Title: Power Sector v. CIR GR No.

198146 dated August 08, 2017

Ponente: J. Carpio

Doctrine to Remember
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. 

The power plants in this case were not previously used in PSALM's business. Therefore, the sale of the
power plants should not be subject to VAT.
Facts
 Petitioner Power Sector Assets and Liabilities Management Corporation (PSALM) is a government-
owned and controlled corporation created 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 PantabanganMasiway 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 ₱3,813,080,472 deficiency value-added tax (VAT)
on the sale of the Pantabangan-Masiway Plant and Magat Plant.

 NPC/PSALM shall remit under protest to the BIR the amount of Php 3,813,080,472.00, representing
basic VAT as shown in the BIR letter dated August 14, 2007, upon execution of this Memorandum of
Agreement (MOA).

 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
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). The BIR Commissioner (Commissioner of Internal Revenue) filed with the Court of
Appeals a petition for certiorari, seeking to set aside the DOJ's decision for lack of jurisdiction.

 The Court of Appeals 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. Consequently, 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.

 In the SC level, 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.

 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. 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.

 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.

Issues Articles/Law Involved

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I. Whether the sale of the Sec. 105. Persons liable. — Any person who, in the course of trade or
power plants is not subject business, sells, barters or exchanges goods, renders services, or engages
to VAT. in similar transactions and any person who, imports goods shall be subject
to the value-added tax (VAT) imposed in Sections 106 to 108of this Code.
II. Whether the Secretary
of Justice has jurisdiction The value-added tax is an indirect tax and the amount of tax may be shifted
over the case. or passed on to the buyer, transferee or lessee of the goods, properties or
services. This rule shall likewise apply to existing sale or lease of goods,
properties or services at the time of the effectivity of Republic Act No. 7716.
III. Whether the CTA can
take cognizance over the
case involving disputes The phrase "in the course of trade or business" means the regular conduct
solely between or among or pursuit of a commercial or an economic activity, including transactions
the government agencies incidental thereto, by any person regardless of whether or not the person
and offices, including engaged therein is a nonstock, nonprofit organization (irrespective of the
government-owned or disposition of its net income and whether or not it sells exclusively to
controlled· corporations. members of 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.

Rulings
I. YES. Privatization of assets by PSALM is not subject to VAT.

The SC held that 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. 

As to the contention of the CIR that the phrase “in the course of trade or business” is expanded and now
covers incidental transactions. The SC disagreed.

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.

In the more recent case of Mindanao II Geothermal Partnership v. Commissioner of Internal Revenue
(Mindanao 11), which was decided under the 1997 NIRC, the Court held that the sale of a fully
depreciated vehicle that had been used in Mindanao II's business was subject to VAT, even if such sale
may be considered isolated. The Court ruled that it does not follow that an isolated transaction cannot be
an incidental transaction for VAT purposes. The Court then cited Section 105 of the 1997 NIRC which
shows that a transaction "in the course of trade or business" includes "transactions incidental thereto."
Thus, the Court held that the sale of the vehicle is an incidental transaction made in the course of
Mindanao II's business which should be subject to VAT.

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.

II. YES.

Jurisdiction over the subject matter is vested by the Constitution or by law, and not by the parties to an
action.

Under Presidential Decree No. 242 (PD 242), all disputes and claims solely between government

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agencies and offices, including government-owned or controlled· corporations, shall be
administratively settled or adjudicated by the Secretary of Justice, the Solicitor General, or the
Government Corporate Counsel, depending on the issues and government agencies involved. As
regards cases involving only questions of law, it is the Secretary of Justice who has jurisdiction. Sections
1, 2, and 3 of PD 242 read:

Section 1. Provisions of law to the contrary notwithstanding, all disputes, claims and

controversies solely between or among the departments, bureaus, offices, agencies and
instrumentalities of the National Government, including constitutional offices or agencies, arising
from the interpretation and application of statutes, contracts or agreements, shall henceforth be
administratively settled or adjudicated as provided hereinafter: Provided, That, this shall not apply to
cases already pending in court at the time of the effectivity of this decree.

Section 2. In all cases involving only questions of law, the same shall be submitted to and settled
or adjudicated by the Secretary of Justice, as Attorney General and ex officio adviser of all
government owned or controlled corporations and entities, in consonance with Section 83 of the Revised
Administrative Code. His ruling or determination of the question in each case shall be conclusive
and binding upon all the parties concerned.

