporations.
The uncontradicted factual antecedents are summarized in the instant petition as follows:
Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue of
Republic Act No. 6958, mandated to "principally undertake the economical, efficient and
effective control, management and supervision of the Mactan International Airport in the
Province of Cebu and the Lahug Airport in Cebu City, . . . and such other Airports as
may be established in the Province of Cebu . . . (Sec. 3, RA 6958). It is also mandated
to:

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the
exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is
a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is
defined as possessed and enjoyed to the exclusion of others; debarred from participation or
enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege
exclusively."40 If real property is used for one or more commercial purposes, it is not
exclusively used for the exempted purposes but is subject to taxation. 41 The words
"dominant use" or "principal use" cannot be substituted for the words "used exclusively"
without doing violence to the Constitutions and the law.42 Solely is synonymous with
exclusively.43

a) encourage, promote and develop international and domestic air traffic in the
Central Visayas and Mindanao regions as a means of making the regions centers of
international trade and tourism, and accelerating the development of the means of
transportation and communication in the country; and
b) upgrade the services and facilities of the airports and to formulate internationally
acceptable standards of airport accommodation and service.
Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption
from payment of realty taxes in accordance with Section 14 of its Charter.
Sec. 14. Tax Exemptions. The authority shall be exempt from realty taxes imposed by
the National Government or any of its political subdivisions, agencies and
instrumentalities . . .

What is meant by actual, direct and exclusive use of the property for charitable purposes is
the direct and immediate and actual application of the property itself to the purposes for
which the charitable institution is organized. It is not the use of the income from the real
property that is determinative of whether the property is used for tax-exempt purposes. 44

On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the
Treasurer of the City of Cebu, demanded payment for realty taxes on several parcels of
land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A, 989-A, 474,
109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A), located at
Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total amount of
P2,229,078.79.

The petitioner failed to discharge its burden to prove that the entirety of its real property is
actually, directly and exclusively used for charitable purposes. While portions of the hospital
are used for the treatment of patients and the dispensation of medical services to them,
whether paying or non-paying, other portions thereof are being leased to private individuals
for their clinics and a canteen. Further, a portion of the land is being leased to a private
individual for her business enterprise under the business name "Elliptical Orchids and Garden
Center." Indeed, the petitioners evidence shows that it collected P1,136,483.45 as rentals in
1991 and P1,679,999.28 for 1992 from the said lessees.

Petitioner objected to such demand for payment as baseless and unjustified, claiming in
its favor the aforecited Section 14 of RA 6958 which exempt it from payment of realty
taxes. It was also asserted that it is an instrumentality of the government performing
governmental functions, citing section 133 of the Local Government Code of 1991 which
puts limitations on the taxing powers of local government units:

Accordingly, we hold that the portions of the land leased to private entities as well as those
parts of the hospital leased to private individuals are not exempt from such taxes. 45 On the
other hand, the portions of the land occupied by the hospital and portions of the hospital
used for its patients, whether paying or non-paying, are exempt from real property taxes.

Sec. 133. Common Limitations on the Taxing Powers of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangay shall not extend to the levy of the following:
a) . . .

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The

respondent Quezon City Assessor is hereby DIRECTED to determine, after due hearing, the
precise portions of the land and the area thereof which are leased to private persons, and to
compute the real property taxes due thereon as provided for by law.

xxx xxx xxx

o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis supplied)
Respondent City refused to cancel and set aside petitioner's realty tax account, insisting
that the MCIAA is a government-controlled corporation whose tax exemption privilege

SO ORDERED.
4

has been withdrawn by virtue of Sections 193 and 234 of the Local Governmental Code
that took effect on January 1, 1992:

This Court's ruling finds expression to give impetus and meaning to the overall
objectives of the New Local Government Code of 1991, RA 7160. "It is hereby declared
the policy of the State that the territorial and political subdivisions of the State shall
enjoy genuine and meaningful local autonomy to enable them to attain their fullest
development as self-reliant communities and make them more effective partners in the
attainment of national goals. Towards this end, the State shall provide for a more
responsive and accountable local government structure instituted through a system of
decentralization whereby local government units shall be given more powers, authority,
responsibilities, and resources. The process of decentralization shall proceed from the
national government to the local government units. . . . 5

Sec. 193. Withdrawal of Tax Exemption Privilege. Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons
whether natural or juridical,including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under RA No. 6938, non-stock,
and non-profit hospitals and educational institutions,are hereby withdrawn upon the
effectivity of this Code. (Emphasis supplied)
xxx xxx xxx
Sec. 234. Exemptions from Real Property taxes. . . .

Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order,
the petitioner filed the instant petition based on the following assignment of errors:

(a) . . .
xxx xxx xxx

(c) . . .

RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER IS VESTED

WITH GOVERNMENT POWERS AND FUNCTIONS WHICH PLACE IT IN THE SAME
CATEGORY AS AN INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT.

Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.

II
RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO PAY REAL
PROPERTY TAXES TO THE CITY OF CEBU.

As the City of Cebu was about to issue a warrant of levy against the properties of
petitioner, the latter was compelled to pay its tax account "under protest" and thereafter
filed a Petition for Declaratory Relief with the Regional Trial Court of Cebu, Branch 20, on
December 29, 1994. MCIAA basically contended that the taxing powers of local
government units do not extend to the levy of taxes or fees of any kind on
an instrumentality of the national government. Petitioner insisted that while it is indeed
a government-owned corporation, it nonetheless stands on the same footing as an
agency or instrumentality of the national government. Petitioner insisted that while it is
indeed a government-owned corporation, it nonetheless stands on the same footing as
an agency or instrumentality of the national government by the very nature of its
powers and functions.

Anent the first assigned error, the petitioner asserts that although it is a government-owned
or controlled corporation it is mandated to perform functions in the same category as an
instrumentality of Government. An instrumentality of Government is one created to perform
governmental functions primarily to promote certain aspects of the economic life of the
people. 6 Considering its task "not merely to efficiently operate and manage the Mactan-Cebu
International Airport, but more importantly, to carry out the Government policies of
promoting and developing the Central Visayas and Mindanao regions as centers of
international trade and tourism, and accelerating the development of the means of
transportation and communication in the country," 7 and that it is an attached agency of the
Department of Transportation and Communication (DOTC), 8 the petitioner "may stand in
[sic] the same footing as an agency or instrumentality of the national government." Hence,
its tax exemption privilege under Section 14 of its Charter "cannot be considered withdrawn
with the passage of the Local Government Code of 1991 (hereinafter LGC) because Section
133 thereof specifically states that the taxing powers of local government units shall not
extend to the levy of taxes of fees or charges of any kind on the national government its
agencies and instrumentalities."

Respondent City, however, asserted that MACIAA is not an instrumentality of the

government but merely a government-owned corporation performing proprietary
functions As such, all exemptions previously granted to it were deemed withdrawn by
operation of law, as provided under Sections 193 and 234 of the Local Government Code
when it took effect on January 1, 1992. 3
The petition for declaratory relief was docketed as Civil Case No. CEB-16900.

As to the second assigned error, the petitioner contends that being an instrumentality of the
National Government, respondent City of Cebu has no power nor authority to impose realty
taxes upon it in accordance with the aforesaid Section 133 of the LGC, as explained in Basco
vs. Philippine Amusement and Gaming Corporation; 9

In its decision of 22 March 1995, 4 the trial court dismissed the petition in light of its findings,
to wit:
A close reading of the New Local Government Code of 1991 or RA 7160 provides the
express cancellation and withdrawal of exemption of taxes by government owned and
controlled corporation per Sections after the effectivity of said Code on January 1, 1992,
to wit: [proceeds to quote Sections 193 and 234]

Local governments have no power to tax instrumentalities of the National Government.

PAGCOR is a government owned or controlled corporation with an original character, PD
1869. All its shares of stock are owned by the National Government. . . .

Petitioners claimed that its real properties assessed by respondent City Government of
Cebu are exempted from paying realty taxes in view of the exemption granted under RA
6958 to pay the same (citing Section 14 of RA 6958).

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter joke is
governmental, which places it in the category of an agency or instrumentality of the
Government. Being an instrumentality of the Government, PAGCOR should be and
actually is exempt from local taxes. Otherwise, its operation might be burdened,
impeded or subjected to control by a mere Local government.

However, RA 7160 expressly provides that "All general and special laws, acts, city
charters, decress [sic], executive orders, proclamations and administrative regulations,
or part or parts thereof which are inconsistent with any of the provisions of this Code
are hereby repealed or modified accordingly." ([f], Section 534, RA 7160).

The states have no power by taxation or otherwise, to retard, impede, burden or in any
manner control the operation of constitutional laws enacted by Congress to carry into
execution the powers vested in the federal government. (McCulloch v. Maryland, 4
Wheat 316, 4 L Ed. 579).

With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly repealed by
the provisions of the New Local Government Code of 1991.

This doctrine emanates from the "supremacy" of the National Government over local
government.

So that petitioner in this case has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.

Justice Holmes, speaking for the Supreme Court, make references to the entire absence
of power on the part of the States to touch, in that way (taxation) at least, the
5

instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be
agreed that no state or political subdivision can regulate a federal instrumentality in
such a way as to prevent it from consummating its federal responsibilities, or even to
seriously burden it in the accomplishment of them. (Antieau Modern Constitutional Law,
Vol. 2, p. 140)

Constitution. 22 Under the latter, the exercise of the power may be subject to such guidelines
and limitations as the Congress may provide which, however, must be consistent with the
basic policy of local autonomy.
There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt
from the payment of realty taxes imposed by the National Government or any of its political
subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the rule and
exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure of
the taxing authority. The only exception to this rule is where the exemption was granted to
private parties based on material consideration of a mutual nature, which then becomes
contractual and is thus covered by the non-impairment clause of the Constitution. 23

Otherwise mere creature of the State can defeat National policies thru extermination of
what local authorities may perceive to be undesirable activities or enterprise using the
power to tax as "a toll for regulation" (U.S. v. Sanchez, 340 US 42). The power to tax
which was called by Justice Marshall as the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very
entity which has the inherent power to wield it. (Emphasis supplied)

The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the
exercise by local government units of their power to tax, the scope thereof or its limitations,
and the exemption from taxation.

It then concludes that the respondent Judge "cannot therefore correctly say that the
questioned provisions of the Code do not contain any distinction between a governmental
function as against one performing merely proprietary ones such that the exemption
privilege withdrawn under the said Code would apply to allgovernment corporations." For it is
clear from Section 133, in relation to Section 234, of the LGC that the legislature meant to
exclude instrumentalities of the national government from the taxing power of the local
government units.

Section 133 of the LGC prescribes the common limitations on the taxing powers of local
government units as follows:
Sec. 133. Common Limitations on the Taxing Power of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:

In its comment respondent City of Cebu alleges that as local a government unit and a
political subdivision, it has the power to impose, levy, assess, and collect taxes within its
jurisdiction. Such power is guaranteed by the Constitution 10 and enhanced further by the
LGC. While it may be true that under its Charter the petitioner was exempt from the
payment of realty taxes, 11 this exemption was withdrawn by Section 234 of the LGC. In
response to the petitioner's claim that such exemption was not repealed because being an
instrumentality of the National Government, Section 133 of the LGC prohibits local
government units from imposing taxes, fees, or charges of any kind on it, respondent City of
Cebu points out that the petitioner is likewise a government-owned corporation, and Section
234 thereof does not distinguish between government-owned corporation, and Section 234
thereof does not distinguish between government-owned corporation, and Section 234
thereof does not distinguish between government-owned or controlled corporations
performing governmental and purely proprietary functions. Respondent city of Cebu urges
this the Manila International Airport Authority is a governmental-owned corporation, 12 and
to reject the application of Basco because it was "promulgated . . . before the enactment and
the singing into law of R.A. No. 7160," and was not, therefore, decided "in the light of the
spirit and intention of the framers of the said law.

(a) Income tax, except when levied on banks and other financial institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, "inheritance, gifts, legacies and other acquisitions mortis
causa, except as otherwise provided herein
(d) Customs duties, registration fees of vessels and wharfage on wharves, tonnage
dues, and all other kinds of customs fees charges and dues except wharfage on
wharves constructed and maintained by the local government unit concerned:
(e) Taxes, fees and charges and other imposition upon goods carried into or out of,
or passing through, the territorial jurisdictions of local government units in the
guise or charges for wharfages, tolls for bridges or otherwise, or other taxes, fees
or charges in any form whatsoever upon such goods or merchandise;
(f) Taxes fees or charges on agricultural and aquatic products when sold by
marginal farmers or fishermen;
(g) Taxes on business enterprise certified to be the Board of Investment as pioneer
or non-pioneer for a period of six (6) and four (4) years, respectively from the date
of registration;

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found
only in the responsibility of the legislature which imposes the tax on the constituency who
are to pay it. Nevertheless, effective limitations thereon may be imposed by the people
through their Constitutions. 13 Our Constitution, for instance, provides that the rule of
taxation shall be uniform and equitable and Congress shall evolve a progressive system of
taxation.14 So potent indeed is the power that it was once opined that "the power to tax
involves the power to destroy." 15Verily, taxation is a destructive power which interferes with
the personal and property for the support of the government. Accordingly, tax statutes must
be construed strictly against the government and liberally in favor of the taxpayer. 16 But
since taxes are what we pay for civilized society, 17 or are the lifeblood of the nation, the law
frowns against exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayers and liberally in favor of the taxing
authority. 18 A claim of exemption from tax payment must be clearly shown and based on
language in the law too plain to be mistaken. 19 Elsewise stated, taxation is the rule,
exemption therefrom is the exception. 20 However, if the grantee of the exemption is a
political subdivision or instrumentality, the rigid rule of construction does not apply because
the practical effect of the exemption is merely to reduce the amount of money that has to be
handled by the government in the course of its operations. 21

(h) Excise taxes on articles enumerated under the National Internal Revenue Code,
as amended, and taxes, fees or charges on petroleum products;
(i) Percentage or value added tax (VAT) on sales, barters or exchanges or similar
transactions on goods or services except as otherwise provided herein;
(j) Taxes on the gross receipts of transportation contractor and person engage in
the transportation of passengers of freight by hire and common carriers by air,
land, or water, except as provided in this code;
(k) Taxes on premiums paid by ways reinsurance or retrocession;
(l) Taxes, fees, or charges for the registration of motor vehicles and for the
issuance of all kinds of licenses or permits for the driving of thereof, except,
tricycles;
(m) Taxes, fees, or other charges on Philippine product actually exported, except as
otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprise and
Cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixty
nine hundred thirty-eight (R.A. No. 6938) otherwise known as the "Cooperative
Code of the Philippines; and

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be
exercised by local legislative bodies, no longer merely by virtue of a valid delegation as
before, but pursuant to direct authority conferred by Section 5, Article X of the
6

(o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE NATIONAL GOVERNMENT,

ITS AGENCIES AND INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS.
(emphasis supplied)

and/or generation and transmission of electric power; and (iii) all machinery and
equipment used for pollution control and environmental protection.
To help provide a healthy environment in the midst of the modernization of the country,
all machinery and equipment for pollution control and environmental protection may not
be taxed by local governments.

Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges"
referred to are "of any kind", hence they include all of these, unless otherwise provided by
the LGC. The term "taxes" is well understood so as to need no further elaboration, especially
in the light of the above enumeration. The term "fees" means charges fixed by law or
Ordinance for the regulation or inspection of business activity, 24while "charges" are
pecuniary liabilities such as rents or fees against person or property. 25

2. Other Exemptions Withdrawn. All other exemptions previously granted to natural

or juridical persons including government-owned or controlled corporations are
withdrawn upon the effectivity of the Code. 26
Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It
provides:

Among the "taxes" enumerated in the LGC is real property tax, which is governed by Section
232. It reads as follows:

Sec. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this
code, tax exemptions or incentives granted to or presently enjoyed by all persons,
whether natural or juridical, including government-owned, or controlled corporations,
except local water districts, cooperatives duly registered under R.A. 6938, non stock and
non profit hospitals and educational constitutions, are hereby withdrawn upon the
effectivity of this Code.

Sec. 232. Power to Levy Real Property Tax. A province or city or a municipality within
the Metropolitan Manila Area may levy on an annual ad valorem tax on real property
such as land, building, machinery and other improvements not hereafter specifically
exempted.
Section 234 of LGC provides for the exemptions from payment of real property taxes and
withdraws previous exemptions therefrom granted to natural and juridical persons, including
government owned and controlled corporations, except as provided therein. It provides:

On the other hand, the LGC authorizes local government units to grant tax exemption
privileges. Thus, Section 192 thereof provides:

Sec. 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:

Sec. 192. Authority to Grant Tax Exemption Privileges. Local government units may,
through ordinances duly approved, grant tax exemptions, incentives or reliefs under
such terms and conditions as they may deem necessary.

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof had been granted, for
reconsideration or otherwise, to a taxable person;

The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers of local
government units and the exceptions to such limitations; and (b) the rule on tax exemptions
and the exceptions thereto. The use of exceptions of provisos in these section, as shown by
the following clauses:

(b) Charitable institutions, churches, parsonages or convents appurtenants thereto,

mosques nonprofits or religious cemeteries and all lands, building and
improvements actually, directly, and exclusively used for religious charitable or
educational purposes;

(1) "unless otherwise provided herein" in the opening paragraph of Section 133;
(2) "Unless otherwise provided in this Code" in section 193;

(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;

(3) "not hereafter specifically exempted" in Section 232; and

(4) "Except as provided herein" in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too, that the aforementioned
clause in section 133 seems to be inaccurately worded. Instead of the clause "unless
otherwise provided herein," with the "herein" to mean, of course, the section, it should have
used the clause "unless otherwise provided in this Code." The former results in absurdity
since the section itself enumerates what are beyond the taxing powers of local government
units and, where exceptions were intended, the exceptions were explicitly indicated in the
text. For instance, in item (a) which excepts the income taxes "when livied on banks and
other financial institutions", item (d) which excepts "wharfage on wharves constructed and
maintained by the local government until concerned"; and item (1) which excepts taxes,
fees, and charges for the registration and issuance of license or permits for the driving of
"tricycles". It may also be observed that within the body itself of the section, there are
exceptions which can be found only in other parts of the LGC, but the section
interchangeably uses therein the clause "except as otherwise provided herein" as in items (c)
and (i), or the clause "except as otherwise provided herein" as in items (c) and (i), or the
clause "excepts as provided in this Code" in item (j). These clauses would be obviously
unnecessary or mere surplus-ages if the opening clause of the section were" "Unless
otherwise provided in this Code" instead of "Unless otherwise provided herein". In any event,
even if the latter is used, since under Section 232 local government units have the power to
levy real property tax, except those exempted therefrom under Section 234, then Section
232 must be deemed to qualify Section 133.

(d) All real property owned by duly registered cooperatives as provided for under
R.A. No. 6938; and;
(e) Machinery and equipment used for pollution control and environmental
protection.
Except as provided herein, any exemptions from payment of real property tax
previously granted to or presently enjoyed by, all persons whether natural or
juridical, including all government owned or controlled corporations are hereby
withdrawn upon the effectivity of his Code.
These exemptions are based on the ownership, character, and use of the property. Thus;
(a) Ownership Exemptions. Exemptions from real property taxes on the basis of
ownership are real properties owned by: (i) the Republic, (ii) a province, (iii) a city,
(iv) a municipality, (v) a barangay, and (vi) registered cooperatives.
(b) Character Exemptions. Exempted from real property taxes on the basis of their
character are: (i) charitable institutions, (ii) houses and temples of prayer like
churches, parsonages or convents appurtenant thereto, mosques, and (iii) non
profit or religious cemeteries.
(c) Usage exemptions. Exempted from real property taxes on the basis of the
actual, direct and exclusive use to which they are devoted are: (i) all lands
buildings and improvements which are actually, directed and exclusively used for
religious, charitable or educational purpose; (ii) all machineries and equipment
actually, directly and exclusively used or by local water districts or by governmentowned or controlled corporations engaged in the supply and distribution of water

Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a general
rule, as laid down in Section 133 the taxing powers of local government units cannot extend
to the levy of inter alia, "taxes, fees, and charges of any kind of the National Government, its
agencies and instrumentalties, and local government units"; however, pursuant to Section
232, provinces, cities, municipalities in the Metropolitan Manila Area may impose the real
property tax except on, inter alia, "real property owned by the Republic of the Philippines or
7

any of its political subdivisions except when the beneficial used thereof has been granted, for
consideration or otherwise, to a taxable person", as provided in item (a) of the first
paragraph of Section 234.

Government then is composed of the three great departments the executive, the legislative
and the judicial. 30
An "agency" of the Government refers to "any of the various units of the Government,
including a department, bureau, office instrumentality, or government-owned or controlled
corporation, or a local government or a distinct unit therein;" 31 while an "instrumentality"
refers to "any agency of the National Government, not integrated within the department
framework, vested with special functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying operational autonomy; usually
through a charter. This term includes regulatory agencies, chartered institutions and
government-owned and controlled corporations". 32

As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical

persons, including government-owned and controlled corporations, Section 193 of the LGC
prescribes the general rule, viz., they are withdrawn upon the effectivity of the LGC, except
upon the effectivity of the LGC, except those granted to local water districts, cooperatives
duly registered under R.A. No. 6938, non stock and non-profit hospitals and educational
institutions, and unless otherwise provided in the LGC. The latter proviso could refer to
Section 234, which enumerates the properties exempt from real property tax. But the last
paragraph of Section 234 further qualifies the retention of the exemption in so far as the real
property taxes are concerned by limiting the retention only to those enumerated there-in; all
others not included in the enumeration lost the privilege upon the effectivity of the LGC.
Moreover, even as the real property is owned by the Republic of the Philippines, or any of its
political subdivisions covered by item (a) of the first paragraph of Section 234, the
exemption is withdrawn if the beneficial use of such property has been granted to taxable
person for consideration or otherwise.

If Section 234(a) intended to extend the exception therein to the withdrawal of the
exemption from payment of real property taxes under the last sentence of the said section to
the agencies and instrumentalities of the National Government mentioned in Section 133(o),
then it should have restated the wording of the latter. Yet, it did not Moreover, that Congress
did not wish to expand the scope of the exemption in Section 234(a) to include real property
owned by other instrumentalities or agencies of the government including governmentowned and controlled corporations is further borne out by the fact that the source of this
exemption is Section 40(a) of P.D. No. 646, otherwise known as the Real Property Tax Code,
which reads:

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the
LGC, exemptions from real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and
the petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that
its exemption from such tax granted it in Section 14 of its charter, R.A. No. 6958, has been
withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge
under any of the exceptions provided in Section 234, but not under Section 133, as it now
asserts, since, as shown above, the said section is qualified by Section 232 and 234.

Sec 40. Exemption from Real Property Tax. The exemption shall be as follows:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions and any government-owned or controlled corporations so exempt by is
charter: Provided, however, that this exemption shall not apply to real property of the
above mentioned entities the beneficial use of which has been granted, for consideration
or otherwise, to a taxable person.

