G.R. No. 259309 , February 13, 2023
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. TOLEDO POWER COMPANY, RESPONDENT.

FACTS

Respondent Toledo Power Company (Toledo) is a domestic corporation engaged in operating electrical generation facilities. For the taxable year 2011, petitioner Commissioner of Internal Revenue (CIR) issued a Preliminary Assessment Notice (PAN) detailing deficiency taxes, including a Value-Added Tax (VAT) assessment of PHP 4,025,642.60 on Toledo’s sale of power to Carmen Copper Corporation (CCC). The PAN stated that only the portion of the sale attributable to CCC’s general and administrative costs should be subject to 12% VAT, while the portion for direct production costs should be zero-rated. Thirty-six days after receiving the PAN, Toledo paid the assessed VAT deficiency plus interest, totaling PHP 6,971,071.10. No Final Letter of Demand/Final Assessment Notice (FLD/FAN) was issued by the CIR after this payment. Fifty-two days after payment, Toledo filed an administrative claim for refund, arguing its sale to CCC, a 100% Board of Investments-registered exporter, should be entirely zero-rated, and the payment was erroneous due to the lack of an FLD/FAN. After the CIR’s inaction, Toledo filed a Petition for Review with the Court of Tax Appeals (CTA) within the two-year prescriptive period. The CTA Second Division granted the refund, a decision affirmed by the CTA En Banc. The CIR now petitions the Supreme Court, arguing Toledo failed to prove entitlement to the refund and that its voluntary payment constituted abandonment of its objections.

ISSUE

Whether the Court of Tax Appeals correctly ordered the refund of PHP 6,971,071.10 to Toledo Power Company as an erroneous payment of VAT.

RULING

The Supreme Court DENIED the petition and AFFIRMED the CTA En Banc’s decision. The Court held that Toledo’s payment based solely on the PAN was an erroneous payment of tax. A PAN is merely a preliminary notice and does not constitute a final assessment. Under the National Internal Revenue Code and relevant regulations, a final assessment arises only upon the issuance of an FLD/FAN after the taxpayer’s response or default. Since no FLD/FAN was issued, the CIR’s assessment never attained finality, and Toledo’s payment, made without a final, executory demand, was considered erroneous. The Court further ruled that Toledo’s sale of power to CCC was entirely zero-rated. Applying the cross-border doctrine and relevant revenue issuances (RMC No. 74-99 and RMO No. 9-2000), the sale of power to a BOI-registered enterprise with 100% export sales is zero-rated because the power cost forms part of the direct cost of goods destined for consumption outside the Philippines. The PAN’s allocation between direct cost and administrative cost for VAT purposes was incorrect. Toledo validly complied with the procedural requirements for a refund claim under Section 229 of the NIRC, having filed its administrative claim and subsequent judicial claim within the two-year prescriptive period from the date of payment. The defense of voluntary payment and estoppel was unavailing against the claim for refund of an erroneously paid tax.