MANILA ELECTRIC COMPANY v. COMMISSIONER OF INTERNAL REVENUE

1j(Y Republic of the Ph ilippines COURT OF TAX APPEALS Quezon City SECOND DIVISION MANILA ELECTRIC COMPANY, CTA CASE NO. 7242 Petitioner, Presen t: -versus- CASTANEDA JR., Chairperson CASANOVA and COMMISSIONER OF INTERNAL M INDARO-GRULLA JJ. REVENUE , Respondent. Promu!.g._o ted: � � OtL 0 6 , ~ x------------------------------------------------------------,---------r-J--D---t-�-"---~------x DECISION MINDARO-GRULLA, J.: This is on Amended Petition for Review (Ad Coutelom) 1 filed on November 22, 2005 by Manila Electric Company (MERALCO), as petitioner, against the Commissioner of Internal Revenue (CIR ) as respondent, for the Court in Division, pursuant to Ru le 4, Section 3 (a) (2), in relation to Rule 8, Section 4(o), of the Revised Ru les of the Court of Tax Appeals (RRCTA) . 1 Ro ll o , pp . 479-493 ~ 1111

MERALCO vs . Commissioner of Internal Revenue Page 2 o f 40 CTA Case No. 7242 DECISION The said Amended Petitio n is an appeal from responden t CIR 's inaction/denial on MERALCO's claim for a ta x refund or credit of excess income tax payments for the taxable years 1994-1998 and 2000 in the total amount of P5,796,342,792.712, broken down as fo ll ows: Taxable Original Tax Disallowed Adjusted Income Adjusted Income Excess Income Year Payments CWTs4 Tax Payments Tax Due Tax Payments6 with CWTs3 with CWTs5 1994 p 15,544 p 1,149,772,719.52 p 697,413,897.48 1995 p 1,847,186,617 p 54,568.24 p 1,847,186,617 p 1,369,237,724.71 p 743,421 ,455.29 1996 p 2,112,659,180 p 18,214 p 2,112,659,180 P1 ,584,311 ,872.82 p 1,016,995,619.18 1997 p 2,601,323,036 p 2,687,466.29 p 2,601,307,492 p 1,496,450,692.45 p 1,094,804,759.31 1998 p 2,591 ,310,020 p 2,775,792.53 p 2,591,255,451.76 p 1,233,907,225.60 p 1'127,850,426.40 2000 p 2,361,775,866 p 2,361,757,652 p 439,614,953.66 p 1'115,856,635.05 p 1,558,159,055 p 1,555,471,588.71 p 7,273,295,188.76 p 5,796,342,792.71 Total P13 ,072 ,413, 774 P13 ,069 ,637 ,981.47 -~~ The orig inal claim for a tax refund o r credit of excess income tax payments for the taxable years 1994-1998 and 2000-2001 amoun ted to P7, 107,534,282 .00. Thereafter, respondent C IR partly granted MERALCO's claim fo r the ta xable year 2001 to the extent of P894,473,932.58. Hence, the original claim in the sum of P7, 107,534,282.00 less MERALCO's c laim for the taxab le year 2001 in the amount of P1,071 ,546,018.00 is equal to the original amended claim for 2 Supplemen tal Joint Stipu lation o f Fac ts and Issues, Rollo, pp. 623-624 3 Supplemen tal Joint Stipu lation of Facts and Issues, Annexes "0", "P", "Q","R", "S" & "S- 1" 4 Supplemental Joint Stipulation of Facts and Issues, citing CIR's Decision doled September 21, 2005, Annex "A" s Original Tax Payments with CWTs less Disa ll owed CWTs 6 Supplemental Joint Stipulation of Facts and Issues, citing CIR's Decision doted September 21, 2005, Annex "A"- Recommended amount for TCC- For denial due to prescription. c.. 111 2

MERALC O vs . Commissioner of Internal Re v enue Page 3 of 40 CTA Case No. 7242 DE C ISION a tax refund or credit of excess income tax payments for the taxable years 1994-1998 and 2000 amounted to P6,035,988,264.00. MERALCO's claim for a tax refund or credit is due to the alleged overpayment of income taxes arising from the Decision of the Supreme Court in the consolidated cases of Republic of the Philippines, et. al. vs. Manila Electric Company, G.R. No. 141314 and Lawyers Against Monopoly, etc. vs. Manila Electric Company, G.R. No. 141369, which became final and executory on May 5, 2003, mandating MERALCO to refund the amount equivalent to P0.167 per kilowatt-hour of over billed electric charges to its customers for their electric consumption made from February 1994 up to December 2003. The dispositive portion of which reads as follows: "WHEREFORE, in view of the foregoing, the instant petitions are GRANTED and the decision of the Court of Appeals in C.A. G.R. SP No. 46888 is REVERSED. Respondent MERALCO is authorized to adopt a rote adjustment in the amount of P0.017 per kil owaithour, effective with respect to MERALCO's billing cycles beginning 1994. Further, in accordance with the decision of the ERB dated February 16, 1998, the excess average amount of P0.167 per kilowatthour starting with MERALCO's billing cycles beginning February 1994 is ordered to be refunded to MERALCO's customers or correspondingly credited in their favor for future consumption. SO ORDERED ." Petitioner MERALCO is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines, with L 111 3

MERALCO vs . Commissio ner o f Internal Re venue Page 4 of 40 CTA Case No . 7242 DECISION principa l o ffice address at Lopez Building, Ortigas Avenue, Pasig City, and engaged in the business of d istribu tin g and supplying e lectric power within its franchise area . MERALCO is a registered ta xpayer wi th TI N 000- 101-528-000 and Certific ate o f Registra tion No. OCN8RCOOOOO 16 11 9 issued by the Bureau of Interna l Revenue on January 29, 1996. Respondent CIR is the officer du ly au thorized by law to assess and co llec t all national internal revenue ta xes, fees , and charges, including the power to decide re funds o f in ternal revenue taxes, fees or other charges, w ith offic e address at the BIR Natio nal Office Building , Agham Road , Diliman, Q uezo n City. On December 23, 1993, MERALCO fi led with the then Energy Regula tory Boord (n ow Energy Regulatory Commission ) an application for the revision of its rate schedules, docke ted as ERB Case No. 93- 11 8. On January 28, 1994, an Order granting a provisiona l increase o f P0.184 per kwh, subjec t to the conditio n that after hearing and evaluation, should MERA LCO be entitled to a lesser increase in rates, a ll excess collected by MERALCO shall be refunded to its c usto mers or credited in their future consumptio n _? 7Joint Sti p ulation o f Fac ts a nd Issues, Roll o, p . 533 ' 1114

MERALCO vs. Comm issioner o f Internal Revenue Pag e 5 o f 40 CTA Case No. 7242 DE C ISION Thus, MERALCO paid the income tax due on its taxable income based on gross electric revenue co mputed at an average basic distribution rate of P2.996 per kwh (i.e. existing average rote of P2.812 per kwh plus provisional inc rease of P0.184). On February 16, 1998, the Energy Regulatory Board rendered a Decisi o n granting on ly a rate increase of P0.17 per kwh and ordering MERALCO to refund or c redit to its customers the average amount of P0.167 per kwh beginning February 1994. MERALCO appealed th e Decision o f the Energy Regulatory Board to the Court o f Appea ls w hich ruled in its fa vor. However, the Supreme Court reverse d the Court o f Appeals' De c ision and upheld the previous Dec ision of the Energy Regulatory Board.s O n May 5, 2003, the Supreme Court's Decision became final and executory, after denying w ith finality MERALCO's Motion for Reconsideration therefrom. As a result, Meralco's gross electric revenue during the ta xa ble years 1994- 1998 and 2000-2001, taxable inco me s Republic o f th e Philippines, represented by the Energy Regula tory Board vs. Manila Electric Company, G. R. No. 141314. and Lawyers Agains t Monopoly and Poverty (LAMP), et. a l. vs. Manila Elec tri c Company, G.R. No. 141 369, November 15, 2002. L 111 5

