“in lieu of all taxes” clause partakes of the nature of a tax exclusion and

G.R. No. 155491. September 16, 2008.* not a tax exemption. A tax exemption means that the taxpayer does not pay
SMART COMMUNICATIONS, INC., petitioner, vs. THE CITY any tax at all. Smart pays VAT, income tax, and real property tax. Thus,
OF DAVAO, represented herein by its Mayor HON. RODRIGO R. what it enjoys is more accurately a tax exclusion. However, as previously
DUTERTE, and the SANGGUNIANG PANLUNGSOD OF held by the Court, both in their nature and effect, there is no essential
DAVAO CITY, respondents. difference between a tax exemption and a tax exclusion. An exemption is
an immunity or a privilege; it is the freedom from a charge or burden to
Taxation; Public Utilities; Franchises; Republic Act No. 7294; which others are subjected. An exclusion, on the other hand, is the removal
Statutory Construction; The grant of tax exemption by R.A. No. 7294 is not of otherwise taxable items from the reach of taxation, e.g., exclusions from
to be interpreted from a consideration of a single portion or of isolated gross income and allowable deductions. An exclusion is, thus, also an
words or clauses, but from a general view of the act as a whole.—The “in immunity or privilege which frees a taxpayer from a charge to which
lieu of all taxes” clause in Smart’s franchise is put in issue before the others are subjected. Consequently, the rule that a tax exemption should be
Court. In order to ascertain its meaning, consistent with fundamentals of applied in strictissimi juris against the240
statutory construction, all the words in the statute must be considered. The
grant of tax exemption by R.A. No. 7294 is not to be interpreted from a
24 SUPREME COURT REPORTS
consideration of a single portion or of isolated words or clauses, but from a
general view of the act as 0 ANNOTATED
_______________
Smart Communications, Inc. vs. The City of Davao
* THIRD DIVISION. taxpayer and liberally in favor of the government applies equally to
tax exclusions.
238 Same; Same; Same; Public Telecommunications Policy Act (R.A.
No. 7925); Most Favored Treatment Clause or Equality Clause; Statutory
23 SUPREME COURT REPORTS Construction; The term “exemption” in Section 23 of R.A. No. 7925 does
not mean tax exemption—it refers to exemption from certain regulations
8 ANNOTATED and requirements imposed by the National Telecommunications
Smart Communications, Inc. vs. The City of Davao Commission.—We find no reason to disturb the previous pronouncements
a whole. Every part of the statute must be construed with reference of this Court regarding the interpretation of Section 23 of R.A. No. 7925.
to the context. As aptly explained in the en banc  decision of this Court in Philippine
Same; Same; Same; Same; Same; Words and Phrases; The Long Distance Telephone Company, Inc. v. City of Davao, 363 SCRA 522
uncertainty in the “in lieu of all taxes” clause in R.A. No. 7294 on whether (2001), and recently in Digital Telecommunications Philippines, Inc.
Smart is exempted from both local and national franchise tax must be (Digitel) v. Province of Pangasinan, 516 SCRA 541 (2007), Congress, in
construed strictly against Smart which claims the exemption—in the approving Section 23 of R.A. No. 7925, did not intend it to operate as a
instant case, the “in lieu of all taxes” clause applies only to national blanket tax exemption to all telecommunications entities. The language of
internal revenue taxes and not to local taxes.—The uncertainty in the “in Section 23 of R.A. No. 7925 and the proceedings of both Houses of
lieu of all taxes” clause in R.A. No. 7294 on whether Smart is exempted Congress are bereft of anything that would signify the grant of tax
from both local and national franchise tax is construed strictly against exemptions to all telecommunications entities, including those whose
Smart who is claiming the exemption. Smart has the burden of proving exemptions had been withdrawn by R.A. No. 7160. The term “exemption”
that, aside from the imposed 3% franchise tax, Congress intended it to be in Section 23 of R.A. No. 7925 does not mean tax exemption. The term
exempted from all kinds of franchise taxes—whether local or national. refers to exemption from certain regulations and requirements imposed by
However, Smart failed in this regard. Tax exemptions are never presumed the National Telecommunications Commission.
and are strictly construed against the taxpayer and liberally in favor of the Same; Same; Same; Contract Clause; Not only are existing laws
taxing authority. They can only be given force when the grant is clear and read into contracts in order to fix obligations as between parties, but the
categorical. The surrender of the power to tax, when claimed, must be reservation of essential attributes of sovereign power is also read into
clearly shown by a language that will admit of no reasonable construction contracts as a basic postulate of the legal order—the Contract Clause has
consistent with the reservation of the power. If the intention of the never been thought as a limitation on the exercise of the State’s power of
legislature is open to doubt, then the intention of the legislature must be taxation save only where a tax exemption has been granted for a valid
resolved in favor of the State. In this case, the doubt must be resolved in consideration.—Smart’s franchise was granted with the express condition
favor of the City of Davao. The “in lieu of all taxes” clause applies only to that it is subject to amendment, alteration, or repeal. As held in Tolentino
national internal revenue taxes and not to local taxes. v. Secretary of Finance, 235 SCRA 630 (1994): It is enough to say that the
Same; Same; Same; Same; Same; Value-Added Tax; It should be parties to a contract cannot, through the exercise of prophetic discernment,
noted that the “in lieu of all taxes” clause in R.A. No. 7294 has become fetter the exercise of the taxing power of the State. For not only are
functus officio with the abolition of the franchise tax on existing laws read into contracts in order to fix obligations as between
telecommunications companies—the “in lieu of all taxes” clause in R.A. parties, but the reservation of essential attributes of sovereign power is also
No. 7294 was rendered ineffective by the advent of the Value-Added Tax read into contracts as a basic postulate of the legal order. The policy of
(VAT) Law.—It should be noted that the “in lieu of all taxes” clause in protecting contracts against impairment presupposes the maintenance of a
R.A. No. 7294 has become functus officio with the abolition of the government which retains adequate authority to241
franchise tax on telecommunications companies. As admitted by Smart in
its pleadings, it is no longer paying the 3% franchise tax mandated in its VOL. 565, SEPTEMBER 16, 2008 241
franchise. Currently, Smart along with other telecommunications
companies pays the uniform 10% value-added tax. The VAT on sale of Smart Communications, Inc. vs. The City of Davao
services of telephone franchise grantees is equivalent to 10% of gross secure the peace and good order of society. In truth, the Contract
receipts derived from the sale or exchange of services. R.A. No. 7716, as Clause has never been thought as a limitation on the exercise of the State’s
amended by the Expanded Value239 power of taxation save only where a tax exemption has been granted for a
valid consideration. x x x.
VOL. 565, SEPTEMBER 16, 2008 239 PETITION for review on certiorari of the decision and order of the
Smart Communications, Inc. vs. The City of Davao Regional Trial Court of Davao City.
Added Tax Law (R.A. No. 8241), the pertinent portion of which is    The facts are stated in the opinion of the Court.
hereunder quoted, amended Section 9 of R.A. No. 7294: x x x R.A. No.   Estelito P. Mendoza and Lorenzo G. Timbol for petitioner.
7716, specifically Section 20 thereof, expressly repealed the provisions of   Office of the City Legal Officer for respondents.
all special laws relative to the rate of franchise taxes. It also repealed,
amended, or modified all other laws, orders, issuances, rules and
NACHURA, J.:
regulations, or parts thereof which are inconsistent with it. In effect, the “in
lieu of all taxes” clause in R.A. No. 7294 was rendered ineffective by the
advent of the VAT Law. This is a petition for review on certiorari under Rule 45 of the
Same; Same; Same; Same; Same; The findings of the Bureau of Rules of Court filed by Smart Communications, Inc. (Smart)
Local Government Finance (BLGF) are not conclusive on the courts.—In against the City of Davao, represented by its Mayor, Hon. Rodrigo
support of its argument that the “in lieu of all taxes” clause is to be R. Duterte, and the Sangguniang Panlungsod of Davao City, to
construed as an exemption from local franchise taxes, Smart submits the annul the Decision  dated July 19, 2002 of the Regional Trial
1

