The Supreme Court ruled in San Roque Power Corporation v. Commissioner of Internal Revenue that a power corporation was entitled to a refund for unutilized input Value Added Tax (VAT), even though its initial sales were part of a testing phase rather than commercial sales. The court recognized that the transfer of electricity during the testing period, in exchange for payment, qualified as a ‘sale’ for VAT purposes, entitling the corporation to a tax refund. This decision clarifies the scope of ‘zero-rated sales’ and provides guidance for businesses involved in infrastructure projects and power generation on claiming VAT refunds during initial operational phases. The ruling emphasizes the importance of aligning tax incentives with legislative intent to promote investment in critical sectors.

Powering Up Refunds: Can Test Runs Qualify as Zero-Rated Sales?

San Roque Power Corporation, created to build and operate the San Roque Multipurpose Project, sought a refund for unutilized input VAT from January to December 2002. The Commissioner of Internal Revenue (CIR) denied the claim, arguing that San Roque Power had no zero-rated sales during that period. The Court of Tax Appeals (CTA) upheld the CIR’s decision. The core legal question was whether the transfer of electricity to the National Power Corporation (NPC) during the project’s testing phase, in exchange for payment, could be considered a ‘sale’ eligible for zero-rating under the National Internal Revenue Code (NIRC).

The Supreme Court reversed the CTA’s decision, emphasizing that San Roque Power was indeed entitled to a VAT refund. The Court grounded its decision in Section 112(A) of the NIRC, which allows VAT-registered entities with zero-rated or effectively zero-rated sales to claim refunds for creditable input tax attributable to such sales. To claim this refund, taxpayers must meet specific criteria, including VAT registration, engagement in zero-rated sales, payment of input taxes, and timely filing of the claim.

The Court highlighted that San Roque Power met these criteria. It was VAT-registered and provided electricity to NPC, an activity subject to zero rate under Section 108(B)(3) of the NIRC. It also presented suppliers’ VAT invoices and official receipts, validated by an independent CPA, Angel A. Aguilar. Aguilar’s audit report confirmed that, with a few exceptions due to incomplete documentation, the remaining input VAT was well-documented and recorded.

A key point of contention was the absence of commercial sales in 2002. The CTA argued that because San Roque Power was still under construction and hadn’t made commercial sales, it couldn’t claim the VAT refund. However, the Supreme Court examined the fourth quarter VAT return for 2002, which reported a zero-rated sale of P42,500,000.00. Further, the Court referenced the affidavit of Carlos Echevarria, San Roque Power’s Vice President, who stated that this amount represented payment from NPC for electricity produced during the testing period.

The Supreme Court broadened the interpretation of “sale” beyond typical commercial transactions. Referencing Section 106(B) of the NIRC, the Court noted that the term “sale” includes transactions that are “deemed” sales, such as transfers or consumption of goods originally intended for sale, even if not in the ordinary course of business. Applying this, the Court reasoned that the transfer of electricity to NPC during the testing phase, in exchange for payment, qualified as a “deemed sale.” This interpretation is crucial because it extends VAT benefits to activities beyond traditional commercial sales, particularly relevant for companies in infrastructure development.

The Court also addressed concerns about the timeliness of the refund claim. While San Roque Power filed some claims prematurely, it demonstrated its accumulation of excess input taxes attributable to the transfer of electricity to NPC. The Court noted the unique circumstances, where San Roque Power’s sole purpose was to operate a power plant transferring electricity to NPC. This reduced the risk of fraudulent claims and supported granting the refund based on substantial justice, equity, and fair play.

Moreover, the Supreme Court emphasized the legislative intent behind zero-rating: to relieve exempt entities like NPC from the burden of indirect taxes. By granting San Roque Power’s refund claim, the Court aligned with the intent to support the development of particular industries. The Court referenced Section 13 of Republic Act No. 6395 (the NPC Charter), which exempts NPC from all taxes, both direct and indirect, highlighting the comprehensive tax exemption granted to NPC due to its significant public interest.

The Court also tied the decision to broader energy policies, citing the EPIRA Law (Republic Act No. 9136), which aims to ensure total electrification, enhance private capital inflow, and promote renewable energy. Denying San Roque Power’s input tax credits would undermine these policies. The Court concluded that legislative grants of tax relief represent a sovereign commitment to taxpayers, crucial for attracting foreign investment in infrastructure. Finally, the Court pointed out that when a claim for refund has a clear legal basis and is well-supported by evidence, it should be granted.

FAQs

What was the key issue in this case?	The key issue was whether the transfer of electricity during the testing phase of a power plant, in exchange for payment, could be considered a ‘sale’ eligible for zero-rating under VAT regulations.
What is zero-rated sale in VAT context?	A zero-rated sale is a taxable supply of goods or services where the VAT rate is zero percent; the supplier can claim a refund or credit for input taxes related to that sale.
What did the Court decide regarding the VAT refund claim?	The Supreme Court ruled in favor of San Roque Power, stating that the transfer of electricity to NPC during the testing phase qualified as a sale, entitling the corporation to a VAT refund.
What is Section 112(A) of the NIRC?	Section 112(A) of the National Internal Revenue Code allows VAT-registered persons with zero-rated or effectively zero-rated sales to apply for a tax credit certificate or refund of creditable input tax attributable to those sales.
Why did the CTA deny the initial refund claim?	The CTA initially denied the claim because it found that San Roque Power had no zero-rated sales during the period in question, as the project was still under construction.
How did the Court interpret the term ‘sale’ in this case?	The Court interpreted ‘sale’ broadly to include transactions ‘deemed’ sales, such as transfers of goods intended for sale, even if not in the ordinary course of business, as defined in Section 106(B) of the NIRC.
What was the significance of the EPIRA Law in this decision?	The EPIRA Law (Republic Act No. 9136) aims to ensure total electrification and promote renewable energy; denying San Roque Power’s tax credits would undermine these policies.
What is input tax and how does it relate to VAT refunds?	Input tax is the VAT a business pays on its purchases; if a business makes zero-rated sales, it can claim a refund for the input tax it paid.
What amount was ultimately ordered to be refunded?	The Supreme Court ordered the Commissioner of Internal Revenue to refund or issue a tax credit certificate to San Roque Power Corporation in the amount of P246,131,610.40.

The San Roque Power case provides important clarity on VAT refund eligibility for businesses engaged in infrastructure projects. By recognizing transfers during testing phases as ‘sales’ for VAT purposes, the Supreme Court has broadened the scope of zero-rated transactions. The decision reinforces the importance of aligning tax incentives with the legislative intent to encourage investment in critical sectors, promoting fairness, substantial justice, and adherence to the nation’s energy objectives.

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: San Roque Power Corporation vs. Commissioner of Internal Revenue, G.R. No. 180345, November 25, 2009