Atlas Consolidated Mining and Development Corp. v. Court of Tax Appeals

FIRST DIVISION [CA-G.R. SP No. 45436. February 18, 2002.] ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION , petitioner , vs . COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE , respondents . D E C I S I O N REYES , B ., J p : This is an appeal from the Decision of the Court of Tax Appeals in the case entitled "Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue" in CTA Case No. 5062 whereby the court denied petitioner's claim for legal compensation or off-setting of the assessment against petitioner for excise taxes made by respondent against former's pending claims for refund or credit of excess input value-added taxes (VAT). Petitioner Atlas Consolidated Mining and Development Corporation is a value added tax (VAT) registered enterprise engaged in the mining, processing and sale of copper concentrates and other mineral products. Since 1988 these sales were all certified by the respondent to be VAT zero-rated. On April 22, 1993 petitioner received a deficiency tax assessment from the respondent Commissioner of Internal Revenue (CIR for brevity) for the 3rd quarter of 1992 in the total amount of P29,187,592.52. On April 28, 1993 petitioner protested the assessment and requested the respondent CIR for the off setting of the above assessment against its pending claims for VAT refunds pursuant to Article 1279 of the New Civil Code. On December 22, 1993 respondent CIR denied petitioner's protest and request for set-off, prompting the latter to elevate the case to the Court of Tax Appeals (TAX COURT for brevity). On September 11, 1997 the Tax Court rendered a decision, the dispositive portion of which reads: "WHEREFORE, PREMISES CONSIDERED, JUDGMENT IS HEREBY RENDERED denying THE HEREIN PETITION FOR REVIEW. Petitioner is hereby ORDERED to PAY the respondent the amount of P26,806,902.28 representing its deficiency excise tax liability for the third quarter of 1992, inclusive of surcharge, plus 20% annual interest from the date prescribed for payment until fully paid pursuant to Sections 248 and 249 of the tax code, as amended. No pronouncement as to costs. SO ORDERED." ( Decision dated September 11, 1997; Rollo, pp. 29-37 ). On January 21, 1994 petitioner filed with this Court the instant petition for review. Petitioner prays that the petition be granted, that the Decision of the CTA in CTA Case No. 5062 be reviewed and reversed, and that offsetting of petitioner's subject liability for excise tax be declared offset and compensated as against petitioner's pending VAT refunds. The only question to be determined in this petition is whether or not petitioner's excise tax liability and its claims for VAT refunds can be the subject of set-off or compensation. Petitioner contends that there is substantial basis for its claim for off-setting and that invocation of technical rules should not be allowed especially where the technical difficulty is anchored by the same party that invokes the same. Petitioner alleges that it had been religiously filing its VAT returns for all quarters since the inception of the VAT system in 1988, as well as the filing of corresponding claims for excess input VAT refund for the various quarters. As of the time of filing of the petition a quo , respondent CIR had not acted on the bulk of its claims for refund contrary to the provision of Section 106. E of the National Internal Revenue Code which mandates that the Commissioner shall refund input taxes within 60 days from the date application for refund was filed with him or his duly authorized representatives. Because of respondent's delays and/or inaction in the processing of petitioner's claims, the latter's rightful claim was defeated, and effectively sought the removal of said claim for refund within the ambit of those which may be the subject of compensation or set-off pursuant to Article 1279, New Civil Code. As of June 1994, the total amount of subject of petitioner's pending claims for VAT refund amounted to P854,726,389.84. CSDcTH Petitioner says that the Tax Court erred in denying the petition a quo based on its finding that off-setting is not applicable because petitioner's claim for refund is not a debt and therefore not subject to compensation under Article 1279 of the Civil Code. Petitioner submits that the trial court should have not denied petitioner's entitlement to refund at least with respect to VAT attributable to actual export sales of copper concentrates, and finds fault in the protracted inaction on respondent CIR's part to cause the actual issuance of a tax refund or credit in its favor. While there may be controversy as to whether "constructive exports" are zero-rated, which would give rise to credits, such questions do not arise with respect to the actual exports. Petitioner insists that insofar as the uncontested portion of its claims for VAT refund is concerned, so that refunds to which petitioner is clearly entitled has been unduly and fairly denied, legal compensation under Article 1279 of the Civil Code is in order, thus: "Article 1279. In order that compensation may be proper, it is necessary: 1. that each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; 2. that both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; 3. that the two debts be due; 4. that over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor." Petitioner maintains that all the requirements set forth above are present and, therefore, the liability subject of the assessment has been partially or fully settled by operation of law. Respondent CIR counters by maintaining that Article 1279 is not applicable to the case at bench because taxes are not debts and therefore not subject to compensation or set-off. We reject petitioner's contention, for the following reasons: First. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other (Article 1278, New Civil Code; Silahis vs. IAC, G.R. 74027, December 7, 1989) . When all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law ( Art. 1200, New Civil Code ). The parties herein are the Government and the petitioner as taxpayer. They are not mutually creditors and debtors of each other, and therefore outside the purview of Article 1278. The circumstances of the case at bench do not satisfy the requirements provided by Article 1279 quoted above, to wit, that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other, and that the two debts be due. Where the parties are not mutually creditors and debtors of each other, the law on compensation is inapplicable ( Republic vs. Mambulao Lumber Company, 4 SCRA 623 ). Second. A tax is not a debt, but an enforced proportionate contribution imposed upon persons, property, or interest by the legislature for a public purpose and generally payable in money ( Nolledo, Bar Reviewer in Taxation, 1990, 10th and Revised Edition, p. 40. ) Among other things, the (1) taxes are of a distinct kind, essence and nature, and these impositions cannot be so classed in merely the same category as ordinary obligations; (2) the applicable laws and principles governing each are peculiar, not necessarily common, to each; (3) public policy is better subserved ( Republic vs. Mambulao Lumber Co., et al., 6 SCRA 858 ). Third. Internal revenue taxes cannot be the subject of set-off or compensation. As held in the case of Republic vs. Mambulao Lumber Co ., ( 4 SCRA 622 ), taxes are not in the nature of contracts between the parties but grow out of a duty to, and are positive acts of, the Government, to the making and enforcing of which, the personal consent of the individual taxpayer is not required. It is settled by a catena of authorities that anent the issue of off-setting of taxes, there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of a public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued on. The general rule based on grounds of public policy is well-settled that no set-off is admissible against demands for taxes levied for general or local government purposes. Finally, the claim for tax refund is not yet liquidated and demandable. In fact, when petitioner received a deficiency tax assessment from the respondent on April 22, 1993 its claims for VAT refunds was still the subject of a pending claim with the respondent CIR. It was only on December 22, 1993 when petitioner's protest and request for set-off was denied by the respondent. Compensation cannot take place if one's claim against the other is still the subject of litigation. ( Solinap vs. Judge del Rosario, G.R. 50638, July 23, 1983; Sycip vs. CA, L-38711, January 31, 1985 ). Under Article 1279, in order that compensation may be proper, it is necessary that they may be liquidated and demandable, and that both be liquidated ( Francia vs. IAC, L-67649, June 28, 1988 [162 SCRA 753]; Commissioner of Internal Revenue vs. Itogon-Suyoc Mines, Inc., [28 SCRA 867] ). Applying the foregoing tenets to the present controversy and taking into account the factual circumstances of this case, We are constrained to agree with respondent's contention. WHEREFORE, the instant petition is hereby DISMISSED for lack of merit. Judgment is hereby rendered affirming in toto the Decision dated September 11, 1997 of the respondent Court of Tax Appeals. ScAHTI SO ORDERED. Austria-Martinez and Barrios, JJ . , concur.