opinion of the Department of Finance, through the BLGF, dated August

13, 1998 and February 24, 1998, regarding the franchises of Smart and
Court (RTC) and its Order  dated September 26, 2002 in Sp. Civil
2

Globe, respectively. Smart presents the same arguments as the Philippine Case No. 28,976-2002.
Long Distance Telephone Company in the previous cases already decided
by this Court. As previously held by the Court, the findings of the BLGF The Facts
are not conclusive on the courts.
Same; Same; Same; Words and Phrases; Tax Exclusion and Tax
Exemption; Both in their nature and effect, there is no essential difference
On February 18, 2002, Smart filed a special civil action for
between a tax exemption and a tax exclusion—an exclusion is also an declaratory relief  under Rule 63 of the Rules of Court, for the
3

immunity or privilege which frees a taxpayer from a charge to which ascertainment of its rights and obligations under the Tax Code of
others are subjected.—Smart gives another perspective of the “in lieu of the City of Davao,  particularly Section 1, Article 10 thereof, the
4

all taxes” clause in Section 9 of R.A. No. 7294 in order to avoid the pertinent portion of which reads:
payment of local franchise tax. It says that, viewed from another angle, the _______________
 1 Penned by Judge Renato A. Fuentes; Rollo, pp. 101-108.
2 Id., at pp. 121-123. 244 SUPREME COURT REPORTS ANNOTATED
3 Records, pp. 2-11.
4 City Ordinance No. 519, series of 1992, amending Ordinance No. 230, series Smart Communications, Inc. vs. The City of Davao
of 1991, otherwise known as the Tax Code of the City of Davao. CLAUSE, AND WHICH IS A SPECIAL LAW ENACTED
SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, NO
242 FRANCHISE TAX MAY BE IMPOSED ON PETITIONER BY
242 SUPREME COURT REPORTS ANNOTATED RESPONDENT CITY.
[b.] THE LOWER COURT ERRED IN HOLDING THAT
Smart Communications, Inc. vs. The City of Davao PETITIONER’S FRANCHISE IS A GENERAL LAW AND DID NOT
“Notwithstanding any exemption granted by any law or other special REPEAL RELEVANT PROVISIONS REGARDING FRANCHISE TAX
law, there is hereby imposed a tax on businesses enjoying a franchise, at a OF THE LOCAL GOVERNMENT CODE, WHICH ACCORDING TO
rate of seventy-five percent (75%) of one percent (1%) of the gross annual THE COURT IS A SPECIAL LAW.
receipts for the preceding calendar year based on the income or receipts [c.] THE LOWER COURT ERRED IN NOT HOLDING THAT
realized within the territorial jurisdiction of Davao City.” SECTION 137 OF THE LOCAL GOVERNMENT CODE, WHICH, IN
RELATION TO SECTION 151 THEREOF, ALLOWS RESPONDENT
Smart contends that its telecenter in Davao City is exempt CITY TO IMPOSE THE FRANCHISE TAX, AND SECTION 193 OF
from payment of franchise tax to the City, on the following THE CODE, WHICH PROVIDES FOR WITHDRAWAL OF TAX
grounds: (a) the issuance of its franchise under Republic Act EXEMPTION PRIVILEGES, ARE NOT APPLICABLE TO THIS CASE.
[d.] THE LOWER COURT ERRED IN NOT HOLDING THAT
(R.A.) No. 7294  subsequent to R.A. No. 7160 shows the clear
5
SECTIONS 137 AND 193 OF THE LOCAL GOVERNMENT CODE
legislative intent to exempt it from the provisions of R.A. REFER ONLY TO EXEMPTIONS ALREADY EXISTING AT THE
7160;  (b) Section 137 of R.A. No. 7160 can only apply to
6
TIME OF ITS ENACTMENT BUT NOT TO FUTURE EXEMPTIONS.
exemptions already existing at the time of its effectivity and not to [e.] THE LOWER COURT ERRED IN APPLYING THE RULE
future exemptions; (c) the power of the City of Davao to impose a OF STATUTORY CONSTRUCTION THAT TAX EXEMPTIONS ARE
