G.R. No. 171470; January 30, 2009
National Power Corporation, Petitioner, vs. Central Board of Assessment Appeals (CBAA), Local Board of Assessment Appeals (LBAA) of La Union, Provincial Treasurer, La Union and Municipal Assessor of Bauang, La Union, Respondents.

FACTS

On January 11, 1993, First Private Power Corporation (FPPC) entered into a Build-Operate-Transfer (BOT) agreement with the National Power Corporation (NAPOCOR) for the construction of the 215 Megawatt Bauang Diesel Power Plant in Bauang, La Union. The agreement provided for the creation of Bauang Private Power Corporation (BPPC) to own, manage, and operate the power plant. Under the BOT agreement, BPPC would convert NAPOCOR’s supplied diesel fuel into electricity for a fee and deliver the electricity to NAPOCOR. The agreement stated that until the transfer date, the contractor (BPPC) shall own the power station and all fixtures, fittings, machinery, and equipment, and shall operate and manage the station. NAPOCOR would supply the fuel and take all electricity generated, paying fees to the contractor. The Municipal Assessor of Bauang initially issued tax-exempt declarations for BPPC’s machineries but later, upon review, issued revised tax declarations subjecting the properties to real property tax and sent a Notice of Assessment and Tax Bill to BPPC. NAPOCOR filed a petition with the Local Board of Assessment Appeals (LBAA) seeking to declare the machineries exempt from real property tax under Section 234(c) of the Local Government Code, which exempts machineries and equipment actually, directly, and exclusively used by government-owned or -controlled corporations engaged in the generation and transmission of electric power. The LBAA denied the petition, ruling that NAPOCOR did not own or actually and directly use the machineries; it was BPPC, a private entity, that owned and operated them. This ruling was affirmed by the Central Board of Assessment Appeals (CBAA) and later by the Court of Tax Appeals (CTA).

ISSUE

Whether the machineries and equipment owned and operated by the private corporation (BPPC) under a BOT agreement with the tax-exempt government corporation (NAPOCOR) are exempt from real property tax under Section 234(c) of the Local Government Code.

RULING

No. The Supreme Court denied the petition and affirmed the decisions of the lower bodies. The tax exemption under Section 234(c) of the Local Government Code requires that the machineries and equipment be actually, directly, and exclusively used by the government-owned or -controlled corporation. In this case, the BOT agreement clearly stipulated that the contractor (BPPC) owned, managed, operated, and maintained the power station and its equipment during the cooperation period. BPPC, a private entity, used the machineries to generate electricity for sale to NAPOCOR. Therefore, BPPC was the actual, direct, and exclusive user of the properties. NAPOCOR’s role was that of a buyer of the generated electricity, not the operator or user of the machineries. The tax exemption is personal to NAPOCOR and cannot be extended to its private contractor. The contractual assumption by NAPOCOR of tax liability does not alter the nature of use for tax exemption purposes, as tax liability is determined by law, not by private agreement. Consequently, the machineries and equipment are subject to real property tax.