In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing
powers of the local government units cannot extend to the levy of:

Note that as a reproduced in Section 234(a), the phrase "and any government-owned or
controlled corporation so exempt by its charter" was excluded. The justification for this
restricted exemption in Section 234(a) seems obvious: to limit further tax exemption
privileges, specially in light of the general provision on withdrawal of exemption from
payment of real property taxes in the last paragraph of property taxes in the last paragraph
of Section 234. These policy considerations are consistent with the State policy to ensure
autonomy to local governments 33 and the objective of the LGC that they enjoy genuine and
meaningful local autonomy to enable them to attain their fullest development as self-reliant
communities and make them effective partners in the attainment of national goals. 34 The
power to tax is the most effective instrument to raise needed revenues to finance and
support myriad activities of local government units for the delivery of basic services essential
to the promotion of the general welfare and the enhancement of peace, progress, and
prosperity of the people. It may also be relevant to recall that the original reasons for the
withdrawal of tax exemption privileges granted to government-owned and controlled
corporations and all other units of government were that such privilege resulted in serious
tax base erosion and distortions in the tax treatment of similarly situated enterprises, and
there was a need for this entities to share in the requirements of the development, fiscal or
otherwise, by paying the taxes and other charges due from them. 35

(o) taxes, fees, or charges of any kind on the National Government, its agencies, or
instrumentalities, and local government units.
I must show that the parcels of land in question, which are real property, are any one of
those enumerated in Section 234, either by virtue of ownership, character, or use of the
property. Most likely, it could only be the first, but not under any explicit provision of the said
section, for one exists. In light of the petitioner's theory that it is an "instrumentality of the
Government", it could only be within be first item of the first paragraph of the section by
expanding the scope of the terms Republic of the Philippines" to
embrace . . . . . . "instrumentalities" and "agencies" or expediency we quote:
(a) real property owned by the Republic of the Philippines, or any of the Philippines, or
any of its political subdivisions except when the beneficial use thereof has been granted,
for consideration or otherwise, to a taxable person.
This view does not persuade us. In the first place, the petitioner's claim that it is an
instrumentality of the Government is based on Section 133(o), which expressly mentions the
word "instrumentalities"; and in the second place it fails to consider the fact that the
legislature used the phrase "National Government, its agencies and instrumentalities" "in
Section 133(o),but only the phrase "Republic of the Philippines or any of its political
subdivision "in Section 234(a).

The crucial issues then to be addressed are: (a) whether the parcels of land in question
belong to the Republic of the Philippines whose beneficial use has been granted to the
petitioner, and (b) whether the petitioner is a "taxable person".

The terms "Republic of the Philippines" and "National Government" are not interchangeable.
The former is boarder and synonymous with "Government of the Republic of the Philippines"
which the Administrative Code of the 1987 defines as the "corporate governmental entity
though which the functions of the government are exercised through at the Philippines,
including, saves as the contrary appears from the context, the various arms through which
political authority is made effective in the Philippines, whether pertaining to the autonomous
reason, the provincial, city, municipal or barangay subdivision or other forms of local
government." 27 These autonomous regions, provincial, city, municipal or barangay
subdivisions" are the political subdivision. 28

Section 15 of the petitioner's Charter provides:

Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing public airport
facilities, runways, lands, buildings and other properties, movable or immovable,
belonging to or presently administered by the airports, and all assets, powers, rights,
interests and privileges relating on airport works, or air operations, including all
equipment which are necessary for the operations of air navigation, acrodrome control
towers, crash, fire, and rescue facilities are hereby transferred to the
Authority: Provided however, that the operations control of all equipment necessary for
the operation of radio aids to air navigation, airways communication, the approach
control office, and the area control center shall be retained by the Air Transportation

On the other hand, "National Government" refers "to the entire machinery of the central
government, as distinguished from the different forms of local Governments." 29 The National
8

Office. No equipment, however, shall be removed by the Air Transportation Office from
Mactan without the concurrence of the authority. The authority may assist in the
maintenance of the Air Transportation Office equipment.

portion of the land transferred to MIAA shall be disposed of through sale or any other mode
unless specifically approved by the President of the Philippines. 5
On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion
No. 061. The OGCC opined that the Local Government Code of 1991 withdrew the exemption
from real estate tax granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA
negotiated with respondent City of Paraaque to pay the real estate tax imposed by the City.
MIAA then paid some of the real estate tax already due.

The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan International
AirPort in the Province of Cebu", 36 which belonged to the Republic of the Philippines, then
under the Air Transportation Office (ATO). 37
It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then
administered by the Lahug Air Port and includes the parcels of land the respondent City of
Cebu seeks to levy on for real property taxes. This section involves a "transfer" of the "lands"
among other things, to the petitioner and not just the transfer of the beneficial use thereof,
with the ownership being retained by the Republic of the Philippines.

On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City
of Paraaque for the taxable years 1992 to 2001. MIAA's real estate tax delinquency is
broken down as follows:
TAX
DECLARATION

This "transfer" is actually an absolute conveyance of the ownership thereof because the
petitioner's authorized capital stock consists of, inter alia "the value of such real estate
owned and/or administered by the airports." 38 Hence, the petitioner is now the owner of the
land in question and the exception in Section 234(c) of the LGC is inapplicable.

TAXABLE YEAR

TAX DUE

PENALTY

TOTAL

E-016-01370

1992-2001

19,558,160.00

11,201,083.20

30,789,243.20

E-016-01374

1992-2001

111,689,424.90

68,149,479.59

179,838,904.49

Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter.
It was only exempted from the payment of real property taxes. The grant of the privilege
only in respect of this tax is conclusive proof of the legislative intent to make it a taxable
person subject to all taxes, except real property tax.

E-016-01375

1992-2001

20,276,058.00

12,371,832.00

32,647,890.00

E-016-01376

1992-2001

58,144,028.00

35,477,712.00

93,621,740.00

E-016-01377

1992-2001

18,134,614.65

11,065,188.59

29,199,803.24

Finally, even if the petitioner was originally not a taxable person for purposes of real property
tax, in light of the forgoing disquisitions, it had already become even if it be conceded to be
an "agency" or "instrumentality" of the Government, a taxable person for such purpose in
view of the withdrawal in the last paragraph of Section 234 of exemptions from the payment
of real property taxes, which, as earlier adverted to, applies to the petitioner.

E-016-01378

1992-2001

111,107,950.40

67,794,681.59

178,902,631.99

E-016-01379

1992-2001

4,322,340.00

2,637,360.00

6,959,700.00

E-016-01380

1992-2001

7,776,436.00

4,744,944.00

12,521,380.00

*E-016-013-85

1998-2001

6,444,810.00

2,900,164.50

9,344,974.50

*E-016-01387

1998-2001

34,876,800.00

5,694,560.00

50,571,360.00

*E-016-01396

1998-2001

75,240.00

33,858.00

109,098.00

Accordingly, the position taken by the petitioner is untenable. Reliance on Basco

vs. Philippine Amusement and Gaming Corporation 39 is unavailing since it was decided
before the effectivity of the LGC. Besides, nothing can prevent Congress from decreeing that
even instrumentalities or agencies of the government performing governmental functions
may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and
national policy, no one can doubt its wisdom.

GRAND TOTAL

1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75
#9476101 for P28,676,480.00
#9476103 for P49,115.006

WHEREFORE, the instant petition is DENIED. The challenged decision and order of the
Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.

On 17 July 2001, the City of Paraaque, through its City Treasurer, issued notices of levy and
warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Paraaque
threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to pay
the real estate tax delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061.

No pronouncement as to costs.
SO ORDERED.

On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The
OGCC pointed out that Section 206 of the Local Government Code requires persons exempt
from real estate tax to show proof of exemption. The OGCC opined that Section 21 of the
MIAA Charter is the proof that MIAA is exempt from real estate tax.

-----------------------------------------------------------------------------------------------------------G.R. No. 155650

P392,435,861.95 P232,070,863.47 P 624,506,725.42

July 20, 2006

MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs. COURT OF APPEALS,

CITY OF PARAAQUE, CITY MAYOR OF PARAAQUE, SANGGUNIANG
PANGLUNGSOD NG PARAAQUE, CITY ASSESSOR OF PARAAQUE, and CITY
TREASURER OF PARAAQUE, respondents.

On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition
and injunction, with prayer for preliminary injunction or temporary restraining order. The
petition sought to restrain the City of Paraaque from imposing real estate tax on, levying
against, and auctioning for public sale the Airport Lands and Buildings. The petition was
docketed as CA-G.R. SP No. 66878.

DECISION
CARPIO, J.:

On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond
the 60-day reglementary period. The Court of Appeals also denied on 27 September 2002
MIAA's motion for reconsideration and supplemental motion for reconsideration. Hence, MIAA
filed on 5 December 2002 the present petition for review.7

The Antecedents
Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino
International Airport (NAIA) Complex in Paraaque City under Executive Order No. 903,
otherwise known as the Revised Charter of the Manila International Airport Authority ("MIAA
Charter"). Executive Order No. 903 was issued on 21 July 1983 by then President Ferdinand
E. Marcos. Subsequently, Executive Order Nos. 9091 and 2982 amended the MIAA Charter.

Meanwhile, in January 2003, the City of Paraaque posted notices of auction sale at the
Barangay Halls of Barangays Vitalez, Sto. Nio, and Tambo, Paraaque City; in the public
market of Barangay La Huerta; and in the main lobby of the Paraaque City Hall. The City of
Paraaque published the notices in the 3 and 10 January 2003 issues of the Philippine Daily
Inquirer, a newspaper of general circulation in the Philippines. The notices announced the
public auction sale of the Airport Lands and Buildings to the highest bidder on 7 February
2003, 10:00 a.m., at the Legislative Session Hall Building of Paraaque City.

As operator of the international airport, MIAA administers the land, improvements and
equipment within the NAIA Complex. The MIAA Charter transferred to MIAA approximately
600 hectares of land,3 including the runways and buildings ("Airport Lands and Buildings")
then under the Bureau of Air Transportation.4 The MIAA Charter further provides that no
9

A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this
Court an Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary Restraining
Order. The motion sought to restrain respondents the City of Paraaque, City Mayor of
Paraaque, Sangguniang Panglungsod ng Paraaque, City Treasurer of Paraaque, and the
City Assessor of Paraaque ("respondents") from auctioning the Airport Lands and
Buildings.

Respondents argue that MIAA, being a government-owned or controlled corporation, is not

exempt from real estate tax. Respondents claim that the deletion of the phrase "any
government-owned or controlled so exempt by its charter" in Section 234(e) of the Local
Government Code withdrew the real estate tax exemption of government-owned or
controlled corporations. The deleted phrase appeared in Section 40(a) of the 1974 Real
Property Tax Code enumerating the entities exempt from real estate tax.

On 7 February 2003, this Court issued a temporary restraining order (TRO) effective
immediately. The Court ordered respondents to cease and desist from selling at public
auction the Airport Lands and Buildings. Respondents received the TRO on the same day that
the Court issued it. However, respondents received the TRO only at 1:25 p.m. or three hours
after the conclusion of the public auction.

There is no dispute that a government-owned or controlled corporation is not exempt from

real estate tax. However, MIAA is not a government-owned or controlled corporation. Section
2(13) of the Introductory Provisions of the Administrative Code of 1987 defines a
government-owned or controlled corporation as follows:
SEC. 2. General Terms Defined. x x x x

On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.

(13) Government-owned or controlled corporation refers to any agency organized as a

stock or non-stock corporation, vested with functions relating to public needs
whether governmental or proprietary in nature, and owned by the Government directly
or through its instrumentalities either wholly, or, where applicable as in the case of stock
corporations, to the extent of at least fifty-one (51) percent of its capital stock: x x x.
(Emphasis supplied)

On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the
directive issued during the hearing, MIAA, respondent City of Paraaque, and the Solicitor
General subsequently submitted their respective Memoranda.
MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in
the name of MIAA. However, MIAA points out that it cannot claim ownership over these
properties since the real owner of the Airport Lands and Buildings is the Republic of the
Philippines. The MIAA Charter mandates MIAA to devote the Airport Lands and Buildings for
the benefit of the general public. Since the Airport Lands and Buildings are devoted to public
use and public service, the ownership of these properties remains with the State. The Airport
Lands and Buildings are thus inalienable and are not subject to real estate tax by local
governments.

A government-owned or controlled corporation must be "organized as a stock or nonstock corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not
a stock corporation because it has no capital stock divided into shares. MIAA has no
stockholders or voting shares. Section 10 of the MIAA Charter9provides:
SECTION 10. Capital. The capital of the Authority to be contributed by the National
Government shall be increased from Two and One-half Billion (P2,500,000,000.00)
Pesos to Ten Billion (P10,000,000,000.00) Pesos to consist of:

MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the
payment of real estate tax. MIAA insists that it is also exempt from real estate tax under
Section 234 of the Local Government Code because the Airport Lands and Buildings are
owned by the Republic. To justify the exemption, MIAA invokes the principle that the
government cannot tax itself. MIAA points out that the reason for tax exemption of public
property is that its taxation would not inure to any public advantage, since in such a case the
tax debtor is also the tax creditor.

(a) The value of fixed assets including airport facilities, runways and equipment and
such other properties, movable and immovable[,] which may be contributed by the
National Government or transferred by it from any of its agencies, the valuation of
which shall be determined jointly with the Department of Budget and Management and
the Commission on Audit on the date of such contribution or transfer after making due
allowances for depreciation and other deductions taking into account the loans and
other liabilities of the Authority at the time of the takeover of the assets and other
properties;

Respondents invoke Section 193 of the Local Government Code, which expressly
withdrew the tax exemption privileges of "government-owned and-controlled
corporations" upon the effectivity of the Local Government Code. Respondents also argue
that a basic rule of statutory construction is that the express mention of one person, thing,
or act excludes all others. An international airport is not among the exceptions mentioned in
Section 193 of the Local Government Code. Thus, respondents assert that MIAA cannot claim
that the Airport Lands and Buildings are exempt from real estate tax.

(b) That the amount of P605 million as of December 31, 1986 representing about
seventy percentum (70%) of the unremitted share of the National Government from
1983 to 1986 to be remitted to the National Treasury as provided for in Section 11 of E.
O. No. 903 as amended, shall be converted into the equity of the National Government
in the Authority. Thereafter, the Government contribution to the capital of the Authority
shall be provided in the General Appropriations Act.

Respondents also cite the ruling of this Court in Mactan International Airport v.
Marcos8 where we held that the Local Government Code has withdrawn the exemption from
real estate tax granted to international airports. Respondents further argue that since MIAA
has already paid some of the real estate tax assessments, it is now estopped from claiming
that the Airport Lands and Buildings are exempt from real estate tax.

Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.
Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital stock
is divided into shares and x x x authorized to distribute to the holders of such
shares dividends x x x." MIAA has capital but it is not divided into shares of stock. MIAA
has no stockholders or voting shares. Hence, MIAA is not a stock corporation.

The Issue
This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA
are exempt from real estate tax under existing laws. If so exempt, then the real estate tax
assessments issued by the City of Paraaque, and all proceedings taken pursuant to such
assessments, are void. In such event, the other issues raised in this petition become moot.

MIAA is also not a non-stock corporation because it has no members. Section 87 of the
Corporation Code defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." A non-stock corporation must
have members. Even if we assume that the Government is considered as the sole member of
MIAA, this will not make MIAA a non-stock corporation. Non-stock corporations cannot
distribute any part of their income to their members. Section 11 of the MIAA Charter
mandates MIAA to remit 20% of its annual gross operating income to the National
Treasury.11 This prevents MIAA from qualifying as a non-stock corporation.

The Court's Ruling

We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by
local governments.
First, MIAA is not a government-owned or controlled corporation but an instrumentality of
the National Government and thus exempt from local taxation. Second, the real properties of
MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax.

Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary,
scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like

1. MIAA is Not a Government-Owned or Controlled Corporation

10

chambers." MIAA is not organized for any of these purposes. MIAA, a public utility, is
organized to operate an international and domestic airport for public use.

a person, article or activity is taxable is resolved against taxation. This rule applies with
greater force when local governments seek to tax national government instrumentalities.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA within
the National Government?

Another rule is that a tax exemption is strictly construed against the taxpayer claiming the
exemption. However, when Congress grants an exemption to a national government
instrumentality from local taxation, such exemption is construed liberally in favor of the
national government instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:

MIAA is a government instrumentality vested with corporate powers to perform efficiently

its governmental functions. MIAA is like any other government instrumentality, the only
difference is that MIAA is vested with corporate powers. Section 2(10) of the Introductory
Provisions of the Administrative Code defines a government "instrumentality" as follows:

The reason for the rule does not apply in the case of exemptions running to the benefit
of the government itself or its agencies. In such case the practical effect of an
exemption is merely to reduce the amount of money that has to be handled by
government in the course of its operations. For these reasons, provisions granting
exemptions to government agencies may be construed liberally, in favor of non taxliability of such agencies.19

SEC. 2. General Terms Defined. x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by
law, endowed with some if not all corporate powers, administering special funds,
and enjoying operational autonomy, usually through a charter. x x x (Emphasis supplied)

There is, moreover, no point in national and local governments taxing each other, unless a
sound and compelling policy requires such transfer of public funds from one government
pocket to another.

When the law vests in a government instrumentality corporate powers, the instrumentality
does not become a corporation. Unless the government instrumentality is organized as a
stock or non-stock corporation, it remains a government instrumentality exercising not only
governmental but also corporate powers. Thus, MIAA exercises the governmental powers of
eminent domain,12 police authority13 and the levying of fees and charges.14 At the same time,
MIAA exercises "all the powers of a corporation under the Corporation Law, insofar as these
powers are not inconsistent with the provisions of this Executive Order." 15

There is also no reason for local governments to tax national government instrumentalities
for rendering essential public services to inhabitants of local governments. The only
exception is when the legislature clearly intended to tax government
instrumentalities for the delivery of essential public services for sound and
compelling policy considerations. There must be express language in the law
empowering local governments to tax national government instrumentalities. Any doubt
whether such power exists is resolved against local governments.

Likewise, when the law makes a government instrumentality operationally autonomous,

the instrumentality remains part of the National Government machinery although not
integrated with the department framework. The MIAA Charter expressly states that
transforming MIAA into a "separate and autonomous body"16 will make its operation more
"financially viable."17

Thus, Section 133 of the Local Government Code states that "unless otherwise provided"
in the Code, local governments cannot tax national government instrumentalities. As this
Court held in Basco v. Philippine Amusements and Gaming Corporation:
The states have no power by taxation or otherwise, to retard, impede, burden or in
any manner control the operation of constitutional laws enacted by Congress to
carry into execution the powers vested in the federal government. (MC Culloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579)

Many government instrumentalities are vested with corporate powers but they do not
become stock or non-stock corporations, which is a necessary condition before an agency or
instrumentality is deemed a government-owned or controlled corporation. Examples are the
Mactan International Airport Authority, the Philippine Ports Authority, the University of the
Philippines and Bangko Sentral ng Pilipinas. All these government instrumentalities exercise
corporate powers but they are not organized as stock or non-stock corporations as required
by Section 2(13) of the Introductory Provisions of the Administrative Code. These
government instrumentalities are sometimes loosely called government corporate entities.
However, they are not government-owned or controlled corporations in the strict sense as
understood under the Administrative Code, which is the governing law defining the legal
relationship and status of government entities.

This doctrine emanates from the "supremacy" of the National Government over local
governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at least,
the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them."
(Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)

A government instrumentality like MIAA falls under Section 133(o) of the Local
Government Code, which states:

Otherwise, mere creatures of the State can defeat National policies thru extermination
of what local authorities may perceive to be undesirable activities or enterprise using
the power to tax as "a tool for regulation" (U.S. v. Sanchez, 340 US 42).

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of
the following:

The power to tax which was called by Justice Marshall as the "power to destroy" (Mc
Culloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of
the very entity which has the inherent power to wield it. 20

xxxx
(o) Taxes, fees or charges of any kind on the National Government, its agencies
and instrumentalities and local government units.(Emphasis and underscoring
supplied)

2. Airport Lands and Buildings of MIAA are Owned by the Republic

a. Airport Lands and Buildings are of Public Dominion
The Airport Lands and Buildings of MIAA are property of public dominion and therefore
owned by the State or the Republic of the Philippines. The Civil Code provides:

Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax.
While the 1987 Constitution now includes taxation as one of the powers of local
governments, local governments may only exercise such power "subject to such guidelines
and limitations as the Congress may provide."18

ARTICLE 419. Property is either of public dominion or of private ownership.

ARTICLE 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers,
torrents, ports and bridges constructed by the State, banks, shores, roadsteads,
and others of similar character;

When local governments invoke the power to tax on national government instrumentalities,
such power is construed strictly against local governments. The rule is that a tax is never
presumed and there must be clear language in the law imposing the tax. Any doubt whether
11

(2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth. (Emphasis supplied)

its authority in the exercise of its powers by executing a contract over a thing of which it
could not dispose, nor is it empowered so to do.

ARTICLE 421. All other property of the State, which is not of the character stated in the
preceding article, is patrimonial property.

The Civil Code, article 1271, prescribes that everything which is not outside the
commerce of man may be the object of a contract, and plazas and streets are outside
of this commerce, as was decided by the supreme court of Spain in its decision of
February 12, 1895, which says: "Communal things that cannot be sold because
they are by their very nature outside of commerce are those for public use,
such as the plazas, streets, common lands, rivers, fountains, etc." (Emphasis
supplied) 23

ARTICLE 422. Property of public dominion, when no longer intended for public use or for
public service, shall form part of the patrimonial property of the State.
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil
Code, like "roads, canals, rivers, torrents, ports and bridges constructed by the
State," are owned by the State. The term "ports" includes seaports and airports. The
MIAA Airport Lands and Buildings constitute a "port" constructed by the State. Under Article
420 of the Civil Code, the MIAA Airport Lands and Buildings are properties of public dominion
and thus owned by the State or the Republic of the Philippines.

Again in Espiritu v. Municipal Council, the Court declared that properties of public
dominion are outside the commerce of man:
xxx Town plazas are properties of public dominion, to be devoted to public use and
to be made available to the public in general. They are outside the commerce of
man and cannot be disposed of or even leased by the municipality to private parties.
While in case of war or during an emergency, town plazas may be occupied temporarily
by private individuals, as was done and as was tolerated by the Municipality of
Pozorrubio, when the emergency has ceased, said temporary occupation or use must
also cease, and the town officials should see to it that the town plazas should ever be
kept open to the public and free from encumbrances or illegal private
constructions.24 (Emphasis supplied)

The Airport Lands and Buildings are devoted to public use because they are used by the
public for international and domestic travel and transportation. The fact that the
MIAA collects terminal fees and other charges from the public does not remove the character
of the Airport Lands and Buildings as properties for public use. The operation by the
government of a tollway does not change the character of the road as one for public use.
Someone must pay for the maintenance of the road, either the public indirectly through the
taxes they pay the government, or only those among the public who actually use the road
through the toll fees they pay upon using the road. The tollway system is even a more
efficient and equitable manner of taxing the public for the maintenance of public roads.

The Court has also ruled that property of public dominion, being outside the commerce of
man, cannot be the subject of an auction sale.25

The charging of fees to the public does not determine the character of the property whether
it is of public dominion or not. Article 420 of the Civil Code defines property of public
dominion as one "intended for public use." Even if the government collects toll fees, the road
is still "intended for public use" if anyone can use the road under the same terms and
conditions as the rest of the public. The charging of fees, the limitation on the kind of
vehicles that can use the road, the speed restrictions and other conditions for the use of the
road do not affect the public character of the road.

