COMMISSIONER OF INTERNAL REVENUE vs. MAGSAYSAY LINES, INC.

Facts:
The NDC decided to sell in one lot its NMC shares and five (5) of its ships, which are 3,700
DWT Tween-Decker, "Kloeckner" type vessels. The NMC shares and the vessels were
offered for public bidding. Terms and conditions provide that winning bidder was to pay "a
value added tax of 10% on the value of the vessels." On 3 June 1988, private respondent
Magsaysay Lines, Inc. offered to buy the shares and the vessels for P168,000,000.00. The
bid was made by Magsaysay Lines, purportedly for a new company still to be formed
composed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in
Hongkong (collectively, private respondents). The bid was approved and a Notice of Award
was issued to Magsaysay Lines. Contract of Sale was executed with stipulation that "valueadded tax shall be for the account of the PURCHASER." Per arrangement, an irrevocable
confirmed Letter of Credit previously filed as bidders bond was accepted by NDC as
security for the payment of VAT, if any. By this time, a formal request for a ruling on whether
or not the sale of the vessels was subject to VAT had already been filed with the Bureau of
Internal Revenue (BIR). Private respondents received VAT Ruling No. 568-88 holding that
the sale of the vessels was subject to the 10% VAT. The ruling cited the fact that NDC was a
VAT-registered enterprise. NDC drew on the Letter of Credit to pay for the VAT. Private
respondents filed an Appeal and Petition for Refund with the CTA. CTA granted the
petition.It is an isolated transaction and is not deemed sale. The CIR appealed the CTA
Decision to the CA. CA agreed with the CTA. The "change of ownership of business" as
contemplated in R.R. No. 5-87 must be a consequence of the "retirement from or cessation
of business" by the owner of the goods, as provided for in Section 100 of the Tax Code. The
Court of Appeals also agreed with the CTA that the classification of transactions "deemed
sale" was a classification statute, and not an exemption statute, thus warranting the
resolution of any doubt in favor of the taxpayer.
Issue:
Whether or not the respondent is subject to VAT.
Held:
NO. Any sale, barter or exchange of goods or services not in the course of trade or
business is not subject to VAT.VAT is ultimately a tax on consumption, even though it is
assessed on many levels of transactions on the basis of a fixed percentage. It is the end
user of consumer goods or services which ultimately shoulders the tax, as the liability
therefrom is passed on to the end users by the providers of these goods or services who in
turn may credit their own VAT liability (or input VAT) from the VAT payments they receive
from the final consumer (or output VAT). The final purchase by the end consumer represents
the final link in a production chain that itself involves several transactions and several acts
of consumption. The VAT system assures fiscal adequacy through the collection of taxes on
every level of consumption, yet assuages the manufacturers or providers of goods and
services by enabling them to pass on their respective VAT liabilities to the next link of the
chain until finally the end consumer shoulders the entire tax liability.

The tax is levied only on the sale, barter or exchange of goods or services by persons who
engage in such activities, in the course of trade or business. These transactions outside
the course of trade or business may invariably contribute to the production chain, but they
do so only as a matter of accident or incident.
The sale of the vessels was not in the ordinary course of trade or business of NDC as
appreciated by both the CTA and the Court of Appeals. In Imperial v. Collector of Internal
Revenue, the term "carrying on business" does not mean the performance of a single
disconnected act, but means conducting, prosecuting and continuing business by
performing progressively all the acts normally incident thereof; while "doing business"
conveys the idea of business being done, not from time to time, but all the time. What is
clear therefore, based on the aforecited jurisprudence, is that "course of business" or "doing
business" connotes regularity of activity. In the instant case, the sale was an isolated
transaction. The sale which was involuntary and made pursuant to the declared policy of
Government for privatization could no longer be repeated or carried on with regularity. It
should be emphasized that the normal VAT-registered activity of NDC is leasing personal
property.
It would have been a different matter if Section 100 purported to define the phrase "in the
course of trade or business" as expressed in Section 99. If that were so, reference to
Section 100 would have been necessary as a means of ascertaining whether the sale of the
vessels was "in the course of trade or business," and thus subject to
VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87
elaborate on is not the meaning of "in the course of trade or business," but instead the
identification of the transactions which may be deemed as sale. It would become necessary
to ascertain whether under those two provisions the transaction may be deemed a sale,
only if it is settled that the transaction occurred in the course of trade or business in the first
place. If the transaction transpired outside the course of trade or business, it would be
irrelevant for the purpose of determining VAT liability whether the transaction may be
deemed sale, since it anyway is not subject to VAT.

[G.R. No. 153866. February 11, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE

TECHNOLOGY (PHILIPPINES),respondent.
DECISION
PANGANIBAN, J.:

Business companies registered in and operating from the Special

Economic Zone in Naga, Cebu -- like herein respondent -- are entities exempt
from all internal revenue taxes and the implementing rules relevant thereto,
including the value-added taxes or VAT. Although export sales are not
deemed exempt transactions, they are nonetheless zero-rated. Hence, in the
present
case,
the
distinction
between
exempt entities and
exempt transactions has little significance, because the net result is that the
taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise,
has complied with all requisites for claiming a tax refund of or credit for the
input VAT it paid on capital goods it purchased. Thus, the Court of Tax
Appeals and the Court of Appeals did not err in ruling that it is entitled to such
refund or credit.
The Case
Before us is a Petition for Review [1] under Rule 45 of the Rules of Court,
seeking to set aside the May 27, 2002 Decision [2] of the Court of Appeals (CA)
in CA-GR SP No. 66093. The decretal portion of the Decision reads as
follows:
WHEREFORE, foregoing premises considered, the petition for review
is DENIED for lack of merit.[3]
The Facts
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as
follows:
As jointly stipulated by the parties, the pertinent facts x x x involved in this case are
as follows:
1. [Respondent] is a resident foreign corporation duly registered with the Securities
and Exchange Commission to do business in the Philippines, with principal office
address at the new Cebu Township One, Special Economic Zone, Barangay
Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and
empowered to perform the duties of his office, including, among others, the duty to
act and approve claims for refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and
has been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No.
66, as amended, to engage in the manufacture of recording components primarily
used in computers for export. Such registration was made on 6 June 1997;

4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT

Registration Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by
[respondent];
6.

An administrative claim for refund of VAT input taxes in the amount

of P28,369,226.38 with supporting documents (inclusive of theP12,267,981.04 VAT
input taxes subject of this Petition for Review), was filed on 4 October 1999 with
Revenue District Office No. 83, Talisay Cebu;

7. No final action has been received by [respondent] from [petitioner] on [respondents]

claim for VAT refund.

The administrative claim for refund by the [respondent] on October 4, 1999 was not
acted upon by the [petitioner] prompting the [respondent] to elevate the case to [the
CTA] on July 21, 2000 by way of Petition for Review in order to toll the running of
the two-year prescriptive period.
For his part, [petitioner] x x x raised the following Special and Affirmative Defenses,
to wit:
1. [Respondents] alleged claim for tax refund/credit is subject to administrative
routinary investigation/examination by [petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and
regulations, the [respondent] has the burden of proof that the taxes sought to be
refunded were erroneously or illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court
ruled that:
A claimant has the burden of proof to establish the factual
basis of his or her claim for tax credit/refund.
4. Claims for tax refund/tax credit are construed in strictissimi juris against the
taxpayer. This is due to the fact that claims for refund/credit [partake of] the nature
of an exemption from tax. Thus, it is incumbent upon the [respondent] to prove that
it is indeed entitled to the refund/credit sought. Failure on the part of the
[respondent] to prove the same is fatal to its claim for tax credit. He who claims
exemption must be able to justify his claim by the clearest grant of organic or
statutory law. An exemption from the common burden cannot be permitted to exist
upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone
Authority (PEZA) registered Ecozone Enterprise, then its business is not subject to
VAT pursuant to Section 24 of Republic Act No. ([RA]) 7916 in relation to Section
103 of the Tax Code, as amended. As [respondents] business is not subject to VAT,
the capital goods and services it alleged to have purchased are considered not used
in VAT taxable business. As such, [respondent] is not entitled to refund of input
taxes on such capital goods pursuant to Section 4.106.1 of Revenue Regulations
No. ([RR])7-95, and of input taxes on services pursuant to Section 4.103 of said
regulations.

6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229
of the 1997 Tax Code on filing of a written claim for refund within two (2) years from
the date of payment of tax.

On July 19, 2001, the Tax Court rendered a decision granting the claim for refund. [4]
Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA granting the claim for refund or
issuance of a tax credit certificate (TCC) in favor of respondent in the reduced
amount of P12,122,922.66. This sum represented the unutilized but
substantiated input VAT paid on capital goods purchased for the period
covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the
fiscal incentives under Executive Order No. (EO) 226 (otherwise known as the
Omnibus Investment Code of 1987), not of those under both Presidential
Decree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent
was, therefore, considered exempt only from the payment of income tax when
it opted for the income tax holiday in lieu of the 5 percent preferential tax on
gross income earned. As a VAT-registered entity, though, it was still subject to
the payment of other national internal revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor
Sections 4.106-1 and 4.103-1 of RR 7-95 were applicable. Having paid the
input VAT on the capital goods it purchased, respondent correctly filed the
administrative and judicial claims for its refund within the two-year prescriptive
period. Such payments were -- to the extent of the refundable value -- duly
supported by VAT invoices or official receipts, and were not yet offset against
any output VAT liability.
Hence this Petition.[5]
Sole Issue
Petitioner submits this sole issue for our consideration:
Whether or not respondent is entitled to the refund or issuance of Tax Credit
Certificate in the amount of P12,122,922.66 representing alleged unutilized input VAT
paid on capital goods purchased for the period April 1, 1998 to June 30, 1999. [6]
The Courts Ruling
The Petition is unmeritorious.

Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to
a Refund of or Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a special economic
zone,[7] respondent is entitled to the fiscal incentives and benefits [8] provided
for in either PD 66[9] or EO 226.[10] It shall, moreover, enjoy all privileges,
benefits, advantages or exemptions under both Republic Act Nos. (RA)
7227[11] and 7844.[12]
Preferential Tax Treatment
Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other laws to
the contrary, respondent shall not be subject to internal revenue laws and
regulations for raw materials, supplies, articles, equipment, machineries,
spare parts and wares, except those prohibited by law, brought into the zone
to be stored, broken up, repacked, assembled, installed, sorted, cleaned,
graded or otherwise processed, manipulated, manufactured, mixed or used
directly or indirectly in such activities.[13] Even so, respondent would enjoy a
net-operating loss carry over; accelerated depreciation; foreign exchange and
financial assistance; and exemption from export taxes, local taxes and
licenses.[14]
Comparatively, the same exemption from internal revenue laws and
regulations applies if EO 226[15] is chosen. Under this law, respondent shall
further be entitled to an income tax holiday; additional deduction for labor
expense; simplification of customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing warehouse system; privileges
for foreign nationals employed; tax credits on domestic capital equipment, as
well as for taxes and duties on raw materials; and exemption from contractors
taxes, wharfage dues, taxes and duties on imported capital equipment and
spare parts, export taxes, duties, imposts and fees, [16] local taxes and licenses,
and real property taxes.[17]
A privilege available to respondent under the provision in RA 7227 on tax
and duty-free importation of raw materials, capital and equipment [18] -- is, ipso
facto, also accorded to the zone[19] under RA 7916. Furthermore, the latter law
-- notwithstanding other existing laws, rules and regulations to the contrary -extends[20] to that zone the provision stating that no local or national taxes shall
be imposed therein.[21] No exchange control policy shall be applied; and free
markets for foreign exchange, gold, securities and future shall be allowed and

maintained.[22] Banking and finance shall also be liberalized under minimum

Bangko Sentral regulation with the establishment of foreign currency
depository units of local commercial banks and offshore banking units of
foreign banks.[23]
In the same vein, respondent benefits under RA 7844 from negotiable tax
credits[24] for locally-produced materials used as inputs. Aside from the other
incentives possibly already granted to it by the Board of Investments, it also
enjoys preferential credit facilities[25] and exemption from PD 1853.[26]
From the above-cited laws, it is immediately clear that petitioner enjoys
preferential tax treatment.[27] It is not subject to internal revenue laws and
regulations and is even entitled to tax credits. The VAT on capital goods is an
internal revenue tax from which petitioner as an entity is exempt. Although
the transactions involving such tax are not exempt, petitioner as a VATregistered person,[28] however, is entitled to their credits.
Nature of the VAT and
the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0
percent to 10 percent levied on every importation of goods, whether or not in
the course of trade or business, or imposed on each sale, barter, exchange or
lease of goods or properties or on each rendition of services in the course of
trade or business[29] as they pass along the production and distribution chain,
the tax being limited only to the value added [30] to such goods, properties or
services by the seller, transferor or lessor.[31]It is an indirect tax that may be
shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services.[32] As such, it should be understood not in the context of
the person or entity that is primarily, directly and legally liable for its payment,
but in terms of its nature as a tax on consumption. [33] In either case, though,
the same conclusion is arrived at.
The law[34] that originally imposed the VAT in the country, as well as the
subsequent amendments of that law, has been drawn from the tax credit
method.[35] Such method adopted the mechanics and self-enforcement
features of the VAT as first implemented and practiced in Europe and
subsequently adopted in New Zealand and Canada.[36] Under the present
method that relies on invoices, an entity can credit against or subtract from the
VAT charged on its sales or outputs the VAT paid on its purchases, inputs and
imports.[37]

If at the end of a taxable quarter the output taxes[38] charged by a

seller[39] are equal to the input taxes[40] passed on by the suppliers, no payment
is required. It is when the output taxes exceed the input taxes that the excess
has to be paid.[41] If, however, the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or quarters. [42]Should
the input taxes result from zero-rated or effectively zero-rated transactions or
from the acquisition of capital goods,[43] any excess over the output taxes shall
instead be refunded[44] to the taxpayer or credited[45] against other internal
revenue taxes.[46]
Zero-Rated and Effectively
Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated transactions
differ from effectively zero-rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and
supply of services.[47] The tax rate is set at zero. [48]When applied to the tax
base, such rate obviously results in no tax chargeable against the purchaser.
The seller of such transactions charges no output tax, [49] but can claim a
refund of or a tax credit certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods [50] or
supply of services[51] to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a signatory
effectively subjects such transactions to a zero rate. [52] Again, as applied to the
tax base, such rate does not yield any tax chargeable against the purchaser.
The seller who charges zero output tax on such transactions can also claim a
refund of or a tax credit certificate for the VAT previously charged by suppliers.
Zero Rating and
Exemption
In terms of the VAT computation, zero rating and exemption are the same,
but the extent of relief that results from either one of them is not.
Applying the destination principle[53] to the exportation of goods, automatic
zero rating[54] is primarily intended to be enjoyed by the seller who is directly
and legally liable for the VAT, making such seller internationally competitive by
allowing the refund or credit of input taxes that are attributable to export sales.
[55]
Effective zero rating, on the contrary, is intended to benefit the purchaser
who, not being directly and legally liable for the payment of the VAT, will
ultimately bear the burden of the tax shifted by the suppliers.

In both instances of zero rating, there is total relief for the purchaser from
the burden of the tax.[56] But in an exemption there is only partial relief,
[57]
because the purchaser is not allowed any tax refund of or credit for input
taxes paid.[58]
Exempt Transaction
and Exempt Party
The object of exemption from the VAT may either be the transaction itself
or any of the parties to the transaction.[59]
An exempt transaction, on the one hand, involves goods or services
which, by their nature, are specifically listed in and expressly exempted from
the VAT under the Tax Code, without regard to the tax status -- VAT-exempt or
not -- of the party to thetransaction.[60] Indeed, such transaction is not subject
to the VAT, but the seller is not allowed any tax refund of or credit for any input
taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT
exemption under the Tax Code, a special law or an international agreement to
which the Philippines is a signatory, and by virtue of which its taxable
transactions become exempt from the VAT.[61] Such party is also not subject to
the VAT, but may be allowed a tax refund of or credit for input taxes paid,
depending on its registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of
which may be shifted or passed on by the seller to the purchaser of the goods,
properties or services.[62] While the liability is imposed on one person,
the burden may be passed on to another. Therefore, if a special law merely
exempts a party as a seller from its direct liability for payment of the VAT, but
does not relieve the same party as a purchaser from its indirect burden of the
VAT shifted to it by its VAT-registered suppliers, the purchase transaction is
not exempt. Applying this principle to the case at bar, the purchase
transactions entered into by respondent are not VAT-exempt.
Special laws may certainly exempt transactions from the VAT.[63] However,
the Tax Code provides that those falling under PD 66 are not. PD 66 is the
precursor of RA 7916 -- the special law under which respondent was
registered. The purchasetransactions it entered into are, therefore, not VATexempt. These are subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the
standard rate of 10 percent,[64] depending again on the application of
the destination principle.[65]

If respondent enters into such sales transactions with a purchaser -usually in a foreign country -- for use or consumption outside the Philippines,
these shall be subject to 0 percent.[66] If entered into with a purchaser for use
or consumption in the Philippines, then these shall be subject to 10 percent,
[67]
unless the purchaser is exempt from the indirect burden of the VAT, in
which case it shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate
to be applied is zero. Its exemption under both PD 66 and RA 7916 effectively
subjects such transactions to a zero rate, [68] because the ecozone within which
it is registered is managed and operated by the PEZA as a separate customs
territory.[69] This means that in such zone is created the legal fiction of foreign
territory.[70] Under the cross-border principle[71] of the VAT system being
enforced by the Bureau of Internal Revenue (BIR),[72] no VAT shall be imposed
to form part of the cost of goods destined for consumption outside of the
territorial border of the taxing authority. If exports of goods and services from
the Philippines to a foreign country are free of the VAT,[73] then the same rule
holds for such exports from the national territory -- except specifically declared
areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a
PEZA-registered entity are considered exports to a foreign country;
conversely, sales by a PEZA-registered entity to a VAT-registered person in
the customs territory are deemed imports from a foreign country.[74] An
ecozone -- indubitably a geographical territory of the Philippines -- is,
however, regarded in law as foreign soil.[75] This legal fiction is necessary to
give meaningful effect to the policies of the special law creating the zone. [76] If
respondent is located in an export processing zone [77] within that ecozone,
sales to the export processing zone, even without being actually exported,
shall in fact be viewed as constructively exported under EO 226.[78] Considered
as export sales,[79] such purchase transactions by respondent would indeed be
subject to a zero rate.[80]
Tax Exemptions
Broad and Express
Applying the special laws we have earlier discussed, respondent as an
entity is exempt from internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the
very nature of the VAT as a tax on consumption, for which the direct liability is
imposed on one person but the indirect burden is passed on to another.
Respondent, as an exempt entity, can neither be directly charged for the VAT

on its sales nor indirectly made to bear, as added cost to such sales, the
equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere
debemus. Where the law does not distinguish, we ought not to distinguish.
Moreover, the exemption is both express and pervasive for the following
reasons:
First, RA 7916 states that no taxes, local and national, shall be imposed
on business establishments operating within the ecozone.[81] Since this law
does not exclude the VAT from the prohibition, it is deemed
included. Exceptio firmat regulam in casibus non exceptis. An exception
confirms the rule in cases not excepted; that is, a thing not being excepted
must be regarded as coming within the purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the
transaction, it may still be passed on and, therefore, indirectly imposed on the
same entity -- a patent circumvention of the law. That no VAT shall be
imposed directly upon business establishments operating within the ecozone
under RA 7916 also means that no VAT may be passed on and imposed
indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum.
When anything is prohibited directly, it is also prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same
prohibition applied, except for real property taxes that presently are imposed
on land owned by developers.[82] This similar and repeated prohibition is an
unambiguous ratification of the laws intent in not imposing local or national
taxes on business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and
the like shall not be subject to x x x internal revenue laws and regulations
under PD 66[83] -- the original charter of PEZA (then EPZA) that was later
amended by RA 7916.[84] No provisions in the latter law modify such
exemption.
Although this exemption puts the government at an initial disadvantage,
the reduced tax collection ultimately redounds to the benefit of the national
economy by enticing more business investments and creating more
employment opportunities.[85]
Fourth, even the rules implementing the PEZA law clearly reiterate that
merchandise -- except those prohibited by law -- shall not be subject to x x x
internal revenue laws and regulations x x x[86] if brought to the ecozones
restricted area[87] for manufacturing by registered export enterprises,[88] of
which respondent is one. These rules also apply to all enterprises registered
with the EPZA prior to the effectivity of such rules.[89]

Fifth, export processing zone enterprises registered[90] with the Board of

Investments (BOI) under EO 226 patently enjoy exemption from national
internal revenue taxes on imported capital equipment reasonably needed and
exclusively used for the manufacture of their products;[91] on required supplies
and spare part for consigned equipment;[92] and on foreign and domestic
merchandise, raw materials, equipment and the like -- except those prohibited
by law -- brought into the zone for manufacturing.[93] In addition, they are given
credits for the value of the national internal revenue taxes imposed on
domestic capital equipment also reasonably needed and exclusively used for
the manufacture of their products,[94] as well as for the value of such taxes
imposed on domestic raw materials and supplies that are used in the
manufacture of their export products and that form part thereof.[95]
Sixth, the exemption from local and national taxes granted under RA
7227[96] are ipso facto accorded to ecozones.[97] In case of doubt, conflicts with
respect to such tax exemption privilege shall be resolved in favor of the
ecozone.[98]
And seventh, the tax credits under RA 7844 -- given for imported raw
materials primarily used in the production of export goods, [99] and for locally
produced raw materials, capital equipment and spare parts used by exporters
of non-traditional products[100] -- shall also be continuously enjoyed by similar
exporters within the ecozone.[101] Indeed, the latter exporters are likewise
entitled to such tax exemptions and credits.
Tax Refund as
Tax Exemption
To be sure, statutes that grant tax exemptions are construed strictissimi
juris[102] against the taxpayer[103] and liberally in favor of the taxing authority.[104]
Tax refunds are in the nature of such exemptions.[105] Accordingly, the
claimants of those refunds bear the burden of proving the factual basis of their
claims;[106] and of showing, by words too plain to be mistaken, that the
legislature intended to exempt them.[107] In the present case, all the cited legal
provisions are teeming with life with respect to the grant of tax exemptions too
vivid to pass unnoticed. In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions
which are not exempt. The end result, however, is that it is not subject to the
VAT. The non-taxability of transactions that are otherwise taxable is merely a
necessary incident to the tax exemption conferred by law upon it as an entity,
not upon the transactions themselves.[108] Nonetheless, its exemption as an

entity and the non-exemption of its transactions lead to the same result for the
following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities
who are called upon to execute or administer such laws [109] will have to be
adopted. Their prior tax issuances have held inconsistent positions brought
about by their probable failure to comprehend and fully appreciate the nature
of the VAT as a tax on consumption and the application of the destination
principle.[110] Revenue Memorandum Circular No. (RMC) 74-99, however, now
clearly and correctly provides that any VAT-registered suppliers sale of goods,
property or services from the customs territory to any registered enterprise
operating in the ecozone -- regardless of the class or type of the latters PEZA
registration -- is legally entitled to a zero rate.[111]
Second, the policies of the law should prevail. Ratio legis est anima. The
reason for the law is its very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as
well as the establishment of export processing zones, seeks to encourage
and promote foreign commerce as a means of x x x strengthening our export
trade and foreign exchange position, of hastening industrialization, of reducing
domestic unemployment, and of accelerating the development of the
country.[112]
RA 7916, as amended by RA 8748, declared that by creating the PEZA
and integrating the special economic zones, the government shall actively
encourage, promote, induce and accelerate a sound and balanced industrial,
economic and social development of the country x x x through the
establishment, among others, of special economic zones x x x that shall
effectively attract legitimate and productive foreign investments.[113]
Under EO 226, the State shall encourage x x x foreign investments in
industry x x x which shall x x x meet the tests of international
competitiveness[,] accelerate development of less developed regions of the
country[,] and result in increased volume and value of exports for the
economy.[114] Fiscal incentives that are cost-efficient and simple to administer
shall be devised and extended to significant projects to compensate for
market imperfections, to reward performance contributing to economic
development,[115] and to stimulate the establishment and assist initial
operations of the enterprise.[116]
Wisely accorded to ecozones created under RA 7916 [117] was the
governments policy -- spelled out earlier in RA 7227 -- of converting into
alternative productive uses[118] the former military reservations and their

extensions,[119] as well as of providing them incentives[120] to enhance the

benefits that would be derived from them[121] in promoting economic and social
development.[122]
Finally, under RA 7844, the State declares the need to evolve export
development into a national effort[123] in order to win international markets. By
providing many export and tax incentives,[124] the State is able to drive home
the point that exporting is indeed the key to national survival and the means
through which the economic goals of increased employment and enhanced
incomes can most expeditiously be achieved.[125]
The Tax Code itself seeks to promote sustainable economic growth x x x;
x x x increase economic activity; and x x x create a robust environment for
business to enable firms to compete better in the regional as well as the
global market.[126] After all, international competitiveness requires economic
and tax incentives to lower the cost of goods produced for export. State
actions that affect global competition need to be specific and selective in the
pricing of particular goods or services.[127]
All these statutory policies are congruent to the constitutional mandates of
providing incentives to needed investments,[128] as well as of promoting the
preferential use of domestic materials and locally produced goods and
adopting measures to help make these competitive.[129] Tax credits for
domestic inputs strengthen backward linkages. Rightly so, the rule of law
and the existence of credible and efficient public institutions are essential
prerequisites for sustainable economic development.[130]
VAT Registration, Not Application
for Effective Zero Rating,
Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT law.
Petitioner alleges that respondent did register for VAT purposes with the
appropriate Revenue District Office. However, it is now too late in the day for
petitioner to challenge the VAT-registered status of respondent, given the
latters prior representation before the lower courts and the mode of appeal
taken by petitioner before this Court.
[131]

The PEZA law, which carried over the provisions of the EPZA law, is clear
in exempting from internal revenue laws and regulations the equipment -including capital goods -- that registered enterprises will use, directly or
indirectly, in manufacturing.[132] EO 226 even reiterates this privilege among
the incentives it gives to such enterprises. [133] Petitioner merely asserts that by

virtue of the PEZA registration alone of respondent, the latter is not subject to
the VAT. Consequently, the capital goods and services respondent has
purchased are not considered used in the VAT business, and no VAT refund or
credit is due.[134] This is a non sequitur. By the VATs very nature as a tax on
consumption, the capital goods and services respondent has purchased are
subject to the VAT, although at zero rate. Registration does not determine
taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts.
Having failed to present evidence to support its contentions against
the income tax holiday privilege of respondent,[135] petitioner is deemed to have
conceded. It is a cardinal rule that issues and arguments not adequately and
seriously brought below cannot be raised for the first time on appeal.[136]This is
a matter of procedure[137] and a question of fairness.[138] Failure to assert
within a reasonable time warrants a presumption that the party entitled to
assert it either has abandoned or declined to assert it.[139]
The BIR regulations additionally requiring an approved prior application for
effective zero rating[140] cannot prevail over the clear VAT nature of
respondents transactions. The scope of such regulations is not within the
statutory authority x x x granted by the legislature.[141]
First, a mere administrative issuance, like a BIR regulation, cannot amend
the law; the former cannot purport to do any more than interpret the latter.
[142]
The courts will not countenance one that overrides the statute it seeks to
apply and implement.[143]
Other than the general registration of a taxpayer the VAT status of which is
aptly determined, no provision under our VAT law requires an additional
application to be made for such taxpayers transactions to be considered
effectively zero-rated. An effectively zero-rated transaction does not and
cannot become exempt simply because an application therefor was not made
or, if made, was denied. To allow the additional requirement is to give
unfettered discretion to those officials or agents who, without fluid
consideration, are bent on denying a valid application. Moreover, the State
can never be estopped by the omissions, mistakes or errors of its officials or
agents.[144]
Second, grantia argumenti that such an application is required by law,
there is still the presumption of regularity in the performance of official duty.
[145]
Respondents registration carries with it the presumption that, in the
absence of contradictory evidence, an application for effective zero rating was
also filed and approval thereof given. Besides, it is also presumed that the
law has been obeyed[146] by both the administrative officials and the applicant.

Third, even though such an application was not made, all the
special laws we have tackled exempt respondent not only from internal
revenue laws but also from the regulations issued pursuant thereto. Leniency
in the implementation of the VAT in ecozones is an imperative, precisely to
spur economic growth in the country and attain global competitiveness as
envisioned in those laws.
A VAT-registered status, as well as compliance with the invoicing
requirements,[147] is sufficient for the effective zero rating of the transactions of
a taxpayer. The nature of its business and transactions can easily be perused
from, as already clearly indicated in, its VAT registration papers and
photocopied documents attached thereto. Hence, its transactions cannot be
exempted by its mere failure to apply for their effective zero rating. Otherwise,
their VAT exemption would be determined, not by their nature, but by the
taxpayers negligence -- a result not at all contemplated. Administrative
convenience cannot thwart legislative mandate.
Tax Refund or
Credit in Order
Having determined that respondents purchase transactions are subject to
a zero VAT rate, the tax refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent had
chosen the fiscal incentives in EO 226 over those in RA 7916 and PD 66. It
opted for the income tax holiday regime instead of the 5 percent preferential
tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration
under the PEZA law,[148] for EO 226[149] also has provisions to contend with.
These two regimes are in fact incompatible and cannot be availed of
simultaneously by the same entity. While EO 226 merely exempts it from
income taxes, the PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but
only from the payment of income tax for a certain number of years, depending
on its registration as a pioneer or a non-pioneer enterprise. Besides, the
remittance of the aforesaid 5 percent of gross income earned in lieu of local
and national taxes imposable upon business establishments within the
ecozone cannot outrightly determine a VAT exemption. Being subject to VAT,
payments erroneously collected thereon may then be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential
tax regime in RA 7916, Section 24 thereof does not preclude the VAT. One

can, therefore, counterargue that such provision merely exempts respondent

from taxes imposed on business. To repeat, the VAT is a tax imposed on
consumption, not on business. Although respondent as an entity is exempt,
the transactions it enters into are not necessarily so. The VAT payments
made in excess of the zero rate that is imposable may certainly be refunded
or credited.
Compliance with All Requisites
for VAT Refund or Credit
As further enunciated by the Tax Court, respondent complied with all the
requisites for claiming a VAT refund or credit.[150]
First, respondent is a VAT-registered entity. This fact alone distinguishes
the present case from Contex, in which this Court held that the petitioner
therein was registered as a non-VAT taxpayer.[151] Hence, for being merely
VAT-exempt, the petitioner in that case cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent are duly
supported by VAT invoices and have not been offset against any output
taxes. Although enterprises registered with the BOI after December 31, 1994
would no longer enjoy the tax credit incentives on domestic capital equipment
-- as provided for under Article 39(d), Title III, Book I of EO 226 [152] -- starting
January 1, 1996, respondent would still have the same benefit under a
general and express exemption contained in both Article 77(1), Book VI of EO
226; and Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones
by RA 7916.
There was a very clear intent on the part of our legislators, not only to
exempt investors in ecozones from national and local taxes, but also to grant
them tax credits. This fact was revealed by the sponsorship speeches in
Congress during the second reading of House Bill No. 14295, which later
became RA 7916, as shown below:
MR. RECTO. x x x Some of the incentives that this bill provides are exemption
from national and local taxes; x x x tax credit for locally-sourced inputs x x x.
xxx

xxx

xxx

MR. DEL MAR. x x x To advance its cause in encouraging investments and creating
an environment conducive for investors, the bill offers incentives such as the
exemption from local and national taxes, x x x tax credits for locally sourced inputs x
x x.[153]

And third, no question as to either the filing of such claims within the
prescriptive period or the validity of the VAT returns has been raised. Even if
such a question were raised, the tax exemption under all the special laws
cited above is broad enough to cover even the enforcement of internal
revenue laws, including prescription.[154]
Summary
To summarize, special laws expressly grant preferential tax treatment to
business establishments registered and operating within an ecozone, which
by law is considered as a separate customs territory. As such, respondent is
exempt from all internal revenue taxes, including the VAT, and regulations
pertaining thereto. It has opted for the income tax holiday regime, instead of
the 5 percent preferential tax regime. As a matter of law and procedure, its
registration status entitling it to such tax holiday can no longer be questioned.
Its sales transactions intended for export may not be exempt, but like its
purchase transactions, they are zero-rated. No prior application for the
effective zero rating of its transactions is necessary. Being VAT-registered and
having satisfactorily complied with all the requisites for claiming a tax refund of
or credit for the input VAT paid on capital goods purchased, respondent is
entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No
pronouncement as to costs.
SO ORDERED.

G.R. No. 151135

July 2, 2004

CONTEX CORPORATION, petitioner,

vs.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

QUISUMBING, J.:
For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in CA-G.R.
SP No. 62823, which reversed and set aside the decision 2 dated October 13, 2000, of the
Court of Tax Appeals (CTA). The CTA had ordered the Commissioner of Internal Revenue
(CIR) to refund the sum of P683,061.90 to petitioner as erroneously paid input value-added
tax (VAT) or in the alternative, to issue a tax credit certificate for said amount. Petitioner also
assails the appellate courts Resolution,3 dated December 19, 2001, denying the motion for
reconsideration.
Petitioner is a domestic corporation engaged in the business of manufacturing hospital
textiles and garments and other hospital supplies for export. Petitioners place of business is
at the Subic Bay Freeport Zone (SBFZ). It is duly registered with the Subic Bay Metropolitan
Authority (SBMA) as a Subic Bay Freeport Enterprise, pursuant to the provisions of
Republic Act No. 7227.4 As an SBMA-registered firm, petitioner is exempt from all local and
national internal revenue taxes except for the preferential tax provided for in Section 12
(c)5 of Rep. Act No. 7227. Petitioner also registered with the Bureau of Internal Revenue
(BIR) as a non-VAT taxpayer under Certificate of Registration RDO Control No. 95-180000133.
From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and
materials necessary in the conduct of its manufacturing business. The suppliers of these
goods shifted unto petitioner the 10% VAT on the purchased items, which led the petitioner
to pay input taxes in the amounts of P539,411.88 and P504,057.49 for 1997 and 1998,
respectively.6
Acting on the belief that it was exempt from all national and local taxes, including VAT,
pursuant to Rep. Act No. 7227, petitioner filed two applications for tax refund or tax credit of
the VAT it paid. Mr. Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied the
first application letter, dated December 29, 1998.
Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax
refund/credit, this time directly with Atty. Alberto Pagabao, the regional director of BIR
Revenue Region No. 4. The second letter sought a refund or issuance of a tax credit
certificate in the amount of P1,108,307.72, representing erroneously paid input VAT for the
period January 1, 1997 to November 30, 1998.
When no response was forthcoming from the BIR Regional Director, petitioner then
elevated the matter to the Court of Tax Appeals, in a petition for review docketed as CTA
Case No. 5895. Petitioner stressed that Section 112(A) 7 if read in relation to Section 106(A)
(2)(a)8 of the National Internal Revenue Code, as amended and Section 12(b) 9 and (c) of
Rep. Act No. 7227 would show that it was not liable in any way for any value-added tax.
In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule
that claims for refund are strictly construed against the taxpayer. Since petitioner failed to
establish both its right to a tax refund or tax credit and its compliance with the rules on tax
refund as provided for in Sections 20410 and 22911 of the Tax Code, its claim should be
denied, according to the BIR.

