CITY OF IRIGA, PETITIONER, VS. CAMARINES SUR III ELECTRIC COOPERATIVE, INC.

(CASURECO III),
RESPONDENT.
(G.R. No. 192945, September 05, 2012)

DOCTRINE:

The power of the local government units to impose and collect taxes is derived from the Constitution itself which grants them “the
power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the
Congress may provide. (Article X, Section 5, Constitution)” This explicit constitutional grant of power to tax is consistent with the
basic policy of local autonomy and decentralization of governance. With this power, local government units have the fiscal
mechanisms to raise the funds needed to deliver basic services to their constituents and break the culture of dependence on the
national government.

A franchise tax is 'a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the
state

Franchise tax shall be based on gross receipts precisely because it is a tax on business (excise tax), rather than on persons or
property. Since the nature of tax is an excise tax, the situs of taxation is the place where the privilege is exercised.

FACTS OF THE CASE:

In 1973, the promulgation of Presidential Decree 269 granted electric cooperatives registered with the National Electrification
Authority (NEA) several tax privileges, one of which is exemption from the payment of “all national government, local
government and municipal taxes and fees, including franchise, filing, recordation, license or permit fees or taxes. ( Section 39a -
NEA Decree).

In 1975, CASURECO III, an electric power distribution cooperative, duly organized, granted its franchise, and registered with the
National Electrification Administration (NEA), having a principal office in Iriga City. They distributed power to consumers within
the Iriga City, Camarines Sur known as “Rinconada Area”-Nabua, Bato, Baao, Buhi, Bula and Balatan municipalities.

Why Rinconada? It is the spoken language in that particular Bicol Region. It is said that it came from Spanish word
“arrinconda” which means “small district”

In 1990, the Congress enacted Republic Act 6938 (Cooperative Code of the Philippines) which provides that electric cooperatives
registered with the NEA under PD 269 which opt not to register with the CDA shall not be entitled to the benefits and privileges
under the said law. The Republic Act 6939 created the Cooperative Development Authority (CDA) which vested the power to
register cooperatives solely to them.

In this way, CASURECO III registered also in CDA.

On January 1, 1992, the Local Government Code took effect, and Section 193 thereof withdrew tax exemptions or incentives
previously enjoyed by “all persons, whether natural or juridical, including government-owned or controlled corporations, except
local water districts, cooperatives duly registered under Republic Act No. 6938, non-stock and non-profit hospitals and
educational institutions”.

In 2003, petitioner City required CASURECO III to submit a report of its gross receipts for the period 1997-2002 to serve as for
the computation of franchise taxes, fees and other charges. CASURECO III compiled and submitted the gross receipts requested.
The City subsequently assessed their taxes and found that CASURECO III needed to pay franchise taxes from the 1998-2003
periods and real property taxes from 1995-2003 periods including penalties, surcharges, and interest with a sum of more than
Php17 million pesos and almost a million pesos respectively. In this regard, respondent disregarded the said demand by the City.

A year after, petitioner made a final demand on CASURECO III to pay the franchise taxes and real property taxes aforementioned
but to no avail. They argued that it is an electric cooperative PROVISIONALLY REGISTERED with the Cooperative
Development Authority (CDA), and therefore exempt from the payment of local taxes.

Months later, petitioner City filed a complaint for collection of local taxes against CASURECO III before the Regional Trial Court
of Iriga City, citing its power to tax under the Local Government Code (LGC) and the Revenue Code of Iriga City.

Local Government Code: SECTION 137. Franchise Tax - Notwithstanding any exemption granted by any law or other
special laws, the province may impose a tax on business enjoying a franchise, at a rate 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.
 Ordinance 04, Series of 2003 “Revenue Code of Iriga City”: Article 2, Section 1.2.01.f.1. Franchise - is a right or
privilege affected with public interest which is conferred upon private persons or corporation , under such terms and
conditions as the government and its political subdivisions may impose in the interest of public welfare, security, and
safety.

CASURECO III denied liability for the assessed taxes, asserting that THE COMPUTATION of the petitioner WAS
ERRONEOUS because it included:
1) gross receipts from service areas beyond the latter’s territorial jurisdiction;
2) taxes that had already prescribed
3) taxes during the periods 1995-2003 for franchise tax and 1998-2003 real property tax was still exempt from local
government tax by virtue of its then subsisting registration with the CDA

The trial court ruled that the real property taxes due for the years 1995-1999 had already been prescribed in accordance with
Section 194 of the LGC.

