G.R. No. L-16428; April 30, 1963
LEALDA ELECTRIC CO., INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

FACTS

Petitioner Lealda Electric Co., Inc. operates under a franchise originally granted in 1915 by Act No. 2475. The franchise’s Article 8 stipulated that the grantee shall pay quarterly to the provincial treasury, “por sus entradas en bruto tales como se exigen a las demas franquicias y privilegios hoy existentes” (on its gross earnings such as are required of other existing franchises and privileges). From 1915, the original grantee and subsequent successors, including petitioner, paid a franchise tax of 2% on gross receipts, aligning with the rate imposed on other franchises at that time. This continued until October 1, 1946, when Republic Act No. 39 amended Section 259 of the National Internal Revenue Code, increasing the general franchise tax rate to 5%.
Upon the effectivity of R.A. No. 39 , petitioner was required to pay and did pay the increased 5% franchise tax. Subsequently, petitioner filed claims for refund, contending that its charter fixed its liability at only 2% of gross earnings, and that this constituted an inviolable contract. The Commissioner of Internal Revenue denied the claims, and the Court of Tax Appeals dismissed petitioner’s petition for review, holding it liable for the 5% tax. Petitioner appealed to the Supreme Court.

ISSUE

Whether petitioner is liable to pay a franchise tax at the rate of 5% of its gross earnings under R.A. No. 39 , or only at the rate of 2% as allegedly fixed by its franchise.

RULING

The Supreme Court affirmed the decision of the Court of Tax Appeals, ruling that petitioner is subject to the 5% franchise tax. The legal logic is clear. Petitioner’s franchise (Act No. 2475) did not specify a fixed rate of 2%. Instead, it expressly linked the tax obligation to the rate “exigen a las demas franquicias” (required of other franchises). This was a referential or incorporating clause, making the tax rate variable and dependent on the general law applicable to other franchise holders. At the time of the franchise’s grant, the general rate was 2% under existing laws. However, when the general law was amended by R.A. No. 39 to impose a 5% rate on franchise taxes, petitioner’s obligation, by the very terms of its charter, automatically adjusted to that new general rate.
The Court rejected petitioner’s argument that its franchise constituted a private contract immune from legislative alteration. First, Article 11 of Act No. 2475 contained an express reservation that the franchise was subject to alteration or repeal by Congress. Second, the franchises cited by petitioner (e.g., Visayan Electric, Manila Railroad) contained specific “in lieu of all taxes” clauses, which created contractual tax exemptions. Petitioner’s charter contained no such exemption clause. Tax exemptions are never presumed, and the absence of an express exemption meant petitioner remained subject to changes in the general tax law. Therefore, the increase to 5% by R.A. No. 39 lawfully applied to petitioner.