G.R. No. 165827 ; June 16, 2006
NATIONAL POWER CORPORATION, Petitioner, vs. PROVINCE OF ISABELA, represented by HON. BENJAMIN G. DY, Provincial Governor, Respondent.

FACTS

The Province of Isabela filed a complaint against the National Power Corporation (NPC) for sum of money, seeking payment of unpaid franchise tax for the year 1994 pursuant to the Local Government Code (LGC). Isabela alleged that NPC’s Magat River Hydro-Electric Plant was located within its territorial jurisdiction, a claim NPC had acknowledged by paying the tax for 1992 and 1993. NPC, however, refused the 1994 payment, citing an unresolved boundary dispute with the Province of Ifugao, which intervened, claiming the plant was within its territory. NPC also raised jurisdictional and substantive defenses, arguing the trial court lacked jurisdiction due to P.D. No. 242 (requiring administrative settlement of inter-governmental disputes) and that it was exempt from local taxes under its charter.
The Regional Trial Court ruled in favor of Isabela, ordering NPC to deposit the contested 1994 tax in escrow. The Court of Appeals affirmed, holding NPC liable for the franchise tax. NPC elevated the case to the Supreme Court via a petition for review on certiorari.

ISSUE

The primary issue is whether the NPC is liable to pay the local franchise tax to the Province of Isabela despite the unresolved boundary dispute and its claim of tax exemption under its charter.

RULING

The Supreme Court denied the petition and affirmed the lower courts’ decisions. On the procedural issue, the Court held that P.D. No. 242, which mandates prior administrative settlement of disputes between government entities, is not jurisdictional. Non-compliance is merely a ground for dismissal, which can be waived if not invoked in a timely manner. NPC raised this defense only in its Answer, thereby constituting a waiver.
On the substantive issue of tax liability, the Court ruled that NPC is not exempt from paying the local franchise tax. While Section 13 of its charter (R.A. No. 6395) originally granted tax exemptions, Section 193 of the LGC expressly withdrew such exemptions for government-owned and controlled corporations, save for a few exceptions not applicable here. The franchise tax under Section 137 of the LGC is precisely one of the taxes from which exemption was withdrawn. The Court, citing National Power Corporation v. City of Cabanatuan, emphasized that the LGC empowered local government units to impose certain taxes on national government instrumentalities to foster local autonomy. The unresolved boundary dispute between Isabela and Ifugao does not negate NPC’s liability; it merely concerns which local government unit is entitled to receive the payment. The escrow deposit ordered by the trial court was a proper interim measure pending final resolution of the territorial dispute.