MERA LCO vs. Commissioner o f Inte rnal Revenue Page 6 of 40 CTA Case No . 7242 DE C I S ION a nd in come tax liability were reduced, th ereby resu lting to excess income ta x payments as follows: YEAR ORIGINAL RE DUC ED INCOME TAX INCOME TAX EXCESS TAXABLE TA X ABLE ORIGINALLY AC TUALLY INCOME TAX 1994 IN C OME IN C OME PAID 1995 P5,277 ,67 6,049 P3,073,6 19,7 45 PAID p 77 1,4 19,706 1996 6,036, 169,086 3,447,481,566 P1 ,847, 186,6 17 P1,075,766,9 11 906 ,0 4 0 , 6 3 2 1997 7,432,351 ,53 1 4,526,289,260 1,206,6 18,548 1998 7,403,742,9 14 4,275,202,47 6 2, 11 2,659 ,1 80 1,584,20 1,24 1 1,0 17, 121,795 2000 6, 946,399,606 3,629,126,440 2,60 1,323,036 1,496,320,866 1,094,989, 154 200 1 4,869,247,048 1,373,796,730 2,591,3 10,020 1,233,902 ,990 1'127,872,876 TOTAL 4,0 12, 193, 155 387,079,475 2,361,775,866 439,6 14,954 1,1 18,544,1 0 1 P41 ,977,779 ,389 P20,712,595 ,692 1,558, 159,055 2 12,355,792 1,07 1,546,0 18 1,283,90 1,8 10 P7 , 1 0 7,5 3 4 ,2 8 2 P14,356 ,315,584 P7,248,781 ,302 On November 27, 2003, MERALCO filed a claim for tax re fund or c redit o f excess income tax paymen ts w ith respondent CIR. On May 4, 2005, due to inaction, M ER ALCO appealed to this Court and filed a "Petition for Review (Ad Cau telam )" and principa lly anchored its claim for a tax refund or credit of excess incom e tax paymen ts under the principle of so lutio indebiti w ithin the p rescriptive period of six (6 ) years, pursuant to Art. 1145 o f the New Civil Code or within two (2) years, as provided in Section 229 o f the 1997 Tax Code . On July 6, 2005, responden t CIR in his Answer9 raised the special and a ffirmative defenses, as fol lows: " XXX XXX XXX . 9 Rollo, pp. 457-463 L 111 6

M ERA LCO vs . Commissioner o f In ternal Revenue Page 7 o f 40 CTA Case No. 7242 DE C ISION 7.) This Ho norable Court is withou t jurisdic tio n to e ntertain th e insta nt petitio n. Pe ti tioner hinges its c au se o f actio n o n a lterna tiv e provisio ns of law. O ne o f these is th e ordina ry c laim for re fund under th e 1997 Na tio na l Internal Reve nue Code (the "Tax Code" ). partic ularly, Sectio n 229 th ereo f, or th e p rovisio n o n recovery o f taxes erro neously or illegally co llected. Sectio n 229 o f the "Tax Code " e m p ha tica lly states that "In a ny case , no su c h suit or proceeding [R ecovery o f Ta x Erro neously or Illegally Collected] sha ll be fil ed a fter th e expiratio n o f two (2) ye ars from the da te o f paymen t o f th e tax or p e na lty regard less o f any superven ing cause tha t may arise a fter payment. ... "Th e taxable years involved in this case are taxable years 199 4, 1995, 1996, 1997, 1998 and 2000. The income tax re turns fo r th e sa id periods have been filed, and taxes d ue re fl ected th e reon were pa id, a t d ates w hic h are, co ncededly, we ll-beyo nd th e 2-ye ar period g ra nte d b y law wi thin w hic h recovery o f a lleged erro neously pa id or co llected taxes ca n b e had . Thu s, being th a t th e law itse lf w hic h petitio ner invokes m a kes it c rysta l-clear th a t th e pe titio ner is barred from eve n filin g th e insta nt petitio n for rev iew, th is Ho norable Court sho uld dismiss the insta nt pe tition. 8.) Indubitably, petitioner's assertio n th a t th e two (2) year period should be reckoned from th e tim e th e Suprem e Co urt decision came ou t canno t be sus ta ined. The Tax Code ca tegorica lly states th at th e 2 year perio d sho uld be reckone d fro m th e da te o f payme nt o f th e ta x o r p e na lty. Petitio ner' s assertio n is a reductio ad absurdum argume nt, w hic h has no lega l founda tio n. 9. ) Petitioner likewise invokes Artic le 2154 o f the Civil Code, o f solutio indebiti whic h sta tes th a t "if some thing is received whe n th ere is no right to demand it, and it was unduly delivered throug h m istake, th e obligatio n to re turn it arises". Under Article 1145 (2) o f the sa m e Cod e, a cause o f a c tio n arising from so lutio indebiti should be b roug ht w ithin six (6) ye ars fro m th e time o f p aym e nt. xxx. 10.) However, pe ti tioner has no ca use o f actio n under th e p ro visio n o f so lutio indebiti. Th ere was a perfect lega l rig ht o n th e part o f th e respo ndent to dem a nd th e pa ymen t o f th ese taxes during th e taxable years w here re fund is being cla ime d. More important (l y). there was no delivery throug h m istake o n th e part of petitioner. It knew a t th e time it pa id th a t th e income taxes it was paying were actu a lly d ue. Pe titio ner can no t feig n ig no ra nce. As early as Februa ry 1998, w he n th e ER B decisio n L 11 17

MERALCO vs . Commissioner of Internal Revenue Page 8 of 40 CTA Case No. 7242 DECISION came out ordering petitioner to refund Php .1 67 to its consumers, petitioner already knew that it should not be charging the consumers with the extra amount, and was thus not liable for the income taxes on this excessive collection. At that point in time petitioner had an option. Either it restituted its consumers and continued with the status quo ante or continued charging the inofficious exaction while waiting for a court resolution. Petitioner knowingly exercises(d) its option to seek judicial recourse and continued charging the consumers with the higher rate. and paying the income taxes due thereon. Petitioner. thus, cannot be taken as one who was mistaken in payment. Thus. solutio indebiti does not apply. 11 .) Moreover, equity belongs to those who come to court with clean hands. Petitioner had the opportunity to claim for refund as early as 1998 when the Energy Regulatory Board (ERB) issued its Decision ordering herein petitioner to refund Php .167 per kilowatthour to its consumers. At that point in time. petitioner should have ceased burdening the Filipino people, and refunded the excess amounts it collected. Instead. petitioner chose to go through the court processes. It exercised an option available to it. mindful of all its consequences. and continued charging its �consumers with the already declared undue exaction. To reiterate, at that time. petitioner not only refused to comply with the ERB order of refund. it obstinately continued the collection of excessive electricity rates. For petitioner now to turn around and state that it had no opportunity to claim for refund of the allegedly excessive income taxes it paid. before the Supreme Court decision came out. is a falsity. The truth is that when petitioner chose to appeal the decision. it had already considered all the permutations of such decision. It had already foreseen that certain remedies will be lost to it, among which. is the right to claim for refund of income taxes it paid pertaining to the Php .167 refundable to consumers. Petitioner's whimper for equity should be muted by calling into mind the thunderous wails of the Filipino people's protests against lhe undue exactions when the ERB order was disregarded. 12.) The inequity of the petition is further exposed when it is con sidered that petitioner is praying for the entire amount of alleged erroneously collected income taxes it paid from 1994- 1998. and 2000-2001. when it had not even showed proof !hat it had paid all of the amounts it should refund to consumers. As the party claiming for refund. it is incumbent upon the petitioner to show that every cent it had been ordered to return has been (_ 111 8

