Commissioner of Internal Revenue v. Cagayan Electric Power & Light Company, Inc.

SEVENTEENTH DIVISION [CA-G.R. SP No. 65994. July 31, 2002.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . CAGAYAN ELECTRIC POWER & LIGHT COMPANY, INC. , respondent . D E C I S I O N REYES , B. , J p : This is a petition for review interposed under Rule 43 of the Rules of Court which seeks to reverse and set aside the decision and resolution issued by the Court of Tax Appeals in the case entitled "Cagayan Electric Power & Light Company, Inc. vs. Commissioner of Internal Revenue" in CTA Case No. 5883 which partially granted the petition for the issuance of a tax credit certificate in the amount of P3,789,748.00 representing erroneously paid value added tax (VAT) on its importations for the period May 14, 1997 to October 1998. The antecedent facts, which led to the issue of this case, are as follows: Herein Respondent (CEPALCO for brevity) is a corporation duly formed and existing under and by virtue of the laws of the Philippines, with principal offices at the 8th floor, Strata 100 Building, Emerald Avenue, Ortigas Center, Pasig City. A legislative franchise under Republic Act No. 3274 was granted to respondent CEPALCO on June 17, 1961 "to construct, maintain and operate an electric light, heat and power system for the purpose of generating and/or distributing electric light, heat and/or power for sale within the city of Cagayan de Oro and its suburbs. The grantee shall further have the right and privilege to install, lay and maintain on all streets, public thoroughfares, bridges and public places within said limits, poles, wires, transformers, capacitors, overhead protective devices, and pole line hardware, and other equipment necessary for the safe distribution of electric current to the public." ( Rollo , pp. 23-24) On June 21, 1963, Republic Act No. 3570 amended said franchise to include the municipalities of Tagoloan and Opol, both in the province of Misamis Oriental, to respondent CEPALCO'S areas of operation and was further amended by Republic Act No. 6020 on August 4, 1969 to include the municipalities of Villanueva and Jasaan, both of which also form part of the Province of Misamis Oriental. Respondent CEPALCO imported various equipment, machinery and spare parts necessary in the conduct of its business from different countries and was required to pay VAT in the aggregate amount of P4,216,419.00 covering dates from May 1997 to October 1998. Respondent CEPALCO, however, claims that Commissioner should not have collected VAT on said importation citing Section 3 of Republic Acts 3247, 3570 and 6020 which uniformly provide: " Section 3. In consideration of the franchise and rights hereby granted, the grantee shall pay a franchise tax equal to three per centum of the gross earnings for electric current sold under this franchise, Of which two per centum goes into the National Treasury and one per centum goes into the city treasury of Cagayan de Oro: Provided, that the said franchise tax of three per centum of the gross earnings shall be in lieu of all taxes and assessments of whatever authority upon privileges, earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee from which taxes and assessments the grantee is hereby expressly exempted." ( Rollo , p. 24) On April 8, 1999, respondent CEPALCO filed with the Bureau of Internal Revenue (BIR) a letter-claim for refund for the P4,216,419.00 paid as VAT anchored on the following grounds: "A. Sections 108 and 109 of the NIRC specifically exclude electric franchisees from coverage of the value-added tax; B. In BIR Ruling 46-97, the Honorable Commission (sic) of Internal Revenue ruled that an electric franchisee is exempt from value-added tax; C. The Court of Tax Appeals has held that electric franchisees are exempt from value-added tax on importations; and D. The Supreme Court has consistently upheld the "'in lieu of all taxes" proviso of the franchises of numerous grantees." ( Rollo , p. 25) With petitioner's (Commissioner) seemingly passive reaction to said claim, herein respondent CEPALCO decided then to file a petition before the Court of Tax Appeals on May 14, 1999, which sought the issuance of a tax credit certificate in its favor with an aggregate amount of P4,216,419.00 allegedly representing erroneously paid VAT on its importation of equipment, machinery and spare parts from the month of May in 1997 to October of 1998 as well as to toll the running of the two year prescriptive period. In response to the said petition, the Commissioner, by way of Special and Affirmative Defenses, claimed in his answer dated June 22, 1999, that: "5. The Value Added Tax (VAT) on importation under Section 101 of the 1993 Tax Code, as amended, is neither a tax on franchise nor on gross receipts or earnings thereof. It is a tax on the privilege of importing goods whether or not the tax payer is engaged in business and regardless of whether the imported goods are intended for sale, barter or exchange; 6. An analysis of Sections 1 and 2 of R.A. 3247, as amended by R.A. 3570 and further amended by R.A. 6020, which allegedly governs petitioner's (CEPALCO) legislative franchise would show that the "right, privilege and authority" conferred to it are limited to the following, to wit: (a) ". . . to construct, maintain and operate an electric light