On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:
WHEREFORE, in view of the foregoing, the Petition for Review is hereby
PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or in the
alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the sum
of P683,061.90, representing erroneously paid input VAT.
SO ORDERED.12
In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and
112(A) of the Tax Code. The tax court stressed that these provisions apply only to those
entities registered as VAT taxpayers whose sales are zero-rated. Petitioner does not fall
under this category, since it is a non-VAT taxpayer as evidenced by the Certificate of
Registration RDO Control No. 95-180-000133 issued by RDO Rosemarie Ragasa of BIR
RDO No. 18 of the Subic Bay Freeport Zone and thus it is exempt from VAT, pursuant to
Rep. Act No. 7227, said the CTA.
Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on
its purchases of supplies and materials. It pointed out that under Section 12(c) of Rep. Act
No. 7227 and the Implementing Rules and Regulations of the Bases Conversion and
Development Act of 1992, all that petitioner is required to pay as a SBFZ-registered
enterprise is a 5% preferential tax.
The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29,
1997 for being barred by the two-year prescriptive period under Section 229 of the Tax
Code. The tax court also limited the refund only to the input VAT paid by the petitioner on
the supplies and materials directly used by the petitioner in the manufacture of its goods. It
struck down all claims for input VAT paid on maintenance, office supplies, freight charges,
and all materials and supplies shipped or delivered to the petitioners Makati and Pasay City
offices.
Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the
CTA decision by the Court of Appeals. Respondent maintained that the exemption of Contex
Corp. under Rep. Act No. 7227 was limited only to direct taxes and not to indirect taxes
such as the input component of the VAT. The Commissioner pointed out that from its very
nature, the value-added tax is a burden passed on by a VAT registered person to the end
users; hence, the direct liability for the tax lies with the suppliers and not Contex.
Finding merit in the CIRs arguments, the appellate court decided CA-G.R. SP No. 62823 in
his favor, thus:
WHEREFORE, premises considered, the appealed decision is hereby REVERSED
AND SET ASIDE. Contexs claim for refund of erroneously paid taxes is DENIED
accordingly.
SO ORDERED.13

In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on
the importation of raw materials, capital, and equipment of SBFZ-registered enterprises
under Rep. Act No. 7227 and its implementing rules covers only "the VAT imposable under
Section 107 of the [Tax Code], which is a direct liability of the importer, and in no way
includes the value-added tax of the seller-exporter the burden of which was passed on to
the importer as an additional costs of the goods." 14 This was because the exemption
granted by Rep. Act No. 7227 relates to the act of importation and Section 107 15 of the Tax
Code specifically imposes the VAT on importations. The appellate court applied the principle
that tax exemptions are strictly construed against the taxpayer. The Court of Appeals
pointed out that under the implementing rules of Rep. Act No. 7227, the exemption of SBFZregistered enterprises from internal revenue taxes is qualified as pertaining only to those for
which they may be directly liable. It then stated that apparently, the legislative intent behind
Rep. Act No. 7227 was to grant exemptions only to direct taxes, which SBFZ-registered
enterprise may be liable for and only in connection with their importation of raw materials,
capital, and equipment as well as the sale of their goods and services.
Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion
was denied.
Hence, the instant petition raising as issues for our resolution the following:
A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL
INTERNAL REVENUE TAXES PROVIDED IN REPUBLIC ACT NO. 7227 COVERS
THE VALUE ADDED TAX PAID BY PETITIONER, A SUBIC BAY FREEPORT
ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND MATERIALS.
B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT
PETITIONER IS ENTITLED TO A TAX CREDIT OR REFUND OF THE VAT PAID ON
ITS PURCHASES OF SUPPLIES AND RAW MATERIALS FOR THE YEARS 1997
AND 1998.16
Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding
of the Court of Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not
apply to petitioner as a purchaser; and (2) the entitlement of the petitioner to a tax refund on
its purchases of supplies and raw materials for 1997 and 1998.
On the first issue, petitioner argues that the appellate courts restrictive interpretation of
petitioners VAT exemption as limited to those covered by Section 107 of the Tax Code is
erroneous and devoid of legal basis. It contends that the provisions of Rep. Act No. 7227
clearly and unambiguously mandate that no local and national taxes shall be imposed upon
SBFZ-registered firms and hence, said law should govern the case. Petitioner calls our
attention to regulations issued by both the SBMA and BIR clearly and categorically
providing that the tax exemption provided for by Rep. Act No. 7227 includes exemption from
the imposition of VAT on purchases of supplies and materials.
The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does
grant tax exemptions, such grant is not all-encompassing but is limited only to those taxes

for which a SBFZ-registered business may be directly liable. Hence, SBFZ locators are not
relieved from the indirect taxes that may be shifted to them by a VAT-registered seller.
At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of
tax paid on the goods, properties or services bought, transferred, or leased may be shifted
or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee. 17 Unlike a
direct tax, such as the income tax, which primarily taxes an individuals ability to pay based
on his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of
goods, services, or certain transactions involving the same. The VAT, thus, forms a
substantial portion of consumer expenditures.
Further, in indirect taxation, there is a need to distinguish between the liability for the tax
and the burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or
passed on by the seller to the buyer. What is transferred in such instances is not the liability
for the tax, but the tax burden. In adding or including the VAT due to the selling price, the
seller remains the person primarily and legally liable for the payment of the tax. What is
shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of
the tax.18 Stated differently, a seller who is directly and legally liable for payment of an
indirect tax, such as the VAT on goods or services is not necessarily the person who
ultimately bears the burden of the same tax. It is the final purchaser or consumer of such
goods or services who, although not directly and legally liable for the payment thereof,
ultimately bears the burden of the tax. 19
Exemptions from VAT are granted by express provision of the Tax Code or special laws.
Under VAT, the transaction can have preferential treatment in the following ways:
(a) VAT Exemption. An exemption means that the sale of goods or properties and/or
services and the use or lease of properties is not subject to VAT (output tax) and the
seller is not allowed any tax credit on VAT (input tax) previously paid. 20 This is a case
wherein the VAT is removed at the exempt stage (i.e., at the point of the sale, barter
or exchange of the goods or properties).
The person making the exempt sale of goods, properties or services shall not bill any
output tax to his customers because the said transaction is not subject to VAT. On
the other hand, a VAT-registered purchaser of VAT-exempt goods/properties or
services which are exempt from VAT is not entitled to any input tax on such purchase
despite the issuance of a VAT invoice or receipt. 21
(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject
to 0% rate, meaning the tax burden is not passed on to the purchaser. A zero-rated
sale by a VAT-registered person, which is a taxable transaction for VAT purposes,
shall not result in any output tax. However, the input tax on his purchases of goods,
properties or services related to such zero-rated sale shall be available as tax credit
or refund in accordance with these regulations. 22
Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast,
exemption only removes the VAT at the exempt stage, and it will actually increase, rather
than reduce the total taxes paid by the exempt firms business or non-retail customers. It is

for this reason that a sharp distinction must be made between zero-rating and exemption in
designating a value-added tax.23
Apropos, the petitioners claim to VAT exemption in the instant case for its purchases of
supplies and raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No.
7227, which basically exempts them from all national and local internal revenue taxes,
including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95. 24
On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not
controverted by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per
Certificate of Registration25 issued by the BIR. As such, it is exempt from VAT on all its sales
and importations of goods and services.
Petitioners claim, however, for exemption from VAT for its purchases of supplies and raw
materials is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities
can claim Input VAT Credit/Refund.
The point of contention here is whether or not the petitioner may claim a refund on the Input
VAT erroneously passed on to it by its suppliers.
While it is true that the petitioner should not have been liable for the VAT inadvertently
passed on to it by its supplier since such is a zero-rated sale on the part of the supplier, the
petitioner is not the proper party to claim such VAT refund.
Section 4.100-2 of BIRs Revenue Regulations 7-95, as amended, or the "Consolidated
Value-Added Tax Regulations" provide:
Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which
is a taxable transaction for VAT purposes, shall not result in any output tax. However,
the input tax on his purchases of goods, properties or services related to such zerorated sale shall be available as tax credit or refund in accordance with these
regulations.
The following sales by VAT-registered persons shall be subject to 0%:
(a) Export Sales
"Export Sales" shall mean
...
(5) Those considered export sales under Articles 23 and 77 of Executive
Order No. 226, otherwise known as the Omnibus Investments Code of 1987,
and other special laws, e.g. Republic Act No. 7227, otherwise known as the
Bases Conversion and Development Act of 1992.
...

(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No.
7227 duly registered and accredited enterprises with Subic Bay Metropolitan
Authority (SBMA) and Clark Development Authority (CDA), R. A. No. 7916,
Philippine Economic Zone Authority (PEZA), or international agreements, e.g. Asian
Development Bank (ADB), International Rice Research Institute (IRRI), etc. to which
the Philippines is a signatory effectively subject such sales to zero-rate."
Since the transaction is deemed a zero-rated sale, petitioners supplier may claim an Input
VAT credit with no corresponding Output VAT liability. Congruently, no Output VAT may be
passed on to the petitioner.
On the second issue, it may not be amiss to re-emphasize that the petitioner is registered
as a NON-VAT taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not
allowed any tax credit on VAT (input tax) previously paid. In fine, even if we are to assume
that exemption from the burden of VAT on petitioners purchases did exist, petitioner is still
not entitled to any tax credit or refund on the input tax previously paid as petitioner is an
exempt VAT taxpayer.
Rather, it is the petitioners suppliers who are the proper parties to claim the tax credit and
accordingly refund the petitioner of the VAT erroneously passed on to the latter.
Accordingly, we find that the Court of Appeals did not commit any reversible error of law in
holding that petitioners VAT exemption under Rep. Act No. 7227 is limited to the VAT on
which it is directly liable as a seller and hence, it cannot claim any refund or exemption for
any input VAT it paid, if any, on its purchases of raw materials and supplies.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3,
2001, of the Court of Appeals in CA-G.R. SP No. 62823, as well as its Resolution of
December 19, 2001 are AFFIRMED. No pronouncement as to costs.
SO ORDERED.

G.R. No. 125355

March 30, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES
CORPORATION, respondents.
PARDO, J.:
What is before the Court is a petition for review on certiorari of the decision of the Court of
Appeals,1 reversing that of the Court of Tax Appeals,2 which affirmed with modification the
decision of the Commissioner of Internal Revenue ruling that Commonwealth Management
and Services Corporation, is liable for value added tax for services to clients during taxable
year 1988.

Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a

corporation duly organized and existing under the laws of the Philippines. It is an affiliate of
Philippine American Life Insurance Co. (Philamlife), organized by the letter to perform
collection, consultative and other technical services, including functioning as an internal
auditor, of Philamlife and its other affiliates.
1wphi1.nt

On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to
private respondent COMASERCO for deficiency value-added tax (VAT) amounting to
P351,851.01, for taxable year 1988, computed as follows:
Taxable sale/receipt
10% tax due thereon
25% surcharge
20% interest per annum
Compromise penalty for late payment
TOTAL AMOUNT DUE AND COLLECTIBLE

P1,679,155.00
============
167,915.50
41,978.88
125,936.63
16,000.00
P351,831.01
============

COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a
net loss in its operations in the amount of P6,077.00.
On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the
latter's finding of deficiency VAT. On August 20, 1992, the Commissioner of Internal
Revenue sent a collection letter to COMASERCO demanding payment of the deficiency
VAT.
On September 29, 1992, COMASERCO filed with the Court of Tax Appeals 4 a petition for
review contesting the Commissioner's assessment. COMASERCO asserted that the
services it rendered to Philamlife and its affiliates, relating to collections, consultative and
other technical assistance, including functioning as an internal auditor, were on a "no-profit,
reimbursement-of-cost-only" basis. It averred that it was not engaged in the business of
providing services to Philamlife and its affiliates. COMASERCO was established to ensure
operational orderliness and administrative efficiency of Philamlife and its affiliates, and not
in the sale of services. COMASERCO stressed that it was not profit-motivated, thus not
engaged in business. In fact, it did not generate profit but suffered a net loss in taxable year
1988. COMASERCO averred that since it was not engaged in business, it was not liable to
pay VAT.
On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner
of Internal Revenue, the dispositive portion of which reads:
WHEREFORE, the decision of the Commissioner of Internal Revenue assessing
petitioner deficiency value-added tax for the taxable year 1988 is AFFIRMED with

slight modifications. Accordingly, petitioner is ordered to pay respondent

Commissioner of Internal Revenue the amount of P335,831.01 inclusive of the 25%
surcharge and interest plus 20% interest from January 24, 1992 until fully paid
pursuant to Section 248 and 249 of the Tax Code.
The compromise penalty of P16,000.00 imposed by the respondent in her
assessment letter shall not be included in the payment as there was no compromise
agreement entered into between petitioner and respondent with respect to the valueadded tax deficiency.5
On July 26, 1995, respondent filed with the Court of Appeals, a petition for review of the
decision of the Court of Appeals.
After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing
that of the Court of Tax Appeals, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING
and SETTING ASIDE the questioned Decision promulgated on 22 June 1995. The
assessment for deficiency value-added tax for the taxable year 1988 inclusive of
surcharge, interest and penalty charges are ordered CANCELLED for lack of legal
and factual basis. 6
The Court of Appeals anchored its decision on the ratiocination in another tax case involving
the same parties,7where it was held that COMASERCO was not liable to pay fixed and
contractor's tax for services rendered to Philamlife and its affiliates. The Court of Appeals, in
that case, reasoned that COMASERCO was not engaged in business of providing services
to Philamlife and its affiliates. In the same manner, the Court of Appeals held that
COMASERCO was not liable to pay VAT for it was not engaged in the business of selling
services.
On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition for
review on certiorariassailing the decision of the Court of Appeals.
On August 7, 1996, we required respondent COMASERCO to file comment on the petition,
and on September 26, 1996, COMASERCO complied with the resolution. 8
We give due course to the petition.
At issue in this case is whether COMASERCO was engaged in the sale of services, and
thus liable to pay VAT thereon.
Petitioner avers that to "engage in business" and to "engage in the sale of services" are two
different things. Petitioner maintains that the services rendered by COMASERCO to
Philamlife and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on the
value added by the performance of the service. It is immaterial whether profit is derived
from rendering the service.
We agree with the Commissioner.

Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E.
O.) No. 273 in 1988, provides that:
Sec. 99. Persons liable. Any person who, in the course of trade or business, sells,
barters or exchanges goods, renders services, or engages in similar transactions
and any person who, imports goods shall be subject to the value-added tax (VAT)
imposed in Sections 100 to 102 of this Code. 9
COMASERCO contends that the term "in the course of trade or business" requires that the
"business" is carried on with a view to profit or livelihood. It avers that the activities of the
entity must be profit-oriented. COMASERCO submits that it is not motivated by profit, as
defined by its primary purpose in the articles of incorporation, stating that it is operating
"only on reimbursement-of-cost basis, without any profit." Private respondent argues that
profit motive is material in ascertaining who to tax for purposes of determining liability for
VAT.
We disagree.
On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law
(EVAT), amending among other sections, Section 99 of the Tax Code. On January 1, 1998,
Republic Act 8424, the National Internal Revenue Code of 1997, took effect. The amended
law provides that:
Sec. 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 and 108 of this Code.
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 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 organization (irrespective of the disposition of its net income and whether
or not it sells exclusively to members of their guests), or government entity.
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.
Contrary to COMASERCO's contention the above provision clarifies that even a nonstock, non-profit, organization or government entity, is liable to pay VAT on the sale of goods
or services. VAT is a tax on transactions, imposed at every stage of the distribution process
on the sale, barter, exchange of goods or property, and on the performance of services,
even in the absence of profit attributable thereto. The term "in the course of trade or

business" requires the regular conduct or pursuit of a commercial or an economic activity

regardless of whether or not the entity is profit-oriented.
The definition of the term "in the course of trade or business" present law applies to all
transactions even to those made prior to its enactment. Executive Order No. 273 stated that
any person who, in the course of trade or business, sells, barters or exchanges goods and
services, was already liable to pay VAT. The present law merely stresses that even a
nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of
goods and services.
Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase "sale of
services" as the "performance of all kinds of services for others for a fee, remuneration or
consideration." It includes "the supply of technical advice, assistance or services rendered
in connection with technical management or administration of any scientific, industrial or
commercial undertaking or project." 11
On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 01098 12 emphasizing that a domestic corporation that provided technical, research,
management and technical assistance to its affiliated companies and received payments on
a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT
on services rendered. In fact, even if such corporation was organized without any intention
realizing profit, any income or profit generated by the entity in the conduct of its activities
was subject to income tax.
Hence, it is immaterial whether the primary purpose of a corporation indicates that it
receives payments for services rendered to its affiliates on a reimbursement-on-cost basis
only, without realizing profit, for purposes of determining liability for VAT on services
rendered. As long as the entity provides service for a fee, remuneration or consideration,
then the service rendered is subject to VAT.
1awp++i1

At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that allow
exemptions are construed strictly against the grantee and liberally in favor of the
government. Otherwise stated, any exemption from the payment of a tax must be clearly
stated in the language of the law; it cannot be merely implied therefrom. 13 In the case of
VAT, Section 109, Republic Act 8424 clearly enumerates the transactions exempted from
VAT. The services rendered by COMASERCO do not fall within the exemptions.
Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled
that the services rendered by COMASERCO to Philamlife and its affiliates are subject to
VAT. As pointed out by the Commissioner, the performance of all kinds of services for others
for a fee, remuneration or consideration is considered as sale of services subject to VAT. As
the government agency charged with the enforcement of the law, the opinion of the
Commissioner of Internal Revenue, in the absence of any showing that it is plainly wrong, is
entitled to great weight. 14 Also, it has been the long standing policy and practice of this
Court to respect the conclusions of quasi-judicial agencies, such as the Court of Tax
Appeals which, by the nature of its functions, is dedicated exclusively to the study and
consideration of tax cases and has necessarily developed an expertise on the subject,
unless there has been an abuse or improvident exercise of its authority. 15

There is no merit to respondent's contention that the Court of Appeals' decision in CA-G.R.
No. 34042, declaring the COMASERCO as not engaged in business and not liable for the
payment of fixed and percentage taxes, binds petitioner. The issue in CA-G.R. No. 34042 is
different from the present case, which involves COMASERCO's liability for VAT. As
heretofore stated, every person who sells, barters, or exchanges goods and services, in the
course of trade or business, as defined by law, is subject to VAT.
WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the Court of
Appeals in CA-G.R. SP No. 37930. The Court hereby REINSTATES the decision of the
Court of Tax Appeals in C. T. A. Case No. 4853.
No costs.
SO ORDERED.

1wphi1.nt

G.R. No. 146984

July 28, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE
MARDEN GROUP (HK) and NATIONAL DEVELOPMENT COMPANY, respondents.
DECISION
TINGA, J.:
The issue in this present petition is whether the sale by the National Development Company
(NDC) of five (5) of its vessels to the private respondents is subject to value-added tax
(VAT) under the National Internal Revenue Code of 1986 (Tax Code) then prevailing at the
time of the sale. The Court of Tax Appeals (CTA) and the Court of Appeals commonly ruled
that the sale is not subject to VAT. We affirm, though on a more unequivocal rationale than
that utilized by the rulings under review. The fact that the sale was not in the course of the
trade or business of NDC is sufficient in itself to declare the sale as outside the coverage of
VAT.
The facts are culled primarily from the ruling of the CTA.
Pursuant to a government program of privatization, NDC decided to sell to private
enterprise all of its shares in its wholly-owned subsidiary the National Marine Corporation
(NMC). The NDC decided to sell in one lot its NMC shares and five (5) of its ships, which
are 3,700 DWT Tween-Decker, "Kloeckner" type vessels. 1 The vessels were constructed for
the NDC between 1981 and 1984, then initially leased to Luzon Stevedoring Company, also
its wholly-owned subsidiary. Subsequently, the vessels were transferred and leased, on a
bareboat basis, to the NMC.2

The NMC shares and the vessels were offered for public bidding. Among the stipulated
terms and conditions for the public auction was that the winning bidder was to pay "a value
added tax of 10% on the value of the vessels." 3On 3 June 1988, private respondent
Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the shares and the vessels
for P168,000,000.00. The bid was made by Magsaysay Lines, purportedly for a new
company still to be formed composed of itself, Baliwag Navigation, Inc., and FIM Limited of
the Marden Group based in Hongkong (collectively, private respondents). 4 The bid was
approved by the Committee on Privatization, and a Notice of Award dated 1 July 1988 was
issued to Magsaysay Lines.
On 28 September 1988, the implementing Contract of Sale was executed between NDC, on
one hand, and Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other.
Paragraph 11.02 of the contract stipulated that "[v]alue-added tax, if any, shall be for the
account of the PURCHASER."5 Per arrangement, an irrevocable confirmed Letter of Credit
previously filed as bidders bond was accepted by NDC as security for the payment of VAT, if
any. By this time, a formal request for a ruling on whether or not the sale of the vessels was
subject to VAT had already been filed with the Bureau of Internal Revenue (BIR) by the law
firm of Sycip Salazar Hernandez & Gatmaitan, presumably in behalf of private respondents.
Thus, the parties agreed that should no favorable ruling be received from the BIR, NDC was
authorized to draw on the Letter of Credit upon written demand the amount needed for the
payment of the VAT on the stipulated due date, 20 December 1988. 6
In January of 1989, private respondents through counsel received VAT Ruling No. 568-88
dated 14 December 1988 from the BIR, holding that the sale of the vessels was subject to
the 10% VAT. The ruling cited the fact that NDC was a VAT-registered enterprise, and thus
its "transactions incident to its normal VAT registered activity of leasing out personal
property including sale of its own assets that are movable, tangible objects which are
appropriable or transferable are subject to the 10% [VAT]." 7
Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as
VAT Ruling No. 395-88 (dated 18 August 1988), which made a similar ruling on the sale of
the same vessels in response to an inquiry from the Chairman of the Senate Blue Ribbon
Committee. Their motion was denied when the BIR issued VAT Ruling Nos. 007-89 dated
24 February 1989, reiterating the earlier VAT rulings. At this point, NDC drew on the Letter
of Credit to pay for the VAT, and the amount of P15,120,000.00 in taxes was paid on 16
March 1989.
On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA,
followed by a Supplemental Petition for Review on 14 July 1989. They prayed for the
reversal of VAT Rulings No. 395-88, 568-88 and 007-89, as well as the refund of the VAT
payment made amounting to P15,120,000.00.8 The Commissioner of Internal Revenue
(CIR) opposed the petition, first arguing that private respondents were not the real parties in
interest as they were not the transferors or sellers as contemplated in Sections 99 and 100
of the then Tax Code. The CIR also squarely defended the VAT rulings holding the sale of
the vessels liable for VAT, especially citing Section 3 of Revenue Regulation No. 5-87 (R.R.
No. 5-87), which provided that "[VAT] is imposed on any sale or transactions deemed sale
of taxable goods (including capital goods, irrespective of the date of acquisition)." The CIR
argued that the sale of the vessels were among those transactions "deemed sale," as

enumerated in Section 4 of R.R. No. 5-87. It seems that the CIR particularly emphasized
Section 4(E)(i) of the Regulation, which classified "change of ownership of business" as a
circumstance that gave rise to a transaction "deemed sale."
In a Decision dated 27 April 1992, the CTA rejected the CIRs arguments and granted the
petition.9 The CTA ruled that the sale of a vessel was an "isolated transaction," not done in
the ordinary course of NDCs business, and was thus not subject to VAT, which under
Section 99 of the Tax Code, was applied only to sales in the course of trade or business.
The CTA further held that the sale of the vessels could not be "deemed sale," and thus
subject to VAT, as the transaction did not fall under the enumeration of transactions deemed
sale as listed either in Section 100(b) of the Tax Code, or Section 4 of R.R. No. 5-87. Finally,
the CTA ruled that any case of doubt should be resolved in favor of private respondents
since Section 99 of the Tax Code which implemented VAT is not an exemption provision, but
a classification provision which warranted the resolution of doubts in favor of the taxpayer.
The CIR appealed the CTA Decision to the Court of Appeals, 10 which on 11 March 1997,
rendered a Decision reversing the CTA.11 While the appellate court agreed that the sale was
an isolated transaction, not made in the course of NDCs regular trade or business, it
nonetheless found that the transaction fell within the classification of those "deemed sale"
under R.R. No. 5-87, since the sale of the vessels together with the NMC shares brought
about a change of ownership in NMC. The Court of Appeals also applied the principle
governing tax exemptions that such should be strictly construed against the taxpayer, and
liberally in favor of the government.12
However, the Court of Appeals reversed itself upon reconsidering the case, through a
Resolution dated 5 February 2001.13 This time, the appellate court ruled that the "change of
ownership of business" as contemplated in R.R. No. 5-87 must be a consequence of the
"retirement from or cessation of business" by the owner of the goods, as provided for in
Section 100 of the Tax Code. The Court of Appeals also agreed with the CTA that the
classification of transactions "deemed sale" was a classification statute, and not an
exemption statute, thus warranting the resolution of any doubt in favor of the taxpayer. 14
To the mind of the Court, the arguments raised in the present petition have already been
adequately discussed and refuted in the rulings assailed before us. Evidently, the petition
should be denied. Yet the Court finds that Section 99 of the Tax Code is sufficient reason for
upholding the refund of VAT payments, and the subsequent disquisitions by the lower courts
on the applicability of Section 100 of the Tax Code and Section 4 of R.R. No. 5-87 are
ultimately irrelevant.
A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on
consumption, even though it is assessed on many levels of transactions on the basis of a
fixed percentage.15 It is the end user of consumer goods or services which ultimately
shoulders the tax, as the liability therefrom is passed on to the end users by the providers of
these goods or services16 who in turn may credit their own VAT liability (or input VAT) from
the VAT payments they receive from the final consumer (or output VAT). 17 The final
purchase by the end consumer represents the final link in a production chain that itself
involves several transactions and several acts of consumption. The VAT system assures
fiscal adequacy through the collection of taxes on every level of consumption, 18 yet

assuages the manufacturers or providers of goods and services by enabling them to pass
on their respective VAT liabilities to the next link of the chain until finally the end consumer
shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears
direct relevance to the taxpayers role or link in the production chain. Hence, as affirmed by
Section 99 of the Tax Code and its subsequent incarnations, 19 the tax is levied only on the
sale, barter or exchange of goods or services by persons who engage in such activities, in
the course of trade or business. These transactions outside the course of trade or
business may invariably contribute to the production chain, but they do so only as a matter
of accident or incident. As the sales of goods or services do not occur within the course of
trade or business, the providers of such goods or services would hardly, if at all, have the
opportunity to appropriately credit any VAT liability as against their own accumulated VAT
collections since the accumulation of output VAT arises in the first place only through the
ordinary course of trade or business.
That the sale of the vessels was not in the ordinary course of trade or business of NDC was
appreciated by both the CTA and the Court of Appeals, the latter doing so even in its first
decision which it eventually reconsidered.20We cite with approval the CTAs explanation on
this point:
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30,
1955 (97 Phil. 992), the term "carrying on business" does not mean the performance
of a single disconnected act, but means conducting, prosecuting and continuing
business by performing progressively all the acts normally incident thereof; while
"doing business" conveys the idea of business being done, not from time to time,
but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE
(WITH ANNOTATIONS), p. 608-9 (1988)]. "Course of business" is what is usually
done in the management of trade or business. [Idmi v. Weeks & Russel, 99 So.
761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].
What is clear therefore, based on the aforecited jurisprudence, is that "course of
business" or "doing business" connotes regularity of activity. In the instant case, the
sale was an isolated transaction. The sale which was involuntary and made pursuant
to the declared policy of Government for privatization could no longer be repeated or
carried on with regularity. It should be emphasized that the normal VAT-registered
activity of NDC is leasing personal property.21
This finding is confirmed by the Revised Charter 22 of the NDC which bears no indication that
the NDC was created for the primary purpose of selling real property.23
The conclusion that the sale was not in the course of trade or business, which the CIR does
not dispute before this Court,24 should have definitively settled the matter. Any sale, barter or
exchange of goods or services not in the course of trade or business is not subject to
VAT.
Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now
relied upon by the CIR, is captioned "Value-added tax on sale of goods," and it expressly

states that "[t]here shall be levied, assessed and collected on every sale, barter or
exchange of goods, a value added tax x x x." Section 100 should be read in light of Section
99, which lays down the general rule on which persons are liable for VAT in the first place
and on what transaction if at all. It may even be noted that Section 99 is the very first
provision in Title IV of the Tax Code, the Title that covers VAT in the law. Before any portion
of Section 100, or the rest of the law for that matter, may be applied in order to subject a
transaction to VAT, it must first be satisfied that the taxpayer and transaction involved is
liable for VAT in the first place under Section 99.
It would have been a different matter if Section 100 purported to define the phrase "in the
course of trade or business" as expressed in Section 99. If that were so, reference to
Section 100 would have been necessary as a means of ascertaining whether the sale of the
vessels was "in the course of trade or business," and thus subject to
VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87
elaborate on is not the meaning of "in the course of trade or business," but instead the
identification of the transactions which may be deemed as sale. It would become necessary
to ascertain whether under those two provisions the transaction may be deemed a sale,
only if it is settled that the transaction occurred in the course of trade or business in the first
place. If the transaction transpired outside the course of trade or business, it would be
irrelevant for the purpose of determining VAT liability whether the transaction may be
deemed sale, since it anyway is not subject to VAT.
Accordingly, the Court rules that given the undisputed finding that the transaction in
question was not made in the course of trade or business of the seller, NDC that is, the sale
is not subject to VAT pursuant to Section 99 of the Tax Code, no matter how the said sale
may hew to those transactions deemed sale as defined under Section 100.
In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in
this case, the Court finds the discussions offered on this point by the CTA and the Court of
Appeals (in its subsequent Resolution) essentially correct. Section 4 (E)(i) of R.R. No. 5-87
does classify as among the transactions deemed sale those involving "change of ownership
of business." However, Section 4(E) of R.R. No. 5-87, reflecting Section 100 of the Tax
Code, clarifies that such "change of ownership" is only an attending circumstance to
"retirement from or cessation of business[, ] with respect to all goods on hand [as] of the
date of such retirement or cessation."25Indeed, Section 4(E) of R.R. No. 5-87 expressly
characterizes the "change of ownership of business" as only a "circumstance" that attends
those transactions "deemed sale," which are otherwise stated in the same section. 26
WHEREFORE, the petition is DENIED. No costs.
SO ORDERED.

G.R. No. 193301

March 11, 2013

MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
x-----------------------x
G.R. No. 194637
MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CARPIO, J.:
G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on 10 March
2010 as well as the Resolution3 promulgated on 28 July 2010 by the Court of Tax Appeals
En Banc (CTA En Banc) in CTA EB No. 513. The CTA En Banc affirmed the 22 September
2008 Decision4 as well as the 26 June 2009 Amended Decision5 of the First Division of the
Court of Tax Appeals (CTA First Division) in CTA Case Nos. 7227, 7287, and 7317. The CTA
First Division denied Mindanao II Geothermal Partnerships (Mindanao II) claims for refund
or tax credit for the first and second quarters of taxable year 2003 for being filed out of time
(CTA Case Nos. 7227 and 7287). The CTA First Division, however, ordered the
Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II unutilized input
value-added tax (VAT) for the third and fourth quarters of taxable year 2003 (CTA Case No.
7317).
G.R. No. 194637 is a petition for review6 assailing the Decision7 promulgated on 31 May
2010 as well as the Amended Decision8 promulgated on 24 November 2010 by the CTA En
Banc in CTA EB Nos. 476 and 483. In its Amended Decision, the CTA En Banc reversed its
31 May 2010 Decision and granted the CIRs petition for review in CTA Case No. 476. The
CTA En Banc denied Mindanao I Geothermal Partnerships (Mindanao I) claims for refund
or tax credit for the first (CTA Case No. 7228), second (CTA Case No. 7286), third, and
fourth quarters (CTA Case No. 7318) of 2003.
Both Mindanao I and II are partnerships registered with the Securities and Exchange
Commission, value added taxpayers registered with the Bureau of Internal Revenue (BIR),
and Block Power Production Facilities accredited by the Department of Energy. Republic
Act No. 9136, or the Electric Power Industry Reform Act of 2000 (EPIRA), effectively
amended Republic Act No. 8424, or the Tax Reform Act of 1997 (1997 Tax Code), 9 when it
decreed that sales of power by generation companies shall be subjected to a zero rate of
VAT.10 Pursuant to EPIRA, Mindanao I and II filed with the CIR claims for refund or tax credit
of accumulated unutilized and/or excess input taxes due to VAT zero-rated sales in 2003.
Mindanao I and II filed their claims in 2005.

G.R. No. 193301

Mindanao II v. CIR
The Facts
G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227, 7287, and
7317, which were consolidated as CTA EB No. 513. CTA Case Nos. 7227, 7287, and 7317
claim a tax refund or credit of Mindanao IIs alleged excess or unutilized input taxes due to
VAT zero-rated sales. In CTA Case No. 7227, Mindanao II claims a tax refund or credit
of P3,160,984.69 for the first quarter of 2003. In CTA Case No. 7287, Mindanao II claims a
tax refund or credit of P1,562,085.33 for the second quarter of 2003. In CTA Case No. 7317,
Mindanao II claims a tax refund or credit of P3,521,129.50 for the third and fourth quarters
of 2003.
The CTA First Divisions narration of the pertinent facts is as follows:
xxxx
On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-Transfer
(BOT) contract with the Philippine National Oil Corporation Energy Development
Company (PNOC-EDC) for finance, engineering, supply, installation, testing,
commissioning, operation, and maintenance of a 48.25 megawatt geothermal power plant,
provided that PNOC-EDC shall supply and deliver steam to Mindanao II at no cost. In turn,
Mindanao II shall convert the steam into electric capacity and energy for PNOC-EDC and
shall deliver the same to the National Power Corporation (NPC) for and in behalf of PNOCEDC. Mindanao II alleges that its sale of generated power and delivery of electric capacity
and energy of Mindanao II to NPC for and in behalf of PNOC-EDC is its only revenuegenerating activity which is in the ambit of VAT zero-rated sales under the EPIRA Law, x x x.
xxxx
Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable to sales of
generated power by generation companies from ten (10%) percent to zero (0%) percent.
In the course of its operation, Mindanao II makes domestic purchases of goods and
services and accumulates therefrom creditable input taxes. Pursuant to the provisions of the
National Internal Revenue Code (NIRC), Mindanao II alleges that it can use its accumulated
input tax credits to offset its output tax liability. Considering, however that its only revenuegenerating activity is VAT zero-rated under RA No. 9136, Mindanao IIs input tax credits
remain unutilized.
Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II adopted the VAT
zero-rating of the EPIRA in computing for its VAT payable when it filed its Quarterly VAT
Returns on the following dates:
CTA Case No.

Period Covered
(2003)

Date of Filing
Original Return

Amended Return

7227

1st Quarter

April 23, 2003

July 3, 2002 (sic),

April 1, 2004 &
October 22, 2004

7287

2nd Quarter

July 22, 2003

April 1, 2004

7317

3rd Quarter

Oct. 27, 2003

April 1, 2004

7317

4th Quarter

Jan. 26, 2004

April 1, 2204

Considering that it has accumulated unutilized creditable input taxes from its only incomegenerating activity, Mindanao II filed an application for refund and/or issuance of tax credit
certificate with the BIRs Revenue District Office at Kidapawan City on April 13, 2005 for the
four quarters of 2003.
To date (September 22, 2008), the application for refund by Mindanao II remains unacted
upon by the CIR. Hence, these three petitions filed on April 22, 2005 covering the 1st
quarter of 2003; July 7, 2005 for the 2nd quarter of 2003; and September 9, 2005 for the 3rd
and 4th quarters of 2003. At the instance of Mindanao II, these petitions were consolidated
on March 15, 2006 as they involve the same parties and the same subject matter. The only
difference lies with the taxable periods involved in each petition. 11
The Court of Tax Appeals Ruling: Division
In its 22 September 2008 Decision,12 the CTA First Division found that Mindanao II satisfied
the twin requirements for VAT zero rating under EPIRA: (1) it is a generation company, and
(2) it derived sales from power generation. The CTA First Division also stated that Mindanao
II complied with five requirements to be entitled to a refund:
1. There must be zero-rated or effectively zero-rated sales;
2. That input taxes were incurred or paid;
3. That such input VAT payments are directly attributable to zero-rated sales or
effectively zero-rated sales;
4. That the input VAT payments were not applied against any output VAT liability; and
5. That the claim for refund was filed within the two-year prescriptive period. 13
With respect to the fifth requirement, the CTA First Division tabulated the dates of filing of
Mindanao IIs return as well as its administrative and judicial claims, and concluded that
Mindanao IIs administrative and judicial claims were timely filed in compliance with this
Courts ruling in Atlas Consolidated Mining and Development Corporation v. Commissioner
of Internal Revenue (Atlas).14 The CTA First Division declared that the two-year prescriptive
period for filing a VAT refund claim should not be counted from the close of the quarter but
from the date of the filing of the VAT return. As ruled in Atlas, VAT liability or entitlement to a
refund can only be determined upon the filing of the quarterly VAT return.

CTA
Case
No.

