THIRD DIVISION
[G.R. NO. 155491, September 16, 2008]
SMART COMMUNICATIONS, INC., Petitioner, v. THE CITY OF DAVAO, REPRESENTED HEREIN BY ITS MAYOR HON. RODRIGO R. DUTERTE, AND THE SANGGUNIANG PANLUNGSOD OF DAVAO CITY, Respondents.
D E C I S I O N
NACHURA, J.:
Notwithstanding any exemption granted by any law or other special law, there is hereby imposed a tax on businesses enjoying a franchise, at a rate of seventy-five percent (75%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the income or receipts realized within the territorial jurisdiction of Davao City.Smart contends that its telecenter in Davao City is exempt from payment of franchise tax to the City, on the following grounds: (a) the issuance of its franchise under Republic Act (R.A.) No. 72945 subsequent to R.A. No. 7160 shows the clear legislative intent to exempt it from the provisions of R.A. 7160;6 (b) Section 137 of R.A. No. 7160 can only apply to exemptions already existing at the time of its effectivity and not to future exemptions; (c) the power of the City of Davao to impose a franchise tax is subject to statutory limitations such as the "in lieu of all taxes" clause found in Section 9 of R.A. No. 7294; and (d) the imposition of franchise tax by the City of Davao would amount to a violation of the constitutional provision against impairment of contracts.7
[a.] THE LOWER COURT ERRED IN NOT HOLDING THAT UNDER PETITIONER'S FRANCHISE (REPUBLIC ACT NO. 7294), WHICH CONTAINS THE "IN LIEU OF ALL TAXES" CLAUSE, AND WHICH IS A SPECIAL LAW ENACTED SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, NO FRANCHISE TAX MAY BE IMPOSED ON PETITIONER BY RESPONDENT CITY.
[b.] THE LOWER COURT ERRED IN HOLDING THAT PETITIONER'S FRANCHISE IS A GENERAL LAW AND DID NOT REPEAL RELEVANT PROVISIONS REGARDING FRANCHISE TAX OF THE LOCAL GOVERNMENT CODE, WHICH ACCORDING TO THE COURT IS A SPECIAL LAW.
[c.] THE LOWER COURT ERRED IN NOT HOLDING THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE, WHICH, IN RELATION TO SECTION 151 THEREOF, ALLOWS RESPONDENT CITY TO IMPOSE THE FRANCHISE TAX, AND SECTION 193 OF THE CODE, WHICH PROVIDES FOR WITHDRAWAL OF TAX EXEMPTION PRIVILEGES, ARE NOT APPLICABLE TO THIS CASE.
[d.] THE LOWER COURT ERRED IN NOT HOLDING THAT SECTIONS 137 AND 193 OF THE LOCAL GOVERNMENT CODE REFER ONLY TO EXEMPTIONS ALREADY EXISTING AT THE TIME OF ITS ENACTMENT BUT NOT TO FUTURE EXEMPTIONS.
[e.] THE LOWER COURT ERRED IN APPLYING THE RULE OF STATUTORY CONSTRUCTION THAT TAX EXEMPTIONS ARE CONSTRUED STRICTLY AGAINST THE TAXPAYER.
[f.] THE LOWER COURT ERRED IN NOT HOLDING THAT PETITIONER'S FRANCHISE (REPUBLIC ACT NO. 7294) HAS BEEN AMENDED AND EXPANDED BY SECTION 23 OF REPUBLIC ACT NO. 7925, "THE PUBLIC TELECOMMUNICATIONS POLICY ACT," TAKING INTO ACCOUNT THE FRANCHISE OF GLOBE TELECOM, INC. (GLOBE) (REPUBLIC ACT NO. 7229), WHICH ARE SPECIAL PROVISIONS AND WERE ENACTED SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, THEREBY PROVIDING AN ADDITIONAL GROUND WHY NO FRANCHISE TAX MAY BE IMPOSED ON PETITIONER BY RESPONDENT CITY.
[g.] THE LOWER COURT ERRED IN DISREGARDING THE RULING OF THE DEPARTMENT OF FINANCE, THROUGH ITS BUREAU OF LOCAL GOVERNMENT FINANCE, THAT PETITIONER IS EXEMPT FROM THE PAYMENT OF THE FRANCHISE TAX IMPOSABLE BY LOCAL GOVERNMENT UNITS UNDER THE LOCAL GOVERNMENT CODE.