Properties of public dominion, being for public use, are not subject to levy, encumbrance or
disposition through public or private sale. Any encumbrance, levy on execution or auction
sale of any property of public dominion is void for being contrary to public policy. Essential
public services will stop if properties of public dominion are subject to encumbrances,
foreclosures and auction sale. This will happen if the City of Paraaque can foreclose and
compel the auction sale of the 600-hectare runway of the MIAA for non-payment of real
estate tax.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that maintains the operations of MIAA. The
collection of such fees does not change the character of MIAA as an airport for public use.
Such fees are often termed user's tax. This means taxing those among the public who
actually use a public facility instead of taxing all the public including those who never use the
particular public facility. A user's tax is more equitable a principle of taxation mandated in
the 1987 Constitution.21

Before MIAA can encumber26 the Airport Lands and Buildings, the President must
first withdraw from public use the Airport Lands and Buildings. Sections 83 and 88 of the
Public Land Law or Commonwealth Act No. 141, which "remains to this day the existing
general law governing the classification and disposition of lands of the public domain other
than timber and mineral lands,"27 provide:
SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural
Resources, the President may designate by proclamation any tract or tracts of land of
the public domain as reservations for the use of the Republic of the Philippines or of any
of its branches, or of the inhabitants thereof, in accordance with regulations prescribed
for this purposes, or for quasi-public uses or purposes when the public interest requires
it, including reservations for highways, rights of way for railroads, hydraulic power sites,
irrigation systems, communal pastures or lequas communales, public parks, public
quarries, public fishponds, working men's village and other improvements for the public
benefit.

The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport of the
Philippines for both international and domestic air traffic," 22 are properties of public dominion
because they are intended for public use. As properties of public dominion, they
indisputably belong to the State or the Republic of the Philippines.
b. Airport Lands and Buildings are Outside the Commerce of Man
The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties of
public dominion. As properties of public dominion, the Airport Lands and Buildings
are outside the commerce of man. The Court has ruled repeatedly that properties of
public dominion are outside the commerce of man. As early as 1915, this Court already ruled
in Municipality of Cavite v. Rojas that properties devoted to public use are outside the
commerce of man, thus:

SECTION 88. The tract or tracts of land reserved under the provisions of Section
eighty-three shall be non-alienable and shall not be subject to occupation,
entry, sale, lease, or other disposition until again declared alienable under the
provisions of this Act or by proclamation of the President. (Emphasis and
underscoring supplied)

According to article 344 of the Civil Code: "Property for public use in provinces and in
towns comprises the provincial and town roads, the squares, streets, fountains, and
public waters, the promenades, and public works of general service supported by said
towns or provinces."

Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings
from public use, these properties remain properties of public dominion and are inalienable.
Since the Airport Lands and Buildings are inalienable in their present status as properties of
public dominion, they are not subject to levy on execution or foreclosure sale. As long as the
Airport Lands and Buildings are reserved for public use, their ownership remains with the
State or the Republic of the Philippines.

The said Plaza Soledad being a promenade for public use, the municipal council of
Cavite could not in 1907 withdraw or exclude from public use a portion thereof in order
to lease it for the sole benefit of the defendant Hilaria Rojas. In leasing a portion of said
plaza or public place to the defendant for private use the plaintiff municipality exceeded
12

The authority of the President to reserve lands of the public domain for public use, and to
withdraw such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the
Administrative Code of 1987, which states:

The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic
receiving cash, promissory notes or even stock since MIAA is not a stock corporation.
The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport
Lands and Buildings to MIAA, thus:

SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government.
(1) The President shall have the power to reserve for settlement or public
use, and for specific public purposes, any of the lands of the public domain, the
use of which is not otherwise directed by law. The reserved land shall
thereafter remain subject to the specific public purpose indicated until
otherwise provided by law or proclamation;

WHEREAS, the Manila International Airport as the principal airport of the Philippines for
both international and domestic air traffic, is required to provide standards of airport
accommodation and service comparable with the best airports in the world;
WHEREAS, domestic and other terminals, general aviation and other facilities, have to
be upgraded to meet the current and future air traffic and other demands of aviation in
Metro Manila;

x x x x. (Emphasis supplied)
There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by
law or presidential proclamation from public use, they are properties of public dominion,
owned by the Republic and outside the commerce of man.

WHEREAS, a management and organization study has indicated that the objectives of
providing high standards of accommodation and service within the context of a
financially viable operation, will best be achieved by a separate and
autonomous body; and

c. MIAA is a Mere Trustee of the Republic

MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic.
Section 48, Chapter 12, Book I of the Administrative Code allows instrumentalities like
MIAA to hold title to real properties owned by the Republic, thus:

WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No.
1772, the President of the Philippines is given continuing authority to reorganize the
National Government, which authority includes the creation of new entities,
agencies and instrumentalities of the Government[.] (Emphasis supplied)

SEC. 48. Official Authorized to Convey Real Property. Whenever real property of the
Government is authorized by law to be conveyed, the deed of conveyance shall be
executed in behalf of the government by the following:

The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to MIAA
was not meant to transfer beneficial ownership of these assets from the Republic to MIAA.
The purpose was merely to reorganize a division in the Bureau of Air Transportation
into a separate and autonomous body. The Republic remains the beneficial owner of the
Airport Lands and Buildings. MIAA itself is owned solely by the Republic. No party claims any
ownership rights over MIAA's assets adverse to the Republic.

(1) For property belonging to and titled in the name of the Republic of the Philippines,
by the President, unless the authority therefor is expressly vested by law in another
officer.
(2) For property belonging to the Republic of the Philippines but titled in the
name of any political subdivision or of any corporate agency or instrumentality,
by the executive head of the agency or instrumentality. (Emphasis supplied)

The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be
disposed through sale or through any other mode unless specifically approved by
the President of the Philippines." This only means that the Republic retained the
beneficial ownership of the Airport Lands and Buildings because under Article 428 of the Civil
Code, only the "owner has the right to x x x dispose of a thing." Since MIAA cannot dispose
of the Airport Lands and Buildings, MIAA does not own the Airport Lands and Buildings.

In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer
because even its executive head cannot sign the deed of conveyance on behalf of the
Republic. Only the President of the Republic can sign such deed of conveyance. 28
d. Transfer to MIAA was Meant to Implement a Reorganization

At any time, the President can transfer back to the Republic title to the Airport Lands and
Buildings without the Republic paying MIAA any consideration. Under Section 3 of the MIAA
Charter, the President is the only one who can authorize the sale or disposition of the Airport
Lands and Buildings. This only confirms that the Airport Lands and Buildings belong to the
Republic.

The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and
Buildings from the Bureau of Air Transportation of the Department of Transportation and
Communications. The MIAA Charter provides:
SECTION 3. Creation of the Manila International Airport Authority. x x x x

e. Real Property Owned by the Republic is Not Taxable

The land where the Airport is presently located as well as the surrounding land
area of approximately six hundred hectares, are hereby transferred, conveyed
and assigned to the ownership and administration of the Authority, subject to
existing rights, if any. The Bureau of Lands and other appropriate government
agencies shall undertake an actual survey of the area transferred within one year from
the promulgation of this Executive Order and the corresponding title to be issued in the
name of the Authority. Any portion thereof shall not be disposed through sale or
through any other mode unless specifically approved by the President of the
Philippines. (Emphasis supplied)

Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal
property owned by the Republic of the Philippines." Section 234(a) provides:
SEC. 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person;
x x x. (Emphasis supplied)

SECTION 22. Transfer of Existing Facilities and Intangible Assets. All existing public
airport facilities, runways, lands, buildings and other property, movable or
immovable, belonging to the Airport, and all assets, powers, rights, interests and
privileges belonging to the Bureau of Air Transportation relating to airport works or
air operations, including all equipment which are necessary for the operation of crash
fire and rescue facilities, are hereby transferred to the Authority. (Emphasis supplied)

This exemption should be read in relation with Section 133(o) of the same Code, which
prohibits local governments from imposing "[t]axes, fees or charges of any kind on the
National Government, its agencies andinstrumentalities x x x." The real properties owned
by the Republic are titled either in the name of the Republic itself or in the name of agencies
or instrumentalities of the National Government. The Administrative Code allows real
property owned by the Republic to be titled in the name of agencies or instrumentalities of
the national government. Such real properties remain owned by the Republic and continue to
be exempt from real estate tax.

SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau of
Air Transportation and Transitory Provisions. The Manila International Airport
including the Manila Domestic Airport as a division under the Bureau of Air
Transportation is hereby abolished.

The Republic may grant the beneficial use of its real property to an agency or instrumentality
of the national government. This happens when title of the real property is transferred to an

x x x x.
13

agency or instrumentality even as the Republic remains the owner of the real property. Such
arrangement does not result in the loss of the tax exemption. Section 234(a) of the Local
Government Code states that real property owned by the Republic loses its tax exemption
only if the "beneficial use thereof has been granted, for consideration or otherwise, to
a taxable person." MIAA, as a government instrumentality, is not a taxable person under
Section 133(o) of the Local Government Code. Thus, even if we assume that the Republic
has granted to MIAA the beneficial use of the Airport Lands and Buildings, such fact does not
make these real properties subject to real estate tax.

(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis and underscoring supplied)
By express mandate of the Local Government Code, local governments cannot impose any
kind of tax on national government instrumentalities like the MIAA. Local governments are
devoid of power to tax the national government, its agencies and instrumentalities. The
taxing powers of local governments do not extend to the national government, its agencies
and instrumentalities, "[u]nless otherwise provided in this Code" as stated in the saving
clause of Section 133. The saving clause refers to Section 234(a) on the exception to the
exemption from real estate tax of real property owned by the Republic.

However, portions of the Airport Lands and Buildings that MIAA leases to private entities are
not exempt from real estate tax. For example, the land area occupied by hangars that MIAA
leases to private corporations is subject to real estate tax. In such a case, MIAA has granted
the beneficial use of such land area for a consideration to ataxable person and therefore
such land area is subject to real estate tax. In Lung Center of the Philippines v. Quezon
City, the Court ruled:

The minority, however, theorizes that unless exempted in Section 193 itself, all juridical
persons are subject to tax by local governments. The minority insists that the juridical
persons exempt from local taxation are limited to the three classes of entities specifically
enumerated as exempt in Section 193. Thus, the minority states:
x x x Under Section 193, the exemption is limited to (a) local water districts; (b)
cooperatives duly registered under Republic Act No. 6938; and (c) non-stock and nonprofit hospitals and educational institutions. It would be belaboring the obvious why the
MIAA does not fall within any of the exempt entities under Section 193. (Emphasis
supplied)

Accordingly, we hold that the portions of the land leased to private entities as well as
those parts of the hospital leased to private individuals are not exempt from such taxes.
On the other hand, the portions of the land occupied by the hospital and portions of the
hospital used for its patients, whether paying or non-paying, are exempt from real
property taxes.29

The minority's theory directly contradicts and completely negates Section 133(o) of the Local
Government Code. This theory will result in gross absurdities. It will make the national
government, which itself is a juridical person, subject to tax by local governments since the
national government is not included in the enumeration of exempt entities in Section 193.
Under this theory, local governments can impose any kind of local tax, and not only real
estate tax, on the national government.

3. Refutation of Arguments of Minority

The minority asserts that the MIAA is not exempt from real estate tax because Section 193
of the Local Government Code of 1991 withdrew the tax exemption of "all persons,
whether natural or juridical" upon the effectivity of the Code. Section 193 provides:
SEC. 193. Withdrawal of Tax Exemption Privileges Unless otherwise provided in
this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A. No.
6938, non-stock and non-profit hospitals and educational institutions are hereby
withdrawn upon effectivity of this Code. (Emphasis supplied)

Under the minority's theory, many national government instrumentalities with juridical
personalities will also be subject to any kind of local tax, and not only real estate tax. Some
of the national government instrumentalities vested by law with juridical personalities are:
Bangko Sentral ng Pilipinas,30 Philippine Rice Research Institute,31Laguna Lake
Development Authority,32 Fisheries Development Authority,33 Bases Conversion Development
Authority,34Philippine Ports Authority,35 Cagayan de Oro Port Authority,36 San Fernando Port
Authority,37 Cebu Port Authority,38 and Philippine National Railways.39

The minority states that MIAA is indisputably a juridical person. The minority argues that
since the Local Government Code withdrew the tax exemption of all juridical persons, then
MIAA is not exempt from real estate tax. Thus, the minority declares:

The minority's theory violates Section 133(o) of the Local Government Code which expressly
prohibits local governments from imposing any kind of tax on national government
instrumentalities. Section 133(o) does not distinguish between national government
instrumentalities with or without juridical personalities. Where the law does not distinguish,
courts should not distinguish. Thus, Section 133(o) applies to all national government
instrumentalities, with or without juridical personalities. The determinative test whether
MIAA is exempt from local taxation is not whether MIAA is a juridical person, but whether it
is a national government instrumentality under Section 133(o) of the Local Government
Code. Section 133(o) is the specific provision of law prohibiting local governments from
imposing any kind of tax on the national government, its agencies and instrumentalities.

It is evident from the quoted provisions of the Local Government Code that the
withdrawn exemptions from realty tax cover not just GOCCs, but all persons. To
repeat, the provisions lay down the explicit proposition that the withdrawal of realty tax
exemption applies to all persons. The reference to or the inclusion of GOCCs is only
clarificatory or illustrative of the explicit provision.
The term "All persons" encompasses the two classes of persons recognized
under our laws, natural and juridical persons. Obviously, MIAA is not a natural
person. Thus, the determinative test is not just whether MIAA is a GOCC, but
whether MIAA is a juridical person at all. (Emphasis and underscoring in the
original)

Section 133 of the Local Government Code starts with the saving clause "[u]nless otherwise
provided in this Code." This means that unless the Local Government Code grants an express
authorization, local governments have no power to tax the national government, its agencies
and instrumentalities. Clearly, the rule is local governments have no power to tax the
national government, its agencies and instrumentalities. As an exception to this rule, local
governments may tax the national government, its agencies and instrumentalities only if the
Local Government Code expressly so provides.

The minority posits that the "determinative test" whether MIAA is exempt from local taxation
is its status whether MIAA is a juridical person or not. The minority also insists that
"Sections 193 and 234 may be examined in isolation from Section 133(o) to ascertain MIAA's
claim of exemption."
The argument of the minority is fatally flawed. Section 193 of the Local Government Code
expressly withdrew the tax exemption of all juridical persons "[u]nless otherwise
provided in this Code." Now, Section 133(o) of the Local Government Code expressly
provides otherwise, specifically prohibiting local governments from imposing any kind of
tax on national government instrumentalities. Section 133(o) states:

The saving clause in Section 133 refers to the exception to the exemption in Section 234(a)
of the Code, which makes the national government subject to real estate tax when it gives
the beneficial use of its real properties to a taxable entity. Section 234(a) of the Local
Government Code provides:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:

SEC. 234. Exemptions from Real Property Tax The following are exempted from
payment of the real property tax:

xxxx
14

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration
or otherwise, to a taxable person.

The minority also claims that the definition in the Administrative Code of the phrase
"government-owned or controlled corporation" is not controlling. The minority points out that
Section 2 of the Introductory Provisions of the Administrative Code admits that its definitions
are not controlling when it provides:

x x x. (Emphasis supplied)

SEC. 2. General Terms Defined. Unless the specific words of the text, or the context
as a whole, or a particular statute, shall require a different meaning:

Under Section 234(a), real property owned by the Republic is exempt from real estate tax.
The exception to this exemption is when the government gives the beneficial use of the real
property to a taxable entity.

xxxx

The exception to the exemption in Section 234(a) is the only instance when the national
government, its agencies and instrumentalities are subject to any kind of tax by local
governments. The exception to the exemption applies only to real estate tax and not to any
other tax. The justification for the exception to the exemption is that the real property,
although owned by the Republic, is not devoted to public use or public service but devoted to
the private gain of a taxable person.

The minority then concludes that reliance on the Administrative Code definition is "flawed."
The minority's argument is a non sequitur. True, Section 2 of the Administrative Code
recognizes that a statute may require a different meaning than that defined in the
Administrative Code. However, this does not automatically mean that the definition in the
Administrative Code does not apply to the Local Government Code. Section 2 of the
Administrative Code clearly states that "unless the specific words x x x of a particular statute
shall require a different meaning," the definition in Section 2 of the Administrative Code shall
apply. Thus, unless there is specific language in the Local Government Code defining the
phrase "government-owned or controlled corporation" differently from the definition in the
Administrative Code, the definition in the Administrative Code prevails.

The minority also argues that since Section 133 precedes Section 193 and 234 of the Local
Government Code, the later provisions prevail over Section 133. Thus, the minority asserts:
x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an
accepted rule of construction, in case of conflict the subsequent provisions should
prevail. Therefore, MIAA, as a juridical person, is subject to real property taxes, the
general exemptions attaching to instrumentalities under Section 133(o) of the Local
Government Code being qualified by Sections 193 and 234 of the same law. (Emphasis
supplied)

The minority does not point to any provision in the Local Government Code defining the
phrase "government-owned or controlled corporation" differently from the definition in the
Administrative Code. Indeed, there is none. The Local Government Code is silent on the
definition of the phrase "government-owned or controlled corporation." The Administrative
Code, however, expressly defines the phrase "government-owned or controlled corporation."
The inescapable conclusion is that the Administrative Code definition of the phrase
"government-owned or controlled corporation" applies to the Local Government Code.

The minority assumes that there is an irreconcilable conflict between Section 133 on one
hand, and Sections 193 and 234 on the other. No one has urged that there is such a conflict,
much less has any one presenteda persuasive argument that there is such a conflict. The
minority's assumption of an irreconcilable conflict in the statutory provisions is an egregious
error for two reasons.

The third whereas clause of the Administrative Code states that the Code "incorporates in a
unified document the major structural, functional and procedural principles and rules of
governance." Thus, the Administrative Code is the governing law defining the status and
relationship of government departments, bureaus, offices, agencies and instrumentalities.
Unless a statute expressly provides for a different status and relationship for a specific
government unit or entity, the provisions of the Administrative Code prevail.

First, there is no conflict whatsoever between Sections 133 and 193 because Section 193
expressly admits its subordination to other provisions of the Code when Section 193 states
"[u]nless otherwise provided in this Code." By its own words, Section 193 admits the
superiority of other provisions of the Local Government Code that limit the exercise of the
taxing power in Section 193. When a provision of law grants a power but withholds such
power on certain matters, there is no conflict between the grant of power and the
withholding of power. The grantee of the power simply cannot exercise the power on matters
withheld from its power.

The minority also contends that the phrase "government-owned or controlled corporation"
should apply only to corporations organized under the Corporation Code, the general
incorporation law, and not to corporations created by special charters. The minority sees no
reason why government corporations with special charters should have a capital stock. Thus,
the minority declares:

Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local
Government Units." Section 133 limits the grant to local governments of the power to tax,
and not merely the exercise of a delegated power to tax. Section 133 states that the taxing
powers of local governments "shall not extend to the levy" of any kind of tax on the national
government, its agencies and instrumentalities. There is no clearer limitation on the taxing
power than this.

I submit that the definition of "government-owned or controlled corporations" under the

Administrative Code refer to those corporations owned by the government or its
instrumentalities which are created not by legislative enactment, but formed and
organized under the Corporation Code through registration with the Securities and
Exchange Commission. In short, these are GOCCs without original charters.

Since Section 133 prescribes the "common limitations" on the taxing powers of local
governments, Section 133 logically prevails over Section 193 which grants local governments
such taxing powers. By their very meaning and purpose, the "common limitations" on the
taxing power prevail over the grant or exercise of the taxing power. If the taxing power of
local governments in Section 193 prevails over the limitations on such taxing power in
Section 133, then local governments can impose any kind of tax on the national government,
its agencies and instrumentalities a gross absurdity.

xxxx
It might as well be worth pointing out that there is no point in requiring a capital
structure for GOCCs whose full ownership is limited by its charter to the State or
Republic. Such GOCCs are not empowered to declare dividends or alienate their capital
shares.
The contention of the minority is seriously flawed. It is not in accord with the Constitution
and existing legislations. It will also result in gross absurdities.

Local governments have no power to tax the national government, its agencies and
instrumentalities, except as otherwise provided in the Local Government Code pursuant to
the saving clause in Section 133 stating "[u]nless otherwise provided in this Code." This
exception which is an exception to the exemption of the Republic from real estate tax
imposed by local governments refers to Section 234(a) of the Code. The exception to the
exemption in Section 234(a) subjects real property owned by the Republic, whether titled in
the name of the national government, its agencies or instrumentalities, to real estate tax if
the beneficial use of such property is given to a taxable entity.

First, the Administrative Code definition of the phrase "government-owned or controlled

corporation" does not distinguish between one incorporated under the Corporation Code or
under a special charter. Where the law does not distinguish, courts should not distinguish.
Second, Congress has created through special charters several government-owned
corporations organized as stock corporations. Prime examples are the Land Bank of the
Philippines and the Development Bank of the Philippines. The special charter 40 of the Land
Bank of the Philippines provides:
15

SECTION 81. Capital. The authorized capital stock of the Bank shall be nine billion
pesos, divided into seven hundred and eighty million common shares with a par value of
ten pesos each, which shall be fully subscribed by the Government, and one hundred
and twenty million preferred shares with a par value of ten pesos each, which shall be
issued in accordance with the provisions of Sections seventy-seven and eighty-three of
this Code. (Emphasis supplied)

vested with corporate powers provided these instrumentalities perform essential government
functions or public services. However, when the legislature creates through special charters
corporations that perform economic or commercial activities, such entities known as
"government-owned or controlled corporations" must meet the test of economic viability
because they compete in the market place.
This is the situation of the Land Bank of the Philippines and the Development Bank of the
Philippines and similar government-owned or controlled corporations, which derive their
income to meet operating expenses solely from commercial transactions in competition with
the private sector. The intent of the Constitution is to prevent the creation of governmentowned or controlled corporations that cannot survive on their own in the market place and
thus merely drain the public coffers.

Likewise, the special charter41 of the Development Bank of the Philippines provides:
SECTION 7. Authorized Capital Stock Par value. The capital stock of the Bank shall
be Five Billion Pesos to be divided into Fifty Million common shares with par value of
P100 per share. These shares are available for subscription by the National Government.
Upon the effectivity of this Charter, the National Government shall subscribe to TwentyFive Million common shares of stock worth Two Billion Five Hundred Million which shall
be deemed paid for by the Government with the net asset values of the Bank remaining
after the transfer of assets and liabilities as provided in Section 30 hereof. (Emphasis
supplied)

Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:
MR. OPLE: Madam President, the reason for this concern is really that when the
government creates a corporation, there is a sense in which this corporation becomes
exempt from the test of economic performance. We know what happened in the past. If
a government corporation loses, then it makes its claim upon the taxpayers' money
through new equity infusions from the government and what is always invoked is the
common good. That is the reason why this year, out of a budget of P115 billion for the
entire government, about P28 billion of this will go into equity infusions to support a few
government financial institutions. And this is all taxpayers' money which could have
been relocated to agrarian reform, to social services like health and education, to
augment the salaries of grossly underpaid public employees. And yet this is all going
down the drain.

Other government-owned corporations organized as stock corporations under their special

charters are the Philippine Crop Insurance Corporation, 42 Philippine International Trading
Corporation,43 and the Philippine National Bank44 before it was reorganized as a stock
corporation under the Corporation Code. All these government-owned corporations organized
under special charters as stock corporations are subject to real estate tax on real properties
owned by them. To rule that they are not government-owned or controlled corporations
because they are not registered with the Securities and Exchange Commission would remove
them from the reach of Section 234 of the Local Government Code, thus exempting them
from real estate tax.
Third, the government-owned or controlled corporations created through special charters are
those that meet the two conditions prescribed in Section 16, Article XII of the Constitution.
The first condition is that the government-owned or controlled corporation must be
established for the common good. The second condition is that the government-owned or
controlled corporation must meet the test of economic viability. Section 16, Article XII of the
1987 Constitution provides:

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the
"common good," this becomes a restraint on future enthusiasts for state capitalism to
excuse themselves from the responsibility of meeting the market test so that they
become viable. And so, Madam President, I reiterate, for the committee's consideration
and I am glad that I am joined in this proposal by Commissioner Foz, the insertion of
the standard of "ECONOMIC VIABILITY OR THE ECONOMIC TEST," together with the
common good.45

SEC. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the
common good and subject to the test of economic viability. (Emphasis and underscoring
supplied)

Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in

his textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:
The second sentence was added by the 1986 Constitutional Commission. The significant
addition, however, is the phrase "in the interest of the common good and subject to the
test of economic viability." The addition includes the ideas that they must show capacity
to function efficiently in business and that they should not go into activities which the
private sector can do better. Moreover, economic viability is more than financial viability
but also includes capability to make profit and generate benefits not quantifiable in
financial terms.46 (Emphasis supplied)

The Constitution expressly authorizes the legislature to create "government-owned or

controlled corporations" through special charters only if these entities are required to meet
the twin conditions of common good and economic viability. In other words, Congress has no
power to create government-owned or controlled corporations with special charters unless
they are made to comply with the two conditions of common good and economic viability.
The test of economic viability applies only to government-owned or controlled corporations
that perform economic or commercial activities and need to compete in the market place.
Being essentially economic vehicles of the State for the common good meaning for
economic development purposes these government-owned or controlled corporations with
special charters are usually organized as stock corporations just like ordinary private
corporations.