Period
Covered
(2003)

Date Filing
Original
Return

Amended Administrative
Return
Return

Judicial
Claim

7227

1st
Quarter

23 April
2003

1 April
2004

13 April 2005

22 April
2005

7287

2nd
Quarter

22 July
2003

1 April
2004

13 April 2005

7 July
2005

7317

3rd
Quarter

25 Oct.
2003

1 April
2004

13 April 2005

9 Sept.
2005

7317

4th
Quarter

26 Jan.
2004

1 April
2004

13 April 2005

9 Sept.
200515

Thus, counting from 23 April 2003, 22 July 2003, 25 October 2003, and 26 January 2004,
when Mindanao II filed its VAT returns, its administrative claim filed on 13 April 2005 and
judicial claims filed on 22 April 2005, 7 July 2005, and 9 September 2005 were timely filed in
accordance with Atlas.
The CTA First Division found that Mindanao II is entitled to a refund in the modified amount
of P7,703,957.79, after disallowing P522,059.91 from input VAT16 and deducting P18,181.82
from Mindanao IIs sale of a fully depreciated P200,000.00 Nissan Patrol. The input taxes
amounting to P522,059.91 were disallowed for failure to meet invoicing requirements, while
the input VAT on the sale of the Nissan Patrol was reduced by P18,181.82 because the
output VAT for the sale was not included in the VAT declarations.
The dispositive portion of the CTA First Divisions 22 September 2008 Decision reads:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the
CIR is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE in the
modified amount of SEVEN MILLION SEVEN HUNDRED THREE THOUSAND NINE
HUNDRED FIFTY SEVEN AND 79/100 PESOS (P7,703,957.79) representing its unutilized
input VAT for the four (4) quarters of the taxable year 2003.
SO ORDERED.17
Mindanao II filed a motion for partial reconsideration. 18 It stated that the sale of the fully
depreciated Nissan Patrol is a one-time transaction and is not incidental to its VAT zerorated operations. Moreover, the disallowed input taxes substantially complied with the
requirements for refund or tax credit.
The CIR also filed a motion for partial reconsideration. It argued that the judicial claims for
the first and second quarters of 2003 were filed beyond the period allowed by law, as stated
in Section 112(A) of the 1997 Tax Code. The CIR further stated that Section 229 is a
general provision, and governs cases not covered by Section 112(A). The CIR countered
the CTA First Divisions 22 September 2008 decision by citing this Courts ruling in
Commisioner of Internal Revenue v. Mirant Pagbilao Corporation (Mirant), 19 which stated

that unutilized input VAT payments must be claimed within two years reckoned from the
close of the taxable quarter when the relevant sales were made regardless of whether said
tax was paid.
The CTA First Division denied Mindanao IIs motion for partial reconsideration, found the
CIRs motion for partial reconsideration partly meritorious, and rendered an Amended
Decision20 on 26 June 2009. The CTA First Division stated that the claim for refund or credit
with the BIR and the subsequent appeal to the CTA must be filed within the two-year period
prescribed under Section 229. The two-year prescriptive period in Section 229 was
denominated as a mandatory statute of limitations. Therefore, Mindanao IIs claims for
refund for the first and second quarters of 2003 had already prescribed.
The CTA First Division found that the records of Mindanao IIs case are bereft of evidence
that the sale of the Nissan Patrol is not incidental to Mindanao IIs VAT zero-rated
operations. Moreover, Mindanao IIs submitted documents failed to substantiate the
requisites for the refund or credit claims.
The CTA First Division modified its 22 September 2008 Decision to read as follows:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the
CIR is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE to
Mindanao II Geothermal Partnership in the modified amount of TWO MILLION NINE
HUNDRED EIGHTY THOUSAND EIGHT HUNDRED EIGHTY SEVEN AND 77/100 PESOS
(P2,980,887.77) representing its unutilized input VAT for the third and fourth quarters of the
taxable year 2003.
SO ORDERED.21
Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513, before the CTA En
Banc.
The Court of Tax Appeals Ruling: En Banc
On 10 March 2010, the CTA En Banc rendered its Decision 23 in CTA EB No. 513 and denied
Mindanao IIs petition. The CTA En Banc ruled that (1) Section 112(A) clearly provides that
the reckoning of the two-year prescriptive period for filing the application for refund or credit
of input VAT attributable to zero-rated sales or effectively zero-rated sales shall be counted
from the close of the taxable quarter when the sales were made; (2) the Atlas and Mirant
cases applied different tax codes: Atlas applied the 1977 Tax Code while Mirant applied the
1997 Tax Code; (3) the sale of the fully-depreciated Nissan Patrol is incidental to Mindanao
IIs VAT zero-rated transactions pursuant to Section 105; (4) Mindanao II failed to comply
with the substantiation requirements provided under Section 113(A) in relation to Section
237 of the 1997 Tax Code as implemented by Section 4.104-1, 4.104-5, and 4.108-1 of
Revenue Regulation No. 7-95; and (5) the doctrine of strictissimi juris on tax exemptions
cannot be relaxed in the present case.
The dispositive portion of the CTA En Bancs 10 March 2010 Decision reads:

WHEREFORE, on the basis of the foregoing considerations, the Petition for Review en
banc is DISMISSED for lack of merit. Accordingly, the Decision dated September 22, 2008
and the Amended Decision dated June 26, 2009 issued by the First Division are
AFFIRMED.
SO ORDERED.24
The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack of merit Mindanao
IIs Motion for Reconsideration.26 The CTA En Banc highlighted the following bases of their
previous ruling:
1. The Supreme Court has long decided that the claim for refund of unutilized input
VAT must be filed within two (2) years after the close of the taxable quarter when
such sales were made.
2. The Supreme Court is the ultimate arbiter whose decisions all other courts should
take bearings.
3. The words of the law are clear, plain, and free from ambiguity; hence, it must be
given its literal meaning and applied without any interpretation. 27
G.R. No. 194637
Mindanao I v. CIR
The Facts
G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case Nos. 476
and 483. Both CTA EB cases consolidate three cases from the CTA Second Division: CTA
Case Nos. 7228, 7286, and 7318. CTA Case Nos. 7228, 7286, and 7318 claim a tax refund
or credit of Mindanao Is accumulated unutilized and/or excess input taxes due to VAT zerorated sales. In CTA Case No. 7228, Mindanao I claims a tax refund or credit
ofP3,893,566.14 for the first quarter of 2003. In CTA Case No. 7286, Mindanao I claims a
tax refund or credit ofP2,351,000.83 for the second quarter of 2003. In CTA Case No. 7318,
Mindanao I claims a tax refund or credit ofP7,940,727.83 for the third and fourth quarters of
2003.
Mindanao I is similarly situated as Mindanao II. The CTA Second Divisions narration of the
pertinent facts is as follows:
xxxx
In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer (BOT) with
the Philippine National Oil Corporation Energy Development Corporation (PNOC-EDC) for
the finance, design, construction, testing, commissioning, operation, maintenance and
repair of a 47-megawatt geothermal power plant. Under the said BOT contract, PNOC-EDC
shall supply and deliver steam to Mindanao I at no cost. In turn, Mindanao I will convert the
steam into electric capacity and energy for PNOC-EDC and shall subsequently supply and
deliver the same to the National Power Corporation (NPC), for and in behalf of PNOC-EDC.

Mindanao Is 47-megawatt geothermal power plant project has been accredited by the
Department of Energy (DOE) as a Private Sector Generation Facility, pursuant to the
provision of Executive Order No. 215, wherein Certificate of Accreditation No. 95-037 was
issued.
On June 26, 2001, Republic Act (R.A.) No. 9136 took effect, and the relevant provisions of
the National Internal Revenue Code (NIRC) of 1997 were deemed modified. R.A. No. 9136,
also known as the "Electric Power Industry Reform Act of 2001 (EPIRA), was enacted by
Congress to ordain reforms in the electric power industry, highlighting, among others, the
importance of ensuring the reliability, security and affordability of the supply of electric
power to end users. Under the provisions of this Republic Act and its implementing rules
and regulations, the delivery and supply of electric energy by generation companies
became VAT zero-rated, which previously were subject to ten percent (10%) VAT.
xxxx
The amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated
power by generation companies from ten (10%) percent to zero percent (0%). Thus,
Mindanao I adopted the VAT zero-rating of the EPIRA in computing for its VAT payable
when it filed its VAT Returns, on the belief that its sales qualify for VAT zero-rating.
Mindanao I reported its unutilized or excess creditable input taxes in its Quarterly VAT
Returns for the first, second, third, and fourth quarters of taxable year 2003, which were
subsequently amended and filed with the BIR.
On April 4, 2005, Mindanao I filed with the BIR separate administrative claims for the
issuance of tax credit certificate on its alleged unutilized or excess input taxes for taxable
year 2003, in the accumulated amount ofP14,185, 294.80.
Alleging inaction on the part of CIR, Mindanao I elevated its claims before this Court on April
22, 2005, July 7, 2005, and September 9, 2005 docketed as CTA Case Nos. 7228, 7286,
and 7318, respectively. However, on October 10, 2005, Mindanao I received a copy of the
letter dated September 30, 2003 (sic) of the BIR denying its application for tax
credit/refund.28
The Court of Tax Appeals Ruling: Division
On 24 October 2008, the CTA Second Division rendered its Decision 29 in CTA Case Nos.
7228, 7286, and 7318. The CTA Second Division found that (1) pursuant to Section 112(A),
Mindanao I can only claim 90.27% of the amount of substantiated excess input VAT
because a portion was not reported in its quarterly VAT returns; (2) out of
the P14,185,294.80 excess input VAT applied for refund, only P11,657,447.14 can be
considered substantiated excess input VAT due to disallowances by the Independent
Certified Public Accountant, adjustment on the disallowances per the CTA Second Divisions
further verification, and additional disallowances per the CTA Second Divisions further
verification;

(3) Mindanao Is accumulated excess input VAT for the second quarter of 2003 that was
carried over to the third quarter of 2003 is net of the claimed input VAT for the first quarter of
2003, and the same procedure was done for the second, third, and fourth quarters of 2003;
and (4) Mindanao Is administrative claims were filed within the two-year prescriptive period
reckoned from the respective dates of filing of the quarterly VAT returns.
The dispositive portion of the CTA Second Divisions 24 October 2008 Decision reads:
WHEREFORE, premises considered, the consolidated Petitions for Review are hereby
PARTIALLY GRANTED. Accordingly, the CIR is hereby ORDERED TO ISSUE A TAX
CREDIT CERTIFICATE in favor of Mindanao I in the reduced amount of TEN MILLION
FIVE HUNDRED TWENTY THREE THOUSAND ONE HUNDRED SEVENTY SEVEN
PESOS AND 53/100 (P10,523,177.53) representing Mindanao Is unutilized input VAT for
the four quarters of the taxable year 2003.
SO ORDERED.30
Mindanao I filed a motion for partial reconsideration with motion for Clarification 31 on 11
November 2008. It claimed that the CTA Second Division should not have allocated
proportionately Mindanao Is unutilized creditable input taxes for the taxable year 2003,
because the proportionate allocation of the amount of creditable taxes in Section 112(A)
applies only when the creditable input taxes due cannot be directly and entirely attributed to
any of the zero-rated or effectively zero-rated sales. Mindanao I claims that its unreported
collection is directly attributable to its VAT zero-rated sales. The CTA Second Division
denied Mindanao Is motion and maintained the proportionate allocation because there was
a portion of the gross receipts that was undeclared in Mindanao Is gross receipts.
The CIR also filed a motion for partial reconsideration 32 on 11 November 2008. It claimed
that Mindanao I failed to exhaust administrative remedies before it filed its petition for
review. The CTA Second Division denied the CIRs motion, and cited Atlas 33 as the basis for
ruling that it is more practical and reasonable to count the two-year prescriptive period for
filing a claim for refund or credit of input VAT on zero-rated sales from the date of filing of
the return and payment of the tax due.
The dispositive portion of the CTA Second Divisions 10 March 2009 Resolution reads:
WHEREFORE, premises considered, the CIRs Motion for Partial Reconsideration and
Mindanao Is Motion for Partial Reconsideration with Motion for Clarification are hereby
DENIED for lack of merit.
SO ORDERED.34
The Ruling of the Court of Tax Appeals: En Banc
On 31 May 2010, the CTA En Banc rendered its Decision 35 in CTA EB Case Nos. 476 and
483 and denied the petitions filed by the CIR and Mindanao I. The CTA En Banc found no
new matters which have not yet been considered and passed upon by the CTA Second
Division in its assailed decision and resolution.

The dispositive portion of the CTA En Bancs 31 May 2010 Decision reads:
WHEREFORE, premises considered, the Petitions for Review are hereby DISMISSED for
lack of merit. Accordingly, the October 24, 2008 Decision and March 10, 2009 Resolution of
the CTA Former Second Division in CTA Case Nos. 7228, 7286, and 7318, entitled
"Mindanao I Geothermal Partnership vs. Commissioner of Internal Revenue" are hereby
AFFIRMED in toto.
SO ORDERED.36
Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En Bancs 31
May 2010 Decision. In an Amended Decision promulgated on 24 November 2010, the CTA
En Banc agreed with the CIRs claim that Section 229 of the NIRC of 1997 is inapplicable in
light of this Courts ruling in Mirant. The CTA En Banc also ruled that the procedure
prescribed under Section 112(D) now 112(C) 37 of the 1997 Tax Code should be followed first
before the CTA En Banc can act on Mindanao Is claim. The CTA En Banc reconsidered its
31 May 2010 Decision in light of this Courts ruling in Commissioner of Internal Revenue v.
Aichi Forging Company of Asia, Inc. (Aichi).38
The pertinent portions of the CTA En Bancs 24 November 2010 Amended Decision read:
C.T.A. Case No. 7228:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns
for the First Quarter of 2003. Pursuant to Section 112(A) of the NIRC of 1997, as
amended, Mindanao I has two years from March 31, 2003 or until March 31, 2005
within which to file its administrative claim for refund;
(2) On April 4, 2005, Mindanao I applied for an administrative claim for refund of
unutilized input VAT for the first quarter of taxable year 2003 with the BIR, which is
beyond the two-year prescriptive period mentioned above.
C.T.A. Case No. 7286:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns
for the second quarter of 2003. Pursuant to
Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from
June 30, 2003, within which to file its administrative claim for refund for the second
quarter of 2003, or until June 30, 2005;
(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of
unutilized input VAT for the second quarter of taxable year 2003 with the BIR, which
is within the two-year prescriptive period, provided under Section 112 (A) of the
NIRC of 1997, as amended;

(3) The CIR has 120 days from April 4, 2005 (presumably the date Mindanao I
submitted the supporting documents together with the application for refund) or until
August 2, 2005, to decide the administrative claim for refund;
(4) Within 30 days from the lapse of the 120-day period or from August 3, 2005 to
September 1, 2005, Mindanao I should have elevated its claim for refund to the CTA
in Division;
(5) However, on July 7, 2005, Mindanao I filed its Petition for Review with this Court,
docketed as CTA Case No. 7286, even before the 120-day period for the CIR to
decide the claim for refund had lapsed on August 2, 2005. The Petition for Review
was, therefore, prematurely filed and there was failure to exhaust administrative
remedies;
xxxx
C.T.A. Case No. 7318:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns
for the third and fourth quarters of 2003. Pursuant to Section 112(A) of the NIRC of
1997, as amended, Mindanao I therefore, has two years from September 30, 2003
and December 31, 2003, or until September 30, 2005 and December 31, 2005,
respectively, within which to file its administrative claim for the third and fourth
quarters of 2003;
(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of
unutilized input VAT for the third and fourth quarters of taxable year 2003 with the
BIR, which is well within the two-year prescriptive period, provided under Section
112(A) of the NIRC of 1997, as amended;
(3) From April 4, 2005, which is also presumably the date Mindanao I submitted
supporting documents, together with the aforesaid application for refund, the CIR
has 120 days or until August 2, 2005, to decide the claim;
(4) Within thirty (30) days from the lapse of the 120-day period or from August 3,
2005 until September 1, 2005 Mindanao I should have elevated its claim for refund
to the CTA;
(5) However, Mindanao I filed its Petition for Review with the CTA in Division only on
September 9, 2005, which is 8 days beyond the 30-day period to appeal to the CTA.
Evidently, the Petition for Review was filed way beyond the 30-day prescribed period. Thus,
the Petition for Review should have been dismissed for being filed late.
In recapitulation:
(1) C.T.A. Case No. 7228

Claim for the first quarter of 2003 had already prescribed for having been filed
beyond the two-year prescriptive period;
(2) C.T.A. Case No. 7286
Claim for the second quarter of 2003 should be dismissed for Mindanao Is failure to
comply with a condition precedent when it failed to exhaust administrative remedies
by filing its Petition for Review even before the lapse of the 120-day period for the
CIR to decide the administrative claim;
(3) C.T.A. Case No. 7318
Petition for Review was filed beyond the 30-day prescribed period to appeal to the
CTA.
xxxx
IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenues Motion for
Reconsideration is hereby GRANTED; Mindanao Is Motion for Partial Reconsideration is
hereby DENIED for lack of merit.
The May 31, 2010 Decision of this Court En Banc is hereby REVERSED.
Accordingly, the Petition for Review of the Commissioner of Internal Revenue in CTA EB
No. 476 is hereby GRANTED and the entire claim of Mindanao I Geothermal Partnership for
the first, second, third and fourth quarters of 2003 is hereby DENIED.
SO ORDERED.39
The Issues
G.R. No. 193301
Mindanao II v. CIR
Mindanao II raised the following grounds in its Petition for Review:
I. The Honorable Court of Tax Appeals erred in holding that the claim of Mindanao II
for the 1st and 2nd quarters of year 2003 has already prescribed pursuant to the
Mirant case.
A. The Atlas case and Mirant case have conflicting interpretations of the law
as to the reckoning date of the two year prescriptive period for filing claims for
VAT refund.
B. The Atlas case was not and cannot be superseded by the Mirant case in
light of Section 4(3), Article VIII of the 1987 Constitution.

C. The ruling of the Mirant case, which uses the close of the taxable quarter
when the sales were made as the reckoning date in counting the two-year
prescriptive period cannot be applied retroactively in the case of Mindanao II.
II. The Honorable Court of Tax Appeals erred in interpreting Section 105 of the 1997
Tax Code, as amended in that the sale of the fully depreciated Nissan Patrol is a
one-time transaction and is not incidental to the VAT zero-rated operation of
Mindanao II.
III. The Honorable Court of Tax Appeals erred in denying the amount disallowed by
the Independent Certified Public Accountant as Mindanao II substantially complied
with the requisites of the 1997 Tax Code, as amended, for refund/tax credit.
A. The amount of P2,090.16 was brought about by the timing difference in the
recording of the foreign currency deposit transaction.
B. The amount of P2,752.00 arose from the out-of-pocket expenses
reimbursed to SGV & Company which is substantially suppoerted [sic] by an
official receipt.
C. The amount of P487,355.93 was unapplied and/or was not included in
Mindanao IIs claim for refund or tax credit for the year 2004 subject matter of
CTA Case No. 7507.
IV. The doctrine of strictissimi juris on tax exemptions should be relaxed in the
present case.40
G.R. No. 194637
Mindanao I v. CIR
Mindanao I raised the following grounds in its Petition for Review:
I. The administrative claim and judicial claim in CTA Case No. 7228 were timely filed
pursuant to the case of Atlas Consolidated Mining and Development Corporation vs.
Commissioner of Internal Revenue, which was then the controlling ruling at the time
of filing.
A. The recent ruling in the Commissioner of Internal Revenue vs. Mirant
Pagbilao Corporation, which uses the end of the taxable quarter when the
sales were made as the reckoning date in counting the two-year prescriptive
period, cannot be applied retroactively in the case of Mindanao I.
B. The Atlas case promulgated by the Third Division of this Honorable Court
on June 8, 2007 was not and cannot be superseded by the Mirant Pagbilao
case promulgated by the Second Division of this Honorable Court on
September 12, 2008 in light of the explicit provision of Section 4(3), Article
VIII of the 1987 Constitution.

II. Likewise, the recent ruling of this Honorable Court in Commissioner of Internal
Revenue vs. Aichi Forging Company of Asia, Inc., cannot be applied retroactively to
Mindanao I in the present case.41
In a Resolution dated 14 December 2011, 42 this Court resolved to consolidate G.R. Nos.
193301 and 194637 to avoid conflicting rulings in related cases.
The Courts Ruling
Determination of Prescriptive Period
G.R. Nos. 193301 and 194637 both raise the question of the determination of the
prescriptive period, or the interpretation of Section 112 of the 1997 Tax Code, in light of our
rulings in Atlas and Mirant.
Mindanao IIs unutilized input VAT tax credit for the first and second quarters of 2003, in the
amounts ofP3,160,984.69 and P1,562,085.33, respectively, are covered by G.R. No.
193301, while Mindanao Is unutilized input VAT tax credit for the first, second, third, and
fourth quarters of 2003, in the amounts of P3,893,566.14,P2,351,000.83,
and P7,940,727.83, respectively, are covered by G.R. No. 194637.
Section 112 of the 1997 Tax Code
The pertinent sections of the 1997 Tax Code, the law applicable at the time of Mindanao IIs
and Mindanao Is administrative and judicial claims, provide:
SEC. 112. Refunds or Tax Credits of Input Tax. -(A) Zero-rated or Effectively Zero-rated
Sales. - Any VAT-registered person, whose sales are zero-rated or effectively zero-rated
may, within two (2) years after the close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such input tax has
not been applied against output tax: Provided, however, That in the case of zero-rated sales
under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable
foreign currency exchange proceeds thereof had been duly accounted for in accordance
with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further,
That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in
taxable or exempt sale of goods or properties or services, and the amount of creditable
input tax due or paid cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis of the volume of sales.
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper
cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable
input taxes within one hundred twenty (120) days from the date of submission of complete
documents in support of the application filed in accordance with Subsections (A) and (B)
hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the
part of the Commissioner to act on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty day-period, appeal the decision or
the unacted claim with the Court of Tax Appeals.
x x x x 43 (Underscoring supplied)
The relevant dates for G.R. No. 193301 (Mindanao II) are:
CTA
Case
No.

Period
covered by
VAT Sales in
2003 and
amount

Close of
quarter
when
sales
were
made

Last day
for filing
application
of tax
refund/tax
credit
certificate
with the
CIR

Actual date of Last day

filing
for
application for filing case
tax refund/
with CTA45
credit with the
CIR
(administrative
claim)44

7227 1st Quarter,

31 March
P3,160,984.69 2003

31 March
2005

13 April 2005

12
22 April
September 2005
2005

7287 2nd Quarter,

30 June
P1,562,085.33 2003

30 June
2005

13 April 2005

12
7 July
September 2005
2005

7317 3rd and 4th

30
30
13 April 2005
Quarters,
September September
P3,521,129.50 2003
2005

Actual
Date
of filing
case
with CTA
(judicial
claim)

12
9
September September
2005
2005

31
2 January
December 2006
2003
(31
December
2005
being
a
Saturday)
The relevant dates for G.R. No. 194637 (Minadanao I) are:
CTA Period
Case covered by
No. VAT Sales in
2003 and
amount

Close of
quarter
when
sales
were
made

Last day
for filing
application
of tax
refund/tax
credit

Actual date of
filing
application for
tax refund/
credit with the
CIR

Last day
for
filing case
with CTA47

Actual
Date
of filing
case
with CTA
(judicial

certificate
with the
CIR

(administrative
claim)46

claim)

7227 1st Quarter,

31 March
P3,893,566.14 2003

31 March
2005

4 April 2005

1
22 April
September 2005
2005

7287 2nd Quarter,

30 June
P2,351,000.83 2003

30 June
2005

4 April 2005

1
7 July
September 2005
2005

7317 3rd
30
and 4th
September
Quarters,
2003
P7,940,727.83
31
December
2003

30
4 April 2005
September
2005

1
9
September September
2005
2005

2 January
2006
(31
December
2005
being
a
Saturday)

When Mindanao II and Mindanao I filed their respective administrative and judicial claims in
2005, neither Atlas nor Mirant has been promulgated. Atlas was promulgated on 8 June
2007, while Mirant was promulgated on 12 September 2008. It is therefore misleading to
state that Atlas was the controlling doctrine at the time of filing of the claims. The 1997 Tax
Code, which took effect on 1 January 1998, was the applicable law at the time of filing of the
claims in issue. As this Court explained in the recent consolidated cases of Commissioner
of Internal Revenue v. San Roque Power Corporation, Taganito Mining Corporation v.
Commissioner of Internal Revenue, and Philex Mining Corporation v. Commissioner of
Internal Revenue (San Roque):48
Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly
given by law to the Commissioner to decide whether to grant or deny San Roques
application for tax refund or credit. It is indisputable that compliance with the 120-day
waiting period is mandatory and jurisdictional. The waiting period, originally fixed at 60 days
only, was part of the provisions of the first VAT law, Executive Order No. 273, which took
effect on 1 January 1988. The waiting period was extended to 120 days effective 1 January
1998 under RA 8424 or the Tax Reform Act of 1997. Thus, the waiting period has been in
our statute books for more than fifteen (15) years before San Roque filed its judicial claim.
Failure to comply with the 120-day waiting period violates a mandatory provision of law. It
violates the doctrine of exhaustion of administrative remedies and renders the petition
premature and thus without a cause of action, with the effect that the CTA does not acquire
jurisdiction over the taxpayers petition. Philippine jurisprudence is replete with cases
upholding and reiterating these doctrinal principles.

The charter of the CTA expressly provides that its jurisdiction is to review on appeal
"decisions of the Commissioner of Internal Revenue in cases involving x x x refunds of
internal revenue taxes." When a taxpayer prematurely files a judicial claim for tax refund or
credit with the CTA without waiting for the decision of the Commissioner, there is no
"decision" of the Commissioner to review and thus the CTA as a court of special jurisdiction
has no jurisdiction over the appeal. The charter of the CTA also expressly provides that if
the Commissioner fails to decide within "a specific period" required by law, such "inaction
shall be deemed a denial" of the application for tax refund or credit. It is the Commissioners
decision, or inaction "deemed a denial," that the taxpayer can take to the CTA for review.
Without a decision or an "inaction x x x deemed a denial" of the Commissioner, the CTA has
no jurisdiction over a petition for review.
San Roques failure to comply with the 120-day mandatory period renders its petition for
review with the CTA void. Article 5 of the Civil Code provides, "Acts executed against
provisions of mandatory or prohibitory laws shall be void, except when the law itself
authorizes their validity." San Roques void petition for review cannot be legitimized by the
CTA or this Court because Article 5 of the Civil Code states that such void petition cannot be
legitimized "except when the law itself authorizes its validity." There is no law authorizing the
petitions validity.
It is hornbook doctrine that a person committing a void act contrary to a mandatory
provision of law cannot claim or acquire any right from his void act. A right cannot spring in
favor of a person from his own void or illegal act. This doctrine is repeated in Article 2254 of
the Civil Code, which states, "No vested or acquired right can arise from acts or omissions
which are against the law or which infringe upon the rights of others." For violating a
mandatory provision of law in filing its petition with the CTA, San Roque cannot claim any
right arising from such void petition. Thus, San Roques petition with the CTA is a mere
scrap of paper.
This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of
the 120-day period just because the Commissioner merely asserts that the case was
prematurely filed with the CTA and does not question the entitlement of San Roque to the
refund. The mere fact that a taxpayer has undisputed excess input VAT, or that the tax was
admittedly illegally, erroneously or excessively collected from him, does not entitle him as a
matter of right to a tax refund or credit. Strict compliance with the mandatory and
jurisdictional conditions prescribed by law to claim such tax refund or credit is essential and
necessary for such claim to prosper. Well-settled is the rule that tax refunds or credits, just
like tax exemptions, are strictly construed against the taxpayer.
The burden is on the taxpayer to show that he has strictly complied with the conditions for
the grant of the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional conditions mandated by law
simply because the Commissioner chose not to contest the numerical correctness of the
claim for tax refund or credit of the taxpayer. Non-compliance with mandatory periods, nonobservance of prescriptive periods, and non-adherence to exhaustion of administrative
remedies bar a taxpayers claim for tax refund or credit, whether or not the Commissioner
questions the numerical correctness of the claim of the taxpayer. This Court should not

establish the precedent that non-compliance with mandatory and jurisdictional conditions
can be excused if the claim is otherwise meritorious, particularly in claims for tax refunds or
credit. Such precedent will render meaningless compliance with mandatory and
jurisdictional requirements, for then every tax refund case will have to be decided on the
numerical correctness of the amounts claimed, regardless of non-compliance with
mandatory and jurisdictional conditions.
San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine
because San Roque filed its petition for review with the CTA more than four years before
Atlas was promulgated. The Atlas doctrine did not exist at the time San Roque failed to
comply with the 120-day period. Thus, San Roque cannot invoke the Atlas doctrine as an
excuse for its failure to wait for the 120-day period to lapse. In any event, the Atlas doctrine
merely stated that the two-year prescriptive period should be counted from the date of
payment of the output VAT, not from the close of the taxable quarter when the sales
involving the input VAT were made. The Atlas doctrine does not interpret, expressly or
impliedly, the 120+30 day periods.49 (Emphases in the original; citations omitted)
Prescriptive Period for
the Filing of Administrative Claims
In determining whether the administrative claims of Mindanao I and Mindanao II for 2003
have prescribed, we see no need to rely on either Atlas or Mirant. Section 112(A) of the
1997 Tax Code is clear: "Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable quarter when
the sales were made, apply for the issuance of a tax credit certificate or refund of creditable
input tax due or paid attributable to such sales x x x."
We rule on Mindanao I and IIs administrative claims for the first, second, third, and fourth
quarters of 2003 as follows:
(1) The last day for filing an application for tax refund or credit with the CIR for the
first quarter of 2003 was on 31 March 2005. Mindanao II filed its administrative claim
before the CIR on 13 April 2005, while Mindanao I filed its administrative claim
before the CIR on 4 April 2005. Both claims have prescribed, pursuant to Section
112(A) of the 1997 Tax Code.
(2) The last day for filing an application for tax refund or credit with the CIR for the
second quarter of 2003 was on 30 June 2005. Mindanao II filed its administrative
claim before the CIR on 13 April 2005, while Mindanao I filed its administrative claim
before the CIR on 4 April 2005. Both claims were filed on time, pursuant to Section
112(A) of the 1997 Tax Code.
(3) The last day for filing an application for tax refund or credit with the CIR for the
third quarter of 2003 was on 30 September 2005. Mindanao II filed its administrative
claim before the CIR on 13 April 2005, while Mindanao I filed its administrative claim
before the CIR on 4 April 2005. Both claims were filed on time, pursuant to Section
112(A) of the 1997 Tax Code.

(4) The last day for filing an application for tax refund or credit with the CIR for the
fourth quarter of 2003 was on 2 January 2006. Mindanao II filed its administrative
claim before the CIR on 13 April 2005, while Mindanao I filed its administrative claim
before the CIR on 4 April 2005. Both claims were filed on time, pursuant to Section
112(A) of the 1997 Tax Code.
Prescriptive Period for
the Filing of Judicial Claims
In determining whether the claims for the second, third and fourth quarters of 2003 have
been properly appealed, we still see no need to refer to either Atlas or Mirant, or even to
Section 229 of the 1997 Tax Code. The second paragraph of Section 112(C) of the 1997
Tax Code is clear: "In case of full or partial denial of the claim for tax refund or tax credit, or
the failure on the part of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one hundred twenty day-period,
appeal the decision or the unacted claim with the Court of Tax Appeals."
The mandatory and jurisdictional nature of the 120+30 day periods was explained in San
Roque:
At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory
periods were already in the law. Section 112(C) expressly grants the Commissioner 120
days within which to decide the taxpayers claim. The law is clear, plain, and unequivocal: "x
x x the Commissioner shall grant a refund or issue the tax credit certificate for creditable
input taxes within one hundred twenty (120) days from the date of submission of complete
documents." Following the verba legis doctrine, this law must be applied exactly as worded
since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the
CTA without waiting for the Commissioners decision within the 120-day mandatory and
jurisdictional period. The CTA will have no jurisdiction because there will be no "decision" or
"deemed a denial" decision of the Commissioner for the CTA to review. In San Roques
case, it filed its petition with the CTA a mere 13 days after it filed its administrative claim with
the Commissioner. Indisputably, San Roque knowingly violated the mandatory 120-day
period, and it cannot blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the
decision or inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one hundred twenty day-period, appeal the
decision or the unacted claim with the Court of Tax Appeals. (Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this
law should be applied exactly as worded since it is clear, plain, and unequivocal. As this law
states, the taxpayer may, if he wishes, appeal the decision of the Commissioner to the CTA
within 30 days from receipt of the Commissioners decision, or if the Commissioner does not
act on the taxpayers claim within the 120-day period, the taxpayer may appeal to the CTA
within 30 days from the expiration of the 120-day period.

xxxx
There are three compelling reasons why the 30-day period need not necessarily fall within
the two-year prescriptive period, as long as the administrative claim is filed within the twoyear prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "may,
within two (2) years after the close of the taxable quarter when the sales were made, apply
for the issuance of a tax credit certificate or refund of the creditable input tax due or paid to
such sales." In short, the law states that the taxpayer may apply with the Commissioner for
a refund or credit "within two (2) years," which means at anytime within two years. Thus, the
application for refund or credit may be filed by the taxpayer with the Commissioner on the
last day of the two-year prescriptive period and it will still strictly comply with the law. The
two-year prescriptive period is a grace period in favor of the taxpayer and he can avail of
the full period before his right to apply for a tax refund or credit is barred by prescription.
Second, Section 112(C) provides that the Commissioner shall decide the application for
refund or credit "within one hundred twenty (120) days from the date of submission of
complete documents in support of the application filed in accordance with Subsection (A)."
The reference in Section 112(C) of the submission of documents "in support of the
application filed in accordance with Subsection A" means that the application in Section
112(A) is the administrative claim that the Commissioner must decide within the 120-day
period. In short, the two-year prescriptive period in Section 112(A) refers to the period within
which the taxpayer can file an administrative claim for tax refund or credit. Stated otherwise,
the two-year prescriptive period does not refer to the filing of the judicial claim with the CTA
but to the filing of the administrative claim with the Commissioner. As held in Aichi, the
"phrase within two years x x x apply for the issuance of a tax credit or refund refers to
applications for refund/credit with the CIR and not to appeals made to the CTA."
Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive
period (equivalent to 730 days), then the taxpayer must file his administrative claim for
refund or credit within the first 610 days of the two-year prescriptive period. Otherwise, the
filing of the administrative claim beyond the first 610 days will result in the appeal to the CTA
being filed beyond the two-year prescriptive period. Thus, if the taxpayer files his
administrative claim on the 611th day, the Commissioner, with his 120-day period, will have
until the 731st day to decide the claim. If the Commissioner decides only on the 731st day,
or does not decide at all, the taxpayer can no longer file his judicial claim with the CTA
because the two-year prescriptive period (equivalent to 730 days) has lapsed. The 30-day
period granted by law to the taxpayer to file an appeal before the CTA becomes utterly
useless, even if the taxpayer complied with the law by filing his administrative claim within
the two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive period adds a
condition that is not found in the law. It results in truncating 120 days from the 730 days that
the law grants the taxpayer for filing his administrative claim with the Commissioner. This
Court cannot interpret a law to defeat, wholly or even partly, a remedy that the law expressly
grants in clear, plain, and unequivocal language.

Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal
language. The taxpayer can file his administrative claim for refund or credit at anytime
within the two-year prescriptive period. If he files his claim on the last day of the two-year
prescriptive
period, his claim is still filed on time. The Commissioner will have 120 days from such filing
to decide the claim. If the Commissioner decides the claim on the 120th day, or does not
decide it on that day, the taxpayer still has 30 days to file his judicial claim with the CTA.
This is not only the plain meaning but also the only logical interpretation of Section 112(A)
and (C).50 (Emphases in the original; citations omitted)
In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No. DA-489-03
from the time of its issuance on 10 December 2003 up to its reversal in Aichi on 6 October
2010, where this Court held that the 120+30 day periods are mandatory and
jurisdictional."51 We shall discuss later the effect of San Roques recognition of BIR Ruling
No. DA-489-03 on claims filed between 10 December 2003 and 6 October 2010. Mindanao
I and II filed their claims within this period.
We rule on Mindanao I and IIs judicial claims for the second, third, and fourth quarters of
2003 as follows:
G.R. No. 193301
Mindanao II v. CIR
Mindanao II filed its administrative claims for the second, third, and fourth quarters of 2003
on 13 April 2005. Counting 120 days after filing of the administrative claim with the CIR (11
August 2005) and 30 days after the CIRs denial by inaction, the last day for filing a judicial
claim with the CTA for the second, third, and fourth quarters of 2003 was on 12 September
2005. However, the judicial claim cannot be filed earlier than 11 August 2005, which is the
expiration of the 120-day period for the Commissioner to act on the claim.
(1) Mindanao II filed its judicial claim for the second quarter of 2003 before the CTA
on 7 July 2005, before the expiration of the 120-day period. Pursuant to Section
112(C) of the 1997 Tax Code, Mindanao IIs judicial claim for the second quarter of
2003 was prematurely filed.
However, pursuant to San Roques recognition of the effect of BIR Ruling No. DA489-03, we rule that Mindanao IIs judicial claim for the second quarter of 2003
qualifies under the exception to the strict application of the 120+30 day periods.
(2) Mindanao II filed its judicial claim for the third quarter of 2003 before the CTA on
9 September 2005. Mindanao IIs judicial claim for the third quarter of 2003 was thus
filed on time, pursuant to Section 112(C) of the 1997 Tax Code.
(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before the CTA on
9 September 2005. Mindanao IIs judicial claim for the fourth quarter of 2003 was
thus filed on time, pursuant to Section 112(C) of the 1997 Tax Code.

