Tax refund based on “solutio indebiti”

A claim for refund of erroneously, illegally, excessively or wrongfully collected taxes or penalty must be filed within two years from date of payment of the tax or penalty regardless of any supervening cause that may arise after the payment of tax or penalty pursuant to Section 229 of the Tax Code.

In the instant case, the taxpayer-refund claimant — an electric distribution company — filed an application for provisional increase of its electric rate schedules in 1994 with the Energy Regulatory Board (ERB). Acting on its petition, the ERB issued an order granting the company a provisional increase subject to the condition that after hearing and evaluation, should the company be entitled to a lesser increase, all excess amount should be refunded to its customers or credited to their future consumption.

When it imposed the provisional increase upon its consumers, the company declared the provisional increase in its income tax returns and paid the corresponding income tax. However, after consultation and hearing, the ERB rendered a decision in 1998 granting a lesser increase in rates, and thus, it ordered the company to refund or credit to its customers the overcharged amount.

The company appealed the ERB decision to the Court of Appeals (CA), which ruled in 1999 in its favor by reversing the ERB decision. The CA decision was reversed in 2002 by the Supreme Court (SC), and became final and executory on May 5, 2003.

As a result of the mandated refund or credit, the company’s gross electric revenue, taxable income and income tax liability during the taxable years 1994-1998 and 2000-2001 were reduced, resulting in excess income tax payments.  To recover its erroneously paid tax, the company filed with the BIR its administrative claim for refund in 2003 while its judicial claim with the CTA was filed in 2005.

The second division of the CTA entitled the company to claim for tax refund due to the special circumstances prevailing in the instant case. An appeal was made to the CTA en banc, which held that the rule of solutio indebiti does not apply to the claim for refund since the elements of solutio indebiti are lacking in the case. The CTA en banc also held that the two-year prescriptive period for the company to claim refund had lapsed reckoned from the dates the income taxes had been paid without consideration to any supervening cause that arose after the payment of the tax.

In response to the motion for reconsideration of the decision of the CTA en banc, the CTA en banc held that the twoyear prescriptive period under Section 229 of the Tax Code may be suspended for reasons of equity and other special circumstances. It held that considering the SC decision ordering the company to refund or credit to future consumption the overcharged amount became final and executory only on May 5, 2003, it will be iniquitous to rule that the two-year prescriptive period was not interrupted, but instead commenced to run from the date of payment of the taxes sought to be refunded.

In its amended decision, the CTA en banc further held that the principle of solution indebiti is applicable to refund or illegally collected or assessed tax. Based on jurisprudential pronouncements cited by the CTA en banc, it held that the rule on solutio indebiti may be applied to the refund claim of the taxpayer.

(Commissioner of Internal Revenue v. Manila Electric Company, Inc, CTA EB No. 773, November 13, 2012)

Tax Brief – December 2012

Punongbayan and Araullo