[h.] THE LOWER COURT ERRED IN NOT HOLDING THAT THE IMPOSITION OF THE LOCAL FRANCHISE TAX ON PETITIONER WOULD VIOLATE THE CONSTITUTIONAL PROHIBITION AGAINST IMPAIRMENT OF CONTRACTS.
[i.] THE LOWER COURT ERRED IN DENYING THE PETITION BELOW.17
Section 9. Tax provisions. -- 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 which 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 business 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 pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto.Smart alleges that the "in lieu of all taxes" clause in Section 9 of its franchise exempts it from all taxes, both local and national, except the national franchise tax (now VAT), income tax, and real property tax.18
The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue. (Emphasis supplied.)
Section 137. Franchise Tax. -- Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at the rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction.Smart argues that it is not covered by Section 137, in relation to Section 151 of R.A. No. 7160, because its franchise was granted after the effectivity of the said law. We agree with Smart's contention on this matter. The withdrawal of tax exemptions or incentives provided in R.A. No. 7160 can only affect those franchises granted prior to the effectivity of the law. The intention of the legislature to remove all tax exemptions or incentives granted prior to the said law is evident in the language of Section 193 of R.A. No. 7160. No interpretation is necessary.
In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the business started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereon, as provided herein.
Section 151. Scope of Taxing Powers. -- Except as otherwise provided in this Code, the city may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes.
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 RA No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis supplied.)
[T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other than income tax, imposed under the National Internal Revenue Code. The "in lieu of all taxes" clause does not apply to local taxes. The proviso in the first paragraph of Section 9 of Smart's franchise states that the grantee shall "continue to be liable for income taxes payable under Title II of the National Internal Revenue Code." Also, the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code." Moreover, the same paragraph declares that the tax returns "shall be subject to audit by the Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes. The clear intent is for the "in lieu of all taxes" clause to apply only to taxes under the National Internal Revenue Code and not to local taxes. Even with respect to national internal revenue taxes, the "in lieu of all taxes" clause does not apply to income tax.It should be noted that the "in lieu of all taxes" clause in R.A. No. 7294 has become functus officio with the abolition of the franchise tax on telecommunications companies.26 As admitted by Smart in its pleadings, it is no longer paying the 3% franchise tax mandated in its franchise. Currently, Smart along with other telecommunications companies pays the uniform 10% value-added tax.27
If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to local taxes, Congress would have expressly mentioned the exemption from municipal and provincial taxes. Congress could have used the language in Section 9(b) of Clavecilla's old franchise, as follows:x x x in lieu of any and all taxes of any kind, nature or description levied, established or collected by any authority whatsoever, omunicipal, provincial or national, from which the grantee is hereby expressly exempted, x x x. (Emphasis supplied).However, Congress did not expressly exempt Smart from local taxes. Congress used the "in lieu of all taxes" clause only in reference to national internal revenue taxes. The only interpretation, under the rule on strict construction of tax exemptions, is that the "in lieu of all taxes" clause in Smart's franchise refers only to national and not to local taxes.
SEC. 102. Value-added tax on sale of services and use or lease of properties. -- (a) Rate and base of tax. -- There shall be levied assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties.R.A. No. 7716, specifically Section 20 thereof, expressly repealed the provisions of all special laws relative to the rate of franchise taxes. It also repealed, amended, or modified all other laws, orders, issuances, rules and regulations, or parts thereof which are inconsistent with it.30 In effect, the "in lieu of all taxes" clause in R.A. No. 7294 was rendered ineffective by the advent of the VAT Law.31
The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land, air, and water relative to their transport of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and television broasting and all other franchise grantees except those under Section 117 of this Code; services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop insurances) including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. x x x.29
[T]he BLGF opined that §23 of R.A. No. 7925 amended the franchise of petitioner and in effect restored its exemptions from local taxes. Petitioner contends that courts should not set aside conclusions reached by the BLGF because its function is precisely the study of local tax problems and it has necessarily developed an expertise on the subject.IV. Tax Exclusion/Tax Exemption
To be sure, the BLGF is not an administrative agency whose findings on questions of fact are given weight and deference in the courts. The authorities cited by petitioner pertain to the Court of Tax Appeals, a highly specialized court which performs judicial functions as it was created for the review of tax cases. In contrast, the BLGF was created merely to provide consultative services and technical assistance to local governments and the general public on local taxation, real property assessment, and other related matters, among others. The question raised by petitioner is a legal question, to wit, the interpretation of §23 of R.A. No. 7925. There is, therefore, no basis for claiming expertise for the BLGF that administrative agencies are said to possess in their respective fields.