MERALCO vs. Commissioner of Internal Revenue Page 9 of 40 CTA Case No. 7242 DECISION duly returned before the taxes a lleged to have been overpaid, pertaining to such amounts, can be claimed as refund. 13.) This Honorable Court should not be lulled into the attempts of the petition to cite seemingly parallel cases. The general pronouncements of the Supreme Court in the cited cases are all inapplicable to petitioner's case. The factual milieu of the instant situation is worlds apart from any of those cited cases in the petition. 14.) Furthermore, in action for refund, the burden of proof is on the taxpayer to establish its right to refund. Failure to sustain the burden is fatal to the claim for refund/credit. This is so because exemptions from taxation are highly disfavored in law, and he who claims exemption must be able to justify his claim by the clearest grant of organic or statutory law. An exemption from common burden cannot be permitted to exist upon vague implications (Asiatic Petroleum Co. {PI} v. Llanes, 49 Phil. 466 cited in Collector of Internal Revenue v. Manila Jockey Club, Inc. 98 Phil. 670); 15.) The government will not be unduly enriched by keeping the income taxes petitioner paid. The said amounts have already been presumably spent for the welfare of the Filipino people. These are the same people who had been extremely prejudiced by petitioner's undue exaction. The high cost of power during that time had already affected the government due to reduced income taxes paid to the government. Moreover, the impact of the undue exaction had closed innumerable businesses and had prevented the coming of investors. An analysis of the results of petitioner's exercise of discretion to disregard the ERB order cannot be made on simple addition and subtraction. But it is indubitable that petitioner's desire for profit has also taken its toll on the government's revenue generation efforts during those years, and even these days." Thereafter, in a letter dated September 21, 2005 (which was received on October 3, 2005), respondent CIR partially granted MERALCO's claim for a tax refund or credit for the taxable year 2001 to ( 11 19

MERALCO vs . Commissioner o f Internal Revenue Page 10 o f 40 CTA Case No . 7242 DECISION the extent of P894,473,932.58 but denied the c laim with respect to the ta xable years 1994-1998 and 2000 due to prescription. On November 22, 2005, MERALCO filed the instant Amended Petition fo r Review (Ad Ca utelam ). In the course of the proceedings, the parties submitted their "JOINT STIPULATI ON O F FACTS AN D ISS UES" stating, among others, the issues for resoluti o n. Responde nt C IR filed a "Supplemental Answer" and averred that a task force was crea ted by the Large Ta xpayers Service and upo n audit, it found out that there we re several discrepancies resulting to overstatement o n MERALCO's claim for refund. By way o f a Reply, MERALCO maintains that it did not overstate its claim for refund . Nonetheless, the parties filed a "SUPPLEMENTAL JOINT STIPULATION OF FACTS AND ISSU ES" thereby integrating respondent CIR' s Decision dated September 31, 2005, significantly changing some of their previously agreed fa c ts and issues. During trial , MERALCO presented two (2) witnesses, namely: Atty. Jose Ronald V. Va ll es (tsn., August 14, 2006, pp. 5-1 0), and Mr. Gener R. [. 1120

MERALCO vs. Comm issioner of Internal Revenue Page 11 o f 40 CTA Case No . 7242 D EC I S I O N Montemayor (tsn ., November 12, 2007, pp. 4-12; tsn., February 20, 2008, pp. 4-1 0; tsn., March 31, 2008, pp. 4-9; tsn ., May 12, 2008, pp .5- 13; and tsn. , July 30, 2008, pp. 4-8 ). Likewise , respond e nt CIR presented two (2) witnesses, namely: Mr. Hercules M. Catapia (tsn., April 27, 2009 ) and Mr. Oscar A. Sable (tsn ., June 8, 2009, pp. 9- 15) . After trial, the parties were directed to file their Memoranda. On January 25, 20 10, the case was deemed submitted for decision. Instead o f the issues previously agreed upon, the parties have stipulated and agreed on the issues JO to be re solved by this Court, as foll ows: "1. Whether o r no t petitioner's right to recover its exc ess income tax payments in the to tal amount of P5,796,342,792 .71 for the ta xab le years 1994- 1998 and 2000 has prescribed; 2. Whether or not petitioner has c harged to expense or to loss or o ffset against reported revenues in its Income Ta x Returns (ITRs) fo r the taxable years 2003- 2005 the amounts refunded or credited to cus tomers arising from the Supreme Court Decision in G. R. Nos. 141314 and 141369; and 10 Supplemen ta l Joint Sti pulation of Facts and Issues, Rollo, p . 633 t... 1121

MERALCO vs. Comm is sioner of lnl erno l Revenue Page 12 of 40 CTA Cose No. 7242 DECISION 3. Whether or not petitioner's right to recover its excess income ta x payments for the taxable years 1994- 1998 and 2000 is subject to the condition that refund or credit to future consumption due the customers concerned in the average amount of P0.167 per kilowatthour has been actually given or credited to them by the petitioner. We find the Petition meritorious. We discuss the issues in seriatim. 1. As to the first issue - "Whether or not petitioner's right -to recover its excess income tax payments in the total amount of P5,796,342,79 2.7 1 for the ta xa ble years 1994-1998 and 2000 has prescribed" Section 229 of the 1997 National Internal Revenue Code, as amended, provides that taxpayers seeking a refund of any national internal revenue tax hereafter alleged to have been: (1) erroneously or illegally assessed or collected, or (2) of any penalty claimed to have been collected without authority, or (3) of any sum alleged to have been excessive or in any manner wrongfully collected, must file within two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment.JJ 11 Sec. 229. Recovery of Tax Erroneously or Illega lly Colle c ted. - No suit or proceeding shall be maintained in any cou rt for the recovery of any notional internal ( 112 2

MERA LCO vs. Com missio ner o f In terna l Revenu e Pa g e 13 o f 40 CTA C ase No. 7242 DECISION However, under the New Civil Code, Article 22 12 and Article 2154 13 in re lation to Article 1145 14 thereof provide that claims or an action based upon a quasi-contract sha ll be commenced within six (6) years thereafter under the . principle o f solutio indebiti, which apparently provides fo r a m o re lenient rule. Thus, the questio n that arises. is whether a taxpayer suing for a refund of ta xes c ollec ted under the Tax Code may proc eed as a claim for refund and anch o r its claim under Article 22 and Article 2154 in relation to Article 1145 o f the New Civil Code, citing the principle of solutio indebiti as justific atio n a nd basis as to its presc ription , when the re ve nue tax he rea ft er a ll eged Ia have b e e n erro neously o r ill ega lly asse ssed or coll ec te d , or o f any p e na lty c la imed to have been co ll ec ted w ith out a uthority, o r o f any sum a ll eged to have been excessive ly o r in any mann e r w ro ng full y collec te d , until a c laim fo r re fun d or c redit has b een d uly fil ed w ith th e Commissio ne r; but suc h suit or p roceedin g may b e maintaine d , w he th e r or no t suc h tax, p e na lty, o r sum has b een paid unde r pro test o r d uress. In a ny case, no suc h suit or p roceedin g sha ll be fil ed a ft e r th e expira ti o n o f two (2) years fro m th e da te o f payment o f th e tax o r pe na lty reg ardl ess o f any superve nin g cause that may a rise a ft e r payment : Provided, however, Th a t th e Com missio ne r may, even w ith ou t a w ritten c la im th e re fo r, re fund or c redit a ny tax, w here o n th e fa c e o f th e re turn upon w hic h paym e nt was m a d e, suc h paym e nt app e ars c le arly to have b een e rroneously paid. 12 Art. 22 . Every p e rso n w ho thro ug h a n a c t o f p e rfo rman c e b y a no th er, or a ny o ther mea ns, ac q uires or com es into possessio n o f som e thing a t th e exp e nse o f the latter w ith o ut ju st or legal g ro und, sha ll re turn the sa m e to him . 13 Art. 2 154. If somethin g is received w he n th ere is no ri g ht to dem a nd it, a nd it was unduly delivered throug h m istake, the ob li ga tio n to re turn arises." 14 Art. 1145. The fo ll owin g ac tio ns mus t b e co mm e nced wi th in six ye ars: (1) Upon a n ora l co ntrac t; (2) Upon a q uasi-co ntract. c.. 112 3

