1j(Y

Republic of the Phil ippines

COURT OF TAX APPEALS
Quezon City
SECOND DIVISION
MANILA ELECTRIC COMPANY,
Petitioner,
CTA CASE NO. 7242
-versus-
Present :
CASTANEDA JR., Chairperson
CASANOVA and
MINDARO-GRULLA JJ.
COMMISSIONER
REVENUE,
OF INTERNAL
Promu!.g._oted:
Respondent. OtL 0 6 , ~
,- rJD t"
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~ - - - - - - x
DECISION
MINDARO-GRULLA, J.:
This is on Amended Petition for Review (Ad Coutelom)
1
filed on
November 22, 2005 by Manila Electric Company (MERALCO), as
petitioner, against the Commissioner of Internal Revenue (CIR) as
respondent, for the Court in Division, pursuant to Rule 4, Section 3 (a)
(2), in relation to Rule 8, Section 4(o), of the Revised Rules of the Court
of Tax Appeals (RRCTA) .
1
Roll o, pp. 479-493
~
1111
MERALCO vs . Commissioner of Internal Revenue
CT A Case No. 7242
DECISION
Page 2 of 40
The said Amended Petiti on is an appeal from respondent CIR' s
inaction/denial on MERALCO's claim for a tax refund or credit of
excess income tax payments for the taxable years 1994-1998 and 2000
in the total amount of P5,796,342,792.712, broken down as foll ows:
Taxable Original Tax Disallowed Adjusted Income Adjusted Income Excess Income
Year Payments CWTs
4
Tax Payments Tax Due Tax Payments
6
1994
1995
1996
1997
1998
2000
Total
with CWTs
3
with CWTs
5
p 1,847,186,617 p 1,847,186,617 p 1,149,772,719.52
p
697,413,897.48
p 2,112,659,180 p 2,112,659,180 p 1,369,237,724.71
p
7 43,421 ,455.29
p 2,601 ,323,036
p
15,544 p 2,601,307,492 P1 ,584,311 ,872.82 p 1,016,995,619.18
p 2,591 ,310,020
p
54,568.24 p 2,591,255,451.76 p 1 ,496,450,692.45 p 1,094,804,759.31
p 2,361,775,866
p
18,214 p 2,361,757,652 p 1,233,907,225.60 p 1 '127,850,426.40
p 1 ,558,159,055 p 2,687,466.29 p 1,555,471,588.71
p
439,614,953.66 p 1 '115,856,635.05
P13,072,413, 774 p 2,775,792.53 P13,069,637,981.47 p 7,273,295,188.76 p 5,796,342,792.71
The original claim for a tax refund or credit of excess income tax
payments for the taxable years 1994-1998 and 2000-2001 amounted to
P7, 107,534,282.00. Thereafter, respondent CIR partly granted
MERALCO's claim for the taxable year 2001 to the extent of
P894,473,932.58. Hence, the original claim in the sum of
P7, 107,534,282.00 less MERALCO's claim for the taxable year 2001 in the
amount of P 1 ,071 ,546,018.00 is equal to the original amended claim for
2
Supplemental Joint Stipulation of Facts and Issues, Rollo, pp. 623-624
3
Supplemental Joint Stipulation of Facts and Issues, Annexes "0", "P", "Q","R", "S" &
"S- 1"
4
Supplemental Joint Stipulation of Facts and Issues, citing CIR's Decision doled
September 21, 2005, Annex "A"
s Original Tax Payments with CWTs less Disall owed CWTs
6 Supplemental Joint Stipulation of Facts and Issues, citing CIR's Decision doted
September 21, 2005, Annex "A"- Recommended amount for TCC- For denial due to
prescription.
111 2
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- ~ ~
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DE C ISION
Page 3 of 40
a tax refund or credit of excess income tax payments for the taxable
years 1994-1998 and 2000 amounted to P6,035,988,264.00.
MERALCO's claim for a tax refund or credit is due to the alleged
overpayment of income taxes arising from the Decision of the Supreme
Court in the consolidated cases of Republic of the Philippines, et. al. vs.
Manila Electric Company, G.R. No. 141314 and Lawyers Against
Monopoly, etc. vs. Manila Electric Company, G.R. No. 141369, which
became final and executory on May 5, 2003, mandating MERALCO to
refund the amount equivalent to P0.167 per kilowatt-hour of over billed
electric charges to its customers for their electric consumption made
from February 1994 up to December 2003. The dispositive portion of
which reads as follows:
"WHEREFORE, in view of the foregoing, the instant
petitions are GRANTED and the decision of the Court of Appeals
in C.A. G.R. SP No. 46888 is REVERSED. Respondent MERALCO is
authorized to adopt a rote adjustment in the amount of P0.017
per kil owaithour, effective with respect to MERALCO's billing
cycles beginning 1994. Further, in accordance with the decision
of the ERB dated February 16, 1998, the excess average amount
of P0.167 per kilowatthour starting with MERALCO's billing cycles
beginning February 1994 is ordered to be refunded to
MERALCO's customers or correspondingly credited in their favor
for future consumption.
SO ORDERED."
Petitioner MERALCO is a domestic corporation duly organized
and existing under the laws of the Republic of the Philippines, with
111 3
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MERALCO vs. Commissi oner of Internal Revenue
CT A Case No. 7242
DECISION
Page 4 of 40
principal office address at Lopez Building, Ortigas Avenue, Pasig City,
and engaged in the business of distributing and supplying electric
power within its franchi se area . MERALCO is a registered taxpayer wi th
TI N 000- 101-528-000 and Certifi c ate of Registration No. OCN8RCOOOOO
1611 9 issued by the Bureau of Internal Revenue on January 29, 1996.
Respondent CIR is the officer duly authorized by law to assess
and collect all national internal revenue taxes, fees, and charges,
including the power to decide refunds of internal revenue taxes, fees or
other charges, with offi c e address at the BIR Nati onal Office Bui lding,
Agham Road, Di liman, Quezon City.
On December 23, 1993, MERALCO fi led with the then Energy
Regulatory Boord (now Energy Regulatory Commission) an application
for the revision of its rate schedules, docketed as ERB Case No. 93- 11 8.
On January 28, 1994, an Order granting a provisional increase of P0.184
per kwh, subjec t to the conditi on that after hearing and evaluation,
should MERALCO be entitled to a lesser increase in rates, all excess
collected by MERALCO shall be refunded to its c ustomers or credi t ed in
their future consumpti on_?
7
Joint Sti pulation of Facts and Issues, Roll o, p. 533
'
1114
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DE C ISION
Page 5 of 40
Thus, MERALCO paid the income tax due on its taxable income
based on gross electric revenue computed at an average basic
distribution rate of P2.996 per kwh (i.e. existing average rote of P2.812
per kwh plus provisional inc rease of P0.184).
On February 16, 1998, the Energy Regulatory Board rendered a
Decisi on granting only a rate increase of P0. 17 per kwh and ordering
MERALCO to refund or c redit to its customers the average amount of
P0.167 per kwh beginning February 1994.
MERALCO appealed the Decision of the Energy Regulatory
Board to the Court of Appeals which ruled in its favor.
However, the Supreme Court reversed the Court of Appeals'
Decision and upheld the previous Decision of the Energy Regulatory
Board.s
On May 5, 2003, the Supreme Court's Decision became final and
executory, after denying with finality MERALCO's Motion for
Reconsideration therefrom. As a result, Meralco's gross electric revenue
during the taxable years 1994- 1998 and 2000-2001, taxable income
s Republic of the Philippines, represented by the Energy Regulatory Board vs. Manila
Electric Company, G. R. No. 141314. and Lawyers Against Monopoly and Poverty
(LAMP), et. al. vs. Manila Electri c Company, G.R. No. 141 369, November 15, 2002.