Petitioner likewise argues that the BLGF enjoys the presumption of regularity in the performance of its duty. It does enjoy this presumption, but this has nothing to do with the question in this case. This case does not concern the regularity of performance of the BLGF in the exercise of its duties, but the correctness of its interpretation of a provision of law.34
SECTION 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 franchise 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. (Emphasis supplied.)In sum, Smart wants us to interpret anew Section 23 of R.A. No. 7925, in connection with the franchise of Globe (R.A. No. 7227),37 which was enacted on March 19, 1992.
(b) The grantee shall further pay to the Treasurer of the Philippines each year after the audit and approval of the accounts as prescribed in this Act, one and one-half per centum of all gross receipts from business transacted under this franchise by the said grantee in the Philippines, in lieu of any and all taxes of any kind, nature or description levied, established or collected by any authority whatsoever, municipal, provincial or national, from which the grantee is hereby expressly exempted, effective from the date of the approval of Republic Act Numbered Sixteen hundred eighteen.39We find no reason to disturb the previous pronouncements of this Court regarding the interpretation of Section 23 of R.A. No. 7925. As aptly explained in the en banc decision of this Court in Philippine Long Distance Telephone Company, Inc. v. City of Davao,40 and recently in Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan, 41Congress, in approving Section 23 of R.A. No. 7925, did not intend it to operate as a blanket tax exemption to all telecommunications entities.42 The language of Section 23 of R.A. No. 7925 and the proceedings of both Houses of Congress are bereft of anything that would signify the grant of tax exemptions to all telecommunications entities, including those whose exemptions had been withdrawn by R.A. No. 7160.43 The term "exemption" in Section 23 of R.A. No. 7925 does not mean tax exemption. The term refers to exemption from certain regulations and requirements imposed by the National Telecommunications Commission.44
The acceptance of petitioner's theory would result in absurd consequences. To illustrate: In its franchise, Globe is required to pay a franchise tax of only one and one-half percentum (1 ½%) of all gross receipts from its transactions while Smart is required to pay a tax of three percent (3%) on all gross receipts from business transacted. Petitioner's theory would require that, to level the playing field, any "advantage, favor, privilege, exemption, or immunity" granted to Globe must be extended to all telecommunications companies, including Smart. If, later, Congress again grants a franchise to another telecommunications company imposing, say, one percent (1%) franchise tax, then all other telecommunications franchises will have to be adjusted to "level the playing field" so to speak. This could not have been the intent of Congress in enacting §23 of Rep. Act 7925. Petitioner's theory will leave the Government with the burden of having to keep track of all granted telecommunications franchises, lest some companies be treated unequally. It is different if Congress enacts a law specifically granting uniform advantages, favor, privilege, exemption, or immunity to all telecommunications entities.46VI. Non-impairment Clause of the Constitution
It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing power of the State. For not only are existing laws read into contracts in order to fix obligations as between parties, but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace and good order of society.WHEREFORE, the instant petition is DENIED for lack of merit. Costs against petitioner.
In truth, the Contract Clause has never been thought as a limitation on the exercise of the State's power of taxation save only where a tax exemption has been granted for a valid consideration. x x x.
Endnotes:
1 Penned by Judge Renato A. Fuentes; rollo, pp. 101-108.
2 Id. at 121-123.
3 Records, pp. 2-11.
4 City Ordinance No. 519, series of 1992, amending Ordinance No. 230, series of 1991, otherwise known as the Tax Code of the City of Davao.
5 An act granting Smart Information Technologies, Inc. (Smart) a franchise to establish, install, maintain, lease and operate integrated telecommunications/computer/electronic services, and stations throughout the Philippines for public domestic and international telecommunications, and for other purposes.
6 Smart's franchise lapsed into law on March 27, 1992 without the President's signature in accordance with Article VI, Section 27(1) of the Constitution.
7 Records, pp. 7-8.
8 Id. at 21-26.
9 CONSTITUTION, Art. X, Sec. 5.
10 Records, p. 62.
11 Supra note 1.
12 Id. at 104.
13 Id. at 106.
14 G.R. No. 120082, September 11, 1996, 261 SCRA 667.
15Rollo, p. 107.
16 Id . at 121-123.
17 Id. at 24-26.
18 Id. at 258.
19Aquino v. Quezon City, G.R. No. 137534, August 3, 2006, 497 SCRA 497, 507.
20Rollo, p. 258.
21 Id.
22Commissioner of Internal Revenue v. Visayan Electric Company, 132 Phil. 203, 215 (1968).
23Commissioner of Internal Revenue v. Rio Tuba Nickel Mining Corporation, G.R. NOS. 83583-84, September 30, 1991, 202 SCRA 137.