MERALCO vs . Commissi o ner of Internal Revenue Page 14 of 40 CTA Case No. 7242 DE C ISION same has already prescribed under the Tax Code. The answer is in the negative. But we rule pro hac vice that MERALCO's right to recover its excess income tax payments for the taxable years 1994-1998 and 2000 has not prescribed . MERALCO is entitled to its claim for a tax refund or credit for the taxable years 1994-1998 and 2000 due to the special circumstance in the instant case, pursuant to section 229 of the 1997 NIRC. The two (2) - year prescriptive period should commence to run on May 5, 2003, the date the Supreme Court's Decision in G.R . Nos . 141314 and 141369 bec ame� final and e xec utory. It is only at that time that the right to claim for a tax refund or credit becomes determinable and the basis for the exc essive or erroneou s payment arises . In G.R . Nos. 141314 & 141369, the Supreme Court, in its desire to be an infallible advocate of truth for the protection of the general populace, ordered MERALCO to refund the amount it overcharged the public when it found out that MERALCO used a higher rate in billing the public, whi c h evidently resulted into excessive income ta x payments. It is therefore apparent that MERALCO cannot be faulted for seeking a claim for refund for the tax excessively paid to and collected by respondent CIR. L. 112 4

MERALCO vs. C ommissioner of Internal Revenue Page 15 of 40 CTA Case No. 7242 DE C ISION MERALCO contends that it would be absurd to reckon the running of the prescriptive period whether it be two (2) years or six (6) years, from the date of payment of the tax-that is, on or before 15 April, for the years 1995-1999 and 2000- when the excess paymen ts and the right to recover the same came about only on 5 May 2003 which is the date the Decision of the Supreme Court in G.R . Nos. 141314 & 141369 became final and executory. Hence, MERALCO maintains that based on the special circumstance of the aforementioned cases and this petition, equity and fairness dictate that the filing of the original petition (May 4, 2005) and the amended petition (November 22, 2005) before this Court are we ll within the prescriptive period of two (2) years or six (6) years. In sum, MERALCO states that its claim is within the prescriptive period because the prescriptive period for the recovery of erroneously or illegally collected tax under the principle of solutio indebiti is six (6) years, pursuant to Article 1145 of the New Civil Code. MERALCO states further that the counting of this period should be reckoned from May 5, 2003 when the Supreme Court Decision became final and executory since it was only then that MERALCO's right of action for the recovery of excess income ta x payments accrued. Suffice it to say that the existence of any excess income tax payments arising from the c.. 112 5

MERALCO vs . Comm issioner of Internal Revenue Page 16 o f 40 CTA Case No. 7242 DE C I S ION mandated refund could be determined only after the finality of the Supreme Court Decisio n. Thus, MERALCO invokes the application of Section 229 of the NIR C o f 1997 and at the same time, anchors its claim for refund under the principle of solutio indebiti. MERALCO, c itin g the cases of CIR vs. Philippine American Life Insurance Co.ls, CIR vs . PNB 16, and Ramie Te xtiles, Inc. vs. Mathay, SrY, seeks the same treatment given in the above-mentioned cases due to the special circumstance in the instant case, such that "it would seem unedifying fo r the government, that knowing it has no right at all to collect o r to receive money fo r alleged ta xes paid by mistake, it would be reluctant to return the same". Respondent CIR maintains that MERALCO's claim for a ta x refund or c redit was filed beyond the two (2) - year prescriptive period pursuant to Sec tio n 229 o f the NIRC o f 1997. A ta x refund, being in the nature o f an exemption, shou ld be construed strictissimi juris against the taxpaye r. Suffice it to say that in the rece nt case of Commissioner of Internal Revenue vs. Aichi Forging Company of Asia, lnc. 1s the Supreme Court stated that- 1s 244 SCRA 447, 453( 1995) 16 G.R . No . 161997, O c tober 25, 2005, 474 SCRA 303 (2005) 17 89 SCRA 586 (1979) 1s G.R . No . 184823, Oc tober 6, 20 10. L 112 6

MERALCO vs . Commissioner of Internal Revenue Page 17 of 40 CTA Case No . 7242 DE C ISION "A taxpayer is entitled to a refund either by authority of a statute expressly granting such right, privilege, or incentive in his favor, or under the principle of solutio indebiti requiring the return of taxes erroneously or illegally collected. In both cases, a taxpayer must prove not only his entitlement to a refund but also his compliance with the procedural due process as non-observance of the prescriptive periods within which to file the administrative and the judicial claims would result in the denial of his claim." Between the New Civil Code, on one hand, which is a general law and the NIRC of 1997, which is special law governing national internal revenue taxes , effective January 1, 1998, the latter prevails. It has always been the rule that on a specific matter, the special law shall prevail over the general law, which, shall be resorted only, to supply deficiencies in the former. Also, where there are two (2) statutes, the latter a special law and the former a general law- it shall be construed to mean that the terms of the general law is broad enough to include the matter provided for in the special law. The fact that one is special and the other is general creates a presumption that the special is to be considered as remaining an exception to the general, one as a general law of the land, the other as the law of a particular case . It is a canon in statutory construction that a later statute, general in its terms and not expressly repealing a prior special statute, will ordinarily not affect the special provisions of such earlier statute. 19 19 Commissioner of Internal Revenue vs . PAL, G .R. No. 180066, July 7, 2009 c.. 112 7

MERALCO vs. Comm issioner of Internal Revenue Page 18 o f 40 CTA Case No . 7242 DE C ISION The inco me tax w hich MERALCO seeks to refund falls under the National Internal Revenue Code, hence, it is only befitting to conclude that the Tax Code governs the period of limitation and not the Civil Code. Evidently, the provisions o f the Natio nal Internal Revenue Code shall necessarily govern the instant case. But it is no teworthy to emphasize that MERALCO would have not in vo ked the special jurisdic tion of this Court, which is dedicated exclusively for the res o lution of tax problems, if the ground for which such claim is made d oes no t involve a ta x refund but rather an ordinary claim of solutio indebiti. Also, it is not difficult to understand as to why the law provides for a shorter period of limitation in case of a claim for refund of national internal revenue ta xes, as o ppose d to a claim based on solutio indebiti. If the period is lo nger as to th e c laim for refund o f natio nal internal revenue ta xe s, the same wou ld certainly impede the effective administration of th e revenue laws. Thus, the pre scriptive period as to the claim for a tax refund or cred it, as provided in the Tax Code, is geared towards achieving a n effective tax co llection system so as no t to para lyze the opera tions o f our governm en t. c.. 1128

MERALCO vs . Com missioner of Internal Revenue Page 19 of 40 CTA Case No. 7242 DECISION The c ase o f United States vs. C lintwoo d Elkh o rn Mining Co. et. a l., de c ided b y the U.S. Suprem e Court2o through Chief Justice Robert, is in structi o nal and mainta in s th e co nsiste nt inte rpretati o n o f tax law s, the pertinent p o rti o n o f w hi c h reads as fo ll ows: " Indeed, we a ll but decide d th e questio n p rese nte d o ve r six d eca des ago in United Sta tes v. A. S. Kre ide r Co., 3 13 U.S. 443 (1941) . Section 1l1 3 (a ) o f th e Reve nue Ac t o f 1926, like th e re fund cl a im p rovisio n in � 7422 (a) o f th e c urre nt Cod e, prescribed th a t " [n]o suit or proceeding shall be maintained in any court for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected until a claim for refund or credit has been duly filed with th e Commissioner of Internal Revenue," and established a time limit for bringing suit once the claim -filing requirement had been m et. 44 Stat . 11 6. Like th e compa nies he re, A. S. Kreider had failed to fil e a tax-re fun d actio n w ithin th a t limita tio ns period . See 3 13 U. S., a t 446. And, like the compa nies he re, A. S. Kreider arg ued th a t it was instead subject o nly to th e lo nger 6 year sta tute o f lim ita tio ns under th e Tucker Ac t. ld ., a t 447. � We rejected the claim, holding that the Tucker Act limitations period "was intended merely to place an outside limit on the period within whic h all suits must be initiated " under that Act, a nd th a t " Co ngress le ft it ope n to provide less libe rally fo r partic ular a c ti ons w hic h, beca use o f special co nside ra tio ns, re quire d diffe re nt trea tme nt. " Ibid . We held that the limitations period in�l113(a) was "precisely that type of provision," finding that Congress created a shorter statute of limitations for tax claims because " suits against the United States for the recovery of taxes impeded effective administration of the revenue laws." Ibid. If such suits were allowed to be brought subject only to the 6-year limitations period in the Tucker Act, we explained, �1113(a) would hav.e "no meaning whatever. " ld ., a t 448. So too he re . Th e re fun d sc he m e in th e c urre nt Code would ha ve "no m ean ing w ha tever" if taxpayers fa iling to com ply w ith it were 2o No. 07-308, Argued March 24, 2008, decided April 15, 2008, 553 U.S . 1 (2008) c.. 112 9

