San Fernando Electric Co., Inc. vs. Saga

SIXTH DIVISION [CA-G.R. SP No. 40839. February 24, 1997.] SAN FERNANDO ELECTRIC, CO., INC. , petitioner , vs . AMANCIO Q. SAGA, COMMISSIONER OF INTERNAL REVENUE and the COURT OF TAX APPEALS , respondents . D E C I S I O N MARTINEZ , A.M . , J p : This is a petition for review of a decision rendered by the Court of Tax Appeals affirming the income tax assessment made by the Bureau of Internal Revenue on petitioner San Fernando Electric Light and Power Co. Inc., in the amount of P6,257,133.28 for the year 1990. The resolution denying the motion for reconsideration is likewise assailed. Petitioner alleges that as early as 1927, it was granted a municipal franchise for an electric light, heat and power system by the municipal council of San Fernando, Pampanga, pursuant to the provisions of RA No. 667 as amended. The municipal franchise was amended by a legislative franchise valid for 50 years or up to 21 June 2013 as embodied in RA 3660 which took effect on 22 June 1963. The present controversy begun when on 14 December 1993, petitioner San Fernando Electric Light and Power Co. Inc. (SFELAPCO) with offices located at San Fernando, Pampanga was assessed by the public respondent Amancio Q. Saga, the Regional Director of Revenue Region 4, Bureau of Internal Revenue, San Fernando, Pampanga of a deficiency income tax for the year 1990 in the amount of P6,035,614.95. Petitioner objected to such assessment in a letter dated 20 December 1993 invoking Section 2-A of RA 3660 of its legislative franchise which states in part: "Sec. 2-A. . . . Effective upon the date the original franchise was granted, no other tax upon its capital stock, franchise, right of way, earnings and all other property owned or operated by the grantee under this concession or franchise shall be levied or assessed on the herein grantee except the franchise tax of two per centum of the gross earnings mentioned in the said original franchise." In answer, public respondent pointed out that Section 2-A of RA 3660 was revoked by Executive Order 72 dated 25 November 1986 which provides that: "Sec. 2. Any provision of general or special law to the contrary notwithstanding, all grantees of franchises shall be subject to income tax levied under Title II of the National Internal Revenue Code, as amended. SEC. 3. . . . the pertinent provisions of the charters of franchise grantees, and all other laws, orders, issuances, rules and regulations or parts thereof, inconsistent with this Executive Order are hereby repealed or modified accordingly. On the basis of the aforequoted executive order the Revenue Regional Director refused to set aside its assessment and insisted on the liability of petitioner to pay the income tax. On appeal, the Court of Tax appeals upheld the income tax assessment. Hence this petition for review. The question to be resolved is: Is petitioner rightfully assessed an income tax deficiency. The petition is without merit. The assessment of the deficiency income tax is correct. Petitioner's insistence that RA 3660 provides for its tax exemption is not well-taken. The act is entitled: "AN ACT TO AMEND REPUBLIC ACT NUMBERED THIRTY-TWO HUNDRED SEVEN, ENTITLED An Act Granting The San Fernando Electric Light and Power Co., Inc., A Franchise For An Electric Light, Heat And Power System In The Municipality of San Fernando, Province of Pampanga,". The entire act consists only of two sections which states to wit: SEC. 1. Republic Act Numbered Thirty-two hundred seven is hereby amended by inserting between sections two and three thereof the following new section: " SEC . 2-A . In consideration of the franchise and rights hereby granted, the grantee shall pay into the Treasury of the Philippines a franchise tax equal to two per centum of the gross earnings for electric current sold under this franchise . Provision of laws to the contrary notwithstanding, the franchise tax equal to two per centum of the gross earnings of the grantee shall be respected . Effective upon the date the original franchise was granted, no other tax upon its capital stock, franchise, right of way, earnings and all other property owned or operated by the grantee under this concession or franchise shall be levied or assessed on the herein grantee except the franchise tax of two per centum of the gross earnings mentioned in the said original franchise ." SEC. 2. This Act shall take effect upon its approval. Approved, June 22, 1963. To say that the abovequoted legislative act is an omnibus grant of tax exemption from all taxes including national income tax is not correct. Time and again it has been held that tax exemptions are to be construed strictly against the taxpayer and liberally in favor of the taxing authority. This must be so because "taxes are the lifeblood of government and their prompt and certain availability is an imperious need". "Thus to be exempted from payment of taxes, it is the taxpayer's duty to justify the exemption by words too plain to be mistaken and too categorical to be misinterpreted". (Province of Tarlac vs. Judge Alcantara 216 SCRA 790, 798). The tax exemption claimed by petitioner cannot be gleaned from Section 2-A of RA 3660. If the intention is to exempt petitioner from the payment of income tax, it should have so expressly stated. Instead, the statute proceeded to enumerate the nature of other taxes from which petitioner as operator of public utility can be exempted. The statute made the following enumeration to wit: ". . . no other tax upon its capital stock, franchise, right of way, earnings and all other property owned or operated by the grantee under this concession shall be levied or assessed on the herein grantee except the franchise tax of two per centum of the gross earnings mentioned in the said original franchise." As it is, there is no express grant of exemption from income tax. Strikingly similar to the case at bench is that case of Province of Tarlac vs. Judge Alcantara (supra) . In that case, petitioner Province of Tarlac assessed Tarlac Enterprises Inc., a corporation supplying electric power within the province of Tarlac, real estate tax. Tarlac Enterprises protested claiming exemption under Sec. 40, paragraph (g) of PD no. 464 (Real Property Tax Code) in relation to PD no. 551 (Lowering the Cost to Consumers of Electricity by Reducing the Franchise Tax Payable by Electric Franchise Holders and the tariff on Fuel Oils for the Generation of Electric Power by Public Utilities) as amended. Sec. 40 of PD 464 provides to wit: "Sec. 40. Exemptions from Real Property Tax . The exemption shall be as follows: xxx xxx xxx (g) Real property exempt under other laws ."