Commissioner of Internal Revenue v. Mirant Pagbilao Corp.

FIFTH DIVISION [CA-G.R. SP No. 60783. July 30, 2003.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . MIRANT PAGBILAO CORPORATION (formerly SOUTHERN ENERGY QUEZON, INC. , respondent . D E C I S I O N REYES, JR., A. , J p : Before the Court is a Petition for Review under Rule 43 of the 1997 Rules of Civil Procedure assailing the 11 July 2000 Decision 1 of the Court of Tax Appeals in CTA Case No. 5658, ordering petitioner to issue a tax credit certificate in the amount of P28,744,626.95 in favor of private respondent Mirant Pagbilao Corporation. The undisputed facts of the case as recited in the Decision of the Court of Tax Appeals, are: "Petitioner is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines with principal office address in Pagbilao Grande Island, Pagbilao, Quezon. It is licensed by the Securities and Exchange Commission to principally engage in the business of power generation and subsequent sale thereof (Exh. A). It is registered with the Bureau of Internal Revenue as a VAT registered entity with Certificate of Registration bearing RDO Control No. 96-600-002498, dated January 26, 1996. For the period April 1, 1996 to December 31, 1996, Petitioner seasonably filed its Quarterly VAT Returns reflecting an accumulated input taxes in the amount of P39,330,500.85 (Exhs. B, C, and D). These input taxes were allegedly paid by Petitioner to the suppliers of capital goods and services for the construction and development of the power generating plant and other related facilities in Pagbilao, Quezon (TSN, November 16, 1998, p. 11). Pursuant to the procedures prescribed under Revenue Regulations No. 7-95, as amended, Petitioner filed on June 30, 1998, an application for tax credit or refund of the aforementioned unutilized VAT paid on capital goods (Exhibit 'E'). Without waiting for an answer from the Respondent, Petitioner filed the instant petition for review on July 10, 1998, in order to toll the running of the two-year prescriptive period for claiming a refund under the law. In answer to the Petition, Respondent advanced as special and affirmative defenses that '[P]etitioner's claim for refund is still pending investigation and consideration before the office of Respondent, accordingly, the filing of the present petition is premature; well-settled is the doctrine that provisions in tax refund and credit are construed strictly against the taxpayer as they are in the nature of a tax exemption; in an action for refund or tax credit, the taxpayer has the burden to show that the taxes paid were erroneously or illegally paid and failure to sustain the said burden is fatal to the action for refund; it is incumbent upon Petitioner to show that the claim for tax credit has been filed within the prescriptive period under the Tax Code; and the taxes allegedly paid by Petitioner are presumed to have been collected and received in accordance with law and revenue regulations. STcaDI xxx xxx xxx." On 11 July 2000, the Court of Tax Appeals rendered its Decision , disposing: "The records show that both the revenue examiner and the independent auditor find Petitioner to be entitled to a refund. However, in the recommendation made by the revenue examiner only those input taxes that pertain to purchases of computers were considered as capital assets. She did not consider the payments for progress work, engineering services and purchases of construction supplies in her final recommendation. As discussed earlier, the Court finds that these should have been considered necessary in the construction of power plant facilities. In determining what constitutes capital goods, courts should look to the origin and character of the expenditure so as to ascertain whether or not these goods shall be considered as capital asset. A scrutiny of the invoices and/or official receipts supporting Petitioner's claim for refund, together with the findings of the commissioned independent auditor, reveals that the amount of P875.45 should be disallowed for being expended on xerox and office supplies which cannot be capitalized and not necessary in the construction of power plant facilities (Exhs. G-3-B-11 and G-3-B-20). Below is the recomputation of Petitioner's entitlement to the refund of input taxes on capital goods: Total amount of the claim for refund P39,330,500.85 Less: Disallowances a. Per independent auditor P10,584,998.45 b. Per CTA's examination 875.45 10,585,873.90 Amount refundable P28,744,626.95 =========== WHEREFORE, in view of the foregoing, Petitioner's claim for refund is hereby partially GRANTED. Respondent is ORDERED to ISSUE A TAX CREDIT CERTIFICATE in the amount of P28,744,626.95 representing input taxes paid on capital goods for the period April 1, 1996 to December 31, 1996. SO ORDERED." Aggrieved by the denial of its Motion for Reconsideration in a Resolution 2 dated 31 August 2000 issued by the CTA, petitioner elevated this case before this Tribunal, theorizing: "1. RESPONDENT BEING AN ELECTRIC UTILITY, IT IS SUBJECT TO FRANCHISE TAX UNDER THEN SECTION 117 (NOW SECTION 119) OF THE TAX CODE AND NOT TO VALUE ADDED TAX (VAT). 