and power system for the purpose of generating and distributing electric light and power for sale within the municipalities . . . " (b) ". . . to install, lay and maintain on all streets, public thoroughfares, bridges and public places within said limits, poles, wires, transformers, capacitors, overhead protective devices, and poles line hardware and other equipment necessary for the safe distribution of electric current to the public . . . " Petitioner's alleged exemption from VAT based on its privilege to import is unmistakably not one among those enumerated in the aforequoted rights and privileges. Petitioner's theory of exemption, therefore, is a mere opinion, speculation and conclusion bereft of any basis in law. "7. The Supreme Court in the case of Borja vs. Collector of Internal Revenue (3 SCRA 500), ruled that: "Considering Section 190 of the Tax Code is a sort of an equalizer, to place casual importers, who are not merchants on equal footing with established merchants who pay sales tax on articles imported by them, a grantee of legislative franchise is not exempt from the payment of compensation tax on the goods directly imported for use in her electric plant." A close analysis of the legal principles enunciated in said case reveals that the rationale for the imposition of compensating tax for importation of goods by a franchise-grantee, likewise apply to the value added tax on importation of personal properties. Such being the case, it was not the intention, therefore, of R.A. 3247 as amended by R.A. 3570, and further amended by R.A. 6020 to exempt herein respondent CEPALCO petitioner from payment of value added tax on its importation of certain equipment, machinery, etc., since it does appear clearly and manifestly in its legislative franchise that an exemption from payment of VAT on its importation was intended. Hence, the legislative franchise allegedly granted to petitioner (CEPALCO) must be construed strictly against the grant of tax exemption. 8. The VAT under Section 101 (a) of the 1997 Tax Code, as amended, replaced the advance sales tax and compensating tax under the Sections 162 (c) and 169 of the 1997 Tax Code. Accordingly, the 3% franchise tax did not substitute the 10% of the value added tax on petitioner's (CEPALCO) importation of equipment, machinery and spare parts for the use of its electric power plant; 9. Exemption from taxation is highly disfavored in law; and he who claims exemption must be able to justify his claim by the clearest grant of organic or statutory law. In other words, an exemption from the common burden cannot be permitted to exist upon vague implication ( Asiatic Petroleum Co. vs. Llanes, 46 Phil. 466); 10. In an action for refund and/or tax credit, the taxpayer has the burden of showing that the taxes paid were erroneously collected, and failure to sustain this burden is fatal to the action for refund and/or tax credit; 11. Claims for refund and/or tax credit are construed strictly against claimants since they are in the nature of tax exemption. They cannot be allowed unless granted in the most explicit and categorical language. ( Manila Electric Co. vs. CIR , 47 SCRA 351); 12. Petitioner must show that it has complied with the provisions of Sections 204(c) and 229 of the 1997 Tax Code on the filing of a written claim for refund within two (2) years from the payment of the tax." ( Rollo , pp. 25-27) On May 4, 2001, the Court of Tax Appeals rendered a decision now being assailed, the decretal text of which reads thusly: "WHEREFORE, in the light of all the foregoing, the instant Petition for Review is hereby PARTIALLY GRANTED. Respondent is hereby ORDERED to ISSUE A TAX CREDIT CERTIFICATE in favor of the Petitioner in the amount of P3,789,748.00 representing erroneously paid VAT on its importations for the period of May 14, 1997 to October 1998. SO ORDERED." ( Rollo , p. 34) Displeased with the Court of Tax Appeals' rendered decision, the Commissioner instituted a Motion for Reconsideration on May 22, 2001 stating that the said court erred in holding that respondent CEPALCO was indeed exempt from the payment of VAT on its importations arguing that the VAT levied on said importations are not taxes imposed on its franchise or gross earnings, thus making it duty bound to pay the same. Despite such efforts on the part of the Commissioner, the resolution rendered by the Court of Tax Appeals on July 22, 2001 in response to said motion was, unfortunately, not in his favor. In other words, the resolution DENIED the motion for reconsideration. With yet another unfavorable finding by the court a quo , herein petitioner, maintaining a firm stand on his belief that respondent CEPALCO is indeed not exempted from the payment of VAT on its importation, instituted the instant Petition for Review on August 22, 2001. The petition presented before us essentially reiterates the Commissioner's arguments in his motion for reconsideration the formulation of issues of which state in effect that the VAT to be paid by respondent CEPALCO to cover its importation from May of 1997 to October of 1998 is not levied on its franchise or gross earnings but rather on the privilege of importing certain goods and with the establishment of such a claim it naturally follows that respondent CEPALCO is not exempt from the payment of such, as the Commissioner