Clearly, the test of economic viability does not apply to government entities vested with
corporate powers and performing essential public services. The State is obligated to render
essential public services regardless of the economic viability of providing such service. The
non-economic viability of rendering such essential public service does not excuse the State
from withholding such essential services from the public.
However, government-owned or controlled corporations with special charters, organized
essentially for economic or commercial objectives, must meet the test of economic viability.
These are the government-owned or controlled corporations that are usually organized under
their special charters as stock corporations, like the Land Bank of the Philippines and the
Development Bank of the Philippines. These are the government-owned or controlled
corporations, along with government-owned or controlled corporations organized under the
Corporation Code, that fall under the definition of "government-owned or controlled
corporations" in Section 2(10) of the Administrative Code.

In contrast, government instrumentalities vested with corporate powers and performing

governmental or public functions need not meet the test of economic viability. These
instrumentalities perform essential public services for the common good, services that every
modern State must provide its citizens. These instrumentalities need not be economically
viable since the government may even subsidize their entire operations. These
instrumentalities are not the "government-owned or controlled corporations" referred to in
Section 16, Article XII of the 1987 Constitution.
Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or
public functions. Congress has plenary authority to create government instrumentalities

The MIAA need not meet the test of economic viability because the legislature did not create
MIAA to compete in the market place. MIAA does not compete in the market place because
there is no competing international airport operated by the private sector. MIAA performs an
16

essential public service as the primary domestic and international airport of the Philippines.
The operation of an international airport requires the presence of personnel from the
following government agencies:

Local Government Code. The exception to the exemption in Section 234(a) does not apply to
MIAA because MIAA is not a taxable entity under the Local Government Code. Such
exception applies only if the beneficial use of real property owned by the Republic is given to
a taxable entity.

1. The Bureau of Immigration and Deportation, to document the arrival and departure of
passengers, screening out those without visas or travel documents, or those with hold
departure orders;

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus
are properties of public dominion. Properties of public dominion are owned by the State or
the Republic. Article 420 of the Civil Code provides:

2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited
importations;

Art. 420. The following things are property of public dominion:

3. The quarantine office of the Department of Health, to enforce health measures

against the spread of infectious diseases into the country;

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;

4. The Department of Agriculture, to enforce measures against the spread of plant and
animal diseases into the country;

(2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth. (Emphasis supplied)

5. The Aviation Security Command of the Philippine National Police, to prevent the entry
of terrorists and the escape of criminals, as well as to secure the airport premises from
terrorist attack or seizure;

The term "ports x x x constructed by the State" includes airports and seaports. The Airport
Lands and Buildings of MIAA are intended for public use, and at the very least intended for
public service. Whether intended for public use or public service, the Airport Lands and
Buildings are properties of public dominion. As properties of public dominion, the Airport
Lands and Buildings are owned by the Republic and thus exempt from real estate tax under
Section 234(a) of the Local Government Code.

6. The Air Traffic Office of the Department of Transportation and Communications, to

authorize aircraft to enter or leave Philippine airspace, as well as to land on, or take off
from, the airport; and
7. The MIAA, to provide the proper premises such as runway and buildings for the
government personnel, passengers, and airlines, and to manage the airport operations.

4. Conclusion
Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code,
which governs the legal relation and status of government units, agencies and offices within
the entire government machinery, MIAA is a government instrumentality and not a
government-owned or controlled corporation. Under Section 133(o) of the Local Government
Code, MIAA as a government instrumentality is not a taxable person because it is not subject
to "[t]axes, fees or charges of any kind" by local governments. The only exception is when
MIAA leases its real property to a "taxable person" as provided in Section 234(a) of the Local
Government Code, in which case the specific real property leased becomes subject to real
estate tax. Thus, only portions of the Airport Lands and Buildings leased to taxable persons
like private parties are subject to real estate tax by the City of Paraaque.

All these agencies of government perform government functions essential to the operation of
an international airport.
MIAA performs an essential public service that every modern State must provide its citizens.
MIAA derives its revenues principally from the mandatory fees and charges MIAA imposes on
passengers and airlines. The terminal fees that MIAA charges every passenger are regulatory
or administrative fees47 and not income from commercial transactions.
MIAA falls under the definition of a government instrumentality under Section 2(10) of the
Introductory Provisions of the Administrative Code, which provides:
SEC. 2. General Terms Defined. x x x x

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted
to public use, are properties of public dominion and thus owned by the State or the Republic
of the Philippines. Article 420 specifically mentions "ports x x x constructed by the State,"
which includes public airports and seaports, as properties of public dominion and owned by
the Republic. As properties of public dominion owned by the Republic, there is no doubt
whatsoever that the Airport Lands and Buildings are expressly exempt from real estate tax
under Section 234(a) of the Local Government Code. This Court has also repeatedly ruled
that properties of public dominion are not subject to execution or foreclosure sale.

(10) Instrumentality refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter. x x x (Emphasis supplied)
The fact alone that MIAA is endowed with corporate powers does not make MIAA a
government-owned or controlled corporation. Without a change in its capital structure, MIAA
remains a government instrumentality under Section 2(10) of the Introductory Provisions of
the Administrative Code. More importantly, as long as MIAA renders essential public services,
it need not comply with the test of economic viability. Thus, MIAA is outside the scope of the
phrase "government-owned or controlled corporations" under Section 16, Article XII of the
1987 Constitution.

WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the Court
of Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878.
We DECLARE the Airport Lands and Buildings of the Manila International Airport
Authority EXEMPT from the real estate tax imposed by the City of Paraaque. We
declare VOID all the real estate tax assessments, including the final notices of real estate
tax delinquencies, issued by the City of Paraaque on the Airport Lands and Buildings of the
Manila International Airport Authority, except for the portions that the Manila International
Airport Authority has leased to private parties. We also declare VOID the assailed auction
sale, and all its effects, of the Airport Lands and Buildings of the Manila International Airport
Authority.

The minority belittles the use in the Local Government Code of the phrase "governmentowned or controlled corporation" as merely "clarificatory or illustrative." This is fatal. The
1987 Constitution prescribes explicit conditions for the creation of "government-owned or
controlled corporations." The Administrative Code defines what constitutes a "governmentowned or controlled corporation." To belittle this phrase as "clarificatory or illustrative" is
grave error.
To summarize, MIAA is not a government-owned or controlled corporation under Section
2(13) of the Introductory Provisions of the Administrative Code because it is not organized as
a stock or non-stock corporation. Neither is MIAA a government-owned or controlled
corporation under Section 16, Article XII of the 1987 Constitution because MIAA is not
required to meet the test of economic viability. MIAA is a government instrumentality vested
with corporate powers and performing essential public services pursuant to Section 2(10) of
the Introductory Provisions of the Administrative Code. As a government instrumentality,
MIAA is not subject to any kind of tax by local governments under Section 133(o) of the

No costs.
SO ORDERED.
-----------------------------------------------------------------------------------------------------------G.R. No. 163072

17

April 2, 2009

MANILA INTERNATIONAL AIRPORT AUTHORITY, Petitioner, vs. CITY OF PASAY,

SANGGUNIANG PANGLUNGSOD NG PASAY, CITY MAYOR OF PASAY, CITY
TREASURER OF PASAY, and CITY ASSESSOR OF PASAY, Respondents.

The Court of Appeals held that Sections 193 and 234 of Republic Act No. 7160 or the Local
Government Code, which took effect on 1 January 1992, withdrew the exemption from
payment of real property taxes granted to natural or juridical persons, including governmentowned or controlled corporations, except local water districts, cooperatives duly registered
under Republic Act No. 6938, non-stock and non-profit hospitals and educational institutions.
Since MIAA is a government-owned corporation, it follows that its tax exemption under
Section 21 of EO 903 has been withdrawn upon the effectivity of the Local Government Code.

DECISION
CARPIO, J.:
This is a petition for review on certiorari1 of the Decision2 dated 30 October 2002 and the
Resolution dated 19 March 2004 of the Court of Appeals in CA-G.R. SP No. 67416.

The Issue

The Facts

The issue raised in this petition is whether the NAIA Pasay properties of MIAA are exempt
from real property tax.

Petitioner Manila International Airport Authority (MIAA) operates and administers the Ninoy
Aquino International Airport (NAIA) Complex under Executive Order No. 903 (EO
903),3 otherwise known as the Revised Charter of the Manila International Airport Authority.
EO 903 was issued on 21 July 1983 by then President Ferdinand E. Marcos. Under Sections
34 and 225 of EO 903, approximately 600 hectares of land, including the runways, the airport
tower, and other airport buildings, were transferred to MIAA. The NAIA Complex is located
along the border between Pasay City and Paraaque City.

The Courts Ruling

The petition is meritorious.
In ruling that MIAA is not exempt from paying real property tax, the Court of Appeals cited
Sections 193 and 234 of the Local Government Code which read:
SECTION 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether
natural or juridical, including government-owned or controlled corporations, except local
water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code.

On 28 August 2001, MIAA received Final Notices of Real Property Tax Delinquency from the
City of Pasay for the taxable years 1992 to 2001. MIAAs real property tax delinquency for its
real properties located in NAIA Complex, Ninoy Aquino Avenue, Pasay City (NAIA Pasay
properties) is tabulated as follows:
TAX DECLA-RATION

TAXABLE
YEAR

TAX DUE

PENALTY

SECTION 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:

TOTAL

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration
or otherwise to a taxable person;

A7-183-08346

1997-2001

243,522,855.00 123,351,728.18

366,874,583.18

A7-183-05224

1992-2001

113,582,466.00

71,159,414.98

184,741,880.98

A7-191-00843

1992-2001

54,454,800.00

34,115,932.20

88,570,732.20

A7-191-00140

1992-2001

1,632,960.00

1,023,049.44

2,656,009.44

A7-191-00139

1992-2001

6,068,448.00

3,801,882.85

9,870,330.85

A7-183-05409

1992-2001

59,129,520.00

37,044,644.28

96,174,164.28

(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;

A7-183-05410

1992-2001

20,619,720.00

12,918,254.58

33,537,974.58

(d) All real property owned by duly registered cooperatives as provided for under R.A.
No. 6938; and

A7-183-05413

1992-2001

7,908,240.00

4,954,512.36

12,862,752.36

A7-183-05412

1992-2001

18,441,981.20

11,553,901.13

29,995,882.33

A7-183-05411

1992-2001

109,946,736.00

68,881,630.13

178,828,366.13

A7-183-05245

1992-2001

7,440,000.00

4,661,160.00

12,101,160.00

P642,747,726.2 P373,466,110.1
0
3

P1,016,213,836.
33

GRAND TOTAL

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,

mosques, non-profit or religious cemeteries and all lands, buildings and improvements
actually, directly, and exclusively used for religious, charitable or educational purposes;

(e) Machinery and equipment used for pollution control and environment protection.
Except as provided herein, any exemption from payment of real property tax previously
granted to, or presently enjoyed by, all persons, whether natural or juridical, including all
government-owned or controlled corporations are hereby withdrawn upon the effectivity of
this Code.
The Court of Appeals held that as a government-owned corporation, MIAAs tax exemption
under Section 21 of EO 903 has already been withdrawn upon the effectivity of the Local
Government Code in 1992.
In Manila International Airport Authority v. Court of Appeals6 (2006 MIAA case), this Court
already resolved the issue of whether the airport lands and buildings of MIAA are exempt
from tax under existing laws. The 2006 MIAA case originated from a petition for prohibition
and injunction which MIAA filed with the Court of Appeals, seeking to restrain the City of
Paraaque from imposing real property tax on, levying against, and auctioning for public sale
the airport lands and buildings located in Paraaque City. The only difference between the
2006 MIAA case and this case is that the 2006 MIAA case involved airport lands and
buildings located in Paraaque City while this case involved airport lands and buildings
located in Pasay City. The 2006 MIAA case and this case raised the same threshold issue:
whether the local government can impose real property tax on the airport lands, consisting
mostly of the runways, as well as the airport buildings, of MIAA. In the 2006 MIAA case, this
Court held:

On 24 August 2001, the City of Pasay, through its City Treasurer, issued notices of levy and
warrants of levy for the NAIA Pasay properties. MIAA received the notices and warrants of
levy on 28 August 2001. Thereafter, the City Mayor of Pasay threatened to sell at public
auction the NAIA Pasay properties if the delinquent real property taxes remain unpaid.
On 29 October 2001, MIAA filed with the Court of Appeals a petition for prohibition and
injunction with prayer for preliminary injunction or temporary restraining order. The petition
sought to enjoin the City of Pasay from imposing real property taxes on, levying against, and
auctioning for public sale the NAIA Pasay properties.
On 30 October 2002, the Court of Appeals dismissed the petition and upheld the power of
the City of Pasay to impose and collect realty taxes on the NAIA Pasay properties. MIAA filed
a motion for reconsideration, which the Court of Appeals denied. Hence, this petition.
The Court of Appeals Ruling

To summarize, MIAA is not a government-owned or controlled corporation under Section

2(13) of the Introductory Provisions of the Administrative Code because it is not organized as
18

a stock or non-stock corporation. Neither is MIAA a government-owned or controlled

corporation under Section 16, Article XII of the 1987 Constitution because MIAA is not
required to meet the test of economic viability. MIAA is a government instrumentality vested
with corporate powers and performing essential public services pursuant to Section 2(10) of
the Introductory Provisions of the Administrative Code. As a government instrumentality,
MIAA is not subject to any kind of tax by local governments under Section 133(o) of the
Local Government Code. The exception to the exemption in Section 234(a) does not apply to
MIAA because MIAA is not a taxable entity under the Local Government Code. Such
exception applies only if the beneficial use of real property owned by the Republic is given to
a taxable entity.

"instrumentality" that does not qualify as a "government-owned or controlled

corporation." As explained in the 2006 MIAA case:
A government-owned or controlled corporation must be "organized as a stock or non-stock
corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders or
voting shares. x x x
Section 3 of the Corporation Code defines a stock corporation as one whose "capital stock is
divided into shares and x x x authorized to distribute to the holders of such shares
dividends x x x." MIAA has capital but it is not divided into shares of stock. MIAA has no
stockholders or voting shares. Hence, MIAA is not a stock corporation.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and
thus are properties of public dominion. Properties of public dominion are owned by the State
or the Republic. Article 420 of the Civil Code provides:

xxx
MIAA is also not a non-stock corporation because it has no members. Section 87 of the
Corporation Code defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." A non-stock corporation must
have members. Even if we assume that the Government is considered as the sole member of
MIAA, this will not make MIAA a non-stock corporation. Non-stock corporations cannot
distribute any part of their income to their members. Section 11 of the MIAA Charter
mandates MIAA to remit 20% of its annual gross operating income to the National Treasury.
This prevents MIAA from qualifying as a non-stock corporation.

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridgesconstructed by the State, banks, shores, roadsteads, and others of similar
character;
(2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth.
The term "ports x x x constructed by the State" includes airports and seaports. The Airport
Lands and Buildings of MIAA are intended for public use, and at the very least intended for
public service. Whether intended for public use or public service, the Airport Lands and
Buildings are properties of public dominion. As properties of public dominion, the Airport
Lands and Buildings are owned by the Republic and thus exempt from real estate tax under
Section 234(a) of the Local Government Code.7 (Emphasis in the original)

Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary,
scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like
chambers." MIAA is not organized for any of these purposes. MIAA, a public utility, is
organized to operate an international and domestic airport for public use.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA within
the National Government?

The definition of "instrumentality" under Section 2(10) of the Introductory Provisions of the
Administrative Code of 1987 uses the phrase "includes x x x government-owned or controlled
corporations" which means that a government "instrumentality" may or may not be a
"government-owned or controlled corporation." Obviously, the term government
"instrumentality" is broader than the term "government-owned or controlled corporation."
Section 2(10) provides:

MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only
difference is that MIAA is vested with corporate powers. x x x
When the law vests in a government instrumentality corporate powers, the instrumentality
does not become a corporation. Unless the government instrumentality is organized as a
stock or non-stock corporation, it remains a government instrumentality exercising not only
governmental but also corporate powers. Thus, MIAA exercises the governmental powers of
eminent domain, police authority and the levying of fees and charges. At the same time,
MIAA exercises "all the powers of a corporation under the Corporation Law, insofar as these
powers are not inconsistent with the provisions of this Executive Order." 9

SEC. 2. General Terms Defined. x x x

(10) Instrumentality refers to any agency of the national Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed
with some if not all corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. This term includes regulatory agencies, chartered
institutions and government-owned or controlled corporations.
The term "government-owned or controlled corporation" has a separate definition under
Section 2(13)8 of the Introductory Provisions of the Administrative Code of 1987:

Thus, MIAA is not a government-owned or controlled corporation but a government

instrumentality which is exempt from any kind of tax from the local governments. Indeed,
the exercise of the taxing power of local government units is subject to the limitations
enumerated in Section 133 of the Local Government Code.10 Under Section 133(o)11 of the
Local Government Code, local government units have no power to tax instrumentalities of
the national government like the MIAA. Hence, MIAA is not liable to pay real property tax for
the NAIA Pasay properties.

SEC. 2. General Terms Defined. x x x

(13) Government-owned or controlled corporation refers to any agency organized as a stock
or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through its
instrumentalities either wholly, or, where applicable as in the case of stock corporations, to
the extent of at least fifty-one (51) percent of its capital stock: Provided, That governmentowned or controlled corporations may further be categorized by the department of Budget,
the Civil Service Commission, and the Commission on Audit for the purpose of the exercise
and discharge of their respective powers, functions and responsibilities with respect to such
corporations.

Furthermore, the airport lands and buildings of MIAA are properties of public dominion
intended for public use, and as such are exempt from real property tax under Section 234(a)
of the Local Government Code. However, under the same provision, if MIAA leases its real
property to a taxable person, the specific property leased becomes subject to real property
tax.12 In this case, only those portions of the NAIA Pasay properties which are leased to
taxable persons like private parties are subject to real property tax by the City of Pasay.

The fact that two terms have separate definitions means that while a government
"instrumentality" may include a "government-owned or controlled corporation," there may be
a government "instrumentality" that will not qualify as a "government-owned or controlled
corporation."

WHEREFORE, we GRANT the petition. We SET ASIDE the Decision dated 30 October 2002
and the Resolution dated 19 March 2004 of the Court of Appeals in CA-G.R. SP No. 67416.
We DECLARE the NAIA Pasay properties of the Manila International Airport
Authority EXEMPT from real property tax imposed by the City of Pasay. We declare VOID all
the real property tax assessments, including the final notices of real property tax

A close scrutiny of the definition of "government-owned or controlled corporation" in Section

2(13) will show that MIAA would not fall under such definition. MIAA is a government
19

delinquencies, issued by the City of Pasay on the NAIA Pasay properties of the Manila
International Airport Authority, except for the portions that the Manila International Airport
Authority has leased to private parties.

SEC. 11. The grantee, its successors or assigns shall be liable to pay the same taxes on their
real estate, buildings and personal property, exclusive of this franchise, as other persons or
corporations are now or hereafter may be required by law to pay. In addition thereto, the
grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%)
of all gross receipts of the telephone or other telecommunications businesses transacted
under this franchise by the grantee, its successors or assigns and the said percentage shall
be in lieu of all taxes on this franchise or earnings thereof. Provided, That the grantee, its
successors or assigns shall continue to be liable for income taxes payable under Title II of
the National Internal Revenue Code . xxx. [Emphasis supplied]

No costs.
SO ORDERED.
-----------------------------------------------------------------------------------------------------------G.R. No. 162015

March 6, 2006

It is undisputed that within the territorial boundary of Quezon City, Bayantel owned several
real properties on which it maintained various telecommunications facilities. These real
properties, as hereunder described, are covered by the following tax declarations:

THE CITY GOVERNMENT OF QUEZON CITY, AND THE CITY TREASURER OF QUEZON
CITY, DR. VICTOR B. ENRIGA, Petitioners, vs. BAYAN TELECOMMUNICATIONS,
INC., Respondent.

(a) Tax Declaration Nos. D-096-04071, D-096-04074, D-096-04072 and D-096-04073

pertaining to Bayantels Head Office and Operations Center in Roosevelt St., San
Francisco del Monte, Quezon City allegedly the nerve center of petitioners
telecommunications franchise operations, said Operation Center housing mainly
petitioners Network Operations Group and switching, transmission and related
equipment;

DECISION
GARCIA,J.:
Before the Court, on pure questions of law, is this petition for review on certiorari under Rule
45 of the Rules of Court to nullify and set aside the following issuances of the Regional Trial
Court (RTC) of Quezon City, Branch 227, in its Civil Case No. Q-02-47292, to wit:

(b) Tax Declaration Nos. D-124-01013, D-124-00939, D-124-00920 and D-124-00941

covering Bayantels land, building and equipment in Maginhawa St., Barangay East
Teachers Village, Quezon City which houses telecommunications facilities; and

1) Decision dated June 6, 2003, declaring respondent Bayan Telecommunications, Inc.

exempt from real estate taxation on its real properties located in Quezon City; and
2) Order

2 dated December 30, 2003, denying petitioners motion for reconsideration.

(c) Tax Declaration Nos. D-011-10809, D-011-10810, D-011-10811, and D-011-11540

referring to Bayantels Exchange Center located in Proj. 8, Brgy. Bahay Toro, Tandang
Sora, Quezon City which houses the Network Operations Group and cover switching,
transmission and other related equipment.

The facts:
Respondent Bayan Telecommunications, Inc.

3 (Bayantel) is a legislative franchise holder

In 1993, the government of Quezon City, pursuant to the taxing power vested on local
government units by Section 5, Article X of the 1987 Constitution, infra, in relation to Section
232 of the LGC, supra, enacted City Ordinance No. SP-91, S-93, otherwise known as the

under Republic Act (Rep. Act) No. 3259 to establish and operate radio stations for domestic
telecommunications, radiophone, broadcasting and telecasting.
Of relevance to this controversy is the tax provision of Rep. Act No. 3259, embodied in
Section 14 thereof, which reads:

Quezon City Revenue Code (QCRC), imposing, under Section 5 thereof, a real property tax
on all real properties in Quezon City, and, reiterating in its Section 6, the withdrawal of
exemption from real property tax under Section 234 of the LGC, supra. Furthermore, much
like the LGC, the QCRC, under its Section 230, withdrew tax exemption privileges in general,
as follows:

SECTION 14. (a) The grantee shall be liable to pay the same taxes on its real estate,
buildings and personal property, exclusive of the franchise, as other persons or corporations
are now or hereafter may be required by law to pay. (b) The grantee shall further pay to the
Treasurer of the Philippines each year, within ten days after the audit and approval of the
accounts as prescribed in this Act, one and one-half per centum of all gross receipts from the
business transacted under this franchise by the said grantee (Emphasis supplied).

SEC. 230. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code,
tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural
or juridical, including government owned or controlled corporations, except local water
districts, cooperatives duly registered under RA 6938, non-stock and non-profit hospitals and
educational institutions, business enterprises certified by the Board of Investments (BOI) as
pioneer or non-pioneer for a period of six (6) and four (4) years, respectively, are hereby
withdrawn effective upon approval of this Code (Emphasis supplied).

On January 1, 1992, Rep. Act No. 7160, otherwise known as the "Local Government Code of
1991" (LGC), took effect. Section 232 of the Code grants local government units within the
Metro Manila Area the power to levy tax on real properties, thus:
SEC. 232. Power to Levy Real Property Tax. A province or city or a municipality within the
Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land,
building, machinery and other improvements not hereinafter specifically exempted.

Conformably with the Citys Revenue Code, new tax declarations for Bayantels real
properties in Quezon City were issued by the City Assessor and were received by Bayantel on
August 13, 1998, except one (Tax Declaration No. 124-01013) which was received on July
14, 1999.

Complementing the aforequoted provision is the second paragraph of Section 234 of the
same Code which withdrew any exemption from realty tax heretofore granted to or enjoyed
by all persons, natural or juridical, to wit:

Meanwhile, on March 16, 1995, Rep. Act No. 7925, otherwise known as the "Public
Telecommunications Policy Act of the Philippines," envisaged to level the playing field among
telecommunications companies, took effect. Section 23 of the Act provides:

SEC. 234 - Exemptions from Real Property Tax. The following are exempted from payment of
the real property tax:
xxx xxx xxx

SEC. 23. Equality of Treatment in the Telecommunications Industry. Any advantage, favor,
privilege, exemption, or immunity granted under existing franchises, or may hereafter be
granted, shall ipso facto become part of previously granted telecommunications franchises
and shall be accorded immediately and unconditionally to the grantees of such franchises:
Provided, however, That the foregoing shall neither apply to nor affect provisions of
telecommunications franchises concerning territory covered by the franchise, the life span of
the franchise, or the type of service authorized by the franchise.

Except as provided herein, any exemption from payment of real property tax previously
granted to, or enjoyed by, all persons, whether natural or juridical, including governmentowned-or-controlled corporations is hereby withdrawn upon effectivity of this Code
(Emphasis supplied).
On July 20, 1992, barely few months after the LGC took effect, Congress enacted Rep. Act
No. 7633, amending Bayantels original franchise. The amendatory law (Rep. Act No. 7633)
contained the following tax provision:
20

On January 7, 1999, Bayantel wrote the office of the City Assessor seeking the exclusion of
its real properties in the city from the roll of taxable real properties. With its request having
been denied, Bayantel interposed an appeal with the Local Board of Assessment Appeals
(LBAA). And, evidently on its firm belief of its exempt status, Bayantel did not pay the real
property taxes assessed against it by the Quezon City government.

III. [In] declaring the real properties of respondent exempt from real property taxes
notwithstanding the vague and ambiguous grant of tax exemption provided under Section 11
of RA 7633.
IV. [In] declaring the real properties of respondent exempt from real property taxes
notwithstanding the fact that [it] had failed to exhaust administrative remedies in its claim
for real property tax exemption. (Words in bracket added.)

On account thereof, the Quezon City Treasurer sent out notices of delinquency for the total
amount ofP43,878,208.18, followed by the issuance of several warrants of levy against
Bayantels properties preparatory to their sale at a public auction set on July 30, 2002.

As we see it, the errors assigned may ultimately be reduced to two (2) basic issues, namely:
1. Whether or not Bayantels real properties in Quezon City are exempt from real
property taxes under its legislative franchise; and

Threatened with the imminent loss of its properties, Bayantel immediately withdrew its
appeal with the LBAA and instead filed with the RTC of Quezon City a petition for prohibition
with an urgent application for a temporary restraining order (TRO) and/or writ of preliminary
injunction, thereat docketed as Civil Case No. Q-02-47292, which was raffled to Branch 227
of the court.

2. Whether or not Bayantel is required to exhaust administrative remedies before

seeking judicial relief with the trial court.
We shall first address the second issue, the same being procedural in nature.
Petitioners argue that Bayantel had failed to avail itself of the administrative remedies
provided for under the LGC, adding that the trial court erred in giving due course to
Bayantels petition for prohibition. To petitioners, the appeal mechanics under the LGC
constitute Bayantels plain and speedy remedy in this case.

On July 29, 2002, or in the eve of the public auction scheduled the following day, the lower
court issued a TRO, followed, after due hearing, by a writ of preliminary injunction via its
order of August 20, 2002.
And, having heard the parties on the merits, the same court came out with its challenged
Decision of June 6, 2003, the dispositive portion of which reads:

The Court does not agree.

Petitions for prohibition are governed by the following provision of Rule 65 of the Rules of
Court:

WHEREFORE, premises considered, pursuant to the enabling franchise under Section 11 of

Republic Act No. 7633, the real estate properties and buildings of petitioner [now,
respondent Bayantel] which have been admitted to be used in the operation of petitioners
franchise described in the following tax declarations are hereby DECLARED exempt from real
estate taxation:

SEC. 2. Petition for prohibition. When the proceedings of any tribunal, are without or in
excess of its or his jurisdiction, or with grave abuse of discretion amounting to lack or excess
of jurisdiction, and there is no appeal or any other plain, speedy, and adequate remedy in
the ordinary course of law, a person aggrieved thereby may file a verified petition in the
proper court, alleging the facts with certainty and praying that judgment be rendered
commanding the respondent to desist from further proceedings in the action or matter
specified therein, or otherwise, granting such incidental reliefs as law and justice may
require.

(1) Tax Declaration No. D-096-04071

(2) Tax Declaration No. D-096-04074
(3) Tax Declaration No. D-124-01013
(4) Tax Declaration No. D-011-10810
(5) Tax Declaration No. D-011-10811

With the reality that Bayantels real properties were already levied upon on account of its
nonpayment of real estate taxes thereon, the Court agrees with Bayantel that an appeal to
the LBAA is not a speedy and adequate remedy within the context of the aforequoted Section
2 of Rule 65. This is not to mention of the auction sale of said properties already scheduled
on July 30, 2002.

(6) Tax Declaration No. D-011-10809

(7) Tax Declaration No. D-124-00941
(8) Tax Declaration No. D-124-00940
(9) Tax Declaration No. D-124-00939

Moreover, one of the recognized exceptions to the exhaustion- of-administrative remedies

rule is when, as here, only legal issues are to be resolved. In fact, the Court, cognizant of the
nature of the questions presently involved, gave due course to the instant petition. As the

(10) Tax Declaration No. D-096-04072

(11) Tax Declaration No. D-096-04073

Court has said in Ty vs. Trampe:

(12) Tax Declaration No. D-011-11540

xxx. Although as a rule, administrative remedies must first be exhausted before resort to
judicial action can prosper, there is a well-settled exception in cases where the controversy
does not involve questions of fact but only of law. xxx.

The preliminary prohibitory injunction issued in the August 20, 2002 Order of this Court is
hereby made permanent. Since this is a resolution of a purely legal issue, there is no
pronouncement as to costs.

Lest it be overlooked, an appeal to the LBAA, to be properly considered, required prior

payment under protest of the amount of P43,878,208.18, a figure which, in the light of the
then prevailing Asian financial crisis, may have been difficult to raise up. Given this reality,
an appeal to the LBAA may not be considered as a plain, speedy and adequate remedy. It is
thus understandable why Bayantel opted to withdraw its earlier appeal with the LBAA and,
instead, filed its petition for prohibition with urgent application for injunctive relief in Civil
Case No. Q-02-47292. The remedy availed of by Bayantel under Section 2, Rule 65 of the
Rules of Court must be upheld.

SO ORDERED.
Their motion for reconsideration having been denied by the court in its Order dated
December 30, 2003, petitioners elevated the case directly to this Court on pure questions of
law, ascribing to the lower court the following errors:
I. [I]n declaring the real properties of respondent exempt from real property taxes
notwithstanding the fact that the tax exemption granted to Bayantel in its original franchise
had been withdrawn by the [LGC] and that the said exemption was not restored by the
enactment of RA 7633.

This brings the Court to the more weighty question of whether or not Bayantels real
properties in Quezon City are, under its franchise, exempt from real property tax.

II. [In] declaring the real properties of respondent exempt from real property taxes
notwithstanding the enactment of the [QCRC] which withdrew the tax exemption which may
have been granted by RA 7633.

The lower court resolved the issue in the affirmative, basically owing to the phrase "exclusive
of this franchise" found in Section 11 of Bayantels amended franchise, Rep. Act No. 7633. To
petitioners, however, the language of Section 11 of Rep. Act No. 7633 is neither clear nor
unequivocal. The elaborate and extensive discussion devoted by the trial court on the
21

meaning and import of said phrase, they add, suggests as much. It is petitioners thesis that
Bayantel was in no time given any express exemption from the payment of real property tax
under its amendatory franchise.

Bayantel answers the poser in the negative arguing that once again it is only "liable to pay
the same taxes, as any other persons or corporations on all its real or personal properties,
exclusive of its franchise."

There seems to be no issue as to Bayantels exemption from real estate taxes by virtue of
the term "exclusive of the franchise" qualifying the phrase "same taxes on its real estate,
buildings and personal property," found in Section 14, supra, of its franchise, Rep. Act No.
3259, as originally granted.

Bayantels posture is well-taken. While the system of local government taxation has changed
with the onset of the 1987 Constitution, the power of local government units to tax is still
limited. As we explained in Mactan Cebu International Airport Authority:

The legislative intent expressed in the phrase "exclusive of this franchise" cannot be
construed other than distinguishing between two (2) sets of properties, be they real or
personal, owned by the franchisee, namely, (a) those actually, directly and exclusively used
in its radio or telecommunications business, and (b) those properties which are not so used.
It is worthy to note that the properties subject of the present controversy are only those
which are admittedly falling under the first category.

Clearly then, while a new slant on the subject of local taxation now prevails in the sense that
the former doctrine of local government units delegated power to tax had been effectively
modified with Article X, Section 5 of the 1987 Constitution now in place, .the basic doctrine
on local taxation remains essentially the same. For as the Court stressed in Mactan, "the
power to tax is [still] primarily vested in the Congress."

To the mind of the Court, Section 14 of Rep. Act No. 3259 effectively works to grant or
delegate to local governments of Congress inherent power to tax the franchisees properties
belonging to the second group of properties indicated above, that is, all properties which,
"exclusive of this franchise," are not actually and directly used in the pursuit of its franchise.
As may be recalled, the taxing power of local governments under both the 1935 and the
1973 Constitutions solely depended upon an enabling law. Absent such enabling law, local
government units were without authority to impose and collect taxes on real properties
within their respective territorial jurisdictions. While Section 14 of Rep. Act No. 3259 may be
validly viewed as an implied delegation of power to tax, the delegation under that provision,
as couched, is limited to impositions over properties of the franchisee which are not actually,
directly and exclusively used in the pursuit of its franchise. Necessarily, other properties of
Bayantel directly used in the pursuit of its business are beyond the pale of the delegated
taxing power of local governments. In a very real sense, therefore, real properties of
Bayantel, save those exclusive of its franchise, are subject to realty taxes. Ultimately,
therefore, the inevitable result was that all realties which are actually, directly and
exclusively used in the operation of its franchise are "exempted" from any property tax.

This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a
Commissioner of the 1986 Constitutional Commission which crafted the 1987 Constitution,
thus:
What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5
does not change the doctrine that municipal corporations do not possess inherent powers of
taxation. What it does is to confer municipal corporations a general power to levy taxes and
otherwise create sources of revenue. They no longer have to wait for a statutory grant of
these powers. The power of the legislative authority relative to the fiscal powers of local
governments has been reduced to the authority to impose limitations on municipal powers.
Moreover, these limitations must be "consistent with the basic policy of local autonomy." The
important legal effect of Section 5 is thus to reverse the principle that doubts are resolved
against municipal corporations. Henceforth, in interpreting statutory provisions on municipal
fiscal powers, doubts will be resolved in favor of municipal corporations. It is understood,
however, that taxes imposed by local government must be for a public purpose, uniform
within a locality, must not be confiscatory, and must be within the jurisdiction of the local

Bayantels franchise being national in character, the "exemption" thus granted under Section
14 of Rep. Act No. 3259 applies to all its real or personal properties found anywhere within
the Philippine archipelago.
However, with the LGCs taking effect on January 1, 1992, Bayantels "exemption" from real
estate taxes for properties of whatever kind located within the Metro Manila area was, by
force of Section 234 of the Code, supra, expressly withdrawn. But, not long thereafter,
however, or on July 20, 1992, Congress passed Rep. Act No. 7633 amending Bayantels
original franchise. Worthy of note is that Section 11 of Rep. Act No. 7633 is a virtual
reenacment of the tax provision, i.e., Section 14, supra, of Bayantels original franchise under
Rep. Act No. 3259. Stated otherwise, Section 14 of Rep. Act No. 3259 which was deemed
impliedly repealed by Section 234 of the LGC was expressly revived under Section 14 of Rep.
Act No. 7633. In concrete terms, the realty tax exemption heretofore enjoyed by Bayantel
under its original franchise, but subsequently withdrawn by force of Section 234 of the LGC,
has been restored by Section 14 of Rep. Act No. 7633.

unit to pass.

11(Emphasis supplied).

In net effect, the controversy presently before the Court involves, at bottom, a clash
between the inherent taxing power of the legislature, which necessarily includes the power to
exempt, and the local governments delegated power to tax under the aegis of the 1987
Constitution.
Now to go back to the Quezon City Revenue Code which imposed real estate taxes on all real
properties within the citys territory and removed exemptions theretofore "previously granted

12

to, or presently enjoyed by all persons, whether natural or juridical .,"

there can really
be no dispute that the power of the Quezon City Government to tax is limited by Section 232
of the LGC which expressly provides that "a province or city or municipality within the
Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land,
building, machinery, and other improvement not hereinafter specifically exempted." Under
this law, the Legislature highlighted its power to thereafter exempt certain realties from the
taxing power of local government units. An interpretation denying Congress such power to
exempt would reduce the phrase "not hereinafter specifically exempted" as a pure jargon,
without meaning whatsoever. Needless to state, such absurd situation is unacceptable.

The Court has taken stock of the fact that by virtue of Section 5, Article X of the 1987
Constitution,

10

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be
exercised by local legislative bodies, no longer merely be virtue of a valid delegation as
before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution.
Under the latter, the exercise of the power may be subject to such guidelines and limitations
as the Congress may provide which, however, must be consistent with the basic policy of
local autonomy. (at p. 680; Emphasis supplied.)

8 local governments are empowered to levy taxes. And pursuant to this

9

constitutional empowerment, juxtaposed with Section 232 of the LGC, the Quezon City
government enacted in 1993 its local Revenue Code, imposing real property tax on all real
properties found within its territorial jurisdiction. And as earlier stated, the Citys Revenue
Code, just like the LGC, expressly withdrew, under Section 230 thereof, supra, all tax
exemption privileges in general.

For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of

13

This thus raises the question of whether or not the Citys Revenue Code pursuant to which
the city treasurer of Quezon City levied real property taxes against Bayantels real properties
located within the City effectively withdrew the tax exemption enjoyed by Bayantel under its
franchise, as amended.

Davao,
this Court has upheld the power of Congress to grant exemptions over the power
of local government units to impose taxes. There, the Court wrote:
Indeed, the grant of taxing powers to local government units under the Constitution and the
LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant
to a declared national policy. The legal effect of the constitutional grant to local governments
22

simply means that in interpreting statutory provisions on municipal taxing powers, doubts
must be resolved in favor of municipal corporations. (Emphasis supplied.)

POLAR and Personal Income Taxes of its employees and (ii) construction permit fees,
environmental permit fees and other similar fees and charges) and (b) all real estate taxes

As we see it, then, the issue in this case no longer dwells on whether Congress has the
power to exempt Bayantels properties from realty taxes by its enactment of Rep. Act No.
7633 which amended Bayantels original franchise. The more decisive question turns on
whether Congress actually did exempt Bayantels properties at all by virtue of Section 11 of
Rep. Act No. 7633.

and assessments, rates and other charges in respect of the Power Barges.

On August 7, 1995, FELS received an assessment of real property taxes on the power barges
from Provincial Assessor Lauro C. Andaya of Batangas City. The assessed tax, which likewise
covered those due for 1994, amounted to P56,184,088.40 per annum. FELS referred the
matter to NPC, reminding it of its obligation under the Agreement to pay all real estate
taxes. It then gave NPC the full power and authority to represent it in any conference
regarding the real property assessment of the Provincial Assessor.

Admittedly, Rep. Act No. 7633 was enacted subsequent to the LGC. Perfectly aware that the
LGC has already withdrawn Bayantels former exemption from realty taxes, Congress opted
to pass Rep. Act No. 7633 using, under Section 11 thereof, exactly the same defining phrase
"exclusive of this franchise" which was the basis for Bayantels exemption from realty taxes
prior to the LGC. In plain language, Section 11 of Rep. Act No. 7633 states that "the grantee,
its successors or assigns shall be liable to pay the same taxes on their real estate, buildings
and personal property, exclusive of this franchise, as other persons or corporations are now
or hereafter may be required by law to pay." The Court views this subsequent piece of
legislation as an express and real intention on the part of Congress to once again remove
from the LGCs delegated taxing power, all of the franchisees (Bayantels) properties that are
actually, directly and exclusively used in the pursuit of its franchise.

In a letter dated September 7, 1995, NPC sought reconsideration of the Provincial

Assessors decision to assess real property taxes on the power barges. However, the motion
was denied on September 22, 1995, and the Provincial Assessor advised NPC to pay the

assessment. This prompted NPC to file a petition with the Local Board of Assessment
Appeals (LBAA) for the setting aside of the assessment and the declaration of the barges as
non-taxable items; it also prayed that should LBAA find the barges to be taxable, the

WHEREFORE, the petition is DENIED.

No pronouncement as to costs.

Provincial Assessor be directed to make the necessary corrections.

SO ORDERED.

Before the case was decided by the LBAA, NPC filed a Manifestation, informing the LBAA that

February 16, 2007

10

the Department of Finance (DOF) had rendered an opinion

dated May 20, 1996, where it
is clearly stated that power barges are not real property subject to real property assessment.

FELS ENERGY, INC., Petitioner, vs. THE PROVINCE OF BATANGAS and

THE OFFICE OF THE PROVINCIAL ASSESSOR OF BATANGAS, Respondents.

On August 26, 1996, the LBAA rendered a Resolution

reads:

x----------------------------------------------------x
G.R. No. 170628

In its Answer to the petition, the Provincial Assessor averred that the barges were real
property for purposes of taxation under Section 199(c) of Republic Act (R.A.) No. 7160.

-----------------------------------------------------------------------------------------------------------G.R. No. 168557

Subsequently, Polar Energy, Inc. assigned its rights under the Agreement to FELS. The NPC
initially opposed the assignment of rights, citing paragraph 17.2 of Article 17 of the
Agreement.

February 16, 2007

11 denying the petition. The fallo

WHEREFORE, the Petition is DENIED. FELS is hereby ordered to pay the real estate tax in the
amount ofP56,184,088.40, for the year 1994.

NATIONAL POWER CORPORATION, Petitioner, vs. LOCAL BOARD OF ASSESSMENT

APPEALS OF BATANGAS, LAURO C. ANDAYA, in his capacity as the Assessor of the
Province of Batangas, and the PROVINCE OF BATANGAS represented by its
Provincial Assessor, Respondents.

12

SO ORDERED.

The LBAA ruled that the power plant facilities, while they may be classified as movable or
personal property, are nevertheless considered real property for taxation purposes because
they are installed at a specific location with a character of permanency. The LBAA also
pointed out that the owner of the bargesFELS, a private corporationis the one being taxed,
not NPC. A mere agreement making NPC responsible for the payment of all real estate taxes
and assessments will not justify the exemption of FELS; such a privilege can only be granted
to NPC and cannot be extended to FELS. Finally, the LBAA also ruled that the petition was
filed out of time.

DECISION
CALLEJO, SR., J.:
Before us are two consolidated cases docketed as G.R. No. 168557 and G.R. No. 170628,
which were filed by petitioners FELS Energy, Inc. (FELS) and National Power Corporation
(NPC), respectively. The first is a petition for review on certiorari assailing the August 25,

1 of the Court of Appeals (CA) in CA-G.R. SP No. 67490 and its

2 dated June 20, 2005; the second, also a petition for review on certiorari,
challenges the February 9, 2005 Decision3 and November 23, 2005 Resolution4 of the CA in
2004 Decision
Resolution

Aggrieved, FELS appealed the LBAAs ruling to the Central Board of Assessment Appeals
(CBAA).

CA-G.R. SP No. 67491. Both petitions were dismissed on the ground of prescription.

On August 28, 1996, the Provincial Treasurer of Batangas City issued a Notice of Levy and

The pertinent facts are as follows:

Warrant by Distraint
over the power barges, seeking to collect real property taxes
amounting to P232,602,125.91 as of July 31, 1996. The notice and warrant was officially
served to FELS on November 8, 1996. It then filed a Motion to Lift Levy dated November 14,
1996, praying that the Provincial Assessor be further restrained by the CBAA from enforcing
the disputed assessment during the pendency of the appeal.

13

On January 18, 1993, NPC entered into a lease contract with Polar Energy, Inc. over 3x30
MW diesel engine power barges moored at Balayan Bay in Calaca, Batangas. The contract,
denominated as an Energy Conversion Agreement
years. Article 10 reads:

5 (Agreement), was for a period of five

14

On November 15, 1996, the CBAA issued an Order

lifting the levy and distraint on the
properties of FELS in order not to preempt and render ineffectual, nugatory and illusory any
resolution or judgment which the Board would issue.

10.1 RESPONSIBILITY. NAPOCOR shall be responsible for the payment of (a) all taxes,
import duties, fees, charges and other levies imposed by the National Government of the
Republic of the Philippines or any agency or instrumentality thereof to which POLAR may be
or become subject to or in relation to the performance of their obligations under this
agreement (other than (i) taxes imposed or calculated on the basis of the net income of
23

Meantime, the NPC filed a Motion for Intervention

15 dated August 7, 1998 in the

proceedings before the CBAA. This was approved by the CBAA in an Order16 dated

On September 20, 2004, FELS timely filed a motion for reconsideration seeking the reversal
of the appellate courts decision in CA-G.R. SP No. 67490.

September 22, 1998.

Thereafter, NPC filed a petition for review dated October 19, 2004 before this Court,
docketed as G.R. No. 165113, assailing the appellate courts decision in CA-G.R. SP No.

During the pendency of the case, both FELS and NPC filed several motions to admit bond to
guarantee the payment of real property taxes assessed by the Provincial Assessor (in the
event that the judgment be unfavorable to them). The bonds were duly approved by the
CBAA.

67490. The petition was, however, denied in this Courts Resolution

of November 8, 2004,
for NPCs failure to sufficiently show that the CA committed any reversible error in the
challenged decision. NPC filed a motion for reconsideration, which the Court denied with

25

finality in a Resolution

17 finding the power barges exempt from

On April 6, 2000, the CBAA rendered a Decision

real property tax. The dispositive portion reads:

26 dated January 19, 2005.

Meantime, the appellate court dismissed the petition in CA-G.R. SP No. 67491. It held that
the right to question the assessment of the Provincial Assessor had already prescribed upon
the failure of FELS to appeal the disputed assessment to the LBAA within the period
prescribed by law. Since FELS had lost the right to question the assessment, the right of the
Provincial Government to collect the tax was already absolute.

