SAN ROQUE POWER CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OFTAX APPEALS QUEZON CITY SPECIAL THIRD DIVISION SAN ROQUE POWER CTA Case No. 11118 CORPORATION, Petitioner, Members: REYES-FAJARDO, Chnirperso11, -versus- and ANGELES, IL Promulgated: COMMISSIONER OF '"' 1 6 2026 INTERNAL REVENUE, Respondent. X---- --------- ------ - ---------- ------------ ----- - -- --- X DECISION REYES-FAJARDO, J.: This Petition for Review filed on March 31, 2023, by San Roque Power Corporation seeks to cancel and set aside alleged deficiency value-added tax (VAT), final withholding tax (FWT), and final withholding VAT assessments for fiscal year (FY) ending March 31, 2020, in the amount of P212,476,688.89.1 FACTS Petitioner San Roque Power Corporation is a corporation organized and existing under the laws of the Republic of the Philippines, with principal office address at Barangay San Roque, Municipality of San Manuel 2438, Pangasinan, Philippines. It is a registered taxpayer with Taxpayer Identification No. 005-017-501- 0000. 2 Stateme nt of the Case, Pre-Trial Order dated February 2, 202-!, Docket - Vol. I, p. 267. Par. 1, Summary of Ad.miUed Facts, Joint Stipulation of Facts .md Issues OSFI), Docket - Vol. I, p. 250.

DECISION CTA Casl' No. 11118 Page 2 of 2-l Respondent is the head of the Bureau of Internal Revenue (BIR), the government agency officially responsible for the assessment and collection of all national internal revenue taxes, fees, and charges.3 On November 15, 2021, petitioner received an undated Preliminary Assessment Notice (PAN), containing proposed deficiency income tax, VAT on ancillary services, VAT on unaccounted source of cash, expanded withholding tax (EWT), FWT, final withholding VAT, fringe benefits tax (FBT), documentary stamp tax (DST), and administrative penalties, in the total amount of 1'211,566,497.86, inclusive of interest and penalties, for taxable year 2020.4 On November 29, 2021, petitioner filed its Reply to the PAN. 5 On March 21, 2022, petitioner received the Formal Letter of Demand/Final Assessment Notice (FLD/FAN) dated March 17,2022, with the Details of Discrepancies, which found petitioner liable for alleged deficiency income tax, VAT on ancillary services, VAT on unaccounted source of cash, EWT, FWT, final withholding VAT, FBT, and DST in the total amount of I'208,059,827.70, inclusive of interest and penalties, for taxable year 2020. In addition, a compromise penalty of I'215,000.00 was imposed.6 On April 20, 2022, petitioner filed its Protest to FAN with Request for Reinvestigation, accompanied by supporting documents? On June 17, 2022, petitioner filed its Supplemental Protest Against the FAN and submitted additional supporting documents.8 On March 3, 2023, petitioner received the Final Decision on Disputed Assessment (FDDA) issued by respondent. The FDDA upheld deficiency tax assessments against petitioner for I'214,066,997.53, inclusive of interest and penalties.9 ' Par. 2, Summary of Admilll'U Facls, jSFJ, Docket- Vol. I, p. 250. ~ Par. 6, Summarv of Admitted Facts, )SF!, Docket- Vol. I, p. 251. s Par. 7, Sunnnaryof Admilled FacLs, )SF!, Doch>t- Vol. I, p. 251. Par. 8, Summarv of AJmittl'd Facts, )SF!, DockL�t- Vol. I, pp. 251to 252. Par. 11, Stipulall'd Fads, )SF!, Dockl't- Vol. I, p. 252. 8 Pdf. 12, Stipulated FallS, JSFl, Do< ket- Vol. !, p. 2.32; Exhibit "P-17," Docket- Vol. II, p. 8-!9 to Docket- Vol. lll, p. 1097. ' Par. 9, Summary of AdmittPd Facts, )SF!, Docket- Vol. I, p. 252; Exhibit "P-18," DockPt- Vol. III, pp. 1098 to 1113.

DECISION CTA Cas<' No.1111R Page 3 of 2-1 On March 7, 2023, petitioner paid the deficiency income tax, VAT on unaccounted source of cash, and EWT in the total amount of t'1,610,719.07, inclusive of interest and penalties as of March 7, 2023,10 and submitted the proof thereof to respondent on March 8, 2023.11 Thus, only the VAT, FWT, and final withholding VAT assessments remain in dispute. On March 31, 2023, petitioner filed its Petition for Review.12 On July 4, 2023, respondent posted his Answer.n On November 21, 2023, the Pre-Trial Conference was set and held. 1 ~ On December 20, 2023, the parties submitted their Joint Stipulation of Facts and Issues,l" which was admitted and approved by the Court by Resolution dated January 11, 2024. The Pre-Trial Order dated February 2, 2024, was then issued.16 Trial ensued. Petitioner presented: (1) Ms. Lalaine A. EstayoY petitioner's Assistant Manager; (2) Mr. Rubentheo P. Cuta,18 petitioner's Operations Manager; and (3) Atty. Jose M. Layug, Jr. (Atty. Layug Jr.),19 petitioner's expert witness. On June 28, 2024, Petitioner filed its Formal Offer of Evidence,2� with respondent's Comment filed on July 8, 2024.21 10 Par. 10, Summary of Admilll'd Facts, )SF!, Docket- Vol. I, p. 252. 11 Pdf. B, Stipulatc'J Fdels, )SFI. Docket- Vol. I. p. 252. " Docket- Vol. I, pp. 6 to 59. I' DockPt- Vol. I, pp. 153 to 1hh. '" tvlinute Resolution dat<'d August2-l, 2023, DockPt- Vol. I, pp. 17() to 177; tvlinutes of the hc'aring held on, and Order datPd, Novc'mhl'r 21, 202\ DockPt- Vol. I, p. 23-1 and 238 to 2-!0. " Doch't- Vol. I, pp. 250 to 21>3. lc Docket- Vol. I. pp. 2o7to 277. . JC Exhihits "P-39" and "P--!3," Docket- Vol. I. pp. 78 to 110 and pp. 291 to 297; Minutes of tlw lwarinp, hl'ld on, and Ordl'f datl'd, April11, 202-!, DockPt- VoL I. pp. 302 to 303. 1, Exhibit "P--10," Docket- Vol. I, pp. 111 to 121; Minutes of the lwanng held on, and Order dated, April11, 202-l, Docket- Vol. I, pp. 302 to 303. Exhihits "P-..Jt" Docket- Vol. I, pp. 122lo 1-1:0; l\1inutL~s of tlw hl'aring lwld on, dnd OrdPr Ill dated, June 13, 202-l, Dcx-kl'l- Vol. I, pp. '\30 to 332. 2n Docket- Vol. I, pp. 3'\-lto 357. 21 DockPt- Vol. N, pp. 1887 to1889.