SECTION 194. Periods of Assessment and Collection. - (a) Local taxes, fees, or charges shall be assessed within five (5)
years from the date they became due. No action for the collection of such taxes, fees, or charges, whether
administrative or judicial, shall be instituted after the expiration of such period: Provided, That, taxes, fees or charges
which have accrued before the effectivity of this Code may be assessed within a period of three (3) years from the date
they became due

However, it found CASURECO III liable for franchise taxes for the years 2000-2003 based on its gross receipts from Iriga City
and the Rinconada area on the ground that the “situs of taxation is the place where the privilege is exercised.

CASURECO III questioned the franchise taxes on appeal. The appellate court found CASURECO III to be a nonprofit entity,
not falling within the purview of “businesses enjoying a franchise” pursuant Local Government Code. Hence, being non-profit in
nature means that it failed to be categorized as a “business” which is a “trade or commercial activity regularly engaged in as a
means of livelihood or WITH A VIEW TO PROFIT.” (Section 131, item 9, Local Government Code). The appellate court
expunged CASURECO III in its franchise tax liability.

Hence, this petition.

ISSUES:

(1) Whether CASURECO III is not liable for payment of local franchise taxes invoking the law that operates their registration
(2) Whether CASURECO III is not liable for payment of local franchise taxes invoking being non-profit in nature pursuant to
Presidential Decree 269
(2) Whether the City is correct in collecting franchise tax to the respondent electric cooperative because it complies with the situs
of taxation in Iriga City wherein the place where the franchise holder exercises its franchise follows regardless of the place where
its services or products are delivered

HELD:

1) No, CASURECO III is liable for the payment of local franchise taxes.

According to the jurisprudence (Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary,
Department of Interior and Local Government), the Court held that the tax privileges granted to electric cooperatives registered
with NEA under PD 269 were validly withdrawn and only those registered with the CDA under RA 6938 may continue to enjoy
the tax privileges under the Cooperative Code.

In this case, they cannot use the tax exemption provided by Republic Act 6938 in this situation to avoid paying local taxes like
franchise taxes because it expressly revoked tax exemptions that were already provided by the Local Government Code, despite the
fact that their provisional registration in the CDA only lasts until May 1992. Hence, from 1992 onwards, which in this case,
franchise taxes from 1998-2003, shall be counted for liability of payments.

The power of the local government units to impose and collect taxes is derived from the Constitution itself which grants them “the
power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the
Congress may provide.” This explicit constitutional grant of power to tax is consistent with the basic policy of local autonomy and
decentralization of governance. With this power, local government units have the fiscal mechanisms to raise the funds needed to
deliver basic services to their constituents and break the culture of dependence on the national government.
 2) No, CASURECO III is still liable for the payment of local franchise taxes

According to jurisprudence (National Power Corporation v. City of Cabanatuan), the Court declared that “a franchise tax is 'a
tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state.'”It is not
levied on the corporation simply for existing as a corporation, upon its property or its income, but on its exercise of the rights or
privileges granted to it by the government.

To be liable for local franchise tax, the following requisites should concur: (1) that one has a "franchise" in the sense of a
secondary or special franchise; and (2) that it is exercising its rights or privileges under this franchise within the territory of the
pertinent local government unit.

By virtue of PD 269, NEA granted CASURECO III a franchise to operate an electric light and power service for a period of fifty
(50) years from June 6, 1979 (1st requisite complied). CASURECO III operates within Iriga City and the Rinconada area (2nd
requisite complied). It is, therefore, liable to pay franchise tax notwithstanding its non-profit nature.

3) Yes, the City is correct for purposes of collection of local franchise tax

According to the Local Government Code (Section 137), franchise tax shall be based on gross receipts precisely because it is a tax
on business (excise tax), rather than on persons or property. Since the nature of tax is an excise tax, the situs of taxation is the
place where the privilege is exercised.

In this case, CASURECO III principal office is located in Iriga City. It is the situs of the taxation regardless of the place where its
services or products are delivered. Hence, franchise tax covers all gross receipts from Iriga City and the Rinconada area.

The petition is GRANTED. The assailed Decision of the Court of Appeals are hereby SET ASIDE and the Decision of the
Regional Trial Court of Iriga City is REINSTATED.