111 5
L
YEAR
1994
1995
1996
1997
1998
2000
200 1
TOTAL
MERALCO vs. Commissioner of Internal Revenue
CTA Case No. 7242
DE C I SION
Page 6 of 40
and income tax liability were reduced, thereby resulti ng to excess
income t ax payments as follows:
ORIGINAL REDUCED INCOME TAX INCOME TAX EXCESS
TAXABLE TAXABLE ORIGINALLY ACTUALLY INCOME TAX
INCOME INCOME PAID PAID
P5,277 ,67 6,049 P3,073,6 19,7 45 P1 ,847, 186,6 17 P1 ,075,766,9 11 p 77 1 ,419,706
6,036, 169,086 3,447,481,566 2, 11 2,659,1 80 1 ,206,618,548 906,040,632
7,432,351 ,53 1 4,526,289,260 2,60 1 ,323,036 1,584,201,241 1 ,017, 121,795
7,403,742,9 14 4,275,202,47 6 2,591,3 1 0,020 1 ,496,320,866 1 ,094,989, 154
6, 946,399,606 3,629,126,440 2,361,775,866 1,233,902,990 1 '127,872,876
4,869,247,048 1 ,373,796,730 1 ,558, 159,055 439,6 14,954 1,1 18,544,1 0 1
4,0 12, 193, 155 387,079,475 1, 283,90 1,8 10 212,355,792 1 ,071 ,546,018
P41 , 977,779,389 P20,712,595,692 P14,356,315,584 P7,248,781 ,302 P7, 107,534,282
On November 27, 2003, MERALCO fi led a claim for tax refund or
c redit of excess income tax payments wit h respondent CIR.
On May 4, 2005, due to inaction, MERALCO appealed to thi s
Court and fi led a "Petition for Review (Ad Cautelam)" and principall y
anchored its claim for a tax refund or credit of excess income tax
payments under the principle of solutio indebiti within the prescriptive
period of six (6) years, pursuant to Art. 1145 of the New Civi l Code or
within two (2) years, as provided in Section 229 of the 1997 Tax Code.
On July 6, 2005, respondent CIR in his Answer9 raised the special
and affirmative defenses, as fol lows:
" XXX XXX XXX.
9
Rollo, pp. 457-463 L
111 6
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DE C ISION
Page 7 of 40
7.) Thi s Honorable Court is wit hout jurisdic tion to entertain
the instant petiti on. Peti tioner hinges its c ause of acti on on
alternative provisions of law. One of these is the ordinary c laim
for refund under the 1997 Nati onal Internal Revenue Code(the
"Tax Code" ). parti c ul arly, Section 229 thereof, or the provision
on recovery of taxes erroneously or ill egally coll ected. Secti on
229 o f the "Tax Code" emphati cally states that "In any case, no
suc h suit or proceeding [Recovery of Tax Erroneously or Illegally
Coll ected] shall be fil ed aft er the expirati on of two (2) years
from t he date of payment of the tax or penalty regardless of
any supervening cause that may arise aft er payment. ... "The
taxable years involved in this case are taxable years 1994, 1995,
1996, 1997, 1998 and 2000. The income tax returns for the said
periods have been filed, and taxes due refl ected thereon were
paid, at dates whic h are, concededly, well -beyond the 2-year
peri od gra nt ed by law wi thin whic h recovery of all eged
erroneously paid or coll ected taxes can be had. Thus, being
that the law itself whic h petiti oner invokes makes it c rystal-clear
tha t the petitioner is barred from even filing the insta nt petiti on
for review, this Honorable Court shoul d dismiss the instant
petiti on.
8.) Indubitably, petitioner's asserti on tha t the two (2) year
peri od should be reckoned from the time the Supreme Court
decision came out cannot be sustained. The Tax Code
categoricall y states that the 2 year period shoul d be reckoned
from the date of payment of the tax or penalty. Petiti oner' s
asserti on is a reductio ad absurdum argument, whi ch has no
legal foundati on.
9. ) Petitioner li kewise invokes Arti c le 2154 of the Civil
Code, of solutio indebiti which states tha t "if something is
received when there is no right to demand it, and it was unduly
deli vered through mistake, the obli gati on to return it arises".
Under Arti cle 1145 (2) of the same Code, a cause of ac ti on
arising from solutio indebiti should be brought within six (6) years
from the ti me of payment . xxx.
1 0.) However, peti tioner has no cause of acti on under the
provi sion of solutio indebiti . There was a perfect legal ri ght on
the part of the respondent to demand the payment of these
taxes during the taxable years where refund is being claimed.
More important (l y). there was no delivery through mistake on
the part of petitioner. It knew a t the ti me it paid that the income
taxes it was paying were actuall y due. Petiti oner cannot feign
ignorance. As early as February 1998, when the ERB decision
11 17
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MERALCO vs. Commissioner of Internal Revenue
CTA Case No. 7242
Page 8 of 40
DECISION
came out ordering petitioner to refund Php .1 67 to its consumers,
petitioner already knew that it should not be charging the
consumers with the extra amount, and was thus not liable for
the income taxes on this excessive collection. At that point in
time petitioner had an option. Either it restituted its consumers
and continued with the status quo ante or continued charging
the inofficious exaction while waiting for a court resolution.
Petitioner knowingly exercises(d) its option to seek judicial
recourse and continued charging the consumers with the higher
rate. and paying the income taxes due thereon. Petitioner. thus,
cannot be taken as one who was mistaken in payment. Thus.
solutio indebiti does not apply.
11 .) Moreover, equity belongs to those who come to
court with clean hands. Petitioner had the opportunity to claim
for refund as early as 1998 when the Energy Regulatory Board
(ERB) issued its Decision ordering herein petitioner to refund
Php .167 per kilowatthour to its consumers. At that point in time.
petitioner should have ceased burdening the Filipino people,
and refunded the excess amounts it collected. Instead.
petitioner chose to go through the court processes. It exercised
an option available to it. mindful of all its consequences. and
continued charging its consumers with the already declared
undue exaction. To reiterate, at that time. petitioner not only
refused to comply with the ERB order of refund. it obstinately
continued the collection of excessive electricity rates. For
petitioner now to turn around and state that it had no
opportunity to claim for refund of the allegedly excessive
income taxes it paid. before the Supreme Court decision came
out. is a falsity. The truth is that when petitioner chose to appeal
the decision. it had already considered all the permutations of
such decision. It had already foreseen that certain remedies will
be lost to it, among which. is the right to claim for refund of
income taxes it paid pertaining to the Php .167 refundable to
consumers. Petitioner's whimper for equity should be muted by
calling into mind the thunderous wails of the Filipino people's
protests against lhe undue exactions when the ERB order was
disregarded.
12.) The inequity of the petition is further exposed when it
is considered that petitioner is praying for the entire amount of
alleged erroneously collected income taxes it paid from 1994-
1998. and 2000-2001. when it had not even showed proof !hat it
had paid all of the amounts it should refund to consumers. As
the party claiming for refund. it is incumbent upon the petitioner
to show that every cent it had been ordered to return has been
111 8
(_
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DECISION
Page 9 of 40
duly returned before the taxes all eged to have been overpaid,
pertaining to such amounts, can be claimed as refund.
13.) This Honorable Court should not be lulled into the
attempts of the petition to cite seemingly parallel cases. The
general pronouncements of the Supreme Court in the cited
cases are all inapplicable to petitioner's case. The factual
mi lieu of the instant situation is worlds apart from any of those
cited cases in the petition.