MERALCO vs. Commissioner o f Internal Revenue Page 20 of 40 CTA Case No. 7242 DECISION nonetheless allowed to bring sui t subject only to the Tucker Ac t's longer tim e bar."(Emphasis Supplied ) Conside ring th at our "Tax Code", being a law of American o rigin, the above-mentioned decision pertaining to the period of limitation has a peculiar and persuasive force in the Philippines. 21 In the consolidated cases o f Republic vs. Manila Electric Company and LAMP vs. Manila Electric Company, 22 th e Sup reme Court had the occasion to sta te that: "Whi le our tax lows were pa tt erned and of foreign origin, American decisio ns and authori ties ore not per se con trolling in this jurisdic tion. A t best, they ore persuasive for no court holds a po ten t on correc t decisions. Our lows must be constru ed in accordance with th e intention o f our own lawmakers and such intent may be deduced from the language o f each low and the context of other local legisla tion related th ere to. More importantly, they musl be construed lo serve our own public interes t which is the be-oil and the end-a ll of a ll our lows. And it need not be stressed that our public interest is d istinc t and different from o th ers." In this jurisdic ti on, it is quite evident that a shorter sta tute of limitation to a claim for a tax refund under th e Tax Code which is two (2) years best serves our pub li c interest, as opposed to a c laim based on so lutio indebiti which is six (6) years. It is a necessary consequence in 21 Commissioner o f Inf ernal Revenue vs. Julione Boier-Nickel. os represent ed by Morino Q. Guzman (AII orney-in-focl). G .R. No. 153793. August 29. 2006, 500 SCRA 87 (2006) 22 Republic of the Philippi(les. represented by the Energy Regu latory Boord vs. Manila Electric Company. G. R. No. 141314 . and Lawyers Against Monopoly and Poverty (LAMP) . et. ol. vs. Manila Electric Company, G.R . No. 141369. November 15, 2002 t.. 11 30

MERALCO vs. Commissioner of Internal Revenue Page 21 o f 40 CTA Case No. 7242 DECISION order to have an efficient ta x co ll ection system so as not to hamper the operations of our government co nsidering that taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effect its functions for the we lfare o f its constituents.23 Thus, in the examination of Section 229 of the Tax Code and the jurisprudence thereon, the conclusion is inevitable. The Ta x Code provides that all suits or proceedings shall be file d before the expiration o f two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment. This means that the two-year prescriptive period is reckoned from the filing of the final adjusted return. 24 At first glance, it would appear that prescription has set in as the claim for refund for the ta xable years 1994 to 1998 and 2000, both in the administrative le ve l (N ovember 27, 2003) and judicial level (May 4, 23 Dayrit, et al. vs. Cruz, L-3991 0, September 21, 1988, 165 SCRA 57 1. 24 Commissioner of Internal Revenue and Arturo V. Pa rce ro in his o ffi cia l capacity as Revenue Distric t O ffi cer o f Revenue District No. 049 (Makoti) vs. Primetown Property G roup, Inc., G.R. No. 162155 . August 28, 2007.; Philippine Bank o f Communica tions vs. Commissioner o f Internal Revenue, Court o f Tax Appea ls and Court o f Appea ls, G.R. No. 11 2024. January 28, 1999 c.. 1131

MERALCO vs. Commissioner o f Internal Revenue Page 22 o f 40 CTA Case No . 7242 DECISION 2005) were both filed beyond the two-year reglementary period from the filing of the final adjusted return . However, the special circumstance in the instant case demands that it be given a different treatment. While MERALCO diligently filed its final adjustment return and paid the income ta x thereon, it is beyond cavil that neither the right to claim for refund can be determined nor there was basis for MERALCO to know that the income ta x payments for the taxab le years 1994- 1998 and 2000 were erroneous and excessive. Such fact arose on ly when the Supreme Court's Decision in G.R. Nos. 141314 and 14136925 became final and executory on May 5, 2003 . MERALCO aptly" reli ed in the case of CIR vs. Philippine American Life Insurance Co 26 , where the Supreme Court ruled that "The prescriptive period o f two (2) years should commence to run only from the time that the refund is ascertained, which con only be determined after a final adjustment return is accomplished, regardless of any supervening cause that may arise thereafter." This is so be ca use at that 25Supra. Note 6. 26 244 SCRA 447, 453( 1995) '- 113 2

MERA LCO vs . Com missio ner o f Intern a l Revenue Pag e 23 of 40 CTA C a se No. 7242 DECISION point, it can already be determined whether there has been an overpayment by the taxpayer.27 In the instant case, it is clear that MERALCO's right to claim for a tax refund for the taxable years 1994-1998 and 2000 cannot yet be ascertained or determined at the filing of the final adjustment return. Hence, the two (2) - year period should not yet commence to run. We are aware that equity is a vailable only in the absence of law and not as its replacement .2BIndisputably, at the time MERA LCO filed its final adjustment re turn and paid the income tax thereon, the am o unt b ein g claim e d fo r refund c ann ot be said to be "excessively and wrongfully co llec ted" . It w as o nly o n May 5, 2003, that the income tax payments for the taxable years 1994-1998 and 2000 being claimed for refund we re d e te rmin e d a s "excessively and wrongfully collected". Equity as the c o mplement of legal jurisdictio n seeks to reach and d o c omplete justic e w here c ourts of law, through the inflexibility of their rules and want o f p ower to a d o pt their judgments to the spec ial circumstances of c ases, are inc ompetent to do 29 . To reckon the running of the prescripti ve period from the filing of the final adjustment 27 C IR vs. Co urt o f Appea ls, e t. a l. , G .R. No . 11 7254 . Ja nu ary 2 1.1 999. 28 Aguil a vs. Cou rt o f Fi rs t Ins ta nce o f Ba ta ngas . Bra nc h 1, 160 SCRA 352 29 Tamio vs. Ticso n. G . R. No. 154895, Nove m ber 18. 2004; ci ting Air M a nila vs. C IR, 83 SC RA 579, 589. June 9. 1978. c. 113 3

MERALCO vs. Comm issioner o f Internal Re ve nue Page 24 of 40 CTA Case No. 7242 DE C ISION return and payment of the tax thereon for the taxable years 1994-1998 and 2000 when the excess payments and the right to recover the same came about only on 5 May 2003, would be iniquitous . The law on prescription being a remedial measure shou ld be interpreted in a way conducive to bringing about the beneficent purpose of balancing the ta xpayer and the government's interest. That is, if the circumstances warrant, th e interpretati o n o n the law on prescription may be rela xe d for equitable reason. The instant case is one of the special circumstances where the two (2) - year prescriptive period may be suspended. In the case of CIR vs. Philippine American Life Insurance Co.3o, the Supreme Court, held that - "Moreover, even if the two-year period had already lapsed , the sam e is not jurisdictional and may be suspended for reasons of equity and other special circumstances. (Emphasis Supplied) As the Supreme Court renders justice to the general populace when it ordered MERALCO in G .R. Nos. 141314 &141369, to refund the amount it overcharged the public when it found out that MERALCO used a high er rate in billing the public, it is only but equitable that the excessive income taxes collec ted by respondent C IR thereon be 3D 244 SCRA 447, 453( 1995) ( 113 4