franchise tax is subject to statutory limitations such as the “in lieu CONSTRUED STRICTLY AGAINST THE TAXPAYER.
of all taxes” clause found in Section 9 of R.A. No. 7294; and (d) [f.] THE LOWER COURT ERRED IN NOT HOLDING THAT
the imposition of franchise tax by the City of Davao would PETITIONER’S FRANCHISE (REPUBLIC ACT NO. 7294) HAS BEEN
AMENDED AND EXPANDED BY SECTION 23 OF REPUBLIC ACT
amount to a violation of the constitutional provision against NO. 7925, “THE PUBLIC TELECOMMUNICATIONS POLICY ACT,”
impairment of contracts. 7
TAKING INTO ACCOUNT THE FRANCHISE OF GLOBE TELECOM,
On March 2, 2002, respondents filed their Answer  in which 8
INC. (GLOBE) (REPUBLIC ACT NO. 7229), WHICH ARE SPECIAL
they contested the tax exemption claimed by Smart. They invoked PROVISIONS AND WERE ENACTED SUBSEQUENT TO THE
the power granted by the Constitution to local government units to LOCAL GOVERNMENT CODE, THEREBY PROVIDING AN
create their own sources of revenue. 9 ADDITIONAL GROUND WHY NO FRANCHISE TAX MAY BE
On May 17, 2002, a pre-trial conference was held. Inasmuch IMPOSED ON PETITIONER BY RESPONDENT CITY.
as only legal issues were involved in the case, the RTC [g.] THE LOWER COURT ERRED IN DISREGARDING THE
_______________ RULING OF THE DEPARTMENT OF FINANCE, THROUGH ITS
BUREAU OF LOCAL GOVERNMENT FINANCE, THAT
PETITIONER IS EXEMPT FROM THE PAYMENT OF THE FRAN-245
5 An act granting Smart Information Technologies, Inc. (Smart) a franchise to
establish, install, maintain, lease and operate integrated
telecommunications/computer/electronic services, and stations throughout the VOL. 565, SEPTEMBER 16, 2008 245
Philippines for public domestic and international telecommunications, and for other
purposes. Smart Communications, Inc. vs. The City of Davao
6 Smart’s franchise lapsed into law on March 27, 1992 without the President’s CHISE TAX IMPOSABLE BY LOCAL GOVERNMENT UNITS
signature in accordance with Article VI, Section 27(1) of the Constitution.
UNDER THE LOCAL GOVERNMENT CODE.
7 Records, pp. 7-8.
8 Id., at pp. 21-26. [h.] THE LOWER COURT ERRED IN NOT HOLDING THAT
9 Constitution, Art. X, Sec. 5. THE IMPOSITION OF THE LOCAL FRANCHISE TAX ON
PETITIONER WOULD VIOLATE THE CONSTITUTIONAL
243 PROHIBITION AGAINST IMPAIRMENT OF CONTRACTS.
[i.] THE LOWER COURT ERRED IN DENYING THE PETITION
VOL. 565, SEPTEMBER 16, 2008 243 BELOW. 17

Smart Communications, Inc. vs. The City of Davao

issued an order requiring the parties to submit their respective The Issue
memoranda and, thereafter, the case would be deemed submitted
for resolution. 10
In sum, the pivotal issue in this case is whether Smart is liable
On July 19, 2002, the RTC rendered its Decision  denying the 11
to pay the franchise tax imposed by the City of Davao.
petition. The trial court noted that the ambiguity of the “in lieu of
all taxes” provision in R.A. No. 7294, on whether it covers both The Ruling of the Court
national and local taxes, must be resolved against the
taxpayer.  The RTC ratiocinated that tax exemptions are construed
12

We rule in the affirmative.

in strictissimi juris against the taxpayer and liberally in favor of
I. Prospective Effect of R.A. No. 7160
the taxing authority and, thus, those who assert a tax exemption
On March 27, 1992, Smart’s legislative franchise (R.A. No.
must justify it with words too plain to be mistaken and too
7294) took effect. Section 9 thereof, quoted hereunder, is at the
categorical not to be misinterpreted.  On the issue of violation of
13

heart of the present controversy:

the non-impairment clause of the Constitution, the trial court “Section 9. Tax provisions.—The grantee, its successors or assigns
cited Mactan Cebu International Airport Authority v. shall be liable to pay the same taxes on their real estate buildings and
Marcos,  and declared that the city’s power to tax is based not
14
personal property, exclusive of’ this franchise, as other persons or
merely on a valid delegation of legislative power but on the direct corporations which are now or hereafter may be required by law to pay. In
authority granted to it by the fundamental law. It added that while addition thereto, the grantee, its successors or assigns shall pay a
such power may be subject to restrictions or conditions imposed franchise tax equivalent to three percent (3%) of all gross receipts of
by Congress, any such legislated limitation must be consistent the business transacted under this franchise by the grantee, its
with the basic policy of local autonomy. 15 successors or assigns and the said percentage shall be in lieu of all
taxes on this franchise or earnings thereof: Provided, That the grantee,
Smart filed a motion for reconsideration which was denied by its successors or assigns shall continue to be liable for income taxes
the trial court in an Order  dated September 26, 2002.
16
payable under Title II of the National Internal Revenue Code pursuant to
Thus, the instant case. Section 2 of Executive Order No. 72 unless the latter enact-
Smart assigns the following errors: _______________
[a.] THE LOWER COURT ERRED IN NOT HOLDING THAT
UNDER PETITIONER’S FRANCHISE (REPUBLIC ACT NO. 7294), 17 Id., at pp. 24-26.
WHICH CONTAINS THE “IN LIEU OF ALL TAXES”
_______________ 246

10 Records, p. 62. 246 SUPREME COURT REPORTS ANNOTATED

11 Supra note 1.
12 Id., at p. 104.
13 Id., at p. 106.
Smart Communications, Inc. vs. The City of Davao
14 G.R. No. 120082, September 11, 1996, 261 SCRA 667. ment is amended or repealed, in which case the amendment or repeal
15 Rollo, p. 107. shall be applicable thereto.
16 Id.,  at pp. 121-123. 
The grantee shall file the return with and pay the tax due thereon to
244 the Commissioner of Internal Revenue or his duly authorized
representative in accordance with the National Internal Revenue Code and
the return shall be subject to audit by the Bureau of Internal Revenue.” three percent (3%) of all gross receipts of the business transacted
(Emphasis supplied.) under its franchise. But whether the franchise tax exemption
would include exemption from exactions by both the local and the
Smart alleges that the “in lieu of all taxes” clause in Section 9 of
national government is not unequivocal.
its franchise exempts it from all taxes, both local and national,
The uncertainty in the “in lieu of all taxes” clause in R.A. No.
except the national franchise tax (now VAT), income tax, and real
7294 on whether Smart is exempted from both local and national
property tax. 18
franchise tax is construed strictly against Smart who is claiming
On January 1, 1992, two months ahead of Smart’s franchise,
the exemption. Smart has the burden of proving that, aside from
the Local Government Code (R.A. No. 7160) took effect. Section
the imposed 3% franchise tax, Congress intended it to be
137, in relation to Section 151 of R.A. No. 7160, allowed the
exempted from all kinds of franchise taxes—whether local or
imposition of franchise tax by the local government units; while
national. However, Smart failed in this regard.
Section 193 thereof provided for the withdrawal of tax exemption _______________
privileges granted prior to the issuance of R.A. No. 7160 except
for those expressly mentioned therein, viz.: 19 Aquino v. Quezon City, G.R. No. 137534, August 3, 2006, 497 SCRA 497,
“Section 137. Franchise Tax.—Notwithstanding any exemption 507.
granted by any law or other special law, the province may impose a 20 Rollo, p. 258.
tax on businesses enjoying a franchise, at the rate not exceeding fifty 21 Id. 
percent (50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized, 249
within its territorial jurisdiction. VOL. 565, SEPTEMBER 16, 2008 249
In the case of a newly started business, the tax shall not exceed one-
twentieth (1/20) of one percent (1%) of the capital investment. In the Smart Communications, Inc. vs. The City of Davao
succeeding calendar year, regardless of when the business started to Tax exemptions are never presumed and are strictly construed
operate, the tax shall be based on the gross receipts for the preceding against the taxpayer and liberally in favor of the taxing
calendar year, or any fraction thereon, as provided herein. authority.  They can only be given force when the grant is clear
22

Section 151. Scope of Taxing Powers.—Except as otherwise and categorical.  The surrender of the power to tax, when claimed,
23

provided in this Code, the city may levy the taxes, fees, and charges which
must be clearly shown by a language that will admit of no
the province or municipality may impose: Provided, however,
_______________ reasonable construction consistent with the reservation of the
power. If the intention of the legislature is open to doubt, then the
18 Id.,  at p. 258. intention of the legislature must be resolved in favor of the State. 24

In this case, the doubt must be resolved in favor of the City of

247
Davao. The “in lieu of all taxes” clause applies only to national
internal revenue taxes and not to local taxes. As appropriately
VOL. 565, SEPTEMBER 16, 2008 247 pointed out in the separate opinion of Justice Antonio T. Carpio in
Smart Communications, Inc. vs. The City of Davao a similar case  involving a demand for exemption from local
25

That the taxes, fees and charges levied and collected by highly urbanized franchise taxes:
and independent component cities shall accrue to them and distributed in “[T]he “in lieu of all taxes” clause in Smart’s franchise refers only to taxes,
accordance with the provisions of this Code. other than income tax, imposed under the National Internal Revenue Code.
The rates of taxes that the city may levy may exceed the The “in lieu of all taxes” clause does not apply to local taxes. The proviso
maximum rates allowed for the province or municipality by not more in the first paragraph of Section 9 of Smart’s franchise states that the
than fifty percent (50%) except the rates of professional and grantee shall “continue to be liable for income taxes payable under Title II
amusement taxes. of the National Internal Revenue Code.” Also, the second paragraph of
Section 193. Withdrawal of Tax Exemption Privileges.—Unless Section 9 speaks of tax returns filed and taxes paid to the “Commissioner
otherwise provided in this Code, tax exemptions or incentives granted to, of Internal Revenue or his duly authorized representative in accordance
or presently enjoyed by all persons, whether natural or juridical, including with the National Internal Revenue Code.” Moreover, the same paragraph
government-owned or controlled corporations, except local water districts, declares that the tax returns “shall be subject to audit by the Bureau of
cooperatives duly registered under RA No. 6938, non-stock and non-profit Internal Revenue.” Nothing is mentioned in Section 9 about local taxes.
hospitals and educational institutions, are hereby withdrawn upon the The clear intent is for the “in lieu of all taxes” clause to apply
effectivity of this Code.” (Emphasis supplied.) _______________