14.) Furthermore, in action for refund, the burden of
proof is on the taxpayer to establish its right to refund. Failure to
sustain the burden is fatal to the claim for refund/credit. This is
so because exemptions from taxation are highly disfavored in
law, and he who claims exemption must be able to justify his
claim by the clearest grant of organic or statutory law. An
exemption from common burden cannot be permitted to exist
upon vague implications (Asiatic Petroleum Co. {PI} v. Llanes, 49
Phil. 466 cited in Collector of Internal Revenue v. Manila Jockey
Club, Inc. 98 Phil. 670);
15.) The government will not be unduly enriched by
keeping the income taxes petitioner paid. The said amounts
have already been presumably spent for the welfare of the
Filipino people. These are the same people who had been
extremely prejudiced by petitioner's undue exaction. The high
cost of power during that time had already affected the
government due to reduced income taxes paid to the
government. Moreover, the impact of the undue exaction had
closed innumerable businesses and had prevented the coming
of investors. An analysis of the results of petitioner's exercise of
discretion to disregard the ERB order cannot be made on simple
addition and subtraction. But it is indubitable that petitioner's
desire for profit has also taken its toll on the government's
revenue generation efforts during those years, and even these
days."
Thereafter, in a letter dated September 21, 2005 (which was
received on October 3, 2005), respondent CIR partially granted
MERALCO's claim for a tax refund or credit for the taxable year 2001 to
11 19
(
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DECISION
Page 10 of 40
the extent of P894,473,932.58 but denied the c laim with respect to the
taxable years 1994-1998 and 2000 due to prescription.
On November 22, 2005, MERALCO filed the instant Amended
Petition for Review (Ad Cautelam).
In the course of the proceedings, the parties submitted their
"JOINT STIPULATI ON OF FACTS AND ISSUES" stating, among others, the
issues for resoluti on.
Respondent CIR filed a "Supplemental Answer" and averred
that a task force was created by the Large Taxpayers Service and
upon audit, it found out that there were several discrepancies resulting
to overstatement on MERALCO's claim for refund.
By way of a Reply, MERALCO maintains that it did not overstate
its claim for refund.
Nonetheless, the parties filed a "SUPPLEMENTAL JOINT
STIPULATION OF FACTS AND ISSUES" thereby integrating respondent
CIR' s Decision dated September 31, 2005, significantly changing some
of their previously agreed fac ts and issues.
During trial , MERALCO presented two (2) witnesses, namely: Atty.
Jose Ronald V. Vall es (tsn., August 14, 2006, pp. 5-1 0), and Mr. Gener R.
1120
[.
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
D EC I SI O N
Page 11 of 40
Montemayor (tsn., November 12, 2007, pp. 4-12; tsn., February 20, 2008,
pp. 4-1 0; tsn., March 31, 2008, pp. 4-9; tsn., May 12, 2008, pp.5- 13; and
tsn. , July 30, 2008, pp. 4-8).
Likewise, respondent CIR presented two (2) witnesses, namely: Mr.
Hercules M. Catapia (tsn., April 27, 2009) and Mr. Oscar A. Sable (tsn.,
June 8, 2009, pp. 9- 15) .
After trial, the parties were directed to file their Memoranda.
On January 25, 20 10, the case was deemed submitted for
decision.
Instead of the issues previously agreed upon, the parties have
stipulated and agreed on the issues JO to be resolved by this Court, as
foll ows:
"1. Whether or not petitioner's right to recover its excess
income tax payments in the total amount of
P5,796,342,792.71 for the taxable years 1994- 1998
and 2000 has prescribed;
2. Whether or not petitioner has c harged to expense or
to loss or offset against reported revenues in its
Income Tax Returns (ITRs) for the taxable years 2003-
2005 the amounts refunded or credited to customers
arising from the Supreme Court Decision in G. R. Nos.
141314 and 141369; and
10 Supplemental Joint Sti pulation of Facts and Issues, Rollo, p. 633
1121
t...
MERALCO vs. Commissioner of lnl ernol Revenue
CT A Cose No. 7242
DECISION
Page 12 of 40
3. Whether or not petitioner's right to recover its excess
income tax payments for the taxable years 1994-
1998 and 2000 is subject to the condition that refund
or credit to future consumption due the customers
concerned in the average amount of P0.167 per
kilowatthour has been actually given or credited to
them by the petitioner.
We find the Petition meritorious.
We discuss the issues in seriatim.
1. As to the first issue -
"Whether or not petitioner's right -to recover its excess
income tax payments in the total amount of
P5,796,342,792.7 1 for the taxable years 1994-1998 and
2000 has prescribed"
Section 229 of the 1997 National Internal Revenue Code, as amended,
provides that taxpayers seeking a refund of any national internal
revenue tax hereafter alleged to have been:
( 1 ) erroneously or illegally assessed or collected, or
(2) of any penalty claimed to have been collected without
authority, or
(3) of any sum alleged to have been excessive or in any
manner wrongfully collected,
must file within two (2) years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise after
payment.JJ
11
Sec. 229. Recovery of Tax Erroneously or Ill egall y Collec ted. - No suit or
proceeding shall be maintained in any court for the recovery of any notional internal
112 2
(
MERALCO vs. Commi ssioner of Internal Revenue
CTA Case No. 7242
DECISION
Page 13 of 40
However, under the New Civil Code, Article 22
12
and Article
2154 13 in relation to Article 114514 thereof provide that claims or an
action based upon a quasi-contract shall be commenced within six (6)
years thereafter under the . principle of solutio indebiti, which
apparently provides for a more lenient rule.
Thus, the questi on that arises. is whether a taxpayer suing for a
refund of taxes c ollec ted under the Tax Code may proc eed as a claim
for refund and anchor its claim under Article 22 and Article 2154 in
relation to Article 1145 of the New Civil Code, citing the principle of
solutio indebiti as justifi c ati on and basis as to its presc ription, when the
revenue tax hereaft er all eged Ia have been erroneously or ill egall y assessed or
coll ected , or of any penalty c laimed to have been coll ected without authority, or of
any sum a ll eged to have been excessively or in any manner wrongfull y collec ted,
until a c laim for refund or c redit has been duly fil ed with the Commissioner; but suc h
suit or proceeding may be maintained , whether or not such t ax, penalty, or sum has
been pai d under protest or duress.
In any case, no such suit or proceeding shall be fil ed a ft er the expirati on of
two (2) years from the date of payment of the tax or penalty regardl ess of any
supervening cause that may ari se a ft er payment : Provided, however, That the
Commissioner may, even without a written c laim therefor, refund or c redit a ny tax,
where on the fac e of the return upon whi c h payment was made, suc h payment
appears c learl y t o have been erroneously paid.
1
2 Art. 22. Every person who through a n ac t of performanc e by a nother, or any other
means, acq uires or comes into possession of something at the expense of the latter
without just or legal ground, shall return the same to him.
1
3 Art. 2154. If something is received when there is no ri ght to demand it, and it was
unduly delivered through mistake, the obli gati on to return ari ses."
14
Art. 1145. The foll owing acti ons must be commenced wi thin six years:
( 1) Upon an oral contract;
(2) Upon a quasi-contract.
112 3
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MERALCO vs. Commissi oner of Internal Revenue
CTA Case No. 7242
DE C ISION
Page 14 of 40
same has already prescribed under the Tax Code. The answer is in the
negative.
But we rule pro hac vice that MERALCO's right to recover its
excess income tax payments for the taxable years 1994-1998 and 2000
has not prescribed. MERALCO is entitled to its claim for a tax refund or
credit for the taxable years 1994-1998 and 2000 due to the special
circumstance in the instant case, pursuant to section 229 of the 1997
NIRC. The two (2) - year prescriptive period should commence to run
on May 5, 2003, the date the Supreme Court's Decision in G.R. Nos.
