TITLE:

HYDRO RESOURCES CONTRACTORS CORPORATION, Petitioner, vs. THE COURT OF TAX APPEALS and THE HON. DEPUTY MINISTER OF FINANCE, ALFREDO PIO
DE RODA, Respondents. [G.R. No. 80276 : December 21, 1990] 192 SCRA 604

CASE PROBLEM:

The issue in this case is whether or not Hydro should pay the 3% ad valorem tax even if the contract was perfected before EO 860 was promulgated and the
Court held that it should not pay.

CASE FACTS:

• In 1978, The National Irrigation Administration (NIA) entered into an agreement with Hydro Resources Contractors Corporation (HYDRO) for the construction
of the Magat River Multipurpose Project in Ramon, Isabela.

• Under the contract, HYDRO was to procure new construction equipment abroad for the project. The cost of which as well as all taxes, duties, and fees
incidental to the importation of the equipment shall be shouldered by NIA. Payments advanced by the NIA shall be repaid by HYDRO through deductions from
progress payments due to them. Also, ownership of the equipment shall be transferred to Hydro once payment is completed.

• However, NIA failed to comply with its tax obligations. In the meantime, HYDRO had fully repaid the value of the construction equipment so much so that NIA
executed deeds of sale covering the same, and transferred the ownership thereof in favor of HYDRO.

• Upon the transfer of the ownership of the said equipment, HYDRO was assessed by the Bureau of Customs (BoC) for customs duty and compensating tax
(P2,303,378.63) which was subsequently paid by HYDRO. In addition, HYDRO was assessed additional 3% ad valorem duty in the amount of P281,591
prescribed in Executive Order 860. HYDRO also paid this amount but this time under protest.

• The Collector of Customs acted favorably on petitioner’s protest and ruled that the imposition of the 3% ad valorem tax was unfair considering that EO No.
860 took effect only on December 21, 1982 when the sale of the equipment took place in 1978. The Acting Customs Commissioner also ruled in favor of HYDRO
however their findings were reversed by the Deputy Minister of Finance. The CTA also denied the appeal of HYDRO. Hence this petition in this case.

ANALYSIS OF CASE FACTS:

The National Irrigation Administration agreed with petitioner Hydro Resources Contractors Corporation to construct the Magat River Multipurpose Project.
Under the contract, petitioner was allowed to procure new construction equipment, spare parts and tools from abroad, the payment for which was advanced
by NIA under a financing plan embodied in the contract. By the terms of the contract, NIA undertakes payment of all the import duties and taxes incident to the
importations. HYDRO shall repay NIA in full the value of the construction equipment out of the same proceeds before eventual transfer of subject construction
equipment upon termination of the contract. NIA reneged and failed in the compliance of its tax obligations. In the meantime, HYDRO had fully repaid the value
of the construction equipment so much so that NIA executed deeds of sale covering the same and transferring the ownership thereof in favor of petitioner.
Upon the transfer of the ownership of the said equipment the Bureau of Customs assessed HYDRO the corresponding customs duty and compensating tax.
HYDRO was assessed additional 3% ad valorem duty prescribed in Executive Order 860. HYDRO paid this amount but this time under protest. The issue in this
case is whether or not Hydro should pay the 3% ad valorem tax even if the contract was perfected before EO 860 was promulgated and the Court held that it
should not pay. Executive Order No. 860 which was the basis for the imposition of the 3% ad valorem duty upon the said importations, took effect on December
21, 1982. The importations were effected in 1978 and 1979 by NIA. It is a cardinal rule that laws shall have no retroactive effect, unless the contrary is provided.
Except for a statement providing for its immediate execution, Executive Order No. 860 does not provide for its retroactivity. Consequently, the importations in
question which arrived in 1977 and 1978 are not subject to the 3% additional ad valorem duty, the same being imposed only on those whose letter of credit
were opened after the promulgation of Executive Order 860.

WHAT CONSTITUTIONAL LIMITATION IS INVOLVED?

The Constitutional Limitation of Prohibition against impairment of obligation of contracts.

No law impairing the obligation of contracts shall be passed. [Section 10, Article III, Constitution]

The power of taxation cannot be exercised in a manner that would impair the obligation of contracts. Therefore, EO 860, which assessed the additional ad
valorem duty of 3%, cannot be made applicable to the contract between Hydro and NIA.

WHAT IS YOUR CONCLUSION IN THIS CASE?

EO 860, which was the basis for the imposition of the ad valorem duty took effect December 1982. The importations were effected in 1978 and 1979 by NIA. It
is a cardinal rule that laws shall have no retroactive effect unless contrary is provided. EO 860 does not provide for its retroactivity. The Deputy Minister of
Finance even clarified that letters of credit opened prior to the effectivity of EO 860 are not subject to its provisions.

In the case, the procurement of the equipment was not on a tax exempt basis as the import liabilities have been secured to paid under a financial scheme. It is a
matter of implementing a pre-existing agreement, hence, the imported articles can only be subject to the rates of import duties prevailing at the time of entry
or withdrawal from the customs’ custody.