In Kepco Ilijan Corporation v. Commissioner of Internal Revenue, the Supreme Court addressed the correct application of the prescriptive periods for claiming a refund or tax credit certificate (TCC) for input value-added tax (VAT) on zero-rated sales. The Court clarified how to properly count the periods under Section 112(A) and Section 112(C) of the National Internal Revenue Code (NIRC) when seeking a VAT refund or TCC issuance. Ultimately, the court ruled that the administrative claim for the first quarter of the taxable year 2002 was filed late and thus barred by prescription. However, the claims for the second, third, and fourth quarters were deemed timely filed.

Power Producer’s Pursuit: Unraveling the VAT Refund Timeline Knot

Kepco Ilijan Corporation, an independent power producer (IPP) selling electricity solely to the National Power Corporation (NPC), sought a refund or tax credit for VAT incurred during the 2002 taxable year, amounting to P74,658,461.68. The company filed its quarterly VAT returns for 2002, detailing expenses from importing and purchasing goods and services, including input VAT. On April 13, 2004, Kepco filed an administrative claim for a refund with the Bureau of Internal Revenue (BIR). Nine days later, it filed a petition for review with the Court of Tax Appeals (CTA).

The CTA in Division initially granted a partial refund of P23,389,050.05 for the second, third, and fourth quarters of 2002, but denied the claim for the first quarter due to prescription. Kepco filed a motion for partial reconsideration, arguing that the prevailing jurisprudence at the time, as per Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue (Atlas), allowed reckoning the two-year period from the date of filing the return and payment of tax. However, the CTA in Division later reversed its decision, dismissing the entire claim as premature, citing non-compliance with the periods under the NIRC, based on the rulings in Commissioner of Internal Revenue v. Mirant Pagbilao Corporation (Mirant) and Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi).

Kepco then elevated the case to the CTA En Banc, arguing the timeliness of its claims and the CTA’s jurisdiction. The CTA En Banc affirmed the amended decision of the CTA in Division, leading to Kepco’s appeal to the Supreme Court. The central issue before the Supreme Court was determining the correct reckoning point for the two-year prescriptive period for filing administrative and judicial claims for VAT refunds under Section 112 of the NIRC. The petitioner argued that the CTA acquired jurisdiction over the case and that it relied in good faith on the prevailing rule that the two-year period should be reckoned from the filing of the return and payment of the tax due.

To properly understand the court’s decision, it’s important to analyze the relevant provisions of the NIRC, particularly Section 112(A) and Section 112(C):

SEC. 112. Refunds or Tax Credits of Input Tax.-

(A) Zero-rated or Effectively Zero-rated Sales. – Any VAT registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: x x x.

(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. – 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 referenced the landmark case of Commissioner of Internal Revenue v. San Roque Corporation (San Roque), which clarified the effectivity of the pronouncements in Atlas and Mirant regarding the reckoning of the two-year prescriptive period. In Atlas, the Court had stated that it was more practical to count the two-year period from the date of filing the return and payment of the tax due. However, Mirant abandoned Atlas and held that the reckoning point should always be the end of the quarter when the pertinent sales or transaction was made, regardless of when the input VAT was paid.

The court in San Roque established that the Atlas pronouncement was effective only from its promulgation on June 8, 2007, until its abandonment on September 12, 2008, through Mirant. Prior to Atlas, Section 112(A) should be applied following the verba legis rule adopted in Mirant. Because Kepco filed its administrative claims on April 13, 2004, the claims were governed by Section 112(A) of the NIRC as it stood prior to Atlas and Mirant. Therefore, the proper reckoning date was the close of the taxable quarter when the relevant sales were made.

Applying this principle, the Supreme Court determined that the claims for the first quarter of 2002 (ending March 31, 2002) filed on April 13, 2004, were indeed filed beyond the two-year period and were thus barred. However, the claims corresponding to the second, third, and fourth quarters were timely filed, as they were within two years from the close of each respective quarter. The court then addressed the timeliness of filing the judicial claim in the CTA, noting that Kepco filed its judicial claim on April 22, 2004, only nine days after filing the administrative claim, without waiting for the 120-day period provided under the NIRC.

In Aichi, the Court clarified that the 120-day period granted to the CIR was mandatory and jurisdictional, meaning that failure to observe this period would be fatal to the filing of the judicial claim in the CTA. However, the court also acknowledged an exception carved out in San Roque regarding premature filings made during the interim period from the issuance of BIR Ruling No. DA-489-03 on December 10, 2003, to October 6, 2010, when the Aichi doctrine was adopted. BIR Ruling No. DA-489-03 stated that the taxpayer-claimant need not wait for the lapse of the 120-day period before seeking judicial relief with the CTA. Since Kepco filed its claims within this exempted period, the CTA could take cognizance of the claims despite the premature filing.

Consequently, the Supreme Court remanded the case to the CTA in Division for further proceedings on the claim for a refund of Kepco’s input VAT for the second, third, and fourth quarters of taxable year 2002. This decision underscores the importance of understanding the evolving jurisprudence surrounding VAT refund claims and adhering strictly to the prescribed timelines, while also recognizing the exceptions created by specific BIR rulings during certain periods.

FAQs

What was the key issue in this case?	The central issue was determining the correct reckoning point for the two-year prescriptive period for filing administrative and judicial claims for VAT refunds under Section 112 of the NIRC. The court needed to clarify the effect of conflicting jurisprudence from the Supreme Court itself on the matter.
What did the Supreme Court rule regarding the administrative claim?	The Supreme Court ruled that Kepco’s administrative claim for the first quarter of 2002 was filed late and thus barred by prescription. However, the claims for the second, third, and fourth quarters were deemed timely filed.
What is the significance of the San Roque case in this decision?	The San Roque case clarified the effectivity of the pronouncements in Atlas and Mirant regarding the reckoning of the two-year prescriptive period. It established that the Atlas pronouncement was effective only from June 8, 2007, until September 12, 2008, and that prior to Atlas, Section 112(A) should be applied following the verba legis rule adopted in Mirant.
Why was Kepco’s judicial claim considered prematurely filed?	Kepco’s judicial claim was initially considered prematurely filed because it was filed only nine days after filing the administrative claim, without waiting for the 120-day period provided under the NIRC.
What exception allowed the CTA to take cognizance of the prematurely filed judicial claim?	The exception carved out in San Roque regarding premature filings made during the interim period from the issuance of BIR Ruling No. DA-489-03 on December 10, 2003, to October 6, 2010, allowed the CTA to take cognizance of the claims despite the premature filing.
What is the 120-day period mentioned in the decision?	The 120-day period, as provided in Section 112(C) of the NIRC, is the period within which the Commissioner of Internal Revenue shall grant a refund or issue a tax credit certificate for creditable input taxes from the date of submission of complete documents.
What was the final outcome of the case?	The Supreme Court remanded the case to the CTA in Division for further proceedings on the claim for a refund of Kepco’s input VAT for the second, third, and fourth quarters of taxable year 2002.
What is the implication of this ruling for other VAT-registered taxpayers?	This ruling underscores the importance of understanding the evolving jurisprudence surrounding VAT refund claims and adhering strictly to the prescribed timelines. Taxpayers must carefully consider the applicable rules and exceptions when filing their claims to avoid being time-barred.

In conclusion, the Kepco Ilijan Corporation case serves as a crucial reminder of the complexities involved in VAT refund claims and the significance of adhering to the prescribed timelines under the NIRC. It highlights the importance of staying informed about evolving jurisprudence and seeking professional guidance to ensure compliance.

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: KEPCO ILIJAN CORPORATION, VS. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 205185, September 26, 2018