141314 and 141369 became final and exec utory. It is only at that time
that the right to claim for a tax refund or credit becomes determinable
and the basis for the excessive or erroneous payment arises.
In G.R. Nos. 141314 & 141369, the Supreme Court, in its desire to
be an infallible advocate of truth for the protection of the general
populace, ordered MERALCO to refund the amount it overcharged the
public when it found out that MERALCO used a higher rate in billing the
public, whi c h evidentl y resulted into excessive income tax payments. It
is therefore apparent that MERALCO cannot be faulted for seeking a
claim for refund for the tax excessively paid to and collected by
respondent CIR.
112 4
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MERALCO vs. Commissioner of Int ernal Revenue
CT A Case No. 7242
DE C ISION
Page 15 of 40
MERALCO contends that it would be absurd to reckon the
running of the prescriptive period whether it be two (2) years or six (6)
years, from the date of payment of the tax-that is, on or before 15
April, for the years 1995-1999 and 2000- when the excess payments and
the right to recover the same came about only on 5 May 2003 which is
the date the Decision of the Supreme Court in G.R. Nos. 141314
& 141369 became final and executory.
Hence, MERALCO maintains that based on the special
circumstance of the aforementioned cases and this petition, equity
and fairness dictate that the filing of the original petition (May 4, 2005)
and the amended petition (November 22, 2005) before this Court are
well within the prescriptive period of two (2) years or six (6) years.
In sum, MERALCO states that its claim is within the prescriptive
period because the prescriptive period for the recovery of erroneously
or illegally collected tax under the principle of solutio indebiti is six (6)
years, pursuant to Article 1145 of the New Civil Code. MERALCO states
further that the counting of this period should be reckoned from May 5,
2003 when the Supreme Court Decision became final and executory
since it was only then that MERALCO's right of action for the recovery
of excess income tax payments accrued. Suffice it to say that the
existence of any excess income tax payments arising from the
112 5
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MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DE C I SION
Page 16 o f 40
mandated refund could be determined only after the finality of the
Supreme Court Deci sion. Thus, MERALCO invokes the application of
Section 229 of the NIRC of 1997 and at the same time, anchors its claim
for refund under the principle of solutio indebiti.
MERALCO, c iting the cases of CIR vs. Philippine American Life
Insurance Co.ls, CIR vs. PNB 16, and Ramie Textiles, Inc. vs. Mathay, SrY,
seeks the same treatment given in the above-mentioned cases due to
the special circumstance in the instant case, such that "it would seem
unedifying for the government, that knowing it has no right at all to
collect or to receive money for alleged taxes paid by mistake, it would
be reluctant to return the same".
Respondent CIR maintains that MERALCO's claim for a tax refund
or c redit was filed beyond the two (2) - year prescriptive period
pursuant to Secti on 229 of the NIRC of 1997. A tax refund, being in the
nature of an exemption, should be construed strictissimi juris against the
taxpayer.
Suffice it to say that in the recent case of Commissioner of Internal
Revenue vs. Aichi Forging Company of Asia, lnc.
1
s the Supreme Court stated
that-
1s 244 SCRA 447, 453( 1995)
1
6 G.R. No. 161997, Oc tober 25, 2005, 474 SCRA 303 (2005)
17 89 SCRA 586 (1979)
1s G.R. No. 184823, October 6, 2010.
112 6
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MERALCO vs . Commissioner of Internal Revenue
CTA Case No. 7242
DE C ISION
Page 17 of 40
"A taxpayer is entitled to a refund either by authority of a
statute expressly granting such right, privilege, or incentive in his favor,
or under the principle of solutio indebiti requiring the return of taxes
erroneously or illegally collected. In both cases, a taxpayer must
prove not only his entitlement to a refund but also his compliance
with the procedural due process as non-observance of the
prescriptive periods within which to file the administrative and the
judicial claims would result in the denial of his claim."
Between the New Civil Code, on one hand, which is a general
law and the NIRC of 1997, which is special law governing national
internal revenue taxes, effective January 1, 1998, the latter prevails. It
has always been the rule that on a specific matter, the special law shall
prevail over the general law, which, shall be resorted only, to supply
deficiencies in the former.
Also, where there are two (2) statutes, the latter a special law
and the former a general law- it shall be construed to mean that the
terms of the general law is broad enough to include the matter
provided for in the special law. The fact that one is special and the
other is general creates a presumption that the special is to be
considered as remaining an exception to the general, one as a
general law of the land, the other as the law of a particular case. It is a
canon in statutory construction that a later statute, general in its terms
and not expressly repealing a prior special statute, will ordinarily not
affect the special provisions of such earlier statute.
19
19 Commissioner of Internal Revenue vs . PAL, G.R. No. 180066, July 7, 2009
112 7
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MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DE C ISION
Page 18 of 40
The income tax whi ch MERALCO seeks to refund falls under the
National Internal Revenue Code, hence, it is only befitting to conclude
that the Tax Code governs the period of limitation and not the Civil
Code.
Evidently, the provisions of the Nati onal Internal Revenue Code
shall necessarily govern the instant case.
But it is noteworthy to emphasize that MERALCO would have not
invoked the special juri sdic tion of this Court, which is dedicated
exclusively for the resoluti on of tax problems, if the ground for which
such claim is made does not involve a tax refund but rather an ordinary
claim of solutio indebiti.
Also, it is not difficult to understand as to why the law provides for
a shorter period of limitation in case of a claim for refund of national
internal revenue taxes, as opposed to a claim based on solutio indebiti .
If the period is longer as to the c laim for refund of nati onal internal
revenue taxes, the same would certainly impede the effective
administration of the revenue laws. Thus, the prescriptive period as to
the claim for a tax refund or credit, as provided in the Tax Code, is
geared towards achieving an effective tax collection system so as not
to paralyze the operati ons of our government.
1128
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MERALCO vs . Commi ssioner of Internal Revenue
CT A Case No. 7242
DECISION
Page 19 of 40
The c ase o f United States vs. Clintwood Elkho rn Mining Co. et . a l.,
dec ided b y the U.S. Supreme Court2o t hrough Chief Justice Robert, is
instructi o nal and mainta ins the consist e nt inte rpretati o n o f tax law s, the
pertinent p o rti o n o f w hi c h reads as fo ll ows:
" Indeed, we all but decided the question presented over
six decades ago in United States v. A. S. Kreider Co., 313 U.S.
443 ( 1941) . Section 1l1 3(a ) of the Revenue Act of 1926, like the
refund cl aim provision in 7 422(a) of the c urrent Code,
prescribed that " [n]o suit or proceeding shall be maintained in
any court for the recovery of any internal-revenue tax alleged
to have been erroneously or illegally assessed or collected, or of
any penalty claimed to have been collected without authority,
or of any sum alleged to have been excessive or in any manner
wrongfully collected until a claim for refund or credit has been
duly filed with the Commissioner of Internal Revenue," and
established a time limit for bringing suit once the claim-filing
requirement had been met . 44 Stat . 11 6. Like the compa nies
here, A. S. Kreider had fai led to fil e a tax-refund acti on within
tha t limitati o ns period. See 313 U. S., at 446. And, li ke the
compa nies here, A. S. Kreider argued tha t it was instead subject
onl y to the longer 6 year stat ute of li mitati ons under the Tucker
Act. ld., a t 447.
We rejected the claim, holding that the Tucker Act
limitations period "was intended merely to place an outside limit
on the period within whi c h all suits must be initiated" under that
Act, a nd that " Congress left it open to provide less liberall y for
parti c ular ac ti ons which, because of speci al considerati o ns,
required different treatment. " Ibid. We held that the limitations
period inl113(a) was " precisely that type of provision, " finding
that Congress created a shorter statute of limitations for tax
claims because " suits against the United States for the recovery
of taxes impeded effective administration of the revenue laws."