DECISION CTA Case No. 11118 Pag<'-� of 2-� By Resolution dated October 10, 2024,22 the Court admitted all of petitioner's offered exhibits. Respondent presented Revenue Officer (RO) Bacolor D. Yambing. 23 On November 27, 2024, respondent filed its Formal Offer of Evidence}~ with petitioner's Comment filed on December 16, 2024.25 By Resolution dated May 14, 2023,26 the Court admitted all of respondent's offered exhibits. On June 18, 2025, respondent's27 and petitioner's28 Memoranda were both posted. On July 18, 2025, the case was submitted for decision.29 ISSUE Is petitioner liable for alleged deficiency VAT on ancillary services, FWT, and final withholding VAT (inclusive of interest and penalties) for taxable year 2020 in the amount of PhP212,476,688.89?30 ARGUMENTS Petitioner contends that the PAN, FLD/FAN, and FDDA are void for offending its right to due process, as respondent failed to consider its defenses to the PAN and FLD/FAN. It asserts that respondent erroneously assessed VAT on its Ancillary Services Procurement Agreement (ASPA). Further, it argues that the services rendered under its Operation & Maintenance Consulting Agreement (Offshore) (OMCA) shall not be subject to FWT and final withholding VAT assessment. Docket- Vol. IV, pp. 1899to 1900. Exhihit "R-13," Dockl'L- Vol. I, pp. 223to 233; Minutes of the !waring held on, and Ordc>r datc>d, Nowmhl'r 1-�, 202-�, Dockl'L- Vol. IV, pp. 1901 to 19ll:\. Docket - Vol. IV, pp. 1906 to 1912. 23 Docket- Vol. IV, pp. 1916 to 1920. Docket- Vol. IV, pp. 19-�3 to 19-�6. Docket- Vol. IV, pp.19-�9to 1967. Docket- Vol. IV, pp. 1971to 2023. tv!inulP Rc�soiution dated July 18, 2023, Om kPt- Vol. IV, p. 2028. See Stipulatpd Issue, ]SF!, Duckl't- Vol. I, pp. 232 to 233.

DECISION CTA Cclse No.11118 Respondent counters that there was no denial of petitioner's right to due process. He maintains that petitioner is liable for the remaining deficiency tax assessments. RULING We grant the Petition. Foremost. We are vested with jurisdiction over the instant case. Section 7, in relation to Section 11 of Republic Act (RA) No. 1125, as amended by RA No. 9282,31 pertinently provides: Sec. 7. Jurisdiction. - The CTA shall exercise: a. Exclusive appellate jurisdiction to review by appeal, as herein provided: 1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue; SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a decision, ruling or inaction of the Commissioner of Internal Revenue, ... may file an appeal with the CTA within thirty (30) days after the receipt of such decision or ruling or after the expiration of the period fixed by law for action as referred to in Section 7(a)(2) herein.'2 Indeed, a party aggrieved by the decision of respondent or his duly authorized representative on a disputed assessment may seek recourse before the CTA in Division, within thirty (30) days from receipt thereof. This matches with the period to appeal endowed to the taxpayer, in impugning respondent or his duly authorized :'\! An Act Expcindil18 the jurisdiction of tlw Court of Tax Appeals, El<'Vclting lls Rclnk to the Lew! of cl Collegiclte Court with Specicll jurisdiLtion clnd Enlarging its Memhership, Amending for Llll' Purpose Cr�rluin Seclions or Rcpubli~o.: Act No. 1125, as umPnded, otherwise known as the Lclw CrL'ating the Court ofTax Appeals, clnd for Other Purpose's, March ~o. 20li.J. Emphusis ours.

DECISION CTA Case No. 11118 Page> 6 of 2-l representative's decision on disputed assessment, under Section 228 of the NIRC of 1997 (NIRC), as amended: Section 228. Protesting of Assessment. - If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable.33 Here, petitioner received respondent's FDDA on March 3, 2023.3" Counting thirty (30) days from said date, petitioner had until April 3, 2023 to appeal before the Court. Timely enough, on March 31, 2023, petitioner filed the Petition for Review,35 thus clothing Us with jurisdiction over CTA Case No. 11118. Next. Respondent duly observed petitioner's right to due process for VAT, FWT, and final withholding VAT assessments. Section 228 of the NIRC as amended, ordains: SEC. 228. Protesti11g of Assessmfl!l. - ... The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. .16 This statutory mandate reflects the principles of administrative due process enunciated in Ang Tibay v. Court of Industrial Relations (Ang Tibay). 37 It decreed that: one, the administrative tribunal or body must consider the evidence presented; and two, the administrative tribunal's decision is rendered in a manner that the parties may know the various issues involved and the reasons for the decision. Emphasis ours. Supra at note 9. Supra dt note 12. Emphc1sis ours. G.R. No. L--!6..196, Fehruary 27, 19-!0.

