COMMISSIONER OF INTERNAL REVENUE vs.

MIGRANT PAGBILAO
CORPORATION



Facts: Migrant Pagbilao Corporation (MPC) is a corporation engaged in the
business of power generation and distribution. It accumulated input taxes in the
amount of 39,330,500.85 from April 1, 1996 to December 31, 1996. MPC claims
that it paid these input taxes to the suppliers of capital goods and services for the
construction and development of power plants. MPC applied for tax credit/refund
on the unutilized VAT paid on capital goods. Without waiting for the BIR
Commissioner to answer, MPC filed a petition for review to toll the running of the
2-year prescriptive period for claiming a refund under the law. The BIR in its
answer denied MPCs application citing that MPCs claim for refund is still being
investigated before the BIR, that the action is premature, and that tax credit laws
are construed against MPC. Upon investigation, the Revenue Officer
recommended for the approval of the tax credit but it reduced the amount from
39,330,500.85 to 28,745,502.40, as duly proven by valid invoices or official
receipts. The CTA ruled that indeed, MPC is entitled to tax credit but the amount
is reduced in line with the Revenue Officers findings. The BIR filed a motion for
reconsideration that was subsequently denied. On appeal, the BIR raised that
MPC being an electric utility is subject to franchise tax and not VAT and since it
is VAT exempt, it cant claim tax refund. The CA denied BIRs appeal upholding
that it is not allowed to change its theory on appeal.

Issues: 1. Whether the BIR is allowed to change its theory on appeal.
2. Whether Input VAT on capital goods and services is allowed.

Ruling:

1. The SC prohibited the BIR from changing its theory on the case and raising a
new issue on appeal. As a rule, a party is never allowed to change its theory or
raise a totally new issue on appeal. On exceptional cases, the rules may be
relaxed allowing new issues on appeal but it is only done for good and sufficient
causes in order to pave way for justice. The BIR has not shown any good or
sufficient cause for relaxing the rules.

2. Input VAT on capital goods and services may be claimed as tax refund. The
BIR is erroneous in stating that a VAT exempt or zero rated VAT payer is not
allowed to claim tax credits. Pertinent provisions of the Tax Code allow that Input
VAT on capital goods be claimed as tax credit. Sec 106 (b) of the Tax Code of
1986 as amended by RA 7716 expressly states that A VAT- registered person
may apply for the issued of a tax credit certificate or refund of input taxes paid on
capital goods imported or locally purchased, to the extent that such input taxes
have not been applied against output taxes.