PSALM vs. Commissioner of Internal Revenue

In disputes solely between government offices, agencies, and government-owned or controlled corporations involving questions of law, the Secretary of Justice has original administrative jurisdiction under Presidential Decree No. 242 (now Chapter 14, Book IV of Executive Order No. 292), which as a special law prevails over the general provisions of the National Internal Revenue Code regarding the Court of Tax Appeals' jurisdiction. Furthermore, the sale of power generation assets by PSALM pursuant to its mandate under EPIRA is not subject to VAT as it is not conducted "in the course of trade or business" but as a governmental function to liquidate NPC's financial obligations.

PSALM was created under Republic Act No. 9136 (EPIRA) to manage the orderly sale, disposition, and privatization of National Power Corporation (NPC) generation assets, real estate, and Independent Power Producer (IPP) contracts with the objective of liquidating all NPC financial obligations and stranded contract costs in an optimal manner. PSALM conducted public biddings for the Pantabangan-Masiway Hydroelectric Power Plant and the Magat Hydroelectric Power Plant in 2006, selling them to First Gen Hydropower Corporation and SN Aboitiz Power Corporation, respectively. The Bureau of Internal Revenue (BIR) subsequently assessed deficiency VAT on these sales, leading to a dispute between PSALM, NPC, and the BIR regarding the taxability of the privatization transactions.

• PSALM is a government-owned and controlled corporation created under Republic Act No. 9136 (EPIRA) with the principal purpose of managing the orderly sale, disposition, and privatization of NPC generation assets, real estate, and other disposable assets to liquidate NPC financial obligations.
• On September 8, 2006 and December 14, 2006, PSALM conducted public biddings for the Pantabangan-Masiway Hydroelectric Power Plant and the Magat Hydroelectric Power Plant, respectively, with First Gen Hydropower Corporation and SN Aboitiz Power Corporation emerging as winning bidders.
• On August 14, 2007, the BIR sent a demand letter to NPC for the payment of P3,813,080,472.00 representing deficiency VAT for the sale of the two power plants, which NPC indorsed to PSALM.
• On August 30, 2007, the BIR, NPC, and PSALM executed a Memorandum of Agreement (MOA) wherein PSALM agreed to remit the basic VAT amount under protest without prejudice to the final resolution of the issues by appropriate courts or bodies, and the BIR agreed to waive interests and surcharges.
• In compliance with the MOA, PSALM remitted P3,813,080,472.00 to the BIR under protest.
• On September 21, 2007, PSALM filed a petition with the DOJ for the adjudication of the dispute to resolve whether the sale was subject to VAT, docketed as OSJ Case No. 2007-3.
• The DOJ ruled in favor of PSALM, holding that: (1) it had jurisdiction over the purely legal question between government entities; (2) PSALM was not a successor-in-interest of NPC as ownership had transferred to PSALM by operation of law under EPIRA; (3) the sale was not in the regular conduct of commercial activity but mandated by EPIRA; and (4) the VAT imposition was NULL and VOID.
• The BIR argued before the Court of Appeals that the DOJ had no jurisdiction because the dispute involved tax assessments within the exclusive authority of the Commissioner of Internal Revenue and the appellate jurisdiction of the Court of Tax Appeals under the NIRC.
• The Court of Appeals ruled that the DOJ gravely abused its discretion in assuming jurisdiction, holding that parties cannot stipulate to confer jurisdiction where none exists by law, and that the dispute fell within the CIR's authority under Section 204 of the NIRC.

• The Secretary of Justice has jurisdiction over the dispute under Presidential Decree No. 242, which mandates administrative settlement of disputes solely between government agencies, offices, and government-owned or controlled corporations involving questions of law.
• PD 242 is a special law that prevails over the general provisions of the National Internal Revenue Code regarding the Court of Tax Appeals' jurisdiction.
• PSALM is not a successor-in-interest of NPC; ownership of the generation assets was transferred to PSALM by operation of law under Sections 49 and 55 of the EPIRA.
• The sale of the power plants is not "in the course of trade or business" under Section 105 of the NIRC because it is a governmental function mandated by law to privatize NPC assets and liquidate debts, not a regular commercial activity.
• The BIR is estopped from denying the DOJ's jurisdiction because it voluntarily executed the MOA which explicitly recognized the DOJ's authority to resolve the dispute.

• The dispute involves a tax assessment and refund, which falls within the exclusive and original jurisdiction of the Commissioner of Internal Revenue under Section 4 of the NIRC and the exclusive appellate jurisdiction of the Court of Tax Appeals under Republic Act No. 9282.
• The DOJ has no jurisdiction over tax disputes; jurisdiction over the subject matter is conferred by law and cannot be conferred by consent or agreement of the parties.
• PSALM is a successor-in-interest of NPC, and therefore the repeal by Republic Act No. 9337 of NPC's VAT exemption applies to PSALM.
• The sale is "in the course of trade or business" under Section 105 of the NIRC, which includes incidental transactions, and is therefore subject to VAT.

• Procedural Issues:
  • Whether the Court of Appeals erred in giving due course to the petition for certiorari and in ruling that the Secretary of Justice lacked jurisdiction over the dispute.
  • Whether the BIR deserved the relief of certiorari.
• Substantive Issues:
  • Whether the sale of the Pantabangan-Masiway and Magat Power Plants by PSALM to private entities is subject to Value-Added Tax under Section 105 of the National Internal Revenue Code.

• Procedural:
  • The Court of Appeals erred in nullifying the DOJ decisions. The Secretary of Justice has jurisdiction over the dispute under Presidential Decree No. 242 because it involves solely government entities (PSALM and NPC as government-owned corporations, and the BIR as a government office) and questions of law regarding the interpretation and application of statutes. PD 242, as a special law governing intra-governmental disputes, prevails over the general provisions of the NIRC regarding the CTA's jurisdiction. The MOA executed by the parties, which explicitly recognized DOJ jurisdiction, is valid and binding. The President's constitutional power of control over all executive departments supports the administrative settlement of intra-governmental disputes before judicial recourse. The doctrine of exhaustion of administrative remedies requires parties to avail of the administrative remedy under PD 242 before resorting to courts.
• Substantive:
  • The sale of the power plants is NOT subject to VAT. PSALM is not a successor-in-interest of NPC; ownership of the generation assets, real estate, and IPP contracts was transferred to PSALM by operation of law under Sections 49 and 55 of the EPIRA. The sale was not "in the course of trade or business" under Section 105 of the NIRC because it was not the regular conduct or pursuit of a commercial or economic activity, but rather a governmental function mandated by the EPIRA to privatize NPC assets and liquidate financial obligations. Following Commissioner of Internal Revenue v. Magsaysay Lines, Inc., an isolated transaction made pursuant to a government privatization policy is not subject to VAT. The DOJ decisions declaring the VAT imposition NULL and VOID and ordering the refund of the P3,813,080,472.00 remitted under protest are reinstated.

• Special Law vs. General Law — A special law (PD 242 on intra-governmental disputes) prevails over a general law (NIRC on tax jurisdiction) when there is conflict; the special law is treated as an exception to the general law rather than being repealed by it.
• President's Power of Control — Under Section 17, Article VII of the Constitution, the President has the power to alter, modify, nullify, or set aside the judgment or action of subordinate officers in executive departments; this power cannot be diminished or withdrawn by Congress and supports the administrative settlement of disputes between executive agencies before judicial intervention.
• Exhaustion of Administrative Remedies — Parties must exhaust administrative remedies provided by statute (such as PD 242) before resorting to courts; failure to do so renders the action premature for lack of cause of action.
• "In the Course of Trade or Business" (VAT Liability) — Means the regular conduct or pursuit of a commercial or economic activity; isolated transactions mandated by law for governmental purposes (such as privatization to liquidate debts) do not qualify as being in the course of trade or business and are not subject to VAT.

• "Jurisdiction over the subject matter is vested by the Constitution or by law, and not by the parties to an action. Jurisdiction cannot be conferred by consent or acquiescence of the parties or by erroneous belief of the court, quasi-judicial office or government agency that it exists."
• "The use of the word 'shall' in a statute connotes a mandatory order or an imperative obligation... administrative settlement or adjudication of disputes and claims between government agencies and offices... is not merely permissive but mandatory and imperative."
• "PD 242 is only applicable to disputes, claims, and controversies solely between or among the departments, bureaus, offices, agencies and instrumentalities of the National Government, including government-owned or controlled corporations, and where no private party is involved."
• "The sale of the power plants is not in pursuit of a commercial or economic activity but a governmental function mandated by law to privatize NPC generation assets."
• "Since the Constitution has given the President the power of control, with all its awesome implications, it is the Constitution alone which can curtail such power."

• Philippine National Oil Company v. Court of Appeals — Distinguished; involved a private citizen (Tirso Savellano) thus PD 242 did not apply because the dispute was not solely between government entities.
• Philippine Veterans Investment Development Corp. (PHIVIDEC) v. Judge Velez — Cited to explain that PD 242 is constitutional and its purpose is to provide speedy administrative settlement of government disputes to avoid clogging court dockets.
• Commissioner of Internal Revenue v. Magsaysay Lines, Inc. — Followed; sale of vessels by National Development Company pursuant to privatization policy was not subject to VAT as it was not in the course of trade or business.
• Mindanao II Geothermal Partnership v. Commissioner of Internal Revenue — Distinguished; sale of vehicle previously used in business held subject to VAT as an incidental transaction, unlike the power plants sold for privatization purposes.
• Vinzons-Chato v. Fortune Tobacco Corporation — Cited for rules on statutory construction regarding the relationship between general and special laws.
• Carpio v. Executive Secretary — Cited for the definition and scope of the President's power of control over executive departments.
• Rufino v. Endriga — Cited for the principle that Congress cannot by law deprive the President of his constitutional power of control over executive offices.

• Section 17, Article VII of the 1987 Constitution — Grants the President control over all executive departments, bureaus, and offices.
• Presidential Decree No. 242 — Prescribes the procedure for administrative settlement or adjudication of disputes solely between or among government offices, agencies, and instrumentalities, including government-owned or controlled corporations.
• Chapter 14, Book IV of Executive Order No. 292 (Administrative Code of 1987) — Codifies PD 242 provisions regarding settlement of controversies among government offices and corporations.
• Section 105 of the National Internal Revenue Code of 1997 — Defines persons liable for VAT and the phrase "in the course of trade or business."
• Section 4 of the National Internal Revenue Code of 1997 — Grants the Commissioner of Internal Revenue power to interpret tax laws and decide tax cases, subject to review by the Secretary of Finance.
• Republic Act No. 9136 (EPIRA), Sections 47, 49, 50, 51, and 55 — Provisions on the creation and powers of PSALM, the privatization mandate, and the transfer of ownership of NPC assets to PSALM.
• Republic Act No. 9282 — Expands the jurisdiction of the Court of Tax Appeals; cited to contrast with PD 242 regarding jurisdiction over intra-governmental tax disputes.
• Republic Act No. 9337, Section 24 — Repeals the VAT exemption of NPC; argued by BIR but held not applicable to PSALM as PSALM is not NPC's successor-in-interest.

• Justice Velasco, Jr. — Concurred in the ruling on DOJ jurisdiction but emphasized the procedural hierarchy for appeals: decisions of the Secretary of Justice should be appealed to the Office of the President (if the amount exceeds one million pesos), and from the Office of the President, the aggrieved party should file directly with the Supreme Court via certiorari, not with the Court of Appeals, because the CA has no jurisdiction over tax cases and the CTA has no jurisdiction over decisions of the Office of the President.

• Justice Del Castillo — Argued that tax disputes fall exclusively under the jurisdiction of the Commissioner of Internal Revenue and the Court of Tax Appeals under Republic Act No. 1125 and Republic Act No. 9282; PD 242 is a general law that must yield to the specific NIRC provisions on tax jurisdiction; allowing DOJ jurisdiction would deprive the CTA of its exclusive appellate jurisdiction and the CIR of any judicial remedy since the CA cannot review tax cases and the CTA cannot review Office of the President decisions; cited Philippine National Oil Company v. Court of Appeals and CIR v. Secretary of Justice to support the exclusivity of CTA jurisdiction over tax matters.