[C.T.A. CASE NO. 1152. October 31, 1965.

PHILIPPINE POWER & DEVELOPMENT CO., INC., petitioner,

vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

This is an appeal from a decision of respondent holding petitioner liable for

the sum of P141,469.40 as deficiency franchise tax for the taxable period from
October 1, 1955 to June 30, 1960, plus the sum of P39,930.76, representing
franchise tax erroneously credited to petitioner, or a total amount of P181,300.16.

Petitioner, a corporation duly organized and existing under the laws of the
Philippines, is engaged in the business of supplying electric light, heat and power
in the municipalities of Bay, Calamba, Lilio, Los Baños, Magdalena, Majayjay,
Nagcarlan, Pila, Rizal, and Sta. Cruz, all in the Province of Laguna, and in the
municipalities of Sto. Tomas and Tanauan, in the Province of Batangas, pursuant
to the municipal franchises granted under Act No. 667 of the Philippine
Commission. The said municipal franchises, follow a standard form or pattern and
contain similar provisions. cdrep

Paragraphs 10 and 13, of Resolution No. 81, dated October 21, 1929, of the
Municipal Council of Bay, Laguna, one of the franchise involved herein, provide
in part:

"Par. 10. . . . The said grantee, in consideration of the franchise

hereby granted, shall pay quarterly into the Provincial Treasury of Laguna,
one percentum of the gross earnings, obtained thru this privilege during the
first twenty years (20) and two percentum during the remaining fifteen (15)
years of the life of said franchise." (Exhibit "A-1", p. 61, C.T.A. records.)

"Par. 13. This franchise is granted with the understanding and

upon the condition that it shall be subject to amendment, alteration or repeal
by the Congress of the United States as provided in Section 28 of the Act of
Congress approved August 29, 1916, entitled 'AN ACT TO DECLARE THE
Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 1
 PURPOSE OF THE PEOPLE OF THE UNITED STATES AS TO
FUTURE POLITICAL STATES OF THE PEOPLE OF THE PHILIPPINE
ISLANDS, AND TO PROVIDE A MORE AUTONOMOUS
GOVERNMENT FOR THOSE ISLANDS: and that it shall be subject
moreover to the provisions of Act No. 3108 as amended. . . ." (Par. 13,
Exhibit "A", p. 62 C.T.A. records.)

In the light of the decision of the Supreme Court in the cases entitled Hoa
Hin Co., Inc. vs. Saturnino David and Hoa Hin Co., Inc. vs. Blaquera, G.R. Nos.
L-9616 and L-11783, May 25, 1959, the field corporation auditor of the General
Auditing Office made a recomputation of the franchise tax liability of petitioner
based on the gross earnings of its operation, which recomputation is contained in a
report submitted to the Auditor General. In a letter dated November 15, 1960, the
Auditor General furnished respondent with said audit report, which reads:

"Pursuant to the provisions of Section 259 of the Tax Code, as

amended, the utility had been paying its franchise tax at the rate of 5% on its
gross receipts up to March 31, 1955. By virtue of the letter of the Collector
of Internal Revenue dated April 4, 1955, the utility's franchise tax rate was
declared to be 2% and not 5% in conformity with its franchise authorized
under Act 667, as amended. Following the ruling of the Collector of Internal
Revenue, our audit report dated May 18, 1955 was based on the tax rate of
2%. Accordingly, the utility requested the refund of its tax overpayment for
the first quarter of 1953 and for the period from July 1, 1953 to March 31,
1955, in its letters dated March 18, 1955 and July 18, 1955, and the
Collector of Internal Revenue in its letter dated June 15 and July 12, 1955,
granted a tax credit in the amount of P30,178.28 and P9,652.48 or a total
amount of P39,830.76 for the said periods. Since April 1, 1955, therefore,
the utility had been paying franchise tax at the rate of 2%."