24Philippine Long Distance Telephone Company, Inc. v. City of Davao, 415 Phil. 764, 775 (2001).
25Philippine Long Distance Telephone Company, Inc. v. City of Davao, 447 Phil. 571, 594 (2003).
26 Id. at 593.
27Rollo, p. 269.
28 Section 108, National Internal Revenue Code, as amended by the Tax Reform Act of 1997(R.A. No. 8424).
29 Now Section 108, R.A. No. 8424, as amended. (Emphasis supplied.)
30 SECTION 20. Repealing Clauses. -- The provisions of any special law relative to the rate of franchise taxes are hereby expressly repealed. Sections 113, 114 and 116 of the National Internal Revenue Code are hereby repealed.
Paragraphs (c), (d), and (e) of Article 39 of Executive Order No. 226, otherwise as the Omnibus Investment Code of 1987, are hereby repealed: Provided, however, That the benefits and incentives under said paragraphs shall continue to be enjoyed by enterprises registered with the Board of Investments before the effectivity of this Act.
Unless otherwise excluded by the President pursuant to Section 17 hereof, Sections 19 and 20 of the National Internal Revenue Code shall be repealed upon the expiration of two (2) years from the effectivity of this Act. During the period that the freight services rendered by international cargo vessels are not covered by the value-added tax imposed under this Act, said services shall pay a tax at a rate of three per centum (3%) of their quarterly gross receipts derived from outgoing cargoes.
All other laws, orders, issuances, rules and regulations of parts thereof inconsistent with this Act are hereby repealed, amended or modified accordingly.
31Philippine Long Distance Telephone Company, Inc. v. City of Davao, supra note 24.
32Rollo, pp. 303-309.
33Philippine Long Distance Telephone Company, Inc. v. Province of Cebu, G.R. No. 151208, October 16, 2006; Philippine Long Distance Telephone Company, Inc. v. Province of Laguna, G.R. No. 151899, August 16, 2005, 467 SCRA 93; Philippine Long Distance Telephone Company, Inc. v. City of Bacolod, G.R. No. 149179, July 15, 2005, 463 SCRA 528; Philippine Long Distance Telephone Company, Inc. v. City of Davao, supra note 25; Philippine Long Distance Telephone Company, Inc. v. City of Davao, supra note 24.
34Philippine Long Distance Telephone Company, Inc. v. City of Davao, supra note 24, at 779-780.
35Rollo, pp. 276-277.
36Philippine Long Distance Telephone Company, Inc. v. City of Davao, supra note 24, at 775.
37 An Act approving the merger between Globe Mackay Cable and Radio Corporation and Clavecilla Radio System and the consequent transfer of the franchise of Clavecilla Radio System granted under Republic Act No. 402, as amended, to Globe Mackay Cable and Radio Corporation, extending the life of said franchise and repealing certain sections of RA No. 402, as amended.
38Rollo, p. 256.
39 Section 9 of R.A. No. 4540. (Emphasis supplied).
40Philippine Long Distance Telephone Company, Inc. v. City of Davao, supra note 24.
41 G.R. No. 152534, February 23, 2007, 516 SCRA 541.
42 Id.
43 Id.
44Philippine Long Distance Telephone Company, Inc. v. City of Davao, supra note 25.
45 Section 11 of R.A. No. 7229 provides: "All other provisions of Republic Act No. 402, as amended by Republic Act Nos. 1618 and 4540, and the provisions of Batas Pambansa Blg. 95 which are not inconsistent with the provisions of this Act and are still unrepealed shall continue to be in full force and effect."
In view of the above-mentioned provision, Section 3 of R.A. No. 4540, the pertinent portion of which is quoted herein, is incorporated into R.A. No. 7229: "(b) The grantee shall further pay to the Treasurer of the Philippines each year after the audit and approval of the accounts as prescribed in this Act, one and one-half per centum of all gross receipts from business transacted under this franchise by the said grantee in the Philippines, in lieu of any and all taxes of any kind, nature or description levied, established or collected by an authority whatsoever, municipal, provincial or national, from which the grantee is hereby expressly exempted, effective from the date of the approval of Republic Act Numbered Sixteen hundred eighteen."
46Philippine Long Distance Telephone Company, Inc. v. City of Davao, supra note 24, at 776.
47Rollo, pp. 310-313.
48 CONSTITUTION, Art. XII, Sec. 11.
49 G. R. No. 115455, August 25, 1994, 235 SCRA 630, 685.