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PHILEX MINING CORPORATION v. CIR

FACTS:

The case involves petitioner Philex Mining Corp. appealing the decision of the Court of Appeals affirming the Court of Tax Appeals' ruling that ordered Philex to pay the amount of P110,677,668.52 as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992, plus 20% annual interest. The Bureau of Internal Revenue (BIR) sent a letter to Philex on August 5, 1992, demanding the settlement of its tax liabilities.

Philex protested the demand, stating that it has pending claims for VAT input credit/refund that should be applied against its tax liabilities. The BIR rejected Philex's position, and Philex raised the issue to the Court of Tax Appeals. The CTA reduced Philex's tax liabilities but still ordered Philex to pay the remaining balance.

Philex appealed to the Court of Appeals, which affirmed the CTA's decision. Philex filed a motion for reconsideration, which was denied. Philex later obtained its VAT input credit/refund. Philex argued that the VAT credit should offset its excise tax liabilities, but the court rejected this argument, stating that taxes cannot be subject to compensation as taxes are due to the government in its sovereign capacity.

ISSUES:

  1. Whether Philex's pending claims for VAT input credit/refund can be offset against its excise tax liability.

  2. Whether taxes can be subject to set-off or compensation.

RULING:

  1. Philex's pending claims for VAT input credit/refund cannot be offset against its excise tax liability. The Court held that for legal compensation to take place, both obligations must be liquidated and demandable. Since the claims for VAT refund were still pending litigation and had not been determined, they cannot be set-off against the excise tax liability.

  2. Taxes cannot be subject to set-off or compensation. The Court reiterated that taxes and debts are distinct. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. Thus, the government and the taxpayer are not creditors and debtors of each other, and taxes cannot be subject to compensation.

PRINCIPLES:

  • For legal compensation to take place, both obligations must be liquidated and demandable.

  • Taxes and debts are distinct, and taxes cannot be subject to set-off or compensation.