The Supreme Court (SC) has rebuked the National Power Corp. (NPC) for assuming the P1.5 billion tax obligations of its partner in its Build-Operate-Transfer (BOT) contract and later on claiming tax exemption as a government-owned and controlled corporation.

In a decision written by Justice Arturo D. Brion, the SC dismissed NPC’s petition seeking to stop the town government of Pagbilao, Quezon from collecting P1.5 billion in taxes for 1997 to 2000 taxable years from Mirant, an independent power company.

“We find it essentially wrong to allow the NPC to assume in its BOT contracts the liability of the other contracting party for taxes that the government can impose on that other party, and at the same time allow NPC to turn around and say that no taxes should be collected because the NPC is tax-exempt as a government-owned and controlled corporation,” the SC said.

In 1991, NPC and Mirant signed an Energy Conversion Agreement (ECA) which called for the latter to build and finance a coal-fired thermal power plant to convert fuel into electricity on the property owned by the former in Pagbilao town.

Also, the ECA provided that the NPC would supply the fuel and use the electricity generated for the needs of its consumers. After 25 years, Mirant would turn over to NPC all the machineries and equipment at no cost.

But the ECA provided that the NPC would shoulder all the taxes the government may impose on Mirant.

In 2006, the Court of Tax Appeals (CTA) dismissed the petition of NPC to reverse the ruling of the Local Board of Assessment Appeals (LBAA) denying the power firm’s move to exempt it from the payment of taxes on the machineries and equipment put up by Mirant.

The NPC elevated the issue before the SC. In affirming the CTA, the SC said: “We cannot be a party to this kind of arrangement; for us to allow it without congressional authority is to intrude into the realm of policy to debase the tax system that the legislature established.”

According to the SC, the NPC is not the proper party to question the demand for tax payment issued by the town government of Pagbilao despite the power firm’s insistence that it has beneficial ownership of the power plant and its machineries and equipment.

It pointed out that the NPC is neither the owner nor the possessor of the plant and its machineries and equipment because “its ownership of the plant will only happen after the lapse of the 25-year period.”

It stressed that only Mirant as the contractual obligor, not the local government unit, can enforce the tax liability that the NPC assumed under the ECA.

“Only the parties to the ECA agreement can exact and demand the enforcement of the rights and obligations it established -- only Mirant can demand compliance from the NPC for the payment of the real property tax the NPC assumed to pay. The local government units (the municipality of Pagbilao and the Province of Quezon) as third parties to the ECA cannot demand payment from the NPC on the basis of the ECA alone,” the SC said.

At the same time, the SC said that the NPC cannot claim tax exemptions under Section 234 (c) of the Local Government Code which provides tax exemption on all machineries and equipment that are exclusively used by government-owned and controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electricity.

Under the ECA, it is Mirant not the NPC that directly operates the machineries and equipment used in the Pagbilao power plant.

Senior Justice Leonardo A. Quisumbing and Justices Conchita Carpio Morales, Minita V. Chico Nazario, and Teresta J. Leonardo de Castro concurred in the decision.