G.R. No. 125704 August 28, 1998
PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF TAX APPEALS, respondents.

FACTS

Petitioner Philex Mining Corporation was assessed by the BIR for excise tax liabilities totaling P123,821,982.52 for the periods from the 2nd quarter of 1991 to the 2nd quarter of 1992, inclusive of surcharge and interest. Philex protested the demand, asserting that it had pending claims for VAT input credit/refund for the years 1989 to 1991 amounting to P119,977,037.02, which should be applied against its excise tax liabilities, citing the case of Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc. The BIR denied the protest, stating that no legal compensation could take place as the pending claims were not yet established or determined with certainty. Philex elevated the case to the Court of Tax Appeals (CTA). During the proceedings, the BIR issued a Tax Credit Certificate in the amount of P13,144,313.88, reducing Philex’s liability to P110,677,668.52. The CTA ordered Philex to pay this balance plus 20% annual interest, ruling that legal compensation could not apply because the claim for VAT refund was unliquidated and pending litigation, and that taxes cannot be subject to set-off or compensation. The Court of Appeals affirmed the CTA decision. After the denial of its motion for reconsideration, Philex obtained several VAT input credit/refunds in July 1996 for the years 1989-1992 and 1994. Philex then contended that these credits, now liquidated, should ipso jure offset its excise tax liabilities.

ISSUE

Whether Philex Mining Corporation’s excise tax liabilities can be legally compensated or set off against its VAT input credit/refund claims.

RULING

No. The Supreme Court affirmed the decisions of the Court of Tax Appeals and the Court of Appeals. The Court held that taxes cannot be subject to set-off or legal compensation. The government and the taxpayer are not mutual creditors and debtors of each other; taxes are due to the government in its sovereign capacity, while debts are due in its corporate capacity. A claim for taxes is not a debt that can be compensated under Article 1279 of the Civil Code. The Court reiterated its consistent rulings, notably in Francia v. Intermediate Appellate Court and Caltex Philippines, Inc. v. Commission on Audit, that a taxpayer cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax. The Court further ruled that the doctrine in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc., which allowed a set-off, was based on a provision of the 1939 Tax Code that was omitted in the 1977 Tax Code, and thus could no longer be invoked. The Court also found no merit in Philex’s claim that the imposition of surcharge and interest was unjustified, emphasizing that taxes are the lifeblood of the government and must be collected without unnecessary hindrance. The non-payment of tax within the prescribed period triggers the mandatory imposition of surcharge and interest, which cannot be waived for flimsy reasons. However, the Court agreed with Philex that the BIR violated the statutory period (60 days under the 1977 Code) for processing its VAT refund claims, which took approximately five years, and reminded the BIR of its duty to act on such claims with purposeful dispatch.