G.R. No. 194637

Mindanao I v. CIR
Mindanao I filed its administrative claims for the second, third, and fourth quarters of 2003
on 4 April 2005. Counting 120 days after filing of the administrative claim with the CIR (2
August 2005) and 30 days after the CIRs denial by inaction, 52 the last day for filing a judicial
claim with the CTA for the second, third, and fourth quarters of 2003 was on 1 September
2005. However, the judicial claim cannot be filed earlier than 2 August 2005, which is the
expiration of the 120-day period for the Commissioner to act on the claim.
(1) Mindanao I filed its judicial claim for the second quarter of 2003 before the CTA
on 7 July 2005, before the expiration of the 120-day period. Pursuant to Section
112(C) of the 1997 Tax Code, Mindanao Is judicial claim for the second quarter of
2003 was prematurely filed. However, pursuant to San Roques recognition of the
effect of BIR Ruling No. DA-489-03, we rule that Mindanao Is judicial claim for the
second quarter of 2003 qualifies under the exception to the strict application of the
120+30 day periods.
(2) Mindanao I filed its judicial claim for the third quarter of 2003 before the CTA on 9
September 2005. Mindanao Is judicial claim for the third quarter of 2003 was thus
filed after the prescriptive period, pursuant to Section 112(C) of the 1997 Tax Code.
(3) Mindanao I filed its judicial claim for the fourth quarter of 2003 before the CTA on
9 September 2005. Mindanao Is judicial claim for the fourth quarter of 2003 was
thus filed after the prescriptive period, pursuant to Section 112(C) of the 1997 Tax
Code.
San Roque: Recognition of BIR Ruling No. DA-489-03
In the consolidated cases of San Roque, the Court En Banc 53 examined and ruled on the
different claims for tax refund or credit of three different companies. In San Roque, we
reiterated that "following the verba legis doctrine, Section 112(C) must be applied exactly as
worded since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition
with the CTA without waiting for the Commissioners decision within the 120-day mandatory
and jurisdictional period. The CTA will have no jurisdiction because there will be no
decision or deemed a denial decision of the Commissioner for the CTA to review."
Notwithstanding a strict construction of any claim for tax exemption or refund, the Court in
San Roque recognized that BIR Ruling No. DA-489-03 constitutes equitable estoppel 54 in
favor of taxpayers. BIR Ruling No. DA-489-03 expressly states that the "taxpayer-claimant
need not wait for the lapse of the 120-day period before it could seek judicial relief with the
CTA by way of Petition for Review." This Court discussed BIR Ruling No. DA-489-03 and its
effect on taxpayers, thus:
Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner,
particularly on a difficult question of law. The abandonment of the Atlas doctrine by Mirant
and Aichi is proof that the reckoning of the prescriptive periods for input VAT tax refund or
credit is a difficult question of law. The abandonment of the Atlas doctrine did not result in

Atlas, or other taxpayers similarly situated, being made to return the tax refund or credit
they received or could have received under Atlas prior to its abandonment. This Court is
applying Mirant and Aichi prospectively. Absent fraud, bad faith or misrepresentation, the
reversal by this Court of a general interpretative rule issued by the Commissioner, like the
reversal of a specific BIR ruling under Section 246, should also apply prospectively. x x x.
xxxx
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule
applicable to all taxpayers or a specific ruling applicable only to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a
query made, not by a particular taxpayer, but by a government agency tasked with
processing tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit and
Drawback Center of the Department of Finance. This government agency is also the
addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this
government agency mentions in its query to the Commissioner the administrative claim of
Lazi Bay Resources Development, Inc., the agency was in fact asking the Commissioner
what to do in cases like the tax claim of Lazi Bay Resources Development, Inc., where the
taxpayer did not wait for the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can
rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to
its reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120+30
day periods are mandatory and jurisdictional.
xxxx
Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the
issuance of BIR Ruling No. DA-489-03 on 10 December 2003. Truly, Taganito can claim that
in filing its judicial claim prematurely without waiting for the 120-day period to expire, it was
misled by BIR Ruling No. DA-489-03. Thus, Taganito can claim the benefit of BIR Ruling
No. DA-489-03, which shields the filing of its judicial claim from the vice of prematurity.
(Emphasis in the original)
Summary of Administrative and Judicial Claims
G.R. No. 193301
Mindanao II v. CIR
Administrative
Claim

Judicial Claim

Action on Claim

1st Quarter, 2003

Filed late

--

Deny, pursuant to
Section 112(A) of the
1997 Tax Code

2nd Quarter, 2003

Filed on time

Prematurely filed

Grant, pursuant to

BIR Ruling No. DA-489-03

3rd Quarter, 2003

Filed on time

Filed on time

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

4th Quarter, 2003

Filed on time

Filed on time

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

Administrative
Claim

Judicial Claim

Action on Claim

1st Quarter, 2003

Filed late

--

Deny, pursuant to
Section 112(A) of the
1997 Tax Code

2nd Quarter, 2003

Filed on time

Prematurely filed

Grant, pursuant to
BIR Ruling No. DA-489-03

3rd Quarter, 2003

Filed on time

Filed late

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

4th Quarter, 2003

Filed on time

Filed late

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

G.R. No. 194637

Mindanao I v. CIR

Summary of Rules on Prescriptive Periods Involving VAT

We summarize the rules on the determination of the prescriptive period for filing a tax
refund or credit of unutilized input VAT as provided in Section 112 of the 1997 Tax Code, as
follows:
(1) An administrative claim must be filed with the CIR within two years after the close
of the taxable quarter when the zero-rated or effectively zero-rated sales were made.
(2) The CIR has 120 days from the date of submission of complete documents in
support of the administrative claim within which to decide whether to grant a refund
or issue a tax credit certificate. The 120-day period may extend beyond the two-year
period from the filing of the administrative claim if the claim is filed in the later part of
the two-year period. If the 120-day period expires without any decision from the CIR,
then the administrative claim may be considered to be denied by inaction.
(3) A judicial claim must be filed with the CTA within 30 days from the receipt of the
CIRs decision denying the administrative claim or from the expiration of the 120-day
period without any action from the CIR.

(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October
2010, as an exception to the mandatory and jurisdictional 120+30 day periods.
"Incidental" Transaction
Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental
transaction in the course of its business; hence, it is an isolated transaction that should not
have been subject to 10% VAT.
Section 105 of the 1997 Tax Code does not support Mindanao IIs position:
SEC. 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.
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 nonresident foreign persons shall be considered as being
rendered in the course of trade or business. (Emphasis supplied)
Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc.
(Magsaysay)55 and Imperial v. Collector of Internal Revenue (Imperial) 56 to justify its position.
Magsaysay, decided under the NIRC of 1986, involved the sale of vessels of the National
Development Company (NDC) to Magsaysay Lines, Inc. We ruled that the sale of vessels
was not in the course of NDCs trade or business as it was involuntary and made pursuant
to the Governments policy for privatization. Magsaysay, in quoting from the CTAs decision,
imputed upon Imperial the definition of "carrying on business." Imperial, however, is an
unreported case that merely stated that "to engage is to embark in a business or to employ
oneself therein."57
Mindanao IIs sale of the Nissan Patrol is said to be an isolated transaction. However, it
does not follow that an isolated transaction cannot be an incidental transaction for purposes
of VAT liability. Indeed, a reading of Section 105 of the 1997 Tax Code would show that a
transaction "in the course of trade or business" includes "transactions incidental thereto."
1wphi1

Mindanao IIs business is to convert the steam supplied to it by PNOC-EDC into electricity
and to deliver the electricity to NPC. In the course of its business, Mindanao II bought and
eventually sold a Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao
IIs property, plant, and equipment. Therefore, the sale of the Nissan Patrol is an incidental
transaction made in the course of Mindanao IIs business which should be liable for VAT.
Substantiation Requirements
Mindanao II claims that the CTAs disallowance of a total amount of P492,198.09 is
improper as it has substantially complied with the substantiation requirements of Section
113(A)58 in relation to Section 23759 of the 1997 Tax Code, as implemented by Section
4.104-1, 4.104-5 and 4.108-1 of Revenue Regulation No. 7-95. 60
We are constrained to state that Mindanao IIs compliance with the substantiation
requirements is a finding of fact. The CTA En Banc evaluated the records of the case and
found that the transactions in question are purchases for services and that Mindanao II
failed to comply with the substantiation requirements. We affirm the CTA En Bancs finding
of fact, which in turn affirmed the finding of the CTA First Division. We see no reason to
overturn their findings.
WHEREFORE, we PARTIALLY GRANT the petitions. The Decision of the Court of Tax
Appeals En Bane in CT A EB No. 513 promulgated on 10 March 2010, as well as the
Resolution promulgated on 28 July 2010, and the Decision of the Court of Tax Appeals En
Bane in CTA EB Nos. 476 and 483 promulgated on 31 May 2010, as well as the Amended
Decision promulgated on 24 November 2010, are AFFIRMED with MODIFICATION.
For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for the first quarter
of 2003 is DENIED while its claims for the second, third, and fourth quarters of 2003 are
GRANTED. For G.R. No. 19463 7, the claims of Mindanao I Geothermal Partnership for the
first, third, and fourth quarters of 2003 are DENIED while its claim for the second quarter of
2003 is GRANTED.
SO ORDERED.

G.R. No. 168129

April 24, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
PHILIPPINE HEALTH CARE PROVIDERS, INC., Respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997
Rules of Civil Procedure, as amended, seeking to reverse the Decision 1 dated February 18,

2005 and Resolution dated May 9, 2005 of the Court of Appeals (Fifteenth Division) in CAG.R. SP No. 76449.
The factual antecedents of this case, as culled from the records, are:
The Philippine Health Care Providers, Inc., herein respondent, is a corporation organized
and existing under the laws of the Republic of the Philippines. Pursuant to its Articles of
Incorporation,2 its primary purpose is "To establish, maintain, conduct and operate a prepaid
group practice health care delivery system or a health maintenance organization to take
care of the sick and disabled persons enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the organization."
1^vvphi1.net

On July 25, 1987, President Corazon C. Aquino issued Executive Order (E.O.) No. 273,
amending the National Internal Revenue Code of 1977 (Presidential Decree No. 1158) by
imposing Value-Added Tax (VAT) on the sale of goods and services. This E.O. took effect on
January 1, 1988.
Before the effectivity of E.O. No. 273, or on December 10, 1987, respondent wrote the
Commissioner of Internal Revenue (CIR), petitioner, inquiring whether the services it
provides to the participants in its health care program are exempt from the payment of the
VAT.
On June 8, 1988, petitioner CIR, through the VAT Review Committee of the Bureau of
Internal Revenue (BIR), issued VAT Ruling No. 231-88 stating that respondent, as a
provider of medical services, is exempt from the VAT coverage. This Ruling was
subsequently confirmed by Regional Director Osmundo G. Umali of Revenue Region No. 8
in a letter dated April 22, 1994.
Meanwhile, on January 1, 1996, Republic Act (R.A.) No. 7716 (Expanded VAT or E-VAT
Law) took effect, amending further the National Internal Revenue Code of 1977. Then on
January 1, 1998, R.A. No. 8424 (National Internal Revenue Code of 1997) became
effective. This new Tax Code substantially adopted and reproduced the provisions of E.O.
No. 273 on VAT and R.A. No. 7716 on E-VAT.
In the interim, on October 1, 1999, the BIR sent respondent a Preliminary Assessment
Notice for deficiency in its payment of the VAT and documentary stamp taxes (DST) for
taxable years 1996 and 1997.
On October 20, 1999, respondent filed a protest with the BIR.
On January 27, 2000, petitioner CIR sent respondent a letter demanding payment of
"deficiency VAT" in the amount of P100,505,030.26 and DST in the amount
of P124,196,610.92, or a total of P224,702,641.18 for taxable years 1996 and 1997.
Attached to the demand letter were four (4) assessment notices.
On February 23, 2000, respondent filed another protest questioning the assessment
notices.

Petitioner CIR did not take any action on respondent's protests. Hence, on September 21,
2000, respondent filed with the Court of Tax Appeals (CTA) a petition for review, docketed
as CTA Case No. 6166.
On April 5, 2002, the CTA rendered its Decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Petitioner is hereby ORDERED TO PAY the deficiency VAT amounting
to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997
until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge
plus 20% interest from January 20, 1998 until paid for the 1997 VAT
deficiency. Accordingly, VAT Ruling No. 231-88 is declared void and without force and
effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the
said DST deficiency tax.
1awphi1.nt

SO ORDERED.
Respondent filed a motion for partial reconsideration of the above judgment concerning its
liability to pay the deficiency VAT.
In its Resolution3 dated March 23, 2003, the CTA granted respondent's motion, thus:
WHEREFORE, in view of the foregoing, the instant Motion for Partial Reconsideration is
GRANTED. Accordingly, the VAT assessment issued by herein respondent against
petitioner for the taxable years 1996 and 1997 is hereby WITHDRAWN and SET ASIDE.
SO ORDERED.
The CTA held:
Moreover, this court adheres to its conclusion that petitioner is a service contractor subject
to VAT since it does not actually render medical service but merely acts as a conduit
between the members and petitioner's accredited and recognized hospitals and clinics.
However, after a careful review of the facts of the case as well as the Law and
jurisprudence applicable, this court resolves to grant petitioner's "Motion for Partial
Reconsideration." We are in accord with the view of petitioner that it is entitled to the benefit
of non-retroactivity of rulings guaranteed under Section 246 of the Tax Code, in the absence
of showing of bad faith on its part. Section 246 of the Tax Code provides:
Sec. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any
of the rules and regulations promulgated in accordance with the preceding Sections or any
of the rulings or circulars promulgated by the Commissioner shall not be given retroactive
application if the revocation, modification or reversal will be prejudicial to the taxpayers, x x
x.

Clearly, undue prejudice will be caused to petitioner if the revocation of VAT Ruling No. 23188 will be retroactively applied to its case. VAT Ruling No. 231-88 issued by no less than the
respondent itself has confirmed petitioner's entitlement to VAT exemption under Section 103
of the Tax Code. In saying so, respondent has actually broadened the scope of "medical
services" to include the case of the petitioner. This VAT ruling was even confirmed
subsequently by Regional Director Ormundo G. Umali in his letter dated April 22, 1994
(Exhibit M). Exhibit P, which served as basis for the issuance of the said VAT ruling in favor
of the petitioner sufficiently described the business of petitioner and there is no way BIR
could be misled by the said representation as to the real nature of petitioner's business.
Such being the case, this court is convinced that petitioner's reliance on the said ruling is
premised on good faith. The facts of the case do not show that petitioner deliberately
committed mistakes or omitted material facts when it obtained the said ruling from the
Bureau of Internal Revenue. Thus, in the absence of such proof, this court upholds the
application of Section 246 of the Tax Code. Consequently, the pronouncement made by the
BIR in VAT Ruling No. 231-88 as to the VAT exemption of petitioner should be upheld.
Petitioner seasonably filed with the Court of Appeals a petition for review, docketed as CAG.R. SP No. 76449.
In its Decision dated February 18, 2005, the Court of Appeals affirmed the CTA Resolution.
Petitioner CIR filed a motion for reconsideration, but it was denied by the appellate court in
its Resolution4 dated May 9, 2005.
Hence, the instant petition for review on certiorari raising these two issues: (1) whether
respondent's services are subject to VAT; and (2) whether VAT Ruling No. 231-88
exempting respondent from payment of VAT has retroactive application.
On the first issue, respondent is contesting petitioner's assessment of its VAT liabilities for
taxable years 1996 and 1997.
Section 1025 of the National Internal Revenue Code of 1977, as amended by E.O. No. 273
(VAT Law) and R.A. No. 7716 (E-VAT Law), provides:
SEC. 102. 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 10% of gross receipts derived from the sale or exchange of services, including
the use or lease of properties.
The phrase "sale or exchange of service" means the performance of all kinds of services in
the Philippines for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors x x x.
Section 1036 of the same Code specifies the exempt transactions from the provision of
Section 102, thus:
SEC. 103. Exempt Transactions. - The following shall be exempt from the value-added tax:

xxx
(l) Medical, dental, hospital and veterinary services except those rendered by professionals
xxx
The import of the above provision is plain. It requires no interpretation. It contemplates the
exemption from VAT of taxpayers engaged in the performance of medical, dental, hospital,
and veterinary services. In Commissioner of International Revenue v. Seagate Technology
(Philippines),7 we defined an exempt transaction as one involving goods or services which,
by their nature, are specifically listed in and expressly exempted from the VAT, under the
Tax Code, without regard to the tax status of the party in the transaction. In Commissioner
of Internal Revenue v. Toshiba Information Equipment (Phils.) Inc.,8 we reiterated this
definition.
In its letter to the BIR requesting confirmation of its VAT-exempt status, respondent
described its services as follows:
Under the prepaid group practice health care delivery system adopted by Health Care,
individuals enrolled in Health Care's health care program are entitled to preventive,
diagnostic, and corrective medical services to be dispensed by Health Care's duly licensed
physicians, specialists, and other professional technical staff participating in said group
practice health care delivery system established and operated by Health Care. Such
medical services will be dispensed in a hospital or clinic owned, operated, or accredited by
Health Care. To be entitled to receive such medical services from Health Care, an individual
must enroll in Health Care's health care program and pay an annual fee. Enrollment in
Health Care's health care program is on a year-to-year basis and enrollees are issued
identification cards.
From the foregoing, the CTA made the following conclusions:
a) Respondent "is not actually rendering medical service but merely acting as a
conduit between the members and their accredited and recognized hospitals
and clinics."
b) It merely "provides and arranges for the provision of pre-need health care
services to its members for a fixed prepaid fee for a specified period of time."
c) It then "contracts the services of physicians, medical and dental
practitioners, clinics and hospitals to perform such services to its enrolled
members;" and
d) Respondent "also enters into contract with clinics, hospitals, medical
professionals and then negotiates with them regarding payment schemes,
financing and other procedures in the delivery of health services."
We note that these factual findings of the CTA were neither modified nor reversed by the
Court of Appeals. It is a doctrine that findings of fact of the CTA, a special court exercising

particular expertise on the subject of tax, are generally regarded as final, binding, and
conclusive upon this Court, more so where these do not conflict with the findings of the
Court of Appeals.9 Perforce, as respondent does not actually provide medical and/or
hospital services, as provided under Section 103 on exempt transactions, but merely
arranges for the same, its services are not VAT-exempt.
Relative to the second issue, Section 246 of the 1997 Tax Code, as amended, provides that
rulings, circulars, rules and regulations promulgated by the Commissioner of Internal
Revenue have no retroactive application if to apply them would prejudice the taxpayer. The
exceptions to this rule are: (1) where the taxpayer deliberately misstates or omits material
facts from his return or in any document required of him by the Bureau of Internal Revenue;
(2) where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based, or (3) where the taxpayer acted in bad
faith.
We must now determine whether VAT Ruling No. 231-88 exempting respondent from paying
its VAT liabilities has retroactive application.
In its Resolution dated March 23, 2003, the CTA found that there is no showing that
respondent "deliberately committed mistakes or omitted material facts" when it obtained
VAT Ruling No. 231-88 from the BIR. The CTA held that respondent's letter which served as
the basis for the VAT ruling "sufficiently described" its business and "there is no way the BIR
could be misled by the said representation as to the real nature" of said business.
In sustaining the CTA, the Court of Appeals found that "the failure of respondent to refer to
itself as a health maintenance organization is not an indication of bad faith or a deliberate
attempt to make false representations." As "the term health maintenance organization did
not as yet have any particular significance for tax purposes," respondent's failure "to include
a term that has yet to acquire its present definition and significance cannot be equated with
bad faith."
We agree with both the Tax Court and the Court of Appeals that respondent acted in good
faith. In Civil Service Commission v. Maala,10 we described good faith as "that state of mind
denoting honesty of intention and freedom from knowledge of circumstances which ought to
put the holder upon inquiry; an honest intention to abstain from taking any unconscientious
advantage of another, even through technicalities of law, together with absence of all
information, notice, or benefit or belief of facts which render transaction unconscientious."
According to the Court of Appeals, respondent's failure to describe itself as a "health
maintenance organization," which is subject to VAT, is not tantamount to bad faith. We note
that the term "health maintenance organization" was first recorded in the Philippine statute
books only upon the passage of "The National Health Insurance Act of 1995" (Republic Act
No. 7875). Section 4 (o) (3) thereof defines a health maintenance organization as "an entity
that provides, offers, or arranges for coverage of designated health services needed by plan
members for a fixed prepaid premium." Under this law, a health maintenance organization is
one of the classes of a "health care provider."

It is thus apparent that when VAT Ruling No. 231-88 was issued in respondent's favor, the
term "health maintenance organization" was yet unknown or had no significance for taxation
purposes. Respondent, therefore, believed in good faith that it was VAT exempt for the
taxable years 1996 and 1997 on the basis of VAT Ruling No. 231-88.
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, 11 this Court held that under
Section 246 of the 1997 Tax Code, the Commissioner of Internal Revenue is precluded
from adopting a position contrary to one previously taken where injustice would
result to the taxpayer. Hence, where an assessment for deficiency withholding income
taxes was made, three years after a new BIR Circular reversed a previous one upon which
the taxpayer had relied upon, such an assessment was prejudicial to the taxpayer. To rule
otherwise, opined the Court, would be contrary to the tenets of good faith, equity, and fair
play.
This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting Corp. in the later
cases ofCommissioner of Internal Revenue v. Borroughs, Ltd.,12 Commissioner of Internal
Revenue v. Mega Gen. Mdsg. Corp.13 Commissioner of Internal Revenue v. Telefunken
Semiconductor (Phils.) Inc.,14 and Commissioner of Internal Revenue v. Court of
Appeals.15 The rule is that the BIR rulings have no retroactive effect where a grossly unfair
deal would result to the prejudice of the taxpayer, as in this case.
More recently, in Commissioner of Internal Revenue v. Benguet Corporation,16 wherein the
taxpayer was entitled to tax refunds or credits based on the BIR's own issuances but later
was suddenly saddled with deficiency taxes due to its subsequent ruling changing the
category of the taxpayer's transactions for the purpose of paying its VAT, this Court ruled
that applying such ruling retroactively would be prejudicial to the taxpayer.
WHEREFORE, we DENY the petition and AFFIRM the assailed Decision and Resolution of
the Court of Appeals in CA-G.R. SP No. 76449. No costs.
SO ORDERED.

COMMISSIONER OF INTERNAL
REVENUE,
Petitioner,
- versus SM PRIME HOLDINGS, INC.
and FIRST ASIA REALTY
DEVELOPMENT CORPORATION,
Respondents.

G.R. No. 183505

Present:
CARPIO, J., Chairperson,
BRION,
DEL CASTILLO,
ABAD, and
PEREZ, JJ.
Promulgated:
February 26, 2010

x------------------------------------------------------------------x

DECISION
DEL CASTILLO, J.:
When the intent of the law is not apparent as worded, or when the application of
the law would lead to absurdity or injustice, legislative history is all important. In such
cases, courts may take judicial notice of the origin and history of the law, [1] the
deliberations during the enactment,[2] as well as prior laws on the same subject matter [3] to
ascertain the true intent or spirit of the law.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in
relation to Republic Act (RA) No. 9282,[4]seeks to set aside the April 30, 2008
Decision[5] and the June 24, 2008 Resolution[6] of the Court of Tax Appeals (CTA).
Factual Antecedents
Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty
Development Corporation (First Asia) are domestic corporations duly organized and
existing under the laws of the Republic of the Philippines. Both are engaged in the
business of operating cinema houses, among others.[7]
CTA Case No. 7079
On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a
Preliminary Assessment Notice (PAN) for value added tax (VAT) deficiency on cinema
ticket sales in the amount of P119,276,047.40 for taxable year 2000.[8] In response, SM
Prime filed a letter-protest dated December 15, 2003.[9]
On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for
the alleged VAT deficiency, which the latter protested in a letter dated January 14, 2004.
[10]

On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered
it to pay the VAT deficiency for taxable year 2000 in the amount of P124,035,874.12.[11]
On October 15, 2004, SM Prime filed a Petition for Review before the CTA
docketed as CTA Case No. 7079.[12]
CTA Case No. 7085
On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on
cinema ticket sales for taxable year 1999 in the total amount of P35,823,680.93.
[13]
First Asia protested the PAN in a letter datedJuly 9, 2002.[14]
Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT
deficiency which was protested by First Asia in a letter dated December 12, 2002.[15]
On September 6, 2004, the BIR rendered a Decision denying the protest and
ordering First Asia to pay the amount ofP35,823,680.93 for VAT deficiency for taxable
year 1999.[16]
Accordingly, on October 20, 2004, First Asia filed a Petition for Review before
the CTA, docketed as CTA Case No. 7085.[17]
CTA Case No. 7111
On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on
cinema
ticket
sales
for
taxable
year
2000
in
the
amount
of P35,840,895.78. First Asia protested the PAN through a letter dated April 22, 2004.
[18]

[19]

Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency.
First Asia protested the same in a letter dated July 9, 2004.[20]

On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the
VAT deficiency in the amount ofP35,840,895.78 for taxable year 2000.[21]
This prompted First Asia to file a Petition for Review before the CTA
on December 16, 2004. The case was docketed as CTA Case No. 7111.[22]
CTA Case No. 7272
Re: Assessment Notice No. 008-02
A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the
total amount of P32,802,912.21 was issued against First Asia by the BIR. In response,
First Asia filed a protest-letter dated November 11, 2004. The BIR then sent a Formal
Letter of Demand, which was protested by First Asia on December 14, 2004.[23]
Re: Assessment Notice No. 003-03
A PAN for VAT deficiency on cinema ticket sales in the total amount
of P28,196,376.46 for the taxable year 2003 was issued by the BIR against First Asia. In
a letter dated September 23, 2004, First Asia protested the PAN. A Formal Letter of
Demand was thereafter issued by the BIR to First Asia, which the latter protested through
a letter dated November 11, 2004. [24]
On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered
First Asia to pay the amounts ofP33,610,202.91 and P28,590,826.50 for VAT deficiency
for taxable years 2002 and 2003, respectively.[25]
Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA,
docketed as CTA Case No. 7272.[26]
Consolidated Petitions

The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions
filed by SM Prime and First Asia.[27]
On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085,
7111 and 7272 with CTA Case No. 7079 on the grounds that the issues raised therein are
identical and that SM Prime is a majority shareholder of First Asia. The motion was
granted.[28]
Upon submission of the parties respective memoranda, the consolidated cases
were submitted for decision on the sole issue of whether gross receipts derived from
admission tickets by cinema/theater operators or proprietors are subject to VAT.[29]
Ruling of the CTA First Division
On September 22, 2006, the First Division of the CTA rendered a Decision
granting the Petition for Review. Resorting to the language used and the legislative
history of the law, it ruled that the activity of showing cinematographic films is not a
service covered by VAT under the National Internal Revenue Code (NIRC) of 1997, as
amended, but an activity subject to amusement tax under RA 7160, otherwise known as
the Local Government Code (LGC) of 1991. Citing House Joint Resolution No. 13,
entitledJoint Resolution Expressing the True Intent of Congress with Respect to the
Prevailing Tax Regime in the Theater and Local Film Industry Consistent with the States
Policy to Have a Viable, Sustainable and Competitive Theater and Film Industry as One
of its Partners in National Development,[30] the CTA First Division held that the House
of Representatives resolved that there should only be one business tax applicable to
theaters and movie houses, which is the 30% amusement tax imposed by cities and
provinces under the LGC of 1991. Further, it held that consistent with the States policy
to have a viable, sustainable and competitive theater and film industry, the national
government should be precluded from imposing its own business tax in addition to that
already imposed and collected by local government units. The CTA First Division
likewise found that Revenue Memorandum Circular (RMC) No. 28-2001, which

imposes VAT on gross receipts from admission to cinema houses, cannot be given force
and effect because it failed to comply with the procedural due process for tax issuances
under RMC No. 20-86.[31] Thus, it disposed of the case as follows:
IN VIEW OF ALL THE FOREGOING, this Court
hereby GRANTS the Petitions for Review. Respondents Decisions denying
petitioners protests against deficiency value-added taxes are
hereby REVERSED. Accordingly, Assessment Notices Nos. VT-00-000098,
VT-99-000057, VT-00-000122, 003-03 and 008-02 are ORDERED cancelled
and set aside.
SO ORDERED.[32]

Aggrieved, the CIR moved for reconsideration which was denied by the First
Division in its Resolution dated December 14, 2006.[33]
Ruling of the CTA En Banc
Thus, the CIR appealed to the CTA En Banc.[34] The case was docketed as CTA
EB No. 244.[35] The CTA En Banchowever denied[36] the Petition for Review and
dismissed[37] as well petitioners Motion for Reconsideration.
The CTA En Banc held that Section 108 of the NIRC actually sets forth an
exhaustive enumeration of what services are intended to be subject to VAT. And since
the showing or exhibition of motion pictures, films or movies by cinema operators or
proprietors is not among the enumerated activities contemplated in the phrase sale or
exchange of services, then gross receipts derived by cinema/ theater operators or
proprietors from admission tickets in showing motion pictures, film or movie are not
subject to VAT. It reiterated that the exhibition or showing of motion pictures, films, or
movies is instead subject to amusement tax under the LGC of 1991. As regards the
validity of RMC No. 28-2001, the CTA En Banc agreed with its First Division that the
same cannot be given force and effect for failure to comply with RMC No. 20-86.
Issue

Hence, the present recourse, where petitioner alleges that the CTA En
Banc seriously erred:
(1)

(2)

In not finding/holding that the gross receipts derived by

operators/proprietors of cinema houses from admission tickets [are]
subject to the 10% VAT because:
(a)

THE EXHIBITION OF MOVIES BY CINEMA

OPERATORS/PROPRIETORS TO THE PAYING
PUBLIC IS ASALE OF SERVICE;

(b)

UNLESS EXEMPTED BY LAW, ALL SALES OF

SERVICES ARE EXPRESSLY SUBJECT TO VAT
UNDER SECTION 108 OF THE NIRC OF 1997;

(c)

SECTION 108 OF THE NIRC OF 1997 IS A CLEAR

PROVISION OF LAW AND THE APPLICATION OF
RULES OF STATUTORY CONSTRUCTION AND
EXTRINSIC AIDS IS UNWARRANTED;

(d)

GRANTING WITHOUT CONCEDING THAT RULES

OF CONSTRUCTION ARE APPLICABLE HEREIN,
STILL THE HONORABLE COURT ERRONEOUSLY
APPLIED THE SAME AND PROMULGATED
DANGEROUS PRECEDENTS;

(e)

THERE IS NO VALID, EXISTING PROVISION OF

LAW EXEMPTING RESPONDENTS SERVICES FROM
THE VAT IMPOSED UNDER SECTION 108 OF THE
NIRC OF 1997;

(f)

QUESTIONS ON THE WISDOM OF THE LAW ARE

NOT PROPER ISSUES TO BE TRIED BY THE
HONORABLE COURT; and

(g)

RESPONDENTS WERE TAXED BASED ON THE

PROVISION OF SECTION 108 OF THE NIRC.

In ruling that the enumeration in Section 108 of the NIRC of

1997 is exhaustive in coverage;

(3)

In misconstruing the NIRC of 1997 to conclude that the

showing of motion pictures is merely subject to the amusement tax
imposed by the Local Government Code; and

(4)

In invalidating Revenue Memorandum Circular (RMC) No. 282001.[38]

Simply put, the issue in this case is whether the gross receipts derived by operators
or proprietors of cinema/theater houses from admission tickets are subject to VAT.
Petitioners Arguments
Petitioner argues that the enumeration of services subject to VAT in Section 108 of
the NIRC is not exhaustive because it covers all sales of services unless exempted by
law. He claims that the CTA erred in applying the rules on statutory construction and in
using extrinsic aids in interpreting Section 108 because the provision is clear and
unambiguous. Thus, he maintains that the exhibition of movies by cinema operators or
proprietors to the paying public, being a sale of service, is subject to VAT.
Respondents Arguments
Respondents, on the other hand, argue that a plain reading of Section 108 of the
NIRC of 1997 shows that the gross receipts of proprietors or operators of
cinemas/theaters derived from public admission are not among the services subject to
VAT. Respondents insist that gross receipts from cinema/theater admission tickets were
never intended to be subject to any tax imposed by the national government. According
to them, the absence of gross receipts from cinema/theater admission tickets from the list
of services which are subject to the national amusement tax under Section 125 of the
NIRC of 1997 reinforces this legislative intent. Respondents also highlight the fact that
RMC No. 28-2001 on which the deficiency assessments were based is an unpublished
administrative ruling.
Our Ruling

The petition is bereft of merit.

The enumeration of services subject to VAT
under Section 108 of the NIRC is not
exhaustive

Section 108 of the NIRC of the 1997 reads:

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 (10%) of gross receipts
derived from the sale or exchange of services, including the use or lease of
properties.
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, including those performed or rendered by construction and
service contractors; stock, real estate, commercial, customs and immigration
brokers; lessors of property, whether personal or real; warehousing
services; lessors or distributors of cinematographic films; persons engaged
in milling, processing, manufacturing or repacking goods for others;
proprietors, operators or keepers of hotels, motels, rest houses, pension houses,
inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes
and other eating places, including clubs and caterers; dealers in securities;
lending investors; transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for hire and other
domestic common carriers by land, air and water relative to their transport of
goods or cargoes; services of franchise grantees of telephone and telegraph,
radio and television broadcasting and all other franchise grantees except those
under Section 119 of this Code; services of banks, non-bank financial
intermediaries and finance companies; and non-life insurance companies
(except their crop insurances), including surety, fidelity, indemnity and
bonding companies; and similar services regardless of whether or not the
performance thereof calls for the exercise or use of the physical or mental
faculties. The phrase sale or exchange of services shall likewise include:

(1) The lease or the use of or the right or privilege to use any
copyright, patent, design or model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or right;
xxxx
(7) The lease of motion picture films, films, tapes and discs;
and
(8) The lease or the use of or the right to use radio, television,
satellite transmission and cable television time.
x x x x (Emphasis supplied)

A cursory reading of the foregoing provision clearly shows that the enumeration
of the sale or exchange of services subject to VAT is not exhaustive. The words,
including, similar services, and shall likewise include, indicate that
the enumeration is by way of example only.[39]
Among those included in the enumeration is the lease of motion picture films,
films, tapes and discs. This, however, is not the same as the showing or exhibition of
motion pictures or films. As pointed out by the CTA En Banc:
Exhibition in Blacks Law Dictionary is defined as To show or display. x x
x To produce anything in public so that it may be taken into possession (6th
ed., p. 573). While the word lease is defined as a contract by which one
owning such property grants to another the right to possess, use and enjoy it on
specified period of time in exchange for periodic payment of a stipulated price,
referred to as rent (Blacks Law Dictionary, 6th ed., p. 889). x x x[40]

Since the activity of showing motion pictures, films or movies by cinema/ theater
operators or proprietors is not included in the enumeration, it is incumbent upon the court
to the determine whether such activity falls under the phrase similar services. The
intent of the legislature must therefore be ascertained.
The legislature never intended operators

or proprietors of cinema/theater houses to be

covered by VAT
Under the NIRC of 1939,[41] the national government imposed amusement tax on
proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses,
boxing exhibitions, and other places of amusement, including cockpits, race tracks, and
cabaret.[42] In the case of theaters or cinematographs, the taxes were first deducted,
withheld, and paid by the proprietors, lessees, or operators of such theaters or
cinematographs before the gross receipts were divided between the proprietors, lessees,
or operators of the theaters or cinematographs and the distributors of the cinematographic
films. Section 11[43] of the Local Tax Code,[44] however, amended this provision by
transferring the power to impose amusement tax[45] on admission from theaters,
cinematographs, concert halls, circuses and other places of amusements exclusively to
the local government. Thus, when the NIRC of 1977[46] was enacted, the national
government imposed amusement tax only on proprietors, lessees or operators of cabarets,
day and night clubs, Jai-Alai and race tracks.[47]
On January 1, 1988, the VAT Law[48] was promulgated. It amended certain
provisions of the NIRC of 1977 by imposing a multi-stage VAT to replace the tax on
original and subsequent sales tax and percentage tax on certain services. It imposed VAT
on sales of services under Section 102 thereof, which provides:
SECTION 102. Value-added tax on sale of services. (a) Rate and
base of tax. There shall be levied, assessed and collected, a value-added tax
equivalent to 10% percent of gross receipts derived by any person engaged in
the sale of services. The phrase sale of services means the performance of all
kinds of services for others for a fee, remuneration or consideration, including
those performed or rendered by construction and service contractors; stock,
real estate, commercial, customs and immigration brokers; lessors of personal
property; lessors or distributors of cinematographic films; persons engaged
in milling, processing, manufacturing or repacking goods for others; and
similar services regardless of whether or not the performance thereof calls for
the exercise or use of the physical or mental faculties: Provided That the
following services performed in the Philippines by VAT-registered persons
shall be subject to 0%:

(1)
Processing manufacturing or repacking goods for other
persons doing business outside the Philippines which goods are subsequently
exported, x x x
xxxx
Gross receipts means the total amount of money or its equivalent
representing the contract price, compensation or service fee, including the
amount charged for materials supplied with the services and deposits or
advance payments actually or constructively received during the taxable
quarter for the service performed or to be performed for another person,
excluding value-added tax.
(b)
Determination of the tax. (1) Tax billed as a separate item
in the invoice. If the tax is billed as a separate item in the invoice, the tax
shall be based on the gross receipts, excluding the tax.
(2)
Tax not billed separately or is billed erroneously in the
invoice. If the tax is not billed separately or is billed erroneously in the
invoice, the tax shall be determined by multiplying the gross receipts
(including the amount intended to cover the tax or the tax billed erroneously)
by 1/11. (Emphasis supplied)
Persons subject to amusement tax under the NIRC of 1977, as amended, however, were
exempted from the coverage of VAT.[49]

On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 888, which clarified that the power to impose amusement tax on gross receipts derived
from admission tickets was exclusive with the local government units and that onlythe
gross receipts of amusement places derived from sources other than from admission
tickets were subject to amusement tax under the NIRC of 1977, as amended. Pertinent
portions of RMC 8-88 read:
Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to
levy amusement tax on gross receipts arising from admission to places of
amusement has been transferred to the local governments to the exclusion of
the national government.
xxxx

Since the promulgation of the Local Tax Code which took effect on
June 28, 1973 none of the amendatory laws which amended the National
Internal Revenue Code, including the value added tax law under Executive
Order No. 273, has amended the provisions of Section 11 of the Local Tax
Code. Accordingly, the sole jurisdiction for collection of amusement tax on
admission receipts in places of amusement rests exclusively on the local
government, to the exclusion of the national government. Since the Bureau of
Internal Revenue is an agency of the national government, then it follows that
it has no legal mandate to levy amusement tax on admission receipts in the
said places of amusement.
Considering the foregoing legal background, the provisions under
Section 123 of the National Internal Revenue Code as renumbered by
Executive Order No. 273 (Sec. 228, old NIRC) pertaining to amusement taxes
on places of amusement shall be implemented in accordance with BIR
RULING, dated December 4, 1973 and BIR RULING NO. 231-86
dated November 5, 1986 to wit:
x x x Accordingly, only the gross receipts of the amusement places
derived from sources other than from admission tickets shall be subject to
x x x amusement tax prescribed under Section 228 of the Tax Code, as
amended (now Section 123, NIRC, as amended by E.O. 273). The tax on
gross receipts derived from admission tickets shall be levied and collected
by the city government pursuant to Section 23 of Presidential Decree No.
231, as amended x x x or by the provincial government, pursuant to
Section 11 of P.D. 231, otherwise known as the Local Tax
Code. (Emphasis supplied)

On October 10, 1991, the LGC of 1991 was passed into law. The local
government retained the power to impose amusement tax on proprietors, lessees, or
operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of
amusement at a rate of not more than thirty percent (30%) of the gross receipts from
admission fees under Section 140 thereof. [50] In the case of theaters or cinemas, the tax
shall first be deducted and withheld by their proprietors, lessees, or operators and paid to
the local government before the gross receipts are divided between said proprietors,
lessees, or operators and the distributors of the cinematographic films. However, the
provision in the Local Tax Code expressly excluding the national government from
collecting tax from the proprietors, lessees, or operators of theaters, cinematographs,
concert halls, circuses and other places of amusements was no longer included.