Ibid. If such suits were allowed to be brought subject only to the
6-year limitations period in the Tucker Act, we explained,
1113(a) would hav.e "no meaning whatever. " ld., at 448. So too
here. The refund scheme in the c urrent Code woul d have "no
meaning wha tever" if taxpayers failing to compl y with it were
2o No. 07-308, Argued March 24, 2008, decided April 15, 2008, 553 U.S. 1 (2008)
1129
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MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DECISION
Page 20 of 40
nonetheless allowed to bring sui t subject only to the Tucker Act's
longer time bar."(Emphasis Suppli ed)
Considering that our "Tax Code", being a law of American origin,
the above-mentioned decision pertaining t o the period of limitati on
has a peculiar and persuasive force in the Philippines. 2
1
In the consolidated cases o f Republic vs. Manila Electric
Company and LAMP vs. Manila Electric Company, 22 the Supreme
Court had the occasion to sta te that:
"Whi le our tax lows were pa tt erned and of foreign origin,
American decisions and authori ti es ore not per se controlling in
this jurisdic tion. At best, they ore persuasive for no court holds a
po ten t on correct decisions. Our lows must be const rued in
accordance with the intention of our own lawmakers and such
intent may be deduced from the language of each low and
the context of other local legisla ti on related thereto. More
importantly, they musl be construed lo serve our own publi c
interest which is the be-oil and the end-all of all our lows. And it
need not be stressed that our publi c interest is distinct and
different from o thers."
In this juri sdicti on, it is quite evident that a shorter sta tute of
limitation to a claim for a tax refund under the Tax Code which is two (2)
years best serves our publi c interest, as opposed to a c laim based on
solutio indebiti which is six (6) years. It is a necessary consequence in
2
1
Commissioner o f Inf ernal Revenue vs. Julione Boier-Nickel. os represent ed by
Morino Q. Guzman (AII orney-in-focl). G.R. No. 153793. August 29. 2006, 500 SCRA 87
(2006)
22 Republic of the Philippi(les. represented by the Energy Regulatory Boord vs. Manila
Electric Company. G. R. No. 141314. and Lawyers Against Monopoly and Poverty
(LAMP) . et. ol. vs. Manila Electric Company, G.R. No. 141369. November 15, 2002
11 30
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MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DECISION
Page 21 of 40
order to have an efficient tax coll ecti on system so as not to hamper the
operations of our government considering that taxes are the lifeblood
of the nation through which the government agencies continue to
operate and with which the State effect its functions for the welfare of
its constituents.23
Thus, in the examination of Section 229 of the Tax Code and the
jurisprudence thereon, the conclusion is inevitable.
The Tax Code provides that all suits or proceedings shall be filed
before 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. This means that the two-year prescriptive period is reckoned
from the filing of the final adjusted return. 2
4
At first glance, it would appear that prescription has set in as the
claim for refund for the taxable years 1994 t o 1998 and 2000, both in
the administrative level (November 27, 2003) and judicial level (May 4,
23
Dayrit, et al. vs. Cruz, L-3991 0, September 21, 1988, 165 SCRA 57 1.
2
4
Commissioner of Internal Revenue and Arturo V. Parcero in his offi cial capacity as
Revenue Distri c t Offi cer of Revenue District No. 049 (Makoti) vs. Primetown Property
Group, Inc., G.R. No. 162155. August 28, 2007.; Philippine Bank of Communications vs.
Commissioner of Internal Revenue, Court of Tax Appeals and Court of Appeals, G.R.
No. 11 2024. January 28, 1999
1131
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MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DECISION
Page 22 o f 40
2005) were both filed beyond the two-year reglementary period from
the filing of the final adjusted return.
However, the special circumstance in the instant case demands
that it be given a different treatment. While MERALCO diligently filed its
final adjustment return and paid the income tax thereon, it is beyond
cavil that neither the right to claim for refund can be determined nor
there was basis for MERALCO to know that the income tax payments
for the taxable years 1994- 1998 and 2000 were erroneous and
excessive. Such fact arose only when the Supreme Court's Decision in
G.R. Nos. 141314 and 14136925 became final and executory on May 5,
2003.
MERALCO aptly" reli ed in the case of CIR vs. Philippine American
Life Insurance Co 2
6
, where the Supreme Court ruled that "The
prescriptive period of two (2) years should commence to run only from
the time that the refund is ascertained, which con only be determined
after a final adjustment return is accomplished, regardless of any
supervening cause that may arise thereafter." This is so because at that
25Supra. Note 6.
26 244 SCRA 447, 453( 1995)
113 2
'-
MERALCO vs . Commi ssioner of Internal Revenue
CTA Case No. 7242
DECISION
Page 23 of 40
point, it can already be determined whether there has been an
overpayment by the taxpayer.27
In the instant case, it is clear that MERALCO's right to claim for a
tax refund for the taxable years 1994-1998 and 2000 cannot yet be
ascertained or determined at the filing of the final adjustment return.
Hence, the two (2) - year period should not yet commence to run.
We are aware that equity is available only in the absence of law
and not as its replacement .2B Indisputably, at the time MERALCO filed
its final adjustment return and paid the income tax thereon, the
amount being claimed for refund c annot be said t o be "excessi vely
and wrongfully collec ted" . It was only on May 5, 2003, that the income
tax payments for the taxable years 1994-1998 and 2000 being claimed
for refund were determined as "excessi vely and wrongfully collected".
Equity as the c omplement of legal jurisdicti on seeks to reach and
do c omplete justi c e where c ourts of law, through the inflexibility of their
rules and want of power to adopt their judgments to the spec ial
circumstances of c ases, are inc ompetent to do 29 . To reckon the
running of the prescripti ve period from the filing of the final adjustment
27
CIR vs. Court of Appeals, et. al. , G .R. No. 11 7254. January 21.1 999.
28 Aguil a vs. Court o f Fi rs t Instance of Bata ngas. Branc h 1, 160 SCRA 352
2
9
Tamio vs. Ti cson. G. R. No. 154895, November 18. 2004; ci ting Air Manila vs. CIR, 83
SCRA 579, 589. June 9. 1978.
113 3
c.
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DE C ISION
Page 24 of 40
return and payment of the tax thereon for the taxable years 1994-1998
and 2000 when the excess payments and the right to recover the same
came about only on 5 May 2003, would be iniquitous. The law on
prescription being a remedial measure should be interpreted in a way
conducive to bringing about the beneficent purpose of balancing the
taxpayer and the government's interest. That is, if the circumstances
warrant, the interpretati on on the law on prescription may be relaxed
for equitable reason.
