G.R. No.

171586 January 25, 2010

NATIONAL POWER CORPORATION, Petitioner,
vs.
PROVINCE OF QUEZON and MUNICIPALITY OF PAGBILAO, Respondent.
R E S O L U T I O N
BRION, J .:
The petitioner National Power Corporation (Napocor) filed the present motion for
reconsideration
1
of the Courts Decision of July 15, 2009, in which we denied Napocors
claimed real property tax exemptions. For the resolution of the motion, we deem it
proper to provide first a background of the case.
BACKGROUND FACTS
The Province of Quezon assessed Mirant Pagbilao Corporation (Mirant) for unpaid real
property taxes in the amount of P1.5 Billion for the machineries located in its power
plant in Pagbilao, Quezon. Napocor, which entered into a Build-Operate-Transfer (BOT)
Agreement (entitled Energy Conversion Agreement) with Mirant, was furnished a copy
of the tax assessment.
Napocor (nota bene, not Mirant) protested the assessment before the Local Board of
Assessment Appeals (LBAA), claiming entitlement to the tax exemptions provided under
Section 234 of the Local Government Code (LGC), which states:
Section 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
x x x x
(c) All machineries and equipment that are actually, directly, and exclusively used by
local water districts and government-owned or controlled corporations engaged in the
supply and distribution of water and/or generation and transmission of electric power;
x x x x
(e) Machinery and equipment used for pollution control and environmental protection.
x x x x
Assuming that it cannot claim the above tax exemptions, Napocor argued that it is
entitled to certain tax privileges, namely:
a. the lower assessment level of 10% under Section 218(d) of the LGC for government-
owned and controlled corporations engaged in the generation and transmission of
electric power, instead of the 80% assessment level for commercial properties imposed
in the assessment letter; and
b. an allowance for depreciation of the subject machineries under Section 225 of the
LGC.
In the Courts Decision of July 15, 2009, we ruled that Napocor is not entitled to any of
these claimed tax exemptions and privileges on the basis primarily of the defective
protest filed by the Napocor. We found that Napocor did not file a valid protest against
the realty tax assessment because it did not possess the requisite legal standing. When
a taxpayer fails to question the assessment before the LBAA, the assessment becomes
final, executory, and demandable, precluding the taxpayer from questioning the
correctness of the assessment or from invoking any defense that would reopen the
question of its liability on the merits.
2

Under Section 226 of the LGC,
3
any owner or person having legal interest in the
property may appeal an assessment for real property taxes to the LBAA. Since Section
250 adopts the same language in enumerating who may pay the tax, we equated those
who are liable to pay the tax to the same entities who may protest the tax assessment.
A person legally burdened with the obligation to pay for the tax imposed on the property
has the legal interest in the property and the personality to protest the tax assessment.
To prove that it had legal interest in the taxed machineries, Napocor relied on:.
1. the stipulation in the BOT Agreement that authorized the transfer of ownership
to Napocor after 25 years;
2. its authority to control and supervise the construction and operation of the
power plant; and
3. its obligation to pay for all taxes that may be incurred, as provided in the BOT
Agreement.
Napocor posited that these indicated that Mirant only possessed naked title to the
machineries.
We denied the first argument by ruling that legal interest should be one that is actual
and material, direct and immediate, not simply contingent or expectant.
4
We disproved
Napocors claim of control and supervision under the second argument after reading the
full terms of the BOT Agreement, which, contrary to Napocors claims, granted Mirant
substantial power in the control and supervision of the power plants construction and
operation.
5

