Philippine Geothermal, Inc. vs. Commissioner of Internal Revenue

The amount of a VAT refund is determined by the taxpayer’s VAT Returns, not by the official receipts issued to the customer; a reimbursement of the tax by the customer to the statutory taxpayer neither extinguishes nor diminishes the taxpayer’s right to a refund from the Government, because the payment was made under a mistake of law and must be restored in full under the principle of solutio indebiti. For indirect taxes, the proper party to claim a refund is the statutory taxpayer who paid the tax, even if the economic burden was shifted.

Petitioner, Philippine Geothermal, Inc., is a resident foreign corporation engaged in the exploration, development, and exploitation of geothermal energy under a service contract with the National Power Corporation executed in September 1971. From September 1995 to February 1996, petitioner billed NPC a 10% VAT on its service fees for supplying steam. NPC refused to pay the VAT. To avert a tax deficiency, petitioner remitted VAT equivalent to 1/11 of the fees it had received, totaling ₱39,328,775.41. Petitioner later concluded that the supply of steam to NPC was a VAT-exempt transaction under Section 103 of the Tax Code, in light of Fiscal Incentives Review Board Resolution No. 17-87 restoring NPC’s tax and duty exemption privileges. On July 10, 1996, it filed an administrative claim for refund with the Bureau of Internal Revenue. The BIR did not act on the claim, prompting petitioner to file a petition with the Court of Tax Appeals on July 2, 1997. The BIR subsequently issued Ruling No. DA-111-96 on March 15, 1996, confirming the VAT exemption.

• Nature: Petitioner, Philippine Geothermal, Inc., is a resident foreign corporation duly licensed to engage in geothermal energy exploration, development, and exploitation. It had a service contract with the National Power Corporation since September 1971 to supply steam for electricity generation.

• VAT Payments: From September 1995 to February 1996, petitioner billed NPC value-added tax at 10% of its service fees. NPC did not pay the VAT. To forestall a possible deficiency assessment, petitioner paid VAT equivalent to 1/11 of the fees received, totaling ₱39,328,775.41, in several tranches covering each production period.

• Claim for Refund: On July 10, 1996, petitioner filed an administrative claim for refund with the Bureau of Internal Revenue, asserting that the sale of steam to NPC was a VAT-exempt transaction under Section 103 of the Tax Code, as implemented by Fiscal Incentives Review Board Resolution No. 17-87, which restored NPC’s tax and duty exemption privileges effective March 10, 1987. The BIR did not act on the claim.

• BIR Ruling: On March 15, 1996, the BIR issued Ruling No. DA-111-96, which categorically stated that the supply of steam by petitioner to NPC for generating electricity was exempt from VAT.

• CTA and CA Rulings: The Court of Tax Appeals ruled that the transaction was indeed VAT-exempt, but it awarded a refund of only ₱9,012,310.26. It deducted ₱30,316,465.15 from the claim, finding that the remaining amount represented VAT that NPC had already paid, as reflected in the official receipts petitioner issued to NPC showing VAT-inclusive amounts. The Court of Appeals affirmed this partial award.

• Misapprehension of Facts: Petitioner argued that the CTA’s conclusion that NPC had paid ₱30,316,465.15 as VAT was a misapprehension of the evidence. Petitioner never received the VAT amount from NPC; it paid the VAT from its own funds and recorded the payments in its VAT Returns. The official receipts merely indicated the gross billings inclusive of the VAT component that NPC was supposed to pay but did not.

• Entitlement to Full Refund: Petitioner maintained that having incontrovertibly established that the transaction was VAT-exempt and that it had remitted the full amount of ₱39,328,775.41 to the BIR, it was entitled to a complete restitution of the erroneous payments, irrespective of any purported reimbursement by NPC.

• Limited Exemption: Respondent Commissioner of Internal Revenue countered that FIRB Resolution No. 17-87 did not extend NPC’s tax exemption to purchases of goods and services, such as the supply of steam; thus, the transaction was not VAT-exempt and no refund was warranted.

• Strict Construction and Burden of Proof: Respondent asserted that claims for refund are construed strictissimi juris against the claimant and that petitioner failed to discharge its burden of proving indubitable entitlement to the refund, particularly since NPC appeared to have absorbed the VAT as part of the contract price.

• Amount of Refund: Whether the Court of Tax Appeals erred in awarding only a partial refund of ₱9,012,310.26 instead of the full ₱39,328,775.41, based on a misappreciation of the official receipts as evidence that NPC had paid the balance of the VAT.

• Relevance of Reimbursement: Whether any reimbursement or absorption of the VAT by NPC between the parties precludes petitioner from recovering the full amount of erroneously paid VAT from the Government.