DECISION CTA Cdse No. 11118 Page 7 of 2-� These two (2) components of administrative due process in Ang Tibay were applied in Commissioner of Internal Revenue v. Avon Products Manufacturing, Inc. (Avon). 18 There, Avon Products Manufacturing, Inc. (APMI) advanced before the BIR, its defenses on the initial findings of the examining revenue officers, informal conference, PAN, and FAN. However, the BIR failed to give explanation or discussion on APMI's defenses in various segments of the assessment process. Avon decreed that the BIR scorned APMI's right to due process: The facts demonstrate that Avon was deprived of due process. It was not fullv apprised of the legal and factual bases of the assessments issued against it. The Details of Discrepancy attached to the Preliminary Assessment Notice, as well as the Formal Letter of Demand with the Final Assessment Notices, did not even comment or address the defenses and documents submitted by Avon. Thus, Avon was left unaware on how the Commissioner or her authorized representatives appreciated the explanations or defenses raised in connection with the assessments. There was clear inaction of the Commissioner at every stage of the proceedings. It is true that the Commissioner is not obliged to accept the taxpayer's explanations, as explained by the Court of Tax Appeals. However, when he or she rejects these explanations, he or she must give some reason for doing so. He or she must give the particular facts upon which his or her conclusions are based, and those facts must appear in the record. Indeed, the Commissioner's inaction and omission to give due consideration to the arguments and evidence submitted before her by Avon are deplorable transgressions of Avon's right to due process. The right to be heard, which includes the right to present evidence, is meaningless if the Commissioner can simply ignore the evidence without reason.'9 Commissioner of Internal Revenue v. Unioil Corporation (Unioil)40 condensed Avon by instructing that the "CIR, in exercising its power to assess and collect taxes if these are owed, ought to give due consideration to the arguments and evidence submitted by the affected party." Here, respondent adhered to the teachings of Avon and Unioil. G.R. Nos. 20B98-99, Ollohl'r \ 2018. Emphdsis ours. G.R. No. 20-�-�05, August-�, 2021.

DECISION CTA Case No.11118 While the amounts in respondent's FLD41 are substantially the same as the PAN,42 save for interest, We found that respondent addressed petitioner's arguments in its Reply to the PAN as indicated in the Details of Discrepancies43 attached to the FLD, viz.: In the protest to the PAN, SRPC claimed that the ancillary service income without energy dispatched is subject to 0% VAT since the language in Section 108 (B) (7) of the NIRC of 1997, as amended is plain, clear and unambiguous. The sales of power that is generated through renewable sources of energy such as hydropower, is subject to zero percent (0%) VAT rate, w!Iet!Ier or not t!Iere is 'actual genemtio11 of power'. In other words, SRPC would have us believe that it is not subject to VAT for the payments received fi�om NGCP for the periods during which the latter did not receive power as consideration therefor. This Office agrees with the contention of SRPC that the language in Section 108 (B) (7) of the NIRC of 1997, as amended is plain, clear, and unambiguous. According to the Oxford dictionary, to 'generate' means to 'produce'. It must be given its literal meaning and must be applied without further interpretation. SRPC cannot interpret the law to state that the sale of power that is generated through renewable sources of energy such as hydropower, is subject to zero percent (0%) VAT rate, w!Iet/1er or not t!Iere is 'nctunl genemtio11 of pozuer' because this would run counter to the spirit and intent of the law. After thorough evaluation and consideration, SRPC was not able to adduce sufficient evidence necessary to overcome the assessment. Thus, the deficiency tax assessment is sustained in its entirety since the ancillary service income without energy dispatched is subject to 12% VAT pursuant to Section 108(A) of the :\TIRC as amended. In the protest to the PAN, SRPC claimed that the operation and maintenance contract between KEPCO and SRPC is an offshore contract. All services rendered by KEPCO to SRPC during the period were performed outside of Philippines. Further, KEPCO, as a non-resident foreign corporation not engaged in trade or business in the Philippines cannot be compelled to implement/ adopt the BIRs invoicing requirement. In reply, Section 50 of the NIRC as amended, empowers the Commissioner of Internal Revenue (CIR) to rectify abnormalities " Exhibit "P-15," Docket- Vol. II, al pp. o69 to 670. "" Exhibit "P-B," Dock<'l- Vol. II, pp. 54:lto 55:\. "' Exhibit "P-15," Dockt'l- Vol. II, dl pp. h75 to 677.

DECISION CTA Cdse No. 11118 and distortions in income/ deductions brought about by common control through the adoption of standards considered fair, reasonable or at arm's length, the pertinent portion of which provides that: 'In the case of two or 111ore organizations, trades or businesses, (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the sa111e i11terests, tl1e Co111missioner is authorized to distribute, apportion, or allocate gross income or deductions between or n111ong such organization trade, or business, if he deter111ines that suclz distribution, apportionment, or allocation is necessary in order to prcuent euasion of taxes or clearly to reflect the income of any suclz organizations, trades or business.' In this particular situation, although SRPC cannot com pel KEPCO to comply with the BIR's invoicing requirements to document the payments made to KEPCO, the ann's /eugth priuciple requires any transaction with a related party to be made under comparable conditions and circumstances as a transaction with an independent party. Hence, the proper document to support the payments made should not be an internal invoice which is considered as self-serving evidence but rather the official receipt or any official document being used in the country of origin of KEPCO. Thus, the deficiency final withholding tax assessment is sustained in its entirety. The same holds for the FDDA. Respondent considered and addressed petitioner's arguments in its Protest in the Results of Reinvestigation,-!-! sufficiently informing petitioner of the reasons for his conclusion. What Avon proscribes is inaction. Here, there was no such inaction. Petitioner was neither left unheard nor ignored. Ergo, its right to due process for the subject deficiency tax assessments was fully observed. Ultimately. While due process was observed as regards the deficiency VAT, FWT, and final withholding VAT assessments, petitioner nonetheless bears no liability therefor. Our findings on each item of deficiency tax assessment, and corresponding justifications therefor, shall proceed in seriatim. " Exhibit "P-18," DockPL- Vol. II, dl pp. 1102Lo 1106.

