Mirant (Navotas II) Corp. v. Commissioner of Internal Revenue

EIGHTH DIVISION [CA-G.R. SP No. 64811. October 9, 2002.] MIRANT (NAVOTAS II) CORPORATION (Southern Energy Navotas II Power, Inc. [formerly Hopewell Energy Philippines] Corporation) , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N SALAZAR-FERNANDO , J p : Before Us is a petition for review of the decision 1 and resolution 2 of the Court of Tax Appeals dated March 1, 2001 and May 4, 2001, respectively, in CTA Case No. 5815 entitled "Southern Energy Navotas II Power, Inc. [formerly Hopewell Tileman (Philippines) Corporation], Petitioner versus Commissioner of Internal Revenue, Respondent," the dispositive portion of which reads: Decision of March 1, 2001: "WHEREFORE, in view of the foregoing, Petitioner's claim for refund is hereby DENIED for lack of merit. SO ORDERED." Resolution of May 4, 2001: "WHEREFORE, finding no compelling reason to alter or modify the decision of this Court in the above-entitled case, the "Motion for Reconsideration" filed by Petitioner is hereby DENIED for lack of merit. SO ORDERED." The facts are: Petitioner Mirant (Navotas II) Corporation, formerly Southern Energy Navotas II Power, Inc., (Mirant, for brevity) is a domestic corporation engaged in the business of power generation and the sale thereof to the National Power Corporation (NPC, for brevity) pursuant to a "Build Operate and Transfer Project Agreement for a Gas Turbine Power Station in Navotas, Manila" (BOT Agreement, for brevity) executed between NPC and petitioner Mirant's parent company, Hopewell Energy International Limited (Hopewell, for brevity), and an "Accession Undertaking" executed by all three parties. Under the said BOT Agreement, Hopewell agreed to design, build and operate a gas turbine power station in the Philippines provided that the electricity generated therefrom shall be purchased by NPC, and after the lapse of a certain period, ownership of the power station shall be transferred to NPC. Accordingly, Hopewell specifically created a subsidiary Philippine corporation, petitioner Mirant, to undertake the construction and operation of the power station and to perform its other undertakings under the BOT Agreement. On April 16, 1999, petitioner Mirant filed a petition for review with the Court of Tax Appeals alleging that: it is principally engaged in the business of power generation and the sale thereof; as such, it is registered as a Value Added Tax (VAT) taxpayer in accordance with Section 236 of the National Internal Revenue Code of 1997 (NIRC, for brevity), with BIR Certificate of Registration bearing RDO Control No. 96-051-005717; on March 1, 1996 petitioner Mirant filed with the BIR Revenue District Office No. 51 (Pasay City) an Application for Effective Zero Rating for its services of construction and operation of a power station under the BOT Agreement; for the first quarter of 1997, petitioner Mirant paid P137,535.60 in input VAT which arose from its domestic purchases of goods and services in the total amount of P1,375,355.26 attributable to its zero-rated sale of electricity to NPC; this input VAT paid by petitioner Mirant for the first quarter of 1997 remains unutilized considering that it has not engaged in any business activity or transaction in which it may be liable for output VAT, other than its sale of power generation services to NPC which does not produce any output VAT; on March 30, 1999, petitioner Mirant filed an administrative claim for refund of its unutilized input VAT of P137,535.60 with the Bureau of Internal Revenue (BIR, for brevity); despite submitting all the relevant documents, respondent Commissioner of Internal Revenue (CIR, for brevity) failed to act on its claim for refund, hence, it is filing the petition for review in order to suspend the running of the two-year prescriptive period under the law and preserve its right to judicially claim for the tax refund or tax credit. 3 Petitioner Mirant argued that its sale of power generation services to NPC is zero-rated because under its charter, R.A. 6395, NPC was declared exempt from the payment of all forms of taxes, duties, fees and imposts. Hence, it is entitled to a refund under Section 112(A) of the NIRC which provides that a VAT-registered taxpayer may apply for the issuance of a tax credit or refund of creditable input tax due or paid attributable to zero-rated or effectively zero-rated sales. 