In 1994, RA 7716 restructured the VAT system by widening its tax base and
enhancing its administration. Three years later, RA 7716 was amended by RA
8241. Shortly thereafter, the NIRC of 1997[51] was signed into law. Several
amendments[52] were made to expand the coverage of VAT. However, none pertain to
cinema/theater operators or proprietors. At present, only lessors or distributors of
cinematographic films are subject to VAT. While persons subject to amusement
tax[53] under the NIRC of 1997 are exempt from the coverage of VAT.[54]
Based on the foregoing, the following facts can be established:
(1)

Historically, the activity of showing motion pictures, films or

movies by cinema/theater operators or proprietors has always been
considered as a form of entertainment subject to amusement tax.

(2)

Prior to the Local Tax Code, all forms of amusement tax were
imposed by the national government.

(3)

When the Local Tax Code was enacted, amusement tax on

admission tickets from theaters, cinematographs, concert halls,
circuses and other places of amusements were transferred to the local
government.

(4)

Under the NIRC of 1977, the national government imposed

amusement tax only on proprietors, lessees or operators of cabarets,
day and night clubs, Jai-Alai and race tracks.

(5)

The VAT law was enacted to replace the tax on original and
subsequent sales tax and percentage tax on certain services.
(6)
When the VAT law was implemented, it exempted persons subject
to amusement tax under the NIRC from the coverage of VAT.
(7)

When the Local Tax Code was repealed by the LGC of 1991, the
local government continued to impose amusement tax on admission

tickets from theaters, cinematographs, concert halls, circuses and other

places of amusements.
(8)

Amendments to the VAT law have been consistent in exempting

persons subject to amusement tax under the NIRC from the coverage
of VAT.

(9)

Only lessors or distributors of cinematographic films are included

in the coverage of VAT.

These reveal the legislative intent not to impose VAT on persons already covered
by the amusement tax. This holds true even in the case of cinema/theater operators taxed
under the LGC of 1991 precisely because the VAT law was intended to replace the
percentage tax on certain services. The mere fact that they are taxed by the local
government unit and not by the national government is immaterial. The Local Tax Code,
in transferring the power to tax gross receipts derived by cinema/theater operators or
proprietor from admission tickets to the local government, did not intend to treat
cinema/theater houses as a separate class. No distinction must, therefore, be made
between the places of amusement taxed by the national government and those taxed by
the local government.
To hold otherwise would impose an unreasonable burden on cinema/theater
houses operators or proprietors, who would be paying an additional 10% [55] VAT on top
of the 30% amusement tax imposed by Section 140 of the LGC of 1991, or a total of
40% tax. Such imposition would result in injustice, as persons taxed under the NIRC of
1997 would be in a better position than those taxed under the LGC of 1991. We need not
belabor that a literal application of a law must be rejected if it will operate unjustly or lead
to absurd results.[56] Thus, we are convinced that the legislature never intended to include
cinema/theater operators or proprietors in the coverage of VAT.

[57]

On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals,
to wit:

The power of taxation is sometimes called also the power to destroy.

Therefore, it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the hen that lays the golden egg. And, in
order to maintain the general public's trust and confidence in the Government
this power must be used justly and not treacherously.

The repeal of the Local Tax Code by the LGC

of 1991 is not a legal basis for the imposition of
VAT

Petitioner, in issuing the assessment notices for deficiency VAT against

respondents, ratiocinated that:
Basically, it was acknowledged that a cinema/theater operator was then
subject to amusement tax under Section 260 of Commonwealth Act No. 466,
otherwise known as the National Internal Revenue Code of 1939, computed
on the amount paid for admission. With the enactment of the Local Tax Code
under Presidential Decree (PD) No. 231, dated June 28, 1973, the power of
imposing taxes on gross receipts from admission of persons to cinema/theater
and other places of amusement had, thereafter, been transferred to the
provincial government, to the exclusion of the national or municipal
government (Sections 11 & 13, Local Tax Code). However, the said
provision containing the exclusive power of the provincial government to
impose amusement tax, had also been repealed and/or deleted by Republic
Act (RA) No. 7160, otherwise known as the Local Government Code of
1991, enacted into law on October 10, 1991. Accordingly, the enactment of
RA No. 7160, thus, eliminating the statutory prohibition on the national
government to impose business tax on gross receipts from admission of
persons to places of amusement, led the way to the valid imposition of the
VAT pursuant to Section 102 (now Section 108) of the old Tax Code, as
amended by the Expanded VAT Law (RA No. 7716) and which was
implemented beginning January 1, 1996.[58] (Emphasis supplied)

We disagree.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the
imposition of VAT on the gross receipts of cinema/theater operators or proprietors
derived from admission tickets. The removal of the prohibition under the Local Tax
Code did not grant nor restore to the national government the power to impose
amusement tax on cinema/theater operators or proprietors. Neither did it expand the
coverage of VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot be
presumed nor can it be extended by implication. A law will not be construed as
imposing a tax unless it does so clearly, expressly, and unambiguously.[59] As it is, the
power to impose amusement tax on cinema/theater operators or proprietors remains with
the local government.
Revenue Memorandum Circular No. 28-2001 is
invalid

Considering that there is no provision of law imposing VAT on the gross receipts
of cinema/theater operators or proprietors derived from admission tickets, RMC No. 282001 which imposes VAT on the gross receipts from admission to cinema houses must be
struck down. We cannot overemphasize that RMCs must not override, supplant, or
modify the law, but must remain consistent and in harmony with, the law they seek to
apply and implement.[60]
In view of the foregoing, there is no need to discuss whether RMC No. 28-2001
complied with the procedural due process for tax issuances as prescribed under RMC No.
20-86.
Rule on tax exemption does not apply

Moreover, contrary to the view of petitioner, respondents need not prove their
entitlement to an exemption from the coverage of VAT. The rule that tax exemptions
should be construed strictly against the taxpayer presupposes that the taxpayer is clearly
subject to the tax being levied against him. [61] The reason is obvious: it is both illogical

and impractical to determine who are exempted without first determining who are
covered by the provision.[62] Thus, unless a statute imposes a tax clearly, expressly and
unambiguously, what applies is the equally well-settled rule that the imposition of a tax
cannot be presumed.[63] In fact, in case of doubt, tax laws must be construed strictly
against the government and in favor of the taxpayer.[64]
WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008
Decision of the Court of Tax Appeals En Banc holding that gross receipts derived by
respondents from admission tickets in showing motion pictures, films or movies are not
subject to value-added tax under Section 108 of the National Internal Revenue Code of
1997, as amended, and its June 24, 2008 Resolution denying the motion for
reconsideration are AFFIRMED.
SO ORDERED.
RENATO V. DIAZ and
AURORA MA. F. TIMBOL,
Petitioners,

- versus -

THE SECRETARY OF FINANCE

and THE COMMISSIONER OF
INTERNAL REVENUE,
Respondents.

G.R. No. 193007

Present:
CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,*
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA, and
SERENO,** JJ.
Promulgated:
July 19, 2011

x ---------------------------------------------------------------------------------------- x

DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added
tax?

The Facts and the Case

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this
petition for declaratory relief[1]assailing the validity of the impending imposition of
value-added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections
of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they
have an interest as regular users of tollways in stopping the BIR
action. Additionally, Diaz claims that he sponsored the approval of Republic Act
7716 (the 1994 Expanded VAT Law or EVAT Law) and Republic Act 8424 (the
1997 National Internal Revenue Code or the NIRC) at the House of
Representatives. Timbol, on the other hand, claims that she served as Assistant
Secretary of the Department of Trade and Industry and consultant of the Toll
Regulatory Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration of
President Gloria Macapagal-Arroyo to impose VAT on toll fees. The imposition
was deferred, however, in view of the consistent opposition of Diaz and other
sectors to such move. But, upon President Benigno C. Aquino IIIs assumption of

office in 2010, the BIR revived the idea and would impose the challenged tax on
toll fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC,
intend to include toll fees within the meaning of sale of services that are subject
to VAT; that a toll fee is a users tax, not a sale of services; that to impose VAT
on toll fees would amount to a tax on public service; and that, since VAT was never
factored into the formula for computing toll fees, its imposition would violate the
non-impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO),
enjoining the implementation of the VAT. The Court required the government,
represented by respondents Cesar V. Purisima, Secretary of the Department of
Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue, to
comment on the petition within 10 days from notice. [2] Later, the Court issued
another resolution treating the petition as one for prohibition.[3]
On August 23, 2010 the Office of the Solicitor General filed the
governments comment.[4] The government avers that the NIRC imposes VAT on
all kinds of services of franchise grantees, including tollway operations, except
where the law provides otherwise; that the Court should seek the meaning and
intent of the law from the words used in the statute; and that the imposition of VAT
on tollway operations has been the subject as early as 2003 of several BIR rulings
and circulars.[5]
The government also argues that petitioners have no right to invoke the nonimpairment of contracts clause since they clearly have no personal interest in
existing toll operating agreements (TOAs) between the government and tollway
operators. At any rate, the non-impairment clause cannot limit the States
sovereign taxing power which is generally read into contracts.

Finally, the government contends that the non-inclusion of VAT in the

parametric formula for computing toll rates cannot exempt tollway operators from
VAT. In any event, it cannot be claimed that the rights of tollway operators to a
reasonable rate of return will be impaired by the VAT since this is imposed on top
of the toll rate. Further, the imposition of VAT on toll fees would have very
minimal effect on motorists using the tollways.
In their reply[6] to the governments comment, petitioners point out that
tollway operators cannot be regarded as franchise grantees under the NIRC since
they do not hold legislative franchises. Further, the BIR intends to collect the VAT
by rounding off the toll rate and putting any excess collection in an escrow
account. But this would be illegal since only the Congress can modify VAT rates
and authorize its disbursement. Finally, BIR Revenue Memorandum Circular 632010 (BIR RMC 63-2010), which directs toll companies to record an accumulated
input VAT of zero balance in their books as of August 16, 2010, contravenes
Section 111 of the NIRC which grants entities that first become liable to VAT a
transitional input tax credit of 2% on beginning inventory. For this reason, the
VAT on toll fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1.
Whether or not the Court may treat the petition for declaratory relief
as one for prohibition; and
2.
Whether or not petitioners Diaz and Timbol have legal standing to file
the action.
The case also presents two substantive issues:
1.
Whether or not the government is unlawfully expanding VAT coverage
by including tollway operators and tollway operations in the terms franchise
grantees and sale of services under Section 108 of the Code; and

2.
Whether or not the imposition of VAT on tollway operators a) amounts
to a tax on tax and not a tax on services; b) will impair the tollway operators right
to a reasonable return of investment under their TOAs; and c) is not
administratively feasible and cannot be implemented.
The Courts Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as
one for prohibition rather than one for declaratory relief, the characterization that
petitioners Diaz and Timbol gave their action. The government has sought
reconsideration of the Courts resolution,[7] however, arguing that petitioners
allegations clearly made out a case for declaratory relief, an action over which the
Court has no original jurisdiction. The government adds, moreover, that the
petition does not meet the requirements of Rule 65 for actions for prohibition since
the BIR did not exercise judicial, quasi-judicial, or ministerial functions when it
sought to impose VAT on toll fees. Besides, petitioners Diaz and Timbol has a
plain, speedy, and adequate remedy in the ordinary course of law against the BIR
action in the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one
for prohibition if the case has far-reaching implications and raises questions that
need to be resolved for the public good.[8] The Court has also held that a petition
for prohibition is a proper remedy to prohibit or nullify acts of executive officials
that amount to usurpation of legislative authority.[9]
Here, the imposition of VAT on toll fees has far-reaching implications. Its
imposition would impact, not only on the more than half a million motorists who
use the tollways everyday, but more so on the governments effort to raise revenue
for funding various projects and for reducing budgetary deficits.

To dismiss the petition and resolve the issues later, after the challenged VAT
has been imposed, could cause more mischief both to the tax-paying public and the
government. A belated declaration of nullity of the BIR action would make any
attempt to refund to the motorists what they paid an administrative nightmare with
no solution. Consequently, it is not only the right, but the duty of the Court to take
cognizance of and resolve the issues that the petition raises.
Although the petition does not strictly comply with the requirements of Rule
65, the Court has ample power to waive such technical requirements when the
legal questions to be resolved are of great importance to the public. The same may
be said of the requirement of locus standi which is a mere procedural requisite.[10]
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as
amended. VAT is levied, assessed, and collected, according to Section 108, on the
gross receipts derived from the sale or exchange of services as well as from the use
or lease of properties. The third paragraph of Section 108 defines sale or exchange
of services as follows:
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, including those performed or
rendered by construction and service contractors; stock, real estate,
commercial, customs and immigration brokers; lessors of property,
whether personal or real; warehousing services; lessors or
distributors of cinematographic films; persons engaged in milling,
processing, manufacturing or repacking goods for others;
proprietors, operators or keepers of hotels, motels, resthouses,
pension houses, inns, resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes for hire and other
domestic common carriers by land relative to their transport of
goods or cargoes; common carriers by air and sea relative to their

transport of passengers, goods or cargoes from one place in the

Philippines to another place in the Philippines; sales of electricity by
generation
companies,
transmission,
and
distribution
companies; services of franchise grantees of electric utilities,
telephone and telegraph, radio and television broadcasting and all
other franchise grantees except those under Section 119 of this
Codeand non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding
companies; and similar services regardless of whether or not the
performance thereof calls for the exercise or use of the physical or
mental faculties. (Underscoring supplied)

It is plain from the above that the law imposes VAT on all kinds of
services rendered in the Philippines for a fee, including those specified in the
list. The enumeration of affected services is not exclusive. [11] By qualifying
services with the words all kinds, Congress has given the term services an
all-encompassing meaning. The listing of specific services are intended to
illustrate how pervasive and broad is the VATs reach rather than establish concrete
limits to its application. Thus, every activity that can be imagined as a form of
service rendered for a fee should be deemed included unless some provision of
law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree
(P.D.) 1112 or the Toll Operation Decree establishes the legal basis for the services
that tollway operators render. Essentially, tollway operators construct, maintain,
and operate expressways, also called tollways, at the operators expense. Tollways
serve as alternatives to regular public highways that meander through populated
areas and branch out to local roads. Traffic in the regular public highways is for
this reason slow-moving. In consideration for constructing tollways at their
expense, the operators are allowed to collect government-approved fees from
motorists using the tollways until such operators could fully recover their expenses
and earn reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect
for the latters use of the tollway facilities over which the operator enjoys private

proprietary rights[12] that its contract and the law recognize. In this sense, the
tollway operator is no different from the following service providers under Section
108 who allow others to use their properties or facilities for a fee:
1.
Lessors of property, whether personal or real;
2.
Warehousing service operators;
3.
Lessors or distributors of cinematographic films;
4.
Proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts;
5.
Lending investors (for use of money);
6.
Transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for hire
and other domestic common carriers by land relative to their transport
of goods or cargoes; and
7.
Common carriers by air and sea relative to their transport
of passengers, goods or cargoes from one place in the Philippines to
another place in the Philippines.
It does not help petitioners cause that Section 108 subjects to VAT all kinds
of services rendered for a fee regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental faculties. This
means that services to be subject to VAT need not fall under the traditional
concept of services, the personal or professional kinds that require the use of
human knowledge and skills.
And not only do tollway operators come under the broad term all kinds of
services, they also come under the specific class described in Section 108 as all
other franchise grantees who are subject to VAT, except those under Section 119
of this Code.
Tollway operators are franchise grantees and they do not belong to
exceptions (the low-income radio and/or television broadcasting companies with
gross annual incomes of less than P10 million and gas and water utilities) that
Section 119[13] spares from the payment of VAT. The word franchise broadly

covers government grants of a special right to do an act or series of acts of public

concern.[14]
Petitioners of course contend that tollway operators cannot be considered
franchise grantees under Section 108 since they do not hold legislative
franchises. But nothing in Section 108 indicates that the franchise grantees it
speaks of are those who hold legislative franchises. Petitioners give no reason, and
the Court cannot surmise any, for making a distinction between franchises granted
by Congress and franchises granted by some other government agency. The latter,
properly constituted, may grant franchises. Indeed, franchises conferred or granted
by local authorities, as agents of the state, constitute as much a legislative franchise
as though the grant had been made by Congress itself. [15] The term franchise has
been broadly construed as referring, not only to authorizations that Congress
directly issues in the form of a special law, but also to those granted by
administrative agencies to which the power to grant franchises has been delegated
by Congress.[16]
Tollway operators are, owing to the nature and object of their business,
franchise grantees. The construction, operation, and maintenance of toll facilities
on public improvements are activities of public consequence that necessarily
require a special grant of authority from the state. Indeed, Congress granted
special franchise for the operation of tollways to the Philippine National
Construction Company, the former tollway concessionaire for the North and South
Luzon Expressways. Apart from Congress, tollway franchises may also be granted
by the TRB, pursuant to the exercise of its delegated powers under P.D. 1112.
[17]
The franchise in this case is evidenced by a Toll Operation Certificate.[18]
Petitioners contend that the public nature of the services rendered by tollway
operators excludes such services from the term sale of services under Section
108 of the Code. But, again, nothing in Section 108 supports this contention. The
reverse is true. In specifically including by way of example electric utilities,
telephone, telegraph, and broadcasting companies in its list of VAT-covered

businesses, Section 108 opens other companies rendering public service for a fee to
the imposition of VAT. Businesses of a public nature such as public utilities and
the collection of tolls or charges for its use or service is a franchise.[19]
Nor can petitioners cite as binding on the Court statements made by certain
lawmakers in the course of congressional deliberations of the would-be law. As
the Court said in South African Airways v. Commissioner of Internal Revenue,
[20]
statements made by individual members of Congress in the consideration of a
bill do not necessarily reflect the sense of that body and are, consequently, not
controlling in the interpretation of law. The congressional will is ultimately
determined by the language of the law that the lawmakers voted on. Consequently,
the meaning and intention of the law must first be sought in the words of the
statute itself, read and considered in their natural, ordinary, commonly accepted
and most obvious significations, according to good and approved usage and
without resorting to forced or subtle construction.
Two. Petitioners argue that a toll fee is a users tax and to impose VAT on
toll fees is tantamount to taxing a tax.[21] Actually, petitioners base this argument
on the following discussion in Manila International Airport Authority (MIAA) v.
Court of Appeals:[22]
No one can dispute that properties of public dominion
mentioned in Article 420 of the Civil Code, like roads, canals,
rivers, torrents, ports and bridges constructed by the State, are owned
by the State. The term ports includes seaports and airports.
The MIAA Airport Lands and Buildings constitute a port
constructed by the State. Under Article 420 of the Civil Code,
the MIAA Airport Lands and Buildings are properties of public
dominion and thus owned by the State or the Republic of
the Philippines.
x x x The operation by the government of a tollway does not
change the character of the road as one for public use. Someone
must pay for the maintenance of the road, either the public
indirectly through the taxes they pay the government, or only those

among the public who actually use the road through the toll fees
they pay upon using the road.The tollway system is even a more
efficient and equitable manner of taxing the public for the
maintenance of public roads.
The charging of fees to the public does not determine the
character of the property whether it is for public dominion or not.
Article 420 of the Civil Code defines property of public dominion as
one intended for public use. Even if the government collects toll
fees, the road is still intended for public use if anyone can use the
road under the same terms and conditions as the rest of the
public. The charging of fees, the limitation on the kind of vehicles
that can use the road, the speed restrictions and other conditions for
the use of the road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the
landing fees MIAA charges to airlines, constitute the bulk of the
income that maintains the operations of MIAA. The collection of
such fees does not change the character of MIAA as an airport for
public use. Such fees are often termed users tax. This means taxing
those among the public who actually use a public facility instead of
taxing all the public including those who never use the particular
public facility. A users tax is more equitable a principle of taxation
mandated in the 1987 Constitution.[23] (Underscoring supplied)

Petitioners assume that what the Court said above, equating terminal fees to
a users tax must also pertain to tollway fees. But the main issue in
the MIAA case was whether or not Paraaque City could sell airport lands and
buildings under MIAA administration at public auction to satisfy unpaid real estate
taxes. Since local governments have no power to tax the national government, the
Court held that the City could not proceed with the auction sale. MIAA forms part
of the national government although not integrated in the department
framework.[24] Thus, its airport lands and buildings are properties of public
dominion beyond the commerce of man under Article 420(1) [25] of the Civil Code
and could not be sold at public auction.

As can be seen, the discussion in the MIAA case on toll roads and toll fees
was made, not to establish a rule that tollway fees are users tax, but to make the
point that airport lands and buildings are properties of public dominion and that the
collection of terminal fees for their use does not make them private
properties. Tollway fees are not taxes. Indeed, they are not assessed and collected
by the BIR and do not go to the general coffers of the government.
It would of course be another matter if Congress enacts a law imposing a
users tax, collectible from motorists, for the construction and maintenance of
certain roadways. The tax in such a case goes directly to the government for the
replenishment of resources it spends for the roadways. This is not the case
here. What the government seeks to tax here are fees collected from tollways that
are constructed, maintained, and operated by private tollway operators at their own
expense under the build, operate, and transfer scheme that the government has
adopted for expressways.[26] Except for a fraction given to the government, the toll
fees essentially end up as earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways,
are not taxes in any sense. A tax is imposed under the taxing power of the
government principally for the purpose of raising revenues to fund public
expenditures.[27] Toll fees, on the other hand, are collected by private tollway
operators as reimbursement for the costs and expenses incurred in the construction,
maintenance and operation of the tollways, as well as to assure them a reasonable
margin of income. Although toll fees are charged for the use of public facilities,
therefore, they are not government exactions that can be properly treated as a
tax. Taxes may be imposed only by the government under its sovereign authority,
toll fees may be demanded by either the government or private individuals or
entities, as an attribute of ownership.[28]
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax
due to the nature of VAT as an indirect tax. In indirect taxation, a distinction is
made between the liability for the tax and burden of the tax. The seller who is

liable for the VAT may shift or pass on the amount of VAT it paid on goods,
properties or services to the buyer. In such a case, what is transferred is not the
sellers liability but merely the burden of the VAT.[29]
Thus, the seller remains directly and legally liable for payment of the VAT,
but the buyer bears its burden since the amount of VAT paid by the former is added
to the selling price. Once shifted, the VAT ceases to be a tax[30] and simply becomes
part of the cost that the buyer must pay in order to purchase the good, property or
service.
Consequently, VAT on tollway operations is not really a tax on the tollway
user, but on the tollway operator. Under Section 105 of the Code, [31] VAT is
imposed on any person who, in the course of trade or business, sells or renders
services for a fee. In other words, the seller of services, who in this case is the
tollway operator, is the person liable for VAT. The latter merely shifts the burden of
VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll
fees were deemed as a users tax. VAT is assessed against the tollway operators
gross receipts and not necessarily on the toll fees. Although the tollway operator
may shift the VAT burden to the tollway user, it will not make the latter directly
liable for the VAT. The shifted VAT burden simply becomes part of the toll fees that
one has to pay in order to use the tollways.[32]
Three. Petitioner Timbol has no personality to invoke the non-impairment
of contract clause on behalf of private investors in the tollway projects. She will
neither be prejudiced by nor be affected by the alleged diminution in return of
investments that may result from the VAT imposition. She has no interest at all in
the profits to be earned under the TOAs. The interest in and right to recover
investments solely belongs to the private tollway investors.

Besides, her allegation that the private investors rate of recovery will be
adversely affected by imposing VAT on tollway operations is purely speculative.
Equally presumptuous is her assertion that a stipulation in the TOAs known as the
Material Adverse Grantor Action will be activated if VAT is thus imposed. The
Court cannot rule on matters that are manifestly conjectural. Neither can it prohibit
the State from exercising its sovereign taxing power based on uncertain, prophetic
grounds.
Four. Finally, petitioners assert that the substantiation requirements for
claiming input VAT make the VAT on tollway operations impractical and incapable
of implementation. They cite the fact that, in order to claim input VAT, the name,
address and tax identification number of the tollway user must be indicated in the
VAT receipt or invoice. The manner by which the BIR intends to implement the
VAT by rounding off the toll rate and putting any excess collection in an escrow
account is also illegal, while the alternative of giving change to thousands of
motorists in order to meet the exact toll rate would be a logistical nightmare. Thus,
according to them, the VAT on tollway operations is not administratively feasible.
[33]

Administrative feasibility is one of the canons of a sound tax system. It

simply means that the tax system should be capable of being effectively
administered and enforced with the least inconvenience to the taxpayer. Nonobservance of the canon, however, will not render a tax imposition invalid except
to the extent that specific constitutional or statutory limitations are
impaired.[34] Thus, even if the imposition of VAT on tollway operations may seem
burdensome to implement, it is not necessarily invalid unless some aspect of it is
shown to violate any law or the Constitution.
Here, it remains to be seen how the taxing authority will actually implement
the VAT on tollway operations. Any declaration by the Court that the manner of its
implementation is illegal or unconstitutional would be premature. Although the
transcript of the August 12, 2010 Senate hearing provides some clue as to how the

BIR intends to go about it,[35] the facts pertaining to the matter are not sufficiently
established for the Court to pass judgment on. Besides, any concern about how the
VAT on tollway operations will be enforced must first be addressed to the BIR on
whom the task of implementing tax laws primarily and exclusively rests. The Court
cannot preempt the BIRs discretion on the matter, absent any clear violation of
law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR
RMC 63-2010 which directs toll companies to record an accumulated input VAT of
zero balance in their books as of August 16, 2010, the date when the VAT
imposition was supposed to take effect. The issuance allegedly violates Section
111(A)[36] of the Code which grants first time VAT payers a transitional input VAT
of 2% on beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is actually the
product of negotiations with tollway operators who have been assessed VAT as
early as 2005, but failed to charge VAT-inclusive toll fees which by now can no
longer be collected. The tollway operators agreed to waive the 2% transitional
input VAT, in exchange for cancellation of their past due VAT liabilities. Notably,
the right to claim the 2% transitional input VAT belongs to the tollway operators
who have not questioned the circulars validity. They are thus the ones who have a
right to challenge the circular in a direct and proper action brought for the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative
prerogative or expand the VAT laws coverage when she sought to impose VAT on
tollway operations. Section 108(A) of the Code clearly states that services of all
other franchise grantees are subject to VAT, except as may be provided under
Section 119 of the Code. Tollway operators are not among the franchise grantees
subject to franchise tax under the latter provision. Neither are their services among
the VAT-exempt transactions under Section 109 of the Code.

If the legislative intent was to exempt tollway operations from VAT, as

petitioners so strongly allege, then it would have been well for the law to clearly
say so. Tax exemptions must be justified by clear statutory grant and based on
language in the law too plain to be mistaken. [37] But as the law is written, no such
exemption obtains for tollway operators. The Court is thus duty-bound to simply
apply the law as it is found.
Lastly, the grant of tax exemption is a matter of legislative policy that is
within the exclusive prerogative of Congress. The Courts role is to merely uphold
this legislative policy, as reflected first and foremost in the language of the tax
statute. Thus, any unwarranted burden that may be perceived to result from
enforcing such policy must be properly referred to Congress. The Court has no
discretion on the matter but simply applies the law.
The VAT on franchise grantees has been in the statute books since 1994
when R.A. 7716 or the Expanded Value-Added Tax law was passed. It is only
now, however, that the executive has earnestly pursued the VAT imposition against
tollway operators. The executive exercises exclusive discretion in matters
pertaining to the implementation and execution of tax laws. Consequently, the
executive is more properly suited to deal with the immediate and practical
consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and
Commissioner of Internal Revenues motion for reconsideration of its August 24,
2010 resolution, DISMISSES the petitioners Renato V. Diaz and Aurora Ma. F.
Timbols petition for lack of merit, and SETS ASIDE the Courts temporary
restraining order dated August 13, 2010.
SO ORDERED.

PHILIPPINE
AMUSEMENT
AND
GAMING CORPORATION (PAGCOR),
Petitioner,

- versus -

THE
BUREAU
OF
INTERNAL
REVENUE (BIR), represented herein by
HON. JOSE MARIO BUAG, in his
official capacity as COMMISSIONER
OF INTERNAL REVENUE,
Public Respondent,

G.R. No. 172087

Present:
CORONA, C.J.,
CARPIO,
CARPIO MORALES,
VELASCO, JR.,
NACHURA,*
LEONARDO-DE CASTRO,
BRION,*
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA, and
SERENO, JJ.

JOHN DOE and JANE DOE, who are

persons acting for, in behalf, or under the
authority of Respondent.
Promulgated:
Public and Private
Respondents.
March 15, 2011
x-----------------------------------------------------------------------------------------x
DECISION
PERALTA, J.:

For
resolution
of
this
Court
is
the
Petition
for Certiorari and Prohibition[1] with prayer for the issuance of a Temporary
Restraining Order and/or Preliminary Injunction, dated April 17, 2006, of
petitioner Philippine Amusement and Gaming Corporation (PAGCOR), seeking the
declaration of nullity of Section 1 of Republic Act (R.A.) No. 9337 insofar as it
amends Section 27 (c) of the National Internal Revenue Code of 1997, by
excluding petitioner from exemption from corporate income tax for being

repugnant to Sections 1 and 10 of Article III of the Constitution. Petitioner further

seeks to prohibit the implementation of Bureau of Internal Revenue (BIR) Revenue
Regulations No. 16-2005 for being contrary to law.
The undisputed facts follow.
PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067A on January 1, 1977. Simultaneous to its creation, P.D. No. 1067B[3] (supplementing P.D. No. 1067-A) was issued exempting PAGCOR from the
payment of any type of tax, except a franchise tax of five percent (5%) of the gross
revenue.[4] Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding the
scope of PAGCOR's exemption.[5]
To consolidate the laws pertaining to the franchise and powers of PAGCOR,
P.D. No. 1869[6] was issued. Section 13 thereof reads as follows:
[2]

Sec. 13. Exemptions. x x x

(1) Customs Duties, taxes and other imposts on importations. - All

importations of equipment, vehicles, automobiles, boats, ships, barges,
aircraft and such other gambling paraphernalia, including accessories or
related facilities, for the sole and exclusive use of the casinos, the proper
and efficient management and administration thereof and such other
clubs, recreation or amusement places to be established under and by
virtue of this Franchise shall be exempt from the payment of duties,
taxes and other imposts, including all kinds of fees, levies, or charges of
any kind or nature.
Vessels and/or accessory ferry boats imported or to be imported by
any corporation having existing contractual arrangements with the
Corporation, for the sole and exclusive use of the casino or to be used to
service the operations and requirements of the casino, shall likewise be
totally exempt from the payment of all customs duties, taxes and other
imposts, including all kinds of fees, levies, assessments or charges of any
kind or nature, whether National or Local.
(2) Income and other taxes. - (a) Franchise Holder: No tax of
any kind or form, income or otherwise, as well as fees, charges, or
levies of whatever nature, whether National or Local, shall be
assessed and collected under this Franchise from the Corporation;

nor shall any form of tax or charge attach in any way to the earnings
of the Corporation, except a Franchise Tax of five percent (5%)of
the gross revenue or earnings derived by the Corporation from its
operation under this Franchise. Such tax shall be due and payable
quarterly to the National Government and shall be in lieu of all
kinds of taxes, levies, fees or assessments of any kind, nature or
description, levied, established, or collected by any municipal,
provincial or national government authority.
(b) Others: The exemption herein granted for earnings derived
from the operations conducted under the franchise, specifically from the
payment of any tax, income or otherwise, as well as any form of charges,
fees or levies, shall inure to the benefit of and extend to corporation(s),
association(s), agency(ies), or individual(s) with whom the Corporation
or operator has any contractual relationship in connection with the
operations of the casino(s) authorized to be conducted under this
Franchise and to those receiving compensation or other remuneration
from the Corporation as a result of essential facilities furnished and/or
technical services rendered to the Corporation or operator.
The fee or remuneration of foreign entertainers contracted by the
Corporation or operator in pursuance of this provision shall be free of
any tax.
(3) Dividend Income. Notwithstanding any provision of law to
the contrary, in the event the Corporation should declare a cash dividend
income corresponding to the participation of the private sector shall, as
an incentive to the beneficiaries, be subject only to a final flat income
rate of ten percent (10%) of the regular income tax rates. The dividend
income shall not in such case be considered as part of the beneficiaries'
taxable income; provided, however, that such dividend income shall be
totally exempted from income or other form of taxes if invested within
six (6) months from the date the dividend income is received in the
following:
(a) operation of the casino(s) or investments in any affiliate
activity that will ultimately redound to the benefit of the
Corporation; or any other corporation with whom the Corporation
has any existing arrangements in connection with or related to the
operations of the casino(s);

(b) Government bonds, securities, treasury notes, or

government debentures; or
(c) BOI-registered or export-oriented corporation(s). [7]

PAGCOR's tax exemption was removed in June 1984 through P.D. No.
1931, but it was later restored by Letter of Instruction No. 1430, which was issued
in September 1984.
On January 1, 1998, R.A. No. 8424,[8] otherwise known as the National
Internal Revenue Code of 1997, took effect. Section 27 (c) of R.A. No. 8424
provides that government-owned and controlled corporations (GOCCs) shall pay
corporate income tax, except petitioner PAGCOR, the Government Service and
Insurance Corporation, the Social Security System, the Philippine Health Insurance
Corporation, and the Philippine Charity Sweepstakes Office, thus:
(c) Government-owned or Controlled Corporations, Agencies or
Instrumentalities. - The provisions of existing special general laws to the
contrary notwithstanding, all corporations, agencies or instrumentalities
owned and controlled by the Government, except the Government
Service and Insurance Corporation (GSIS), the Social Security
System (SSS), the Philippine Health Insurance Corporation (PHIC),
the Philippine Charity Sweepstakes Office (PCSO), and the
Philippine Amusement and Gaming Corporation (PAGCOR), shall
pay such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in similar business,
industry, or activity.[9]

With the enactment of R.A. No. 9337[10] on May 24, 2005, certain sections of
the National Internal Revenue Code of 1997 were amended. The particular
amendment that is at issue in this case is Section 1 of R.A. No. 9337, which
amended Section 27 (c) of the National Internal Revenue Code of 1997 by
excluding PAGCOR from the enumeration of GOCCs that are exempt from
payment of corporate income tax, thus:

(c) Government-owned or Controlled Corporations, Agencies or

Instrumentalities. - The provisions of existing special general laws to the
contrary notwithstanding, all corporations, agencies, or instrumentalities
owned and controlled by the Government, except the Government
Service and Insurance Corporation (GSIS), the Social Security
System (SSS), the Philippine Health Insurance Corporation (PHIC),
and the Philippine Charity Sweepstakes Office (PCSO), shall pay
such rate of tax upon their taxable income as are imposed by this Section
upon corporations or associations engaged in similar business, industry,
or activity.

Different groups came to this Court via petitions for certiorari and
prohibition[11] assailing the validity and constitutionality of R.A. No. 9337,
in particular:
1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of
goods and properties; Section 5, which imposes a 10% VAT on importation of
goods; and Section 6, which imposes a 10% VAT on sale of services and use or
lease of properties, all contain a uniform proviso authorizing the President, upon
the recommendation of the Secretary of Finance, to raise the VAT rate to
12%. The said provisions were alleged to be violative of Section 28 (2), Article VI
of the Constitution, which section vests in Congress the exclusive authority to fix
the rate of taxes, and of Section 1, Article III of the Constitution on due process, as
well as of Section 26 (2), Article VI of the Constitution, which section provides for
the "no amendment rule" upon the last reading of a bill;
2) Sections 8 and 12 were alleged to be violative of Section 1, Article III
of the Constitution, or the guarantee of equal protection of the laws, and
Section 28 (1), Article VI of the Constitution; and
3) other technical aspects of the passage of the law, questioning the
manner it was passed.

On September 1, 2005, the Court dismissed all the petitions and upheld the
constitutionality of R.A. No. 9337.[12]
On the same date, respondent BIR issued Revenue Regulations (RR) No.
16-2005,[13] specifically identifying PAGCOR as one of the franchisees subject to
10% VAT imposed under Section 108 of the National Internal Revenue Code of
1997, as amended by R.A. No. 9337. The said revenue regulation, in part, reads:
Sec. 4. 108-3. Definitions and Specific Rules on Selected Services.
xxxx
(h) x x x
Gross Receipts of all other franchisees, other than those covered by Sec.
119 of the Tax Code, regardless of how their franchisees may have been granted,
shall be subject to the 10% VAT imposed under Sec.108 of the Tax Code. This
includes, among others, the Philippine Amusement and Gaming Corporation
(PAGCOR), and its licensees or franchisees.