� MER ALCO vs. Commissioner of Internal Reve nue Pa ge 25 of 40 CTA Case No. 7242 DE C ISI O N returned to MERALC O . O th erwise , taxpayers would be reluctant in paying their ta xes. Co nsidering the government's vigilance in colle c ting ta xe s, at least, th e same standard shall be giv en t o the ta xpay ers in refunding exc e ss in come ta x pay m e nts. This is in a ccordan c e w ith the co nsist e nt pro no un c ement o f the Supreme Court th a t: " ...Tec hnica lities a nd lega lisms, however exalte d , shou ld no t be misused by th e g overnm ent to kee p mo ney no t belo nging to it and thereby enric h itself at the exp e nse of its law-abiding ci tize ns. If th e State expects its taxpayers to o bserve fairn ess a nd ho nesty in paying their taxes , so must it a pply th e same sta ndard aga inst itse lf in paying the ir taxes, so m ust it apply the same sta ndard a g ainst itself in re fundin g excess pa ym ents o f suc h taxes. Indeed, the State must lead by its own exa m p le o f ho nor, d ig nity a nd up rig htn ess ."31 Indeed , the gover~me nt has no rig ht to retain w hat d o es no t belong to it. No o ne, no t e ven the Sta te, sho uld enric h o neself at the expense of another32, espec ially given th e unmistakable bias o f o ur tax laws in severely penalizing d e linque nt taxp ayers w ith surc harges and interests. While taxes are the lifeblo od o f the governm e nt, this Court must likewise be sensitive of its respo nsibility to apply the princ ip les o f justice, e quity and fa irness as its guide in interpreting the p e riod o f limita tio n w hic h is re m e dial in nature. 3 1 Philippine Phosphate Fertilizer Corporation vs. Commissioner of Intern al Revenue, G.R. No.141973, June 28,2005, 461 SCRA 369 (2005 ), p. 390, citing BPI-Family Savings Bonk, Inc. vs . Court of Appea ls, G.R. No. 122480, April 12, 2000, 330 SCRA 507, 509-510 32 Commissioner of Internal Revenue vs . Smart Communica tions, Inc ., G.R . Nos. 179045-46, August 25, 20 10. ' 11 35

MER ALCO vs. Com m issioner o f In te rn a l Reve nue Pag e 26 o f 40 CTA Case No . 7242 DECISION Despite the continued , if no t so metimes fataL increase o f monthly electric bills fo r consume rs, clearly, substantial justice, equity and fair play are o n the side of MERALCO. Technic alities and legalisms, however exa lted, should no t b e m isused b y the government to keep money not belonging to it, th ereby enric hing itself at th e exp e nse o f its la w-abiding c itizens.33 In the c ase of C o mmissio ner o f Internal Revenue vs. Mirant Pagbilao Corporatio n (Formerly South ern Energy Q uezon, lnc .) 34, the Supreme Court held that: "Verily, a c la im for tax re fund may be b ased o n a statute gra nting tax exem p tio n, or, as Commissioner o f Internal Reve nue v. Fortun e Tobacco Corporatio n wou ld have it, th e result o f leg islative grace. In suc h c ase, th e cla im is to be co nstru ed stric tissimi j uris against th e taxpayer, m ea ning that th e claim ca nnot be made to rest o n vague infere nce. Where the rule o f stric t in terpre ta tio n a g ainst the taxpayer is app lic able as the c laim for re fund p arta kes o f th e nature o f an exemptio n, the cla imant must show .th a t he clearly fa lls under th e exem p tin g sta tute. O n the o th er hand, a tax re fun d may b e, as usua lly it is, pred ica ted o n tax refund provisio ns al lowing a re fund o f erro neous or excess payme nt o f tax. The return of what was erroneously paid is founded on the principle of solutio indebiti, a basic postulate that no one should unjustly enrich himself at the expense of another. The caveat against unjust enrichment covers the government. And as decisional law teaches, a claim for tax refund proper, as here, necessitates only the preponderance-of-evidence threshold like in any ordinary civil case. " (Em p hasis supplied ) 33 Sta te Land Investm e nt Corpora tion, vs. Commissio ner o f Inte rn a l Revenue, G .R. No . 171956, January 18,2008, 542 SCRA 11 4 (2008) 34 G. R. No. 172 129, Sep tember 12, 2008, 565 SCRA 154 (2008) !.. 1136

MERALCO vs. Commissioner of Internal Revenue Page 27 of 40 CTA Case No. 7242 DE C ISION Consequently, we will apply the foregoing elementary principles in our evaluation of the evidence presented. 2. As regards the second issue- "Whether or not petitioner has charged to expense or to loss or offset against reported revenues in its Income Tax Returns (ITRs) for the taxable years 2003-2005 the amounts refunded or credited to customers arising from the Supreme Court Decision in G. R. Nos. 141314 and 141369" MERALCO alleges that it did not charge to expense or to loss or offset against reported revenues in its Income Tax Returns (ITRs) for the taxable years 2003-2005 the amounts refunded or credited to customers arising from the Supreme Court's Decision in G.R. Nos. 141314 and 141369. The Notes to Financial Statements, attached to MERALCO's Audited Financial Statements35 for the years ended December 31, 2003 and 2002, stated: "xxx The loss arising from the SC decision amounted to P28,728 million, which represents the amount of refund to its customers of P0.167 per kwh for billing cycles from February 1994 to December 31, 2002. The Company's 2002 financial statements have been restated to reflect the loss arising from the SC decision. Refunds covering the periods February 1994 to December 31, 2001, amounting to P23,817 million, net of tax effect for 1999 of P1, 126 million (see Note 23), were accounted for as an extraordinary loss in the 2002 statement of income. Refunds covering the period January 1, 2002 to December 31, 35 Exhibit "Y", Notes to Financial Statements, page 3, paragraph 4 c.. 113 7

MERALCO vs. Commissioner of Internal Revenue Page 28 of 40 CTA Case No. 7242 DECISION 2002, amounting to P3,785 million were reflected as a reversal of 2002 revenues. The related tax effect of P1,133 million is re fl ected as a reduction in the provision for income tax (see Note 23). The Company's revenues for the first five months of 2003 were adjusted to reflect a rollback of its distribution rates totalling approximately P1 ,595 million." Based from the foregoing, the amounts to be refunded to or credited against future consumption of MERALCO's customers pursuant to the Supreme Court Decision in G.R. Nos. 141314 and 141369 totalled P30,323 million, broken down as follows: Amount of Refund (in Period Covered millions) Feb 1994 to December 31, 2001 p 24,943 Jan. 1, 2002 to Dec. 31, 2002 Jan. 1 to May 2003 3,785 1,595 p 30,323 A scrutiny of MERALCO's Statement of Income [as restated) for the year ended December 31, 2002 shows that MERALCO treated the refundable amount covering the period of February 1994 to December 31, 2001 as an extraordinary loss but in the amount of P23,817 million, net of tax effect for 1999 of P1, 126 million. Likewise, MERALCO reflected the refundable amount of P3, 785 million as reduction from the revenues of P121 ,60636 million originally reported by MERALCO, resulting in a reduced revenue amount of P117,821 million for the said 36 Exhibit "W", Statement of Income for the year ended December 31, 2002 t.. 1138

MERALCO vs. Commissioner of Internal Revenue Page 29 o f 40 CTA Case No. 7242 DE C ISION year. The related ta x effect of P1,133 million was shown as a reduction from the provision for income tax. However, in its Amended Annual Income Tax Return for the ta xab le year 200237, MERALCO did not charge to expense or loss nor deduct against its revenues for the year 2002 any of the refundable amounts of P23,817 million and P3,785 million covering the periods February 1994 to December 31, 2001 and January 1, 2002 to December 31, 2002, respectively. This . can be clearly seen from MERALCO's Reconciliation of Net Income Per Books Against Taxable Income for the ta xab le year 2002, wherein MERALCO's net ta xable income per return in the amount of P1, 166,760,574.00 was based on MERALCO's net loss per books in th e amount of P2,015,232,945.00. It must be noted that the net loss per books of P2,015,232,945.00 was the amount reported by MERALCO before it refle c ted the refundable amounts of P23,817 million and P3, 785 million as e xtraordinary loss and revenue reversal for the year 2002, respectively. In its Statement of Income for the year ended December 31, 2003, MERALCO reflected the refundable amount of P1 ,595 million as reduction of its revenues for the months of January to May 2003. With regard to the refundable amounts covering the periods February 1994 37 Exhibit "V" L 113 9