DECISION CTA Cast' No. 11118 Petitioner is not liable for VAT on its ancillary sermce mcome. Respondent found that petitioner derived gross receipts of .P1,152,371,809.78 from ancillary services rendered to the National Grid Corporation of the Philippines (NGCP) under the ASPA, broken down as follows: Customer Offici.tl Receipt Ancillary Ser\"ice N.:tme Income Period SOA D.tle J.m. ::!6- Fe h. '13, 2019 h�b_ 28, ?QJ9 Numb..>r Duh� J.m. 16- Feb. :?.5. 2019 Mar. :?.9, 2019 MM. '16 A 1r. 25, "019 NCCP 3QQ(){)j[ ?I' Apr. 30, :?.019 1QQ0006!46 A ,r_ -~0. 2019 �'100_")-!8.36 Apr. :?.6- M,n� :?.3, :?.019 -~00001194- :?.QQQQ()6J4S A 1r. ~0, 2019 JOS,097,T:>.l6:?. Apr. -,6- M.lY :?.3, "~019 NCCP -~00001:?.51� M.tl' :u. 2019 :?.0000065'r M<11 ?>1,:?.019 103,950,5-!7.77 M<l\" :?.6- ju1w 25.1019 30000132"�1 20000070'�2 June :?.8. 2019 !30A9l,058.40 June 26- Juh� 25,1019 NCCP M,n� 31. :?.019 :?.000007:V�4 Juh� 31. :?.019 June 26- juh� :5, 2019 NCCP .30000132'�' June :?.8, :?.019 :?.000007}:�6 lu\y 3L 2019 --1-1,711.51 Juh� 26- Aug. 25. 2019 30000137"; luh<H. 2019 20000077">8 Aug. 30.2019 1 l 5 , 2 l � U O S ..l l Au�.26-::;..,,t.:?.5,1019 NGCP 30000142'- Julv 3L 2019 10000080oO ::;ept. 30,2019 120,228,147.21 .:-;epL 26- Oct. 15. 2019 NGCP 300001-PSQ Aug. 30,2019 2000008062 Sept. 30.2019 Ocl. :?.6- No\�. 15, :?:019 NCCP 30000147" 1 1QQOOO&:;u4 Oct.Jl. 2019 90.245.98 No\�. :?.6- Der. 25,2019 NGCP 3000015:W s.. 1[ 30. 1019 10000086(�1� No\'. 29, .?019 114,062,098.21 DPC. :?.6- J.m. :?.5, :?.020 NGCP 30QQ()\_38US 20CJ0009QUS DPL. 27, :?:019 l33.145A06. 10 NGCP 3000016-to- Ott. ?�L .?019 :?.0000095-o Jnn. 31. :?.0:?.0 170,31 6,\6.,1.14 NGCP No\'. 30, :?:019 :?.0000098-2 Feh. 28, 20:?.0 51.7::?.0,77:?..9-l NCCP 30000171"~ Dec 3L 1019 6:?.,:?.43,087.76 NGCP Jan.3L :?.020 rurAl 41,860,489.36 NGCP 30000176- 1 ~1,152,371,SOIJ.78 BIR Rt'tords (Exhibit "R-12"), p. -158. SIR RPcords (Exhibit "R-12"), p. 510. BIR RPcords- Docket 1 (Exhibit "R-12"), p. 458. 48 BIR Records- Docket1 (Exhibit "R-12"), p. 510. " BIR Records- DockN 1 (Exhibit "R-12"), p. 452. 5ll BIR Records- Docket1 (Exhibit "R-12"), p. 506. 51 BIR Records- Docket 1 (Exhibit "R-12"), p. -!E BIR Rt'nwds- Dockl'l1 (Exhibit "R-12"), p. 501. S3 BIR Records - Docket 1 (Exhibit "R-12"), p. 445. B!R Records- Docket1 (Exhibit "R-12"), p. 498. 55 BIR Records- Dockl't1 (Exhibit "R-12"), p. 440. 5o BIR Records- DockPt1 (Exhibit "R-12"), p. -198. B!R RPcords- Dockl't 1 (Exhibit "R-12"), p. -135. 5,8, BIR Records- DockPt1 (Exhibit "R-12"), p. 494. B!R Records - Dockl't 1 (Exhibit "R-12"), p. -135. B!R RPcords- Docket1 (Exhibit "R-12"), p. 491. BIR Rc'cords- DockN 1 (Exhibit "R-12"), p. 430. BIR RPcords- Dockl't1 (Exhibit "R-12"), p. -191. BIR Rc'cords- Docket1 (Exhibit "R-12"), p. 42-1. BIR Records- Docket 1 (Exhibit "R-12"), p. 488. o5 BIR Records- Docket] (Exhibit "R-12"), p. -119. BIR RL'cords- Docket1 (Exhibit "R-12"), p. 485. B!R RPcords- Docket1 (Exhibit "R-12"), p. 41."\. o8 BIR Rc'cords- Docket 1 (Exhibit "R-12"), p. 481. o" BlR Records- DockPt 1 (Exhibit "R-12"), p. -!06. BIR RPcords- Dockl't 1 (Exhibit "R-12"), p. -176. Cl BIR Rc'cords- Dockt>t 1 (Exhibit "R-12"), p. 401. B!R Records- Docket1 (Exhibit "R-12"), p. -!73.