XXX

The use of the word "shall" in a statute connotes a mandatory order or an imperative obligation. 25 Its use
rendered the provisions mandatory and not merely permissive, and unless PD 242 is declared
unconstitutional, its provisions must be followed. The use of the word "shall" means that administrative
settlement or adjudication of disputes and claims between government agencies and offices, including
government-owned or controlled corporations, is not merely permissive but mandatory and imperative.
Thus, under PD 242, it is mandatory that disputes and claims "solely" between government agencies and
offices, including government-owned or controlled corporations, involving only questions of law, be
submitted to and settled or adjudicated by the Secretary of Justice.

Since this case is solely a dispute between PSALM arid NPC, both government owned and controlled
corporations, and the BIR, a National Government office, PD 242 clearly applies and the Secretary of
Justice has jurisdiction over this case.

III. NO

Section 17, Article VII of the Constitution states unequivocally that: "The President shall have control of
all the executive departments, bureaus and offices. 

This power of control vested by the Constitution in the President cannot be diminished by law. As held
in Rufino v. Endriga,34 Congress cannot by law deprive the President of his power of control, thus: The
Legislature cannot validly enact a law· that puts a government office in the Executive branch outside the
control of the President in the guise of insulating that office from politics or making it independent. If the
office is part of the Executive branch, it must remain subject to the control of the President.
Otherwise, the Legislature can deprive the President of his constitutional power of control over
"all the executive x x x offices." If the Legislature can do this with the Executive branch, then the
Legislature can also deal a similar blow to the Judicial branch by enacting a law putting decisions
of certain lower courts beyond the review power of the Supreme Court. This will destroy the system
of checks and balances finely structured in the 1987 Constitution among the Executive, Legislative, and
Judicial branches.

This. constitutional power of control of the President cannot be diminished by the CTA. Thus, if
two executive offices or agencies cannot agree, it is only proper and logical that the President, as
the sole Executive who under the Constitution has control over both offices or agencies in
dispute, should resolve the dispute instead of the courts. The judiciary should not intrude in this
executive function of determining which is correct between the opposing government offices or
agencies, which are both under the sole control of the President. Under his constitutional power
of control, the President decides the dispute between the two executive offices. The judiciary
cannot substitute its decision over that of the President. Only after the President has decided or
settled the dispute can the courts' jurisdiction be invoked. Until such time, the judiciary should not interfere
since the issue is not yet ripe for judicial adjudication. Otherwise, the judiciary would infringe on the
President's exercise of his constitutional power of control over all the executive departments, bureaus,
and offices.

SEC 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The power to

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interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds in internal revenue taxes, fees or other charges.
penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions
thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals. (Emphasis supplied)

The second paragraph of Section 4 of the 1997 NIRC, providing for the exclusive appellate jurisdiction of
the CTA as regards the CIR's decisions on matters involving disputed assessments, refunds in internal
revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under
NIRC, is in conflict with PD 242. Under PD 242, all disputes and claims solely between government
agencies and offices, including government-owned or controlled corporations, shall be administratively
settled or adjudicated by the Secretary of Justice, the Solicitor General, or the Government Corporate
Counsel, depending on the issues and government agencies involved.

To harmonize Section 4 of the 1997 NIRC with PD 242, the following interpretation should be adopted: (1)
As regards private entities and the BIR, the power to decide disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the
NIRC or other laws administered by the. BIR is vested in the CIR subject to the exclusive appellate
jurisdiction of the CTA, in accordance with Section 4 of the NIRC; and (2) Where the disputing parties
are all public entities (covers disputes between the BIR and other government entities), the case shall
be governed by PD 242.

Furthermore, it should be noted that the 1997 NIRC is a general law governing the imposition of national
internal revenue taxes, fees, and charges.47 On the other hand, PD 242 is a special law that applies
only to disputes involving solely government offices, agencies, or instrumentalities. 

Thus, even if the 1997 NIRC, a general statute, is a later act, PD 242, which is a special law, will
still prevail and is treated as an exception to the terms of the 1997 NIRC with regard solely to
intragovernmental disputes.