Visayan Electric Co. v. Commissioner of Internal Revenue
REITERATIONFacts
The Antecedents: Petitioner, Visayan Electric Company, Inc. (VECO), holder of a legislative franchise (Act No. 2701) to operate an electric light, heat, and power system in Dumaguete City, realized gross receipts exceeding two million pesos from April 1, 1952, to December 31, 1959. VECO paid a 2% franchise tax based on its franchise instead of the 5% franchise tax prescribed in Section 259 of the National Internal Revenue Code (NIRC), as amended by Republic Act 418. Procedural History: On December 14, 1960, the Commissioner of Internal Revenue assessed VECO for deficiency franchise tax and surcharge, totaling P78,670.55. VECO's request for reconsideration was denied, leading to an appeal to the Court of Tax Appeals (CTA). The CTA rendered a decision sentencing VECO to pay the assessed amount, which was later affirmed upon denial of VECO's motion for reconsideration. The Petition: VECO appealed to the Supreme Court, contending that the CTA erred in holding it liable for the 5% franchise tax under Section 259 of the NIRC instead of the 2% tax in its franchise, arguing its franchise was different from those in prior cases. VECO also argued its franchise was a contract not amended by Section 259 of the NIRC and that the assessment for deficiency taxes was barred by prescription.
Issue(s)
Whether the 5% franchise tax under Section 259 of the NIRC applies instead of the 2% tax provided in petitioner's franchise. Whether petitioner's franchise, being in the nature of a contract, was amended by Section 259 of the NIRC. Whether the assessment for deficiency taxes, with penalties, was barred by prescription.
Ruling
The Supreme Court affirmed the decision of the Court of Tax Appeals, holding petitioner liable for the deficiency franchise tax and surcharge. The Court ruled that the absence of an "in lieu of all taxes" clause in VECO's franchise makes it subject to the higher franchise tax rate prescribed by the NIRC. The Court also held that the defense of prescription was waived by VECO's failure to raise it seasonably.
Ratio Decidendi
On the applicability of Section 259 of the NIRC: The Court reiterated its rulings in Hoa Hin Co., Inc. and Lealda Electric Co., Inc., emphasizing that the franchises in those cases, similar to VECO's franchise (Act No. 2701), did not contain a provision stating that the franchise tax paid was "in lieu of all taxes of every name and nature." The absence of such an "in lieu of all taxes" clause is crucial because it means the franchise tax is not exclusive, and the grantee remains subject to other applicable taxes, including the higher franchise tax rate prescribed by the NIRC. Section 259 of the NIRC provides that whichever rate is higher, between the one in the special charter and the one in the NIRC, shall apply. Since Section 259 imposes a 5% rate, which is higher than the 2% rate in VECO's franchise, the 5% rate is applicable. The Court distinguished VECO's franchise from those in cases like Manila Railroad Company v. Rafferty, where the franchises explicitly contained an "in lieu of all taxes" clause, thereby exempting the grantees from other taxes. On the amendment of the franchise by Section 259 of the NIRC: The Court found VECO's contention that its franchise, as a contract, could not be amended by Section 259 of the NIRC to be without merit. The Court pointed out that Article 11 of Act No. 2701, VECO's franchise, expressly allows for amendments or even repeal. Petitioner and its predecessor were aware of and accepted this condition, thus they have no valid ground to complain about the application of Section 259 of the NIRC, which amended the tax provisions of existing franchises by imposing a higher rate where no "in lieu of all taxes" clause existed. On the defense of prescription: The Court held that VECO's claim that the assessment was barred by prescription was not a valid defense because it was not raised seasonably. The settled law in the jurisdiction is that prescription as a defense is deemed waived if not raised at the earliest opportunity, either in the administrative agency (Bureau of Internal Revenue) or in the judicial tribunal (Court of Tax Appeals). VECO failed to interpose this defense before the BIR, the CTA, or even in its petition for review to the Supreme Court. The Court also dismissed VECO's argument that the prayer for general relief in its petition for review somehow preserved the defense of prescription, reiterating that such a prayer only allows for relief justified by the pleadings, not for introducing defenses not properly pleaded.
Main Doctrine
A franchise tax rate stipulated in a legislative franchise will yield to a higher rate prescribed in the National Internal Revenue Code (NIRC) if the franchise does not contain an 'in lieu of all taxes' clause. The defense of prescription is deemed waived if not raised seasonably before the Bureau of Internal Revenue or the Court of Tax Appeals.