Hence, the present petition for certiorari.

PAGCOR raises the following issues:
I
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB
INITIO FOR BEING REPUGNANT TO THEEQUAL PROTECTION
[CLAUSE] EMBODIED IN SECTION 1, ARTICLE III OF THE 1987
CONSTITUTION.
II
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB
INITIO FOR BEING REPUGNANT TO THE NON-IMPAIRMENT [CLAUSE]
EMBODIED IN SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.
III
WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS
NULL AND VOID AB INITIO FOR BEING BEYOND THE SCOPE OF THE
BASIC LAW, RA 8424, SECTION 108, INSOFAR AS THE SAID

REGULATION IMPOSED VAT ON THE SERVICES OF THE PETITIONER AS

WELL AS PETITIONERS LICENSEES OR FRANCHISEES WHEN THE
BASIC LAW, AS INTERPRETED BY APPLICABLE JURISPRUDENCE,
DOES NOT IMPOSE VAT ON PETITIONER OR ON PETITIONERS
LICENSEES OR FRANCHISEES.[14]

The BIR, in its Comment[15] dated December 29, 2006, counters:

I
SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869
ARE BOTH VALID AND CONSTITUTIONAL PROVISIONS OF
LAWS THAT SHOULD BE HARMONIOUSLY CONSTRUED
TOGETHER SO AS TO GIVE EFFECT TO ALL OF THEIR
PROVISIONS WHENEVER POSSIBLE.
II
SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1
AND SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.
III
BIR REVENUE REGULATIONS ARE PRESUMED VALID AND
CONSTITUTIONAL UNTIL STRICKEN DOWN BY LAWFUL
AUTHORITIES.

The Office of the Solicitor General (OSG), by way of Manifestation

In Lieu of Comment,[16] concurred with the arguments of the petitioner. It added
that although the State is free to select the subjects of taxation and that the inequity
resulting from singling out a particular class for taxation or exemption is not an
infringement of the constitutional limitation, a tax law must operate with the same
force and effect to all persons, firms and corporations placed in a similar situation.
Furthermore, according to the OSG, public respondent BIR exceeded its statutory
authority when it enacted RR No. 16-2005, because the latter's provisions are
contrary to the mandates of P.D. No. 1869 in relation to R.A. No. 9337.
The main issue is whether or not PAGCOR is still exempt from corporate
income tax and VAT with the enactment of R.A. No. 9337.

After a careful study of the positions presented by the parties, this Court
finds the petition partly meritorious.
Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National
Internal Revenue Code of 1977, petitioner is no longer exempt from corporate
income tax as it has been effectively omitted from the list of GOCCs that are
exempt from it. Petitioner argues that such omission is unconstitutional, as it is
violative of its right to equal protection of the laws under Section 1, Article III of
the Constitution:
Sec. 1. No person shall be deprived of life, liberty, or property
without due process of law, nor shall any person be denied the equal
protection of the laws.
.

In City of Manila v. Laguio, Jr.,[17] this Court expounded the meaning and
scope of equal protection, thus:
Equal protection requires that all persons or things similarly
situated should be treated alike, both as to rights conferred and
responsibilities imposed. Similar subjects, in other words, should not be
treated differently, so as to give undue favor to some and unjustly
discriminate against others. The guarantee means that no person or class of
persons shall be denied the same protection of laws which is enjoyed by
other persons or other classes in like circumstances. The "equal protection
of the laws is a pledge of the protection of equal laws." It limits
governmental discrimination. The equal protection clause extends to
artificial persons but only insofar as their property is concerned.
xxxx
Legislative bodies are allowed to classify the subjects of
legislation. If the classification is reasonable, the law may operate only on
some and not all of the people without violating the equal protection
clause. The classification must, as an indispensable requisite, not be
arbitrary. To be valid, it must conform to the following requirements:

1) It must be based on substantial distinctions.

2) It must be germane to the purposes of the law.
3) It must not be limited to existing conditions only.
4) It must apply equally to all members of the class. [18]

It is not contested that before the enactment of R.A. No. 9337, petitioner was
one of the five GOCCs exempted from payment of corporate income tax as shown
in R.A. No. 8424, Section 27 (c) of which, reads:
(c) Government-owned or Controlled Corporations, Agencies or
Instrumentalities. - The provisions of existing special or general laws to
the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except the
Government Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance Corporation
(PHIC), the Philippine Charity Sweepstakes Office (PCSO), and
the Philippine Amusement and Gaming Corporation (PAGCOR),
shall pay such rate of tax upon their taxable income as are imposed by
this Section upon corporations or associations engaged in similar
business, industry, or activity.[19]

A perusal of the legislative records of the Bicameral Conference Meeting of

the Committee on Ways on Means dated October 27, 1997 would show that the
exemption of PAGCOR from the payment of corporate income tax was due to
the acquiescence of the Committee on Ways on Means to the request of
PAGCOR that it be exempt from such tax.[20] The records of the Bicameral
Conference Meeting reveal:
HON. R. DIAZ. The other thing, sir, is we --- I noticed we
imposed a tax on lotto winnings.
CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.

HON. R. DIAZ. Tinanggal na ba natin yon?

CHAIRMAN ENRILE. Oo.
HON. R. DIAZ. Because I was wondering whether we covered
the tax on --- Whether on a universal basis, we included a tax on
cockfighting winnings.
CHAIRMAN ENRILE. No, we removed the --HON. R. DIAZ. I . . . (inaudible) natin yong lotto?
CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.
CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission.
CHAIRMAN ENRILE. Philippine Insurance --- Health, health
ba. Yon ang request ng Chairman, I will accept. (laughter) Pag-Pagibig yon, maliliit na sa tao yon.
HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers
if we factored in an amount that would reflect the VAT and other sales
taxes--CHAIRMAN ENRILE. No, were talking of this measure
only. We will not --- (discontinued)
HON. ROXAS. No, no, no, no, from the --- arising from the
exemption. Assuming that when we release the money into the hands of
the public, they will not use that to --- for wallpaper. They will spend
that eh, Mr. Chairman. So when they spend that--CHAIRMAN ENRILE. Theres a VAT.
HON. ROXAS. There will be a VAT and there will be other sales
taxes no. Is there a quantification? Is there an approximation?
CHAIRMAN JAVIER. Not anything.

HON. ROXAS. So, in effect, we have sterilized that entire seven

billion. In effect, it is not circulating in the economy which is unrealistic.
CHAIRMAN ENRILE. It does, it does, because this is taken and
spent by government, somebody receives it in the form of wages and
supplies and other services and other goods. They are not being taken
from the public and stored in a vault.
CHAIRMAN JAVIER. That 7.7 loss because
exemption. That will be extra income for the taxpayers.

of

tax

HON. ROXAS. Precisely, so they will be spending it.[21]

The discussion above bears out that under R.A. No. 8424, the exemption of
PAGCOR from paying corporate income tax was not based on a classification
showing substantial distinctions which make for real differences, but to reiterate,
the exemption was granted upon the request of PAGCOR that it be exempt from
the payment of corporate income tax.
With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424,
PAGCOR has been excluded from the enumeration of GOCCs that are exempt
from paying corporate income tax. The records of the Bicameral Conference
Meeting dated April 18, 2005, of the Committee on the Disagreeing Provisions of
Senate Bill No. 1950 and House Bill No. 3555, show that it is the legislative intent
that PAGCOR be subject to the payment of corporate income tax, thus:
THE CHAIRMAN (SEN. RECTO). Yes, Osmea, the proponent
of the amendment.
SEN. OSMEA. Yeah. Mr. Chairman, one of the reasons why
we're even considering this VAT bill is we want to show the world who our
creditors, that we are increasing official revenues that go to the national budget.
Unfortunately today, Pagcor is unofficial.
Now, in 2003, I took a quick look this morning, Pagcor had a net
income of 9.7 billion after paying some small taxes that they are subjected
to. Of the 9.7 billion, they claim they remitted to national government seven
billion. Pagkatapos, there are other specific remittances like to the Philippine
Sports Commission, etc., as mandated by various laws, and then about 400

million to the President's Social Fund. But all in all, their net profit today
should be about 12 billion. That's why I am questioning this two
billion. Because while essentially they claim that the money goes to
government, and I will accept that just for the sake of argument. It does
not pass through the appropriation process. And I think that at least if we
can capture 35 percent or 32 percent through the budgetary process, first, it
is reflected in our official income of government which is applied to the
national budget, and secondly, it goes through what is constitutionally
mandated as Congress appropriating and defining where the money is
spent and not through a board of directors that has absolutely no
accountability.
REP. PUENTEBELLA. Well, with all due respect, Mr.
Chairman, follow up lang.
There is wisdom in the comments of my good friend from Cebu,
Senator Osmea.
SEN. OSMEA. And Negros.
REP. PUENTEBELLA. And Negros at the same time ay
Kasimanwa. But I would not want to put my friends from the Department of
Finance in a difficult position, but may we know your comments on this
knowing that as Senator Osmea just mentioned, he said, I accept that that a lot
of it is going to spending for basic services, you know, going to most, I think,
supposedly a lot or most of it should go to government spending, social services
and the like. What is your comment on this? This is going to affect a lot of
services on the government side.
THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.
SEN. OSMEA. It goes from pocket to the other, Monico.
REP. PUENTEBELLA. I know that. But I wanted to ask them,
Mr. Senator, because you may have your own pre-judgment on this and I don't
blame you. I don't blame you. And I know you have your own research. But
will this not affect a lot, the disbursements on social services and other?
REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to
that question also. Wouldn't it be easier for you to explain to, say,
foreign creditors, how do you explain to them that if there is a fiscal gap some
of our richest corporations has [been] spared [from] taxation by the government
which is one rich source of revenues. Now, why do you save, why do you spare
certain government corporations on that, like Pagcor? So, would it be easier for
you to make an argument if everything was exposed to taxation?

REP. TEVES. Mr. Chair, please.

THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to
respond to those before we call Congressman Teves?
MR. PURISIMA. Thank you, Mr. Chair.
Yes, from definitely improving the collection, it will help us
because it will then enter as an official revenue although when dividends
declare it also goes in as other income. (sic)
xxxx
REP. TEVES. Mr. Chairman.
xxxx
THE CHAIRMAN (REP. LAPUS). Congressman Teves.
REP. TEVES. Yeah. Pagcor is controlled under Section 27,
that is on income tax. Now, we are talking here on value-added tax. Do you
mean to say we are going to amend it from income tax to value-added tax,
as far as Pagcor is concerned?
THE CHAIRMAN (SEN. RECTO). No. We are just amending
that section with regard to the exemption from income tax of Pagcor.
xxxx
REP.

NOGRALES. Mr.

Chairman,

Mr.

Chairman. Mr.

Chairman.
THE CHAIRMAN (REP. LAPUS). Congressman Nograles.
REP. NOGRALES. Just a point of inquiry from the Chair. What
exactly are the functions of Pagcor that are VATable? What will we VAT in
Pagcor?
THE CHAIRMAN (REP. LAPUS). This is on own income
tax. This is Pagcor income tax.
REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa
kanya. Sale of what?
xxxx

REP. VILLAFUERTE. Mr. Chairman, my question is, what are

we VATing Pagcor with, is it the . . .
REP. NOGRALES. Mr. Chairman, this is a secret agreement or
the way they craft their contract, which basis?
THE CHAIRMAN (SEN. RECTO). Congressman Nograles,
the Senate version does not discuss a VAT on Pagcor but it just takes away
their exemption from non-payment of income tax.[22]

Taxation is the rule and exemption is the exception.[23] The burden of proof
rests upon the party claiming exemption to prove that it is, in fact, covered by the
exemption so claimed.[24] As a rule, tax exemptions are construed strongly against
the claimant.[25] Exemptions must be shown to exist clearly and categorically, and
supported by clear legal provision.[26]
In this case, PAGCOR failed to prove that it is still exempt from the payment
of corporate income tax, considering that Section 1 of R.A. No. 9337 amended
Section 27 (c) of the National Internal Revenue Code of 1997 by omitting
PAGCOR from the exemption. The legislative intent, as shown by the discussions
in the Bicameral Conference Meeting, is to require PAGCOR to pay corporate
income tax; hence, the omission or removal of PAGCOR from exemption from the
payment of corporate income tax. It is a basic precept of statutory construction
that the express mention of one person, thing, act, or consequence excludes all
others as expressed in the familiar maxim expressio unius est exclusio alterius.
[27]
Thus, the express mention of the GOCCs exempted from payment of corporate
income tax excludes all others. Not being excepted, petitioner PAGCOR must be
regarded as coming within the purview of the general rule that GOCCs shall pay
corporate income tax, expressed in the maxim: exceptio firmat regulam in casibus
non exceptis.[28]
PAGCOR cannot find support in the equal protection clause of the
Constitution, as the legislative records of the Bicameral Conference Meeting dated
October 27, 1997, of the Committee on Ways and Means, show that PAGCORs

exemption from payment of corporate income tax, as provided in Section 27 (c)

of R.A. No. 8424, or the National Internal Revenue Code of 1997, was not made
pursuant to a valid classification based on substantial distinctions and the other
requirements of a reasonable classification by legislative bodies, so that the law
may operate only on some, and not all, without violating the equal protection
clause. The legislative records show that the basis of the grant of exemption to
PAGCOR from corporate income tax was PAGCORs own request to be exempted.
Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and
void ab
initio for
violating
the
non-impairment
clause
of
the
Constitution. Petitioner avers that laws form part of, and is read into, the contract
even without the parties expressly saying so. Petitioner states that the private
parties/investors transacting with it considered the tax exemptions, which inure to
their benefit, as the main consideration and inducement for their decision to
transact/invest with it. Petitioner argues that the withdrawal of its exemption from
corporate income tax by R.A. No. 9337 has the effect of changing the main
consideration and inducement for the transactions of private parties with it; thus,
the amendatory provision is violative of the non-impairment clause of the
Constitution.
Petitioners contention lacks merit.
The non-impairment clause is contained in Section 10, Article III of the
Constitution, which provides that no law impairing the obligation of contracts shall
be passed. The non-impairment clause is limited in application to laws that
derogate from prior acts or contracts by enlarging, abridging or in any manner
changing the intention of the parties. [29] There is impairment if a subsequent law
changes the terms of a contract between the parties, imposes new conditions,
dispenses with those agreed upon or withdraws remedies for the enforcement of
the rights of the parties.[30]

As
regards
franchises, Section
11,
Article
XII
of
[31]
the Constitution provides that no franchise or right shall be granted except
under the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires.[32]
In Manila Electric Company v. Province of Laguna,[33] the Court held that a
franchise partakes the nature of a grant, which is beyond the purview of the
non-impairment clause of the Constitution.[34] The pertinent portion of the case
states:
While the Court has, not too infrequently, referred to tax exemptions
contained in special franchises as being in the nature of contracts and a part of the
inducement for carrying on the franchise, these exemptions, nevertheless, are far
from being strictly contractual in nature. Contractual tax exemptions, in the real
sense of the term and where the non-impairment clause of the Constitution can
rightly be invoked, are those agreed to by the taxing authority in contracts, such
as those contained in government bonds or debentures, lawfully entered into by
them under enabling laws in which the government, acting in its private capacity,
sheds its cloak of authority and waives its governmental immunity. Truly, tax
exemptions of this kind may not be revoked without impairing the obligations of
contracts. These contractual tax exemptions, however, are not to be confused with
tax exemptions granted under franchises. A franchise partakes the nature of a
grant which is beyond the purview of the non-impairment clause of the
Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution, like its
precursor provisions in the 1935 and the 1973 Constitutions, is explicit that
no franchise for the operation of a public utility shall be granted except
under the condition that such privilege shall be subject to amendment,
alteration or repeal by Congress as and when the common good so requires.
[35]

In this case, PAGCOR was granted a franchise to operate and maintain

gambling casinos, clubs and other recreation or amusement places, sports, gaming
pools, i.e., basketball, football, lotteries, etc., whether on land or sea, within the
territorial jurisdiction of the Republic of the Philippines. [36] Under Section 11,
Article XII of the Constitution, PAGCORs franchise is subject to amendment,
alteration or repeal by Congress such as the amendment under Section 1 of R.A.
No. 9377. Hence, the provision in Section 1 of R.A. No. 9337, amending Section

27 (c) of R.A. No. 8424 by withdrawing the exemption of PAGCOR from

corporate income tax, which may affect any benefits to PAGCORs transactions
with private parties, is not violative of the non-impairment clause of the
Constitution.
Anent the validity of RR No. 16-2005, the Court holds that the provision
subjecting PAGCOR to 10% VAT is invalid for being contrary to R.A. No.
9337. Nowhere in R.A. No. 9337 is it provided that petitioner can be subjected to
VAT. R.A. No. 9337 is clear only as to the removal of petitioner's exemption from
the payment of corporate income tax, which was already addressed above by this
Court.
As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from
VAT pursuant to Section 7 (k) thereof, which reads:
Sec. 7. Section 109 of the same Code, as amended, is hereby further
amended to read as follows:

Section 109. Exempt Transactions. - (1) Subject to

the provisions of Subsection (2) hereof, the following
transactions shall be exempt from the value-added tax:
xxxx
(k) Transactions
which
are
exempt under
international agreements to which the Philippines is a
signatory or under special laws, except Presidential Decree
No. 529.[37]

Petitioner is exempt from the payment of VAT, because PAGCORs charter,

P.D. No. 1869, is a special law that grants petitioner exemption from taxes.
Moreover, the exemption of PAGCOR from VAT is supported by Section 6
of R.A. No. 9337, which retained Section 108 (B) (3) of R.A. No. 8424, thus:
[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424),
as amended, is hereby further amended to read as follows:

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
(10%) of gross receipts derived from the sale or exchange of
services, including the use or lease of properties: x x x
xxxx
(B) Transactions Subject to Zero Percent (0%) Rate.
The following services performed in the Philippines by VATregistered persons shall be subject to zero percent (0%) rate;
xxxx
(3) Services rendered to persons or entities whose
exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects the
supply of such services to zero percent (0%) rate;
x x x x[38]

As pointed out by petitioner, although R.A. No. 9337 introduced

amendments to Section 108 of R.A. No. 8424 by imposing VAT on other services
not previously covered, it did not amend the portion of Section 108 (B) (3) that
subjects to zero percent rate services performed by VAT-registered persons to
persons or entities whose exemption under special laws or international agreements
to which the Philippines is a signatory effectively subjects the supply of such
services to 0% rate.
Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No.
8424 has been thoroughly and extensively discussed in Commissioner of Internal
Revenue v. Acesite (Philippines) Hotel Corporation.[39] Acesite was the owner and
operator of the Holiday Inn Manila Pavilion Hotel. It leased a portion of the
hotels premises to PAGCOR. It incurred VAT amounting to P30,152,892.02 from
its rental income and sale of food and beverages to PAGCOR from January 1996
to April 1997. Acesite tried to shift the said taxes to PAGCOR by incorporating it

in the amount assessed to PAGCOR. However, PAGCOR refused to pay the taxes
because of its tax-exempt status. PAGCOR paid only the amount due to Acesite
minus VAT in the sum of P30,152,892.02. Acesite paid VAT in the amount
of P30,152,892.02 to the Commissioner of Internal Revenue, fearing the legal
consequences of its non-payment. In May 1998, Acesite sought the refund of the
amount it paid as VAT on the ground that its transaction with PAGCOR was
subject to zero rate as it was rendered to a tax-exempt entity. The Court ruled that
PAGCOR and Acesite were both exempt from paying VAT, thus:
xxxx
PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the
latter an exemption from the payment of taxes.Section 13 of P.D. 1869 pertinently
provides:
Sec. 13. Exemptions.
xxxx
(2) Income and other taxes. - (a) Franchise Holder: No tax
of any kind or form, income or otherwise, as well as fees, charges
or levies of whatever nature, whether National or Local, shall be
assessed and collected under this Franchise from the Corporation;
nor shall any form of tax or charge attach in any way to the
earnings of the Corporation, except a Franchise Tax of five (5%)
percent of the gross revenue or earnings derived by the
Corporation from its operation under this Franchise. Such tax shall
be due and payable quarterly to the National Government and shall
be in lieu of all kinds of taxes, levies, fees or assessments of any
kind, nature or description, levied, established or collected by any
municipal, provincial, or national government authority.
(b) Others: The exemptions herein granted for earnings
derived from the operations conducted under the franchise
specifically from the payment of any tax, income or otherwise, as
well as any form of charges, fees or levies, shall inure to the
benefit of and extend to corporation(s), association(s), agency(ies),
or individual(s) with whom the Corporation or operator has any
contractual relationship in connection with the operations of the

casino(s) authorized to be conducted under this Franchise and to

those receiving compensation or other remuneration from the
Corporation or operator as a result of essential facilities furnished
and/or technical services rendered to the Corporation or operator.

Petitioner contends that the above tax exemption refers only to

PAGCOR's direct tax liability and not to indirect taxes, like the VAT.
We disagree.
A close scrutiny of the above provisos clearly gives PAGCOR
a blanket exemption to taxes with no distinction on whether the
taxes are direct or indirect. We are one with the CA ruling that
PAGCOR is also exempt from indirect taxes, like VAT, as follows:
Under the above provision [Section 13 (2) (b) of P.D.
1869], the term "Corporation" or operator refers to
PAGCOR. Although the law does not specifically mention
PAGCOR's exemption from indirect taxes, PAGCOR is
undoubtedly exempt from such taxes because the law
exempts from taxes persons or entities contracting with
PAGCOR in casino operations. Although, differently
worded, the provision clearly exempts PAGCOR from
indirect taxes. In fact, it goes one step further by
granting tax exempt status to persons dealing with
PAGCOR in casino operations. The unmistakable
conclusion is that PAGCOR is not liable for the P30,
152,892.02 VAT and neither is Acesite as the latter is
effectively subject to zero percent rate under Sec. 108 B
(3), R.A. 8424. (Emphasis supplied.)
Indeed, by extending the exemption to entities or individuals
dealing with PAGCOR, the legislature clearly granted exemption also
from indirect taxes. It must be noted that the indirect tax of VAT, as in
the instant case, can be shifted or passed to the buyer, transferee, or
lessee of the goods, properties, or services subject to VAT. Thus, by
extending the tax exemption to entities or individuals dealing with
PAGCOR in casino operations, it is exempting PAGCOR from being
liable to indirect taxes.
The manner of charging VAT does not make PAGCOR liable to said
tax.

It is true that VAT can either be incorporated in the value of the

goods, properties, or services sold or leased, in which case it is computed
as 1/11 of such value, or charged as an additional 10% to the value.
Verily, the seller or lessor has the option to follow either way in charging
its clients and customer. In the instant case, Acesite followed the latter
method, that is, charging an additional 10% of the gross sales and
rentals. Be that as it may, the use of either method, and in particular, the
first method, does not denigrate the fact that PAGCOR is exempt from
an indirect tax, like VAT.
VAT exemption extends to Acesite
Thus, while it was proper for PAGCOR not to pay the 10% VAT
charged by Acesite, the latter is not liable for the payment of it as it is
exempt in this particular transaction by operation of law to pay the
indirect tax. Such exemption falls within the former Section 102 (b) (3)
of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424),
which provides:
Section 102. Value-added tax on sale of services.- (a)
Rate and base of tax - There shall be levied, assessed and
collected, a value-added tax equivalent to 10% of gross
receipts derived by any person engaged in the sale of
services x x x; Provided, that the following services
performed in the Philippines by VAT registered persons
shall be subject to 0%.
xxxx
(3) Services rendered to persons or entities whose
exemption under special laws or international agreements
to which the Philippines is a signatory effectively subjects
the supply of such services to zero (0%) rate (emphasis
supplied).
The rationale for the exemption from indirect taxes provided for
in P.D. 1869 and the extension of such exemption to entities or
individuals dealing with PAGCOR in casino operations are best
elucidated from the 1987 case of Commissioner of Internal
Revenue v. John Gotamco & Sons, Inc., where the absolute tax
exemption of the World Health Organization (WHO) upon an

international agreement was upheld. We held in said case that the

exemption of contractee WHO should be implemented to mean that the
entity or person exempt is the contractor itself who constructed the
building owned by contractee WHO, and such does not violate the rule
that tax exemptions are personal because the manifest intention of the
agreement is to exempt the contractor so that no contractor's tax may be
shifted to the contractee WHO. Thus, the proviso in P.D. 1869,
extending the exemption to entities or individuals dealing with
PAGCOR in casino operations, is clearly to proscribe any indirect
tax, like VAT, that may be shifted to PAGCOR.[40]

Although the basis of the exemption of PAGCOR and Acesite from VAT in
the case of The Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation was Section 102 (b) of the 1977 Tax Code, as amended, which section
was retained as Section 108 (B) (3) in R.A. No. 8424,[41] it is still applicable to this
case, since the provision relied upon has been retained in R.A. No. 9337.[42]
It is settled rule that in case of discrepancy between the basic law and a rule
or regulation issued to implement said law, the basic law prevails, because the said
rule or regulation cannot go beyond the terms and provisions of the basic law.
[43]
RR No. 16-2005, therefore, cannot go beyond the provisions of R.A. No.
9337. Since PAGCOR is exempt from VAT under R.A. No. 9337, the BIR
exceeded its authority in subjecting PAGCOR to 10% VAT under RR No. 16-2005;
hence, the said regulatory provision is hereby nullified.
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of
Republic Act No. 9337, amending Section 27 (c) of the National Internal Revenue
Code of 1997, by excluding petitioner Philippine Amusement and Gaming
Corporation from the enumeration of government-owned and controlled
corporations exempted from corporate income tax is valid and constitutional,
while BIR Revenue Regulations No. 16-2005 insofar as it subjects PAGCOR to
10% VAT is null and void for being contrary to the National Internal Revenue
Code of 1997, as amended by Republic Act No. 9337.
No costs.

SO ORDERED.

G.R. No. 152609

June 29, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), Respondent.
DECISION
PANGANIBAN, J.:
As a general rule, the value-added tax (VAT) system uses the destination principle.
However, our VAT law itself provides for a clear exception, under which the supply of
service shall be zero-rated when the following requirements are met: (1) the service is
performed in the Philippines; (2) the service falls under any of the categories provided in
Section 102(b) of the Tax Code; and (3) it is paid for in acceptable foreign currency that is
accounted for in accordance with the regulations of the Bangko Sentral ng Pilipinas. Since
respondents services meet these requirements, they are zero-rated. Petitioners Revenue
Regulations that alter or revoke the above requirements are ultra vires and invalid.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the
February 28, 2002 Decision2of the Court of Appeals (CA) in CA-GR SP No. 62727. The
assailed Decision disposed as follows:
"WHEREFORE, premises considered, the petition is hereby DISMISSED for lack of merit.
The assailed decision of the Court of Tax Appeals (CTA) is AFFIRMED in toto."3
The Facts
Quoting the CTA, the CA narrated the undisputed facts as follows:
"[Respondent] is a Philippine branch of American Express International, Inc., a corporation
duly organized and existing under and by virtue of the laws of the State of Delaware,
U.S.A., with office in the Philippines at the Ground Floor, ACE Building, corner Rada and de
la Rosa Streets, Legaspi Village, Makati City. It is a servicing unit of American Express
International, Inc. - Hongkong Branch (Amex-HK) and is engaged primarily to facilitate the
collections of Amex-HK receivables from card members situated in the Philippines and
payment to service establishments in the Philippines.

"Amex Philippines registered itself with the Bureau of Internal Revenue (BIR), Revenue
District Office No. 47 (East Makati) as a value-added tax (VAT) taxpayer effective March
1988 and was issued VAT Registration Certificate No. 088445 bearing VAT Registration No.
32A-3-004868. For the period January 1, 1997 to December 31, 1997, [respondent] filed
with the BIR its quarterly VAT returns as follows:
Exhibit

Period Covered

Date Filed

1997 1st Qtr.

April 18, 1997

2nd Qtr.

July 21, 1997

3rd Qtr.

October 2, 1997

4th Qtr.

January 20, 1998

"On March 23, 1999, however, [respondent] amended the aforesaid returns and declared
the following:
Exh
1997

Taxable
Sales

Output
VAT

I 1st qtr

P59,597.20

J 2nd
qtr

67,517.20

6,751.72

K 3rd
qtr

51,936.60

L 4th
qtr

67,994.30

Total

Zero-rated
Sales

P5,959.72 P17,513,801.11

Domestic
Purchases

Input
VAT

P6,778,182.30

P677,818.23

17,937,361.51

9,333,242.90

933,324.29

5,193.66

19,627,245.36

8,438,357.00

843,835.70

6,799.43

25,231,225.22

13,080,822.10

1,308,082.21

P247,045.30 P24,704.53 P80,309,633.20 P37,630,604.30 P3,763,060.43

"On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997
excess input taxes in the amount of P3,751,067.04, which amount was arrived at after
deducting from its total input VAT paid ofP3,763,060.43 its applied output VAT liabilities only
for the third and fourth quarters of 1997 amounting toP5,193.66 and P6,799.43,
respectively. [Respondent] cites as basis therefor, Section 110 (B) of the 1997 Tax Code, to
state:
Section 110. Tax Credits. xxxxxxxxx
(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds
the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds
the output tax, the excess shall be carried over to the succeeding quarter or quarters. Any

input tax attributable to the purchase of capital goods or to zero-rated sales by a VATregistered person may at his option be refunded or credited against other internal revenue
taxes, subject to the provisions of Section 112.
"There being no immediate action on the part of the [petitioner], [respondents] petition was
filed on April 15, 1999.
"In support of its Petition for Review, the following arguments were raised by [respondent]:
A. Export sales by a VAT-registered person, the consideration for which is paid for in
acceptable foreign currency inwardly remitted to the Philippines and accounted for in
accordance with existing regulations of the Bangko Sentral ng Pilipinas, are subject to [VAT]
at zero percent (0%). According to [respondent], being a VAT-registered entity, it is subject
to the VAT imposed under Title IV of the Tax Code, to wit:
Section 102.(sic) Value-added tax on sale of services.- (a) Rate and base of tax. - There
shall be levied, assessed and collected, a value-added tax equivalent to 10% percent of
gross receipts derived by any person engaged in the sale of services. The phrase "sale of
services" means the performance of all kinds of services for others for a fee, remuneration
or consideration, including those performed or rendered by construction and service
contractors: stock, real estate, commercial, customs and immigration brokers; lessors of
personal property; lessors or distributors of cinematographic films; persons engaged in
milling, processing, manufacturing or repacking goods for others; and similar services
regardless of whether o[r] not the performance thereof calls for the exercise or use of the
physical or mental faculties: Provided That the following services performed in the
Philippines by VAT-registered persons shall be subject to 0%:
(1) x x x
(2) Services other than those mentioned in the preceding subparagraph, the
consideration is paid for in acceptable foreign currency which is remitted inwardly to
the Philippines and accounted for in accordance with the rules and regulations of the
BSP. x x x.
In addition, [respondent] relied on VAT Ruling No. 080-89, dated April 3, 1989, the pertinent
portion of which reads as follows:
In Reply, please be informed that, as a VAT registered entity whose service is paid for in
acceptable foreign currency which is remitted inwardly to the Philippines and accounted for
in accordance with the rules and regulations of the Central [B]ank of the Philippines, your
service income is automatically zero rated effective January 1, 1998. [Section 102(a)(2) of
the Tax Code as amended].4 For this, there is no need to file an application for zero-rate.
B. Input taxes on domestic purchases of taxable goods and services related to zero-rated
revenues are available as tax refund in accordance with Section 106 (now Section 112) of
the [Tax Code] and Section 8(a) of [Revenue] Regulations [(RR)] No. 5-87, to state:
Section 106. Refunds or tax credits of input tax. -

(A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered person, except those
covered by paragraph (a) above, whose sales are zero-rated or are effectively zero-rated,
may, within two (2) years after the close of the taxable quarter when such sales were made,
apply for the issuance of tax credit certificate or refund of the input taxes due or attributable
to such sales, to the extent that such input tax has not been applied against output tax. x x
x. [Section 106(a) of the Tax Code]5
Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable transaction for
value-added tax purposes. A sale by a VAT-registered person of goods and/or services
taxed at zero rate shall not result in any output tax. The input tax on his purchases of goods
or services related to such zero-rated sale shall be available as tax credit or refundable in
accordance with Section 16 of these Regulations. x x x. [Section 8(a), [RR] 5-87]. 6
"[Petitioner], in his Answer filed on May 6, 1999, claimed by way of Special and Affirmative
Defenses that:
7. The claim for refund is subject to investigation by the Bureau of Internal Revenue;
8. Taxes paid and collected are presumed to have been made in accordance with laws and
regulations, hence, not refundable. Claims for tax refund are construed strictly against the
claimant as they partake of the nature of tax exemption from tax and it is incumbent upon
the [respondent] to prove that it is entitled thereto under the law and he who claims
exemption must be able to justify his claim by the clearest grant of organic or statu[t]e law.
An exemption from the common burden [cannot] be permitted to exist upon vague
implications;
9. Moreover, [respondent] must prove that it has complied with the governing rules with
reference to tax recovery or refund, which are found in Sections 204(c) and 229 of the Tax
Code, as amended, which are quoted as follows:
Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit
Taxes. - The Commissioner may - x x x.
(C) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or change unused stamps that
have been rendered unfit for use and refund their value upon proof of destruction. No credit
or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after payment of the tax or
penalty:Provided, however, That a return filed with an overpayment shall be considered a
written claim for credit or refund.
Section 229. Recovery of tax erroneously or illegally collected.- No suit or proceeding
shall be maintained in any court for the recovery of any national internal revenue tax
hereafter 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 excessively or in any manner wrongfully collected, until a claim for refund or credit has

been duly filed with the Commissioner; but such suit or proceeding may be maintained,
whether or not such tax, penalty or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be begun (sic) after the expiration of two (2)
years from the date of payment of the tax or penalty regardless of any supervening cause
that may arise after payment: Provided, however, That the Commissioner may, even without
written claim therefor, refund or credit any tax, where on the face of the return upon which
payment was made, such payment appears clearly to have been erroneously paid.
"From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta rendered a
decision7 in favor of the herein respondent holding that its services are subject to zero-rate
pursuant to Section 108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of
Revenue Regulations 5-96, the decretal portion of which reads as follows:
WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious and in
accordance with law. Accordingly, [petitioner] is hereby ORDERED to REFUND to
[respondent] the amount of P3,352,406.59 representing the latters excess input VAT paid
for the year 1997."8
Ruling of the Court of Appeals
In affirming the CTA, the CA held that respondents services fell under the first type
enumerated in Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96. More
particularly, its "services were not of the same class or of the same nature as project
studies, information, or engineering and architectural designs" for non-resident foreign
clients; rather, they were "services other than the processing, manufacturing or repacking of
goods for persons doing business outside the Philippines." The consideration in both types
of service, however, was paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas.
Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98 was unwarranted. By
requiring that respondents services be consumed abroad in order to be zero-rated,
petitioner went beyond the sphere of interpretation and into that of legislation. Even granting
that it is valid, the ruling cannot be given retroactive effect, for it will be harsh and
oppressive to respondent, which has already relied upon VAT Ruling No. 080-89 for zero
rating.
Hence, this Petition.9
The Issue
Petitioner raises this sole issue for our consideration:
"Whether or not the Court of Appeals committed reversible error in holding that respondent
is entitled to the refund of the amount of P3,352,406.59 allegedly representing excess input
VAT for the year 1997."10
The Courts Ruling

The Petition is unmeritorious.