Smart argues that it is not covered by Section 137, in relation 22 Commissioner of Internal Revenue v. Visayan Electric Company, 132 Phil. 203, 215; 23
SCRA 715, 727 (1968).
to Section 151 of R.A. No. 7160, because its franchise was granted 23 Commissioner of Internal Revenue v. Rio Tuba Nickel Mining Corporation,  G.R. Nos.
after the effectivity of the said law. We agree with Smart’s 83583-84, September 30, 1991, 202 SCRA 137.
24 Philippine Long Distance Telephone Company, Inc. v. City of Davao, 415 Phil. 764, 775;
contention on this matter. The withdrawal of tax exemptions or 363 SCRA 522, 529 (2001).
incentives provided in R.A. No. 7160 can only affect those 25 Philippine Long Distance Telephone Company, Inc. v. City of Davao, 447 Phil. 571, 594;
399 SCRA 442, 465 (2003).
franchises granted prior to the effectivity of the law. The intention
of the legislature to remove all tax exemptions or incentives 250
granted prior to the said law is very evident in the language of
Section 193 of R.A. No. 7160. No interpretation is necessary. 250 SUPREME COURT REPORTS ANNOTATED
II. The “in lieu of all taxes” Clause in R.A. No. 7294
The “in lieu of all taxes” clause in Smart’s franchise is put in issue Smart Communications, Inc. vs. The City of Davao
only to taxes under the National Internal Revenue Code and not to local
before the Court. In order to ascertain its meaning, consistent with
taxes. Even with respect to national internal revenue taxes, the “in lieu of
fundamentals of statutory construction, all the words in the statute all taxes” clause does not apply to income tax.
must be considered. The grant of tax exemption by R.A. No. 7294 If Congress intended the “in lieu of all taxes” clause in Smart’s
is not to be interpreted from a consideration of a single portion or franchise to also apply to local taxes, Congress would have expressly
of isolated words or clauses, but from a general view of the act as mentioned the exemption from municipal and provincial taxes. Congress
a whole. Every248 could have used the language in Section 9(b) of Clavecilla’s old franchise,
as follows:
248 SUPREME COURT REPORTS ANNOTATED x x x in lieu of any and all taxes of any kind, nature or description
Smart Communications, Inc. vs. The City of Davao levied, established or collected by any authority
whatsoever, municipal, provincial or national, from which the
part of the statute must be construed with reference to the context. 19

grantee is hereby expressly exempted, x x x. (Emphasis

Smart is of the view that the only taxes it may be made to bear supplied).
under its franchise are the national franchise tax (now VAT), However, Congress did not expressly exempt Smart from local taxes.
income tax, and real property tax.  It claims exemption from the
20
Congress used the “in lieu of all taxes” clause only in reference to national
local franchise tax because the “in lieu of taxes” clause in its internal revenue taxes. The only interpretation, under the rule on strict
franchise does not distinguish between national and local taxes. 21 construction of tax exemptions, is that the “in lieu of all taxes” clause in
We pay heed that R.A. No. 7294 is not definite in granting Smart’s franchise refers only to national and not to local taxes.”
exemption to Smart from local taxation. Section 9 of R.A. No.
It should be noted that the “in lieu of all taxes” clause in R.A.
7294 imposes on Smart a franchise tax equivalent to three percent
No. 7294 has become functus officio with the abolition of the
(3%) of all gross receipts of the business transacted under the
franchise tax on telecommunications companies.  As admitted by 26

franchise and the said percentage shall be in lieu of all taxes on the
Smart in its pleadings, it is no longer paying the 3% franchise tax
franchise or earnings thereof. R.A. No 7294 does not expressly
mandated in its franchise. Currently, Smart along with other
provide what kind of taxes Smart is exempted from. It is not clear
telecommunications companies pays the uniform 10% value-added
whether the “in lieu of all taxes” provision in the franchise of
tax. 27

Smart would include exemption from local or national taxation.

The VAT on sale of services of telephone franchise grantees is
What is clear is that Smart shall pay franchise tax equivalent to
equivalent to 10% of gross receipts derived from the sale or
exchange of services.  R.A. No. 7716, as amended by
28
nance, through the BLGF, dated August 13, 1998 and February 24,
the Expanded Value Added Tax Law (R.A. No. 8241), the 1998, regarding the franchises of Smart and Globe,
pertinent portion of which is hereunder quoted, amended Section 9 respectively.  Smart presents the same arguments as the Philippine
32

of R.A. No. 7294: Long Distance Telephone Company in the previous cases already
_______________ decided by this Court.  As previously held by the Court, the
33

findings of the BLGF are not conclusive on the courts:

26 Id., at p. 593. “[T]he BLGF opined that §23 of R.A. No. 7925 amended the franchise of
27 Rollo, p. 269. petitioner and in effect restored its exemptions from local taxes. Petitioner
28 Section 108, National Internal Revenue Code, as amended by the Tax
contends that courts should not set aside conclusions reached by the BLGF
Reform Act of 1997 (R.A. No. 8424).
because its function is precisely the study of local tax problems and it has
251 necessarily developed an expertise on the subject.
To be sure, the BLGF is not an administrative agency whose findings
VOL. 565, SEPTEMBER 16, 2008 251 on questions of fact are given weight and deference in the courts. The
Smart Communications, Inc. vs. The City of Davao authorities cited by petitioner pertain to the Court of Tax Appeals, a highly
specialized court which performs judicial functions as it was created for
“SEC. 102. Value-added tax on sale of services and use or lease
the review of tax cases. In contrast, the BLGF was created merely to
of properties.—(a) Rate and base of tax.—There shall be levied
provide consultative services and technical assistance to local governments
assessed and collected, a value-added tax equivalent to ten percent
and the general public on local taxation, real property assessment, and
(10%) of gross receipts derived from the sale or exchange of services,
other related matters, among others. The question raised by petitioner is a
including the use or lease of properties.
legal question, to wit, the interpretation of §23 of R.A. No. 7925. There is,
The phrase “sale or exchange of services” means the performance
therefore, no basis for claiming expertise for the BLGF that administrative
of all kinds of services in the Philippines for others for a fee,
agencies are said to possess in their respective fields.
remuneration or consideration, including those performed or
Petitioner likewise argues that the BLGF enjoys the presumption of
rendered by construction and service contractors; stock, real estate,
regularity in the performance of its duty. It does enjoy this presumption,
commercial, customs and immigration brokers; lessors of property,
but this has nothing to do with the question in this
whether personal or real; warehousing services; lessors or distributors of _______________
cinematographic films; persons engaged in milling, processing,
manufacturing or repacking goods for others; proprietors, operators or 32 Rollo, pp. 303-309.
keepers of hotels, motels, rest houses, pension houses, inns, resorts; 33 Philippine Long Distance Telephone Company, Inc. v. Province of Cebu, G.R. No.
proprietors or operators of restaurants, refreshment parlors, cafes and other 151208, October 16, 2006; Philippine Long Distance Telephone Company, Inc. v. Province of
Laguna, G.R. No. 151899, August 16, 2005, 467 SCRA 93; Philippine Long Distance Telephone
eating places, including clubs and caterers; dealers in securities; lending Company, Inc. v. City of Bacolod, G.R. No. 149179, July 15, 2005, 463 SCRA 528; Philippine
investors; transportation contractors on their transport of goods or cargoes, Long Distance Telephone Company, Inc. v. City of Davao, supra note 25; Philippine Long Distance
including persons who transport goods or cargoes for hire and other Telephone Company, Inc. v. City of Davao, supra note 24.
domestic common carriers by land, air, and water relative to their transport
254
of goods or cargoes; services of franchise grantees of telephone and
telegraph, radio and television broadcasting and all other franchise
grantees except those under Section 117 of this Code; services of banks, 254 SUPREME COURT REPORTS ANNOTATED
non-bank financial intermediaries and finance companies; and non-life
insurance companies (except their crop insurances) including surety,
Smart Communications, Inc. vs. The City of Davao
fidelity, indemnity and bonding companies; and similar services regardless case. This case does not concern the regularity of performance of the
of whether or not the performance thereof calls for the exercise or use of BLGF in the exercise of its duties, but the correctness of its interpretation
the physical or mental faculties. x x x.” 29
of a provision of law.” 34

R.A. No. 7716, specifically Section 20 thereof, expressly repealed IV. Tax Exclusion/Tax Exemption
the provisions of all special laws relative to the rate of franchise Smart gives another perspective of the “in lieu of all taxes”
taxes. It also repealed, amended, or modified all other laws, clause in Section 9 of R.A. No. 7294 in order to avoid the payment
orders, issuances, rules and regulations, or parts of local franchise tax. It says that, viewed from another angle, the
_______________ “in lieu of all taxes” clause partakes of the nature of a tax
exclusion and not a tax exemption. A tax exemption means that
29 Now Section 108, R.A. No. 8424, as amended. (Emphasis supplied.) the taxpayer does not pay any tax at all. Smart pays VAT, income
tax, and real property tax. Thus, what it enjoys is more accurately
252 a tax exclusion. 35

252 SUPREME COURT REPORTS ANNOTATED However, as previously held by the Court, both in their nature
and effect, there is no essential difference between a tax
Smart Communications, Inc. vs. The City of Davao
exemption and a tax exclusion. An exemption is an immunity or a
thereof which are inconsistent with it.  In effect, the “in lieu of all
30
privilege; it is the freedom from a charge or burden to which
taxes” clause in R.A. No. 7294 was rendered ineffective by the others are subjected. An exclusion, on the other hand, is the
advent of the VAT Law. 31
removal of otherwise taxable items from the reach of
However, the franchise tax that the City of Davao may impose taxation, e.g., exclusions from gross income and allowable
must comply with Sections 137 and 151 of R.A. No. 7160. Thus, deductions. An exclusion is, thus, also an immunity or privilege
the local franchise tax that may be imposed by the City must not which frees a taxpayer from a charge to which others are
exceed 50% of 1% of the gross annual receipts for the preceding subjected. Consequently, the rule that a tax exemption should be
calendar year based on the income on receipts realized within the applied in strictissimi juris against the taxpayer and liberally in
territorial jurisdiction of Davao. favor of the government applies equally to tax exclusions. 36

