CIR vs.

MIRANT PAGBILAO CORPORATION (FORMERLY SOUTHERN ENERGY

QUEZON, INC.)
MPC, formerly Southern Energy Quezon, Inc., and also formerly known as Hopewell (Phil.) Corporation,
is a domestic firm engaged in the generation of power which it sells to the National Power Corporation
(NPC). From 1993 to 1996, MPC secured the services of Mitsubishi Corporation (Mitsubishi) of Japan. for
the construction of the electrical and mechanical equipment portion of its Pagbilao, Quezon. In its
revised charter, as found in RA No. 6395, it is exempt from all taxes. The following ensued after the
sale of the power generation service to NPC,

viz:  December 1, 1997: With the above-mentioned exemption, it filed with the RDO No. 60 in Lucena
City an application for Effective Zero Rating covering the construction and operation of its Pagbilao
power state under a Build, Operate, and Transfer scheme. This application, it based with Section
108(B)(3) of the Tax Code - Zero-rated for VAT purposes.

 January 28, 1998: Since, no response has been received from the BIR district office (RDO), it refiled
the same application before the BIR.

 May 13, 1999: CIR issued VAT Ruling No. 052-99, stating that "the supply of electricity by Hopewell
Phil. to the NPC, shall be subject to the zero percent (0%) VAT, pursuant to Section 108 (B) (3) of the
NIRC of 1997."

 April 14, 1998 MPC paid Mitsubishi the VAT component for the progress billings from April 1993-
September 1996, supported by OR No. 0189 covering P135,993,570.00. Mitsubishi had advanced the
VAT component as this serves as its output VAT which is essential for the determination of its VAT
payment.

 August 25, 1998 While awaiting approval of its application, it file its quarterly VAT return, 2nd quarter
of 1998, reflecting total Input VAT of P148,003,047.62 (inclusive of the P135,993,570.00 VAT component
of the progress billings)

 December 20, 1999  MPC filed a claim for refund of the unutilized Input VAT of P148,003,047.62 
No action from the CIR as of yet… It filed a petition for review before the CTA and contends that with the
inaction of the CIR, its claim for refund forestall the running of the two-year prescriptive period under
Section 229 of the NIRC. CIR asserted that the MPC's claim for refund cannot be granted because MPC's
sale of electricity to NPC is not zero-rated for its failure to secure an approved application for zero-
rating. CTA granted MPC's claim for input VAT refund or credit, but only P 10,766,939.48 and ordered
the CIR to refund or issued Tax Credit Certificate to MPC. Before the CA, modified CTAs decision by
ordering the CIR to make refund or issue a tax credit certificate in favor of MPC of its unutilized input
VAT payments directly attributable to its effectively zero-rated sales, 2nd quarter 1998 of
P146,760,509.48. ISSUES:  MPCs entitlement to zero-rating for VAT purposed for its sales and services
to tax-exempt NPC  Refund or Tax Credit for its unutilized input VAT, 2nd quarter of 1998
HELD:

Petition is Partly granted, ordering the CIR for the issuance of the tax credit certificate to MPC
representing its unutilized input VAT payments directly attributable to its effectively zero-rated sales,
2nd quarter of P10,766,939.48 but denying the tax refund or credit to the extent of P135,993,570
(P146,760,509.48 - P10,766,939.48) representing its input VAT payments for service purchases from
Mitsubishi Corporation of Japan for the construction of a portion of its Pagbilao, Quezon power station
on the ground that it has prescribed. On claim for refund: The claim for tax refund may be based on a
statute granting tax exemption, which is to be construed strictissimi juris against the taxpayer, meaning
that the claim cannot be made to rest on vague inference. Where the rule of strict interpretation against
the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, the claimant
must show that he clearly falls under the exempting statute. On Prescription: The claim for tax refund/
credit of input tax covered by OR No. 0189, re: purchases by MPC from Mitsubishi from 1993 to 1996
was filed on December 20, 1999,clearly way beyond the two-year prescriptive period set in Sec. 112 of
the NIRC, which provides: (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: x x x The above proviso clearly provides that
unutilized input VAT payments not otherwise used for any internal revenue tax due the taxpayer must
be claimed within two years reckoned from the close of the taxable quarter when the relevant sales
were made pertaining to the input VAT regardless of whether said tax was paid or not. Thus, when a
zero-rated VAT taxpayer pays its input VAT a year after the pertinent transaction, said taxpayer only has
a year to file a claim for refund or tax credit of the unutilized creditable input VAT. The reckoning frame
would always be the end of the quarter when the pertinent sales or transaction was made, regardless
when the input VAT was paid. The creditable input VAT due for the period covering the progress billing
of September 6, 1996 is the third quarter of 1996 ending on September 30, 1996, any claim for
unutilized creditable input VAT refund or tax credit for said quarter prescribed two years after
September 30, 1996 or on September 30, 1998. Consequently, MPC's claim for refund or tax credit filed
on December 10, 1999 had already prescribed. MPC cannot avail itself of the provisions of Section
204(C) or 229 of the NIRC which, for the purpose of refund, prescribes a different starting point for the
two-year prescriptive limit for the filing of a claim therefore and in both instances apply only to
erroneous payment or illegal collection of internal revenue taxes.  Sec. 204. Authority of the
Commissioner to Compromise, Abate and Refund or Credit Taxes.-- The Commissioner may – x x x x  (c)
Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund
the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in
his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their
value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the
taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the
payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be
considered as a written claim for credit or refund. x x x x
 Sec. 229. Recovery of Tax Erroneously or Illegally Collected.-- No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have
been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, of any sum alleged to have been excessively or in any manner wrongfully collected
without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected,
until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding
may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In
any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid. (Emphasis ours.) On entitlement to creditable input VAT: Section 105 of
the NIRC provides that a creditable input VAT is an indirect tax which can be shifted or passed on to the
buyer, transferee, or lessee of the goods, properties, or services of the taxpayer. The fact that the
subsequent sale or transaction involves a wholly-tax exempt client, resulting in a zero-rated or
effectively zero-rated transaction, does not, standing alone, deprive the taxpayer of its right to a refund
for any unutilized creditable input VAT, albeit the erroneous, illegal, or wrongful payment angle does not
enter the equation. Its application has been drawn from the Tax Credit Method, of which an entity can
credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases,
inputs and imports. If at the end of a taxable quarter the output taxes charged by a seller are equal to
the input taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed
the input taxes that the excess has to be paid. If, however, the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from
zero-rated or effectively zero-rated transactions or from the acquisition of capital goods, any excess
over the output taxes shall instead be refunded to the taxpayer or credited against other internal
revenue taxes. On Zero-rated transactions: It refers to the export sale of goods and supply of services.
The tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable
against the purchaser. The seller of such transactions charges no output tax, but can claim a refund of or
a tax credit certificate for the VAT previously charged by suppliers.