has stated: "xxx xxx xxx The phrase, " in lieu of all taxes ", means, to our mind, that if the taxes are not imposed on respondent's franchise of gross earnings from the sale of electricity, the 3% franchise tax shall not be in lieu of the taxes imposed upon privileges, earnings, income, franchise and poles, wires, transformers, and insulators. In other words, herein respondent shall still be liable for taxes not imposed on its franchise or gross earnings from the sale of electricity." "It follows, therefore, that the VAT paid by herein respondent on its importation of various equipment, machinery, and spare parts from different countries for the period covering May, 1997 to October, 1998 is not a tax imposed on its franchise or gross earnings on the sale of electricity, but it is a tax imposed on its privilege to import goods, in the character of excise tax. The privilege to import is not a franchise in itself. It is merely incidental to the operation of its franchise." ( Rollo , pp. 13-14) In the comment filed by respondent CEPALCO on September 21, 2000, it was submitted that the Court of Tax Appeals correctly ruled in holding that respondent CEPALCO is exempt from the payment of VAT in issue. Through the citation of different statutes, as well as jurisprudence, respondent CEPALCO stated the reasons why issues raised by the Commissioner were resolved in its favor, thus: a. The Value-Added Tax (VAT) Law expressly exempts Electric Utilities from the coverage of VAT; b. The VAT is not the same as compensating tax; c. The Court of Appeals and the Court of Tax Appeals have already ruled in Numerous cases that the "in lieu of" provision exempts franchisees from VAT; d. CEPALCO is also exempt from paying taxes of whatever authority upon its privilege; e. The Supreme Court has in Numerous Instances upheld the "in lieu of all taxes" proviso; f. CEPALCO's legislative franchise is a private contract protected by the Non-Impairment Clause of the Bill of Rights; and g. The "in lieu of" provision in CEPALCO's legislative franchise is meant to lessen the cost of producing electricity. To back-track for a moment, even before respondent CEPALCO sent a letter-claim to the BIR for refund and/or tax credit certificate, it sent a prior letter to the said bureau on February 29, 1999 requesting for a confirmation on its exemption from the payment of the VAT covering its importation of various goods. In response to said letter, the BIR issued a VAT REVIEW COMMITTEE RULING on July 23, 2001, which stated a favorable answer to respondent CEPALCO's inquiry declaring the same to be exempted, however with a qualification that if other facts arise to negate the findings then the ruling does not have binding effect. CcTIAH Because of the said favorable issuance, respondent CEPALCO sought for the denial of the instant petition through a Rejoinder filed on November 22, 2001, having such a rejoinder allowed to be attached to its Reply. In the memoranda filed by both parties, the Commissioner reiterated his arguments and justification for holding respondent CEPALCO liable in paying the said VAT as he has in his previous pleadings. Respondent CEPALCO, on the other hand, maintained that it is truly exempt from the payment of the same with the inclusion of the VAT Review Committee Ruling issued in its favor as another ground to justify its alleged exemption. At the threshold of this suit is the query: Is respondent CAGAYAN ELECTRIC POWER & LIGHT COMPANY, INC. (CEPALCO) entitled to the refund or issuance of the tax credit certificate in the amount of P3,789,748.00 allegedly representing erroneously paid VAT on its importation for the period of May 14, 1997 to October 1998? We find for the respondent CEPALCO. It ought to be stressed at the outset that herein petitioner Commissioner of Internal Revenue himself has brought upon this case its very conclusion, which is, unfortunately for him, not in his favor. It clearly appears that the deciding factor which led to the conclusion of this case came from the petitioner himself via the VAT Review Committee Ruling No. 050-2001 , duly signed by him. ECSHID Said ruling has put the issue to rest in clear and unequivocal terms. As a matter of fact, what petitioner did was precisely to confirm, if not strengthen, the very argument and reasoning respondent CEPALCO persistently asserted to free itself from carrying upon its shoulders a burden that was not for it to bear in the first place. The pertinent portions of said ruling which relate to the present issue thus states: xxx xxx xxx "In reply, please be advised that this office is of the opinion as it hereby holds that pursuant to the aforequoted provisions of Republic Act No. 3247, as amended by Republic Acts Nos. 3570 and 6020, CEPALCO's liability to the franchise tax shall be in lieu of all taxes and assessments of whatever authority, and this includes the value added tax on its importation of various equipments, machineries, and spare parts to be used in the conduct of its business (emphasis ours). In its decision in the case of Davao Light and Power Company vs. The Commissioner of Internal Revenue (C.T.A. Case No. 5160, December 18, 1995, and The Commissioner of Internal Revenue vs. Philippine Long Distance Company, CA-G.R. SP No. 40881), the Court of Tax Appeals held that the "in lieu of all taxes" provision