DECISION CTA Cclse No. 11118 Pclg<' 11 of 2-1 Petitioner submits that the income from the sale of ancillary services under the ASPA is a sale of power generated through renewable sources of energy, which is subject to zero percent (0%) VAT, as contemplated under Section 108(B)(7) of the NIRC as amended. 7' On the contrary, respondent asserts that the ancillary service fees paid by NGCP are subject to the regular 12% VAT under Section lOS(A) of the NIRC as amended. He posits that these fees are derived from ancillary services without energy generation and, therefore, did not constitute power generated through renewable energy sources as contemplated under Section 108(B)(7) of the NIRC as amended. Petitioner is correct. Section 108(B)(7) of the NIRC as an"lended, provides that the sale of power generated through renewable sources of energy IS among the transactions subject to zero percent (0%) VAT, viz.: SEC. 108. Value-added Tnx 011 Sale of Services n11d Use or Lease of Properties. - ... (B) Trnllsnctiolls Subject to Zero PerceJit (0%) Rnte. - The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: ... (7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energv, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels?� To determine whether petitioner's sale of ancillary services to NGCP falls within the foregoing provision, the nature of ancillary services must first be considered. Section 4(b) of the Electric Power Industry Reform Act of 200175 defines ancillary services as "those services necessary to support the transmission of capacity and energy from resources to loads while Par. It Grounds to RevPrsP the AssailPLi Decision, I\tll'momndum for PPtilioner, Dockl'l- Vol. IV, p. 1979. Emphasis ours. Repuhlic Acl No. 91:\6 june' 8, 21llll.

DECISION CTA Case' No. 11118 PagL' 12 of 2~ maintammg reliable operation of the transmission system m accordance with good utility practice and the Grid Code..." Consistent therewith, the Philippine Grid Code76 identifies ancillary services as "support services such as Primary Reserve, Secondary Reserve, Tertiary Reserve, Reactive Power Support, and Black Start Capability which are necessary to support the transmission capacity and energy that are essential in maintaining power quality and the reliability of the Grid." From this, ancillary services are classified and defined as: 1. Primary Reserve (Colllillgwcy Resave) - Synchronized generating capacitv that is allocated to stabilize the system Frequency and to cover the loss or failure of a Svnchronized Generating Unit or a transmission line or the power import from a single circuit interconnection.77 2. Secondarv Reserve (Reglllnlillg Reserve) Synchronized generating capacity that is allocated to restore the system Frequency from the quasi-steady state value as established by the Primary Responses of Generating Units to the nominal Frequency of 60 Hz?R 3. Tertiary Reserve (Dispatcilnble Reserve) - The capacity which can be connected (automatically or manually) under Tertiary Control, in order to provide an adequate Secondary Reserve.79 4. Reactive Power Support - The capability of a Generating Unit to supply or absorb Reactive Power beyond the ranges prescribed under GCR 4.4.2.1.3.80 5. Black Start Capability - The ability of a Generating Unit to go from a shutdown condition to an operating condition, within a specified period of time, without feedback power from the Grid and to start delivering power to the sections of the Grid and provide power to other Generating Plants and other criticalloads.81 By way of illustration, Primary Reserve or Contingency Reserve, comes into play when a generating unit or transmission line suddenly fails and the grid immediately loses part of its power Energy Regulatory Commission Resolution No. 22, Series of 2016, October 5, 2016. Ibid. Ibid. Ibid. Ibid. Ibid.

DECISION CTA Cas<' No.11118 Page 13 of 2~ supply.82 In such a case, the Primary Reserve is at once tapped to supply the missing power, stabilize the system frequency, and prevent a wider power interruption. On the other hand, Secondary Reserve or Regulating Reserve, operates during normal system conditions when electricity demand and generator output naturally rise or fall from time to time. These small fluctuations create temporary imbalances between supply and demand, causing minor deviations in system frequency.83 The Regulating Reserve is then used to correct these imbalances and restore the system frequency to the nominal level of 60 Hz, thereby maintaining the quality and reliability of the grid. Atty. Layug Jr., petitioner's expert witness in energy law and the Philippine power industry, confirmed that treating the sale of power as both the sale of energy and generating capacity is an industry practice, viz.: 8" Q13: Why do you say that the indush�y practice also supports your conclusion? A13: In the energy sector, it is an established industry practice for power purchase agreements, power supply agreements, energy conversion agreements and similar agreements involving the sale of power to include both a sale of energy and a sale of capacity. Under power industry practice, the term "power'' means (i) energy, in KWh or MWh, and (ii) capacity or demand, in KW or MW and, hence, sale of power covers both sale of energy and sale of capacity. Also, sale of energy requires actual generation and delivery of electricity or energy while sale of capacity requires the seller to make available the capacity of a generating plant without necessarily requiring actual generation and delivery of energy. From this backdrop, it may be gleaned that while ancillary services are characterized as support services, it shows that they actually consist of power reserves through generating capacity available to the transmission system. Accordingly, the sale of power is not confined to the sale of electricity actually dispatched. It also includes the sale of generating capacity, which may be purchased even without the actual delivery of energy. To exclude generating capacity derived from the same Exhibit "P-21," DockPl- Vol. III, p. 1207. Exhibit "P-21," DockPt- Vol. Ill, p. 1207. Exhibit "P-~1," Dorkl'l- Vol. I, pp. 122lo HO.