On the basis of said audit report, respondent, on November 29, 1960,

assessed and demanded from petitioner the total amount of P201,627.21,
representing deficiency franchise tax for the period from January 1, 1947 to June
30, 1960, inclusive of the 25% surcharge and the amount of P39,830.76 alleged to
have been erroneously credited in favor of petitioner. This assessment was
received by petitioner on December 19, 1960. In a letter, dated January 5, 1961,
petitioner protested and requested the cancellation and withdrawal thereof. This
request was partially granted in a revised assessment, dated October 18, 1961,
reducing the original assessment of P201,627.21 to P181,300.16 by eliminating
therefrom the alleged deficiency corresponding to the period beyond five years
from the date of the original assessment, that is, the period from January 1, 1947 to
September 30, 1955, and limiting the assessment to the period from October 1,
1955 to June 30, 1960. LLphil

Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 2
 This revised assessment is itemized as follows:
Total gross receipts per audit P3,733,619.69
——————
5% tax due thereon 186,680.98
Less: Amount paid 73,505.46
——————
Balance 113,175.52
Add: 25% surcharge 28,293.88 P141,469.40
——————
Tax erroneously credited 39,830.76
——————
Total amount due P181,300.16
===========
The issues raised for our consideration are:

1. Whether or not respondent has jurisdiction, power and authority to

assess and collect the franchise tax in question;

2. Whether the correct rate of franchise tax payable by petitioner is the

2% prescribed in its municipal franchises or the 5% provided for in Section 259 of
the Tax Code, as amended;

3. Whether or not petitioner is liable for the 25% surcharge on the

alleged deficiency franchise tax;

4. Whether or not respondent can recover the amount of P39,830.76

alleged to have been erroneously credited to the petitioner for the period from
January 1, 1953 to March 31, 1955; and

5. Whether or not the income of the employees' retirement fund, the

interest on savings account, the gain in the sale of fixed assets and cars, and the
proceeds on sales of materials and supplies form part of the gross receipts subject
to franchise tax.

On the first issue, petitioner contends that the powers and duties of the
Commissioner of Internal Revenue comprehend only "the collection of all national
internal revenue taxes, fees and charges, and the enforcement of all forfeitures,
penalties, and fines in connection there with", and do not include the collection of
franchise tax under Act No. 667, as amended, which by the terms of the municipal
franchises is paid by the grantee to the Provincial Treasurer, who acts, not as
deputy of the respondent, but solely in behalf of and for the benefit of the local
governments (Par. 1, p. 4, Petitioner's Memorandum). In short, petitioner claims
that the franchise tax in question is a municipal tax, not an internal revenue tax,

Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 3
 and therefore, respondent has no power and authority to assess and collect the
same.

This contention is untenable. Section 3 and 18 of the Tax Code respectively

provide:

"SECTION 3. Powers and duties of Bureau. — The powers

and duties of the Bureau of Internal Revenue shall comprehend the collection
of all national internal revenue taxes, fees and charges, and the enforcement
of all forfeitures, penalties, and fines connected therewith. Said Bureau shall
also give effect to and administer the supervisory and police power conferred
to it by this Code or other laws". (Emphasis ours.) cdphil

"SECTION 18. Sources of Revenue.— The following taxes, fees,

and charges are deemed to be national internal revenue taxes:

xxx xxx xxx

(g) Miscellaneous taxes, fees and charges, namely, taxes

on banks, and insurance companies, franchises taxes,
taxes on amusements charges on forest products, fees
for sealing weights and measures, firearms license fees,
radio registration fees, tobacco inspection fees, and
water rentals". (Emphasis ours.)

It will be noted that in the above enumerated sources of revenue, franchise taxes
are deemed to be national internal revenue taxes. And before its amendment by
Section 5 of Republic Act No. 2655, Section 6 of the Tax Code designated
provincial and city treasurers as deputies of the Commissioner of Internal Revenue
in the collection of national internal revenues, of which franchise tax is one. But
with the said amendment: "Any and all references in the National Internal Revenue
Code to the provincial and city treasurers and their deputies, their functions and
duties in connection with internal revenue shall . . . be deemed to refer to the
collection agents of the Bureau of Internal Revenue." From these provisions, it is
clear that respondent Commissioner of Internal Revenue is empowered or
authorized to assess and collect franchise taxes due under Act No. 667.