• Amount of Refund: The CTA’s reliance on the official receipts to reduce the refund was misplaced. The VAT Returns filed by the taxpayer, not the supplier’s official receipts issued to its customer, constitute the proper basis for determining the amount of tax remitted to the BIR. Petitioner’s VAT Returns established that it had paid the entire ₱39,328,775.41. The official receipts showing VAT-inclusive amounts merely reflected billings, not actual payments by NPC. The CTA’s finding that NPC had paid the balance was a misapprehension of the evidence.

• Relevance of Reimbursement: The fact that NPC may have reimbursed petitioner for the VAT is legally irrelevant to the taxpayer’s right to a refund from the Government. Petitioner paid the VAT out of its own service fee under a mistake of law, and those payments were discontinued only after the BIR’s March 15, 1996 ruling. For indirect taxes such as VAT, the proper party to seek a refund is the statutory taxpayer who paid the tax to the government, even when the economic burden is passed on. Any reimbursement between petitioner and NPC is solely a matter between them. Under the principle of solutio indebiti, the Government received sums to which it had no right and must restore them in full.

• Strictissimi juris construction of tax refund claims — Tax refunds are in the nature of tax exemptions and must be strictly construed against the claimant. The burden rests upon the taxpayer to establish entitlement by sufficient and competent evidence. In this case, the taxpayer discharged that burden by presenting the BIR ruling confirming the exemption and its VAT Returns proving payment.

• Proper party to claim refund of indirect taxes — For indirect taxes like VAT, the proper party to question or seek a refund is the statutory taxpayer—the person on whom the tax is imposed by law and who paid the same—even when that taxpayer shifts the economic burden to another. The customer’s reimbursement of the tax does not affect the statutory taxpayer’s standing or right to recover from the Government.

• VAT Returns as basis for refund — The amount of a tax refund is to be determined from the taxpayer’s VAT Returns, not from the official receipts issued to the customer. The returns reflect the actual tax remitted to the Bureau of Internal Revenue.

• Solutio indebiti in tax refunds — Article 2154 of the Civil Code applies to erroneous tax payments: if something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. The Government must restore sums representing erroneous tax payments.

• “Tax refunds are in the nature of tax exemptions, and are to be construed strictissimi juris against the entity claiming the same. Thus, the burden of proof rests upon the taxpayer to establish by sufficient and competent evidence, its entitlement to a claim for refund.”

• “For indirect taxes like VAT, the proper party to question or seek a refund of the tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even when he shifts the burden thereof to another.”

• “The amount of refund should have been based on the VAT Returns filed by the taxpayer. Whether NPC had reimbursed petitioner is not the concern of the CTA. It is solely a matter between petitioner and NPC.”

• “Under the principle of solutio indebiti, the government has to restore to petitioner the sums representing erroneous payments of taxes. It is of no moment whether NPC had already reimbursed petitioner or not because in this case, there should have been no VAT paid at all.”

• Maceda v. Macaraig, Jr., G.R. No. 88291, June 8, 1993, 223 SCRA 217 — Followed. Established that NPC’s tax exemption under Republic Act No. 358 is broad enough to cover both direct and indirect taxes, confirming that the legislative intent was a complete tax exemption.

• Commissioner of Internal Revenue v. Solidbank Corporation, G.R. No. 148191, November 25, 2003, 416 SCRA 436 — Cited for the rule that tax refunds are construed strictissimi juris and that the taxpayer bears the burden of proving entitlement.

• Commissioner of Internal Revenue v. American Rubber Co., No. L-19667, November 29, 1966, 18 SCRA 842 — Followed. Held that a taxpayer who erroneously pays a tax is entitled to a refund even if the tax was passed on to the buyer, and that the statutory taxpayer is the proper claimant for indirect taxes.

• Cebu Portland Cement Co. v. Collector of Internal Revenue, No. L-20563, October 29, 1968, 25 SCRA 789 — Followed. Reiterated that the statutory taxpayer is the proper party to claim a refund of indirect taxes.

• National Development Company v. Cebu City, G.R. No. 51593, November 5, 1992, 215 SCRA 382 — Cited for the application of solutio indebiti to the restitution of erroneously paid taxes.

• Article 2154, Civil Code — Applied. The provision codifies the principle of solutio indebiti, obliging the Government to return the VAT payments that petitioner unduly delivered through a mistake of law.

• Republic Act No. 358, as amended by Republic Act No. 6395 and Presidential Decrees Nos. 380 and 938 — Applied. The series of statutes comprehensively exempts the National Power Corporation from all taxes, duties, fees, imposts, charges, and restrictions, whether direct or indirect, confirming the VAT-exempt character of the supply of steam to NPC.

• Fiscal Incentives Review Board Resolution No. 17-87 — Applied. Restored NPC’s tax and duty exemption privileges effective March 10, 1987, subject to exclusions that did not encompass the domestic purchase of services such as the supply of steam.

• Section 103 (now Section 109), National Internal Revenue Code — Applied. Exempts from VAT transactions that are exempt under special laws, thereby incorporating NPC’s statutory exemption into the VAT system.

Davide, Jr., C.J. (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concurred.

N/A — The decision was unanimous.