COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. COURT OF TAX APPEALS AND CBK POWER COMPANY LIMITED, RESPONDENTS.

Commissioner of Internal Revenue versus CBK Power Company

The Case

This is a petition for certiorari under Rule 65 filed by the Commissioner of Internal Revenue against the Court of Tax Appeals and CBK Power Company Limited. The Commissioner asks the Supreme Court to annul and set aside three resolutions of the Court of Tax Appeals in division that declared her in default at the pre-trial, allowed CBK Power to present its evidence ex parte, and denied her motions to lift the default and for reconsideration. The case matters for two reasons: it settles the correct remedy against an interlocutory order of a Court of Tax Appeals division, and it restates the liberal policy on lifting orders of default so that litigants may present their claims on the merits.

Procedural History

CBK Power filed two separate judicial claims for tax credit certificates with the Court of Tax Appeals, one covering the first quarter of 2009 and another covering the second quarter of 2009. The cases were later consolidated upon CBK Power's motion. When the Commissioner's counsel failed to appear at the pre-trial conference of the consolidated cases, the Court of Tax Appeals, in a resolution dated December 23, 2011, allowed CBK Power to present its evidence ex parte. The Commissioner filed a motion to lift the order of default, which the Court of Tax Appeals denied in a resolution dated April 19, 2012. Her motion for reconsideration was likewise denied in a resolution dated June 13, 2012. The Commissioner then filed this petition for certiorari with the Supreme Court, raising the ground that the Court of Tax Appeals gravely abused its discretion in declaring her in default despite her counsel having actively defended her cause and without any intention to defy the court's order.

Facts

CBK Power Company Limited is a special purpose entity engaged in the design, financing, construction, operation, and maintenance of the Kalayaan II pumped storage hydroelectric power plant and the rehabilitation and management of the Caliraya, Botocan, and Kalayaan I hydroelectric power plants in Laguna. On March 30, 2011, it filed a judicial claim with the Court of Tax Appeals for a tax credit certificate in the amount of Seventeen Million Seven Hundred Eighty-Four Thousand Nine Hundred Sixty-Eight and 91/100 Pesos, representing unutilized input taxes attributable to zero rated sales for the period of January 1, 2009 to March 31, 2009. On June 28, 2011, it filed a second judicial claim for Thirty-One Million Six Hundred Eighty Thousand Two Hundred Ninety and 87/100 Pesos, covering the period of April 1, 2009 to June 30, 2009.

The two cases were handled by different lawyers of the Commissioner. The cases were later consolidated upon CBK Power's motion, and the pre-trial conference was set on November 3, 2011. The lawyer handling the second case failed to appear because he was on leave for health reasons from October to December 2011. The pre-trial was reset to December 1, 2011. The lawyer to whom the consolidated cases were assigned filed a consolidated pre-trial brief on November 15, 2011, but on December 1, 2011 he failed to appear on time because he was attending a hearing in another division of the Court of Tax Appeals at the same hour.

On December 23, 2011, the Court of Tax Appeals allowed CBK Power to present its evidence ex parte. On January 6, 2012, twenty days before the scheduled ex parte presentation of evidence, the Commissioner filed a motion to lift the order of default. CBK Power did not file any comment or opposition to the motion, nor to the later motion for reconsideration. The Court of Tax Appeals nevertheless denied both motions.

Issues

• Whether or not a petition for certiorari under Rule 65 is the proper remedy against an interlocutory order of a division of the Court of Tax Appeals, instead of an appeal to the Court of Tax Appeals en banc.
• Whether or not the Court of Tax Appeals gravely abused its discretion in declaring the Commissioner in default and allowing CBK Power to present its evidence ex parte.

Applicable Provisions

Section 1 of Rule 41 of the Rules of Court, which applies suppletorily to proceedings before the Court of Tax Appeals, provides:

Section 1. Subject of appeal. An appeal may be taken from a judgment or final order that completely disposes of the case, or of a particular matter therein when declared by these Rules to be appealable. No appeal may be taken from: x x x x (c) An interlocutory order. In all the above instances where the judgment or final order is not appealable, the aggrieved party may file an appropriate special civil action under Rule 65.

This provision is the basis for holding that the default orders, being interlocutory, cannot be appealed to the Court of Tax Appeals en banc and may be challenged only by certiorari.

Section 2 of Rule 1 of the Revised Rules of the Court of Tax Appeals provides:

Section 2. Liberal construction. The Rules shall be liberally construed in order to promote their objective of securing a just, speedy, and inexpensive determination of every action and proceeding before the Court.

This provision supports the setting aside of the default so that the Commissioner may present her evidence on the merits.

Ruling

On the first issue, the Court held that the petition for certiorari was the proper remedy. The Court en banc of the Court of Tax Appeals has appellate jurisdiction only over final orders or judgments of a division, not over interlocutory orders. The order of default, the order denying the motion to lift it, and the order denying reconsideration are all interlocutory, because they did not finally dispose of the case on the merits but merely cleared the way for the reception of CBK Power's evidence. Since no appeal lies from an interlocutory order, the Commissioner correctly filed a special civil action under Rule 65.

On the second issue, the Court held that the Court of Tax Appeals gravely abused its discretion. Following the rule that default should be imposed only where a party's conduct is so negligent, irresponsible, contumacious, or dilatory as to provide substantial grounds for it, the Court found no showing that the Commissioner intentionally disregarded the court's authority. The two cases were filed on different dates and handled by different lawyers; one was on health leave, and the other was attending another hearing in another division. The Commissioner had timely filed her consolidated pre-trial brief, and she moved to lift the default twenty days before the scheduled ex parte presentation, without any opposition from CBK Power. The Court stressed that courts should be liberal in setting aside orders of default, for default judgments are frowned upon, and that both parties should be given every chance to fight their case fairly and in the open.

Doctrine

First, an order of default and the orders denying a motion to lift it and a motion for reconsideration are interlocutory orders, because they do not finally dispose of the case on the merits. No appeal may be taken from an interlocutory order of a division of the Court of Tax Appeals; the proper remedy is a special civil action for certiorari under Rule 65. Second, default is a harsh sanction that should be imposed only where the party's conduct is so negligent, irresponsible, contumacious, or dilatory as to provide substantial grounds for it. Courts should be liberal in lifting orders of default, and the rules of the Court of Tax Appeals are to be liberally construed to secure a just, speedy, and inexpensive determination of every action.

Disposition

The petition for certiorari was granted. The three resolutions of the Court of Tax Appeals were set aside, and the consolidated cases were remanded to the Court of Tax Appeals Third Division to give the Commissioner the chance to present evidence, rebuttal, and sur-rebuttal evidence, if needed.

Remember This

Memorize this line: an order of default is interlocutory and cannot be appealed to the Court of Tax Appeals en banc; it is challenged by certiorari, and default judgments are frowned upon. Examiners use this case to test the distinction between final and interlocutory orders in the Court of Tax Appeals and the liberal policy on lifting orders of default.