The instant case is one of the special circumstances where the
two (2) - year prescriptive period may be suspended. In the case of
CIR vs. Philippine American Life Insurance Co. 3o, the Supreme Court,
held that -
"Moreover, even if the two-year period had already
lapsed, the same is not jurisdictional and may be suspended for
reasons of equity and other special circumstances. (Emphasis
Supplied)
As the Supreme Court renders justi ce to the general populace
when it ordered MERALCO in G.R. Nos. 141314 &141369, to refund the
amount it overcharged the public when it found out that MERALCO
used a higher rate in billing the public, it is only but equitable that the
excessive income taxes collec ted by respondent CIR thereon be
3D 244 SCRA 447, 453( 1995)
113 4
(

MERALCO vs. Commi ssioner of Internal Revenue
CT A Case No. 7242
Page 25 of 40
DE C ISI O N
returned to MERALCO. Otherwise, taxpayers would be reluctant in
paying their taxes. Considering the government's vigilance in
collec ting taxes, at least, the same standard shall be gi ven t o the
taxpayers in refunding excess income tax payments. This is in
accordanc e w ith the consist ent pronounc ement of the Supreme Court
tha t :
" ... Technicalities and legalisms, however exalted, should
not be misused by the government to keep money not
belonging to it and thereby enric h itself at the expense of its
law-abiding ci tizens. If the State expects its taxpayers to
observe fairness and honesty in paying their taxes, so must it
appl y the same standard against itself in paying their taxes, so
must it appl y the same standard against itself in refunding
excess payments of such taxes. Indeed, the State must lead by
its own example of honor, dignity and upri ghtness."3
1
Indeed, the has no ri ght to retain what does not belong to
it. No one, not even the State, shoul d enric h oneself at the expense of
another32, espec ially given the unmistakable bias of our tax laws in severely
penalizing delinquent taxpayers with surc harges and interests. Whil e taxes
are the lifeblood of the government, this Court must li kewise be sensitive of its
responsibility to apply the principles of justi ce, equity and fairness as its guide
in interpreting the peri od of limitati on whic h is remedial in nature.
3
1
Phili ppi ne Phosphate Fertili zer Corporati on vs. Commissioner of Internal Revenue,
G.R. No.141973, June 28,2005, 461 SCRA 369 (2005), p. 390, citing BPI -Famil y Savings
Bonk, Inc. vs. Court of Appeals, G.R. No. 122480, April 12, 2000, 330 SCRA 507, 509-510
32 Commi ssioner of Internal Revenue vs . Smart Communications, Inc., G.R. Nos.
179045-46, August 25, 2010.
11 35
'
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DECISION
Page 26 of 40
Despite the continued, if not sometimes fataL increase of monthly
electric bill s for consumers, cl early, substantial justice, equity and fair play are
on the side of MERALCO. Techni calities and legalisms, however exalted,
should not be misused by the government to keep money not belonging to
it, thereby enric hing itself at the expense of its law-abiding c itizens.33
In the c ase of Commissioner of Internal Revenue vs. Mirant Pagbilao
Corporati on (Formerly Southern Energy Quezon, lnc .) 34, the Supreme Court
held that:
"Veril y, a claim for tax refund may be based on a statute
granting tax exempti on, or, as Commissioner of Internal
Revenue v. Fortune Tobacco Corporation would have it, the
result of legislative grace. In suc h case, the claim is to be
construed stric tissimi j uris against the taxpayer, meaning that the
claim cannot be made to rest on vague inference. Where the
rule of strict interpretati on against the taxpayer is applicabl e as
the claim for refund partakes of the nature of an exemption, the
claimant must show .that he clearly fall s under the exempting
statute. On the other hand, a tax refund may be, as usually it is,
predicated on tax refund provisions al lowing a refund of
erroneous or excess payment of tax. The return of what was
erroneously paid is founded on the principle of solutio indebiti, a
basic postulate that no one should unjustly enrich himself at the
expense of another. The caveat against unjust enrichment
covers the government. And as decisional law teaches, a claim
for tax refund proper, as here, necessitates only the
preponderance-of-evidence threshold like in any ordinary civil
case. " (Emphasis suppli ed)
33 State Land Investment Corporation, vs. Commissioner of Internal Revenue, G.R. No.
171956, January 18,2008, 542 SCRA 11 4 (2008)
3
4
G. R. No. 172129, September 12, 2008, 565 SCRA 154 (2008)
1136
!..
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
Page 27 of 40
DE C ISION
Consequently, we will apply the foregoing elementary principles
in our evaluation of the evidence presented.
2. As regards the second issue-
"Whether or not petitioner has charged to expense or
to loss or offset against reported revenues in its Income
Tax Returns (ITRs) for the taxable years 2003-2005 the
amounts refunded or credited to customers arising from
the Supreme Court Decision in G. R. Nos. 141314 and
141369"
MERALCO alleges that it did not charge to expense or to loss or offset
against reported revenues in its Income Tax Returns (ITRs) for the
taxable years 2003-2005 the amounts refunded or credited to
customers arising from the Supreme Court's Decision in G.R. Nos.
141314 and 141369.
The Notes to Financial Statements, attached to MERALCO's
Audited Financial Statements35 for the years ended December 31, 2003
and 2002, stated:
"xxx The loss arising from the SC decision amounted to P28,728
million, which represents the amount of refund to its customers
of P0.167 per kwh for billing cycles from February 1994 to
December 31, 2002. The Company's 2002 financial statements
have been restated to reflect the loss arising from the SC
decision. Refunds covering the periods February 1994 to
December 31, 2001, amounting to P23,817 million, net of tax
effect for 1999 of P1, 126 million (see Note 23), were accounted
for as an extraordinary loss in the 2002 statement of income.
Refunds covering the period January 1, 2002 to December 31,
35
Exhibit "Y", Notes to Financial Statements, page 3, paragraph 4
113 7
c..
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DECISION
Page 28 of 40
2002, amounting to P3,785 million were reflected as a reversal of
2002 revenues. The related tax effect of P 1, 133 million is
refl ected as a reduction in the provision for income tax (see
Note 23). The Company's revenues for the first five months of
2003 were adjusted to reflect a rollback of its distribution rates
totalling approximately P1 ,595 million."
Based from the foregoing, the amounts to be refunded to or
credited against future consumption of MERALCO's customers pursuant
to the Supreme Court Decision in G.R. Nos. 141314 and 141369 totalled
P30,323 million, broken down as follows:
Amount of Refund (in
Period Covered millions)
Feb 1994 to December 31, 2001
p
24,943
Jan. 1, 2002 to Dec. 31, 2002 3,785
Jan. 1 to May 2003 1,595
p
30,323
A scrutiny of MERALCO's Statement of Income [as restated) for
the year ended December 31, 2002 shows that MERALCO treated the
refundable amount covering the period of February 1994 to December
31, 2001 as an extraordinary loss but in the amount of P23,817 million,
net of tax effect for 1999 of P1, 126 million. Likewise, MERALCO
reflected the refundable amount of P3, 785 million as reduction from
the revenues of P121 ,60636 million originally reported by MERALCO,
resulting in a reduced revenue amount of P117,821 million for the said
36 Exhibit "W", Statement of Income for the year ended December 31, 2002
1138
t..
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DE C ISION
Page 29 of 40
year. The related tax effect of P 1, 133 million was shown as a reduction
from the provision for income tax.
However, in its Amended Annual Income Tax Return for the
taxable year 20023
7
, MERALCO did not charge to expense or loss nor
deduct against its revenues for the year 2002 any of the refundable
amounts of P23,817 million and P3,785 million covering the periods
February 1994 to December 31, 2001 and January 1, 2002 to December
31, 2002, respectively. This . can be clearly seen from MERALCO's
Reconciliation of Net Income Per Books Against Taxable Income for the
taxable year 2002, wherein MERALCO's net taxable income per return
in the amount of P1, 166,760,574.00 was based on MERALCO's net loss
per books in the amount of P2,015,232,945.00. It must be noted that
the net loss per books of P2,015,232,945.00 was the amount reported by
MERALCO before it reflec ted the refundable amounts of P23,817 million
and P3, 785 million as extraordinary loss and revenue reversal for the
year 2002, respectively.