III. Opinion of the Bureau of Local Government Finance V. Section 23 of R.A. No. 7925
(BLGF) To further its claim, Smart invokes Section 23 of the Public
In support of its argument that the “in lieu of all taxes” clause Telecommunications Policy Act (R.A. No. 7925):
is to be construed as an exemption from local franchise taxes, _______________
Smart submits the opinion of the Department of Fi-
_______________
34 Philippine Long Distance Telephone Company, Inc. v. City of Davao,
supra note 24, at pp. 779-780; pp. 533-534.
30 SECTION 20. Repealing Clauses.—The provisions of any special law 35 Rollo, pp. 276-277.
relative to the rate of franchise taxes are hereby expressly repealed. Sections 113, 114 36 Philippine Long Distance Telephone Company, Inc. v. City of Davao,
and 116 of the National Internal Revenue Code are hereby repealed. supra note 24, at p. 775; p. 529.
Paragraphs (c), (d), and (e) of Article 39 of Executive Order No. 226, otherwise
as the Omnibus Investment Code of 1987, are hereby repealed: Provided, however, 255
That the benefits and incentives under said paragraphs shall continue to be enjoyed by
enterprises registered with the Board of Investments before the effectivity of this Act. VOL. 565, SEPTEMBER 16, 2008 255
Unless otherwise excluded by the President pursuant to Section 17 hereof,
Sections 19 and 20 of the National Internal Revenue Code shall be repealed upon the Smart Communications, Inc. vs. The City of Davao
expiration of two (2) years from the effectivity of this Act. During the period that the “SECTION 23. Equality of Treatment in the
freight services rendered by international cargo vessels are not covered by the value- Telecommunications Industry.—Any advantage, favor, privilege,
added tax imposed under this Act, said services shall pay a tax at a rate of three per exemption, or immunity granted under existing franchises, or may
centum (3%) of their quarterly gross receipts derived from outgoing cargoes. hereafter be granted, shall ipso facto become part of previously
All other laws, orders, issuances, rules and regulations of parts thereof
granted telecommunications franchise and shall be accorded
inconsistent with this Act are hereby repealed, amended or modified accordingly.
31 Philippine Long Distance Telephone Company, Inc. v. City of Davao, immediately and unconditionally to the grantees of such
supra note 24. franchises: Provided, however, That the foregoing shall neither apply to
nor affect provisions of telecommunications franchises concerning
253 territory covered by the franchise, the life span of the franchise, or the type
of service authorized by the franchise.” (Emphasis supplied.)
VOL. 565, SEPTEMBER 16, 2008 253
Smart Communications, Inc. vs. The City of Davao
 In sum, Smart wants us to interpret anew Section 23 of R.A. imposing, say, one percent (1%) franchise tax, then all other
No. 7925, in connection with the franchise of Globe (R.A. No. telecommunications franchises will have to be adjusted to “level the
7227),  which was enacted on March 19, 1992.
37 playing field” so to speak. This could not
_______________
Allegedly, by virtue of Section 23 of R.A. No. 7925,
otherwise known as the “most favored treatment clause” or the 45 Section 11 of R.A. No. 7229 provides: “All other provisions of Republic Act No. 402, as
“equality clause,” the provision in the franchise of Globe amended by Republic Act Nos. 1618 and 4540, and the provisions of Batas Pambansa Blg. 95
which are not inconsistent with the provisions of this Act and are still unrepealed shall continue to
exempting it from local taxes is automatically incorporated in the be in full force and effect.”
franchise of Smart.  Smart posits that, since the franchise of Globe
38 In view of the above-mentioned provision, Section 3 of R.A. No. 4540, the pertinent portion
of which is quoted herein, is incorporated into R.A. No. 7229: “(b) The grantee shall further pay to
contains a provision exempting it from municipal or local the Treasurer of the Philippines each year after the audit and approval of the accounts as prescribed
franchise tax, this provision should also benefit Smart by virtue of in this Act, one and one-half per centum of all gross receipts from business transacted under this
franchise by the said grantee in the Philippines, in lieu of any and all taxes of any kind, nature or
Section 23 of R.A. No. 7925. The provision in Globe’s franchise description levied, established or collected by an authority whatsoever, municipal, provincial or
invoked by Smart reads: national, from which the grantee is hereby expressly exempted, effective from the date of the
approval of Republic Act Numbered Sixteen hundred eighteen.”
“(b) The grantee shall further pay to the Treasurer of the Philippines
each year after the audit and approval of the accounts as prescribed in this 258
Act, one and one-half per centum of all gross receipts from business
transacted under this franchise by the said grantee in the Philippines, in
lieu of any and all taxes of any kind, nature or description levied, 258 SUPREME COURT REPORTS ANNOTATED
established or collected by Smart Communications, Inc. vs. The City of Davao
_______________
have been the intent of Congress in enacting §23 of Rep. Act 7925.
Petitioner’s theory will leave the Government with the burden of having to
37 An Act approving the merger between Globe Mackay Cable and Radio Corporation and
Clavecilla Radio System and the conesquent transfer of the franchise of Clavecilla Radio System keep track of all granted telecommunications franchises, lest some
granted under Republic Act No. 402, as amended, to Globe Mackay Cable and Radio Corporation, companies be treated unequally. It is different if Congress enacts a law
extending the life of said franchise and repealing certain sections of RA No. 402, as amended. specifically granting uniform advantages, favor, privilege, exemption, or
38 Rollo, p. 256.
immunity to all telecommunications entities.” 46