DECISION CT A Case' No. 11118 Page 1-lof 2-l renewable source, would unduly restrict the statutory grant of VAT zero-rating pursuant to State's policy to "increase the utilization of renewable energy...by providing fiscal and nonfiscal incentives."83 This conclusion is reinforced by RR No. 16-2005,86 which implements provisions of Section 108(B)(7) of the NIRC by including related ancillary services in the gross receipts of generation companies and subjecting the sale of power generated through renewable sources to zero percent (0%) VAT, thus: SEC. 4.108-3. Definitions and Specific Rules on Selected Services.- ... (f) Sale of electricity bv generation, transmission, and distribution companies shall be subject to 10% VAT on their gross receipts; Provided, that sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels shall be subject to 0";(, VAT. "Gross Receipts" under this Subsection (f) shall refer to the following: (a) Total amount charged by generation companies for the sale of electricity and related ancillary services; and/ or SEC. 4.108-5. Zero-Rated Sale of Services.- ... (b) Transactions Subject to Zero Percent (0%) VAT Rate.- The following services performed in the Philippines by a VAT- registered person shall be subject to zero percent (0%) VAT rate: ... (7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal and steam, ocean energy, and other emerging sources using technologies such as fuel cells and hydrogen fuels; Provided, however, that zero-rating shall apply strictly to the sale of power or fuel generated through renewable sources of energy, and shall not extend to the sale of services Whereas Clause. RPpublic All No. 9513, Renewable Energy All of 2008, December 16, 2008. Consolidated ValuP-Addc'J Tax Regulations of 2003, Sq,tc'mber 1, 2003.

DECISION CTA Case No. 11118 PagL' 15 of 2-� related to the maintenance or operation of plants generating said powerP In passing, upon the effectivity of the TRAIN Law, RR Nos. 13- 201888 and 26-201889 amended the regular VAT rate applicable to the sale of electricity to 12% but retained the zero-rating of power generated through renewable sources and the definition of gross receipts. Hence, RR No. 16-2005, as amended, treats related ancillary services as part of the sale of power by generation companies. A fortiori, ancillary service fees from the sale of hydroelectric generating capacity are subject to zero percent (0%) VAT under Section 108(B)(7) of the NIRC, as amended. Here, records show that: (1) petitioner is a generation company primarily engaged in the business of generation of electricity or power generation and provision of ancillary services;90 (2) petitioner is registered with the BOI as an operator of a hydroelectric power generating plant with capacity of 345 MW;91 (3) petitioner and NGCP entered into an ASPA on November 1, 2017 for the provision of Ancillary Services;92 approved by the Energy Regulatory Cornmission,93 and through thereof (4) petitioner generated gross receipts from the sale of ancillary services to NGCP amounting f'1,152,371,809.78. In fine, applying the above disquisitions, petitioner sufficiently established that, in TY 2020, it sold ancillary services to NGCP, consisting of power capacity or reserves generated solely from hydropower. Accordingly, such sales are subject to zero percent (0%) VAT. s:" Emp hasls nu rs. ;s Regulations Implc'nwnting tlw VAT Provisions under the RA No. 10963, Further Amending RR No. 16-2005, as AnwndL'd, March 15, 2018. . RW Anwnds CPrluin Provisions of RR No. 13-2018 to lmplenwnl Llw 90-Duy ProLL'ssmg of Claim for VAT Rl'fund undPr 5L'Clion 112 (C) of the Tax Code of 1997, as AmendPd hy Rl'public Act (R.A.) No. 10963, OtlwrwiSL' Known as llw Tax Rpform for Accell'ration and Inclusion or TRAIN, Dl'LP!llhl'r 21, 201~. "'' Exllihil "P-I," Dolkl'l- Vol. I, pp. 361 lo ~05. o1 Exhihil "P-el," Docket- Vol. I, pp. -�25 tons. '" Exhihit "P-20," DockL'l- Vol. Ill, pp. 113-� lo 1201. "' Exhibit "P-21," Docket- Vol. lll, pp. 1202 to 1219.

DECISION CT A Cas<' No. 11118 Pagp 16 of 2~ Petitioner's OMCA transactions are not subject toFWT. Respondent found that petitioner paid 1'51,994,611.14 to Kansai Electric Power Co., Inc. (KEPCO), a Japan-incorporated non-resident foreign corporation9~ and related party, under OMCA dated April 1, 2015. 95 According to respondent, petitioner submitted only email correspondence, KEPCO's internal invoices, and bank remittance receipts, but no official receipts pertaining to said services. For this reason, respondent subjected petitioner's payments to FWT under Sections 28(B) and 57(A) of the NIRC, as amended.96 Petitioner retorts that the services rendered under the OMCA were performed outside the Philippines. As such, the income derived therefrom is not considered Philippine-sourced income and is therefore not subject to withholding tax. Petitioner is again correct. Section 57(A) of the NIRC, as amended, enjoins income-payors to withhold final income taxes on, among others, income of NRFCs taxed under, inter alia, Section 28(B)(l) of the same Code: Section 57. Witllllo/ilillg ofTnx nt So11rce.- (A) !Vitlllw/ilillg of Fi11nl Tnx 011 Certni11 lllcOII/es. - Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(l), 24(B)(2), 24(C), 24(D)(l ); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(l), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(S)(a), 28(B)(S)(b), 28(B)(S)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/ or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code. Exhibit" P-23," Dockpt- Vol. I, at pp. 13-!7 to 1361. Exhibit "P-15," Dockc>t- Vol. 11, at pp. 676to 677. Exhibit "P-18," Docket- Vol. III, at pp. 1105 to 1106.