Sole Issue:
Entitlement to Tax Refund
Section 102 of the Tax Code11 provides:
"Sec. 102. 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 (10%) of gross receipts derived from the sale or exchange of
services x x x.
"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, including those
performed or rendered by x x x persons engaged in milling, processing, manufacturing or
repacking goods for others; x x x services of banks, non-bank financial intermediaries and
finance companies; x x x and similar services regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or
exchange of services' shall likewise include:
xxxxxxxxx
(3) The supply of x x x commercial knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a
means of enabling the application or enjoyment of x x x any such knowledge or information
as is mentioned in subparagraph (3);
xxxxxxxxx
(6) The supply of technical advice, assistance or services rendered in connection with
technical management or administration of any x x x commercial undertaking, venture,
project or scheme;
xxxxxxxxx
"The term 'gross receipts means the total amount of money or its equivalent representing
the contract price, compensation, service fee, rental or royalty, including the amount
charged for materials supplied with the services and deposits and advanced payments
actually or constructively received during the taxable quarter for the services performed or
to be performed for another person, excluding value-added tax.
"(b) Transactions subject to zero percent (0%) rate. -- The following services performed in
the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate[:]
(1) Processing, manufacturing or repacking goods for other persons doing business outside
the Philippines which goods are subsequently exported, where the services are paid for in

acceptable foreign currency and accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding subparagraph, the consideration
for which is paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the [BSP];"
xxxxxxxxx
Zero Rating of "Other" Services
The law is very clear. Under the last paragraph quoted above, services performed by VATregistered persons in the Philippines (other than the processing, manufacturing or repacking
of goods for persons doing business outside the Philippines), when paid in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the BSP,
are zero-rated.
Respondent is a VAT-registered person that facilitates the collection and payment of
receivables belonging to its non-resident foreign client, for which it gets paid in acceptable
foreign currency inwardly remitted and accounted for in conformity with BSP rules and
regulations. Certainly, the service it renders in the Philippines is not in the same category as
"processing, manufacturing or repacking of goods" and should, therefore, be zero-rated. In
reply to a query of respondent, the BIR opined in VAT Ruling No. 080-89 that the income
respondent earned from its parent companys regional operating centers (ROCs) was
automatically zero-rated effective January 1, 1988. 12
Service has been defined as "the art of doing something useful for a person or company for
a fee"13 or "useful labor or work rendered or to be rendered by one person to another." 14 For
facilitating in the Philippines the collection and payment of receivables belonging to its Hong
Kong-based foreign client, and getting paid for it in duly accounted acceptable foreign
currency, respondent renders service falling under the category of zero rating. Pursuant to
the Tax Code, a VAT of zero percent should, therefore, be levied upon the supply of that
service.15
The Credit Card System and Its Components
For sure, the ancillary business of facilitating the said collection is different from
the main business of issuing credit cards.16 Under the credit card system, the credit card
company extends credit accommodations to its card holders for the purchase of goods and
services from its member establishments, to be reimbursed by them later on upon proper
billing. Given the complexities of present-day business transactions, the components of this
system can certainly function as separate billable services.
Under RA 8484,17 the credit card that is issued by banks18 in general, or by non-banks in
particular, refers to "any card x x x or other credit device existing for the purpose of
obtaining x x x goods x x x or services x x x on credit;" 19 and is being used "usually on a
revolving basis."20 This means that the consumer-credit arrangement that exists between
the issuer and the holder of the credit card enables the latter to procure goods or services

"on a continuing basis as long as the outstanding balance does not exceed a specified
limit."21 The card holder is, therefore, given "the power to obtain present control of goods or
service on a promise to pay for them in the future." 22
Business establishments may extend credit sales through the use of the credit card facilities
of a non-bank credit card company to avoid the risk of uncollectible accounts from their
customers. Under this system, the establishments do not deposit in their bank accounts the
credit card drafts23 that arise from the credit sales. Instead, they merely record their
receivables from the credit card company and periodically send the drafts evidencing those
receivables to the latter.
The credit card company, in turn, sends checks as payment to these business
establishments, but it does not redeem the drafts at full price. The agreement between them
usually provides for discounts to be taken by the company upon its redemption of the
drafts.24 At the end of each month, it then bills its credit card holders for their respective
drafts redeemed during the previous month. If the holders fail to pay the amounts owed, the
company sustains the loss.25
In the present case, respondents role in the consumer credit 26 process described above
primarily consists of gathering the bills and credit card drafts of different service
establishments located in the Philippines and forwarding them to the ROCs outside the
country. Servicing the bill is not the same as billing. For the former type of service alone,
respondent already gets paid.
The parent company -- to which the ROCs and respondent belong -- takes charge not only
of redeeming the drafts from the ROCs and sending the checks to the service
establishments, but also of billing the credit card holders for their respective drafts that it
has redeemed. While it usually imposes finance charges 27 upon the holders, none may be
exacted by respondent upon either the ROCs or the card holders.
Branch and Home Office
By designation alone, respondent and the ROCs are operated as branches. This means
that each of them is a unit, "an offshoot, lateral extension, or division" 28 located at some
distance from the home office29 of the parent company; carrying separate inventories;
incurring their own expenses; and generating their respective incomes. Each may conduct
sales operations in any locality as an extension of the principal office. 30
The extent of accounting activity at any of these branches depends upon company
policy,31 but the financial reports of the entire business enterprise -- the credit card company
to which they all belong -- must always show its financial position, results of operation, and
changes in its financial position as a single unit. 32 Reciprocal accounts are reconciled or
eliminated, because they lose all significance when the branches and home office are
viewed as a single entity.33 In like manner, intra-company profits or losses must be offset
against each other for accounting purposes.
Contrary to petitioners assertion,34 respondent can sell its services to another branch of the
same parent company.35 In fact, the business concept of a transfer price allows goods and

services to be sold between and among intra-company units at cost or above cost. 36 A
branch may be operated as a revenue center, cost center, profit center or investment center,
depending upon the policies and accounting system of its parent company. 37Furthermore,
the latter may choose not to make any sale itself, but merely to function as a control center,
where most or all of its expenses are allocated to any of its branches. 38
Gratia argumenti that the sending of drafts and bills by service establishments to
respondent is equivalent to the act of sending them directly to its parent company abroad,
and that the parent companys subsequent redemption of these drafts and billings of credit
card holders is also attributable to respondent, then with greater reason should the service
rendered by respondent be zero-rated under our VAT system. The service partakes of the
nature of export sales as applied to goods, 39 especially when rendered in the Philippines by
a VAT-registered person40 that gets paid in acceptable foreign currency accounted for in
accordance with BSP rules and regulations.
VAT Requirements for the Supply of Service
The VAT is a tax on consumption41 "expressed as a percentage of the value added to goods
or services"42purchased by the producer or taxpayer.43 As an indirect tax44 on services,45 its
main object is the transaction46itself or, more concretely, the performance of all kinds of
services47 conducted in the course of trade or business in the Philippines. 48 These services
must be regularly conducted in this country; undertaken in "pursuit of a commercial or an
economic activity;"49 for a valuable consideration; and not exempt under the Tax Code, other
special laws, or any international agreement. 50
Without doubt, the transactions respondent entered into with its Hong Kong-based client
meet all these requirements.
First, respondent regularly renders in the Philippines the service of facilitating the
collection and payment of receivables belonging to a foreign company that is a
clearly separate and distinct entity.
Second, such service is commercial in nature; carried on over a sustained period of
time; on a significant scale; with a reasonable degree of frequency; and not at
random, fortuitous or attenuated.
Third, for this service, respondent definitely receives consideration in foreign
currency that is accounted for in conformity with law.
Finally, respondent is not an entity exempt under any of our laws or international
agreements.
Services Subject to Zero VAT
As a general rule, the VAT system uses the destination principle as a basis for the
jurisdictional reach of the tax. 51Goods and services are taxed only in the country where they
are consumed. Thus, exports are zero-rated, while imports are taxed.

Confusion in zero rating arises because petitioner equates the performance of a particular
type of service with theconsumption of its output abroad. In the present case, the facilitation
of the collection of receivables is different from the utilization or consumption of the
outcome of such service. While the facilitation is done in the Philippines, the consumption is
not. Respondent renders assistance to its foreign clients -- the ROCs outside the country -by receiving the bills of service establishments located here in the country and forwarding
them to the ROCs abroad. The consumption contemplated by law, contrary to petitioners
administrative interpretation,52 does not imply that the service be done abroad in order to be
zero-rated.
Consumption is "the use of a thing in a way that thereby exhausts it." 53 Applied to services,
the term means the performance or "successful completion of a contractual duty, usually
resulting in the performers release from any past or future liability x x x." 54 The services
rendered by respondent are performed or successfully completed upon its sending to its
foreign client the drafts and bills it has gathered from service establishments here. Its
services, having been performed in the Philippines, are therefore also consumed in the
Philippines.
Unlike goods, services cannot be physically used in or bound for a specific place when their
destination is determined. Instead, there can only be a "predetermined end of a
course"55 when determining the service "location or position x x x for legal
purposes."56 Respondents facilitation service has no physical existence, yet takes place
upon rendition, and therefore upon consumption, in the Philippines. Under the destination
principle, as petitioner asserts, such service is subject to VAT at the rate of 10 percent.
Respondents Services Exempt from the Destination Principle
However, the law clearly provides for an exception to the destination principle; that is, for a
zero percent VAT rate for services that are performed in the Philippines, "paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations
of the [BSP]."57 Thus, for the supply of service to be zero-rated as an exception, the law
merely requires that first, the service be performed in the Philippines; second, the service
fall under any of the categories in Section 102(b) of the Tax Code; and, third, it be paid in
acceptable foreign currency accounted for in accordance with BSP rules and regulations.
Indeed, these three requirements for exemption from the destination principle are met by
respondent. Its facilitation service is performed in the Philippines. It falls under the second
category found in Section 102(b) of the Tax Code, because it is a service other than
"processing, manufacturing or repacking of goods" as mentioned in the provision.
Undisputed is the fact that such service meets the statutory condition that it be paid in
acceptable foreign currency duly accounted for in accordance with BSP rules. Thus, it
should be zero-rated.
Performance of Service versus Product Arising from Performance
Again, contrary to petitioners stand, for the cost of respondents service to be zero-rated, it
need not be tacked in as part of the cost of goods exported. 58 The law neither imposes such
requirement nor associates services with exported goods. It simply states that

the services performed by VAT-registered persons in the Philippines -- services other than
the processing, manufacturing or repacking of goods for persons doing business outside
this country -- if paid in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the BSP, are zero-rated. The service rendered by respondent is
clearly different from the product that arises from the rendition of such service. The activity
that creates the income must not be confused with the main business in the course of which
that income is realized.59
Tax Situs of a Zero-Rated Service
The law neither makes a qualification nor adds a condition in determining the tax situs of a
zero-rated service. Under this criterion, the place where the service is rendered determines
the jurisdiction60 to impose the VAT.61Performed in the Philippines, such service is
necessarily subject to its jurisdiction,62 for the State necessarily has to have "a substantial
connection"63 to it, in order to enforce a zero rate.64 The place of payment is
immaterial;65much less is the place where the output of the service will be further or
ultimately used.
Statutory Construction or Interpretation Unnecessary
As mentioned at the outset, Section 102(b)(2) of the Tax Code is very clear. Therefore, no
statutory construction or interpretation is needed. Neither can conditions or limitations be
introduced where none is provided for. Rewriting the law is a forbidden ground that only
Congress may tread upon.
The Court may not construe a statute that is free from doubt. 66 "[W]here the law speaks in
clear and categorical language, there is no room for interpretation. There is only room for
application."67 The Court has no choice but to "see to it that its mandate is obeyed." 68
No Qualifications Under RR 5-87
In implementing the VAT provisions of the Tax Code, RR 5-87 provides for the zero rating of
services other than the processing, manufacturing or repacking of goods -- in general and
without qualifications -- when paid for by the person to whom such services are rendered in
acceptable foreign currency inwardly remitted and duly accounted for in accordance with
the BSP (then Central Bank) regulations. Section 8 of RR 5-87 states:
"SECTION 8. Zero-rating. -- (a) In general. -- A zero-rated sale is a taxable transaction for
value-added tax purposes. A sale by a VAT-registered person of goods and/or services
taxed at zero rate shall not result in any output tax. The input tax on his purchases of goods
or services related to such zero-rated sale shall be available as tax credit or refundable in
accordance with Section 16 of these Regulations.
xxxxxxxxx
" (c) Zero-rated sales of services. -- The following services rendered by VAT-registered
persons are zero-rated:

(1) Services in connection with the processing, manufacturing or repacking of goods for
persons doing business outside the Philippines, where such goods are actually shipped out
of the Philippines to said persons or their assignees and the services are paid for in
acceptable foreign currency inwardly remitted and duly accounted for under the regulations
of the Central Bank of the Philippines.
xxxxxxxxx
(3) Services performed in the Philippines other than those mentioned in subparagraph (1)
above which are paid for by the person or entity to whom the service is rendered in
acceptable foreign currency inwardly remitted and duly accounted for in accordance with
Central Bank regulations. Where the contract involves payment in both foreign and local
currency, only the service corresponding to that paid in foreign currency shall enjoy zerorating. The portion paid for in local currency shall be subject to VAT at the rate of 10%."
RR 7-95 Broad Enough
RR 7-95, otherwise known as the "Consolidated VAT Regulations," 69 reiterates the abovequoted provision and further presents as examples only the services performed in the
Philippines by VAT-registered hotels and other service establishments. Again, the condition
remains that these services must be paid in acceptable foreign currency inwardly remitted
and accounted for in accordance with the rules and regulations of the BSP. The term "other
service establishments" is obviously broad enough to cover respondents facilitation service.
Section 4.102-2 of RR 7-95 provides thus:
"SECTION 4.102-2. Zero-Rating. -- (a) In general. -- A zero-rated sale by a VAT registered
person, which is a taxable transaction for VAT purposes, shall not result in any output tax.
However, the input tax on his purchases of goods, properties or services related to such
zero-rated sale shall be available as tax credit or refund in accordance with these
regulations.
"(b) Transaction subject to zero-rate. -- The following services performed in the Philippines
by VAT-registered persons shall be subject to 0%:
(1) Processing, manufacturing or repacking goods for other persons doing business
outside the Philippines which goods are subsequently exported, where the services
are paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the BSP;
(2) Services other than those mentioned in the preceding subparagraph, e.g. those
rendered by hotels and other service establishments, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the BSP;"
xxxxxxxxx
Meaning of "as well as" in RR 5-96

Section 4.102-2(b)(2) of RR 7-95 was subsequently amended by RR 5-96 to read as

follows:
"Section 4.102-2(b)(2) -- Services other than processing, manufacturing or repacking for
other persons doing business outside the Philippines for goods which are subsequently
exported, as well as services by a resident to a non-resident foreign client such as project
studies, information services, engineering and architectural designs and other similar
services, the consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP."
Aside from the already scopious coverage of services in Section 4.102-2(b)(2) of RR 7-95,
the amendment introduced by RR 5-96 further enumerates specific services entitled to zero
rating. Although superfluous, these sample services are meant to be merely illustrative. In
this provision, the use of the term "as well as" is not restrictive. As a prepositional phrase
with an adverbial relation to some other word, it simply means "in addition to, besides, also
or too."70
Neither the law nor any of the implementing revenue regulations aforequoted categorically
defines or limits the services that may be sold or exchanged for a fee, remuneration or
consideration. Rather, both merely enumerate the items of service that fall under the term
"sale or exchange of services."71
Ejusdem Generis
Inapplicable
The canon of statutory construction known as ejusdem generis or "of the same kind or
specie" does not apply to Section 4.102-2(b)(2) of RR 7-95 as amended by RR 5-96.
First, although the regulatory provision contains an enumeration of particular or
specific words, followed by the general phrase "and other similar services," such
words do not constitute a readily discernible class and are patently not of the same
kind.72 Project studies involve investments or marketing; information services focus
on data technology; engineering and architectural designs require creativity. Aside
from calling for the exercise or use of mental faculties or perhaps producing written
technical outputs, no common denominator to the exclusion of all others
characterizes these three services. Nothing sets them apart from other and similar
general services that may involve advertising, computers, consultancy, health care,
management, messengerial work -- to name only a few.
Second, there is the regulatory intent to give the general phrase "and other similar
services" a broader meaning.73 Clearly, the preceding phrase "as well as" is not
meant to limit the effect of "and other similar services."
Third, and most important, the statutory provision upon which this regulation is based
is by itself not restrictive. The scope of the word "services" in Section 102(b)(2) of the
Tax Code is broad; it is not susceptible of narrow interpretation. 74
1avvphi1.zw+

VAT Ruling Nos. 040-98 and 080-89

VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the
administrative level,75rendered by the BIR commissioner upon request of a taxpayer to
clarify certain provisions of the VAT law. As correctly held by the CA, when this ruling states
that the service must be "destined for consumption outside of the Philippines" 76 in order to
qualify for zero rating, it contravenes both the law and the regulations issued pursuant to
it.77 This portion of VAT Ruling No. 040-98 is clearly ultra vires and invalid.78
Although "[i]t is widely accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great respect by the
courts,"79 this interpretation is not conclusive and will have to be "ignored if judicially found
to be erroneous"80 and "clearly absurd x x x or improper."81 An administrative issuance that
overrides the law it merely seeks to interpret, instead of remaining consistent and in
harmony with it, will not be countenanced by this Court. 82
In the present case, respondent has relied upon VAT Ruling No. 080-89, which clearly
recognizes its zero rating. Changing this status will certainly deprive respondent of a refund
of the substantial amount of excess input taxes to which it is entitled.
Again, assuming arguendo that VAT Ruling No. 040-98 revoked VAT Ruling No. 080-89,
such revocation could not be given retroactive effect if the application of the latter ruling
would only be prejudicial to respondent.83Section 246 of the Tax Code categorically declares
that "[a]ny revocation x x x of x x x any of the rulings x x x promulgated by the
Commissioner shall not be given retroactive application if the revocation x x x will be
prejudicial to the taxpayers." 84
It is also basic in law that "no x x x rule x x x shall be given retrospective effect 85 unless
explicitly stated."86 No indication of such retroactive application to respondent does the
Court find in VAT Ruling No. 040-98. Neither do the exceptions enumerated in Section
24687 of the Tax Code apply.
Though vested with the power to interpret the provisions of the Tax Code 88 and not bound by
predecessors acts or rulings, the BIR commissioner may render a different construction to a
statute89 only if the new interpretation is in congruence with the law. Otherwise, no amount
of interpretation can ever revoke, repeal or modify what the law says.
"Consumed Abroad" Not Required by Legislature
Interpellations on the subject in the halls of the Senate also reveal a clear intent on the part
of the legislators not to impose the condition of being "consumed abroad" in order
for services performed in the Philippines by a VAT-registered person to be zero-rated. We
quote the relevant portions of the proceedings:
"Senator Maceda: Going back to Section 102 just for the moment. Will the Gentleman
kindly explain to me - I am referring to the lower part of the first paragraph with the
Provided. Section 102. Provided that the following services performed in the Philippines by
VAT registered persons shall be subject to zero percent. There are three here. What is the
difference between the three here which is subject to zero percent and Section 103 which is
exempt transactions, to being with?

"Senator Herrera: Mr. President, in the case of processing and manufacturing or repacking
goods for persons doing business outside the Philippines which are subsequently exported,
and where the services are paid for in acceptable foreign currencies inwardly remitted, this
is considered as subject to 0%. But if these conditions are not complied with, they are
subject to the VAT.
"In the case of No. 2, again, as the Gentleman pointed out, these three are zero-rated and
the other one that he indicated are exempted from the very beginning. These three
enumerations under Section 102 are zero-rated provided that these conditions indicated in
these three paragraphs are also complied with. If they are not complied with, then they are
not entitled to the zero ratings. Just like in the export of minerals, if these are not exported,
then they cannot qualify under this provision of zero rating.
"Senator Maceda: Mr. President, just one small item so we can leave this. Under the
proviso, it is required that the following services be performed in the Philippines.
"Under No. 2, services other than those mentioned above includes, let us say,
manufacturing computers and computer chips or repacking goods for persons doing
business outside the Philippines. Meaning to say, we ship the goods to them in Chicago or
Washington and they send the payment inwardly to the Philippines in foreign currency, and
that is, of course, zero-rated.
lawphil.net

"Now, when we say services other than those mentioned in the preceding subsection[,]
may I have some examples of these?
"Senator Herrera: Which portion is the Gentleman referring to?
"Senator Maceda: I am referring to the second paragraph, in the same Section 102. The
first paragraph is when one manufactures or packages something here and he sends it
abroad and they pay him, that is covered. That is clear to me. The second paragraph says
Services other than those mentioned in the preceding subparagraph, the consideration of
which is paid for in acceptable foreign currency
"One example I could immediately think of -- I do not know why this comes to my mind
tonight -- is for tourism or escort services. For example, the services of the tour operator or
tour escort -- just a good name for all kinds of activities -- is made here at the Midtown
Ramada Hotel or at the Philippine Plaza, but the payment is made from outside and
remitted into the country.
"Senator Herrera: What is important here is that these services are paid in acceptable
foreign currency remitted inwardly to the Philippines.
"Senator Maceda: Yes, Mr. President. Like those Japanese tours which include $50 for the
services of a woman or a tourist guide, it is zero-rated when it is remitted here.
"Senator Herrera: I guess it can be interpreted that way, although this tourist guide should
also be considered as among the professionals. If they earn more than P200,000, they
should be covered.

xxxxxxxxx
Senator Maceda: So, the services by Filipino citizens outside the Philippines are subject to
VAT, and I am talking of all services. Do big contractual engineers in Saudi Arabia pay VAT?
"Senator Herrera: This provision applies to a VAT-registered person. When he performs
services in the Philippines, that is zero-rated.
"Senator Maceda: That is right."90
Legislative Approval By Reenactment
Finally, upon the enactment of RA 8424, which substantially carries over the particular
provisions on zero rating of services under Section 102(b) of the Tax Code, the principle of
legislative approval of administrative interpretation by reenactment clearly obtains. This
principle means that "the reenactment of a statute substantially unchanged is persuasive
indication of the adoption by Congress of a prior executive construction." 91
The legislature is presumed to have reenacted the law with full knowledge of the contents of
the revenue regulations then in force regarding the VAT, and to have approved or confirmed
them because they would carry out the legislative purpose. The particular provisions of the
regulations we have mentioned earlier are, therefore, re-enforced. "When a statute is
susceptible of the meaning placed upon it by a ruling of the government agency charged
with its enforcement and the [l]egislature thereafter [reenacts] the provisions [without]
substantial change, such action is to some extent confirmatory that the ruling carries out the
legislative purpose."92
In sum, having resolved that transactions of respondent are zero-rated, the Court upholds
the formers entitlement to the refund as determined by the appellate court. Moreover, there
is no conflict between the decisions of the CTA and CA. This Court respects the findings
and conclusions of a specialized court like the CTA "which, by the nature of its functions, is
dedicated exclusively to the study and consideration of tax cases and has necessarily
developed an expertise on the subject."93
Furthermore, under a zero-rating scheme, the sale or exchange of a particular service is
completely freed from the VAT, because the seller is entitled to recover, by way of a refund
or as an input tax credit, the tax that is included in the cost of purchases attributable to the
sale or exchange.94 "[T]he tax paid or withheld is not deducted from the tax base." 95 Having
been applied for within the reglementary period, 96 respondents refund is in order.
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision AFFIRMED. No
pronouncement as to costs.
SO ORDERED.

COMMISSIONER OF

G.R. No. 153205

INTERNAL REVENUE,
Petitioner,

Present:

- versus -

BURMEISTER AND WAIN

SCANDINAVIAN CONTRACTOR
MINDANAO, INC.,
Respondent.

QUISUMBING, J.
Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.
Promulgated:
January 22, 2007

x----------------------------------------------------------------------------------------x
DECISION
CARPIO, J.:
The Case

This petition for review[1] seeks to set aside the 16 April 2002 Decision[2] of
the Court of Appeals in CA-G.R. SP No. 66341 affirming the 8 August
2001 Decision[3] of the Court of Tax Appeals (CTA). The CTA ordered the
Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate
for P6,994,659.67 in favor of Burmeister andWain Scandinavian Contractor
Mindanao, Inc. (respondent).

The Antecedents
The CTA summarized the facts, which the Court of Appeals adopted, as
follows:

[Respondent] is a domestic corporation duly organized and

existing under and by virtue of the laws of the Philippines with principal
address
located
at Daruma Building, Jose
P.
Laurel
Avenue, Lanang, Davao City.
It
is
represented
that
a
foreign
consortium
composed of Burmeister and Wain Scandinavian
Contractor
A/S
(BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd., and
Mitsui and Co., Ltd. entered into a contract with the National Power
Corporation (NAPOCOR) for the operation and maintenance of
[NAPOCORs] two power barges. The Consortium appointed BWSCDenmark as its coordination manager.
BWSC-Denmark established [respondent] which subcontracted
the actual operation and maintenance of NAPOCORs two power barges
as well as the performance of other duties and acts which necessarily
have to be done in the Philippines.
NAPOCOR paid capacity and energy fees to the Consortium in a
mixture of currencies (Mark, Yen, and Peso). The freely convertible
non-Peso component is deposited directly to the Consortiums bank
accounts in Denmark and Japan, while the Peso-denominated component
is deposited in a separate and special designated bank account in
the Philippines. On the other hand, the Consortium pays [respondent] in
foreign currency inwardly remitted to the Philippines through the
banking system.
In order to ascertain the tax implications of the above
transactions, [respondent] sought a ruling from the BIR which responded
with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein
that if [respondent] chooses to register as a VAT person and the
consideration for its services is paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to
VAT at zero-rate.
[Respondent] chose to register as a VAT taxpayer. On May 26,
1995, the Certificate of Registration bearing RDO Control No. 95-113007556 was issued in favor of [respondent] by the Revenue District
Office No. 113 of Davao City.

For the year 1996, [respondent] seasonably filed its quarterly

Value-Added Tax Returns reflecting, among others, a total zero-rated
sales of P147,317,189.62 with VAT input taxes of P3,361,174.14,
detailed as follows:
Qtr. Exh. Date Filed
Zero-Rated Sales VAT Input Tax
---------------------------------------------------------------------------------1st
2nd
3rd
4th
Totals

E
F
G
H

04-18-96
07-16-96
10-14-96
01-20-97

P 33,019,651.07
37,108,863.33
34,196,372.35
42,992,302.87
P147,317,189.62

P608,953.48
756,802.66
930,279.14
1,065,138.86
P3,361,174.14

On December 29, 1997, [respondent] availed of the Voluntary

Assessment Program (VAP) of the BIR. It allegedly misinterpreted
Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable
to its case. Revenue Regulations No. 5-96 provides in part thus:
SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of
Revenue Regulations No. 7-95 are hereby amended to read
as follows:
Section 4.102-2(b)(2) Services other than
processing, manufacturing or repacking for other persons
doing business outside the Philippines for goods which are
subsequently exported, as well as services by a resident to a
non-resident foreign client such as project studies,
information services, engineering and architectural designs
and other similar services, the consideration for which is
paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the BSP.
xxx
.

xxx

xxxx

In [conformity] with the aforecited Revenue Regulations,

[respondent] subjected its sale of services to the Consortium to the 10%
VAT in the total amount of P103,558,338.11 representing April to
December 1996 sales since said Revenue Regulations No. 5-96 became

effective only on April 1996. The sum of P43,893,951.07, representing

January to March 1996 sales was subjected to zero rate. Consequently,
[respondent] filed its 1996 amended VAT return consolidating therein the
VAT output and input taxes for the four calendar quarters of 1996. It
paid
the
amount
of P6,994,659.67 through BIRs collecting
agent, PCIBank, as its output tax liability for the year 1996, computed as
follows:
Amount subject to 10% VAT
P103,558,338.11
Multiply by
10%
VAT Output Tax
P 10,355,833.81
Less: 1996 Input VAT
P 3,361,174.14
VAT
Output
Tax
Payable
P 6,994,659.67
On January 7,1999, [respondent] was able to secure VAT Ruling
No. 003-99 from the VAT Review Committee which reconfirmed BIR
Ruling No. 023-95 insofar as it held that the services being rendered by
BWSCMI is subject to VAT at zero percent (0%).
On the strength of the aforementioned rulings, [respondent]
on April 22,1999, filed a claim for the issuance of a tax credit certificate
with Revenue District No. 113 of the BIR. [Respondent] believed that it
erroneously paid the output VAT for 1996 due to its availment of the
Voluntary Assessment Program (VAP) of the BIR.[4]

On 27 December 1999, respondent filed a petition for review with the CTA in
order to toll the running of the two-year prescriptive period under the Tax Code.

The Ruling of the Court of Tax Appeals

In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit
certificate for P6,994,659.67 in favor of respondent. The CTAs ruling stated:

[Respondents] sale of services to the Consortium [was] paid for in

acceptable foreign currency inwardly remitted to the Philippines and
accounted for in accordance with the rules and regulations
of Bangko Sentral ng Pilipinas. These were established by various BPI
Credit Memos showing remittances in Danish Kroner (DKK) and US
dollars (US$) as payments for the specific invoices billed by
[respondent] to the consortium. These remittances were further certified
by the Branch Manager xx x of BPI-Davao Lanang Branch to represent
payments
for
sub-contract
fees
that
came
from
Den Danske Aktieselskab Bank-Denmark
for
the
account
of
[respondent]. Clearly, [respondents] sale of services to the Consortium
is subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code.
xxxx
The zero-rating of [respondents] sale of services to the
Consortium was even confirmed by the [petitioner] in BIR
Ruling
No. 023-95 dated February 15, 1995, and later by VAT
Ruling No. 003-99 dated January 7,1999, x x x.
Since it is apparent that the payments for the services rendered by
[respondent] were indeed subject to VAT at zero percent, it follows that it
mistakenly availed of the Voluntary Assessment Program by paying
output tax for its sale of services. x x x
x x x Considering the principle of solutio indebiti which requires
the return of what has been delivered by mistake, the [petitioner] is
obligated to issue the tax credit certificate prayed for by
[respondent].
x x x[5]

Petitioner filed a petition for review with the Court of Appeals, which
dismissed the petition for lack of merit and affirmed the CTA decision.[6]
Hence, this petition.

The Court of Appeals Ruling

In affirming the CTA, the Court of Appeals rejected petitioners view that
since respondents services are not destined for consumption abroad, they are not
of the same nature as project studies, information services, engineering and
architectural designs, and other similar services mentioned in Section 4.102-2(b)(2)
of Revenue Regulations No. 5-96[7] as subject to 0% VAT. Thus, according to
petitioner, respondents services cannot legally qualify for 0% VAT but are subject
to the regular 10% VAT.[8]
The Court of Appeals found untenable petitioners contention that under VAT
Ruling No. 040-98, respondents services should be destined for consumption
abroad to enjoy zero-rating. Contrary to petitioners interpretation, there are two
kinds of transactions or services subject to zero percent VAT under VAT Ruling No.
040-98. These are (a) services other than repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported; and (b)
services by a resident to a non-resident foreign client, such as project studies,
information services, engineering and architectural designs and other similar
services, the consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP).[9]
The Court of Appeals stated that only the first classification is required by
the provision to be consumed abroad in order to be taxed at zero rate. In x x x the
absence of such express or implied stipulation in the statute, the second
classification need not be consumed abroad.[10]
The Court of Appeals further held that assuming petitioners interpretation of
Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 is correct, such
administrative provision is void being an amendment to the Tax Code. Petitioner
went beyond merely providing the implementing details by adding another
requirement to zero-rating. This is indicated by the additional phrase as well as
services by a resident to a non-resident foreign client, such as project studies,

information services and engineering and architectural designs and other similar
services. In effect, this phrase adds not just one but two requisites:
(a) services must be rendered by a resident to a non-resident; and (b) these must be
in the nature of project studies, information services, etc.[11]
The Court of Appeals explained that under Section 108(b)(2) of the Tax
Code,[12] for services which were performed in the Philippines to enjoy zero-rating,
these must comply only with two requisites, to wit: (1) payment in acceptable
foreign currency and (2) accounted for in accordance with the rules of the
BSP. Section 108(b)(2) of the Tax Code does not provide that services must be
destined for consumption abroad in order to be VAT zero-rated.[13]
The Court of Appeals disagreed with petitioners argument that our VAT law
generally follows the destination principle (i.e., exports exempt, imports taxable).
[14]
The Court of Appeals stated that if indeed the destination principleunderlies
and is the basis of the VAT laws, then petitioners proper remedy would be to
recommend an amendment of Section 108(b)(2) to Congress. Without such
amendment, however, petitioner should apply the terms of the basic law. Petitioner
could not resort to administrative legislation, as what [he] had done in this case.[15]
The Issue
The lone issue for resolution is whether respondent is entitled to the refund
of P6,994,659.67 as erroneously paid output VAT for the year 1996.[16]

The Ruling of the Court

We deny the petition.
At the outset, the Court declares that the denial of the instant petition is not
on the ground that respondents services are subject to 0% VAT. Rather, it is based

on the non-retroactivity of the prejudicial revocation of BIR Ruling No. 02395[17] and VAT Ruling No. 003-99,[18] which held that respondents services are
subject to 0% VAT and which respondent invoked in applying for refund of the
output VAT.
Section 102(b) of the Tax Code,[19] the applicable provision in 1996 when
respondent rendered the services and paid the VAT in question, enumerates which
services are zero-rated, thus:
(b) Transactions subject to zero-rate. The following services
performed in the Philippines by VAT-registered persons shall be subject
to 0%:
(1) Processing, manufacturing or repacking goods for other
persons doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding subparagraph, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas(BSP);
(3) Services rendered to persons or entities whose exemption
under special laws or international agreements to which
thePhilippines is a signatory effectively subjects the supply of such
services to zero rate;
(4) Services rendered to vessels engaged exclusively in
international shipping; and
(5) Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual
production. (Emphasis supplied)

In insisting that its services should be zero-rated, respondent claims that it

complied with the requirements of the Tax Code for zero rating under the second
paragraph of Section 102(b). Respondent asserts that (1) the payment of its service
fees was in acceptable foreign currency, (2) there was inward remittance of the
foreign currency into the Philippines, and
(3) accounting of such remittance
was in accordance with BSP rules. Moreover, respondent contends that
itsservices which constitute the actual operation and management of two (2)
power barges in Mindanao are not even remotely similar to project studies,
information services and engineering and architectural designs under Section
4.102-2(b)(2) of Revenue Regulations No. 5-96. As such, respondents services
need not be destined to be consumed abroad in order to be VAT zero-rated.
Respondent is mistaken.
The Tax Code not only requires that the services be other than processing,
manufacturing or repacking of goods and that payment for such services be in
acceptable foreign currency accounted for in accordance with BSP rules. Another
essential condition for qualification to zero-rating under Section 102(b)(2) is that
the recipient of such services is doing business outside the Philippines. While
this requirement is not expressly stated in the second paragraph of Section 102(b),
this is clearly provided in the first paragraph of Section 102(b) where the listed
services must be for other persons doing business outside the
Philippines. The phrase for other persons doing business outside the
Philippines not only refers to the services enumerated in the first paragraph of
Section 102(b), but also pertains to the general term services appearing in the
second paragraph of Section 102(b). In short, services other than processing,
manufacturing, or repacking of goods must likewise be performed for persons
doing business outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the
provider and recipient of the other services are both doing business in the
Philippines, the payment of foreign currency is irrelevant. Otherwise, those

subject to the regular VAT under Section 102(a) can avoid paying the VAT by
simply stipulating payment in foreign currency inwardly remitted by the recipient
of services. To interpret Section 102(b)(2) to apply to a payer-recipient of services
doing business in the Philippines is to make the payment of the regular VAT under
Section 102(a) dependent on the generosity of the taxpayer. The provider of
services can choose to pay the regular VAT or avoid it by stipulating payment in
foreign currency inwardly remitted by the payer-recipient. Such interpretation
removes Section 102(a) as a tax measure in the Tax Code, an interpretation this
Court cannot sanction. A tax is a mandatory exaction, not a voluntary
contribution.
When Section 102(b)(2) stipulates payment in acceptable foreign currency
under BSP rules, the law clearly envisions the payer-recipient of services to be
doing business outside the Philippines. Only those not doing business in the
Philippines can be required under BSP rules[20] to pay in acceptable foreign
currency for their purchase of goods or services from the Philippines. In a
domestic transaction, where the provider and recipient of services are both doing
business in the Philippines, the BSP cannot require any party to make payment in
foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export
sales since the payer-recipient of services is doing business outside the
Philippines. Under BSP rules,[21] the proceeds of export sales must be reported to
the BangkoSentral ng Pilipinas. Thus, there is reason to require the provider of
services under Section 102(b) (1) and (2) to account for the foreign currency
proceeds to the BSP. The same rationale does not apply if the provider and
recipient of the services are both doing business in the Philippines since their
transaction is not in the nature of an export sale even if payment is denominated in
foreign currency.
Further, when the provider and recipient of services are both doing business
in the Philippines, their transaction falls squarely under Section 102(a)

governing domestic sale or exchange of services. Indeed, this is a purely local sale
or exchange of services subject to the regular VAT, unless of course the transaction
falls under the other provisions of Section 102(b).
Thus, when Section 102(b)(2) speaks of [s]ervices other than those
mentioned in the preceding subparagraph,the legislative intent is that only the
services are different between subparagraphs 1 and 2. The requirements for zerorating, including the essential condition that the recipient of services is doing
business outside the Philippines, remain the same under both subparagraphs.
Significantly, the amended Section 108(b)[22] [previously Section 102(b)] of
the present Tax Code clarifies this legislative intent. Expressly included among the
transactions subject to 0% VAT are [s]ervices other than those mentioned in the
[first] paragraph [of Section 108(b)] rendered to a person engaged in business
conducted outside the Philippines or to a nonresident person not engaged in
business who is outside the Philippines when the services are performed, the
consideration for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the BSP.

In this case, the payer-recipient of respondents services is the Consortium

which is a joint-venture doing business in the Philippines. While the Consortiums
principal members are non-resident foreign corporations, the Consortium itself is
doing business in the Philippines. This is shown clearly in BIR Ruling No. 02395 which states that the contract between the Consortium and NAPOCOR is for
a 15-year term, thus:
This refers to your letter dated January 14, 1994 requesting for a
clarification of the tax implications of a contract between a consortium composed
of Burmeister & Wain Scandinavian Contractor A/S (BWSC), Mitsui
Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. (MITSUI), all
referred to hereinafter as the Consortium, and the National Power Corporation
(NAPOCOR) for the operation and maintenance of two 100-Megawatt

power barges (Power Barges) acquired by NAPOCOR for a 15-year term.