Petitioner's claim that it is liable only for 2% franchise tax is likewise

without merit. Nowhere in the franchises of petitioner can be found a provision to
the effect that the franchise tax prescribed therein "shall be in lieu of all other
taxes." Inasmuch as said franchises do not preclude the imposition of a higher
franchise tax, petitioner-grantee is subject to the 5% franchise tax provided in
Section 259 of the Tax Code, as amended, and not to the lower rate of franchise
tax prescribed in the franchises in question. This doctrine has been consistently
upheld in previous cases involving franchises of similar nature (Balanga Power
Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 4
 Plant Co., Inc. vs. Commissioner of Internal Revenue, G. R. No. L-20499, June
30, 1965; Lealda Electric Co., Inc., vs. Commissioner of Internal Revenue, G. R.
No. L-16428, April 30, 1963; Hoa Hin Co., Inc. vs. David etc. and Hoa Hin Co.,
Inc. vs. Blaquera etc., G. R. Nos. L-9616 and 11783, May 25, 1959; also, Imus
Electric Co, Inc. vs. Commissioner of Internal Revenue, C.T.A. Case No. 1144,
December 16, 1963; Escudero Electric Service Co. vs. Melecio R. Domingo etc.,
C.T.A. Case No. 1026, December 26, 1963; and Guagua Electric Plant Co., Inc.
vs. Commissioner of Internal Revenue, C.T.A. Case No. 1175, August 29, 1964).
More so, because each franchise was granted with the express "understanding and
upon the condition that it shall be subject to amendment, alteration or repeal by the
Congress of the United States", now (the Congress of the Philippines).

And having accepted said franchises subject to the afore-mentioned terms

and conditions, petitioner cannot now assert that the imposition and collection of
the higher rate of 5% is in violation of the non-impairment clause of our
constitution (Lealda Electric Co., Inc. vs. Commissioner of Internal Revenue,
supra; Balanga Power Plant Co., Inc. vs. Commissioner of Internal Revenue,
supra). LLphil

On the third issue, petitioner contends that he is not liable for the sum of
P28,293.88, representing the 25% surcharge, for the reason that the failure to pay
the 5% franchise tax was due to respondent's letters, dated June 15, 1955 and July
13, 1955, respectively, which led him to believe that the correct rate of percentage
tax due was only 2%, and in consequence of which it was granted a tax credit of
P39,830.76, or the difference between the 5% prescribed in Section 259 of the Tax
Code and the 2% provided in its franchises.

This contention is well taken. Having acted in good faith and having been
misled by the respondent, it would not be fair and equitable to impose upon the
petitioner the 25% surcharge. In the case of Ilagan Electric & Ice Plant, Inc. vs. the
Commissioner of Internal Revenue, C.T.A. Case No. 1178, May 18, 1964, this
Court held:

"It is undisputed that petitioner paid the 2% franchise tax in

accordance with the view of respondent's deputy that the former was liable
only for the 2% franchise tax. It may, therefore, be said that the failure to pay
the correct amount of tax is clearly and directly attributable to the mistaken
view of respondent's deputy regarding the rate of tax applicable to
petitioner's gross receipts. In paying 2% franchise tax, petitioner was acting
in good faith. Having thus acted, it would not be just to penalize petitioner
with 25% surcharge for falling into the error to which it has been led by
respondent's deputy. (See Connell Bros. Co. [Phil.] vs. Collector of Internal
Revenue, G.R. No. L-15470, December 26, 1963.)"

Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 5
 The defense of prescription interposed by petitioner against the collection
and/or recovery of the sum of P39,830.76, which was credited as overpayment, is
well taken. It is the rule that where deficiencies in taxes arise as a result of
erroneous refunds made by respondent, he may make a new or deficiency
assessment against the taxpayer if the statute of limitations has not yet set in
(Ilagan Electric & Ice Plant, Inc. vs. Commissioner of Internal Revenue, supra,
citing May R. Millez, 19 TC 395; Carl H. Thorsell, 13 TC 909; Rothensies v.
Electric Storage Battery Co., 329 U. S. 296; Southern Maryland Agricultural Fair
Association vs. Comr. of Int. Rev., 40 BTA 549, 554). In the case at bar, petitioner
paid franchise tax and was granted a tax credit in the total amount of P39,830.76
for the period from the first quarter of 1953 to the first quarter of 1955. From this,
we can reasonably assume that quarterly returns were seasonably filed for that
period. Consequently, the right of respondent to assess the amount of P39,830.76
is limited to five (5) years from the filing of the returns (See Section 331 of the
Tax Code). And it appearing that the assessment in question was made only on
November 29, 1960, and received by petitioner on December 19, 1960 it is
obvious that the assessment was made beyond five (5) years from the filing of the
last return for the first quarter of 1955. Hence, the right of respondent to collect the
amount of P39,830.76 has prescribed.

But respondent contends that the government is not assessing the deficiency
franchise tax, but is recovering tax erroneously credited, and, therefore, Section
331 of the Tax Code does not apply. In this connection, it must be stated that
respondent, himself, has termed the assessments in question, which include the
amount of P39,830.76, as deficiency. Moreover, if we were to agree to
respondent's contention, then this Court is not the proper forum for recovering the
amount allegedly credited as tax (Guagua Electric Plant Co., Inc. vs.
Commissioner of Internal Revenue, supra.). cdll

Petitioner admits its franchise tax liability on the income of P7,033.57 it

derived from rental of poles, rental of bulbs, jobbing, and adjustment of accounts
receivable. But, it is contesting the imposition of franchise tax on the interest
income on its savings account, earning of the employees' retirement fund, profits in
the sales of fixed assets, interest in the sale of cars, and proceeds of sales of
materials and supplies, which amounted to P57,321.34, on the ground that these
items were not obtained thru the franchise granted to petitioner.

The interest income on petitioner's savings accounts is subject to franchise

tax for the reason that it represents profit made in the course of regular transactions
in connection with petitioner's franchise (Philippine Long Distance Telephone Co.
vs. Collector, 90 Phil. 674). Similarly, the other contested items, consisting of
earning of employees' retirement fund, profits in the sales of fixed assets, interest
in the sale of cars, and proceeds of sales of materials and supplies are earnings or
Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 6
 profits incidental to and necessarily connected with the operation of its franchises,
hence, includible in its taxable gross earnings.

WHEREFORE, the assessment appealed from is hereby modified.

Petitioner is hereby ordered to pay respondent Commissioner, within 30 days from
the date this decision becomes final, deficiency franchise tax for the period from
October 1, 1955 to June 30, 1960 in the amount of P113,175.52. If the said amount
is not paid within 30 days from the date this decision becomes final, the same shall
be subject to the surcharge of 25% for delinquency pursuant to Section 259 of the
Revenue Code. cdpr

SO ORDERED.

ROMAN M. UMALI
Associate Judge

I CONCUR:

ALEJANDRO B. AFURONG
Associate Judge

Separate Opinions

I concur with the majority opinion except on the question of the (a) interest
income on the savings account, (b) the earning of the Employees' Retirement Fund,
(c) the profits in the sales of fixed assets, (d) the interest in the sale of cars, and (e)
the proceeds of sales of materials and supplies. I do not believe that these items are
subject to franchise tax. The pertinent provisions of law in this case are the
following:

"Par. 10. . . . The said grantee, in consideration of the franchise

hereby granted, shall pay quarterly into the Provincial Treasurer of Laguna,
one per centum of the gross earnings obtained thru this privilege during the
first twenty years (20) and two per centum during the remaining fifteen (15)
years of the life of said franchise."(Resolution No. 81, dated October 21,
1929, of the Municipal Council of Bay, Laguna, Exh. "A-1," p. 61, C.T.A.
Records). Emphasis supplied. prll

"SECTION 259. Tax on Corporate Franchises. — There shall be

collected in respect to all existing and future franchises, upon the gross
earnings or receipts from the business covered by the law granting the

Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 7
 franchise a tax of five per centum or such taxes, charges, and percentages as
are specified in the special charters of the grantees upon whom such
franchises are conferred, whichever is higher, unless the provisions thereof
preclude the imposition of a higher tax. . . .. (National Internal Revenue
Code). Emphasis supplied.

