THE COMMISIONER OF INTERNAL REVENUE, PETITIONER, VS. ACESITE (PHILIPPINES) HOTEL CORPORATION, RESPONDENT.

Commissioner of Internal Revenue versus Acesite (Philippines) Hotel Corporation

The Case

This is a petition for review on certiorari filed by the Commissioner of Internal Revenue against Acesite (Philippines) Hotel Corporation, the owner and operator of the Holiday Inn Manila Pavilion Hotel. The Commissioner assails the decision of the Court of Appeals which affirmed the Court of Tax Appeals in ordering a refund of value-added tax paid on rentals and sales of food and beverages to the Philippine Amusement and Gaming Corporation, or PAGCOR. The case matters because it settles a question every tax practitioner must answer: when a special law grants a tax-exempt entity a blanket exemption, does that exemption reach the indirect tax of value-added tax that a supplier would otherwise shift to it, and if so, may the supplier claim a refund of what it mistakenly remitted?

Procedural History

Acesite filed an administrative claim for refund with the Commissioner of Internal Revenue, who failed to resolve it. Acesite then filed a petition for review with the Court of Tax Appeals, which partially granted the claim and ordered the Commissioner to refund the amount of 30,054,148.64 pesos, after deducting the prescribed portion of 98,743.40 pesos. The Commissioner appealed to the Court of Appeals, which affirmed the decision of the Court of Tax Appeals in its entirety. The Commissioner then elevated the matter to the Supreme Court through a petition for review on certiorari under Rule 45.

Facts

Acesite owns and operates the Holiday Inn Manila Pavilion Hotel along United Nations Avenue in Manila. It leases 6,768.53 square meters of the hotel premises to PAGCOR for casino operations, and it also caters food and beverages to PAGCOR's casino patrons through the hotel's restaurant outlets. For the period from January 1996 to April 1997, Acesite incurred value-added tax amounting to 30,152,892.02 pesos from its rental income and its sale of food and beverages to PAGCOR.

Acesite tried to shift the tax to PAGCOR by incorporating it in the amount assessed, but PAGCOR refused to pay on account of its tax-exempt status. PAGCOR thus paid the amount due minus the value-added tax, while Acesite, fearing the legal consequences of non-payment, remitted the tax to the Commissioner. Acesite later concluded that its transactions with PAGCOR should have been subject to the zero percent rate because they were rendered to a tax-exempt entity.

On 21 May 1998, Acesite filed its administrative claim for refund. When the Commissioner failed to act, Acesite filed its petition with the Court of Tax Appeals on 29 May 1998. Both the Court of Tax Appeals and the Court of Appeals ruled in Acesite's favor, and the Commissioner brought the matter to the Supreme Court.

Issues

• Whether or not PAGCOR's tax exemption privilege includes the indirect tax of value-added tax, so as to entitle Acesite to the zero percent rate.
• Whether or not the zero percent rate under the then Section 102, paragraph b, subparagraph 3 of the Tax Code, now Section 108, paragraph B, subparagraph 3 of the Tax Code of 1997, legally applies to Acesite.

Applicable Provisions

Section 13, paragraph 2, subparagraph b of Presidential Decree 1869, the charter creating PAGCOR, provides:

The exemptions herein granted for earnings derived from the operations conducted under the franchise specifically from the payment of any tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extend to corporation(s), association(s), agency(ies), or individual(s) with whom the Corporation or operator has any contractual relationship in connection with the operations of the casino(s) authorized to be conducted under this Franchise and to those receiving compensation or other remuneration from the Corporation or operator as a result of essential facilities furnished and/or technical services rendered to the Corporation or operator.

This is the provision that extends PAGCOR's exemption to those dealing with it, and the Court reads it as reaching indirect taxes as well.

Section 102, paragraph b, subparagraph 3 of the 1977 Tax Code, as amended, provides:

Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero (0%) rate.

This is the zero-rating provision on which Acesite's claim for refund rests.

Article 2142 of the Civil Code provides:

Certain lawful, voluntary, and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of another.

Article 2154 of the Civil Code provides:

If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises.

These two articles supply the principle of solutio indebiti, the return of what was delivered by mistake, which grounds the refund.

Ruling

On the first issue, the Court answered in the affirmative. A close scrutiny of Section 13 of Presidential Decree 1869 shows a blanket exemption from taxes, with no distinction between direct and indirect taxes. By extending the exemption to entities or individuals dealing with PAGCOR in casino operations, the legislature clearly granted exemption also from indirect taxes, because the value-added tax can be shifted or passed to the buyer, transferee, or lessee. The Court invoked its earlier ruling in Commissioner of Internal Revenue versus John Gotamco and Sons, where the exemption of the World Health Organization was implemented by exempting the contractor itself, precisely so that no contractor's tax could be shifted to the exempt contractee. The proviso in Presidential Decree 1869 serves the same purpose: to proscribe any indirect tax that may be shifted to PAGCOR.

On the second issue, the Court held that the zero percent rate applied to Acesite. While it was proper for PAGCOR not to pay the ten percent value-added tax charged by Acesite, Acesite itself is not liable for it, as it is exempt in this particular transaction by operation of law. That exemption falls within the zero-rating provision quoted above.

The Court also held that Acesite paid the tax under a mistake of fact, being unaware at the time of payment that its transactions with PAGCOR were zero-rated. Such payment is not voluntary and may be recovered. The Court applied solutio indebiti against the Government, stressing that no person shall unjustly enrich himself at the expense of another, and the Government is not exempted from this doctrine. Finally, while an action for refund partakes of the nature of an exemption and is strictly construed against the claimant, Acesite discharged its burden: it proved its actual payments through an independent certified public accountant commissioned by the Court of Tax Appeals, and the Commissioner never disputed the evidence nor presented any of its own.

Doctrine

A tax exemption granted by special law in blanket terms, with no distinction between direct and indirect taxes, extends to indirect taxes such as the value-added tax. Where the exempt entity's charter extends the exemption to persons or entities dealing with it in the covered operations, the supplier's services are effectively subject to the zero percent rate, and the supplier is not liable for the tax it would otherwise shift to the exempt entity.

A payment made under a mistake of fact, where the taxpayer was unaware of an existing exemption in its favor at the time of payment, is an erroneous payment that may be refunded under the principle of solutio indebiti embodied in Articles 2142 and 2154 of the Civil Code. The Government is not exempt from this doctrine. An action for refund, being akin to an exemption, is strictly construed against the claimant, who must convincingly prove the actual payments made.

Disposition

The petition was denied for lack of merit, and the decision of the Court of Appeals affirming the refund of 30,054,148.64 pesos to Acesite was affirmed, with the reminder that the Bureau of Internal Revenue must release the refund without unreasonable delay.

Remember This

Memorize this line: a blanket tax exemption in a special charter reaches indirect taxes, and the supplier dealing with the exempt entity is effectively zero-rated and may recover what it paid by mistake. Examiners use this case on value-added tax zero-rating, the scope of PAGCOR's exemption, and the application of solutio indebiti against the Government in refund suits.