4 For its part, respondent CIR claimed that before petitioner Mirant can claim that its sale of power generation services to NPC is a zero-rated transaction, it must first comply with the condition provided under Section 8(d) of Revenue Regulations No. 5-87. This means that petitioner Mirant should first secure from the BIR an approved application for effective zero-rating on its sale of services to NPC. He also argued that the taxes sought to be refunded by petitioner Mirant were not for purchases made in the course of its trade or business of power generation and for that reason it does not fall under the Tax Code's definition of the term "input tax." 5 On March 1, 2001, the Court of Tax Appeals issued a decision denying petitioner Mirant's application for a refund. It held that in the absence of an approved application for effective zero-rating, a transaction that is otherwise entitled to zero-rating shall be considered exempt, and under Section 9(a) of RR 5-87, VAT-exempt sales transactions are not entitled to creditable input tax. In line with its previous rulings in ABB Power Generation Ltd. v. Commissioner of Internal Revenue 6 and Kumagai-gumi Co. Ltd. v. Commissioner of Internal Revenue, 7 the court reiterated the rule that a VAT entity which failed to present an approved application for zero-rating, as required by Section 8(d) of RR No. 5-87, will not be considered a zero-rated entity and will not be entitled to a refund of input taxes paid. The court also stated that while it is true that petitioner Mirant had already filed such an application for effective zero-rating on March 1, 1996 and waited a long time for respondent's CIR action, its application still remains unresolved. But it had the impression that petitioner Mirant did not exert an effort to follow-up its application with the BIR. Petitioner Mirant Should have filed a petition for mandamus to compel respondent CIR to act on its application and secure its approval. 8 Its motion for reconsideration having been denied, petitioner Mirant now asks this Court to reverse both assailed orders with the following issues: I. WHETHER OR NOT PETITIONER IS ENTITLED TO THE REFUND OF ITS UNAPPLIED OR UNUTILIZED CREDITABLE VAT INPUTS FOR THE QUARTER ENDED MARCH 31, 1997 AMOUNTING TO P137,535.60. II. WHETHER OR NOT THE COURT OF TAX APPEALS ERRED IN DENYING PETITIONER'S CLAIM FOR REFUND ON THE SOLE GROUND THAT THE PETITIONER FAILED TO ACQUIRE AN APPROVED APPLICATION FOR ZERO RATING FROM THE BIR. Section 13 of R.A. No. 6395 provides: "Section 13. Non-profit character of the Corporation: Exemption from All Taxes, Duties, Imposts and Other Charges by the Government and Government Instrumentalities. The Corporation shall be non-profit and shall devote all its returns from capital investment as well as excess revenues from its operations for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance of effective implementation of the policy enunciated in Section One of this Act, the Corporation including its subsidiaries, is hereby declared exempt from the payment of all forms of taxes, duties, fees, imposts as well as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings." NPC's exemption was later affirmed by the Supreme Court in Maceda v. Macaraig 9 : "The use of the phrase 'all forms' of taxes demonstrate the intention of the law to give NPC all the tax exemptions it has been enjoying before. The rationale for this exemption is that being non-profit the NPC 'shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion.' . . . "It is evident from the provisions of PD No. 938 that its purpose is to maintain the tax exemption of NPC from all forms of taxes including indirect taxes as provided for under R.A. No. 6395 and P.D. 380 if it is to attain its goals." In a Memorandum dated January 28, 1998 from the Department of Finance addressed to respondent CIR, the former likewise upheld NPC's exemption, viz : "In view of the foregoing and using the power of review granted to the Secretary of Finance under Section 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 VAT at zero-rate. " 10 (Emphasis theirs) Lastly, in VAT Ruling No. 052-99 dated May 13, 1999, the BIR ruled that the sale of electricity by Hopewell Power (Philippines) Corporation to NPC is subject to zero percent VAT in accordance with Section 108(B)(3) of the NIRC. 11 Considering the foregoing and based on the records of this case, it appears that the question on whether or not the sale of electricity to NPC is zero-rated is no longer in issue. Petitioner Mirant has more than adequately established such fact and the lower court neither discussed nor took exception thereto, but denied nonetheless the refund, due to petitioner Mirants failure to obtain from the BIR an approved application for zero-rating. At issue still, however, is whether or not petitioner Mirant is entitled to a refund notwithstanding the fact that its application for zero-rating has yet to be approved by the BIR. Petitioner Mirant contends that it has substantially complied with the requirements for the refund of input VAT; the requirement of an approved application for zero-rating as a condition precedent for a transaction to be entitled to zero percent VAT has no basis under the NIRC and is found only in Section 8(d) of RR No. 5-87; considering that rules and regulations issued by administrative agencies in the exercise