05 Napocor Vs Quezon

NAPOCOR vs Quezon (2010)
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 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. And assuming that it cannot claim the said tax exemptions,
Napocor argued that it is entitled to certain tax privileges.
 To prove that it had legal interest in the taxed machineries, Napocor relied on:
o the stipulation in the BOT Agreement that authorized the transfer of ownership
to Napocor after 25 years;
o its authority to control and supervise the construction and operation of the power
plant; and
o its obligation to pay for all taxes that may be incurred, as provided in the BOT
Agreement.
 LBAA ruling:
o The first argument was denied by ruling that legal interest should be one that is
actual and material, direct and immediate, not simply contingent or expectant.
o The court disproved Napocor’s claim of control and supervision under the second
argument after reading the full terms of the BOT Agreement, which, contrary to
Napocor’s claims, granted Mirant substantial power in the control and
supervision of the power plant’s construction and operation.
o For the third argument, it was held that 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 Napocor’s case.
 Motion for Reconsideration
o 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.
o 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.
ISSUE: Whether petitioner file the protest against the real property tax assessment
HELD:
NO.
The two entities vested with personality to contest an assessment are (a) the owner or (b) the
person with legal interest in the property. NPC is neither the owner nor the possessor/user of the
subject machineries even if it will acquire ownership of the plant at the end of 25 years.
The Court said that legal interest should be an interest that is actual and material, direct and
immediate, not simply contingent or expectant. While the Petitioner does indeed assume
responsibility for the taxes due on the power plant and its machineries, the tax liability referred
to is the liability arising from law that the local government unit can rightfully and successfully
enforce, not the contractual liability that is enforceable between the parties to a contract. The
local government units can neither be compelled to recognize the protest of a tax assessment
from the Petitioner, an entity against whom it cannot enforce the tax liability.
While a real property owner’s failure to comply with Sections 202 and 206 does not necessarily
negate its tax obligation nor invalidate its legitimate claim for tax exemption, Napocor’s
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. Court does 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 person’s tax liability by contract.
OTHERS:
The LGC provides that 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.
To successfully claim exemption under Section 234 (c) of the LGC, the claimant must prove two
elements: a) the machineries and equipment are actually, directly, and exclusively used by local
water districts and government-owned or controlled corporations; and b) the local water
districts and government-owned and controlled corporations claiming exemption must be
engaged in the supply and distribution of water and/or the generation and transmission of
electric power. Having failed to comply with both requirements, the claim for exemption must
fall.

05 Napocor Vs Quezon

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