DECISION CT A Case No. 11118 Section 28(B)(l)97 of the NIRC, as amended, imposes income taxes on income or gains of NRFCs derived from sources within the Philippines. Likewise, Section 23(F) of the same Code states that "[a] foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." There is no denying that the income earned by KEPCO was derived from its rendition of services to petitioner under the OMCA. Thus, for said service income to be taxable, it must be derived from sources within the Philippines. The service income earned by KEPCO was derived from sources outside the Philippines; thus, KEPCO is not subject to income tax under Section 28(B)(l) of the NIRC, as amended. For this reason, petitioner's obligation to withhold final income taxes thereon under Section 57(A) of the same Code did not arise. We explain. Section 42(A)(3) and (C)(3) of the NIRC, as amended, is plain in that the place of performance of service is determinative of the source of service income. If the services were performed in the Philippines, the income generated therefrom are derived from sources within the Philippines. In reverse, if the services were performed outside the Philippines, the income generated therefrom are derived from sources outside the Philippines. Thus: Sec. 42. Income from Sources Within the Philippines.- (A) Gross Income From Sources Within the Philippines. - The following items of gross income shall be h�eated as gross income from sources within the Philippines: ... SEC. 28. Rates oflnconle Tax on Foreign Corporations.- (B) Tax on Nonresident Foreign Corporation. - (1) In General. - Except as otherwisp provided in this CodP, a fcm'ign corporation not engaged in Lrctd<' or business in Llw Philippinl'S shall pay a lax c'quallo thirty-fivP pern'nl (35%) of the gross inronw n)n'ived Juring Pach taxahle year from all sources within the Philippines, such as intL'n)sts, dividL'nds, rents, royalliL'S, salariL.::.s, prPmiums (Pxcepl reiilSUfdlKP premiums), annuities, L'molunwnls or other fixed or JcL.:rnlinublc annual, pL'riodic or casual gains, profits and income, c1nd capilal gains, L'XCL'pl capital gains subjecllo ldx under suhpdrugrdph S(c): Provided, Thuleffecliw )unudfy 1, 2009, llw rutc' of inmmc' lox shall hP thirty pPrcPnl (~0%). EmphdS<'S ours.

DECISION CTA CasP No. 11118 Pagp 18 of 2~ (3) Services. - Compensation for labor or personal services performed in the Philippines; ... (C) Gross Income From Sources Without the Philippines. - The following items of gross income shall be treated as income from sources without the Philippines: (3) Compensation for labor or personal services performed without the Philippines. Our immediately preceding remarks find succor in the pronouncement in Commissioner of Internal Revenue v. Baier-Nicke/:98 The important factor therefore which determines the source of income of personal services is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually rendered. The Court reiterates the rule that "source of income" relates to the property, activity or service that produced the income. With respect to rendition of labor or personal service, as in the instant case, it is the place where the labor or service was performed that determines the source of the income. There is therefore no merit in petitioner's interpretation which equates source of income in labor or personal service with the residence of the payor or the place of payment of the income.99 Here, petitioner was able to show that the services were rendered by KEPCO outside the Philippines as indicated in its OMCA dated Aprill, 2015:1l10 4. SITUS Consultant shall render all services outside the Philippines and no personnel or employee of Consultant will go to the Philippines to provide the Services.'o' The OMCA is plain and simple. All of KEPCO's services to petitioner are performed outside the Philippines. Too, none of G.R. No. 153793 August 29, 200o. Emphasis ours. 100 Exhihil "P-2~," Dockl'l- Vol. III. at p. B69. OMCA for hrPvily. !lll Emp basis Ours.

DECISION CTA ClS<' No. 11118 KEPCO's employees or personnel would go to the Philippines in the performance of services. It means that the service income of KEPCO resulting from the performance thereof is derived from sources outside the Philippines. In fact, respondent acknowledged through the Certificate of Entitlement to Treaty Benefit102 that services performed by KEPCO was rendered outside the Philippines and therefore exempt from income tax: In this case, (KEPCO) does not have a fixed place of business in the Philippines, and did not furnish consultancy or supervisory services in the Philippines in connection with a contract for a building, construction or Installation project, through its employees or other personnel, for a period aggregating more than six months within any twelve-month period. In fact, the services were rendered and will be rendered outside the Philippines based on Section 4 (Situs) of the Offshore Operation and Maintenance Consulting Agreement. Accordingly, the income derived bv (KEPCO) from the services it rendered to San Roque is exempt from income tax. 103 In fine, the service income earned by KEPCO was derived from sources outside the Philippines. Being so, it is not subject to income tax under Section 28(B)(l) of the NIRC as amended. A fortiori, petitioner's obligation to withhold final income taxes thereon under Section 57(A) of the same Code did not arise. For this reason, the nullification of the 2020 deficiency FWT assessment slapped against petitioner on said service income is warranted. Petitioner's OMCA transactions are not subject to final withholding VAT. Respondent faults petitioner in its failure to withhold final VAT on the service fees earned by KEPCO by virtue of the latter's OMCA with petitioner. According to respondent, petitioner's obligation to withhold final VAT is sanctioned by Section 4.114(A)(3) of RR No. 2- 98.104 W2 Exhibit "P-~1," Docket- Vol. N, pp. 17~5 to 17:\7. Emphasis ours. Exhibit "P-18," Docket- Vol. III, at p. 1106.

