Title
Power Sector Assets and Liabilities Management Corp. vs. Commissioner of Internal Revenue
Case
G.R. No. 198146
Decision Date
Aug 8, 2017
PSALM contested BIR's VAT assessment on power plant sales, arguing privatization was a governmental function under EPIRA, not subject to VAT. DOJ ruled in PSALM's favor; Supreme Court upheld DOJ's jurisdiction and VAT exemption, ordering BIR to refund PSALM.
jurisdictional dispute
sale of power plants
null and void
A

Case Summary (G.R. No. 198146)

Key Dates and Procedural Posture

Public biddings: 8 Sept. 2006 (Pantabangan‑Masiway) and 14 Dec. 2006 (Magat). BIR demand letter dated 14 Aug. 2007; MOA among BIR/NPC/PSALM executed 30 Aug. 2007. PSALM remitted under protest Php 3,813,080,472.00 (basic VAT) and filed a petition with the DOJ (OSJ Case No. 2007‑3) on 21 Sept. 2007. DOJ issued a decision favorable to PSALM on 13 Mar. 2008 and denied BIR’s motion for reconsideration on 14 Jan. 2009. BIR/CIR filed certiorari with the Court of Appeals (CA); CA declared the DOJ decisions null and void for lack of jurisdiction in a 27 Sept. 2010 decision (affirmed by denial of reconsideration 3 Aug. 2011). PSALM sought review by certiorari to the Supreme Court, which rendered the challenged opinion addressed herein.

Statutory and Constitutional Framework

Governing statutes and instruments: RA 9136 (EPIRA) — creates PSALM and directs privatization of NPC assets (Sec. 49, 50, 51, 55, 47); 1997 National Internal Revenue Code (NIRC) — defines VAT liability (Sec. 105) and vests the Commissioner of Internal Revenue with power to decide disputed assessments and refunds (Sec. 4); RA 9337 — repealed NPC’s prior VAT exemption; PD 242 (1973) and its incorporation into EO 292, Administrative Code of 1987 (Chapter 14, Book IV) — provides for administrative settlement of disputes solely among national government offices and GOCs, assigning cases involving only questions of law to the Secretary of Justice; Constitution (1987) — President’s control over executive departments (Art. VII, Sec. 17) invoked in the majority opinion to support intra‑executive administrative adjudication.

Facts of the Sale and the MOA

PSALM conducted public biddings; First Gen Hydropower and SN Aboitiz Power were winning bidders for the two plants. BIR issued a demand for deficiency VAT; NPC forwarded the demand to PSALM. The MOA among BIR, NPC, and PSALM provided that PSALM would remit the assessed VAT under protest and that a DOJ ruling favorable to NPC/PSALM would be tantamount to an application for refund/TCC, to be processed within 15 working days. MOA terms also contained mutual undertakings to seek final resolution before appropriate bodies and stated that the DOJ’s favorable ruling would be immediately executory and that judicial appeal rights were preserved.

DOJ Ruling and Rationale

The DOJ (Secretary of Justice) assumed jurisdiction and, on 13 Mar. 2008, ruled that (a) the DOJ had jurisdiction because the dispute was an intra‑governmental controversy involving only government entities and raising questions of law — PD 242/EO 292 applies; (b) ownership of the plants had been transferred to PSALM under EPIRA, so PSALM was the seller and not a successor‑in‑interest of NPC; (c) the sale was not “in the course of trade or business” under Sec. 105 NIRC because PSALM’s privatization exercise was a governmental function, an isolated transaction mandated by law and not a regular commercial activity; and (d) subjecting the sale to VAT would frustrate EPIRA’s privatization objectives by reducing optimal proceeds. DOJ directed refund of the paid VAT.

Court of Appeals’ Ruling and Rationale

The CA held that the DOJ lacked jurisdiction: the CA viewed PSALM’s petition as effectively a protest against a tax assessment, an area under the CIR’s authority per Sec. 204 and Sec. 4 of the NIRC, and subject to the CTA’s appellate jurisdiction. The CA emphasized that jurisdiction over subject matter cannot be conferred by party stipulation or estoppel, and that PD 242 cannot displace the CIR/CTA scheme of tax adjudication. The CA therefore nullified the DOJ decisions for lack of jurisdiction.

Issues Presented to the Supreme Court

PSALM’s petition raised, inter alia: (I) whether the CA erred in granting the BIR’s certiorari petition; (II) whether the Secretary of Justice properly assumed jurisdiction and decided the dispute; (III) whether the DOJ correctly ruled that the privatization sale is not subject to VAT; and (IV) whether the respondent CIR is entitled to certiorari relief.

Supreme Court Majority: Jurisdiction — PD 242 / EO 292 Applies

The Supreme Court found the petition meritorious and held that, contrary to the CA’s ruling, PD 242 (now Chapter 14, Book IV of EO 292) vests the Secretary of Justice with jurisdiction to adjudicate disputes that are solely between government offices and GOCs and that involve only questions of law. The Court reasoned that PD 242’s mandatory language requires administrative settlement of such intra‑governmental controversies by the DOJ and that PD 242 is a special law applicable when all parties are public entities, thus to be harmonized as an exception to the general provisions of the NIRC. The Court emphasized the President’s constitutional control over executive departments (Art. VII, Sec. 17) and the doctrine of exhaustion of administrative remedies: intra‑executive disputes must first be resolved administratively to respect executive control and avoid premature judicial intervention. The MOA’s provision treating a favorable DOJ ruling as tantamount to application for refund reinforced that the parties accepted DOJ adjudication. The Court held PD 242 applicable to the present dispute among PSALM, NPC, and BIR and reinstated the DOJ decisions.

Supreme Court Majority: Substantive VAT Determination

On the substantive VAT question, the Supreme Court agreed with the DOJ that the sale was not “in the course of trade or business” under Sec. 105 NIRC and therefore not subject to VAT. The Court relied on PSALM’s statutory mandate in EPIRA to privatize NPC generation assets to liquidate NPC’s liabilities — a governmental, noncommercial function carried out as an isolated, one‑time privatization exercise under a statutory scheme (including required plans, presidential approval, and prescribed grouping and bidding). PSALM was found to be the owner of the assets by operation of law (Sec. 49, 51, 55 EPIRA), not merely a trustee or successor that continued NPC’s regular commercial activities. The Court distinguished cases where incidental disposals by a business (e.g., Mindanao II) were taxable, reasoning that the present transfers were not incidental to a commercial enterprise but were mandated privatizations. The Court ordered refund of the Php 3,813,080,472 remitted under protest.

Relief, Appellate Pathways, and Final Disposition

The Court granted PSALM’s petition, set aside the CA decisions, and reinstated the DOJ decisions of 13 Mar. 2008 and 14 Jan. 2009. The Court noted Section 70, Chapter 14, Book IV of EO 292 and PD 242: because the amount exceeded P1,000,000, the DOJ decision may be appealed to the Office of the President; accordingly, BIR was afforded the opportunity to appeal to the Office of the President within ten days from finality of the Supreme Court decision. No costs were imposed.

Concurring Opinion (Velasco, Jr., J.)

Justice Velasco concurred but emphasized procedural considerations: where DOJ exercises jurisdiction under PD 242, the proper appellate route is to the Office of the President per EO 292 (Sec. 70). He underscored the President’s control over executive agencies and argued that, in tax disputes resolved by the Office of the President, direct certiorari to the Supreme

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