256
VI. Non-impairment Clause of the Constitution
256 SUPREME COURT REPORTS ANNOTATED Another argument of Smart is that the imposition of the local
franchise tax by the City of Davao would violate the constitutional
Smart Communications, Inc. vs. The City of Davao prohibition against impairment of contracts. The franchise,
any authority whatsoever, municipal, provincial or national, from according to petitioner, is in the nature of a contract between the
which the grantee is hereby expressly exempted, effective from the date government and Smart. 47

of the approval of Republic Act Numbered Sixteen hundred eighteen.” 39

However, we find that there is no violation of Article III,

We find no reason to disturb the previous pronouncements of Section 10 of the 1987 Philippine Constitution. As previously
this Court regarding the interpretation of Section 23 of R.A. No. discussed, the franchise of Smart does not expressly provide for
7925. As aptly explained in the en banc decision of this Court exemption from local taxes. Absent the express provision on such
in Philippine Long Distance Telephone Company, Inc. v. City of exemption under the franchise, we are constrained to rule against
Davao,  and recently in Digital Telecommunications Philippines,
40 it. The “in lieu of all taxes” clause in Section 9 of R.A. No. 7294
Inc. (Digitel) v. Province of Pangasinan,  Congress, in approving
41 leaves much room for interpretation. Due to this ambiguity in the
Section 23 of R.A. No. 7925, did not intend it to operate as a law, the doubt must be resolved against the grant of tax
blanket tax exemption to all telecommunications entities.  The 42 exemption.
language of Section 23 of R.A. No. 7925 and the proceedings of Moreover, Smart’s franchise was granted with the express
both Houses of Congress are bereft of anything that would signify condition that it is subject to amendment, alteration, or repeal.  As 48

the grant of tax exemptions to all telecommunications entities, held in Tolentino v. Secretary of Finance:  49

“It is enough to say that the parties to a contract cannot, through the
including those whose exemptions had been withdrawn by R.A.
exercise of prophetic discernment, fetter the exercise of the taxing power
No. 7160.  The term “exemption” in Section 23 of R.A. No. 7925
43
of the State. For not only are existing laws read into contracts in order to
does not mean tax exemption. The term refers to exemption from fix obligations as between parties, but the reservation of essential attributes
certain regulations and requirements imposed by the National of sovereign power is also read into contracts as
Telecommunications Commission. 44 _______________

Furthermore, in the franchise of Globe (R.A. No. 7229), the

46 Philippine Long Distance Telephone Company, Inc. v. City of Davao, supra note 24, at p.
legislature incontrovertibly stated that it will be liable for one and 776; pp. 530-531.
one-half per centum of all gross receipts from business transacted 47 Rollo, pp. 310-313.
48 Constitution, Art. XII, Sec. 11.
under the franchise, in lieu of any and all taxes of any kind, nature, 49 G.R. No. 115455, August 25, 1994, 235 SCRA 630, 685.
or description levied, established, or collected by any authority
whatsoever, municipal, provincial, or national, from which the 259

grantee is hereby expressly ex-

_______________ VOL. 565, SEPTEMBER 16, 2008 259
39 Section 9 of R.A. No. 4540. (Emphasis supplied).
Smart Communications, Inc. vs. The City of Davao
40 Philippine Long Distance Telephone Company, Inc. v. City of Davao, a basic postulate of the legal order. The policy of protecting contracts
supra note 24. against impairment presupposes the maintenance of a government which
41 G.R. No. 152534, February 23, 2007, 516 SCRA 541. retains adequate authority to secure the peace and good order of society.
42 Id. In truth, the Contract Clause has never been thought as a limitation on
43 Id. the exercise of the State’s power of taxation save only where a tax
44 Philippine Long Distance Telephone Company, Inc. v. City of Davao,
exemption has been granted for a valid consideration. x x x.”
supra note 25.

257 WHEREFORE, the instant petition is DENIED for lack of

merit. Costs against petitioner.
VOL. 565, SEPTEMBER 16, 2008 257 SO ORDERED.
Smart Communications, Inc. vs. The City of Davao Ynares-Santiago (Chairperson), Austria-Martinez, Chico-
empted.  The grant of exemption from municipal, provincial, or
45 Nazario and Reyes, JJ., concur.
national is clear and categorical—that aside from the franchise tax
collected by virtue of R.A. No. 7229, no other franchise tax may Petition denied.
be collected from Globe regardless of who the taxing power is. No Notes.—In all grants by the government to private
such provision is found in the franchise of Smart; the kind of tax corporations, the interpretation of rights, privileges, or franchises
from which it is exempted is not clearly specified. is taken against the grantee. Whatever is not clearly and expressly
As previously explained by the Court, the stance of Smart granted is withheld. (Alger Electric, Inc. vs. Court of Appeals, 135
would lead to absurd consequences. SCRA 37 [1985])
“The acceptance of petitioner’s theory would result in absurd
consequences. To illustrate: In its franchise, Globe is required to pay a It is a matter of judicial notice that all legislative franchises
franchise tax of only one and one-half percentum (1½%) of all gross for the operation of a telephone system contain the provision that
receipts from its transactions while Smart is required to pay a tax of three in the event the Philippine Government should desire to maintain
percent (3%) on all gross receipts from business transacted. Petitioner’s and operate for itself the system and enterprise therein authorized,
theory would require that, to level the playing field, any “advantage, favor, the grantee shall surrender his franchise and will turn over to the
privilege, exemption, or immunity” granted to Globe must be extended to Government said system and all serviceable equipment therein, at
all telecommunications companies, including Smart. If, later, Congress cost, less reasonable depreciation. (Republic vs. Republic
again grants a franchise to another telecommunications company
Telephone Company, Inc., 265 SCRA 1 [1996])
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