WHEREFORE, the Resolution of the Local Board of Assessment Appeals of the Province of
Batangas is hereby reversed. Respondent-appellee Provincial Assessor of the Province of
Batangas is hereby ordered to drop subject property under ARP/Tax Declaration No. 01800958 from the List of Taxable Properties in the Assessment Roll. The Provincial Treasurer of
Batangas is hereby directed to act accordingly.

NPC filed a motion for reconsideration dated March 8, 2005, seeking reconsideration of the
February 5, 2005 ruling of the CA in CA-G.R. SP No. 67491. The motion was denied in a

18

27 dated November 23, 2005.

SO ORDERED.

Resolution

Ruling in favor of FELS and NPC, the CBAA reasoned that the power barges belong to NPC;
since they are actually, directly and exclusively used by it, the power barges are covered by

The motion for reconsideration filed by FELS in CA-G.R. SP No. 67490 had been earlier
denied for lack of merit in a Resolution

19

the exemptions under Section 234(c) of R.A. No. 7160.

As to the other jurisdictional
issue, the CBAA ruled that prescription did not preclude the NPC from pursuing its claim for
tax exemption in accordance with Section 206 of R.A. No. 7160. The Provincial Assessor filed
a motion for reconsideration, which was opposed by FELS and NPC.
In a complete volte face, the CBAA issued a Resolution
earlier decision. The fallo of the resolution reads:

28 dated June 20, 2005.

On August 3, 2005, FELS filed the petition docketed as G.R. No. 168557 before this Court,
raising the following issues:
A.
Whether power barges, which are floating and movable, are personal properties and
therefore, not subject to real property tax.

20 on July 31, 2001 reversing its

B.

WHEREFORE, premises considered, it is the resolution of this Board that:

Assuming that the subject power barges are real properties, whether they are exempt from
real estate tax under Section 234 of the Local Government Code ("LGC").

(a) The decision of the Board dated 6 April 2000 is hereby reversed.
(b) The petition of FELS, as well as the intervention of NPC, is dismissed.

C.

(c) The resolution of the Local Board of Assessment Appeals of Batangas is hereby
affirmed,

Assuming arguendo that the subject power barges are subject to real estate tax, whether or
not it should be NPC which should be made to pay the same under the law.

(d) The real property tax assessment on FELS by the Provincial Assessor of Batangas is
likewise hereby affirmed.

D.
Assuming arguendo that the subject power barges are real properties, whether or not the
same is subject to depreciation just like any other personal properties.

21

SO ORDERED.

E.

FELS and NPC filed separate motions for reconsideration, which were timely opposed by the
Provincial Assessor. The CBAA denied the said motions in a Resolution
2001.

22 dated October 19,

Whether the right of the petitioner to question the patently null and void real property tax
assessment on the petitioners personal properties is imprescriptible.

Dissatisfied, FELS filed a petition for review before the CA docketed as CA-G.R. SP No.
67490. Meanwhile, NPC filed a separate petition, docketed as CA-G.R. SP No. 67491.

29

On January 13, 2006, NPC filed its own petition for review before this Court (G.R. No.
170628), indicating the following errors committed by the CA:

On January 17, 2002, NPC filed a Manifestation/Motion for Consolidation in CA-G.R. SP No.
67490 praying for the consolidation of its petition with CA-G.R. SP No. 67491. In a

I
THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT THE APPEAL TO THE LBAA WAS
FILED OUT OF TIME.

23

Resolution
dated February 12, 2002, the appellate court directed NPC to re-file its motion
for consolidation with CA-G.R. SP No. 67491, since it is the ponente of the latter petition who
should resolve the request for reconsideration.

II
THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT THE POWER BARGES ARE
NOT SUBJECT TO REAL PROPERTY TAXES.

NPC failed to comply with the aforesaid resolution. On August 25, 2004, the Twelfth Division
of the appellate court rendered judgment in CA-G.R. SP No. 67490 denying the petition on
the ground of prescription. The decretal portion of the decision reads:

III
THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT THE ASSESSMENT ON THE

WHEREFORE, the petition for review is DENIED for lack of merit and the assailed Resolutions
dated July 31, 2001 and October 19, 2001 of the Central Board of Assessment Appeals are
AFFIRMED.

30

POWER BARGES WAS NOT MADE IN ACCORDANCE WITH LAW.

Considering that the factual antecedents of both cases are similar, the Court ordered the

24

SO ORDERED.

consolidation of the two cases in a Resolution

24

31 dated March 8, 2006.1awphi1.net

In an earlier Resolution dated February 1, 2006, the Court had required the parties to submit
their respective Memoranda within 30 days from notice. Almost a year passed but the parties
had not submitted their respective memoranda. Considering that taxesthe lifeblood of our
economyare involved in the present controversy, the Court was prompted to dispense with
the said pleadings, with the end view of advancing the interests of justice and avoiding
further delay.

For its part, the appellate court declared in CA-G.R. SP No. 67491:

In both petitions, FELS and NPC maintain that the appeal before the LBAA was not timebarred. FELS argues that when NPC moved to have the assessment reconsidered on
September 7, 1995, the running of the period to file an appeal with the LBAA was tolled. For
its part, NPC posits that the 60-day period for appealing to the LBAA should be reckoned
from its receipt of the denial of its motion for reconsideration.

without interruption. This is what We held in SP 67490 and reaffirm today in SP 67491.

x x x. The Court announces: Henceforth, whenever the local assessor sends a notice to the
owner or lawful possessor of real property of its revised assessed value, the former shall no
longer have any jurisdiction to entertain any request for a review or readjustment. The
appropriate forum where the aggrieved party may bring his appeal is the LBAA as provided
by law. It follows ineluctably that the 60-day period for making the appeal to the LBAA runs

37

To reiterate, if the taxpayer fails to appeal in due course, the right of the local government to
collect the taxes due with respect to the taxpayers property becomes absolute upon the

38

expiration of the period to appeal.

It also bears stressing that the taxpayers failure to
question the assessment in the LBAA renders the assessment of the local assessor final,
executory and demandable, thus, precluding the taxpayer from questioning the correctness
of the assessment, or from invoking any defense that would reopen the question of its

Petitioners contentions are bereft of merit.

Section 226 of R.A. No. 7160, otherwise known as the Local Government Code of 1991,
provides:

39

SECTION 226. Local Board of Assessment Appeals. Any owner or person having legal
interest in the property who is not satisfied with the action of the provincial, city or municipal
assessor in the assessment of his property may, within sixty (60) days from the date of
receipt of the written notice of assessment, appeal to the Board of Assessment Appeals of
the province or city by filing a petition under oath in the form prescribed for the purpose,
together with copies of the tax declarations and such affidavits or documents submitted in
support of the appeal.

liability on the merits.

We note that the notice of assessment which the Provincial Assessor sent to FELS on August
7, 1995, contained the following statement:

In the Comment filed by the Provincial Assessor, it is asserted that the instant petition is
barred by res judicata; that the final and executory judgment in G.R. No. 165113 (where
there was a final determination on the issue of prescription), effectively precludes the claims
herein; and that the filing of the instant petition after an adverse judgment in G.R. No.
165113 constitutes forum shopping.

In fine, the LBAA acted correctly when it dismissed the petitioners appeal for having been
filed out of time; the CBAA and the appellate court were likewise correct in affirming the
dismissal. Elementary is the rule that the perfection of an appeal within the period therefor is
both mandatory and jurisdictional, and failure in this regard renders the decision final and

40

executory.

If you are not satisfied with this assessment, you may, within sixty (60) days from the date
of receipt hereof, appeal to the Board of Assessment Appeals of the province by filing a
petition under oath on the form prescribed for the purpose, together with copies of ARP/Tax
Declaration and such affidavits or documents submitted in support of the appeal.

FELS maintains that the argument of the Provincial Assessor is completely misplaced since it
was not a party to the erroneous petition which the NPC filed in G.R. No. 165113. It avers
that it did not participate in the aforesaid proceeding, and the Supreme Court never acquired
jurisdiction over it. As to the issue of forum shopping, petitioner claims that no forum
shopping could have been committed since the elements of litis pendentia or res judicata are
not present.

32

Instead of appealing to the Board of Assessment Appeals (as stated in the notice), NPC
opted to file a motion for reconsideration of the Provincial Assessors decision, a remedy not
sanctioned by law.
The remedy of appeal to the LBAA is available from an adverse ruling or action of the
provincial, city or municipal assessor in the assessment of the property. It follows then that
the determination made by the respondent Provincial Assessor with regard to the taxability
of the subject real properties falls within its power to assess properties for taxation purposes
subject to appeal before the LBAA.

We do not agree.
Res judicata pervades every organized system of jurisprudence and is founded upon two
grounds embodied in various maxims of common law, namely: (1) public policy and
necessity, which makes it to the interest of the

33

State that there should be an end to litigation republicae ut sit litium; and (2) the hardship
on the individual of being vexed twice for the same cause nemo debet bis vexari et eadem
causa. A conflicting doctrine would subject the public peace and quiet to the will and
dereliction of individuals and prefer the regalement of the litigious disposition on the part of

We fully agree with the rationalization of the CA in both CA-G.R. SP No. 67490 and CA-G.R.
SP No. 67491. The two divisions of the appellate court cited the case of Callanta v. Office of

34

35

the Ombudsman,
where we ruled that under Section 226 of R.A. No 7160,
the last
action of the local assessor on a particular assessment shall be the notice of assessment; it is
this last action which gives the owner of the property the right to appeal to the LBAA. The
procedure likewise does not permit the property owner the remedy of filing a motion for
reconsideration before the local assessor. The pertinent holding of the Court in Callanta is as
follows:

suitors to the preservation of the public tranquility and happiness.

Trinidad De Leon Vda. de Roxas v. Court of Appeals:

x x x An existing final judgment or decree rendered upon the merits, without fraud or
collusion, by a court of competent jurisdiction acting upon a matter within its authority is
conclusive on the rights of the parties and their privies. This ruling holds in all other actions
or suits, in the same or any other judicial tribunal of concurrent jurisdiction, touching on the
points or matters in issue in the first suit.

x x x [T]he same Code is equally clear that the aggrieved owners should have brought their
appeals before the LBAA. Unfortunately, despite the advice to this effect contained in their
respective notices of assessment, the owners chose to bring their requests for a
review/readjustment before the city assessor, a remedy not sanctioned by the law. To allow
this procedure would indeed invite corruption in the system of appraisal and assessment. It
conveniently courts a graft-prone situation where values of real property may be initially set
unreasonably high, and then subsequently reduced upon the request of a property owner. In
the latter instance, allusions of a possible covert, illicit trade-off cannot be avoided, and in
fact can conveniently take place. Such occasion for mischief must be prevented and excised
from our system.

41 As we ruled in Heirs of

42

xxx
Courts will simply refuse to reopen what has been decided. They will not allow the same
parties or their privies to litigate anew a question once it has been considered and decided
with finality. Litigations must end and terminate sometime and somewhere. The effective and
efficient administration of justice requires that once a judgment has become final, the
prevailing party should not be deprived of the fruits of the verdict by subsequent suits on the
same issues filed by the same parties.

36
25

This is in accordance with the doctrine of res judicata which has the following elements: (1)
the former judgment must be final; (2) the court which rendered it had jurisdiction over the
subject matter and the parties; (3) the judgment must be on the merits; and (4) there must
be between the first and the second actions, identity of parties, subject matter and causes of
action. The application of the doctrine of res judicata does not require absolute identity of
parties but merely substantial identity of parties. There is substantial identity of parties when
there is community of interest or privity of interest between a party in the first and a party in

doubt, it is a sound policy to leave the assessment undisturbed.

depart from this rule in this case.

50

In Consolidated Edison Company of New York, Inc., et al. v. The City of New York, et al.,
a
power company brought an action to review property tax assessment. On the citys motion to
dismiss, the Supreme Court of New York held that the barges on which were mounted gas
turbine power plants designated to generate electrical power, the fuel oil barges which
supplied fuel oil to the power plant barges, and the accessory equipment mounted on the
barges were subject to real property taxation.

43

the second case even if the first case did not implead the latter.

To recall, FELS gave NPC the full power and authority to represent it in any proceeding
regarding real property assessment. Therefore, when petitioner NPC filed its petition for
review docketed as G.R. No. 165113, it did so not only on its behalf but also on behalf of
FELS. Moreover, the assailed decision in the earlier petition for review filed in this Court was
the decision of the appellate court in CA-G.R. SP No. 67490, in which FELS was the
petitioner. Thus, the decision in G.R. No. 165116 is binding on petitioner FELS under the
principle of privity of interest. In fine, FELS and NPC are substantially "identical parties" as to
warrant the application of res judicata. FELSs argument that it is not bound by the
erroneous petition filed by NPC is thus unavailing.

Moreover, Article 415 (9) of the New Civil Code provides that "[d]ocks and structures which,
though floating, are intended by their nature and object to remain at a fixed place on a river,
lake, or coast" are considered immovable property. Thus, power barges are categorized as
immovable property by destination, being in the nature of machinery and other implements
intended by the owner for an industry or work which may be carried on in a building or on a
piece of land and which tend directly to meet the needs of said industry or work.

We affirm the findings of the LBAA and CBAA that the owner of the taxable properties is
petitioner FELS, which in fine, is the entity being taxed by the local government. As
stipulated under Section 2.11, Article 2 of the Agreement:

44

OWNERSHIP OF POWER BARGES. POLAR shall own the Power Barges and all the fixtures,
fittings, machinery and equipment on the Site used in connection with the Power Barges
which have been supplied by it at its own cost. POLAR shall operate, manage and maintain

Petitioner FELS alleges that there is no forum shopping since the elements of res judicata are
not present in the cases at bar; however, as already discussed, res judicata may be properly
applied herein. Petitioners engaged in forum shopping when they filed G.R. Nos. 168557 and
170628 after the petition for review in G.R. No. 165116. Indeed, petitioners went from one
court to another trying to get a favorable decision from one of the tribunals which allowed
them to pursue their cases.

52

the Power Barges for the purpose of converting Fuel of NAPOCOR into electricity.

It follows then that FELS cannot escape liability from the payment of realty taxes by invoking
its exemption in Section 234 (c) of R.A. No. 7160, which reads:

It must be stressed that an important factor in determining the existence of forum shopping
is the vexation caused to the courts and the parties-litigants by the filing of similar cases to

SECTION 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:

45

xxx

claim substantially the same reliefs.

The rationale against forum shopping is that a party
should not be allowed to pursue simultaneous remedies in two different fora. Filing multiple
petitions or complaints constitutes abuse of court processes, which tends to degrade the
administration of justice, wreaks havoc upon orderly judicial procedure, and adds to the
congestion of the heavily burdened dockets of the courts.

51

Petitioners maintain nevertheless that the power barges are exempt from real estate tax
under Section 234 (c) of R.A. No. 7160 because they are actually, directly and exclusively
used by petitioner NPC, a government- owned and controlled corporation engaged in the
supply, generation, and transmission of electric power.

On the issue of forum shopping, we rule for the Provincial Assessor. Forum shopping exists
when, as a result of an adverse judgment in one forum, a party seeks another and possibly
favorable judgment in another forum other than by appeal or special civil action or certiorari.
There is also forum shopping when a party institutes two or more actions or proceedings
grounded on the same cause, on the gamble that one or the other court would make a
favorable disposition.

49 We find no reason to

(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; x x x

46

Indeed, the law states that the machinery must be actually, directly and exclusively used by
the government owned or controlled corporation; nevertheless, petitioner FELS still cannot
find solace in this provision because Section 5.5, Article 5 of the Agreement provides:

Thus, there is forum shopping when there exist: (a) identity of parties, or at least such
parties as represent the same interests in both actions, (b) identity of rights asserted and
relief prayed for, the relief being founded on the same facts, and (c) the identity of the two
preceding particulars is such that any judgment rendered in the pending case, regardless of

OPERATION. POLAR undertakes that until the end of the Lease Period, subject to the supply
of the necessary Fuel pursuant to Article 6 and to the other provisions hereof, it will operate
the Power Barges to convert such Fuel into electricity in accordance with Part A of Article

47

which party is successful, would amount to res judicata in the other.

53

7.

Having found that the elements of res judicata and forum shopping are present in the
consolidated cases, a discussion of the other issues is no longer necessary. Nevertheless, for
the peace and contentment of petitioners, we shall shed light on the merits of the case.

It is a basic rule that obligations arising from a contract have the force of law between the
parties. Not being contrary to law, morals, good customs, public order or public policy, the

As found by the appellate court, the CBAA and LBAA power barges are real property and are
thus subject to real property tax. This is also the inevitable conclusion, considering that G.R.
No. 165113 was dismissed for failure to sufficiently show any reversible error. Tax
assessments by tax examiners are presumed correct and made in good faith, with the

parties to the contract are bound by its terms and conditions.

54

Time and again, the Supreme Court has stated that taxation is the rule and exemption is the

55

exception.
The law does not look with favor on tax exemptions and the entity that would
seek to be thus privileged must justify it by words too plain to be mistaken and too

48

taxpayer having the burden of proving otherwise.

Besides, factual findings of
administrative bodies, which have acquired expertise in their field, are generally binding and
conclusive upon the Court; we will not assume to interfere with the sensible exercise of the
judgment of men especially trained in appraising property. Where the judicial mind is left in

56

categorical to be misinterpreted.
Thus, applying the rule of strict construction of laws
granting tax exemptions, and the rule that doubts should be resolved in favor of provincial
corporations, we hold that FELS is considered a taxable entity.
26

The mere undertaking of petitioner NPC under Section 10.1 of the Agreement, that it shall be
responsible for the payment of all real estate taxes and assessments, does not justify the
exemption. The privilege granted to petitioner NPC cannot be extended to FELS. The
covenant is between FELS and NPC and does not bind a third person not privy thereto, in this
case, the Province of Batangas.

for the creation of the Bauang Private Power Corporation (BPPC) that will own, manage and
operate the power plant/station, and assume and perform FPPCs obligations under the BOT
agreement. For a fee,3 BPPC will convert NAPOCORs supplied diesel fuel into electricity and
deliver the product to NAPOCOR.
The pertinent provisions of the BOT agreement, as they relate to the submitted issues in the
present case, read:

It must be pointed out that the protracted and circuitous litigation has seriously resulted in
the local governments deprivation of revenues. The power to tax is an incident of
sovereignty and is unlimited in its magnitude, acknowledging in its very nature no perimeter
so that security against its abuse is to be found only in the responsibility of the legislature

2.03 NAPOCOR shall make available the Site to CONTRACTOR for the purpose of building and
operating the Power Station at no cost to CONTRACTOR for the period commencing on the
Effective Date and ending on the Transfer Date and NAPOCOR shall be responsible for the
payment of all real estate taxes and assessments, rates, and other charges in respect of the
Site and the buildings and improvements thereon.

57

which imposes the tax on the constituency who are to pay for it.
The right of local
government units to collect taxes due must always be upheld to avoid severe tax erosion.
This consideration is consistent with the State policy to guarantee the autonomy of local

xxxx

58

governments
and the objective of the Local Government Code that they enjoy genuine
and meaningful local autonomy to empower them to achieve their fullest development as
self-reliant communities and make them effective partners in the attainment of national

2.08 From the date hereof until the Transfer Date, CONTRACTOR shall, directly or indirectly,
own the Power Station and all the fixtures, fittings, machinery, and equipment on the Site or
used in connection with the Power Station which have been supplied by it or at its cost and it
shall operate and manage the Power Station for the purpose of converting fuel of NAPOCOR
into electricity.

59

goals.

In conclusion, we reiterate that the power to tax is the most potent instrument to raise the
needed revenues to finance and support myriad activities of the local government units for
the delivery of basic services essential to the promotion of the general welfare and the
enhancement of peace, progress, and prosperity of the people.

2.09 Until the Transfer Date, NAPOCOR shall, at its own cost, supply and deliver all Fuel for
the Power Station and shall take all electricity generated by the Power Station at the request
of NAPOCOR which shall pay to CONTRACTOR fees as provided in Clause 11.

60

xxxx

WHEREFORE, the Petitions are DENIED and the assailed Decisions and Resolutions
AFFIRMED.

2.11 On the Transfer Date, the Power Station shall be transferred by the CONTRACTOR to
NAPOCOR without payment of any compensation.

SO ORDERED.

The Officer-in-Charge of the Municipal Assessors Office of Bauang, La Union initially issued
Declaration of Real Property Nos. 25016 and 25022 to 25029 declaring BPPCs machineries
and equipment as tax-exempt. On the initiative of the Bauang Vice Mayor, the municipality
questioned before the Regional Director of the Bureau of Local Government Finance (BLGF)
the declared tax exemption; later, the issue was elevated to the Deputy Executive Director
and Officer-in-Charge of the BLGF, Department of Finance, who ruled that BPPCs
machineries and equipments are subject to real property tax and directed the Assessors
Office to take appropriate action.

-----------------------------------------------------------------------------------------------------------G.R. No. 171470

January 30, 2009

NATIONAL POWER CORPORATION, Petitioner, vs. CENTRAL BOARD OF ASSESSMENT

APPEALS (CBAA), LOCAL BOARD OF ASSESSMENT APPEALS (LBAA) OF LA UNION,
PROVINCIAL TREASURER, LA UNION and MUNICIPAL ASSESSOR OF BAUANG, LA
UNION, Respondents.

The Provincial/Municipal Assessors thereupon issued Revised Tax Declaration Nos. 30026 to
30033 and 30337, and cancelled the earlier issued Declarations of Real Property. The
Municipal Assessor of Bauang then issued a Notice of Assessment and Tax Bill to BPPC
assessing/taxing the machineries and equipments in the total sum ofP288,582,848.00 for the
1995-1998 period, sans interest of two percent (2%) on the unpaid amounts. BPPCs VicePresident and Plant Manager received the Notice of Assessment and Tax Bill on August 7,
1998.

DECISION
BRION, J.:
What are the real property tax implications of a Build-Operate-Transfer (BOT) agreement
between a government-owned and controlled corporation (GOCC) that enjoys tax exemption
and a private corporation? Specifically, under the terms of the BOT Areement, can the GOCC
be deemed the actual, direct, and exclusive user of machineries and equipment for tax
exemption purposes? If not, can it pass on its tax-exempt status to its BOT partner, a private
corporation, through the BOT agreement?

On October 5, 1998, NAPOCOR filed a petition (styled In Re Petition to Declare Exempt the
Revised and Retroactive to 1995 Tax Declaration Nos. 30026 to 30033 and 30037) with the
LBAA. The petition asked that, retroactive to 1995, the machineries covered by the tax
declarations be exempt from real property tax under Section 234(c) of Republic Act No. 7160
(the Local Government Code or LGC); and, that these properties be dropped from the
assessment roll pursuant to Section 206 of the LGC. Section 234(c) of the LGC provides: 4

The National Power Corporation (NAPOCOR) claims in this case that the machineries and
equipment used in a project covered by a BOT agreement, to which it is a party, should be
accorded the tax-exempt status it enjoys. The Local Board of Assessment Appeals of the
Province of La Union (LBAA), the Central Board of Assessment Appeals (CBAA) and the Court
of Tax Appeals (CTA) were one in rejecting NAPOCORs claim.

Section 234. Exemptions from Real Property Tax. The following are exempted from the
payment of real property tax:

The present petition for review on certiorari filed under Rule 45 of the Rules of Court by
NAPOCOR challenges this uniform ruling and seeks the reversal of the CTAs Decision dated
February 13, 2006 in the consolidated cases of NAPOCOR v. CBAA, et al.1 and Bauang Private
Power Corp. v. Sangguniang Panlalawigan ng La Union, et al.,2 and of the denial of the
motion for reconsideration that followed.

xxxx
(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;

THE ANTECEDENTS

x x x x.