MERALCO vs . Commissioner of Internal Revenue Page 30 of 40 CTA Case No. 7242 DE C I S ION to December 31, 2001 and January l, 2002 to December 31, 2002, MERALCO reflected the same in its Balance Sheet as of December 31, 2003 under the "Unappropriated Retained Earnings" account as "Prior period adjustments arising from customers refund" in the amount of P26,469 million 38 net of the tax effect for 1999 and 2002 in the respective amounts of P1, 126 million and P1, 133 million. In other words, in arriving at its net income per books of P907 million for the year ended December 31, 2003, MERALCO deducted from its revenues only the refundable amount of P1 ,595 million pertaining to the months of January to May 2003. Inasmuch as it was the net income per books in the amount of P907 million which was reconciled with the net income per Annual Income Tax Return for the year ended December 31, 2003 and none of the reconciling items pertain to the amounts to be refunded/credited to MERALCO's customers, it may be safely concluded that MERALCO did not charge to e xpense/loss nor deduct against its revenues for the said year the amounts to be refunded or credited to its customers pertaining to the period February 1994 to December 31, 2002. As for the taxable years 2004 and 2005, MERALCO's Audited Financial Statements 39 and Annual Income Tax Returns4o for the said 38 Exhibit "Y", Statement of C han ges in St oc kh o lders' Equity, page 3 39 Exhibit s "N" and "P" ( 1140

MERALCO vs. C ommissioner of Internal Revenue Page 3 1 of 40 CTA Case No. 7242 DECISION years a lso proved tha t it did not charge to expense or loss nor deduct agains t its revenues for the said years the amounts it has re funded/credited to its customers pursuant to the Supreme Court 's Decision in G.R. Nos. 1413 14 and 141369. Based on its liability account for Customers Refund as re fl ected in its Audited Balance Sheets4 1 as of the years ended December 3 1, 2002, 2003, 2004 and 2005, MERALCO refunded a to ta l amount o f P10,566 m illion as of December 31, 2005 which was charged to the sa id account and not to any expense/revenue account for the sa id years, as summarized below: 2002 2003 2004 2005 p. (AMOUNTS IN MILLIONS) p 20,551 28,728 Balance, January 1 p 28,728 p 25,608 p 20,551 p 28,728 1,595 794 Add: Set up of Refund - - p 19,757 Subtotal p 30,323 p 25,608 (4,234) p 28,728 less: Refunded 4,715 5,057 p 15,523 p 28,728 Balance, Dec ember 31 p 25,608 p 20,551 Present Value Effect Balance a s shown in Balance Sheet, De c. 31 (Nominal) p 25,608 p 20,551 Breakdown of AP -Customers Refund as shown in B/ S p 22,594 p 6,919 p 5,409 p 3,787 Current 6,134 18,689 15, 142 11,736 Non -Cu rrent Total p 28,728 p 25,608 p 20,551 p 15,523 Total Refunded to customers to dole p p 4,715 p 9,772 p 10,566 28,728 25,608 20,551 19,757 Balance, December 31 (Real) p 28,728 p 30,323 p 30,323 p 30,323 Total �- - - - ~~ - - - -------- ---- - � 40 Exhibits "0" and "JJJ" 41 Exhibits "Y" , "N" and "P" ~ 1141

MERALCO vs. Commissi o ner of Internal Revenue Page 32 of 40 CTA Case No. 7242 DECISION However, while MERALCO's Audited Balance Sheets show that MERALCO has refunded/credited to its customers a total amount of P10,566 million as of December 31, 2005, such amount does not reconcile with the figure of P10,565 million 42 shown in the Manifestation43 dated September 25, 2006, which MERALCO filed with the Energy Regulatory Commission (ERC) on October 2, 2006. Apparently, there were discrepancies on the amounts actually refunded by MERALCO to the prejudice of the consuming public but this does not negate the findings of this Court that MERALCO did not charge to expense/loss nor deduct against its revenues for the said years the amounts to be refunded or credited to its customers pertaining to the period from February 1994 to December 31, 2002. 3. As to the third issue stipulated upon by the parties- "Whether or not petitioner's right to recover its excess income tax payments for the taxable years 1994-1998 and 2000 is subject to the condition that refund or credit to future c onsumption due the customers concerned in the average amo unt of PO. 167 per kilowatthour has been actually given or credited to them by the petitioner." MERALCO posits that the Supreme Court's mandated refund is separate and distinct from the present claim for a tax refund or credit considering that the legal basis and requirements for the Supreme 42 Exhibit "EE" , Annex " C " 43 Exhibit "EE" t... 11 42

MERALCO v s. C ommissio ner o f Internal Rev enue Page 33 of 40 CTA C ase No . 7242 DE C ISION Court's mandated refund are different from the legal basis and requirements for the present claim for a tax refund or credit. MERALCO further argues that fhe Supreme Court's mandated refund is not dependent on the present claim for a tax refund or credit, or vice- versa. Hence, MERALCO asserts that it's right to recover its excess income tax payments for the taxable years 1994-1998 and 2000 cannot be subjected to the condition that the refund or credit to future consumption due the custo mers concerned in the average amount of P0.167 per kilowatthour, has been actually given or credited to them by MERALCO. We disagree . It is true that neither is the Supreme Court's mandated refund dependent on the instant claim for a tax refund or credit, vice-versa, nor do the legal basis and requirements for the Supreme Court's mandated refund be the same as the instant claim for a ta x refund or credit. If it w ere not due to the special circumstance in the instant case , specifically the finality of the Supreme Court's Decision in G.R. Nos. 141314 and 141369, MERALCO would not be entitled to the claim for a tax refund for the ta xable years 1994-1998 and 2000. Thus, due to equity consideration, the two (2) - year prescriptive period under the ~ 11 43

MERALCO vs. Commissioner o f Internal Revenue Page 34 of 40 CTA Case No . 7242 DE C ISION 1997 National Internal Revenue Code is reckoned from the finality of the Supreme Court's Decision in G.R. Nos. 141314 and 141369. MERALCO's claim for a tax refund was not granted or denied by respondent CIR on the condition that MERALCO should have credited to bill or refunded to customers the Supreme Court's mandated refund by MERALCO. It cannot be said that MERALCO's right to recover its excess income tax payments was subject to the condition tha t the tax refund or credit to future consumption due the customers concerned in the average amount of P0.167 per kilowatthour, has been actually given or credited to them by MERALCO. While the above-mentioned Decision of respondent CIR was bereft of any legal justification to the conditional release/issuance of a Ta x Credit Certificate (TCC) covering the granted tax refund, we find the same or that the "releases or issuances of the TCC be proportionate to the amount actually disbursed ", to be just and equitable not only for the MERALCO and the government but also the general public considering that there were discrepancies in the amount to be given and actually given or actually received by MERALCO's customers. This is supported by our findings and as pointed out by respondent CIR in its assailed Decision. ( 1144

