Petron's Sale of Petroleum Products to NPC for EBCC's Use in Generating Electricity for Bataan EPZA Exempt from Excise Tax

March 29, 1999 BIR RULING NO. 036-99 135-000-00-036-99 SGV & Company 6760 Ayala Avenue 1226 Makati City Attention: Mr . Jose A . Osana Partner, Tax Division Gentlemen : This refers to your letter dated August 26, 1998 requesting for a ruling that the sale of petroleum products by Petron to National Power Corporation (NPC) to be used by Edison (Bataan) Cogeneration Corporation (EBCC) in generating electricity for Bataan EPZA is exempt from excise tax. It is represented that EBCC is a PEZA-registered domestic corporation that operates a 58,000 KW Private Sector Generation Facility (PSGF) duly accredited by the Department of Energy within the Bataan Export Processing Zone (EPZA) in Mariveles, Bataan; that said PSGF generates the electricity supplied by EBCC to the Bataan EPZA and to the National Power Corporation (NPC), pursuant to the Power Supply Purchase Agreement and Energy Conversion Agreement, respectively; that NPC supplies all the fuel requirements needed in operating the power plant; that NPC bills EBCC for the fuel used by the latter in generating the electricity supplied to Bataan EPZA, pursuant to Article 2.01 and 2.02, of the Fuel Management Agreement; that since January, 1998, NPC has been billing EBCC for the price of fuel used in. generating electricity supplied to the Bataan EPZA, inclusive of excise tax; and that NPC claims it is paying excise tax to Petron on the said purchases of petroleum fuels. The basic issue in this case is whether the sale of petroleum fuel by Petron to NPC for delivery to EBCC pursuant to the Energy Conversion Agreement and Fuel Management Agreement is exempt from excise tax. In reply, please be informed that Section 135 of the Tax Code of 1997 provides that the sale of petroleum products shall be exempt from excise tax if sold to an entity that enjoys exemption from indirect taxes as follows: "SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies . Petroleum products sold to the following are exempt from excise tax: xxx xxx xxx (c) Entities which are by law exempt from direct and indirect taxes." Moreover, NPC is exempt from "indirect taxes" pursuant to the provisions of its Charter ( Maceda vs . Macaraig, Jr . , G . R . No . 88291, June 8, 1993; Department of Finance Memorandum addressed to Commissioner Liwayway V . Chato, January 26, 1998 .) Such being the case, this Office is of the opinion as it hereby holds that the sale of petroleum products by Petron to NPC to be used by EBCC in generating electricity for the Bataan EPZA is exempt from excise tax. However, under Section 130 (A) (2) of the Tax Code, the excise tax on locally manufactured petroleum products shall be paid before removal thereof from the place of production beginning January 1, 1999. For this reason, if the petroleum products sold by Petron to NPC are sourced from tax-paid inventories, the recourse of Petron is to claim for refund or tax credit of the excise taxes paid. In the event that Petron did not opt to claim the same as refund but, as in the instant case, passed on the cost of excise tax to NPC, then the latter may claim for refund or tax credit pursuant to Section 135 (c) of the Tax Code. Therefore, the issue of whether EBCC is exempt from excise tax is already moot and academic. prcd This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue