PSALM v. CIR (G.R. No. 198146. August 08, 2017)


CASE DIGEST: POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION, PETITIONER, V. COMMISSIONER OF INTERNAL RESPONDENT. [G.R. No. 198146, August 08, 2017]. THIS CASE BRIEF INVOLVES THE ISSUE ON TAXABILITY OF SALE BY PSALM OF POWER PLANTS. FOR OTHER ISSUES: https://www.projectjurisprudence.com/2019/08/psalm-v-cir-gr-no-198146-august-08-2017.html.

FACTS: Petitioner Power Sector Assets and Liabilities Management Corporation (PSALM) is a government-owned and controlled corporation created under Republic Act No. 9136 (RA 9136), also known as the Electric Power Industry Reform Act of 2001 (EPIRA). Section 50 of RA 9136 states that the principal purpose of PSALM is to manage the orderly sale, disposition, and privatization of the National Power Corporation (NPC) generation assets, real estate and other disposable assets, 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 privatization of the Pantabangan-Masiway Hydroelectric Power Plant (Pantabangan-Masiway Plant) and Magat Hydroelectric Power Plant (Magat Plant) on 8 September 2006 and 14 December 2006, respectively. First Gen Hydropower Corporation with its $129 Million bid and SN Aboitiz Power Corporation with its $530 Million bid were the winning bidders for the Pantabangan-Masiway Plant and Magat Plant, respectively.

On 28 August 2007, the NPC received a letter dated 14 August 2007 from the Bureau of Internal Revenue (BIR) demanding immediate payment of P3,813,080,472 deficiency value-added tax (VAT) for the sale of the Pantabangan-Masiway Plant and Magat Plant. The NPC indorsed BIR's demand letter to PSALM.

On 30 August 2007, the BIR, NPC, and PSALM executed a Memorandum of Agreement (MOA).

On 21 September 2007, PSALM filed with the Department of Justice (DOJ) a petition for the adjudication of the dispute with the BIR to resolve the issue of whether the sale of the power plants should be subject to VAT. The case was docketed as OSJ Case No. 2007-3.
On 13 March 2008, the DOJ ruled in favor of PSALM.

The BIR moved for reconsideration, alleging that the DOJ had no jurisdiction since the dispute involved tax laws administered by the BIR and therefore within the jurisdiction of the Court of Tax Appeals (CTA). Furthermore, the BIR stated that the sale of the subject power plants by PSALM to private entities is in the course of trade or business, as contemplated under Section 105 of the National Internal Revenue Code (NIRC) of 1997, which covers incidental transactions. Thus, the sale is subject to VAT. On 14 January 2009, the DOJ denied BIR's Motion for Reconsideration.

The BIR went up to the Court of Appeals which held that the petition filed by PSALM with the DOJ was really a protest against the assessment of deficiency VAT, which under Section 204 of the NIRC of 1997 is within the authority of the Commissioner of Internal Revenue (CIR) to resolve. In fact, PSALM's objective in filing the petition was to recover the P3,813,080,472 VAT which was allegedly assessed erroneously and which PSALM paid under protest to the BIR.

Quoting paragraph H of the MOA among the BIR, NPC, and PSALM, the Court of Appeals stated that the parties in effect agreed to consider a DOJ ruling favorable to PSALM as the latter's application for refund.

Citing Section 4 of the NIRC of 1997, as amended by Section 3 of Republic Act No. 8424 (RA 8424) and Section 7 of Republic Act No. 9282 (RA 9282), the Court of Appeals ruled that the CIR is the proper body to resolve cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the NIRC or other laws administered by the BIR. The Court of Appeals stressed that jurisdiction is conferred by law or by the Constitution; the parties, such as in this case, cannot agree or stipulate on it by conferring jurisdiction in a body that has none.

In conclusion, the Court of Appeals found that the DOJ Secretary gravely abused his discretion amounting to lack of jurisdiction when he assumed jurisdiction over OSJ Case No. 2007-3. PSALM moved for reconsideration, which the Court of Appeals denied in its 3 August 2011 Resolution. Hence, this petition.

ISSUE: Whether the sale of the power plants is subject to VAT?

To resolve the issue of whether the sale of the Pantabangan-Masiway and Magat Power Plants by petitioner PSALM to private entities is subject to VAT, the Court must determine whether the sale is "in the course of trade or business" as contemplated under Section 105 of the NIRC, which reads:
SEC 105. Persons Liable. - Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. xxxThe phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. 
The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business. (Emphasis supplied)
Under Section 50 of the EPIRA law, PSALM's principal purpose is to manage the orderly sale, disposition, and privatization of the NPC generation assets, real estate and other disposable assets, and IPP contracts with the objective of liquidating all NPC financial obligations and stranded contract costs in an optimal manner.

