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Deemed Sale
It seems that words can make us millionaires. That is the beauty of the law and the art by which it is crafted. The Supreme Court (SC) justly refunded P246 Million to a taxpayer by giving life to the enigmatic world of deemed sale as used under the Tax Code of 1997. The Court of Tax Appeals (CTA) denied several claims for refund on the ground that a taxpayer failed to establish that it had incurred zero rated sales or effectively zero-rated sales or because the taxpayer failed to declare zero-rated sales in its VAT return to which creditable input taxes may be attributed. In a rare instance, the SC reversed the CTA in the case of San Roque Power Corporation versus Commissioner of Internal Revenue (GR No. 180345, promulgated on November 25, 2009). The main issue that is resolved by the SC is whether San Roque has zero-rated or effectively zero-rated sales, to which creditable input taxes may be attributed. After reviewing the records of the case, the SC found that in 2002 (the year that is the subject of the claim), San Roque carried out a sale of electricity to the National Power Corporation (NPC). Although the VAT returns for the 1st, 2nd, and 3rd quarters of 2002 did not state a zero-rated sale, the 4th quarter VAT return for 2002 reported a zero-rated sale. This sale is not a commercial sale but this sale arose from San Roques production and transfer of electricity to NPC during the testing period in exchange for the amount of P42.5 Million. According to the SC, it is not unmindful of the fact that the transaction was not a commercial sale. In granting the tax benefit to the VAT-registered zero-rated or effectively zero-rated taxpayers, Section 112 (A) of the Tax Code of 1997 does not limit the definition of sale to commercial transactions. The SC related Section 112(A) with

Section 106(B), which does not limit the term sale to commercial sales, rather it extends the term to transactions that are deemed sale. The SC finds it an equitable construction of the law that when the term sale is made to include certain transactions for the purpose of imposing a tax, these same transactions should be included in the term sale when considering the availability of an exemption or tax benefit. It is undisputed that during the 4th quarter of 2002, San Roque transferred to NPC all the electricity that was produced during the trial period. The fact that it was not transferred through a commercial sale or in the normal course of business does not deflect from the fact that such transaction is deemed a sale under the law. It is also important to discuss another doctrine laid down by the SC in this case. It is observed that San Roque seasonably filed its claim for refund for the 1st to 3rd quarters of 2002, i.e., within 2 years after the close of the taxable quarter when sales were made. The SC however noted that for the period April 2002 to May 2002, San Roque filed its claim prematurely on October 2002, before the last quarter had closed on December 31, 2002. As discussed above, it was on the 4th quarter of 2002 when San Roque made its sale to NPC. This has serious implications since for the first time a claim for refund may now be prematurely filed. It appears that the SC in this case reckons the running of the 2 year period at the end of the quarter when the sales were actually made, i.e., December 31, 2002. In other words, San Roque should have filed its claim for refund for the period April to May 2002 only after the close of December 31, 2002 (the taxable quarter when the sales were made). Stated differently, San Roque should have filed its claim within January 1, 2003 to December 31, 2004. The SC has once again enriched jurisprudence which our tax laws badly need. It not only enlightened us on the mystery of deemed sale and its power to grant refund in millions of pesos if just, but also educated us to follow the clear provision of the law on the seasonable filing of a claim for VAT refund if we do not want to lose the millions that we may be entitled to.

The author is a senior associate of Du-Baladad and Associates Law Offices (BDB Law). If you have any comments or questions concerning the article, you can e-mail the author at irwin.c.nideajr@bdblaw.com.ph or call 403-2001 local 330.