In its Statement of Income for the year ended December 31,
2003, MERALCO reflected the refundable amount of P1 ,595 million as
reduction of its revenues for the months of January to May 2003. With
regard to the refundable amounts covering the periods February 1994
37 Exhibit "V"
113 9
L
MERALCO vs. Commissioner of Int ernal Revenue
CT A Case No. 7242
DE C I S ION
Page 30 of 40
to December 31, 2001 and January l, 2002 to December 31, 2002,
MERALCO reflected the same in its Balance Sheet as of December 31,
2003 under the "Unappropriated Retained Earnings" account as "Prior
period adjustments arising from customers refund" in the amount of
P26,469 million 38 net of the tax effect for 1999 and 2002 in the
respective amounts of P1, 126 million and P1, 133 million. In other words,
in arriving at its net income per books of P907 million for the year ended
December 31, 2003, MERALCO deducted from its revenues only the
refundable amount of P1 ,595 million pertaining to the months of
January to May 2003.
Inasmuch as it was the net income per books in the amount of
P907 million which was reconciled with the net income per Annual
Income Tax Return for the year ended December 31, 2003 and none of
the reconciling items pertain to the amounts to be refunded/credited
to MERALCO's customers, it may be safely concluded that MERALCO
did not charge to expense/loss nor deduct against its revenues for the
said year the amounts to be refunded or credited to its customers
pertaining to the period February 1994 to December 31, 2002.
As for the taxable years 2004 and 2005, MERALCO's Audited
Financial Statements39 and Annual Income Tax Returns4o for the said
38 Exhibit "Y", Statement of Changes in St ockholders' Equity, page 3
39 Exhibit s "N" and "P"
1140
(
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DECISION
Page 31 of 40
years also proved that it did not charge to expense or loss nor deduct
against its revenues for the said years the amounts it has
refunded/credi ted t o its customers pursuant to the Supreme Court 's
Decision in G.R. Nos. 141314 and 141369.
Based on its liability account for Customers Refund as refl ected in
its Audited Balance Sheets
4 1
as of the years ended December 31, 2002,
2003, 2004 and 2005, MERALCO refunded a total amount of P 1 0,566
mill ion as of December 31, 2005 which was charged to the said
account and not to any expense/revenue account for the said years,
as summarized below:
2002 2003 2004 2005
(AMOUNTS IN MILLIONS)
Balance, January 1 p .
p 28,728 p 25,608
p
20,551
Add: Set up of Refund 28,728 1,595 -
Subtotal p
28,728 p 30,323 p 25,608
p
20,551
less: Refunded
- 4,715 5,057 794
Balance, Dec ember 31 p
28,728 p 25,608 p 20,551
p
19,757
Present Value Effect (4,234)
Balance as shown in Balance Sheet, Dec. 31 (Nominal)
p
28,728 p 25,608 p 20,551 p
15,523
Breakdown of AP-Customers Refund as shown in B/ S
Current p
22,594
p
6,919
p
5,409
p
3,787
Non-Current 6, 134 18,689 15, 142 11,736
Total
p
28,728 p 25,608 p 20,551
p
15,523
Total Refunded to customers to dole
p p
4,715
p
9,772
p
10,566
Balance, December 31 (Real) 28,728 25,608 20,551 19,757
Total p
28,728 p 30,323 p 30,323
p
30,323
~ ~ - - - - - - - - - - - - - - - - - - - -
40 Exhibits "0" and "JJJ"
41 Exhibits "Y" , "N" and "P"
1141
~
MERALCO vs. Commi ssi oner of Internal Revenue
CT A Case No. 7242
Page 32 of 40
DECISION
However, while MERALCO's Audited Balance Sheets show that
MERALCO has refunded/credited to its customers a total amount of
P 1 0,566 million as of December 31, 2005, such amount does not
reconcile with the figure of P 1 0,565 million
4
2 shown in the
Manifestation
4
3 dated September 25, 2006, which MERALCO filed with
the Energy Regulatory Commission (ERC) on October 2, 2006.
Apparently, there were discrepancies on the amounts actually
refunded by MERALCO to the prejudice of the consuming public but
this does not negate the findings of this Court that MERALCO did not
charge to expense/loss nor deduct against its revenues for the said
years the amounts to be refunded or credited to its customers
pertaining to the period from February 1994 to December 31, 2002.
3. As to the third issue stipulated upon by the parties-
"Whether or not petitioner's right to recover its excess
income tax payments for the taxable years 1994-1998
and 2000 is subject to the condition that refund or credit
to future c onsumption due the customers concerned in
the average amount of PO. 1 67 per kilowatthour has been
actually gi ven or credited to them by the petitioner."
MERALCO posits that the Supreme Court's mandated refund is
separate and distinct from the present claim for a tax refund or credit
considering that the legal basis and requirements for the Supreme
42 Exhibit "EE" , Annex " C"
4
3 Exhibit "EE"
11 42
t...
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DE C ISION
Page 33 of 40
Court's mandated refund are different from the legal basis and
requirements for the present claim for a tax refund or credit. MERALCO
further argues that fhe Supreme Court's mandated refund is not
dependent on the present claim for a tax refund or credit, or vice-
versa.
Hence, MERALCO asserts that it's right to recover its excess
income tax payments for the taxable years 1994-1998 and 2000 cannot
be subjected to the condition that the refund or credit to future
consumption due the cust omers concerned in the average amount of
P0.167 per kilowatthour, has been actually given or credited to them
by MERALCO.
We disagree.
It is true that neither is the Supreme Court's mandated refund
dependent on the instant claim for a tax refund or credit, vice-versa,
nor do the legal basis and requirements for the Supreme Court's
mandated refund be the same as the instant claim for a tax refund or
credit. If it were not due to the special circumstance in the instant
case, specifically the finality of the Supreme Court's Decision in G.R.
Nos. 141314 and 141369, MERALCO would not be entitled to the claim
for a tax refund for the taxable years 1994-1998 and 2000. Thus, due to
equity consideration, the two (2) - year prescriptive period under the
11 43
~
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DE C ISION
Page 34 of 40
1997 National Internal Revenue Code is reckoned from the finality of
the Supreme Court's Decision in G.R. Nos. 141314 and 141369.
MERALCO's claim for a tax refund was not granted or denied by
respondent CIR on the condition that MERALCO should have credited
to bill or refunded to customers the Supreme Court's mandated refund
by MERALCO. It cannot be said that MERALCO's right to recover its
excess income tax payments was subject to the condition that the tax
refund or credit to future consumption due the customers concerned in
the average amount of P0.167 per kilowatthour, has been actually
given or credited to them by MERALCO.
While the above-mentioned Decision of respondent CIR was
bereft of any legal justification to the conditional release/issuance of a
Tax Credit Certificate (TCC) covering the granted tax refund, we find
the same or that the "releases or issuances of the TCC be
proportionate to the amount actually disbursed", to be just and
equitable not only for the MERALCO and the government but also the
general public considering that there were discrepancies in the
amount to be given and actually given or actually received by
MERALCO's customers. This is supported by our findings and as pointed
out by respondent CIR in its assailed Decision.
1144
(
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
Page 35 of 40
DECISION
The pertinent portion o f respondent CIR's Decision dated
September 21, 2005, partially granting MERALCO's claim for a tax
refund which is alleged t o be subject to a condition, reads as follows:
"In view of the foregoing, the Bureau has no recourse but
to DENY your c laim for tax credit for taxable years 1994 to 1998
and 2000 in the net amount of P5,796,342,792.71 because of
prescription. The related refund dockets for these cases are now
wi th the Legal Service for reference with your current pending
appeal with the Court of Tax Appeals (CTA) .
On the other hand, your request for refund/issuance of
tax c redi t certifi cate (TCC) for taxable year 2001 in the net
amount of P894,473, 932.58 is hereby GRANTED since it was filed
wi thin the two-year prescripti ve period but subject to the
condi ti on that credit to bi ll or refund to customers has actuall y
been credi ted or given to the latter.