For the third argument, we relied on the Courts rulings in Baguio v. Busuego
6
and Lim
v. Manila.
7
In these cases, the Court essentially declared that contractual assumption of
tax liability alone is insufficient to make one liable for taxes. The contractual assumption
of tax liability must be supplemented by an interest that the party assuming the liability
had on the property; the person from whom payment is sought must have also acquired
the beneficial use of the property taxed. In other words, he must have the use and
possession of the property an element that was missing in Napocors case.
We further stated that the tax liability must be a liability that arises from law, which the
local government unit can rightfully and successfully enforce, not the contractual liability
that is enforceable only between the parties to the contract. In the present case, the
Province of Quezon is a third party to the BOT Agreement and could thus not exact
payment from Napocor without violating the principle of relativity of
contracts.
8
Corollarily, for reasons of fairness, the local government units cannot be
compelled to recognize the protest of a tax assessment from Napocor, an entity against
whom it cannot enforce the tax liability.
At any rate, even if the Court were to brush aside the issue of legal interest to protest,
Napocor could still not successfully claim exemption under Section 234 (c) of the LGC
because to be entitled to the exemption under that provision, there must be actual,
direct, and exclusive use of machineries. Napocor failed to satisfy these requirements.
THE MOTION FOR RECONSIDERATION
Although Napocor insists that it is entitled to the tax exemptions and privileges claimed,
the primary issue for the Court to resolve, however, is to determine whether Napocor
has sufficient legal interest to protest the tax assessment because without the requisite
interest, the tax assessment stands, and no claim of exemption or privilege can prevail.
Section 226 of the LGC, as mentioned, limits the right to appeal the local assessors
action to the owner or the person having legal interest in the property. Napocor posits
that it is the beneficial owner of the subject machineries, with Mirant retaining merely a
naked title to secure certain obligations. Thus, it argues that the BOT Agreement is a
mere financing agreement and is similar to the arrangement authorized under Article
1503 of the Civil Code, which declares:
Art. 1503. When there is a contract of sale of specific goods, the seller may, by the
terms of the contract, reserve the right of possession or ownership in the goods until
certain conditions have been fulfilled. The right of possession or ownership may be thus
reserved notwithstanding the delivery of the goods to the buyer or to a carrier or other
bailee for the purpose of transmission to the buyer.
Where goods are shipped, and by the bill of lading the goods are deliverable to the
seller or his agent, or to the order of the seller or of his agent, the seller thereby
reserves the ownership in the goods. But, if except for the form of the bill of lading, the
ownership would have passed to the buyer on shipment of the goods, the seller's
property in the goods shall be deemed to be only for the purpose of securing
performance by the buyer of his obligations under the contract.
x x x x
Pursuant to this arrangement, Mirants ownership over the subject machineries is
merely a security interest, given only for the purpose of ensuring the performance of
Napocors obligations.
Napocor additionally contends that its contractual assumption liability (through the BOT
Agreement) for all taxes vests it with sufficient legal interest because it is actually,
directly, and materially affected by the assessment.
While its motion for reconsideration was pending, Napocor filed a Motion to Refer the
Case to the Court En Banc considering that "the issues raised have far-reaching
consequences in the power industry, the countrys economy and the daily lives of the
Filipino people, and since it involves the application of real property tax provision of the
LGC against Napocor, an exempt government instrumentality."
9

Also, the Philippine Independent Power Producers Association, Inc. (PIPPA) filed a
Motion for Leave to Intervene and a Motion for Reconsideration-in-Intervention. PIPPA
is a non-stock corporation comprising of privately-owned power generating companies
which includes TeaM Energy Corporation (TeaM Energy), successor of Mirant. PIPPA is
claiming interest in the case since any decision here will affect the other members of
PIPPA, all of which have executed similar BOT agreements with Napocor.
THE COURTS RULING
At the outset, we resolve to deny the referral of the case to the Court en banc. We do
not find the reasons raised by Napocor meritorious enough to warrant the attention of
the members of the Court en banc, as they are merely reiterations of the arguments it
raised in the petition for review on certiorari that it earlier filed with the Court.
10