has the effect of exempting from taxation the value-added tax which is covered under the general term "taxes" on the purchases of imported equipments, machineries and spare parts by virtue of the payment of the franchise tax . (Emphasis supplied). Furthermore, CEPALCO, as an electric franchise grantee, is expressly exempt from the ten percent (10%) value-added tax pursuant to Section 109 (j) of the Tax Code and Revenue Memorandum Circular No. 5-96. Moreover, the provisions of RA 7716 guarantees of electric utilities to only two percent (2%) franchise tax and thereby expressly exempting them from VAT. (BIR Ruling No. 072-98 dated May 27, 1998) In the light of the foregoing, this Office hereby holds that CEPALCO is exempt from VAT on its importation of machineries, equipment, spare parts and implements to be exclusively used in the business of generating and selling electric light and power and shall be subject only to the rate of two percent (2%) franchise tax imposed under Section 117 of the Tax Code of 1997. 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.) RENE G. BAEZ Commissioner of Internal Revenue" ( Rollo , pp. 195-196) There is no other way to put this controversy to an end that to use these very declarations in the ruling as basis. No doubt, petitioner has, in effect, reiterated his initial claims and averments which clung to the belief that respondent CEPALCO was indeed covered by the payment of VAT requirement and therefore under the obligation to pay the same. Petitioner has thus rectified a misapplication of statutes and jurisprudence which brought about the question at bench by way of issuing the said committee ruling. ISTECA In herein petitioner's Comment filed on December 18, 2001, he stated that ". . . the ruling was in essence based on representations made by the respondent CEPALCO absent any in-depth investigation or scrutiny that would either support or negate the claims that were made to support the conclusions therein." This was a conclusion drawn from the said ruling which stated that: ". . . 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." ( Rollo, p. 243). The Commissioner cannot, however, use such a qualification to force the issue down our throats. The records clearly show that the case was already in motion as inquiries from his office as well as pleadings from both parties have already been brought before the Court of Tax Appeals regarding the refund even before the issuance of the ruling. It only follows that the Commissioner, as well as the BIR, were already aware of all the facts and circumstances surrounding the case and no other event from that point on, other than those which have already been known to the parties and to the Court, ever arose that can be considered to be different to what has been established. Therefore, there is no ground from which the Commissioner may hold such a ruling to be null and void, neither is there any proof that CEPALCO made representations that are absent in any in-depth scrutiny and investigation that would lead to a favorable ruling signed by no other than the Commissioner himself. If indeed respondent CEPALCO misrepresented the facts and circumstances of the case, the Commissioner would have had the opportunity to expose such and ultimately issue a ruling which negate the exemption sought by respondent CEPALCO, but instead he issued a ruling with the complete opposite effect. Everything pertinent to the resolution of the matter has already been disclosed to him for the case was already being litigated during the time when CEPALCO awaited the Commissioner's reply to their letter of confirmation regarding their refund. Before finally closing the book on this particular matter, it is noteworthy to state that the Court of Tax Appeals as well as herein respondent CEPALCO have satisfactorily upheld why the latter should be exempted from the payment of VAT on the discussed importation. We believe that the said court would be in the best position in determining or construing the provisions on exemption when it comes to legislative franchisees. The Supreme Court has declared on many occasions as it has in the case of Western Mincolo Corp. vs. Commissioner of Internal Revenue, 124 SCRA 121 and Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95 , that "Claims for refund are construed strictly against the claimant for the same partakes of the nature of exemption from taxation and as such, they are looked upon with disfavor." However, in this case, the party seeking a refund has clearly established its inclusion in such exemptions. Although construed strictly, the provision providing for its exemption has been construed by Us to favor it and no one less than the Commissioner of Internal Revenue himself has agreed to such a construction. Finally, it is worth noting that as a general position, findings arrived at by highly specialized bodies such as the Court of Tax Appeals, when ably supported by evidence, should not be disturbed on appeal absent a showing of gross error in its appreciation of facts ( Commissioner of Internal Revenue vs. Court of Appeals, 298 SCRA 83 ). WHEREFORE, having found the assailed decision to be in accord with the pertinent laws and jurisprudence, the instant appeal is hereby DISMISSED. SO ORDERED. Barrios and Sundiam * , JJ . , concur. Footnotes * Acting Third Member