On January 11, 1993, First Private Power Corporation (FPPC) entered into a BOT agreement
with NAPOCOR for the construction of the 215 Megawatt Bauang Diesel Power Plant in
Payocpoc, Bauang, La Union. The BOT Agreement provided, via an Accession Undertaking,

The LBAA denied NAPOCORs petition for exemption in a Decision dated October 26, 2001. It
ruled that the exemption provided by Section 234(c) of the LGC applies only when a
government-owned or controlled corporation like NAPOCOR owns and/or actually uses
27

machineries and equipment for the generation and transmission of electric power; in this
case, NAPOCOR does not own and does not even actually and directly use the machineries. It
is the BPPC, a non-government entity, which owns, maintains, and operates the machineries
and equipment; using these, it generates electricity and then sells this to NAPOCOR.
Additionally, it ruled that the liability for the payment of the real estate taxes is determined
by law and not by the agreement of the parties; hence, the provision in the BOT Agreement
whereby NAPOCOR assumed responsibility for the payment of all real estate taxes and
assessments, rates, and other charges, in relation with the site, buildings, and improvements
in the BOT project, is an arrangement between the parties that cannot be the basis in
identifying who is liable to the government for the real estate tax.

NAPOCOR then filed with the CTA a petition for review, docketed as CTA E.B. No. 51, to
challenge the CBAA decision. BPPC filed its own petition for review of the CBAA decision with
the CTA which was docketed as CTA E.B. No. 58. The two petitions were subsequently
consolidated.
THE APPEALED CTA RULING
The CTA rendered on February 13, 2006 a decision dismissing the consolidated petitions. It
ruled on two issues: (1) whether BPPC seasonably filed its protest against the assessment;
and (2) whether the machineries and equipments are actually, directly, and exclusively used
by NAPOCOR in the generation and transmission of electric power, and are therefore not
subject to tax.

NAPOCOR appealed the LBAA ruling to the CBAA. BPPC moved to intervene on the ground
that it has a direct interest in the outcome of the litigation. 5 The CBAA subsequently
dismissed the appeal based on its finding that the BPPC, and not NAPOCOR, is the actual,
direct and exclusive user of the equipment and machineries; thus, the exemption under
Section 234(c) does not apply. The CBAA ruled:

On the first issue, the CTA applied Section 226 of the LGC which provides the remedy from
an assessment as follows:
SEC. 226. Local Board of Assessment Appeals. Any owner or person having legal interest in
the property who is not satisfied with the action of the provincial, city or municipal assessor
in the assessment of his property may, within sixty (60) days from the date of receipt of the
written notice of assessment, appeal to the Board of Assessment Appeals in the province or
city by filing a petition under oath in the form prescribed for the purpose, together with
copies of tax declarations and such affidavits or documents submitted in support of the
appeal.

Sec. 234 (c), R.A. 7160 (supra), is clear and unambiguous: "there is no room for
construction." (citations omitted)
xxxx
Actual use, according to Sec. 199 (b) of R.A. 7160, "refers to the purpose for which the
property is principally or predominantly utilized by the person in possession thereof." In
Velez v. Locsin, 55 SCRA 152: "The word use means to employ for the attainment of some
purpose or end." In the "Operation of the Power Station" (Clause 8.01 of the BOT
Agreement), CONTRACTOR shall, at its own cost, be responsible for the management,
operation, maintenance and repair of the Power Station during the Co-operation period x x
x." Said Co-operation period is fifteen (15) years, after which the Power Station will be
turned over or transferred to NAPOCOR. Does this determine when NAPOCOR should take
over the actual, direct and exclusive use of the Power Station? That is fifteen (15) years
therefrom?

It found that BPPC never filed an appeal to contest or question the assessment; instead, it
was NAPOCOR that filed the purported appeal a petition for exemption of the machineries
and equipment. The CTA, however, said that NAPOCOR is not the proper party, and the
purported appeal did not substantially comply with the requisites of the law.
According to the CTA, NAPOCOR is not the registered owner of the machineries and
equipment. These are registered in BPPCs name as further confirmed by Section 2.08 of the
BOT Agreement.6 Thus, the CTA declared that until the transfer date of the power station,
NAPOCOR does not own any of the machineries and equipment, and therefore has no legal
right, title, or interest over these properties. Thus, the CTA concluded that NAPOCOR has no
cause of action and no legal personality to question the assessment. As the respondent local
government units claim, NAPOCOR is an interloper in the issue of BPPCs real estate tax
liabilities.

It has been established that BPPC manufactures or generates the power which is sold to
NAPOCOR and NAPOCOR distributes said power to the consumers. In other words, the
relationship between BPPC and NAPOCOR is one of manufacturer or seller and exclusive
distributor or buyer. The general perception is that the exclusive distributor or buyer of goods
has nothing to do with the manufacturing thereof but as exclusive distributor the latter has
the right to acquire all the goods to be sold to the exclusion of all others.

The CTA additionally found that BPPCs subsequent attempt to question the assessment via a
motion for intervention with the CBAA failed to follow the correct process prescribed by the
Rules Governing Appeals to the CBAA; 7 its appeal was not accompanied by an appeal bond.

In terms of the definitions under Sec. 199 (b) and that offered by Respondents-Appelless
(supra), the machineries and equipment are principally or predominantly utilized by BPPC. In
terms of the Velez vs. Locsin case (supra), BPPC employs the machineries and equipment to
attain its purpose of generating power to be sold to NAPOCOR and collect payment therefrom
to compensate for its investment. The BOT Agreement is not a contract for nothing.

Also, the CTA found NAPOCORs petition to be an inappropriate remedy, as it is not the
appeal contemplated by law; NAPOCOR was in fact asserting an exemption on the basis of
the provisions of the BOT Agreement. An exemption is an evidentiary matter for the
assessors, not for the LBAA, to decide pursuant to Section 206 of the LGC; 8 NAPOCOR cannot
simply bypass the authority granted to concerned administrative agencies, as these available
administrative remedies must first be exhausted.

The following definitions are given by Blacks Law Dictionary, Third Edition:
"Actually is opposed to seemingly, pretendedly, or feignedly, as actually engaged in farming
means really, truly in fact."

On the more substantive second issue, the CTA saw it clear from the BOT Agreement that
BPPC owns and uses the machineries and equipment in the power station, thus directly
addressing and disproving NAPOCORs "actual, direct, and exclusive use" argument. It noted
that under the BOT Agreement, NAPOCOR shall have a right over the machineries and
equipments only after their transfer at the end of the 15-year co-operation period. "By the
nature of the agreement and work of BPPC, the [machineries] are actually, directly, and
exclusively used by it in the conversion of bunker fuel to electricity for [NAPOCOR] for a fee,"
the CTA said.

"Directly. In a direct way without anything intervening; not by secondary, but by direct
means."
"Exclusively. Apart from all others; without admission of others to participation; in a manner
to exclude."
Indeed BPPC does not use said machineries and equipment pretendedly or feignedly but truly
and factually hence, "actually." BPPC uses them without anything intervening hence, directly.
BPPC uses the same machineries and equipment apart from all others hence, exclusively.
This is the fact against the fact there is no argument. This same fact will also deny
NAPOCORs claim to a ten (10%) assessment level provided for under Sec. 218 of R.A. 7160
(supra) as to the requirement thereto is simply the same as that in realty tax exemption.
The BPPC is a private entity, not a Government Owned or Controlled Corporation (GOCC),
hence, not entitled to a 10% assessment level.

Section 234(c) of the LGC, according to the CTA, is clear. The exemption under the law does
not apply because BPPC is not a GOCC it is an independent power corporation currently
operating and maintaining the power plant pursuant to the BOT Agreement. The BOT
agreement cannot likewise be the basis for the claimed exemption; tax exemption cannot be
agreed upon by mere contract between the parties (BPPC and NAPOCOR), as it must be
expressly granted by the Constitution, statute, or franchise. A tax exemption, if and when
granted, is also not transferrable, as it is a personal privilege and it must be strictly
construed, the CTA said in closing.
28

THE SEPARATE APPEALS

To support its claim that it is entitled to tax exemption as the actual, direct, and exclusive
user of the machineries and equipment, NAPOCOR argues that:

Thereupon, NAPOCOR and BPPC sought separate reviews of the CTA decision with us.

a. the BOT agreement is a financing agreement where it (NAPOCOR) is the beneficial

owner and the actual, direct, and exclusive user of the power plant, while BPPC is the
lender/creditor that retains the plants legal ownership until it is fully paid; the power
plant is a NAPOCOR project and BPPC is just the financier-contractor, and any BPPC
activity is made on NAPOCORs behalf as a contractor for NAPOCOR; in this way,
NAPOCOR takes advantage of BPPCs financial resources and technical expertise to
secure a continuous supply of electric power.

G.R. No. 173811

BPPC filed on September 11, 2006 its petition separately from NAPOCOR. The BPPC petition
was docketed as G.R. No. 173811 and was raffled to the First Division of the Court.
The First Division denied BPPCs petition in its Resolution dated October 4, 2006 on the
reasoning that BPPC failed to sufficiently show that the CTA committed any reversible error in
the challenged decision and resolution as to warrant the exercise of the Courts discretionary
appellate jurisdiction.

b. its payment of energy fees, fixed operating fees, and other infrastructure fees to
BPPC is not inconsistent with its (NAPOCORs) beneficial ownership and actual, direct,
and exclusive use of the power plant, since the collection of the fees is the repayment
scheme prescribed by Section 69 of Republic Act No. 6957,10 as amended by Republic
Act No. 7718 (BOT Law, as amended); its amortizations over the 15-year co-operation
period constitute full payment for the power plant that would warrant the transfer of
ownership without payment of additional compensation; finally, that Republic Act No.
9136 or the Electric Power Industry Reform Act of 2001 has booked the power plant as
NAPOCORs asset for privatization purposes.

BPPC moved to reconsider the denial of its petition, but the Third Division (after the Courts
reorganization) denied the motion for reconsideration with finality after finding no substantial
arguments to warrant reconsideration. The resolution denying BPPCs petition for review had
become final and executory and was thus recorded in the Book of Entries of Judgment on
April 3, 2007.
G.R. No. 171470 The Present Case
The NAPOCOR petition now pending with us was filed on April 6, 2006 and was docketed as
G.R. No. 171470. We required the respondents to comment on the petition in our Resolution
of May 3, 2006. The respondents filed the required comments. NAPOCOR subsequently filed
its Reply.

c. its tax exemption should apply to a BOT project, citing the conditions that gave rise to
the BOT law and its own mandate to provide electricity nationwide; BOT projects are
really government projects where the private sector participates to provide the heavy
initial financial requirements; and that Congress specifically considered NAPOCORs
situation in granting tax exemption to machineries and equipment used in power
generation and distribution.

NAPOCOR cited the following as grounds for its petition:

I.
THE CTA ERRED ON A QUESTION OF LAW IN NOT RULING THAT PETITIONER IS THE
ACTUAL, DIRECT, AND EXCLUSIVE USER OF THE BAUANG DIESEL POWER PLANT.

d. in the interpretation of Section 234(c) of the LGC, related statutes must be

considered and the task of the courts is to harmonize all these laws, if possible;
specifically, Section 234(c) of the LGC was enacted to clarify or restore NAPOCORs real
property tax exemption so that NAPOCOR can perform its public function of supplying
electricity to the entire country at affordable rates, while the BOT law was enacted,
among others, to authorize NAPOCOR to enter into BOT contracts with the private sector
so that NAPOCOR can carry out its mandate; the tax exemption under Section 234(c) of
the LGC must be given effect as the only legal and cogent way of harmonizing it with
NAPOCORs Charter and the BOT law.

II.
THE CTA ERRED ON A QUESTION OF LAW IN DISREGARDING THAT THE REAL PROPERTY TAX
EXEMPTION IS RETAINED UNDER R.A. NO. 7160.
III.
THE CTA ERRED ON A QUESTION OF LAW IN RULING THAT PETITIONER MUST BE ENGAGED
IN BOTH GENERATION AND TRANSMISSION OF POWER BEFORE THE EXEMPTION UNDER
SECTION 234(C) OF R.A. NO. 7160 CAN APPLY.

NAPOCOR concludes that the CTAs ruling clearly defeats the spirit behind its creation, the
enactment of the BOT Law, and the tax exemption provision under the LGC.

IV.
THE CTA ERRED ON A QUESTION OF LAW IN NOT CONSTRUING THE EXEMPTIONS UNDER
R.A. NO. 7160 IN HARMONY WITH PETITIONERS CHARTER AND THE BOT LAW.

THE COURTS RULING

We find the petition devoid of merit. Like the Courts First Division (later, Third Division)
in G.R. No. 173811, we find that NAPOCOR failed to sufficiently show that the CTA committed
any reversible error in its ruling.

V.
ASSUMING THE 215 MW BAUANG DIESEL POWER PLANT IS TAXABLE, THE SAME SHOULD BE
CLASSIFIED AS "SPECIAL" FOR REAL PROEPRTY TAX PURPOSES SUBJECT TO A 10%
ASSESSMENT LEVEL, AND NOT AS COMMERCIAL/INDUSTRIAL PROPERTIES SUBJECT TO AN
80% ASSESSMENT RATE.

NAPOCORs basis for its claimed exemption Section 234(c) of the LGC is clear and not at
all ambiguous in its terms. Exempt from real property taxation are: (a) all machineries and
equipment; (b) [that are] actually, directly, and exclusively used by; (c) [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.

In the interim and in light of the sale at public auction of the machineries and equipments,
NAPOCOR filed a Supplemental Petition based on the following grounds:
I.

We note, in the first place, that the present case is not the first occasion where NAPOCOR
claimed real property tax exemption for a contract partner under Sec. 234 (c) of the LGC. In
FELS Energy, Inc. v. The Province of Batangas11 (that was consolidated with NAPOCOR v.
Local Board of Assessment Appeals of Batangas, et al.),12the Province of Batangas assessed
real property taxes against FELS Energy, Inc. the owner of a barge used in generating
electricity under an agreement with NAPOCOR. Their agreement provided that NAPOCOR
shall pay all of FELS real estate taxes and assessments. We concluded in that case that we
could not recognize the tax exemption claimed, since NAPOCOR was not the actual, direct
and exclusive user of the barge as required by Sec. 234 (c). In making this ruling, we cited
the required standard of construction applicable to tax exemptions and said:

THE CTA ERRED ON A QUESTION OF LAW IN DISMISSING PETITIONERS APPEAL BECAUSE

THE LATTER IS A GOVERNMENT INSTRUMENTALITY WHOSE FOREIGN AND DOMESTIC
INDEBTEDNESS ARE GUARANTEED BY THE NATIONAL GOVERNMENT, IS THE BENEFICIAL
OWNER OF THE SUBJECT POWER PLANT AND [IS] THUS EXEMPT FROM THE PAYMENT OF
REAL PROPERTY TAXES.
II.
THE CTA ERRED ON A QUESTION OF LAW IN DISMISSING PETITIONERS APPEAL BECAUSE
THIS LED TO THE SALE OF THE BAUANG POWER PLANT TO THE PROVINCIAL GOVERNMENT
OF LA UNION, THUS SERIOUSLY VIOLATING PETITIONERS STATUTORY MANDATE TO CARRY
OUT THE TOTAL ELECTRIFICATION OF THE COUNTRY.

Time and again, the Supreme Court has stated that taxation is the rule and exemption is the
exception. The law does not look with favor on tax exemptions and the entity that would
29

seek to be thus privileged must justify it by words too plain to be mistaken and too
categorical to be misinterpreted. Thus, applying the rule of strict construction of laws
granting tax exemptions, and the rule that doubts should be resolved in favor of provincial
corporations, we hold that FELS is considered a taxable entity.

of its mandate of delivering electricity to consumers at the soonest possible time, without
immediately shouldering the huge financial requirements that the project would entail if it
were to undertake the project on its own. Its obligation, in exchange, is to shoulder specific
operating costs under a compensation scheme that includes the purchase of all the electricity
that BPPC generates.

The mere undertaking of petitioner NPC under Section 10.1 of the Agreement, that it shall be
responsible for the payment of all real estate taxes and assessments, does not justify the
exemption. The privilege granted to petitioner NPC cannot be extended to FELS. The
covenant is between FELS and NPC and does not bind a third person not privy thereto, in this
case, the Province of Batangas.

That some kind of "financing" arrangement is contemplated in the sense that the private
sector proponent shall initially shoulder the heavy cost of constructing the projects buildings
and structures and of purchasing the needed machineries and equipment is undeniable.
The arrangement, however, goes beyond the simple provision of funds, since the private
sector proponent not only constructs and buys the necessary assets to put up the project,
but operates and manages it as well during an agreed period that would allow it to recover
its basic costs and earn profits. In other words, the private sector proponent goes into
business for itself, assuming risks and incurring costs for its account. If it receives support
from the government at all during the agreed period, these are pre-agreed items of
assistance geared to ensure that the BOT agreements objectives both for the project
proponent and for the government are achieved. In this sense, 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. It is different, too, from
an arrangement where a government agency borrows funds to put a project from a private
sector-lender who is thereafter commissioned to run the project for the government agency.
In the latter case, the government agency is the owner of the project from the beginning,
and the lender-operator is merely its agent in running the project.

We also recognized this strictissimi juris standard in NAPOCOR v. City of Cabanatuan. 13 Under
this standard, the claimant must show beyond doubt, with clear and convincing evidence, the
factual basis for the claim. Thus, the real issue in a tax exemption case such as the present
case is whether NAPOCOR was able to convincingly show the factual basis for its claimed
exception.
The records show that NAPOCOR, no less, admits BPPCs ownership of the machineries and
equipment in the power plant.14 Likewise, the provisions of the BOT agreement cited above
clearly show BPPCs ownership. Thus, ownership is not a disputed issue.
Rather than ownership, NAPOCORs use of the machineries and equipment is the critical
issue, since its claim under Sec. 234(c) of the LGC is premised on actual, direct and
exclusive use. To support this claim, NAPOCOR characterizes the BOT Agreement as a mere
financing agreement where BPPC is the financier, while it (NAPOCOR) is the actual user of the
properties.
As in the fact of ownership, NAPOCORs assertion is belied by the documented arrangements
between the contracting parties, viewed particularly from the prism of the BOT law.

If the BOT Agreement under consideration departs at all from the concept of a BOT project
as defined by law, it is only in the way BPPCs cost recovery is achieved; instead of selling to
facility users or to the general public at large, the generated electricity is purchased by
NAPOCOR which then resells it to power distribution companies. This deviation, however, is
dictated, more than anything else, by the structure and usages of the power industry and
does not change the BOT nature of the transaction between the parties.

The underlying concept behind a BOT agreement is defined and described in the BOT law as
follows:
Build-operate-and-transfer A contractual arrangement whereby the project proponent
undertakes the construction, including financing, of a given infrastructure facility, and the
operation and maintenance thereof. The project proponent operates the facility over a fixed
term during which it is allowed to charge facility users appropriate tolls, fees, rentals, and
charges not exceeding those proposed in its bid or as negotiated and incorporated in the
contract to enable the project proponent to recover its investment, and operating and
maintenance expenses in the project. The project proponent transfers the facility to the
government agency or local government unit concerned at the end of the fixed term which
shall not exceed fifty (50) years x x x x.

Consistent with the BOT concept and as implemented, BPPC the owner-manager-operator
of the project is the actual user of its machineries and equipment. BPPCs ownership and
use of the machineries and equipment are actual, direct, and immediate, while NAPOCORs is
contingent and, at this stage of the BOT Agreement, not sufficient to support its claim for tax
exemption. Thus, the CTA committed no reversible error in denying NAPOCORs claim for tax
exemption.
For these same reasons, we reject NAPOCORs argument that the machineries and
equipment must be subjected to a lower assessment level. NAPOCOR cites as support
Section 216 of the LGC which provides:

Under this concept, it is the project proponent who constructs the project at its own cost and
subsequently operates and manages it. The proponent secures the return on its investments
from those using the projects facilities through appropriate tolls, fees, rentals, and charges
not exceeding those proposed in its bid or as negotiated. At the end of the fixed term agreed
upon, the project proponent transfers the ownership of the facility to the government
agency. Thus, the government is able to put up projects and provide immediate services
without the burden of the heavy expenditures that a project start up requires.

Section 216. Special Classes of Real Property. - All lands, buildings, and other improvements
thereon actually, directly and exclusively used for hospitals, cultural, or scientific purposes,
and those owned and used by local water districts, and government-owned or controlled
corporations rendering essential public services in the supply and distribution of water and/or
generation and transmission of electric power shall be classified as special.

A reading of the provisions of the parties BOT Agreement shows that it fully conforms to this
concept. By its express terms, BPPC has complete ownership both legal and beneficial of
the project, including the machineries and equipment used, subject only to the transfer of
these properties without cost to NAPOCOR after the lapse of the period agreed upon. As
agreed upon, BPPC provided the funds for the construction of the power plant, including the
machineries and equipment needed for power generation; thereafter, it actually operated and
still operates the power plant, uses its machineries and equipment, and receives payment for
these activities and the electricity generated under a defined compensation scheme. Notably,
BPPC as owner-user is responsible for any defect in the machineries and equipment. 15

in relation with Section 218 (d) of the LGC which provides:

Section 218. Assessment Levels. - The assessment levels to be applied to the fair market
value of real property to determine its assessed value shall be fixed by ordinances of
the Sangguniang Panlalawigan, Sangguniang Panlungsod or Sangguniang Bayan of a
municipality within the Metropolitan Manila Area, at the rates not exceeding the following:
xxxx
(d) On Special Classes: The assessment levels for all lands buildings, machineries and other
improvements;

As envisioned in the BOT law, the parties agreement assumes that within the agreed BOT
period, BPPC the investorprivate corporation shall recover its investment and earn
profits through the agreed compensation scheme; thereafter, it shall transfer the whole
project, including machineries and equipment, to NAPOCOR without additional cost or
compensation. The latter, for its part, derives benefit from the project through the fulfillment

Actual Use

30

Assessment Level

Cultural

15%

Scientific

15%

Hospital

15%

Local water districts

10%

Government-owned or
controlled corporations
engaged in the supply and
distribution of water and/or
generation and transmission
of electric power

10%

WHEREFORE, premises considered, we DENY NAPOCORs petition for lack of merit.

We AFFIRM the appealed decision of the Court of Tax Appeals. Costs against NAPOCOR.
SO ORDERED.
-----------------------------------------------------------------------------------------------------------G.R. No. 171586

July 15, 2009

NATIONAL POWER CORPORATION, Petitioner, vs. PROVINCE OF QUEZON and

MUNICIPALITY OF PAGBILAO, Respondents.
DECISION
BRION, J.:

Since the basis for the application of the claimed differential treatment or assessment level is
the same as the claimed tax exemption, the lower tribunals correctly found that there is no
basis to apply the lower assessment level of 10%.

We resolve in this petition for review on certiorari the question of whether the National Power
Corporation (NPC), as a government-owned and controlled corporation, can claim tax
exemption under Section 234 of the Local Government Code (LGC) for the taxes due from
the Mirant Pagbilao Corporation (Mirant)1 whose tax liabilities the NPC has contractually
assumed.

As our last point, we note that a real concern for NAPOCOR in this case is its assumption
under the BOT agreement of BPPCs real property tax liability (which in itself is a recognition
that BPPCs real properties are not really tax exempt). NAPOCOR argues that if no tax
exemption will be recognized, the responsibility it assumed carries practical implications that
are very difficult to ignore. In fact, NAPOCORs supplemental petition is anchored on these
practical implications the alleged detriment to the public interest that will result if the levy,
sale, and transfer of the machineries and equipment were to be completed. NAPOCORs
reference is to the fact that the machineries and equipment have been sold in public auction
and the buyer the respondent Province will consolidate its ownership over these
properties on February 1, 2009.

