Power Sector Assets and Liabilities Management Corporation vs. Commissioner of Internal Revenue

The sale of NPC generation assets by PSALM, as well as the lease of property and the collection of income and receivables undertaken as part of its statutory mandate, is not “in the course of trade or business” and is therefore not subject to value-added tax, because such activities are performed in the exercise of a governmental function required by the EPIRA law, not in pursuit of a commercial or economic activity.

PSALM was created under Republic Act No. 9136 (the EPIRA) as a government-owned and controlled corporation. Its principal purpose is to manage the orderly sale, disposition, and privatization of NPC’s generation assets, real estate, and other disposable assets, and IPP contracts, with the objective of liquidating all NPC financial obligations and stranded contract costs in an optimal manner. The EPIRA provides a detailed framework for the total privatization of NPC assets within specified timelines and mandates PSALM to act as conservator of those assets pending their sale or disposition. For taxable year 2008, the Bureau of Internal Revenue (BIR) assessed PSALM for deficiency VAT on proceeds from the sale of the Masinloc, Ambuklao-Binga, and Pantabangan power plants, the lease of the Naga Complex, and various collections of income and employee receivables. PSALM protested, invoking BIR Ruling No. 020-2002 which declared that PSALM’s disposition of assets was not subject to VAT.

• The Entity and Its Mandate: PSALM is a government-owned and controlled corporation created under Section 49 of Republic Act No. 9136 (EPIRA). Its principal purpose, as stated in Section 50, is to manage the orderly sale, disposition, and privatization of NPC generation assets, real estate, other disposable assets, and IPP contracts, with the objective of liquidating all NPC financial obligations and stranded contract costs in an optimal manner. PSALM has a corporate life of 25 years from the effectivity of the EPIRA.

• The Transactions Assessed: For the taxable year 2008, the BIR identified four categories of receipts as subject to VAT: (a) proceeds from the sale of the Masinloc, Ambuklao-Binga, and Pantabangan power plants (generating assets) totaling ₱53,859,322,483.00; (b) proceeds from the lease of the Naga Complex (₱172,096,188.00); (c) collection of income from participation fees, site visit fees, plant CDs, photocopying charges, and data room access fees (₱9,183,364.00); and (d) collection of receivables from employees for excess mobile phone use, inventory variance from a custodian, refund from a successor-generation company of insurance premiums paid, and interest received from mandatory dollar deposit (₱1,148,257.00).

• The Assessment: On 9 June 2011, the BIR issued Final Assessment Notice No. VT-08-00072, assessing PSALM for deficiency VAT of ₱6,485,010,035.34, plus interest of ₱3,618,098,680.02 and a compromise penalty of ₱50,000.00, for a total of ₱10,103,158,715.06. The assessment treated the total proceeds of ₱54,041,750,292.00 as subject to output VAT, without allowing input tax credits.

• PSALM’s Reliance on BIR Ruling: PSALM protested, arguing that its privatization activities were its statutory mandate and not subject to VAT. It cited BIR Ruling No. 020-02 dated 13 May 2002, which had ruled that PSALM’s disposition of assets was not conducted in pursuit of any commercial or profitable activity and was an isolated transaction not subject to VAT.

• The CIR’s Position: The Commissioner of Internal Revenue denied the protest, arguing that RA 9337 had expressly repealed NPC’s VAT exemption under Section 13 of the NPC Charter, making all sales of electricity and related transactions subject to VAT. The CIR posited that PSALM was a successor-in-interest of NPC, and therefore the repeal of NPC’s exemption also revoked the benefit recognized in BIR Ruling No. 020-02.

• The CTA’s Rulings: The CTA Third Division partially granted PSALM’s petition, allowing input tax credits and deleting the compromise penalty, but otherwise sustained the deficiency VAT. It found that the enactment of RA 9337 had superseded BIR Ruling No. 020-02 and that the sale of generating assets fell under “all kinds of goods and properties” subject to VAT under Section 106 of the NIRC. The deficiency VAT was recomputed at ₱6,439,713,829.91, with interest of ₱3,126,348,741.53, for a total of ₱9,566,062,571.44. The CTA En Banc affirmed in toto, though Presiding Justice Del Rosario dissented on the ground that PSALM acted in good faith based on the BIR ruling and that the collection of receivables did not constitute a VAT-able transaction.

