The Supreme Court held that taxpayers must strictly comply with the 120-day period granted to the Commissioner of Internal Revenue (CIR) to decide on refund claims before filing a petition for review with the Court of Tax Appeals (CTA). Filing prematurely, without awaiting the CIR’s decision or the lapse of the 120-day period, deprives the CTA of jurisdiction, emphasizing the mandatory nature of this procedural requirement for seeking judicial relief in tax refund cases. This ruling ensures that the CIR has adequate time to assess refund claims, promoting administrative efficiency and preventing premature judicial intervention.

Navigating Tax Refunds: When Does the Clock Really Start Ticking?

This case, Commissioner of Internal Revenue v. Team Sual Corporation, revolves around Team Sual Corporation’s (TSC) claim for a refund of unutilized input value-added tax (VAT) for the taxable year 2000. TSC, a power generation company selling solely to the National Power Corporation (NPC), sought a refund of ₱179,314,926.56, rooted in its zero-rated sales to NPC. The crux of the legal battle lies in whether TSC prematurely filed its petition for review with the CTA, bypassing the mandatory 120-day period afforded to the CIR to evaluate and decide on the administrative claim.

The procedural timeline is critical here. TSC filed its administrative claim with the Bureau of Internal Revenue (BIR) on March 11, 2002. However, without waiting for the CIR to act or for the 120-day period to expire, TSC filed a petition for review with the CTA on April 1, 2002. The CIR argued that TSC’s action was premature and that TSC failed to submit complete documents supporting its claim. The CTA First Division initially sided with TSC, ordering a refund of ₱173,265,261.30. This decision was later affirmed by the CTA en banc, which held that both administrative and judicial remedies must be pursued within the two-year prescriptive period from the close of the taxable quarter when the sales were made. The CIR then elevated the case to the Supreme Court.

At the heart of the matter is Section 112 of the National Internal Revenue Code (NIRC), which outlines the procedures for claiming VAT refunds or tax credits. Subsections (A) and (C) are particularly relevant. Section 112(A) allows VAT-registered persons with zero-rated sales to apply for a tax credit certificate or refund within two years after the close of the taxable quarter when the sales were made. This sets the outer limit for filing an administrative claim with the BIR. However, Section 112(C) introduces a crucial procedural step, stipulating that:

In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsection (A) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty-day period, appeal the decision or the unacted claim with the Court of Tax Appeals.

The Supreme Court underscored that the 120-day period is not merely directory but mandatory and jurisdictional. It serves the purpose of allowing the CIR adequate time to evaluate the claim and make an informed decision. Filing a judicial claim before the expiration of this period is considered premature, depriving the CTA of jurisdiction to hear the case.

The Court relied heavily on its previous rulings in Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. and Commissioner of Internal Revenue v. San Roque Power Corporation to reinforce this principle. In Aichi, the Court explicitly stated that the phrase “within two (2) years apply for the issuance of a tax credit certificate or refund” refers to applications filed with the CIR, not appeals made to the CTA. Furthermore, applying the two-year period to judicial claims would render Section 112(C) meaningless. In San Roque, the Court emphasized that compliance with the 120-day waiting period is mandatory and jurisdictional. Failure to comply violates the doctrine of exhaustion of administrative remedies and renders the petition premature, thus without a cause of action.

The argument that the imminent lapse of the two-year prescriptive period under Section 112(A) justifies premature filing was explicitly rejected. The Court clarified that the two-year period applies to the filing of the administrative claim with the BIR, not the judicial claim with the CTA. The 120-day period may extend beyond the two-year period, and that is permissible as long as the administrative claim was filed within the two-year window. The critical point is that the taxpayer must wait for the CIR’s decision or the lapse of the 120-day period before seeking judicial recourse.

TSC contended that the requirement to exhaust the 120-day period is a species of the doctrine of exhaustion of administrative remedies, which can be waived. However, the Court disagreed, stating that filing a petition for review without waiting for the 120-day period renders the petition void. A void act cannot be legitimized, and a person cannot acquire any right from such void act.