2. SINCE RESPONDENT IS EXEMPT FROM VAT, IT IS NOT ENTITLED TO THE REFUND OF INPUT VAT PURSUANT TO SECTION 4.103-1 OF REVENUE REGULATIONS NO. 7-95." We find the Petition without merit. I. PETITIONER CANNOT VALIDLY CHANGE HIS THEORY OF THE CASE ON APPEAL In this Petition, petitioner claimed that private respondent Mirant Pagbilao Corporation, as an electric utility engaged in the business of power generation, is subject to franchise tax under then Section 117 (now, Section 119) of the Tax Code. 3 And under then Section 103 (now, Section 109 of the Tax Code), 4 services that are subject to percentage tax (e.g., franchise tax) are considered exempt transactions. Notably, in elevating the action before this Tribunal, petitioner had changed his theory of the case. Originally, as evidenced by the Answer 5 he filed before the CTA, petitioner merely argued that: (1) private respondent's claim for refund was prematurely filed; (2) private respondent failed to overcome the burden of proof required by the Tax Code; (3) private respondent failed to show that the claim for tax refund has been filed within the prescriptive period, and (4) the taxes allegedly paid by private respondent are presumed to have been collected and received in accordance with law and revenue regulations. AIcECS Thus, in disposing the case, the Court of Tax Appeals based its disposition on the above arguments of herein petitioner. But, to repeat, when petitioner elevated the case before this Tribunal, he completely changed his Theory of the Case which cannot be done "for to permit him to do so would only be unfair to the other party but it would also be offensive to the basic rules of fair play, justice and due process ( Drilon vs. Court of Appeals, 270 SCRA 211 [1997] )." Also, in Tinio vs. Court of Appeals, 307 SCRA 461 [1999] , the Supreme Court categorically ruled that: "The applicable and well-settled principle is that 'a party is bound by the theory he adopts and by the cause of action he stands on and cannot be permitted after having lost thereon to repudiate his theory and cause of action and adopt another and seek to re-litigate the matter anew either in the same forum or on appeal.' This is in essence putting petitioners in estoppel to question the judgment." Thus, the legal tactics of petitioner cannot be allowed for being violative of the due process clause. II. PRIVATE RESPONDENT COMPANY IS NOT A PUBLIC UTILITY WITHIN THE CONTEMPLATION OF THE LAW Besides, a perusal of the records shows that private respondent is not a public utility within the contemplation law. In the case of Rodolfo B. Albano vs. Hon. Rainerio O. Reyes, 175 SCRA 264 [1989] , the Supreme Court, citing am. Jur. 2d V. 64, p. 549, held: "A 'public utility' is a business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity , gas, water, transportation, telephone or telegraph service. Apart from statutes which define the public utilities that are within the purview of such statutes, it would be difficult to construct a definition of a public utility which would fit every conceivable case. As its name indicates, however, the term public utility implies a public use and service to the public." (Emphasis, supplied). Corollarily, The term "public use" was succinctly defined by the Highest Magistrate in Iloilo Ice and Cold Storage Company vs. Public Utility Board, G.R. No. 38291, November 16, 1932 , citing United States vs. Tan Piaco (40 Phil. 853), to quote: "Public use" means the same as 'used by the public'. The essential features of the public use that it is not confined to privileged individuals, but is open to the indefinite public . It is this indefinite or unrestricted quality that gives it its public character. . . . There must be, in general, a right which the law compels the owner to give to the general public. It is not enough that the general prosperity of the public is promoted. Public use is not synonymous with public interest. The true criterion by which to judge the character of the use is whether the public may enjoy it by right or only by permission. (Emphasis, supplied) Considering that the essential feature of public use being its availability to the public in general, and not to one single entity, private respondent, therefore, as a corporate entity, is not within the legal contemplation of the term public utility . III. PRIVATE RESPONDENT COMPANY'S SALE OF POWER GENERATION TO THE NPC IS SUBJECT TO VAT AT A 10% RATE In VAT Ruling No. 003-98 dated 15 January 1998, the Bureau of Internal Revenue ("BIR") held that the sale of electricity made by the San Pascual Cogeneration Co. to the NPC shall be subject to the 10% VAT pursuant to Section 102 of the old National Internal Revenue Code ("NIRC") (now Section 108 of the NIRC of 1997). The NPC requested the Department of Finance to review and reconsider the afore-cited ruling in view of its significant implications on national interest. In a Memorandum dated 26 January 1998 addressed to then Commissioner of Internal Revenue Liwayway L. Chato, then Secretary of Finance Mr. Roberto F. de Ocampo ruled: "The Department has consistently