• Not in the Course of Trade or Business: PSALM argued that the sale of the generating assets was not conducted in the regular course of trade or business under Section 105 of the NIRC, but was a governmental function mandated by the EPIRA to privatize NPC assets. It was an isolated transaction that could not be repeated, and thus fell outside the coverage of VAT as held in CIR v. Magsaysay Lines, Inc.

• Validity of BIR Ruling No. 020-2002: PSALM maintained that it relied in good faith on BIR Ruling No. 020-2002, which had pronounced that the disposition or sale of assets as a consequence of its EPIRA mandate was not subject to VAT. The ruling was never revoked prior to the transactions.

• Incidental Transactions Not VAT-able: PSALM asserted that the lease of the Naga Complex and the collection of income and receivables were incidental to its privatization mandate and necessary for the conservation of NPC assets; they were not pursued as a commercial or profit-seeking activity.

• Receivables Not from Sale of Goods or Services: PSALM argued that the collected receivables — from employee mobile phone charges, inventory variance, insurance refunds, and interest on a dollar deposit — did not arise from a sale, barter, exchange, or lease of goods or services, and therefore were not subject to VAT under Section 105 of the NIRC.

• Effect of RA 9337 Repeal: The CIR argued that Section 24 of RA 9337 expressly repealed the VAT exemption of NPC; because PSALM was a successor-in-interest of NPC, the repeal also removed any VAT immunity PSALM might claim, and BIR Ruling No. 020-02 was effectively revoked.

• Transactions in the Ordinary Course: The CIR contended that the sale of power plants, the lease of property, and the collection of income constituted regular business activities that fell squarely within the definition of “in the course of trade or business” under Section 105 of the NIRC, as amended. The EPIRA does not confer a blanket tax exemption.

• VAT on All Goods and Properties: The CIR maintained that under Section 106 of the NIRC, VAT applies to the sale of “all kinds of goods and properties,” and the generating assets sold by PSALM were real properties used in trade or business.

• Privatization Activities: Whether PSALM’s sale of NPC generating assets (privatization activities) is subject to value-added tax under the NIRC.

• Incidental Transactions: Whether the lease of the Naga Complex and the collection of income from participation fees, site visit fees, and similar items, done as part of PSALM’s asset conservation duties, are subject to VAT.

• Receivables Not from Sale of Goods or Services: Whether PSALM is liable for deficiency VAT on the collection of employee receivables and other receipts that did not arise from a sale, barter, exchange, or lease of goods or services.

• Privatization Activities: The sale of the generating assets — the Masinloc, Ambuklao-Binga, and Pantabangan power plants — was not subject to VAT. The Supreme Court applied its binding precedent in PSALM v. CIR, G.R. No. 198146 (8 August 2017), which resolved the same question between the same parties. That decision held: (a) PSALM is not a successor-in-interest of NPC, as the two entities have distinct functions under the EPIRA, so the repeal of NPC’s VAT exemption by RA 9337 does not affect PSALM; (b) even assuming PSALM were a successor-in-interest, the sale of power plants is not “in the course of trade or business” under Section 105 of the NIRC because the sale was an exercise of a governmental function mandated by law to privatize NPC assets, not a regular commercial activity. The sale was isolated, involuntary in character, and made pursuant to the government’s privatization policy, analogous to the sale of NDC vessels in CIR v. Magsaysay Lines, Inc. Consequently, no output VAT was due.

• Incidental Transactions: The lease of the Naga Complex and the collection of income from participation fees, site visit fees, plant CDs, photocopying charges, and data room access fees were likewise not subject to VAT. Section 51 of the EPIRA expressly empowers PSALM to own, hold, acquire, or lease real and personal properties necessary for the discharge of its functions and to manage its personnel. These activities were undertaken in the exercise of PSALM’s statutory mandate as conservator of NPC assets and were not pursued as an independent economic or commercial venture. Because they were not conducted “in the course of trade or business,” they fell outside the scope of VAT.

• Receivables Not from Sale of Goods or Services: The collection of receivables — from employee mobile phone excess charges, inventory variance from a custodian, refund of insurance premiums from a successor-generation company, and interest on a mandatory dollar deposit — was not subject to VAT. These receipts were not derived from a sale, barter, exchange, lease of goods or properties, or performance of services for a fee, and therefore did not constitute a VAT-able transaction under Section 105 of the NIRC. They were incidental reimbursements and internal adjustments within the ambit of PSALM’s functions as conservator of NPC assets.

In light of the finding that no VAT liability arose, the issue of deficiency and delinquency interest was rendered moot and not passed upon.