TSC also cited BIR Ruling No. DA-489-03 and Revenue Memorandum Circular No. 49-03 (RMC No. 49-03) to support its argument that it need not wait for the lapse of the 120-day period. The Court clarified that RMC No. 49-03 merely authorized the BIR to continue processing a claim for refund/tax credit even after an appeal to the CTA. It did not eliminate the mandatory 120-day waiting period. While BIR Ruling No. DA-489-03 did state that a taxpayer-claimant need not wait for the 120-day period, the Court clarified that taxpayers could only rely on this ruling from its issuance on December 10, 2003, until its reversal in Aichi on October 6, 2010. Since TSC filed its judicial claim before the issuance of BIR Ruling No. DA-489-03, it could not benefit from its provisions.

The Supreme Court emphasized that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the entity claiming them. The taxpayer bears the burden of proving compliance with all statutory and administrative requirements. In this case, TSC failed to comply with the mandatory 120-day period, thus its claim for refund/tax credit was denied.

FAQs

What was the key issue in this case?	The central issue was whether Team Sual Corporation (TSC) prematurely filed its petition for review with the Court of Tax Appeals (CTA) without waiting for the 120-day period granted to the Commissioner of Internal Revenue (CIR) to decide on the refund claim. The Supreme Court had to determine if compliance with this 120-day rule is mandatory for seeking judicial relief.
What is the 120-day rule in tax refund cases?	The 120-day rule, as per Section 112(C) of the National Internal Revenue Code (NIRC), requires taxpayers to wait 120 days from the submission of complete documents to the BIR before appealing to the CTA. This period allows the CIR time to evaluate the refund claim and make a decision.
Why is the 120-day rule considered mandatory?	The Supreme Court has consistently held that the 120-day rule is mandatory and jurisdictional. Filing a petition before the lapse of this period deprives the CTA of jurisdiction, as it is a violation of the doctrine of exhaustion of administrative remedies.
Does the two-year prescriptive period affect the 120-day rule?	The two-year prescriptive period under Section 112(A) of the NIRC refers to the period within which to file the administrative claim with the BIR, not the judicial claim with the CTA. The 120-day period is separate and distinct and must be complied with regardless of the two-year period.
What happens if the CIR does not act within 120 days?	If the CIR fails to act on the application within the 120-day period, the taxpayer has 30 days from the expiration of the 120-day period to appeal to the CTA. This ensures that the taxpayer has a remedy even if the CIR is delayed in making a decision.
Can a taxpayer file a case with the CTA if the two-year period is about to expire?	No, the imminent expiration of the two-year prescriptive period does not justify filing a premature case with the CTA. The taxpayer must still comply with the 120-day waiting period, even if it extends beyond the two-year period, as long as the administrative claim was filed within the two-year window.
What was the Court’s ruling on BIR Ruling No. DA-489-03?	The Court clarified that taxpayers could only rely on BIR Ruling No. DA-489-03, which stated that the 120-day period need not be awaited, from its issuance on December 10, 2003, until its reversal in Aichi on October 6, 2010. Since TSC filed its judicial claim before this ruling, it could not benefit from its provisions.
What is the practical implication of this ruling for taxpayers?	This ruling emphasizes the importance of strictly complying with the procedural requirements for claiming tax refunds. Taxpayers must ensure they wait for the 120-day period to lapse or receive a decision from the CIR before filing a petition with the CTA to avoid having their claim dismissed for lack of jurisdiction.

In conclusion, the Supreme Court’s decision in Commissioner of Internal Revenue v. Team Sual Corporation serves as a stern reminder of the importance of adhering to procedural rules in tax refund cases. The mandatory nature of the 120-day waiting period for the CIR to act on refund claims is firmly established, and failure to comply will result in the dismissal of the judicial claim. This decision ensures that the CIR has adequate time to evaluate refund claims, promoting administrative efficiency and preventing premature judicial intervention.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Commissioner of Internal Revenue vs. Team Sual Corporation, G.R. No. 194105, February 05, 2014