Reckoning of the two-year prescriptive period revisited

Reckoning of the two-year prescriptive period revisited by Rachelle Ann C. Baod

The law may be harsh but it is still the law. Dura lex sed lex. This time-honored doctrine in jurisprudence has again been enshrined in a recent decision rendered by the Court of Tax Appeals En Banc (CTA EB) in Commissioner of Internal Revenue (CIR) vs. Manila Electric Company, Inc. (Meralco) dated May 8, 2012 [CTA EB No. 773 (CTA. Case No. 7242)].
 
The instant case involved a claim for refund or tax credit certificate of excess income tax payments for taxable years 1994-1998 and 2000, as a result of the reduction of the rate per kilowatt hour (kWh) that was previously granted by the Energy Regulatory Board (ERB) to Meralco.

On December 23, 1993, Meralco filed with the Energy Regulatory Board (ERB) an application for the revision of its rate schedules with the prayer of approval of the provisional increase of P0.184/kWh. The said application was approved subject to the condition that after hearing and evaluation, should Meralco be entitled to a lesser increase in rates, all excess amounts collected by Meralco shall be refunded to its customers or credited to their future consumption.

As such, Meralco paid the income tax due on its taxable income based on its gross electric revenue computed based on the total amount of its existing average rate plus the provisional increase of P0.184/kWh. On February 16, 1998, however, ERB rendered a decision granting a rate increase of only P0.017/kWh and ordering Meralco to refund or credit to its customers the average amount of P0.167 per kwh beginning February 1994. The issue was elevated to the Supreme Court (SC) which affirmed the ERB decision.

Consequently, on November 27, 2003, Meralco filed a claim for tax refund or credit of excess income tax payments with the CIR. On May 4, 2005, due to inaction, Meralco appealed its claim for refund to the CTA Division. The CIR argued that Meralco’s claim cannot prosper for having been filed beyond the two-year prescriptive period. Meralco, on the other hand, counter-argued by invoking the basic legal principle of solutio indebiti. On December 6, 2010, the CTA Second Division rendered a decision in favor of Meralco, hence, this petition by the CIR with the CTA EB.

The CTA EB denied Meralco’s refund. In arriving at such conclusion, CTA EB emphasized and reiterated various significant points already well settled in jurisprudence, as follows:

1. Reckoning of the two-year prescriptive period

The issue as to the reckoning of the two-year prescriptive period under Section 229 of the 1997 Tax Code, as amended, is not novel since this issue had been previously and unanimously ruled upon by CTA EB in the "Atlanta Case" (CTA EB No. 79, Atlanta Land Corporation vs. CIR dated May 23, 2006), as follows:

"The language of the law is unequivocal; it provides that no suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment. Provided, however, that the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid.

"The date of payment of the tax is the reckoning point of the 2-year period within which a valid claim for refund may be filed both in administrative and judicial levels. Any claim or proceeding for the recovery of taxes shall be filed within the 2-year prescriptive period, otherwise, the taxpayer loses his right ipso facto to recover any tax alleged to have been erroneously or illegally collected."

Records showed that Meralco filed its annual corporate income tax returns and paid the income taxes due thereon on April 7, 1995, April 15, 1996, April 15, 1997, April 15, 1998, April 15, 1999 and April 11, 2001 for the taxable years 1994, 1995, 1996, 1997, 1998 and 2000, r espectively. However, it was only on November 27, 2003 that Meralco filed with the CIR its administrative claim for refund and it was only on May 4, 2005 that it filed its judicial claim with the CTA in Division.

Needless to state, both claims were apparently filed way beyond the two-year prescriptive period.

2. Mandatory character of the two-year prescriptive period

The CTA EB’s decision also bore emphasis on the aforequoted provisions of the Tax Code which clearly showed that the two-year period is mandatory, and not merely permissive. The use of the words "shall" and "must" is imperative, operating to impose a duty.

3. "Regardless of Supervening Cause" Clause

Supervening events refer to facts that transpire after judgment has become final and executory or to new circumstances which developed after the judgment has acquired finality, including matters which the parties were not aware of prior to or during the trial as they were not yet in existence at that time.

Meralco’s claim for refund should have been filed within the twoq-year prescribed period, reckoned from the dates the income taxes thereon had been paid, and not from May 5, 2003, the date the decision of the SC in G.R. Nos. 141314 and 141369 had become final and executory. Meralco’s appeals to the Court of Appeals (CA) and SC are both extraneous matters that occurred after payment of the tax, hence, not relevant in determining the prescriptive period.

Basic is the principle that taxes are the lifeblood of the nation. As such, the availability of funds from the collection of taxes cannot forever be left subject to the contingency of refund brought about by certain acts which are solely within the exclusive control of the private contracting parties, otherwise, fiscal adequacy cannot be achieved.

Without the strict observance of the two-year prescriptive period, the government will always be at the losing end, refunding taxes whenever supervening cause arises even after the expiration of the two-year prescriptive period, thus making the phrase "regardless of any supervening cause" futile and inoperative.

4. Inapplicability of the solutio indebiti rule

The quasi-contract of solutio indebiti is based on the ancient principle that no one, not even the State, shall be unjustly enriched at the expense of another.

In the case of BPI vs. Sarmiento, 484 SCRA 271, the SC held that there is solutio indebiti where: (1) payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who received the payment; and (2) the payment is made through mistake, and not through liberality or some other cause.

The CTA En Banc held that Meralco cannot invoke the rule of solutio indebiti to justify its claim since the aforecited elements were lacking. First, there exists a binding relation between Meralco and the CIR, Meralco being a taxpayer obligated to pay income taxes on its taxable income. Second, there is no misapprehension of facts on the part of Meralco when it paid income taxes to the BIR for the subject years, it being fully aware that the increase initially granted to it by ERB was merely provisional and at the same time, conditional.

5. Inapplicability of the "Equity" rule

The CTA Second Division previously ruled in favor of Meralco on the basis of equity.

The CTA En Banc, however, ruled otherwise. While equity which has been aptly described as "justice outside legality", it is applied only in the absence of, and never against, statutory law or judicial rules of procedure (Mendiola vs. CA, 258 SCRA 502). Positive rules prevail over all abstract arguments based on equity.

Considering that this case falls within the ambit of Section 229, equity will not apply.

As of this writing, the case has not yet been appealed to the SC and we do not know if Meralco will still appea l its case.

Taxpayers and tax practitioners alike are equally interested in the final ruling for this case not only because of the amount involved but, most importantly, because of the peculiarities of the case involving the supervening event.