Who may appeal a real property tax assessment
Legal interest is defined as interest in property or a claim cognizable at law, equivalent
to that of a legal owner who has legal title to the property.
11
Given this definition,
Napocor is clearly not vested with the requisite interest to protest the tax assessment,
as it is not an entity having the legal title over the machineries. It has absolutely no solid
claim of ownership or even of use and possession of the machineries, as our July 15,
2009 Decision explained.
A BOT agreement is not a mere financing arrangement. In Napocor v. CBAA
12
a case
strikingly similar to the one before us, we discussed the nature of BOT agreements in
the following manner:
The underlying concept behind a BOT agreement is defined and described in the BOT
law as follows:
Build-operate-and-transfer A contractual arrangement whereby the project proponent
undertakes the construction, including financing, of a given infrastructure facility, and
the operation and maintenance thereof. The project proponent operates the facility over
a fixed term during which it is allowed to charge facility users appropriate tolls, fees,
rentals, and charges not exceeding those proposed in its bid or as negotiated and
incorporated in the contract to enable the project proponent to recover its investment,
and operating and maintenance expenses in the project. The project proponent
transfers the facility to the government agency or local government unit concerned at
the end of the fixed term which shall not exceed fifty (50) years x x x x.
Under this concept, it is the project proponent who constructs the project at its own cost
and subsequently operates and manages it. The proponent secures the return on its
investments from those using the projects facilities through appropriate tolls, fees,
rentals, and charges not exceeding those proposed in its bid or as negotiated. At the
end of the fixed term agreed upon, the project proponent transfers the ownership of the
facility to the government agency. Thus, the government is able to put up projects and
provide immediate services without the burden of the heavy expenditures that a project
start up requires.1avvphi 1
A reading of the provisions of the parties BOT Agreement shows that it fully conforms
to this concept. By its express terms, BPPC has complete ownership both legal
and beneficial of the project, including the machineries and equipment used,
subject only to the transfer of these properties without cost to NAPOCOR after
the lapse of the period agreed upon. As agreed upon, BPPC provided the funds for
the construction of the power plant, including the machineries and equipment needed
for power generation; thereafter, it actually operated and still operates the power plant,
uses its machineries and equipment, and receives payment for these activities and the
electricity generated under a defined compensation scheme. Notably, BPPC as
owner-user is responsible for any defect in the machineries and equipment.
x x x x
That some kind of "financing" arrangement is contemplated in the sense that the
private sector proponent shall initially shoulder the heavy cost of constructing the
projects buildings and structures and of purchasing the needed machineries and
equipment is undeniable. The arrangement, however, goes beyond the simple
provision of funds, since the private sector proponent not only constructs and buys the
necessary assets to put up the project, but operates and manages it as well during an
agreed period that would allow it to recover its basic costs and earn profits. In other
words, the private sector proponent goes into business for itself, assuming risks and
incurring costs for its account. If it receives support from the government at all during
the agreed period, these are pre-agreed items of assistance geared to ensure that the
BOT agreements objectives both for the project proponent and for the government
are achieved. In this sense, a BOT arrangement is sui generis and is different from
the usual financing arrangements where funds are advanced to a borrower who uses
the funds to establish a project that it owns, subject only to a collateral security
arrangement to guard against the nonpayment of the loan. It is different, too, from an
arrangement where a government agency borrows funds to put a project from a private
sector-lender who is thereafter commissioned to run the project for the government
agency. In the latter case, the government agency is the owner of the project from the
beginning, and the lender-operator is merely its agent in running the project.
If the BOT Agreement under consideration departs at all from the concept of a BOT
project as defined by law, it is only in the way BPPCs cost recovery is achieved; instead
of selling to facility users or to the general public at large, the generated electricity is
purchased by NAPOCOR which then resells it to power distribution companies. This
deviation, however, is dictated, more than anything else, by the structure and usages of
the power industry and does not change the BOT nature of the transaction between the
parties.
Consistent with the BOT concept and as implemented, BPPC the owner-manager-
operator of the project is the actual user of its machineries and equipment.
BPPCs ownership and use of the machineries and equipment are actual, direct,
and immediate, while NAPOCORs is contingent and, at this stage of the BOT
Agreement, not sufficient to support its claim for tax exemption. Thus, the CTA
committed no reversible error in denying NAPOCORs claim for tax exemption.
[Emphasis supplied.]
Given the special nature of a BOT agreement as discussed in the cited case, we find
Article 1503 inapplicable to define the contract between Napocor and Mirant, as it refers
only to ordinary contracts of sale. We thus declared in Tatad v. Garcia
13
that under BOT
agreements, the private corporations/investors are the owners of the facility or
machinery concerned. Apparently, even Napocor and Mirant recognize this principle;
Article 2.12 of their BOT Agreement provides that "until the Transfer Date, [Mirant] shall,
directly or indirectly, own the Power Station and all the fixtures, fitting, machinery and
equipment on the Site x x x. [Mirant] shall operate, manage, and maintain the Power
Station for the purpose of converting fuel of Napocor into electricity."
Moreover, if Napocor truly believed that it was the owner of the subject machineries, it
should have complied with Sections 202 and 206 of the LGC which obligates owners of
real property to:
a. file a sworn statement declaring the true value of the real property, whether
taxable or exempt;
14
and
b. file sufficient documentary evidence supporting its claim for tax exemption.
15