held the view that NPC's purchase of electricity should be treated in the same manner as its purchase of petroleum products. This is in recognition of the broad and comprehensive tax exemption privilege granted to NPC by Congress. The NPC Charter clearly provides for NPC's exemption from all taxes direct and indirect. No less than the Supreme Court ruled that it has been the lawmakers intention that the NPC's is completely exempt from all taxes. The Department of Justice and the Office of the Solicitor General have also issued opinions supporting the full tax exemption of the NPC. Even the BIR has ruled that NPC is exempt from direct and indirect taxes. aHADTC xxx xxx xxx. In view of the foregoing and using the power of review granted to the Secretary of Finance under Sec. 4 of Republic Act no. 8424, the DOF upholds the ruling of the Supreme Court that the NPC is exempt under its charter and subsequent laws from all direct and indirect taxes on its purchases of petroleum products and electricity. Thus, the purchases of NPC of electricity from independent power producers are subject to a VAT at zero-rate ." By virtue of the ruling of the Department of Finance in the afore-quoted memorandum, the BIR, in VAT Ruling No. 052-99 dated 13 May 1999 ruled that respondent is subject to 0% VAT rate on its supply of electricity to the NPC, Thus: Accordingly, please be informed that, based on the said ruling, the supply of electricity by HOPEWELL PHIL . (later changed to Southern energy Quezon, Inc. and now Mirant Pagbilao Corporation) to the NPC, shall be subject to the zero percent (0%) VAT, pursuant to Section 108 (B) (3) of the National Internal Revenue Code of 1997. (Emphasis supplied) The aforecited Memorandum was applied with equal force to other independent power producers which sell their power generation services solely to the NPC (VAT Ruling No. 015-99; VAT Ruling No. 067-99; BIR Ruling DA-632-11-10-99; BIR Ruling DA-209-04-04-00) . IV. PRIVATE RESPONDENT COMPANY AS A VAT-REGISTERED TAXPAYER MAY APPLY FOR TAX CREDIT Apropos , Section 106 of the NIRC which states, to wit: "Section 106 Refunds or tax credits of creditable input tax . (a) . . . ; (b) Capital goods . A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years after the close of the taxable quarter when the importation or purchase was made. " (Emphasis supplied) The afore-quoted provision of the NIRC is the legal basis of private respondent Company's claim for refund which is also the legal issue in this case. And as found by respondent Court, the input taxes sought to be refunded/credited were not applied against any output tax liability of herein private respondent. 6 Hence, private respondent is qualified to apply for tax credit/refund. Neither can we discern any tenability as to petitioner's argument that the taxes which the Company seeks to refund were not creditable input taxes under Section 104(a)(1) and (2) of the Tax Code, as amended by Republic Act No. 7716 considering that the VAT invoices and official receipts presented by private respondent Company overwhelmingly prove that the purchases of goods and services were necessary in the construction of the power plant facilities which were used by private respondent in its business of power generation and sale. As a final point, it is worth mentioning that the same argument was raised by petitioner in an appealed case entitled Commissioner of Internal Revenue vs. Hopewell Power (Phils.) Corporation, CA-G.R. SP No. 51617, dated March 17, 2000 , involving the same issue and parties wherein the Court of Appeals answered the said argument in this wise: "From the evidence on record, the goods purchased on which input VAT was paid were necessary for Hopewell's business of power establishment and generation. They are within the scope and meaning of Revenue Regulations No. 7-95 the Consolidated Value Added Tax Regulations under the term "goods or properties with estimated useful life greater than one year and which are treated as depreciable assets under section 29(f), used directly or indirectly in the production or sale of taxable goods and services." . . . The above pronouncement is in all fours with the case at bar hence, We need not depart from such a conclusion. WHEREFORE, premises considered, the Petition is DISMISSED for lack of merit and the assailed 11 July 2000 Decision of respondent Court in CTA Case No. 5658 is hereby AFFIRMED in toto . No costs. TDcAIH SO ORDERED. Labitoria and Maambong, JJ ., concur. Footnotes 1. Rollo , p. 15. 2. Rollo , p. 22. 3. Section 117 of the Tax Code provides: "Sec. 117. Tax on franchises . Any provision of general or special law to the contrary notwithstanding, there shall be levied, assessed and collected in respect to all franchises on electric , gas and water utilities a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise." 4. Section 109 of the Tax Code partly provides: "Sec. 109. Exempt Transactions. The following shall be exempt from the value-added tax: xxx xxx xxx (j) Services subject to percentage tax under Title V; xxx xxx xxx." 5. Rollo , p. 39. 6. Assailed Decision, p. 4; Rollo , p. 18.