PSALM asserts that the privatization of NPC assets, such as the sale of the Pantabangan-Masiway and Magat Power Plants, is pursuant to PSALM's mandate under the EPIRA law and is not conducted in the course of trade or business. PSALM cited the 13 May 2002 BIR Ruling No. 020-02, that PSALM's sale of assets is not conducted in pursuit of any commercial or profitable activity as to fall within the ambit of a VAT-able transaction under Sections 105 and 106 of the NIRC.

On the other hand, the CIR argues that the previous exemption of NPC from VAT under Section 13 of Republic Act No. 6395 (RA 6395) was expressly repealed by Section 24 of Republic Act No. 9337 (RA 9337).

As a consequence, the CIR posits that the VAT exemption accorded to PSALM under BIR Ruling No. 020-02 is also deemed revoked since PSALM is a successor-in-interest of NPC. Furthermore, the CIR avers that prior to the sale, NPC still owned the power plants and not PSALM, which is just considered as the trustee of the NPC properties. Thus, the sale made by NPC or its successors-in-interest of its power plants should be subject to the 10% VAT beginning 1 November 2005 and 12% VAT beginning 1 February 2007.

We do not agree with the CIR's position, which is anchored on the wrong premise that PSALM is a successor-in-interest of NPC. PSALM is not a successor-in-interest of NPC. PSALM, a government-owned and controlled corporation, was created under the EPIRA law to manage the orderly sale and privatization of NPC assets with the objective of liquidating all of NPC's financial obligations in an optimal manner. Clearly, NPC and PSALM have different functions. Since PSALM is not a successor-in-interest of NPC, the repeal by RA 9337 of NPC's VAT exemption does not affect PSALM.

In any event, even if PSALM is deemed a successor-in-interest of NPC, still the sale of the power plants is not "in the course of trade or business" as contemplated under Section 105 of the NIRC, and thus, not subject to VAT. 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. PSALM was created primarily to liquidate all NPC financial obligations and stranded contract costs in an optimal manner. The purpose and objective of PSALM are explicitly stated in Section 50 of the EPIRA law.

PSALM is limited to selling only NPC assets and IPP contracts of NPC. The sale of NPC assets by PSALM is not "in the course of trade or business" but purely for the specific purpose of privatizing NPC assets in order to liquidate all NPC financial obligations. Thus, it is very clear that the sale of the power plants was an exercise of a governmental function mandated by law for the primary purpose of privatizing NPC assets in accordance with the guidelines imposed by the EPIRA law.

The CIR argues that the Magsaysay case, which involved the sale in 1988 of NDC vessels, is not applicable in this case since it was decided under the 1986 NIRC. The CIR maintains that under Section 105 of the 1997 NIRC, which amended Section 99 of the 1986 NIRC, the phrase "in the course of trade or business" was expanded, and now covers incidental transactions. Since NPC still owns the power plants and PSALM may only be considered as trustee of the NPC assets, the sale of the power plants is considered an incidental transaction which is subject to VAT.

We disagree with the CIR's position. PSALM owned the power plants which were sold. PSALM's ownership of the NPC assets is clearly stated under Sections 49, 51, and 55 of the EPIRA law.

Under the EPIRA law, the ownership of the generation assets, real estate, IPP contracts, and other disposable assets of the NPC was transferred to PSALM. Clearly, PSALM is not a mere trustee of the NPC assets but is the owner thereof. Precisely, PSALM, as the owner of the NPC assets, is the government entity tasked under the EPIRA law to privatize such NPC assets.

The CIR alleges that the sale made by NPC and/or its successors-in­ interest of the power plants is an incidental transaction which should be subject to VAT. This is erroneous. As previously discussed, the power plants are already owned by PSALM, not NPC. Under the EPIRA law, the ownership of these power plants was transferred to PSALM for sale, disposition, and privatization in order to liquidate all NPC financial obligations.

Unlike the Mindanao II case, the power plants in this case were not previously used in PSALM's business. The power plants, which were previously owned by NPC were transferred to PSALM for the specific purpose of privatizing such assets. The sale of the power plants cannot be considered as an incidental transaction made in the course of NPC's or PSALM's business. Therefore, the sale of the power plants should not be subject to VAT.

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