While a real property owners failure to comply with Sections 202 and 206 does not
necessarily negate its tax obligation nor invalidate its legitimate claim for tax exemption,
Napocors omission to do so in this case can be construed as contradictory to its claim
of ownership of the subject machineries. That it assumed liability for the taxes that may
be imposed on the subject machineries similarly does not clothe it with legal title over
the same. We do not believe that the phrase "person having legal interest in the
property" in Section 226 of the LGC can include an entity that assumes another
persons tax liability by contract.
A review of the provisions of the LGC on real property taxation shows that the phrase
has been repeatedly adopted and used to define an entity:
a. in whose name the real property shall be listed, valued, and assessed;
16

b. who may be summoned by the local assessor to gather information on which
to base the market value of the real property;
17

c. who may protest the tax assessment before the LBAA
18
and may appeal the
latters decision to the CBAA;
19

d. who may be liable for the idle land tax,
20
as well as who may be exempt from
the same;
21

e. who shall be notified of any proposed ordinance imposing a special levy,
22
as
well as who may object the proposed ordinance;
23

f. who may pay the real property tax;
24

g. who is entitled to be notified of the warrant of levy and against whom it may be
enforced;
25

h. who may stay the public auction upon payment of the delinquent tax, penalties
and surcharge;
26
and
i. who may redeem the property after it was sold at the public auction for
delinquent taxes.
27

For the Court to consider an entity assuming another persons tax liability by contract as
a person having legal interest in the real property would extend to it the privileges and
responsibilities enumerated above. The framers of the LGC certainly did not
contemplate that the listing, valuation, and assessment of real property can be made in
the name of such entity; nor did they intend to make the warrant of levy enforceable
against it. Insofar as the provisions of the LGC are concerned, this entity is a party
foreign to the operation of real property tax laws and could not be clothed with any legal
interest over the property apart from its assumed liability for tax. The rights and
obligations arising from the BOT Agreement between Napocor and Mirant were of no
legal interest to the tax collector the Province of Quezon which is charged with the
performance of independent duties under the LGC.
28