(emphasis ours) Tarlac Enterprises contend that "other laws" include PD 551 which provides among others: "SEC. 1. Any provision of law or local ordinance to the contrary notwithstanding, the franchise tax payable by all grantees of franchises to generate, distribute and sell electric current for light, heat and power shall be two (2%) of their gross receipts received from the sale of electric current and from transactions incident to the generation, distribution and sale of electric current. Such franchise tax . . . shall, any provision of the Local Tax Code or any other law to the contrary notwithstanding, be in lieu of all taxes and assessments of whatever nature imposed by any national or local authority on earnings, receipts, income and privilege of generation, distribution and sale of electric current ." (Emphasis Ours) In denying the tax exemption claimed, the Supreme Court made the following fine distinctions to wit: "We do not agree with the lower court that the phrase "in lieu of all taxes and assessments of whatever nature" in the second paragraph of sec. 1 of PD no. 551 expressly exempts private respondent from paying real property taxes. As correctly observed by the petitioner, said proviso is modified and delimited by the phrase "on earnings, receipts, income and privilege of generation, distribution and sale" which specifies the kinds of taxes and assessments which shall not be collected in view of the imposition of the franchise tax. Said enumerated items upon which taxes shall not be imposed, have no relation at all to, and are entirely different from, real properties subject to tax. LLphil . . . Private respondent apparently does not quite comprehend the distinction among the subject matters or objects of the taxes involved. It bears emphasis that PD no. 551 as amended by PD no. 852 deals with franchise tax and tariff on fuel oils and the "earnings, receipts, income and privilege of generation, distribution and sale of electric current" are the items exempted from taxation by the imposition of said tax or tariff duty. On the other hand, the collection complaint filed by petitioner specified only taxes due on real properties." In the same vein, a distinction must be made between an income tax and the word "tax" referred to in RA 3660's sec. 2-A. The word "tax" in the phrase "no other tax" as embodied in sec. 2-A of RA 3660 could not have referred to an income tax due the national government. The word "tax" is further qualified in this wise ". . ., no other tax upon its capital stock, franchise, right of way, earnings and all other property owned or operated by the grantee under this concession shall be levied or assessed . . ." (RA 3660, Sec. 2-A) Thus the exemption contemplated is in the nature of tax on property as shown by the general qualifying phrase. Applying the rule on ejusdem generis in statutory construction, the general word or phrase which follows an enumeration shall be construed to include or to be restricted to things or cases akin to, resembling or of the same class or kind as those specifically enumerated. Needless to say, such property tax being a tax on the franchise grantee's property is different from the tax on the privilege to generate income. Income tax is a tax on the privilege to earn income. In contrast to the Province of Tarlac case, the proviso granting tax exemption covers taxes on "earnings, receipts, income and privilege of generation, distribution and sale". Clearly, what was intended therein is an exemption on the franchise-grantee's privilege to earn income, excluding its property used in the generation of such income, thus the assessment of real property tax liability. Ultimately, the resolution of the issue on the constitutionality of EO 72 becomes immaterial. Said executive order, aimed at repealing charters of franchise grantees, has no bearing on the resolution of the validity of the income tax assessment on petitioner. As construed, there was no exemption from income tax granted on petitioner-grantee. It would be different if what is sought to be collected from petitioner is a tax on its property which petitioner is exempt from under its franchise grant. Besides, it is well-settled that a constitutional question may be heard and resolved provided the following requisites are present namely: 1) the existence of an appropriate case; 2) interest personal and substantial by the party raising constitutional question; 3) function be exercised at the earliest opportunity; 4) necessity that the constitutional question be passed upon in order to decide the case (Commissioner of Internal Revenue v. Court of Tax Appeals March 1991). In this case, the last requisite is not present for the case can be disposed of without necessarily resolving the constitutional question raised. With respect to the amount of tax liability, the Supreme Court in certain cases ruled out the imposition of a surcharge (Escudero Electric Co. v. Tabios 33 SCRA 547, Tuason v. Lingad 58 SCRA 170, Imus Electric Co. Inc. v. CTA 19 SCRA 612, Guagua Electric Light Plant Co. Inc. v. Collector of Internal Revenue 19 SCRA 790). Interestingly, these cases also involved electric companies who as franchise grantees posed difficult questions of law in assailing their tax liabilities. Prominent in these cases are questions of constitutionality of a law and the consequent repeal of their franchise grants. In sum, the general principle laid down in these cases in that where the delay in the payment of the deficiency tax was due to the erroneous view in good faith of the taxpayer due to some difficult questions of law, the surcharge of 25% may be dispensed with. This is specially true in this case where petitioner-taxpayer honestly believed that it is exempt from the payment of income tax. More so, when in the view of the collecting party, the government, the franchise had been repealed by a subsequent law thus opening the case to questions of constitutionality. Here the question of income tax liability can be resolved without necessarily resolving the constitutional question. WHEREFORE, the decision of the Court of Tax Appeals is AFFIRMED with MODIFICATION. The surcharge in the amount of P787,218.50 is hereby deleted. cdll SO ORDERED. Montenegro and Lipana-Reyes, JJ . , concur.