BACKGROUND FACTS
The NPC is a government-owned and controlled corporation mandated by law to undertake,
among others, the production of electricity from nuclear, geothermal, and other sources, and
the transmission of electric power on a nationwide basis.2 To pursue this mandate, the NPC
entered into an Energy Conversion Agreement (ECA) with Mirant on November 9, 1991. The
ECA provided for a build-operate-transfer (BOT) arrangement between Mirant and the NPC.
Mirant will build and finance a coal-fired thermal power plant on the lots owned by the NPC in
Pagbilao, Quezon for the purpose of converting fuel into electricity, and thereafter, operate
and maintain the power plant for a period of 25 years. The NPC, in turn, will supply the
necessary fuel to be converted by Mirant into electric power, take the power generated, and
use it to supply the electric power needs of the country. At the end of the 25-year term,
Mirant will transfer the power plant to the NPC without compensation. According to the NPC,
the power plant is currently operational and is one of the largest sources of electric power in
the country.3

We fully recognize these concerns. However, these considerations are not relevant to our
disposition of the issues in this case. We are faced here with the application of clear
provisions of law and settled jurisprudence to a case that, to our mind, should not be treated
differently solely because of non-legal or practical considerations. Significantly, local
government real property taxation also has constitutional underpinnings, based on Section 5
of Article X of the Constitution,16 that we cannot simply ignore. In FELS
Energy, Inc. v. The Province of Batangas,17 earlier cited, we said:

Among the obligations undertaken by the NPC under the ECA was the payment of all taxes
that the government may impose on Mirant; Article 11.1 of the ECA 4 specifically provides:

The power to tax is an incident of sovereignty and is unlimited in its magnitude,

acknowledging in its very nature no perimeter so that security against its abuse is to be
found only in the responsibility of the legislature which imposes the tax on the constituency
who are to pay for it. The right of local government units to collect taxes due must always be
upheld to avoid severe tax erosion. This consideration is consistent with the State policy to
guarantee the autonomy of local governments and the objective of the Local Government
Code that they enjoy genuine and meaningful local autonomy to empower them to achieve
their fullest development as self-reliant communities and make them effective partners in the
attainment of national goals.

11.1 RESPONSIBILITY. [NPC] shall be responsible for the payment of (a) all taxes, import
duties, fees, charges and other levies imposed by the National Government of the Republic of
the Philippines or any agency or instrumentality thereof to which [Mirant] may at any time
be or become subject in or in relation to the performance of their obligations under this
Agreement (other than (i) taxes imposed or calculated on the basis of the net income [of
Mirant] and (ii) construction permit fees, environmental permit fees and other similar fees
and charges), and (b) all real estate taxes and assessments, rates and other charges in
respect of the Site, the buildings and improvements thereon and the Power Station.
[Emphasis supplied.]

In conclusion, we reiterate that the power to tax is the most potent instrument to raise the
needed revenues to finance and support myriad activities of the local government units for
the delivery of basic services essential to the promotion of the general welfare and the
enhancement of peace, progress, and prosperity of the people. [Emphasis supplied.]

In a letter dated March 2, 2000, the Municipality of Pagbilao assessed Mirants real property
taxes on the power plant and its machineries in the total amount of P1,538,076,000.00 for
the period of 1997 to 2000. The Municipality of Pagbilao furnished the NPC a copy of the
assessment letter.

This ruling reminds us of the other side of the coin in terms of concerns and protection of
interests. La Union, as a local government unit, has no less than its own constitutional
interests to protect in pursuing this case. These are interests that this Court must also be
sensitive to and has taken into account in this Decision.

To protect its interests, the NPC filed a petition before the Local Board of Assessment Appeals
(LBAA) entitled "In Re: Petition to Declare Exempt from Payment of Property Tax on
Machineries and Equipment Used for Generation and Transmission of Power, under Section
234(c) of RA 7160 [LGC], located at Pagbilao, Quezon xxx"5 on April 14, 2000. The NPC
objected to the assessment against Mirant on the claim that it (the NPC) is entitled to the tax
exemptions provided in Section 234, paragraphs (c) and (e) of the LGC. These provisions
state:

We close with the observation that our role in addressing the concerns and the interests at
stake is not all-encompassing. The Judiciary can only resolve the current dispute through our
reading and interpretation of the law. The other branches of government which act on policy
and which execute these policies, including NAPOCOR itself and the respondent local
government unit, are more in the position to act in tackling feared practical consequences.
This ruling on the law can be their springboard for action.

Section 234. Exemptions from Real Property Tax. The following are exempted from
payment for the real property tax:

In light of these conclusions and observations, we need not discuss the other issues raised.

xxx
31

xxx

xxx

(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;
xxx

xxx

pollution devices which should have been excluded from the assessment under Section
234(e) of the LGC.
Assuming that the NPC is liable to pay the assessed real property tax, it asserts that a
reassessment is necessary as it is entitled to depreciation allowance on the machineries and
to the lower 10% assessment level under Sections 225 and 218(d) of the LGC, respectively.
This position is complemented by its prayer to have the case remanded to the LBAA for the
proper determination of its tax liabilities.

xxx

(e) Machinery and equipment used for pollution control and environmental protection.
Except as provided herein, any exemption from payment of real property tax previously
granted to, or presently enjoyed by, all persons, whether natural or juridical, including
government-owned or controlled corporations are hereby withdrawn upon the effectivity of
the Code.

THE COURTS RULING

This case is not one of first impression. We have previously ruled against the NPCs claimed
exemptions under the LGC in the cases of FELS Energy, Inc. v. Province of
Batangas8 and NPC v. CBAA.9 Based on the principles we declared in those cases, as well as
the defects we found in the NPCs tax assessment protest, we conclude that the petition
lacks merit.

Assuming that it cannot claim the exemptions stated in these provisions, the NPC
alternatively asserted that it is entitled to:
a. the lower assessment level of 10% under Section 218(d) of the LGC for governmentowned and controlled corporations engaged in the generation and transmission of
electric power, instead of the 80% assessment level for commercial properties as
imposed in the assessment letter; and

The NPC is estopped from questioning the CBAAs jurisdiction

The assailed CTA en banc decision brushed aside the NPCs sin perjuicio arguments by
declaring that:

b. an allowance for depreciation of the subject machineries under Section 225 of the
LGC.

The court finds merit in [NPCs] claim that the Order of the LBAA of the Province of Quezon is
a sin perjuicio decision. A perusal thereof shows that the assailed Order does not contain
findings of facts in support of the dismissal of the case. It merely stated a finding of merit in
the contention of the Municipality of Pagbilao xxx.

The LBAA dismissed the NPCs petition on the Municipality of Pagbilaos motion, through a
one-page Order dated November 13, 2000.6
The NPC appealed the denial of its petition with the Central Board of Assessment Appeals
(CBAA). Although it noted the incompleteness of the LBAA decision for failing to state the
factual basis of its ruling, the CBAA nevertheless affirmed, in its decision of August 18, 2003,
the denial of the NPCs claim for exemption. The CBAA likewise denied the NPCs subsequent
motion for reconsideration, prompting the NPC to institute an appeal before the Court of Tax
Appeals (CTA).

However, on appeal before the CBAA, [NPC] assigned several errors, both in fact and in law,
pertaining to the LBAAs decision. Thus, petitioner is bound by the appellate jurisdiction of
the CBAA under the principle of equitable estoppel. In this regard, [NPC] is in no position to
question the appellate jurisdiction of the CBAA as it is the same party which sought its
jurisdiction and participated in the proceedings therein.10 [Emphasis supplied.]
We agree that the NPC can no longer divest the CBAA of the power to decide the appeal after
invoking and submitting itself to the boards jurisdiction. We note that even the NPC itself
found nothing objectionable in the LBAAs sin perjuicio decision when it filed its appeal before
the CBAA; the NPC did not cite this ground as basis for its appeal. What it cited were
grounds that went into the merits of its case. In fact, its appeal contained no prayer for the
remand of the case to the LBAA.

Before the CTA, the NPC claimed it was procedurally erroneous for the CBAA to exercise
jurisdiction over its appeal because the LBAA issued a sin perjuicio 7 decision, that is, the
LBAA pronounced a judgment without any finding of fact. It argued that the CBAA should
have remanded the case to the LBAA. On substantive issues, the NPC asserted the same
grounds it relied upon to support its claimed tax exemptions.
The CTA en banc resolved to dismiss the NPCs petition on February 21, 2006. From this
ruling, the NPC filed the present petition seeking the reversal of the CTA en bancs decision.

A basic jurisdictional rule, essentially based on fairness, is that a party cannot invoke a
courts jurisdiction to secure affirmative relief and, after failing to obtain the requested relief,
repudiate or question that same jurisdiction.11 Moreover, a remand would be unnecessary, as
we find the CBAAs and the CTA en bancs denial of NPCs claims entirely in accord with the
law and with jurisprudence.

THE PETITION
The NPC contends that the CTA en banc erred in ruling that the NPC is estopped from
questioning the LBAAs sin perjuicio judgment; the LBAA decision, it posits, cannot serve as
an appealable decision that would vest the CBAA with appellate jurisdiction; a sin perjuicio
decision, by its nature, is null and void.

The entity liable for tax has the right to protest the assessment
Before we resolve the question of the NPC's entitlement to tax exemption, we find it
necessary to determine first whether the NPC initiated a valid protest against the
assessment. A taxpayer's failure to question the assessment before the LBAA renders the
assessment of the local assessor final, executory, and demandable, thus 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.12

The NPC likewise assails the CTA en banc ruling that the NPC was not the proper party to
protest the real property tax assessment, as it did not have the requisite "legal interest." The
NPC claims that it has legal interest because of its beneficial ownership of the power plant
and its machineries; what Mirant holds is merely a naked title. Under the terms of the ECA,
the NPC also claims that it possesses all the attributes of ownership, namely, the rights to
enjoy, to dispose of, and to recover against the holder and possessor of the thing owned.
That it will acquire and fully own the power plant after the lapse of 25 years further
underscores its "legal interest" in protesting the assessment.

Section 226 of the LGC lists down the two entities vested with the personality to contest an
assessment: the owner and the person with legal interest in the property.
A person legally burdened with the obligation to pay for the tax imposed on a property has
legal interest in the property and the personality to protest a tax assessment on the
property. This is the logical and legal conclusion when Section 226, on the rules governing an
assessment protest, is placed side by side with Section 250 on the payment of real property
tax; both provisions refer to the same parties who may protest and pay the tax:

The NPCs assertion of beneficial ownership of the power plant also supports its claim for tax
exemptions under Section 234(c) of the LGC. The NPC alleges that it has the right to control
and supervise the entire output and operation of the power plant. This arrangement, to the
NPC, proves that it is the entity actually, directly, and exclusively using the subject
machineries. Mirants possession of the power plant is irrelevant since all of Mirant activities
relating to power generation are undertaken for and in behalf of the NPC. Additionally, all the
electricity Mirant generates is utilized by the NPC in supplying the power needs of the
country; Mirant therefore operates the power plant for the exclusive and direct benefit of the
NPC. Lastly, the NPC posits that the machineries taxed by the local government include anti-

SECTION 226. Local Board of Assessment

Appeals. - Any owner or person having
32

SECTION 250. Payment of Real Property

Taxes in Instalments. - The owner of the

legal interest in the property who is

not satisfied with the action of the
provincial, city or municipal assessor in
the assessment of his property may,
within sixty (60) days from the date of
receipt of the written notice of
assessment, appeal to the Board of
Assessment Appeals of the province or
city xxx.

power plant states that Mirant shall be responsible for the power plants management,
operation, maintenance, and repair until the Transfer Date. This is reiterated in Article 5.3
where Mirant undertakes to operate the power plant to convert fuel into electricity.

real property or the person having

legal interest therein may pay the basic
real property tax xxx due thereon without
interest in four (4) equal instalments xxx.

While the NPC asserts that it has the power to authorize the closure of the power plant
without any veto on the part of Mirant, the full text of Article 8.5 of the ECA shows that
Mirant is possessed with similar powers to terminate the agreement:
8.5 BUYOUT. If the circumstances set out in Article 7.18, Article 9.4, Article 14.4 or Article
28.4 arise or if, not earlier than 20 years after the Completion Date, [the NPC] gives not less
than 90 days notice to [Mirant] that it wishes to close the power station, or if [the NPC]
has failed to ensure the due payment of any sum due hereunder within three
months of its due date then, upon [Mirant] giving to [the NPC] not less than 90
days notice requiring [the NPC] to buy out [Mirant] or, as the case may be, [the NPC]
giving not less than 90 days notice requiring [Mirant] to sell out to [NPC], [NPC] shall
purchase all [Mirant's] right, title, and interest in and to the Power Station and thereupon all
[Mirant's] obligations hereunder shall cease. [Emphasis supplied.]1avvphi1

The liability for taxes generally rests on the owner of the real property at the time the tax
accrues. This is a necessary consequence that proceeds from the fact of
ownership.13 However, personal liability for realty taxes may also expressly rest on the entity
with the beneficial use of the real property, such as the tax on property owned by the
government but leased to private persons or entities, or when the tax assessment is made
on the basis of the actual use of the property.14 In either case, the unpaid realty tax
attaches to the property15 but is directly chargeable against the taxable person who
has actual and beneficial use and possession of the property regardless of whether
or not that person is the owner. 16

On liability for taxes, the NPC indeed assumed responsibility for the taxes due on the power
plant and its machineries,20 specifically, "all real estate taxes and assessments, rates and
other charges in respect of the site, the buildings and improvements thereon and the [power
plant]." At first blush, this contractual provision would appear to make the NPC liable and
give it standing to protest the assessment. The tax liability we refer to above, however, is
the liability arising from law that the local government unit can rightfully and successfully
enforce, not the contractual liability that is enforceable between the parties to a contract as
discussed below. By law, the tax liability rests on Mirant based on its ownership, use, and
possession of the plant and its machineries.

In the present case, the NPC, contrary to its claims, is neither the owner nor the
possessor/user of the subject machineries.
The ECAs terms regarding the power plants machineries clearly vest their ownership with
Mirant. Article 2.12 of the ECA17 states:

In Testate of Concordia Lim v. City of Manila,21 we had occasion to rule that:

2.12 OWNERSHIP OF POWER STATION. From the Effective Date until the Transfer Date [that
is, the day following the last day of the 25-year period], [Mirant] shall, directly or indirectly,
own the Power Station and all the fixtures, fittings, machinery and equipment on the Site or
used in connection with the Power Station which have been supplied by it or at its cost.
[Mirant] shall operate, manage, and maintain the Power Station for the purpose of
converting fuel of [NPC] into electricity. [Emphasis supplied.]

In [Baguio v. Busuego22], the assumption by the vendee of the liability for real estate taxes
prospectively due was in harmony with the tax policy that the user of the property bears
the tax. In [the present case], the interpretation that the [vendee] assumed a liability for
overdue real estate taxes for the periods prior to the contract of sale is incongruent with the
said policy because there was no immediate transfer of possession of the properties previous
to full payment of the repurchase price.

The NPC contends that it should nevertheless be regarded as the beneficial owner of the
plant, since it will acquire ownership thereof at the end of 25 years. The NPC also asserts, by
quoting portions of the ECA, that it has the right to control and supervise the construction
and operation of the plant, and that Mirant has retained only naked title to it. These
contentions, unfortunately, are not sufficient to vest the NPC the personality to protest the
assessment.

xxxx
To impose the real property tax on the estate which was neither the owner nor the beneficial
user of the property during the designated periods would not only be contrary to law but also
unjust.
For a fuller appreciation of this ruling, the Baguio case referred to a contract of sale wherein
the vendee not only assumed liability for the taxes on the property, but also acquired its use
and possession, even though title remained with the vendor pending full payment of the
purchase price. Under this situation, we found the vendee who had assumed liability for the
realty taxes and who had been given use and possession to be liable. Compared with Baguio,
the Lim case supposedly involved the same contractual assumption of tax liabilities,23 but
possession and enjoyment of the property remained with other persons. Effectively, Lim held
that the contractual assumption of the obligation to pay real property tax, by itself, is not
sufficient to make one legally compellable by the government to pay for the taxes due; the
person liable must also have use and possession of the property.

In Cario v. Ofilado,18 we declared that legal interest should be an interest that is actual and
material, direct and immediate, not simply contingent or expectant. The concept of the
directness and immediacy involved is no different from that required in motions for
intervention under Rule 19 of the Rules of Court that allow one who is not a party to the case
to participate because of his or her direct and immediate interest, characterized by either
gain or loss from the judgment that the court may render.19 In the present case, the NPCs
ownership of the plant will happen only after the lapse of the 25-year period; until such time
arrives, the NPC's claim of ownership is merely contingent, i.e., dependent on whether the
plant and its machineries exist at that time. Prior to this event, the NPCs real interest is only
in the continued operation of the plant for the generation of electricity. This interest has not
been shown to be adversely affected by the realty taxes imposed and is an interest that NPC
can protect, not by claiming an exemption that is not due to Mirant, but by paying the taxes
it (NPC) has assumed for Mirant under the ECA.

Using the Baguio and Lim situations as guides, and after considering the comparable legal
situations of the parties assuming liability in these cases, we conclude that the NPCs
contractual liability alone cannot be the basis for the enforcement of tax liabilities against it
by the local government unit. In Baguio and Lim, the vendors still retained ownership, and
the effectiveness of the tax liabilities assumed by the vendees turned on the possession and
use of the property subject to tax. In other words, the contractual assumption of liability was
supplemented by an interest that the party assuming liability had on the property taxed; on
this basis, the vendee in Baguio was found liable, while the vendee in Lim was not. In the
present case, the NPC is neither the owner, nor the possessor or user of the property taxed.
No interest on its part thus justifies any tax liability on its part other than its voluntary
contractual undertaking. Under this legal situation, only Mirant as the contractual obligor, not

To show that Mirant only retains a naked title, the NPC has selectively cited provisions of the
ECA to make it appear that it has the sole authority over the power plant and its operations.
Contrary to these assertions, however, a complete reading of the ECA shows that Mirant has
more substantial powers in the control and supervision of the power plant's construction and
operations.
Under Articles 2.1 and 3.1 of the ECA, Mirant is responsible for the design, construction,
equipping, testing, and commissioning of the power plant. Article 5.1 on the operation of the
33

the local government unit, can enforce the tax liability that the NPC contractually assumed;
the NPC does not have the "legal interest" that the law and jurisprudence require to give it
personality to protest the tax imposed by law on Mirant.

NPC nor Mirant satisfies both requirements. Although the plants machineries are devoted to
the generation of electric power, by the NPCs own admission and as previously pointed out,
Mirant a private corporation uses and operates them. That Mirant operates the
machineries solely in compliance with the will of the NPC only underscores the fact that NPC
does not actually, directly, and exclusively use them. The machineries must be actually,
directly, and exclusively used by the government-owned or controlled corporation for the
exemption under Section 234(c) to apply.26

By our above conclusion, we do not thereby pass upon the validity of the contractual
stipulation between the NPC and Mirant on the assumption of liability that the NPC
undertook. All we declare is that the stipulation is entirely between the NPC and Mirant, and
does not bind third persons who are not privy to the contract between these parties. We say
this pursuant to the principle of relativity of contracts under Article 1311 of the Civil Code
which postulates that contracts take effect only between the parties, their assigns and heirs.
Quite obviously, there is no privity between the respondent local government units and the
NPC, even though both are public corporations. The tax due will not come from one pocket
and go to another pocket of the same governmental entity. An LGU is independent and
autonomous in its taxing powers and this is clearly reflected in Section 130 of the LGC which
states:

Nor will NPC find solace in its claim that it utilizes all the power plants generated electricity
in supplying the power needs of its customers. Based on the clear wording of the law, it is
the machineries that are exempted from the payment of real property tax, not the water or
electricity that these machineries generate and distribute.27
Even the NPCs claim of beneficial ownership is unavailing. The test of exemption is the use,
not the ownership of the machineries devoted to generation and transmission of electric
power.28 The nature of the NPCs ownership of these machineries only finds materiality in
resolving the NPCs claim of legal interest in protesting the tax assessment on Mirant. As we
discussed above, this claim is inexistent for tax protest purposes.

SECTION 130. Fundamental Principles. - The following fundamental principles shall govern
the exercise of the taxing and other revenue-raising powers of local government units:
xxx

Lastly, from the points of view of essential fairness and the integrity of our tax system, we
find it essentially wrong to allow the NPC to assume in its BOT contracts the liability of the
other contracting party for taxes that the government can impose on that other party, and at
the same time allow NPC to turn around and say that no taxes should be collected because
the NPC is tax-exempt as a government-owned and controlled corporation. We cannot be a
party to this kind of arrangement; for us to allow it without congressional authority is to
intrude into the realm of policy and to debase the tax system that the Legislature
established. We will then also be grossly unfair to the people of the Province of Quezon and
the Municipality of Pagbilao who, by law, stand to benefit from the tax provisions of the LGC.

(d) The revenue collected pursuant to the provisions of this Code shall inure solely to the
benefit of, and be subject to disposition by, the local government unit levying the tax, fee,
charge or other imposition unless otherwise specifically provided herein; xxx. [Emphasis
supplied.]
An exception to the rule on relativity of contracts is provided under the same Article 1311 as
follows:
If the contract should contain some stipulation in favor of a third person, he may demand its
fulfilment provided he communicated his acceptance to the obligor before its revocation. A
mere incidental benefit or interest of a person is not sufficient. The contracting parties must
have clearly and deliberately conferred a favor upon a third person. [Emphasis supplied.]

WHEREFORE, we DENY the National Power Corporations petition for review on certiorari,
and AFFIRM the decision of the Court of Tax Appeals en banc dated February 21, 2006. Costs
against the petitioner.

The NPCs assumption of tax liability under Article 11.1 of the ECA does not appear, however,
to be in any way for the benefit of the Municipality of Pagbilao and the Province of Quezon.
In fact, if the NPC theory of the case were to be followed, the NPCs assumption of tax
liability will work against the interests of these LGUs. Besides, based on the objectives of the
BOT Law24 that underlie the parties BOT agreement,25 the assumption of taxes clause is an
incentive for private corporations to take part and invest in Philippine industries. Thus, the
principle of relativity of contracts applies with full force in the relationship between Mirant
and NPC, on the one hand, and the respondent LGUs, on the other.

SO ORDERED.

To reiterate, only the parties to the ECA agreement can exact and demand the enforcement
of the rights and obligations it established only Mirant can demand compliance from the
NPC for the payment of the real property tax the NPC assumed to pay. The local government
units (the Municipality of Pagbilao and the Province of Quezon), as third parties to the ECA,
cannot demand payment from the NPC on the basis of Article 11.1 of the ECA
alone. Corollarily, the local government units can neither be compelled to recognize the
protest of a tax assessment from the NPC, an entity against whom it cannot enforce the tax
liability.
The test of exemption is the nature of the use,
not ownership, of the subject machineries
At any rate, the NPCs claim of tax exemptions is completely without merit. To successfully
claim exemption under Section 234(c) of the LGC, the claimant must prove two elements:
a. the machineries and equipment are actually, directly, and exclusively used
by local water districts and government-owned or controlled corporations; and
b. the local water districts and government-owned and controlled corporations claiming
exemption must be engaged in the supply and distribution of water and/or the
generation and transmission of electric power.
As applied to the present case, the government-owned or controlled corporation claiming
exemption must be the entity actually, directly, and exclusively using the real properties, and
the use must be devoted to the generation and transmission of electric power. Neither the
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