• “In the Course of Trade or Business” under Section 105, NIRC — The phrase means the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, by any person regardless of whether the person is a nonstock, nonprofit private organization or government entity. An isolated transaction that is not conducted for profit and is undertaken pursuant to a governmental function mandated by law does not fall within this definition. The sale of public assets under a statutory privatization program is not a commercial activity but an exercise of governmental power, and therefore not subject to VAT. This principle was established in CIR v. Magsaysay Lines, Inc. and applied to PSALM’s disposal of NPC generation assets.

• PSALM is Not a Successor-in-Interest of NPC — NPC and PSALM have distinct statutory functions under the EPIRA. NPC retains the mandate of missionary electrification through the Small Power Utilities Group, while PSALM is a separate GOCC created solely to privatize NPC assets and liquidate NPC liabilities. Consequently, the repeal by RA 9337 of NPC’s VAT exemption does not automatically subject PSALM’s transactions to VAT.

• Governmental Function Doctrine for GOCC VAT Exemption — When a GOCC performs acts that are required by its charter to implement a state policy of privatization and asset disposition, those acts are deemed the performance of a governmental function, not the pursuit of trade or business. Such transactions are outside the VAT system because VAT is a tax on consumption levied only on those who engage in the regular conduct of commercial activities.

• “PSALM is not a successor-in-interest of NPC. Under its charter, NPC is mandated to 'undertake the development of hydroelectric generation of power and the production of electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide basis.' With the passage of the EPIRA law … the NPC is now primarily mandated to perform missionary electrification function … On the other hand, PSALM … was created under the EPIRA law to manage the orderly sale and privatization of NPC's assets with the objective of liquidating all of NPC's financial obligations in an optimal manner. Clearly, NPC and PSALM have different functions.” — This passage establishes the legal distinction between the two entities, which defeats the CIR’s successor-in-interest theory and the claimed automatic application of the RA 9337 repeal.

• “The sale of the power plants is not in pursuit of a commercial or economic activity but a governmental function mandated by law to privatize NPC generation assets. … PSALM was created primarily to liquidate all NPC financial obligations and stranded contract costs in an optimal manner. … The sale of NPC assets by PSALM is not ‘in the course of trade or business’ but purely for the specific purpose of privatizing NPC assets in order to liquidate all NPC financial obligations.” — This is the core ratio decidendi, squarely applying the Magsaysay Lines doctrine to PSALM’s mandate.

• “VAT is ultimately a tax on consumption, and it is levied only on the sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business.” — This doctrinal anchor reinforces why PSALM’s mandate-driven transactions fall outside VAT’s reach.

• Power Sector Assets and Liabilities Management Corporation v. Commissioner of Internal Revenue, G.R. No. 198146, 8 August 2017 — Controlling precedent. The Supreme Court followed this prior decision between the same parties, which definitively ruled that PSALM’s sale of NPC power plants (Pantabangan-Masiway and Magat) was not subject to VAT because the transactions were not in the course of trade or business and were exercises of a governmental function under the EPIRA. The doctrine was applied with full stare decisis effect.

• Commissioner of Internal Revenue v. Magsaysay Lines, Inc., 529 Phil. 64 (2006) — Followed and extended. In that case, the Court held that the sale of NDC vessels was not subject to VAT as it was an isolated transaction made pursuant to the government’s privatization policy, and not conducted in the regular course of business. The same reasoning was applied to PSALM’s privatization sales.

• Section 105, National Internal Revenue Code of 1997, as amended — Defines persons liable for VAT and the critical phrase “in the course of trade or business.” The provision was interpreted to exclude transactions that are isolated and performed in the exercise of a governmental function mandated by statute.

• Section 108, NIRC — Subjects the sale of electricity by generation, transmission, and distribution companies to VAT. The Court distinguished the sale of electricity from the sale of power plants, holding that the latter is not a sale of electricity and does not fall under this section.

• Section 24, Republic Act No. 9337 — Repealed the VAT exemption of NPC under Section 13 of RA 6395. The Court clarified that this repeal does not extend to PSALM, which is not a successor-in-interest of NPC.

• Sections 47, 49, 50, and 51, Republic Act No. 9136 (EPIRA) — These provisions govern the creation, purpose, powers, and privatization mandate of PSALM. They established the governmental character of PSALM’s functions and demonstrated that the transactions in question were carried out in compliance with its statutory duties.

Justices Perlas-Bernabe, Caguioa, J. Reyes, Jr., and Lazaro-Javier concurred.