Some authorities consider a person whose pecuniary interests is or may be adversely
affected by the tax assessment as one who has legal interest in the property (hence,
possessed of the requisite standing to protest it), citing Cooleys Law on Taxation.
29
The
reference to this foreign material, however, is misplaced. The tax laws of the United
States deem it sufficient that a persons pecuniary interests are affected by the tax
assessment to consider him as a person aggrieved and who may thus avail of the
judicial or administrative remedies against it. As opposed to our LGC, mere pecuniary
interest is not sufficient; our law has required legal interest in the property taxed before
any administrative or judicial remedy can be availed. The right to appeal a tax
assessment is a purely statutory right; whether a person challenging an assessment
bears such a relation to the real property being assessed as to entitle him the right to
appeal is determined by the applicable statute in this case, our own LGC, not US
federal or state tax laws.
In light of our ruling above, PIPPAs motion to intervene and motion for reconsideration-
in-intervention is already mooted. PIPPA as an organization of independent power
producers is not an interested party insofar as this case is concerned. Even if TeaM
Energy, as Mirants successor, is included as one of its members, the motion to
intervene and motion for reconsideration-in-intervention can no longer be entertained,
as it amounts to a protest against the tax assessment that was filed without the
complying with Section 252 of the LGC, a matter that we shall discuss below. Most
importantly, our Decision has not touched or affected at all the contractual stipulations
between Napocor and its BOT partners for the formers assumption of the tax liabilities
of the latter.
Payment under protest is required before an appeal to the LBAA can be made
Apart from Napocors failure to prove that it has sufficient legal interest, a further review
of the records revealed another basis for disregarding Napocors protest against the
assessment.
The LBAA dismissed Napocors petition for exemption for its failure to comply with
Section 252 of the LGC
30
requiring payment of the assailed tax before any protest can
be made. Although the CBAA ultimately dismissed Napocors appeal for failure to meet
the requirements for tax exemption, it agreed with Napocors position that "the protest
contemplated in Section 252 (a) is applicable only when the taxpayer is questioning the
reasonableness or excessiveness of an assessment. It presupposes that the taxpayer is
subject to the tax but is disputing the correctness of the amount assessed. It does not
apply where, as in this case, the legality of the assessment is put in issue on account of
the taxpayers claim that it is exempt from tax." The CTA en banc agreed with the
CBAAs discussion, relying mainly on the cases of Ty v. Trampe
31
and Olivarez v.
Marquez.
32

