Supreme Court: PSALM sale of power plants not subject to VAT

THE Bureau of Internal Revenue (BIR) has lost a P3.81-billion tax case against the Power Sector Assets and Liabilities Management Corp. (PSALM) involving the sale of Pantabangan-Masiway Plant and Magat Hydroelectric Power Plant in 2006.

This was after the Supreme Court (SC), voting 12-2, granted PSALM’s petition seeking the reversal of the Court of Appeals’s (CA) decision issued on September 27, 2010, that declared null and void a resolution issued by the Department of Justice (DOJ) directing the BIR to refund PSALM  the amount of P3.81 billion representing the valued-added tax (VAT) deficiency that it paid to the tax agency under protest for the sale of the said power plants.

Instead, the Court en banc reinstated the decision of the DOJ issued in 2008.

In a 29-page decision penned by Associate Justice Antonio Carpio, the SC held that the CA erred when it ruled that the secretary of the DOJ has no jurisdiction on the issue and can’t rule on whether the sale of the power plants is subject to VAT.

It noted that under Presidential Decree (PD) 242, “All disputes and claim between government agencies and offices, including government-owned or -controlled corporations, shall be administratively settled or adjudicated by the secretary of justice, solicitor general or the Government Corporate Counsel, depending on the issues and government agencies involved.”

Furthermore, the SC ruled that the sale of the power plants by PSALM to private entities is not subject to VAT, since it was made pursuant to its  mandate under the Electric Power Industry Reform Act of 2001 (Epira).

The SC explained that under Section 50 of the Epira, PSALM’s principal purpose is to manage the orderly sale, disposition and privatization of the generations assets, real estate and other disposable assets, and contracts   of the National Power Corp. (NPC), with the objective of liquidating all its financial obligations and stranded contract costs.

It also agreed with PSALM that the sale of the power plants was not done in pursuit of any commercial or profitable activity, where VAT is imposable.

The SC noted that under Section 105 of the Tax Code, VAT may be imposed on any person “who, in the court of trade or business, sells, barters, exchanges, leases goods or properties, renders services and imports goods.”

“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 Court said.

PSALM, according to the SC, is limited to selling only assets and independent power-producer contracts of the NPC.

“Similarly, the sale of the power plants, in this case, is not subject to VAT since the sale was made pursuant to PSALM’s mandate to privatize NPC assets, and was not undertaken in the course of trade of business,” the SC said. “In selling the power plants, PSALM was merely exercising a governmental function for which it was created under the Epira.”

Records showed that Psalm conducted public biddings for the privatization of the Pantabangan-Masiway Hydroelectric Power Plant and Magat Hydroelectric Power Plant.

On August 28, 2007, the BIR sent the NPC. a demand letter for the payment of the VAT deficiency for the sale of the said power plants.  The NPC, in turn, endorsed the said letter to PSALM, considering that the proceeds of the sale are with the latter.

On August 30, 2007, PSALM, the BIR and the NPC executed a memorandum of agreement wherein they agreed that the resolution of tax issues will be submitted to appropriate courts or body.

PSALM subsequently filed a petition with the DOJ for adjudication of the issue of whether the sale of the two power plants is subject to VAT.

The DOJ, in its March 13, 2008, decision, affirmed the position of PSALM that the sale of the said power plants was done in accordance with its mandate under the Epira, thus, the tax assessment should be declared null and void.

The justice department also directed the BIR to refund the P3.81 billion that Psalm paid under protest.

Concurring with the ruling were Chief Justice Ma. Lourdes Sereno,  Associate Justices Presbitero Velasco Jr., Teresita Leonardo de Castro, Diosdado Peralta, Jose Catral
Mendoza, Marvic Leonen, Francis Jardeleza, Alfredo Benjamin Caguioa, Samuel Martiresm Noel Tijam and Andres Reyes Jr.

Associate Justice Lucas Bersamin concurred with the dissenting opinion of Associate Justice Mariano del Castillo. Associate Justice Estela Perlas-Bernade did not take part.




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