Commissioner of Internal Revenue vs. Toledo Power Company

A taxpayer's voluntary payment of a deficiency tax assessment based on a Preliminary Assessment Notice, without protest or awaiting a Final Assessment Notice, constitutes a binding informal settlement with the tax authority. The taxpayer is thereafter estopped from seeking a refund of the payment, having benefited from the termination of the underlying tax investigation and the government's forbearance from pursuing a larger assessed liability.

Toledo Power Company (Toledo), a power generation company, was subjected to a BIR tax investigation for the taxable year 2011. The BIR issued a Preliminary Assessment Notice (PAN) assessing, among others, a deficiency VAT of PHP 4,025,642.60 on Toledo's sale of electricity to Carmen Copper Corporation (CCC). The BIR's position was that only the portion of power attributable to CCC's general and administrative expenses, not its direct export-production costs, was subject to 12% VAT. Toledo paid the assessed VAT deficiency plus interest, totaling PHP 6,971,071.10, via the BIR's electronic payment system. Subsequently, Toledo filed an administrative and then a judicial claim for refund, arguing the payment was erroneous because its sale to CCC, a 100% export-oriented enterprise, should have been zero-rated.

• Nature of Parties and Action: Petitioner Commissioner of Internal Revenue (CIR) sought to reverse the CTA En Banc's decision awarding a tax refund to respondent Toledo Power Company, a VAT-registered power generation company.
• The Tax Investigation and PAN: The BIR investigated Toledo for 2011 taxes and issued a Preliminary Assessment Notice (PAN) assessing a total deficiency of PHP 92,769,216.84. Included was a deficiency VAT of PHP 4,025,642.60 on Toledo's sales to Carmen Copper Corporation (CCC), based on the BIR's finding that only the portion of power used for CCC's general and administrative expenses (not direct export production) was subject to 12% VAT.
• Toledo's Payment: Thirty-six days after receiving the PAN, and without filing a reply, Toledo voluntarily paid the assessed VAT deficiency plus interest, totaling PHP 6,971,071.10, through the BIR's electronic system.
• Cessation of BIR Action: After Toledo's payment, the BIR did not issue a Final Letter of Demand/Final Assessment Notice (FLD/FAN) and ceased further action on the tax investigation.
• Toledo's Refund Claim: Fifty-two days after payment, Toledo filed an administrative claim for refund, arguing the payment was erroneous because its sales to CCC, a BOI-registered 100% exporter, should have been zero-rated. It later filed a judicial claim with the CTA within the two-year prescriptive period.
• CTA Rulings: The CTA Second Division and En Banc granted the refund, finding Toledo met the requirements for refund of an erroneously paid tax and that its sale to CCC was zero-rated under revenue regulations.

• Informal Settlement: The CIR argued that Toledo's voluntary payment of the PAN assessment constituted an informal settlement agreement. By paying, Toledo induced the BIR to forego issuing an FLD/FAN and to terminate the investigation into the much larger PHP 92 million deficiency, thereby compromising the case.
• Estoppel: The CIR maintained that Toledo was estopped from seeking a refund. By paying without protest or reservation, Toledo impliedly admitted the validity of the assessment and led the government to believe the matter was settled. Allowing a refund would unjustly enrich Toledo and prejudice the government, which had lost the opportunity to collect the full assessed amount.
• Failure to Discharge Burden: The CIR asserted that Toledo failed to prove its entitlement to a refund, as its claim that the electricity was used entirely for export production was self-serving.

• Erroneous Payment: Toledo countered that the VAT payment was erroneous because its sale of power to CCC, a BOI-registered manufacturer-exporter with 100% export sales, was automatically zero-rated under Revenue Memorandum Order No. 9-2000.
• No Final Assessment: Toledo argued that since no FLD/FAN was issued, the assessment based solely on the PAN was unauthorized and void. Payment of an unauthorized assessment does not preclude a refund claim.
• Solutio Indebiti: Toledo invoked the principle of solutio indebiti, claiming the government had no right to retain the payment made by mistake.
• Compliance with Refund Requirements: Toledo asserted it complied with all procedural requirements for a tax refund under Sections 204(C) and 229 of the NIRC.

• Informal Settlement and Estoppel: Whether Toledo's voluntary payment of the VAT deficiency based on the PAN constituted a binding informal settlement with the BIR, thereby estopping it from later seeking a refund.
• Entitlement to Refund: Assuming no estoppel, whether Toledo was entitled to a refund of the VAT paid on its sale of electricity to CCC.

• Informal Settlement and Estoppel: The petition was granted. Toledo's voluntary payment constituted an informal settlement agreement. The essential elements of a contract under the Civil Code (consent, object, cause) were present: Toledo's payment was the consideration for the BIR's cessation of its investigation and relinquishment of its right to pursue the larger deficiency assessment. Toledo was estopped from seeking a refund because its payment was an implied admission of the assessment's validity, and it remained silent on its reasons for paying. It benefited from the settlement by avoiding a tedious investigation and a potential PHP 92 million liability. Allowing it to reclaim the payment would constitute a "clear manipulative scheme" and the "highest form of injustice."
• Entitlement to Refund (Obiter): Even assuming no informal settlement, the claim would fail under the doctrine of estoppel. By paying without protest, Toledo led the BIR to believe the matter was settled. Citing Rizal Commercial Banking Corporation v. CIR and Pasion v. Melegrito, the Court held a party is precluded from denying its own acts or admissions to the prejudice of another who relied on them. Toledo's "deafening silence" on why it paid estopped it from later claiming error.

• Informal Settlement of Tax Liabilities: The CIR is authorized to compromise or abate tax liabilities under Section 204 of the NIRC. This authority extends to informal settlements. A taxpayer's voluntary payment of an assessment based on a Preliminary Assessment Notice, without awaiting a Final Assessment Notice, can constitute a binding informal settlement agreement if the tax authority, in reliance thereon, ceases further collection efforts.
• Estoppel by Payment in Tax Cases: A taxpayer who voluntarily pays a tax assessment without protest or reservation is estopped from later claiming the payment was erroneous and seeking a refund. The payment constitutes an implied admission of the assessment's validity, and the taxpayer cannot later repudiate its own act to the prejudice of the government, which may have relied on the payment to close the case and lost the opportunity to pursue other remedies.

• "There was here an informal settlement of tax liability when Toledo paid PHP 6,971,071.10 on the assessed VAT deficiency on September 4, 2015. We say so because as soon as Toledo made this payment, the series of communications and notices between parties stopped dead in its tracks." — This passage defines the core factual finding of an informal settlement.
• "Toledo is now estopped from seeking a refund of this settlement amount especially after it had already benefitted therefrom in terms of being made exempt from an otherwise tedious litigation and the payment of the huge amount of PHP 92,769,216.84." — This articulates the rationale for estoppel based on the benefit received by the taxpayer.
• "Given these odds, Toledo remains to be the winner that takes it all. In contrast, the government is left holding an empty bag all by its lonesome." — This highlights the Court's view of the inequity of allowing the refund.

• Rizal Commercial Banking Corporation (RCBC) v. CIR, 672 Phil. 514 (2011) — Applied as controlling precedent on estoppel arising from a taxpayer's act of partial payment of a revised assessment, which impliedly admitted the validity of the underlying waivers.
• CIR v. Systems Technology Institute, Inc., 814 Phil. 933 (2017) — Cited to characterize the RCBC ruling as establishing "estoppel arising from the taxpayer's act of payment."
• Pasion v. Melegrito, 548 Phil. 302 (2007) — Cited for the principle of estoppel by silence, where a party's failure to speak when duty-bound to do so induces another to act to their prejudice.
• Arthur L. Stair and Bernice Stair v. United States of America, 516 F.2d 560 (2d Cir. 1975) — Referenced for its articulation of stricter requirements for estoppel, which the Court found were met in this case.

• Section 204(C), National Internal Revenue Code (NIRC), as amended — Cited as the source of the Commissioner's authority to refund or credit erroneously paid taxes, subject to a two-year prescriptive period for filing a written claim.
• Section 229, NIRC, as amended — The general provision governing actions for recovery of erroneously or illegally collected taxes, requiring a prior written claim and imposing a two-year prescriptive period from date of payment.
• Articles 1305, 1318, and 1356, Civil Code — Applied to establish that the informal settlement between the BIR and Toledo constituted a valid and binding contract, obligato1y in whatever form, as all essential requisites (consent, object, cause) were present.
• Article 19, Civil Code — Invoked in the context of abuse of rights, noting that Toledo's actions did not "act with justice" or "observe honesty and good faith."
• Revenue Regulations No. 18-2013, Section 3.1.1 — Cited to show that a taxpayer's failure to reply to a PAN within 15 days should result in the issuance of an FLD/FAN, a step the BIR omitted here due to Toledo's payment.

• Justice Alfredo Benjamin S. Caguioa (Chairperson)
• Justice Jhosep Y. Lopez
• Justice Mario V. Lopez
• Justice Antonio T. Kho, Jr.

• N/A (The decision was unanimous.)