We disagree. The cases of Ty and Olivarez must be placed in their proper perspective.
The petitioner in Ty v. Trampe questioned before the trial court the increased real estate
taxes imposed by and being collected in Pasig City effective from the year 1994,
premised on the legal question of whether or not Presidential Decree No. 921 (PD 921)
was repealed by the LGC. PD 921 required that the schedule of values of real
properties in the Metropolitan Manila area shall be prepared jointly by the city assessors
in the districts created therein; while Section 212 of the LGC stated that the schedule
shall be prepared by the provincial, city or municipal assessors of the municipalities
within the Metropolitan Manila Area for the different classes of real property situated in
their respective local government units for enactment by ordinance of the Sanggunian
concerned. The private respondents assailed Tys act of filing a prohibition petition
before the trial court contending that Ty should have availed first the administrative
remedies provided in the LGC, particularly Sections 252 (on payment under protest
before the local treasurer) and 226 (on appeals to the LBAA).
The Court, through former Chief Justice Artemio Panganiban, declared that Ty correctly
filed a petition for prohibition before the trial court against the assailed act of the city
assessor and treasurer. The administrative protest proceedings provided in Section 252
and 226 will not apply. The protest contemplated under Section 252 is required where
there is a question as to the reasonableness or correctness of the amount assessed.
Hence, if a taxpayer disputes the reasonableness of an increase in a real property tax
assessment, he is required to "first pay the tax" under protest. Otherwise, the city or
municipal treasurer will not act on his protest. Ty however was questioning the very
authority and power of the assessor, acting solely and independently, to impose the
assessment and of the treasurer to collect the tax. These were not questions merely of
amounts of the increase in the tax but attacks on the very validity of any increase.
Moreover, Ty was raising a legal question that is properly cognizable by the trial court;
no issues of fact were involved. In enumerating the power of the LBAA, Section 229
declares that "the proceedings of the Board shall be conducted solely for the purpose of
ascertaining the facts x x x." Appeals to the LBAA (under Section 226) are therefore
fruitful only where questions of fact are involved.
Olivarez v. Marquez, on the other hand, involved a petition for certiorari, mandamus,
and prohibition questioning the assessment and levy made by the City of Paraaque.
Olivarez was seeking the annulment of his realty tax delinquency assessment. Marquez
assailed Olivarez failure to first exhaust administrative remedies, particularly the
requirement of payment under protest. Olivarez replied that his petition was filed to
question the assessors authority to assess and collect realty taxes and therefore, as
held in Ty v. Trampe, the exhaustion of administrative remedies was not required. The
Court however did not agree with Olivarezs argument. It found that there was nothing in
his petition that supported his claim regarding the assessors alleged lack of authority.
What Olivarez raised were the following grounds: "(1) some of the taxes being collected
have already prescribed and may no longer be collected as provided in Section 194 of
the Local Government Code of 1991; (2) some properties have been doubly
taxed/assessed; (3) some properties being taxed are no longer existent; (4) some
properties are exempt from taxation as they are being used exclusively for educational
purposes; and (5) some errors are made in the assessment and collection of taxes due
on petitioners properties, and that respondents committed grave abuse of discretion in
making the improper, excessive and unlawful the collection of taxes against the
petitioner." The Olivarez petition filed before the trial court primarily involved the
correctness of the assessments, which is a question of fact that is not allowed in a
petition for certiorari, prohibition, and mandamus. Hence, we declared that the petition
should have been brought, at the very first instance, to the LBAA, not the trial court.
Like Olivarez, Napocor, by claiming exemption from realty taxation, is simply raising a
question of the correctness of the assessment. A claim for tax exemption, whether full
or partial, does not question the authority of local assessor to assess real property tax.
This may be inferred from Section 206 which states that:
SEC. 206. Proof of Exemption of Real Property from Taxation. - Every person by or for
whom real property is declared, who shall claim tax exemption for such property under
this Title shall file with the provincial, city or municipal assessor within thirty (30) days
from the date of the declaration of real property sufficient documentary evidence in
support of such claim including corporate charters, title of ownership, articles of
incorporation, bylaws, contracts, affidavits, certifications and mortgage deeds, and
similar documents. If the required evidence is not submitted within the period herein
prescribed, the property shall be listed as taxable in the assessment roll. However, if the
property shall be proven to be tax exempt, the same shall be dropped from the
assessment roll. [Emphasis provided]
By providing that real property not declared and proved as tax-exempt shall be included
in the assessment roll, the above-quoted provision implies that the local assessor has
the authority to assess the property for realty taxes, and any subsequent claim for
exemption shall be allowed only when sufficient proof has been adduced supporting the
claim. Since Napocor was simply questioning the correctness of the assessment, it
should have first complied with Section 252, particularly the requirement of payment
under protest. Napocors failure to prove that this requirement has been complied with
thus renders its administrative protest under Section 226 of the LGC without any effect.
No protest shall be entertained unless the taxpayer first pays the tax.
It was an ill-advised move for Napocor to directly file an appeal with the LBAA under
Section 226 without first paying the tax as required under Section 252. Sections 252
and 226 provide successive administrative remedies to a taxpayer who questions the
correctness of an assessment. Section 226, in declaring that "any owner or person
having legal interest in the property who is not satisfied with the action of the provincial,
city, or municipal assessor in the assessment of his property may x x x appeal to the
Board of Assessment Appeals x x x," should be read in conjunction with Section 252
(d), which states that "in the event that the protest is denied x x x, the taxpayer may
avail of the remedies as provided for in Chapter 3, Title II, Book II of the LGC [Chapter 3
refers to Assessment Appeals, which includes Sections 226 to 231]. The "action"
referred to in Section 226 (in relation to a protest of real property tax assessment) thus
refers to the local assessors act of denying the protest filed pursuant to Section 252.
Without the action of the local assessor, the appellate authority of the LBAA cannot be
invoked. Napocors action before the LBAA was thus prematurely filed.
For the foregoing reasons, we DENY the petitioners motion for reconsideration.
SO ORDERED.