of their rule-making powers should not amend or extend the statute being implemented, Section 8(d) of RR No. 5-87 is invalid for having gone beyond what the law itself provides; said requirement is a mere technicality imposed by the BIR which should not prevail over petitioner Mirant's substantive right to refund its input VAT; the requirements of substantial justice, equity and fair play mandate that it should not be made to suffer the consequences of respondent CIR's inaction and negligence; in the aforementioned cases of ABB and Kumagai-gumi, supra, there did not appear to be any pending application for zero-rating by said companies; thus there was no attempt or initiative on the part of said companies to secure an approved application for zero-rating whereas petitioner Mirant filed its application in 1996 and followed it up on a regular basis; petitioner Mirant has done all that is within its power and control to secure an approved application for zero-rating and in view of existing laws and jurisprudence, the BIR could not have resolved its application any other way than to approve the same as a matter of course. 12 Respondent CIR argues that: RR No. 7-95 amending RR No. 5-87 is a valid exercise of the power of the Secretary of Finance to promulgate rules and regulations under Section 245 of the Tax Code and as such it has the force and effect of laws did not in any way amend, modify or alter Section 102 of the Tax Code; under said revenue regulations, it is a substantive requirement for a VAT-registered person to file an application for effective zero-rating and "secure an approval of its application;" it is undisputed that petitioner Mirant failed to secure approval of its application; hence, pursuant to Section 109(q) of the Tax Code, its sale of power generation services to NPC is exempt from VAT but it is not entitled to claim refund of any input VAT paid on its domestic purchases of goods and services; under VAT Ruling No. 052-99 cited by petitioner Mirant, it should apply for effective zero-rating otherwise its transactions which are entitled to zero percent VAT shall only be considered VAT-exempt; and since tax refunds are in the nature of tax exemptions, the prevailing rule is that claims for refund should be construed strictly against the claimant. 13 Finally, in a Manifestation dated July 19, 2002, petitioner Mirant invited the Court's attention to a case decided by the Special Seventh Division of this Court on June 27, 2002 entitled Commissioner of Internal Revenue v. Mirant Navotas Corporation (CA-GR SP No. 69114), (a copy of which was allegedly attached thereto although this Court did not find such attachment) the pertinent portion of which is hereunder reproduced: "We agree with the Court of Tax Appeals that the inaction of the Revenue District Officer of RDO No. 51 of Pasay City, regarding respondent's application for zero-rating, should not prejudice the latter. After all, it appears that respondent has submitted the documents for approval of the registration. It is then the function and obligation of the Revenue District Officer to assess the documents with deliberate dispatch and accordingly deny or grant the application. However, more than six (6) years had already lapsed and the application remains unacted upon. No explanation whatsoever was given by petitioner for such unreasonable delay. To deny the Respondent-Corporation's claim for refund solely on the ground that its application for effective zero-rating has yet to be approved by the Revenue District Officer is to sanction such indolence and neglect on the part of said public officer. Had it been promptly processed and passed within the said administrative level, the present controversy would have been resolved earlier ." 14 (Emphasis theirs) The appeal is meritorious. Petitioner Mirant's claim for refund is based on Section 102 of the old Tax Code (now Section 108 of the NIRC) which provides that: "Section 108. . . . (b) Transactions Subject to Zero Percent (0%) Rate. The following service performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;" Early on in this decision, this Court already determined that due to NPC's exemption from all forms of taxes, petitioner Mirant's sale of power generation services thereto was subject to zero percent VAT. With this in mind, petitioner Mirant applied for refund of its input VAT attributable to the sale of its power generation services to NPC pursuant to Section 112 of the NIRC (then Section 106 of the Tax Codes), to wit: "Section 112. . . . (A) Zero-rated or Effectively Zero-rated Sales. Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax;" In implementing Section 102 (now Section 108 of the NIRC), the Secretary of Finance issued Revenue Regulations No. 5-87, Section 8(d) of which reads: "(d) Application for the imposition of zero rate. Any person claiming that its sales of goods or services are effectively zero-rated under Sections 100 and 102 shall file an application in a form prescribed therefor with the Commissioner of Internal Revenue justifying the imposition of zero rate on the said transactions. Upon approval, his status as a zero-rated taxpayer shall remain valid until revoked." Section 8(d) was later amended by Section 4.107-1(d) of Revenue Regulations No. 7-95 which reads: "(d) Application for effective zero-rating. Except for actual export sale, other cases of zero-rated sales in Section 4.100-3 and Section 4.102-2(c) shall require prior application with the Revenue District Office for effective zero-rating. Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt." While there is no question that on March 1, 1996 petitioner Mirant applied for effective zero-rating with the Revenue District Office No. 51 in Pasay City, the fact remains that in 1999 when petitioner Mirant asked for a refund of its input VAT, it still had no approved application for zero-rating since the BIR had yet to act on its application. Petitioner Mirant's argument that said requirement constitutes an improper exercise of the Secretary of Finance's rule-making power is not well-taken. In the first place, prior to its appeal, petitioner Mirant did not question the legality or validity of this requirement. However, considering that the BIR did not act on the application for zero-rating due consideration must be given to their case. But what is important is that the requirement is not improper rule-making. Requiring VAT-registered entities to first apply for zero-rating is needed to ensure that only those which are qualified should be entitled to refund their input VAT. Given their complexity and their ability to confuse even the experts, this Court cannot leave the interpretation of our tax laws, i.e., on who is entitled to zero-rating and who is not, entirely to the taxpayer. Thus, in this case the taxpayer, petitioner Mirant, cannot alone determine for itself if it is a zero-rated entity, no matter how accurate that determination might be. It must still secure the approval or recognition of the government that it is in fact, a zero-rated entity. Still and all, this Court resolves to grant petitioner Mirant its refund. Just as the government is entitled to expect taxpayers to pay their taxes promptly, taxpayers are similarly entitled to expect that the government, through the BIR, shall also act promptly and expeditiously on their pending applications or papers. Respondent CIR's inaction or undue delay in approving petitioner Mirant's application cannot prejudice the latter's right to earned input VAT to which it is already entitled having already complied with the requirements set forth by law. Such a ruling is not only consistent with this Court's ruling in the aforementioned case of CIR v. Mirant Navotas Corporation , docketed as CA-GR SP No. 69114, but also with the prevailing stance of the Court of Tax Appeals on this subject matter. In that case, the facts involved are practically identical to this case except that the Court of Tax Appeals at that time ruled to grant petitioner Mirant's claim for refund of its input VAT for the third and fourth quarter of 1997. This Court concurs with the Court of Tax Appeals' pronouncement, which was later affirmed by this Court's Special Seventh Division, that to deny petitioner Mirant's claim for refund "solely on the ground that its application for effective zero-rating has yet to be approved by the Revenue District Officer, is to sanction indolence and neglect on the part of said public officer." Furthermore, it said that the CIR's reliance on the case of ABB, supra, is misplaced because in that case, the taxpayer completely failed to file an application for zero-rating. Considering that the decision of the Court of Tax Appeals in that case was rendered only on January 16, 2002 while the decision and resolution subject of the instant petition were rendered way back on March 1, 2001 and May 4, 2001, it is reasonable to assume that the Court of Tax Appeals has abandoned its old ruling and the rationale behind it. WHEREFORE, in view of the foregoing, the petition is GRANTED and the questioned decision and resolution of the Court of Tax Appeals in CTA Case No. 5815 dated March 1, 2001 and May 4, 2001 are hereby SET ASIDE. Respondent CIR is ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner Mirant in the amount of P137,535.60, representing its input VAT for the first quarter of 1997. SO ORDERED. Vasquez, Jr. and Maambong, JJ ., concur. Footnotes 1. Rollo , pp. 54-59. 2. Rollo , pp. 60-62. 3. Rollo , pp. 63-83. 4. Rollo , pp. 64-65. 5. Rollo , pp. 56-57. 6. CTA Case No. 5270, March 3, 1999. 7. CTA Case No. 4670, July 29, 1997. 8. Rollo , pp. 57-58. 9. G.R. No. 88291, May 31, 1991. 10. Rollo , p. 36. 11. Rollo, p. 36. 12. Rollo , pp. 36-47. 13. Rollo , pp. 136-144. 14. Rollo , pp. 190-191.