DECISION CTA Case> No. 11118 Page 20 of 2-l Petitioner argues that the services rendered under the OMCA were performed outside the Philippines by a non-resident foreign corporation, thus, such services should not be subject to final withholding VAT. Petitioner is, for the third time, correct. The VAT system generally uses the destination principle as a basis for the jurisdictional reach of the tax. 103 Under the Destination Principle, goods and services are taxed only in the country where these are consumed.JIJ6 Specifically, the place of consumption of services is the place where these services were performed or rendered. Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch) (Amex) 107 is explicit: VAT is a tax on consumption "expressed as a percentage of the value added to goods or services" purchased by the producer or taxpayer. As an indirect tax on services, its main object is the transaction itself or, more concretely, the performance of all kinds of services conducted in the course of trade or business in the Philippines. These services must be regularly conducted in this countrv; undertaken in "pursuit of a commercial or an economic activitv;" for a valuable consideration; and not exempt under the Tax Code, other special laws, or any international agreement. Consumption is "the use of a thing in a way that thereby exhausts it." Applied to services, the term means the performance or "successful completion of a contractual duty, usually resulting in the performer's release from any past or future liability..." 108 With the foregoing discourse as fulcrum, Section 105 and 108 of the NIRC, as amended, subjects to VAT the all kinds of services performed in the Philippines for a fee. In the opposite, services performed outside the Philippines should be free of VAT. Thus: Section 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. lll5 Connnissioner of Intemal Revenue v. Placer Dome Tee/mica/ Services (PIIils.), Inc., G.R. No. 16-!365, )U11l' 8, 2007. Connnissioncr of Intcmal Revenue v. Filniinera Resources Corporation, G.R. No. 236125, Seplembc>r 16, 2020. lll7 G.R. No. 152609, June 29, 2005. E1nphc1sis ours. Citdlions nmilled.

DECISION CTACaseNo.11118 Page 21 of 2~ The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by non- resident foreign persons shall be considered as being in the course of trade or business. Sec. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. - (A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (1 0%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12% ), after any of the following conditions has been satisfied: The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration ... Significantly, the duty of a withholding agent, like petitioner, to withhold final VAT referred to in Sections 105 and 108(A) of the NIRC as amended, would only come into play when the services rendered by non-residents, such as KEPCO, were performed in the Philippines. Inversely, such duty does not arise when the services of the non-resident were performed outside the Philippines. Section 4.114-2(b) of RR No. 16-2005 confirmed: SECTION 4.114-2. Withholding of VAT on Government Money Payments and Payments to Non-Residents. - ...

DECISION CTA Case> No.1111R Page> 22 of 24 (b) The government or any of its political subdivisions, instrumentalities or agencies, including GOCCs, as well as private corporations, individuals, estates and trusts, whether large or non- large taxpayers, shall withhold ten percent (10�;(,) [now 12%] VAT with respect to the following payments: (1) Lease or use of properties or property rights owned by non-residents; (2) Services rendered to local insurance companies, with respect to reinsurance premiums payable to non-residents; and (3) Other services rendered in the Philippines by non- residents. Adverting to Our earlier discourse, the OMCA specifically stipulated that all the services rendered by KEPCO to petitioner are performed outside the Philippines.l09 Such contract also states that none of KEPCO's employees or personnel would go to the Philippines in the performance of services.110 Simply put, KEPCO's services were performed outside the Philippines; thus, should not be subjected to VAT under Section 105, in relation to Section 108(A) of the NIRC, as amended. In view thereof, petitioner's duty to withhold final VAT thereon, likewise, did not arise. On this account, respondent's 2020 deficiency final withholding VAT emanating therefrom should be cancelled. Parenthetically, with KEPCO's performance of services abroad, said services was not done in the course of trade or business, to be saddled with VAT. The last paragraph of Section 105 of the NIRC, as amended, reads: The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business. Here, KEPCO is an NRFC, and the OMCA specifically stipulated that all services thereunder would be rendered outside the Philippines. Hence, the statutory requisite for VAT purposes treating KEPCO's services as rendered in the course of trade or business in the Philippines is therefore absent. This gives Us added justification to blot out respondent's 2020 deficiency final withholding VAT. Supra at note 101. lll1 Ibid.

DECISION CTA Case No. 11118 Page 23 of 2-� Petitioner ts not liable to pay compromise penalties. Respondent meted compromise penalties on the following alleged violations by petitioner, 111 to wit: For failure Lo file and/ or pay VAT allitne or Linws rPyuin~d hv law or reguldtion 1'35,000.00 For failure to withhold or remit Final Withholding Tax allhe li1ne or limes reyuired 25,000.00 hy law or reguldlion For failure lo withhold or remit Final Withholding VAT at the lime or limes reyuired 25,000.00 hy law or regulation TOTAL 1'85,000.00 A compromise is, by its nature, mutual in essence.ll2 It implies agreement. One party cannot impose it upon the other. 113 Considering that there is no indication that petitioner consented to the subject compromise penalty, the said amount cannot be sustained. WHEREFORE, the Petition for Review filed on March 31, 2023, by petitioner San Roque Power Corporation, is GRANTED. Accordingly, respondent's deficiency VAT, final withholding tax, and final withholding VAT assessments, inclusive of interest and penalties against petitioner for fiscal year ending March 31, 2020, in the total amount of fl212,476,688.89 are CANCELLED AND SET ASIDE. Respondent, his representatives, agents, or other persons acting in his behalf are ENJOINED from implementing the collection of VAT, final withholding tax, and final withholding VAT assessments, inclusive of interest and penalties against petitioner for fiscal year ending March 31, 2020, in the total amount of fl212,476,688.89. SO ORDERED. ~ 9:?./f ~-~~~ MARIAN IV'/ F. REYf!S-FAJi\.RDO Associate Justice lll Exhihil T-18," Docket- Vol. Ill, at p. 1108. 112 RE.fer to Vda. De San Agusti11 v. Commissioner of lntenwl Rcz1enuc, G.R. No. 1?.8-!85, Septemher 10, 2001. 11:::. Connnissioncr oflntcnwl Revenue vs. Abad, ct a/., G.R. No. L-19027, june 27,1968.

DECISION CTA Case No. 11118 Page 2-t of 2-� I CONCUR: HENRY~GELES Associate Justice ATTESTATION I attest that the conclusions in the above Decision were reached m consultation before the case was assigned to the writer of the opinion of the Court's Division. ~ ~ f.~-fad~ MARIAN IVy{.:J. REYE%-FAJARDO Associate Justice Chairperson CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. ~.~J- MA. BELEN M. RINGPIS-LIBAN Presiding Justice