To my mind, it is clear that what is intended to be covered by the franchise

tax is gross earnings or receipts obtained thru the exercise of the privilege or the
business covered by the law granting the franchise. The privilege or business
covered by petitioner's municipal franchises is limited to the maintenance and
operation of electric light, heat and power. Clearly, it is the gross earnings or
receipts from such operation that must be considered in the computation of the
franchise tax, and not the non-operating revenues. Therefore, interest on the
savings account, earnings of the Employees' Retirement Fund, profits on the sale
of fixed assets, interest in the sale of cars, and the sales of materials and supplies
are certainly not earnings or receipts obtained thru the exercise of petitioner's
corporate franchises, nor are they necessary in carrying out the public service to
which petitioner is bound to render under the terms and conditions of the
franchise. They should not therefore be considered in the computation of the
franchise tax.

A franchise tax is essentially an imposition for the privilege granted by the

corporate franchise. Thus, it has been defined as:

"A 'franchise tax' is not a tax on property of corporation, but is

imposed on corporation for privilege of carrying on its business and
exercising corporate franchise granted by state. City of Chicago v. Chicago
By. Co., 245 III. App. 473." (Emphasis supplied).

"A franchise tax is a tax imposed directly on the corporation, and not
on its capital stock, its property, the shares of the stockholders, or the
dividends or profits accruing. Worth v. Petersburg R. R. Co., 89 N. C. 301,
305."

"'Franchise Tax' is tax imposed on corporation for privilege of being

corporation, or of doing business in corporate capacity. Pacific Co. v.
Johnson (Cal.) 298 P. 489, 492.

"A 'franchise tax' is a tax on the privilege of doing business under

corporate organization. State v. Clement Nat. Bank, 78 A. 944, 949, 84 Vt.
167, Ann. Cas. 1912D, 22."

(Words & Phrases, Vol. 17, pp. 510, 511)

Moreover, in accordance with the science of accounting, in so far as

Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 8
 petitioner's business is concerned, these incomes are classified as non-operating or
extraneous incomes and are thusly treated in the profit and loss statement. They
are not added to the gross income arising from the operation of electric light, heat
and power because they are not receipts or earnings from such operation. llcd

To consider them as part of the gross receipts or earnings for franchise tax
purposes would be to make the phrase "gross earnings, obtained thru this
privilege" meaningless. They may be subject to other taxes, such as sales tax in the
case of proceeds of sales of materials and supplies, but certainly not to franchise
tax.

In view of the foregoing, I vote for the modification of the decision

appealed from in the sense that petitioner is liable only for deficiency franchise tax
in the amount of P110,609.46, itemized as follows:
Total gross receipts per audit P3,733,619.69
Less:
Interest from Savings Account P6,126.44
Interest earned by employees
retirement fund P34,219.37
Gains on sales of fixed assets P9,704.30
Interest on balances of
company financed cars 597.60
Proceeds of sales of materials
and supplies 673.63
————
Total 51,221.34
————
Gross receipts subject to franchise tax P3,682,298.35
——————
5% tax due thereon P184,114.92
Less: Amount paid 73,505.46
——————
Amount due P110,609.46
===========
plus the delinquency penalty provided for in Section 259 of the National Internal
Revenue Code, in case of non-payment within 30 days from the date this decision
becomes final. cda

SO ORDERED.

TEOFILO D. REYES, SR.

Presiding Judge

Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 9
Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 10