MERALCO vs. Commissioner of Internal Revenue Page 35 o f 40 CTA Case No. 7242 DECISION The pertinent portion o f respo ndent CIR's Decision dated September 2 1, 2005, partially granting MERALCO's claim for a tax refund which is alleged to be subject to a co ndition, reads as follows: "In view of th e foregoing, th e Bureau has no recourse but to DENY your c laim for tax credit for taxable years 1994 to 1998 and 2000 in the net amount of P5,796,342,792.71 because of prescription. The related refund dockets for these cases are now with the Legal Service for reference w ith your curren t pending appeal with th e Court of Tax Appeals (CTA) . On the o ther hand, your request for refund/issuance of tax c redit certificate (TCC) for taxable year 200 1 in the net amoun t o f P894,473, 932.58 is hereby GRANTED since it was filed wi thin th e two-year prescriptive period but subject to the condi tion that credit to bill or refund to customers has actually been credited or given to the latter. Based on the above premise, the initia l TCC to be issued to your company is "P343,746,332.29 as presented in the 200 1 refund docket based on th e projected estim ated refund disbursement to customers belonging to Phases 1,2, and 3 in th e amount of P11 .648 billion submi tted to the ERC. However, based on the Re fund Summary Report as of August 3 1, 2005 th a t you submi tted to this Office and the ERC, on ly P1 0,754,002,740.00 o f th e total P11,633,786,7 41 .00 refund processed for Phases 1 to 3 were actually d isbursed to date. Co nsequen tly, by applying th e formu la of the amoun t of refund actually disbursed per Refund Summary Report submitted over base amount o f tota l refund P30.307 billion mu ltiplied by the net amoun t o f refund granted for 200 1, th e amount of TCC to be initially issued to your company in proportion to th e amoun t o f refund actuall y disbursed shou ld only be P3 17,391 ,200.77. Fina lly, as a cond ition in the processi ng o f the succeeding releases/issuance o f TCC for refund gran ted in 200 1 but to be given in 2005 to 20 10 per refund schedu le, you are required to submit to th e Large Taxpayers Service within thirty (30) days after the end of every year o f th e refund sc hedu le th e Refund Summary Report for each year as submitted to ERC from where th e actual TCC to be issued for a particular year shall be based ." L 114 5

MERALCO vs. Commissioner of Internal Revenue Page 36 of 40 CTA Case No. 7242 DECISION Moreover, this Court is no t only a Court of law but also a Court of equity. In the case o f Gonzalez vs. Rizal Commercial Banking Corporation, 44 the Supreme Court held that: "Courts in this jurisdic tio n ore not only courts of law but also of equity, and therefore cannot unqualifiedly apply a provision of law so as to cause clear injustice which the framers of the law could no t ha ve inte nd ed to so deliberately ca use. In Carce//er v. Court o f Appeals, this Court had occasio n to stress : 'Courts of law, being also courts of equity, may not cou ntenance such grossly unfair results without doing violence to its solemn obligation to administer fair and equal justice for all.' " In the exercise of this Court's jurisdiction also as a court of equity, it is only but fair to allow MERALCO to recover its excess income ta x payments for the taxable years 1994-1998 and 2000, which would have prescribed if not fo r the �specia l circumstance in the instant case, in proportion to or that the refund or credit to future consumption due the customers co nce rned in the average amount o f P0.167 per kilowatthour should have been actually given or credited to them by MERALCO. It wou ld be the height of injustice if MERALCO can recover all the excess income tax payments when it did not refund all to the customers what MERALCO is mandated to refund from which the excess incom e tax payments wo uld arise. 44 G.R. No. 15629 4, November 29,2006,508 SCRA 459 ( 2006 ) L 114 6

MERALCO vs. Commissio ner o f Inte rnal Revenue Page 37 of 40 CTA Case No. 7242 DE C ISION The reason for the exercise of this Court's jurisdiction also as a court of equity in the instant case is to prevent unjust enrichment and to ensure restitution .45 If MERALCO did not overcharge its consumers, the Supreme Court's Decision in G.R. Nos. 141314 and 141369 would not have been rendered, and MERALCO would not have made excessive income tax payments. Justice is done if MERALCO was in good faith and if it had fully disbursed the amount it overcharged from its customers from which the excessive income ta x payments would arise and which would be the basis of this claim for a tax refund. To reiterate, we find that the "releases or issuances of the Tax Credit Certificate (TCC ) be (in) proportion to the amount actually disbursed or given to M ERA LCO' s c ustomers", to be just and equitable. In fine, MERALCO admits and accepts the Audit Findings and Resolution 46 of respondent CIR as embodied in their "SUPPLEMENTAL JOINT STIPULATION OF FACTS AND ISSUES". Specifically MERALCO accepts the mathematical computations of respondent CIR except on the conclusions that the same has prescribed and subject to the condition that the credit to bill or refund to customers in the average 45 Da vid Rey es (Substituted b y Vic toria R. Fabella) vs. Jose Lim , C huy Cheng Keng and Harriso n Lumber, Inc ., G .R. No . 134241 , Augu st 11, 2003] 46 Supple mental Joint Stipulati o n o f Fac ts and Iss ue s. ( 11 47

MERALCO vs . Commissioner of Internal Revenue Page 38 of 40 CTA Case No . 7242 DE C ISION amount of P0.167 per kilowatthour has actually been credited or given to customers.47 The pertinent portion and end result of respondent CIR's computation read as follows: 1994 Rec ommended Re c ommended Total amount of 1995 am ount for TCC- amount for TC C- refund per audit 1996 To be Grante d 1997 for de nia l p 697,413,897.48 1998 p 697.413,897.48 -0- 743,421,455.29 2000 -0- 2001 743.421.455.29 -0- 1,016 , 995 ,619.18 G RAND 1.016,995,619.18 -0- 1,094,804,759 .31 TO TAL l ,094,804.759.31 -0- -0- 1' 127,850,426.4 1'127,850.426.4 P894.473,932.57 1'115,856,635 .05 1'115,856,635.05 P894,473,932. 57 894,473, 932 .57 -0- P6 ,690 ,816 ,725 .28 P5,796,342,792.7 1 Evidently, based on the joint stipulation and admission of facts and issues and from respondent CIR's decision dated September 21, 2005, 48 there were excessive collections for the taxable years 1994-1998 and 2000-2001. Further, an examination of the records shows that MERALCO did not charge to expense or to loss or offset against reported revenues in its Income Tax Returns (ITRs) for the taxable years 2003-2005 the amounts refunded or credited to customers arising from the Supreme Court's Decision in G. R. Nos. 141314 and 141369. 47 Ibid . ( 48 Ibid. 1148

MERALCO vs. C o mmissioner of Internal Revenue Page 39 of 40 CTA Case No . 7242 DE C ISION According to jurisprudence, claimant has the burden of proof to establish the factual .basis of his or her claim for a tax refund or credit. Tax refunds, like tax exemptions, are construed strictly against the taxpayer. In the instant case, MERALCO was able to present sufficient evidence to prove its claim for a tax refund. WHEREFORE, premises considered, the Amended Petition for Review is GRANTED, as follows: 1. Respondent's denial due to prescription of MERALCO's claim for a tax refund or credit for the taxable years 1994-1998 and 2000 is REVERSED and SET ASIDE; 2. Respondent is O RDERED TO REFUND or TO ISSUE A TAX C REDIT C ERTIFI CATE in . favor of MERALCO in the amount of P5,796 ,342, 792.7 1, corresponding to the claim for a tax refund or credit for the taxable years 1994-1998 and 2000, subject to and in proportion that the refund or credit to future consumption due to the customers concerned in the average amount of P0.167 per kilowatthour arising from the Supreme Court's Decision in G . R. Nos. 141314 and 141369, has been actually given or credited to them by MERALCO. SO O RDERED. ~N.M~~- G~ C IELITO N. MINDARO-GRULLA Associate Justice 1149

M ERA LCO vs. Comm issioner o f Intern a l Reve nue Page 40 o f 40 CTA Case No. 7242 DECISION WE CONCUR : ~ (C7(T~w~tthd~lssCen ttGn.gro-p~tonttao.n) .! i0f1 - CAESAR A. CASANOVA JUANITO C. CASTANEDA, JR. Ass ociate Justice Asso ciate Justic e ATTESTATION I a ttest tha t the co ncl usio ns in th e above Decisio n w ere re a c he d in co nsultatio n be fo re th e case was assig ne d to th e wri ter o f th e o pinio n o f th e Court 's Divisio n. ~t;-Cl.QT~~ \)_ . JUANITO C . CASTANEDd,t3R. Associate Justi c e C hairpe rs o n CERTIFICATION Pursua nt to Arti cle VIII. Sec lio n 13 o f th e Constitutio n, a nd th e Divisio n C ha irperso n 's Attesta tion, it is here by c ertifie d th a t th e co nc lusio ns in th e above Decisio n w ere reac hed in co nsultatio n b e fo re th e c ase was assig ne d to th e w riter o f the opinio n o f th e Court 's Divisio n. ~__;-k;Z. Q~ ERNESTO D. ACOSTA Presiding Justic e 11!:'.0