Based on the above premise, the initial TCC to be issued
to your company is "P343,746,332.29 as presented in the 2001
refund docket based on the projected estimated refund
disbursement to customers belonging to Phases 1 ,2, and 3 in the
amount of P 11 .648 bi llion submi tted to the ERC. However, based
on the Refund Summary Report as of August 31, 2005 that you
submi tted to this Office and the ERC, only P1 0,754,002,7 40.00 of
the total P 1 1 ,633,786,7 41 .00 refund processed for Phases 1 to 3
were actually disbursed to date. Consequently, by applying the
formula of the amount of refund actually disbursed per Refund
Summary Report submitted over base amount of total refund
P30.307 bi lli on multiplied by the net amount of refund granted
for 2001, the amount of TCC to be initially issued to your
company in proporti on to the amount of refund actuall y
disbursed should only be P317, 391 ,200.77.
Finall y, as a condition in the processi ng of the
succeeding releases/issuance of TCC for refund granted in 2001
but to be given in 2005 to 2010 per refund schedule, you are
required to submit to the Large Taxpayers Service within thirty
(30) days after the end of every year of the refund schedule the
Refund Summary Report for each year as submi tted to ERC from
where the actual TCC to be issued for a particular year shall be
based."
114 5
L
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DECISION
Page 36 of 40
Moreover, this Court is not only a Court of law but also a Court of
equity. In the case of Gonzalez vs. Rizal Commercial Banking
Corporation,
44
the Supreme Court held that:
"Courts in this jurisdi cti on ore not only courts of law but also of
equity, and therefore cannot unqualifiedly apply a provision of
law so as to cause clear injustice which the framers of the law
could not have intended to so deliberately cause. In Carce//er v.
Court of Appeals, thi s Court had occasion to stress:
'Courts of law, being also courts of equity,
may not countenance such grossly unfair results
without doing violence to its solemn obligation to
administer fair and equal justice for all.' "
In the exercise of thi s Court's jurisdiction also as a court of equity,
it is only but fair to allow MERALCO to recover its excess income tax
payments for the taxable years 1994-1998 and 2000, which would have
prescribed if not for the special circumstance in the instant case, in
proportion to or that the refund or credit to future consumption due the
customers concerned in the average amount of P0. 167 per
kilowatthour should have been actually given or credited to them by
MERALCO. It would be the height of injustice if MERALCO can recover
all the excess income tax payments when it did not refund all to the
customers what MERALCO is mandated to refund from which the
excess income tax payments would ari se.
44
G.R. No. 156294, November 29,2006,508 SCRA 459 ( 2006)
114 6
L
MERALCO vs. Commi ssioner of Internal Revenue
CT A Case No. 7242
DE C ISION
Page 37 of 40
The reason for the exercise of this Court's jurisdiction also as a
court of equity in the instant case is to prevent unjust enrichment and
to ensure restitution.
4
5 If MERALCO did not overcharge its consumers,
the Supreme Court's Decision in G.R. Nos. 141314 and 141369 would
not have been rendered, and MERALCO would not have made
excessive income tax payments. Justice is done if MERALCO was in
good faith and if it had fully disbursed the amount it overcharged from
its customers from which the excessive income tax payments would
arise and which would be the basis of this claim for a tax refund.
To reiterate, we find that the "releases or issuances of the Tax
Credit Certificate (TCC) be (in) proportion to the amount actually
disbursed or given to MERALCO' s customers", to be just and equitable.
In fine, MERALCO admits and accepts the Audit Findings and
Resolution 46 of respondent CIR as embodied in their "SUPPLEMENTAL
JOINT STIPULATION OF FACTS AND ISSUES". Specifically MERALCO
accepts the mathematical computations of respondent CIR except on
the conclusions that the same has prescribed and subject to the
condition that the credit to bill or refund to customers in the average
45 David Reyes (Substituted by Vic toria R. Fabella) vs. Jose Lim, Chuy Cheng Keng and
Harri son Lumber, Inc ., G.R. No. 134241 , August 11, 2003]
46
Suppl emental Joint Stipulati on of Facts and Issues.
11 47
(
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DE C ISION
Page 38 of 40
amount of P0.167 per kilowatthour has actually been credited or given
to customers.47
The pertinent portion and end result of respondent CIR's
computation read as follows:
Recommended Recommended Total amount of
amount for TCC- amount for TCC- refund per audit
for deni al To be Granted
1994 p 697.413,897.48 -0- p 697,413,897.48
1995 7 43.421.455.29 -0- 743,421,455.29
1996 1.016,995,619.18 -0- 1,016,995,619.18
1997 l ,094,804.759.31 -0- 1,094,804,759.31
1998 1 '127,850.426.4 -0- 1 ' 127,850,426.4
2000 1 '115,856,635.05 -0- 1 ' 115,856,635.05
2001 -0- P894.473,932.57 894,473,932.57
GRAND P5,796,342,792.71 P894,473, 932. 57 P6,690,816,725.28
TOTAL
Evidently, based on the joint stipulation and admission of facts
and issues and from respondent CIR's decision dated September 21,
2005,
4
8 there were excessive collections for the taxable years 1994-1998
and 2000-2001.
Further, an examination of the records shows that MERALCO did
not charge to expense or to loss or offset against reported revenues in
its Income Tax Returns (ITRs) for the taxable years 2003-2005 the
amounts refunded or credited to customers arising from the Supreme
Court's Decision in G. R. Nos. 141314 and 141369.
47
Ibid.
48
Ibid.
1148
(
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DE C ISION
Page 39 of 40
According to jurisprudence, claimant has the burden of proof to
establish the factual . basis of his or her claim for a tax refund or
credit. Tax refunds, like tax exemptions, are construed strictly against
the taxpayer. In the instant case, MERALCO was able to present
sufficient evidence to prove its claim for a tax refund.
WHEREFORE, premises considered, the Amended Petition for
Review is GRANTED, as follows:
1. Respondent's denial due to prescription of MERALCO's
claim for a tax refund or credit for the taxable years 1994-1998 and
2000 is REVERSED and SET ASIDE;
2. Respondent is ORDERED TO REFUND or TO ISSUE A TAX
CREDIT CERTIFI CATE in . favor of MERALCO in the amount of
P5,796,342, 792.71, corresponding to the claim for a tax refund or credit
for the taxable years 1994-1998 and 2000, subject to and in proportion
that the refund or credit to future consumption due to the customers
concerned in the average amount of P0.167 per kilowatthour arising
from the Supreme Court's Decision in G. R. Nos. 141314 and 141369, has
been actually given or credited to them by MERALCO.
SO ORDERED.
~ N . M ~ ~ - G ~
CIELITO N. MINDARO-GRULLA
Associate Justice
1149
MERALCO vs. Commissioner of Internal Revenue
CT A Case No. 7242
DECISION
WE CONCUR:
C 0
(7 Twt dlssen tng optnton if1 -
JUANITO C. CASTANEDA, JR.
Associate Justi c e
ATTESTATION
Page 40 of 40

CAESAR A. CASANOVA
Associate Justice
I a ttest that the concl usions in the above Decision were reac hed in
consultation before the case was assigned to the wri ter of the opini on of the
Court 's Di vision.
\)_ .
JUANITO C. CASTANEDd,t3R.
CERTIFICATION
Associate Justi c e
Chairperson
Pursuant to Arti cle VIII. Sec lion 13 of the Constit uti on, a nd the Di vision
Chairperson's Attestati on, it is hereby certifi ed that the conc lusions in the
above Decision were reached in consultation before the c ase was assigned
to the writ er of the opinion of the Court 's Di vision.
11!:'.0

ERNESTO D. ACOSTA
Presiding Justi c e