The Supreme Court ruled that the National Power Corporation (NPC) cannot claim tax exemptions under the Local Government Code (LGC) for taxes due from Mirant Pagbilao Corporation, even though NPC contractually agreed to pay Mirant’s taxes. The court emphasized that tax exemptions are based on actual use and ownership of the property, not on contractual agreements, clarifying that the NPC’s contractual obligations didn’t grant it the legal standing to claim exemptions on behalf of Mirant.

The Power Play: Can NPC Dodge Mirant’s Taxes with a Claim of Government Exemption?

The National Power Corporation (NPC), tasked with generating and distributing electricity nationwide, entered into an Energy Conversion Agreement (ECA) with Mirant Pagbilao Corporation. Under this agreement, Mirant would construct and operate a power plant on NPC-owned land in Pagbilao, Quezon. A critical clause in the ECA stipulated that the NPC would cover all taxes imposed on Mirant, including real estate taxes. However, when the Municipality of Pagbilao assessed Mirant’s real property taxes, the NPC objected, arguing that it was exempt from such taxes under Section 234 of the Local Government Code (LGC). This legal battle brought to the forefront the question of whether a government corporation could claim tax exemptions for a private entity’s tax obligations, solely based on a contractual agreement.

The NPC anchored its claim on two prongs of Section 234 of the LGC. The first, paragraph (c), exempts machineries and equipment “actually, directly, and exclusively used by… government-owned or -controlled corporations engaged in…generation and transmission of electric power.” The second, paragraph (e), covers machinery and equipment used for pollution control and environmental protection. The NPC asserted it was the beneficial owner of the power plant and its machineries, thereby entitling it to these exemptions. It also argued for a lower assessment level and depreciation allowance under the LGC.

However, the Court emphasized that while the NPC had assumed the tax liabilities contractually, this did not automatically grant them the legal right to protest the tax assessment. Section 226 of the LGC specifies that only the property owner or someone with a “legal interest” in the property can contest an assessment. The Court clarified that **legal interest must be actual, material, direct, and immediate, not merely contingent or expectant**. It noted that Mirant, not the NPC, legally owned the power plant’s machineries, thus disqualifying the NPC from protesting the assessment on that basis.

The Supreme Court underscored the principle that tax liability primarily rests with the owner of the real property when the tax accrues. While this liability may extend to entities with beneficial use, such as in cases of leased government property or assessments based on actual use, the crucial factor remains the actual and beneficial use and possession of the property, irrespective of ownership. Here, Mirant possessed and used the machineries; ownership was contractually theirs. NPC’s future ownership was only expectant.

Furthermore, the Court dismissed the argument that the tax liability was for the benefit of a third party (the LGUs). According to Article 1311 of the Civil Code, “contracts take effect only between the parties, their assigns, and heirs.” In addition, Section 130 (d) of the LGC dictates, “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.” The court ruled the NPC’s assumption of tax liability was a contractual matter between NPC and Mirant. The local government units were third parties and could not demand payment on the basis of the ECA.

The Court also rejected the NPC’s claims for tax exemption based on Section 234(c) of the LGC. To qualify for this exemption, the machinery and equipment must be “actually, directly, and exclusively used” by the government-owned corporation engaged in power generation and transmission. Despite the NPC utilizing the generated electricity, the power plant itself was operated and managed by Mirant, a private entity.

FAQs

What was the key issue in this case?	The central issue was whether NPC, a government-owned corporation, could claim tax exemptions for taxes due from Mirant, a private corporation, based on a contractual agreement where NPC agreed to pay Mirant’s taxes.
Why did the NPC claim tax exemptions?	The NPC claimed tax exemptions under Section 234 of the LGC, arguing that the power plant’s machinery was used for power generation and should be exempt as it benefits the public.
What was the court’s reasoning for denying the NPC’s claim?	The court reasoned that tax exemptions are based on actual use and ownership of the property, and since Mirant owned and operated the power plant, the NPC could not claim exemptions on Mirant’s behalf.
What is the significance of the ECA in this case?	The Energy Conversion Agreement (ECA) between NPC and Mirant stipulated that NPC would pay Mirant’s taxes, but this contractual agreement did not grant NPC the legal standing to claim tax exemptions on behalf of Mirant.
Who has the legal right to protest a tax assessment?	Under Section 226 of the LGC, only the owner of the property or someone with a direct and material legal interest can contest a tax assessment.
What does “legal interest” mean in the context of tax assessments?	Legal interest refers to an interest that is actual and material, direct and immediate, and not simply contingent or expectant.
How did the principle of relativity of contracts apply?	The court held that the contract between NPC and Mirant was binding only between them and did not create obligations for third parties like the local government units, who could not demand payment from the NPC based on the ECA alone.
What is the test for tax exemption under Section 234(c) of the LGC?	The claimant must prove that the machineries and equipment are actually, directly, and exclusively used by the government-owned or controlled corporation engaged in the generation and transmission of electric power.

In conclusion, the Supreme Court’s decision clarifies the boundaries of tax exemption claims for government-owned corporations in relation to contracts with private entities. This case underscores the importance of direct ownership and control in availing of tax exemptions, while affirming that contractual agreements alone do not grant legal standing to claim such privileges.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: NATIONAL POWER CORPORATION VS. PROVINCE OF QUEZON AND MUNICIPALITY OF PAGBILAO, G.R. No. 171586, July 15, 2009