[23]
(Emphasis supplied)

Considering this length of time, the Consortiums operation and

maintenance of NAPOCORs power barges cannot be classified as a single or
isolated transaction. The Consortium does not fall under Section 102(b)(2) which
requires that the recipient of the services must be a person doing business outside
the Philippines. Therefore, respondents services to the Consortium, not being
supplied to a person doing business outside the Philippines, cannot legally qualify
for 0% VAT.
Respondent, as subcontractor of the Consortium, operates and
maintains NAPOCORs power barges in the Philippines. NAPOCOR pays the
Consortium, through its non-resident partners, partly in foreign currency outwardly
remitted. In turn, the Consortium pays respondent also in foreign currency
inwardly remitted and accounted for in accordance with BSP rules. This payment
scheme does not entitle respondent to 0% VAT. As the Court held inCommissioner
of Internal Revenue v. American Express International, Inc. (Philippine Branch),
[24]
the place of payment is immaterial, much less is the place where the output of
the service is ultimately used. An essential condition for entitlement to 0% VAT
under Section 102(b)(1) and (2) is that the recipient of the services is a person
doing business outside the Philippines. In this case, the recipient of the services
is the Consortium, which is doing business not outside, but within the
Philippines because it has a 15-year contract to operate and
maintain NAPOCORs two 100-megawatt power barges in Mindanao.
The Court recognizes the rule that the VAT system generally follows the
destination principle (exports are zero-rated whereas imports are
taxed). However, as the Court stated in American Express, there is an exception to
this rule.[25] This exception refers to the 0% VAT on services enumerated in Section
102 and performed in the Philippines. For services covered by Section 102(b)(1)
and (2), the recipient of the services must be a person doing business outside the

Philippines. Thus, to be exempt from the destination principle under Section

102(b)(1) and (2), the services must be (a) performed in the Philippines; (b) for a
person doing business outside the Philippines; and (c) paid in acceptable foreign
currency accounted for in accordance with BSP rules.
Respondents reliance on the ruling in American Express[26] is misplaced.
That case involved a recipient of services, specifically American Express
International, Inc. (Hongkong Branch), doing business outside the
Philippines. There, the Court stated:
Respondent [American Express International, Inc. (Philippine Branch)]
is a VAT-registered person that facilitates the collection and payment of
receivables belonging to its non-resident foreign client [American
Express International, Inc. (HongkongBranch)], for which it gets paid in
acceptable foreign currency inwardly remitted and accounted for in
accordance with BSP rules and regulations. x x x x[27] (Emphasis
supplied)

In contrast, this case involves a recipient of services the Consortium which is

doing business in the Philippines. Hence, American Express services were subject
to 0% VAT, while respondents services should be subject to 10% VAT.
Nevertheless, in seeking a refund of its excess output tax, respondent relied
on VAT Ruling No. 003-99,[28] which reconfirmed BIR Ruling
No. 02395[29] insofar as it held that the services being rendered by BWSCMI is subject to
VAT at zero percent (0%). Respondents reliance on these BIR rulings binds
petitioner.
Petitioners filing of his Answer before the CTA challenging respondents
claim for refund effectively serves as a revocation of VAT Ruling No. 003-99 and
BIR Ruling No. 023-95. However, such revocation cannot be given retroactive
effect since it will prejudice respondent. Changing respondents status will deprive
respondent of a refund of a substantial amount representing excess output tax.
[30]
Section 246 of the Tax Code provides that any revocation of a ruling by the

Commissioner of Internal Revenue shall not be given retroactive application if the

revocation will prejudice the taxpayer. Further, there is no showing of the existence
of any of the exceptions enumerated in Section 246 of the Tax Code for the
retroactive application of such revocation.
However, upon the filing of petitioners Answer dated 2 March 2000
before the CTA contesting respondents claim for refund,
respondents
[31]
services shall be subject to the regular 10% VAT.
Such filing is deemed a
revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition.
SO ORDERED.
THE COMMISIONER OF
INTERNAL REVENUE,
Petitioner,
- versus -

ACESITE (PHILIPPINES)
HOTEL CORPORATION,
Respondent.

G.R. No. 147295

Present:
QUISUMBING, J., Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.
Promulgated:

February 16, 2007

x-----------------------------------------------------------------------------------------x
DECISION
VELASCO, JR., J.:

The Case
Before us is a Petition for Review on Certiorari [1] under Rule 45 of the Rules
of Court, assailing the November 17, 2000 Decision [2] of the Court of Appeals
(CA) in CA-G.R. SP No. 56816, which affirmed the January 3, 2000 Decision[3]of
the Court of Tax Appeals (CTA) in CTA Case No. 5645 entitled Acesite
(Philippines) Hotel Corporation v. The Commissioner of Internal
Revenue for Refund of VAT Payments.

The Facts
The facts as found by the appellate court are undisputed, thus:
Acesite is the owner and operator of the Holiday Inn Manila
Pavilion Hotel along United Nations Avenue in Manila. It leases
6,768.53 square meters of the hotels premises to the Philippine
Amusement and Gaming Corporation [hereafter, PAGCOR] for
casino operations. It also caters food and beverages to PAGCORs
casino patrons through the hotels restaurant outlets. For the period
January (sic) 96 to April 1997, Acesite incurred VAT amounting to
P30,152,892.02 from its rental income and sale of food and
beverages to PAGCOR during said period. Acesite tried to shift the
said taxes to PAGCOR by incorporating it in the amount assessed
to PAGCOR but the latter refused to pay the taxes on account of its
tax exempt status.
Thus, PAGCOR paid the amount due to Acesite minus the
P30,152,892.02 VAT while the latter paid the VAT to the
Commissioner of Internal Revenue [hereafter, CIR] as it feared the
legal consequences of non-payment of the tax. However, Acesite
belatedly arrived at the conclusion that its transaction with
PAGCOR was subject to zero rate as it was rendered to a taxexempt entity. On 21 May 1998, Acesite filed an administrative
claim for refund with the CIR but the latter failed to resolve the

same. Thus on 29 May 1998, Acesite filed a petition with the Court
of Tax Appeals [hereafter, CTA] which was decided in this wise:
As earlier stated, Petitioner is subject to zero percent tax
pursuant to Section 102 (b)(3) [now 106(A)(C)] insofar as
its gross income from rentals and sales to PAGCOR, a tax
exempt entity by virtue of a special law. Accordingly, the
amounts of P21,413,026.78 and P8,739,865.24,
representing the 10% EVAT on its sales of food and
services and gross rentals, respectively from PAGCOR
shall, as a matter of course, be refunded to the petitioner for
having been inadvertently remitted to the respondent.
Thus, taking into consideration the prescribed portion of
Petitioners claim for refund of P98,743.40, and
considering further the principle of solutio indebiti which
requires the return of what has been delivered through
mistake, Respondent must refund to the Petitioner the
amount of P30,054,148.64 computed as follows:
Total
amount
per
claim
30,152,892.02
Less Prescribed amount (Exhs A, X, & X-20)
January 1996
P 2,199.94
February 1996
26,205.04
March 1996
70,338.42
98,743.40
P30,054,148.64
vvvvvvvvvvvvv
WHEREFORE, in view of all the foregoing, the instant
Petition for Review is partially GRANTED. The
Respondent is hereby ORDERED to REFUND to the
petitioner the amount of THIRTY MILLION FIFTY FOUR
THOUSAND ONE HUNDRED FORTY EIGHT PESOS
AND SIXTY FOUR CENTAVOS (P30,054,148.64)
immediately.
SO ORDERED.[4]

The Ruling of the Court of Appeals

Upon appeal by petitioner, the CA affirmed in toto the decision of the CTA
holding that PAGCOR was not only exempt from direct taxes but was also exempt
from indirect taxes like the VAT and consequently, the transactions between
respondent Acesite and PAGCOR were effectively zero-rated because they
involved the rendition of services to an entity exempt from indirect taxes. Thus,
the CA affirmed the CTAs determination by ruling that respondent Acesite was
entitled to a refund of PhP 30,054,148.64 from petitioner.
The Issues
Hence, we have the instant petition with the following issues: (1) whether
PAGCORs tax exemption privilege includes the indirect tax of VAT to entitle
Acesite to zero percent (0%) VAT rate; and (2) whether the zero percent (0%) VAT
rate under then Section 102 (b)(3) of the Tax Code (now Section 108 (B)(3) of the
Tax Code of 1997) legally applies to Acesite.
The petition is devoid of merit.
In resolving the first issue on whether PAGCORs tax exemption privilege
includes the indirect tax of VAT to entitle Acesite to zero percent (0%) VAT rate,
we answer in the affirmative. We will however discuss both issues together.
PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the
latter an exemption from the payment of taxes. Section 13 of P.D. 1869 pertinently
provides:
Sec. 13. Exemptions.
xxxx

(2) Income and other taxes. (a) Franchise Holder: No tax of

any kind or form, income or otherwise, as well as fees, charges
or levies of whatever nature, whether National or Local, shall
be assessed and collected under this Franchise from the
Corporation; nor shall any form of tax or charge attach in any
way to the earnings of the Corporation, except a Franchise Tax
of five (5%) percent of the gross revenue or earnings derived by the
Corporation from its operation under this Franchise. Such tax shall
be due and payable quarterly to the National Government and shall
be in lieu of all kinds of taxes, levies, fees or assessments of any
kind, nature or description, levied, established or collected by any
municipal, provincial, or national government authority.
xxxx
(b) Others: The exemptions herein granted for earnings
derived from the operations conducted under the franchise
specifically from the payment of any tax, income or otherwise,
as well as any form of charges, fees or levies, shall inure to the
benefit of and extend to corporation(s), association(s),
agency(ies), or individual(s) with whom the Corporation or
operator has any contractual relationship in connection with
the operations of the casino(s) authorized to be conducted
under this Franchise and to those receiving compensation or other
remuneration from the Corporation or operator as a result of
essential facilities furnished and/or technical services rendered to
the Corporation or operator. (Emphasis supplied.)

Petitioner contends that the above tax exemption refers only to PAGCORs
direct tax liability and not to indirect taxes, like the VAT.
We disagree.
A close scrutiny of the above provisos clearly gives PAGCOR a blanket
exemption to taxes with no distinction on whether the taxes are direct or
indirect. We are one with the CA ruling that PAGCOR is also exempt from
indirect taxes, like VAT, as follows:

Under the above provision [Section 13 (2) (b) of P.D. 1869],

the term Corporation or operator refers to PAGCOR. Although
the law does not specifically mention PAGCORs exemption from
indirect taxes, PAGCOR is undoubtedly exempt from such taxes
because the law exempts from taxes persons or entities
contracting with PAGCOR in casino operations. Although,
differently worded, the provision clearly exempts PAGCOR from
indirect taxes. In fact, it goes one step further by granting tax
exempt status to persons dealing with PAGCOR in casino
operations. The unmistakable conclusion is that PAGCOR is not
liable for the P30,152,892.02 VAT and neither is Acesite as the
latter is effectively subject to zero percent rate under Sec. 108 B
(3). R.A. 8424. (Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with

PAGCOR, the legislature clearly granted exemption also from indirect taxes. It
must be noted that the indirect tax of VAT, as in the instant case, can be shifted or
passed to the buyer, transferee, or lessee of the goods, properties, or services
subject to VAT. Thus, by extending the tax exemption to entities or individuals
dealing with PAGCOR in casino operations, it is exempting PAGCOR from being
liable to indirect taxes.
The manner of charging VAT does not make PAGCOR liable to said tax
It is true that VAT can either be incorporated in the value of the goods,
properties, or services sold or leased, in which case it is computed as 1/11 of such
value, or charged as an additional 10% to the value. Verily, the seller or lessor has
the option to follow either way in charging its clients and customer. In the instant
case, Acesite followed the latter method, that is, charging an additional 10% of the
gross sales and rentals. Be that as it may, the use of either method, and in
particular, the first method, does not denigrate the fact that PAGCOR is exempt
from an indirect tax, like VAT.
VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by
Acesite, the latter is not liable for the payment of it as it is exempt in this particular
transaction by operation of law to pay the indirect tax. Such exemption falls within
the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108
[b] [3] of R.A. 8424), which provides:
Section 102. Value-added tax on sale of services (a) Rate
and base of tax There shall be levied, assessed and collected, a
value-added tax equivalent to 10% of gross receipts derived by any
person engaged in the sale of services x x x; Provided, that the
following services performed in the Philippines by VAT-registered
persons shall be subject to 0%.
xxxx
(b) Transactions subject to zero percent (0%) rated.
xxxx
(3) Services rendered to persons or entities whose
exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects the supply
of such services to zero (0%) rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.D.
1869 and the extension of such exemption to entities or individuals dealing with
PAGCOR in casino operations are best elucidated from the 1987 case
of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc.,[5] where the
absolute tax exemption of the World Health Organization (WHO) upon an
international agreement was upheld. We held in said case that the exemption of
contractee WHO should be implemented to mean that the entity or person exempt
is the contractor itself who constructed the building owned by contractee WHO,
and such does not violate the rule that tax exemptions are personal because
the manifest intention of the agreement is to exempt the contractor so that no
contractors tax may be shifted to the contractee WHO. Thus, the proviso in

P.D. 1869, extending the exemption to entities or individuals dealing with

PAGCOR in casino operations, is clearly to proscribe any indirect tax, like VAT,
that may be shifted to PAGCOR.
Acesite paid VAT by mistake
Considering the foregoing discussion, there are undoubtedly erroneous
payments of the VAT pertaining to the effectively zero-rate transactions between
Acesite and PAGCOR. Verily, Acesite has clearly shown that it paid the subject
taxes under a mistake of fact, that is, when it was not aware that the transactions it
had with PAGCOR were zero-rated at the time it made the payments. In UST
Cooperative Store v. City of Manila,[6] we explained that there is erroneous
payment of taxes when a taxpayer pays under a mistake of fact, as for the instance
in a case where he is not aware of an existing exemption in his favor at the time the
payment was made.[7] Such payment is held to be not voluntary and, therefore,
can be recovered or refunded.[8]
Moreover, it must be noted that aside from not raising the issue of Acesites
compliance with pertinent Revenue Regulations on exemptions during the
proceedings in the CTA, it cannot be gainsaid that Acesite should have done so as
it paid the VAT under a mistake of fact. Hence, petitioners argument on this point
is utterly tenuous.
Solutio indebiti applies to the Government
Tax refunds are based on the principle of quasi-contract or solutio
indebiti and the pertinent laws governing this principle are found in Arts. 2142 and
2154 of the Civil Code, which provide, thus:
Art. 2142. Certain lawful, voluntary, and unilateral acts give
rise to the juridical relation of quasi-contract to the end that no one
shall be unjustly enriched or benefited at the expense of another.

Art. 2154. If something is received when there is no right to

demand it, and it was unduly delivered through mistake, the
obligation to return it arises.

When money is paid to another under the influence of a mistake of fact, that
is to say, on the mistaken supposition of the existence of a specific fact, where it
would not have been known that the fact was otherwise, it may be recovered. The
ground upon which the right of recovery rests is that money paid through
misapprehension of facts belongs in equity and in good conscience to the person
who paid it.[9]
The Government comes within the scope of solutio indebiti principle as
elucidated in Commissioner of Internal Revenue v. Firemans Fund Insurance
Company, where we held that: Enshrined in the basic legal principles is the timehonored doctrine that no person shall unjustly enrich himself at the expense of
another. It goes without saying that the Government is not exempted from the
application of this doctrine.[10]
Action for refund strictly construed; Acesite discharged the
burden of proof
Since an action for a tax refund partakes of the nature of an exemption,
which cannot be allowed unless granted in the most explicit and categorical
language, it is strictly construed against the claimant who must discharge such
burden convincingly.[11] In the instant case, respondent Acesite had discharged this
burden as found by the CTA and the CA. Indeed, the records show that Acesite
proved its actual VAT payments subject to refund, as attested to by an independent
Certified Public Accountant who was duly commissioned by the CTA. On the
other hand, petitioner never disputed nor contested respondents testimonial and
documentary evidence. In fact, petitioner never presented any evidence on its
behalf.

One final word. The BIR must release the refund to respondent without any
unreasonable delay. Indeed, fair dealing is expected by our taxpayers from the BIR
and this duty demands that the BIR should refund without any unreasonable delay
what it has erroneously collected.[12]
WHEREFORE, the petition is DENIED for lack of merit and
the November 17, 2000 Decision of the CA is herebyAFFIRMED. No costs.
SO ORDERED.

[G.R. No. 153866. February 11, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE

TECHNOLOGY (PHILIPPINES),respondent.
DECISION
PANGANIBAN, J.:

Business companies registered in and operating from the Special

Economic Zone in Naga, Cebu -- like herein respondent -- are entities exempt
from all internal revenue taxes and the implementing rules relevant thereto,
including the value-added taxes or VAT. Although export sales are not
deemed exempt transactions, they are nonetheless zero-rated. Hence, in the
present
case,
the
distinction
between
exempt entities and
exempt transactions has little significance, because the net result is that the
taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise,
has complied with all requisites for claiming a tax refund of or credit for the
input VAT it paid on capital goods it purchased. Thus, the Court of Tax
Appeals and the Court of Appeals did not err in ruling that it is entitled to such
refund or credit.
The Case

Before us is a Petition for Review [1] under Rule 45 of the Rules of Court,
seeking to set aside the May 27, 2002 Decision [2] of the Court of Appeals (CA)
in CA-GR SP No. 66093. The decretal portion of the Decision reads as
follows:
WHEREFORE, foregoing premises considered, the petition for review
is DENIED for lack of merit.[3]
The Facts
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as
follows:
As jointly stipulated by the parties, the pertinent facts x x x involved in this case are
as follows:
1. [Respondent] is a resident foreign corporation duly registered with the Securities
and Exchange Commission to do business in the Philippines, with principal office
address at the new Cebu Township One, Special Economic Zone, Barangay
Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and
empowered to perform the duties of his office, including, among others, the duty to
act and approve claims for refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and
has been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No.
66, as amended, to engage in the manufacture of recording components primarily
used in computers for export. Such registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT
Registration Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by
[respondent];
6.

An administrative claim for refund of VAT input taxes in the amount

of P28,369,226.38 with supporting documents (inclusive of theP12,267,981.04 VAT
input taxes subject of this Petition for Review), was filed on 4 October 1999 with
Revenue District Office No. 83, Talisay Cebu;

7. No final action has been received by [respondent] from [petitioner] on [respondents]

claim for VAT refund.

The administrative claim for refund by the [respondent] on October 4, 1999 was not
acted upon by the [petitioner] prompting the [respondent] to elevate the case to [the
CTA] on July 21, 2000 by way of Petition for Review in order to toll the running of
the two-year prescriptive period.

For his part, [petitioner] x x x raised the following Special and Affirmative Defenses,
to wit:
1. [Respondents] alleged claim for tax refund/credit is subject to administrative
routinary investigation/examination by [petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and
regulations, the [respondent] has the burden of proof that the taxes sought to be
refunded were erroneously or illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court
ruled that:
A claimant has the burden of proof to establish the factual
basis of his or her claim for tax credit/refund.
4. Claims for tax refund/tax credit are construed in strictissimi juris against the
taxpayer. This is due to the fact that claims for refund/credit [partake of] the nature
of an exemption from tax. Thus, it is incumbent upon the [respondent] to prove that
it is indeed entitled to the refund/credit sought. Failure on the part of the
[respondent] to prove the same is fatal to its claim for tax credit. He who claims
exemption must be able to justify his claim by the clearest grant of organic or
statutory law. An exemption from the common burden cannot be permitted to exist
upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone
Authority (PEZA) registered Ecozone Enterprise, then its business is not subject to
VAT pursuant to Section 24 of Republic Act No. ([RA]) 7916 in relation to Section
103 of the Tax Code, as amended. As [respondents] business is not subject to VAT,
the capital goods and services it alleged to have purchased are considered not used
in VAT taxable business. As such, [respondent] is not entitled to refund of input
taxes on such capital goods pursuant to Section 4.106.1 of Revenue Regulations
No. ([RR])7-95, and of input taxes on services pursuant to Section 4.103 of said
regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229
of the 1997 Tax Code on filing of a written claim for refund within two (2) years from
the date of payment of tax.

On July 19, 2001, the Tax Court rendered a decision granting the claim for refund. [4]
Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA granting the claim for refund or
issuance of a tax credit certificate (TCC) in favor of respondent in the reduced
amount of P12,122,922.66. This sum represented the unutilized but
substantiated input VAT paid on capital goods purchased for the period
covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the
fiscal incentives under Executive Order No. (EO) 226 (otherwise known as the

Omnibus Investment Code of 1987), not of those under both Presidential

Decree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent
was, therefore, considered exempt only from the payment of income tax when
it opted for the income tax holiday in lieu of the 5 percent preferential tax on
gross income earned. As a VAT-registered entity, though, it was still subject to
the payment of other national internal revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor
Sections 4.106-1 and 4.103-1 of RR 7-95 were applicable. Having paid the
input VAT on the capital goods it purchased, respondent correctly filed the
administrative and judicial claims for its refund within the two-year prescriptive
period. Such payments were -- to the extent of the refundable value -- duly
supported by VAT invoices or official receipts, and were not yet offset against
any output VAT liability.
Hence this Petition.[5]
Sole Issue
Petitioner submits this sole issue for our consideration:
Whether or not respondent is entitled to the refund or issuance of Tax Credit
Certificate in the amount of P12,122,922.66 representing alleged unutilized input VAT
paid on capital goods purchased for the period April 1, 1998 to June 30, 1999. [6]
The Courts Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to
a Refund of or Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a special economic
zone,[7] respondent is entitled to the fiscal incentives and benefits [8] provided
for in either PD 66[9] or EO 226.[10] It shall, moreover, enjoy all privileges,
benefits, advantages or exemptions under both Republic Act Nos. (RA)
7227[11] and 7844.[12]
Preferential Tax Treatment
Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws to

the contrary, respondent shall not be subject to internal revenue laws and
regulations for raw materials, supplies, articles, equipment, machineries,
spare parts and wares, except those prohibited by law, brought into the zone
to be stored, broken up, repacked, assembled, installed, sorted, cleaned,
graded or otherwise processed, manipulated, manufactured, mixed or used
directly or indirectly in such activities.[13] Even so, respondent would enjoy a
net-operating loss carry over; accelerated depreciation; foreign exchange and
financial assistance; and exemption from export taxes, local taxes and
licenses.[14]
Comparatively, the same exemption from internal revenue laws and
regulations applies if EO 226[15] is chosen. Under this law, respondent shall
further be entitled to an income tax holiday; additional deduction for labor
expense; simplification of customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing warehouse system; privileges
for foreign nationals employed; tax credits on domestic capital equipment, as
well as for taxes and duties on raw materials; and exemption from contractors
taxes, wharfage dues, taxes and duties on imported capital equipment and
spare parts, export taxes, duties, imposts and fees, [16] local taxes and licenses,
and real property taxes.[17]
A privilege available to respondent under the provision in RA 7227 on tax
and duty-free importation of raw materials, capital and equipment [18] -- is, ipso
facto, also accorded to the zone[19] under RA 7916. Furthermore, the latter law
-- notwithstanding other existing laws, rules and regulations to the contrary -extends[20] to that zone the provision stating that no local or national taxes shall
be imposed therein.[21] No exchange control policy shall be applied; and free
markets for foreign exchange, gold, securities and future shall be allowed and
maintained.[22] Banking and finance shall also be liberalized under minimum
Bangko Sentral regulation with the establishment of foreign currency
depository units of local commercial banks and offshore banking units of
foreign banks.[23]
In the same vein, respondent benefits under RA 7844 from negotiable tax
credits[24] for locally-produced materials used as inputs. Aside from the other
incentives possibly already granted to it by the Board of Investments, it also
enjoys preferential credit facilities[25] and exemption from PD 1853.[26]
From the above-cited laws, it is immediately clear that petitioner enjoys
preferential tax treatment.[27] It is not subject to internal revenue laws and
regulations and is even entitled to tax credits. The VAT on capital goods is an
internal revenue tax from which petitioner as an entity is exempt. Although

the transactions involving such tax are not exempt, petitioner as a VATregistered person,[28] however, is entitled to their credits.
Nature of the VAT and
the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0
percent to 10 percent levied on every importation of goods, whether or not in
the course of trade or business, or imposed on each sale, barter, exchange or
lease of goods or properties or on each rendition of services in the course of
trade or business[29] as they pass along the production and distribution chain,
the tax being limited only to the value added [30] to such goods, properties or
services by the seller, transferor or lessor.[31]It is an indirect tax that may be
shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services.[32] As such, it should be understood not in the context of
the person or entity that is primarily, directly and legally liable for its payment,
but in terms of its nature as a tax on consumption. [33] In either case, though,
the same conclusion is arrived at.
The law[34] that originally imposed the VAT in the country, as well as the
subsequent amendments of that law, has been drawn from the tax credit
method.[35] Such method adopted the mechanics and self-enforcement
features of the VAT as first implemented and practiced in Europe and
subsequently adopted in New Zealand and Canada.[36] Under the present
method that relies on invoices, an entity can credit against or subtract from the
VAT charged on its sales or outputs the VAT paid on its purchases, inputs and
imports.[37]
If at the end of a taxable quarter the output taxes[38] charged by a
seller[39] are equal to the input taxes[40] passed on by the suppliers, no payment
is required. It is when the output taxes exceed the input taxes that the excess
has to be paid.[41] If, however, the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or quarters. [42]Should
the input taxes result from zero-rated or effectively zero-rated transactions or
from the acquisition of capital goods,[43] any excess over the output taxes shall
instead be refunded[44] to the taxpayer or credited[45] against other internal
revenue taxes.[46]
Zero-Rated and Effectively
Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions

differ from effectively zero-rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and
supply of services.[47] The tax rate is set at zero. [48]When applied to the tax
base, such rate obviously results in no tax chargeable against the purchaser.
The seller of such transactions charges no output tax, [49] but can claim a
refund of or a tax credit certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods [50] or
supply of services[51] to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a signatory
effectively subjects such transactions to a zero rate. [52] Again, as applied to the
tax base, such rate does not yield any tax chargeable against the purchaser.
The seller who charges zero output tax on such transactions can also claim a
refund of or a tax credit certificate for the VAT previously charged by suppliers.
Zero Rating and
Exemption
In terms of the VAT computation, zero rating and exemption are the same,
but the extent of relief that results from either one of them is not.
Applying the destination principle[53] to the exportation of goods, automatic
zero rating[54] is primarily intended to be enjoyed by the seller who is directly
and legally liable for the VAT, making such seller internationally competitive by
allowing the refund or credit of input taxes that are attributable to export sales.
[55]
Effective zero rating, on the contrary, is intended to benefit the purchaser
who, not being directly and legally liable for the payment of the VAT, will
ultimately bear the burden of the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from
the burden of the tax.[56] But in an exemption there is only partial relief,
[57]
because the purchaser is not allowed any tax refund of or credit for input
taxes paid.[58]
Exempt Transaction
and Exempt Party
The object of exemption from the VAT may either be the transaction itself
or any of the parties to the transaction.[59]
An exempt transaction, on the one hand, involves goods or services
which, by their nature, are specifically listed in and expressly exempted from

the VAT under the Tax Code, without regard to the tax status -- VAT-exempt or
not -- of the party to thetransaction.[60] Indeed, such transaction is not subject
to the VAT, but the seller is not allowed any tax refund of or credit for any input
taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT
exemption under the Tax Code, a special law or an international agreement to
which the Philippines is a signatory, and by virtue of which its taxable
transactions become exempt from the VAT.[61] Such party is also not subject to
the VAT, but may be allowed a tax refund of or credit for input taxes paid,
depending on its registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of
which may be shifted or passed on by the seller to the purchaser of the goods,
properties or services.[62] While the liability is imposed on one person,
the burden may be passed on to another. Therefore, if a special law merely
exempts a party as a seller from its direct liability for payment of the VAT, but
does not relieve the same party as a purchaser from its indirect burden of the
VAT shifted to it by its VAT-registered suppliers, the purchase transaction is
not exempt. Applying this principle to the case at bar, the purchase
transactions entered into by respondent are not VAT-exempt.
Special laws may certainly exempt transactions from the VAT.[63] However,
the Tax Code provides that those falling under PD 66 are not. PD 66 is the
precursor of RA 7916 -- the special law under which respondent was
registered. The purchasetransactions it entered into are, therefore, not VATexempt. These are subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the
standard rate of 10 percent,[64] depending again on the application of
the destination principle.[65]
If respondent enters into such sales transactions with a purchaser -usually in a foreign country -- for use or consumption outside the Philippines,
these shall be subject to 0 percent.[66] If entered into with a purchaser for use
or consumption in the Philippines, then these shall be subject to 10 percent,
[67]
unless the purchaser is exempt from the indirect burden of the VAT, in
which case it shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate
to be applied is zero. Its exemption under both PD 66 and RA 7916 effectively
subjects such transactions to a zero rate, [68] because the ecozone within which
it is registered is managed and operated by the PEZA as a separate customs
territory.[69] This means that in such zone is created the legal fiction of foreign

territory.[70] Under the cross-border principle[71] of the VAT system being

enforced by the Bureau of Internal Revenue (BIR),[72] no VAT shall be imposed
to form part of the cost of goods destined for consumption outside of the
territorial border of the taxing authority. If exports of goods and services from
the Philippines to a foreign country are free of the VAT,[73] then the same rule
holds for such exports from the national territory -- except specifically declared
areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a
PEZA-registered entity are considered exports to a foreign country;
conversely, sales by a PEZA-registered entity to a VAT-registered person in
the customs territory are deemed imports from a foreign country.[74] An
ecozone -- indubitably a geographical territory of the Philippines -- is,
however, regarded in law as foreign soil.[75] This legal fiction is necessary to
give meaningful effect to the policies of the special law creating the zone. [76] If
respondent is located in an export processing zone [77] within that ecozone,
sales to the export processing zone, even without being actually exported,
shall in fact be viewed as constructively exported under EO 226.[78] Considered
as export sales,[79] such purchase transactions by respondent would indeed be
subject to a zero rate.[80]
Tax Exemptions
Broad and Express
Applying the special laws we have earlier discussed, respondent as an
entity is exempt from internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the
very nature of the VAT as a tax on consumption, for which the direct liability is
imposed on one person but the indirect burden is passed on to another.
Respondent, as an exempt entity, can neither be directly charged for the VAT
on its sales nor indirectly made to bear, as added cost to such sales, the
equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere
debemus. Where the law does not distinguish, we ought not to distinguish.
Moreover, the exemption is both express and pervasive for the following
reasons:
First, RA 7916 states that no taxes, local and national, shall be imposed
on business establishments operating within the ecozone.[81] Since this law
does not exclude the VAT from the prohibition, it is deemed
included. Exceptio firmat regulam in casibus non exceptis. An exception

confirms the rule in cases not excepted; that is, a thing not being excepted
must be regarded as coming within the purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the
transaction, it may still be passed on and, therefore, indirectly imposed on the
same entity -- a patent circumvention of the law. That no VAT shall be
imposed directly upon business establishments operating within the ecozone
under RA 7916 also means that no VAT may be passed on and imposed
indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum.
When anything is prohibited directly, it is also prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same
prohibition applied, except for real property taxes that presently are imposed
on land owned by developers.[82] This similar and repeated prohibition is an
unambiguous ratification of the laws intent in not imposing local or national
taxes on business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and
the like shall not be subject to x x x internal revenue laws and regulations
under PD 66[83] -- the original charter of PEZA (then EPZA) that was later
amended by RA 7916.[84] No provisions in the latter law modify such
exemption.
Although this exemption puts the government at an initial disadvantage,
the reduced tax collection ultimately redounds to the benefit of the national
economy by enticing more business investments and creating more
employment opportunities.[85]
Fourth, even the rules implementing the PEZA law clearly reiterate that
merchandise -- except those prohibited by law -- shall not be subject to x x x
internal revenue laws and regulations x x x[86] if brought to the ecozones
restricted area[87] for manufacturing by registered export enterprises,[88] of
which respondent is one. These rules also apply to all enterprises registered
with the EPZA prior to the effectivity of such rules.[89]
Fifth, export processing zone enterprises registered[90] with the Board of
Investments (BOI) under EO 226 patently enjoy exemption from national
internal revenue taxes on imported capital equipment reasonably needed and
exclusively used for the manufacture of their products;[91] on required supplies
and spare part for consigned equipment;[92] and on foreign and domestic
merchandise, raw materials, equipment and the like -- except those prohibited
by law -- brought into the zone for manufacturing.[93] In addition, they are given
credits for the value of the national internal revenue taxes imposed on
domestic capital equipment also reasonably needed and exclusively used for

the manufacture of their products,[94] as well as for the value of such taxes
imposed on domestic raw materials and supplies that are used in the
manufacture of their export products and that form part thereof.[95]
Sixth, the exemption from local and national taxes granted under RA
7227[96] are ipso facto accorded to ecozones.[97] In case of doubt, conflicts with
respect to such tax exemption privilege shall be resolved in favor of the
ecozone.[98]
And seventh, the tax credits under RA 7844 -- given for imported raw
materials primarily used in the production of export goods, [99] and for locally
produced raw materials, capital equipment and spare parts used by exporters
of non-traditional products[100] -- shall also be continuously enjoyed by similar
exporters within the ecozone.[101] Indeed, the latter exporters are likewise
entitled to such tax exemptions and credits.
Tax Refund as
Tax Exemption
To be sure, statutes that grant tax exemptions are construed strictissimi
juris[102] against the taxpayer[103] and liberally in favor of the taxing authority.[104]
Tax refunds are in the nature of such exemptions.[105] Accordingly, the
claimants of those refunds bear the burden of proving the factual basis of their
claims;[106] and of showing, by words too plain to be mistaken, that the
legislature intended to exempt them.[107] In the present case, all the cited legal
provisions are teeming with life with respect to the grant of tax exemptions too
vivid to pass unnoticed. In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions
which are not exempt. The end result, however, is that it is not subject to the
VAT. The non-taxability of transactions that are otherwise taxable is merely a
necessary incident to the tax exemption conferred by law upon it as an entity,
not upon the transactions themselves.[108] Nonetheless, its exemption as an
entity and the non-exemption of its transactions lead to the same result for the
following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities
who are called upon to execute or administer such laws [109] will have to be
adopted. Their prior tax issuances have held inconsistent positions brought
about by their probable failure to comprehend and fully appreciate the nature
of the VAT as a tax on consumption and the application of the destination
principle.[110] Revenue Memorandum Circular No. (RMC) 74-99, however, now
clearly and correctly provides that any VAT-registered suppliers sale of goods,

property or services from the customs territory to any registered enterprise

operating in the ecozone -- regardless of the class or type of the latters PEZA
registration -- is legally entitled to a zero rate.[111]
Second, the policies of the law should prevail. Ratio legis est anima. The
reason for the law is its very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as
well as the establishment of export processing zones, seeks to encourage
and promote foreign commerce as a means of x x x strengthening our export
trade and foreign exchange position, of hastening industrialization, of reducing
domestic unemployment, and of accelerating the development of the
country.[112]
RA 7916, as amended by RA 8748, declared that by creating the PEZA
and integrating the special economic zones, the government shall actively
encourage, promote, induce and accelerate a sound and balanced industrial,
economic and social development of the country x x x through the
establishment, among others, of special economic zones x x x that shall
effectively attract legitimate and productive foreign investments.[113]
Under EO 226, the State shall encourage x x x foreign investments in
industry x x x which shall x x x meet the tests of international
competitiveness[,] accelerate development of less developed regions of the
country[,] and result in increased volume and value of exports for the
economy.[114] Fiscal incentives that are cost-efficient and simple to administer
shall be devised and extended to significant projects to compensate for
market imperfections, to reward performance contributing to economic
development,[115] and to stimulate the establishment and assist initial
operations of the enterprise.[116]
Wisely accorded to ecozones created under RA 7916 [117] was the
governments policy -- spelled out earlier in RA 7227 -- of converting into
alternative productive uses[118] the former military reservations and their
extensions,[119] as well as of providing them incentives[120] to enhance the
benefits that would be derived from them[121] in promoting economic and social
development.[122]
Finally, under RA 7844, the State declares the need to evolve export
development into a national effort[123] in order to win international markets. By
providing many export and tax incentives,[124] the State is able to drive home
the point that exporting is indeed the key to national survival and the means
through which the economic goals of increased employment and enhanced
incomes can most expeditiously be achieved.[125]

The Tax Code itself seeks to promote sustainable economic growth x x x;

x x x increase economic activity; and x x x create a robust environment for
business to enable firms to compete better in the regional as well as the
global market.[126] After all, international competitiveness requires economic
and tax incentives to lower the cost of goods produced for export. State
actions that affect global competition need to be specific and selective in the
pricing of particular goods or services.[127]
All these statutory policies are congruent to the constitutional mandates of
providing incentives to needed investments,[128] as well as of promoting the
preferential use of domestic materials and locally produced goods and
adopting measures to help make these competitive.[129] Tax credits for
domestic inputs strengthen backward linkages. Rightly so, the rule of law
and the existence of credible and efficient public institutions are essential
prerequisites for sustainable economic development.[130]
VAT Registration, Not Application
for Effective Zero Rating,
Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT law.
Petitioner alleges that respondent did register for VAT purposes with the
appropriate Revenue District Office. However, it is now too late in the day for
petitioner to challenge the VAT-registered status of respondent, given the
latters prior representation before the lower courts and the mode of appeal
taken by petitioner before this Court.
[131]

The PEZA law, which carried over the provisions of the EPZA law, is clear
in exempting from internal revenue laws and regulations the equipment -including capital goods -- that registered enterprises will use, directly or
indirectly, in manufacturing.[132] EO 226 even reiterates this privilege among
the incentives it gives to such enterprises. [133] Petitioner merely asserts that by
virtue of the PEZA registration alone of respondent, the latter is not subject to
the VAT. Consequently, the capital goods and services respondent has
purchased are not considered used in the VAT business, and no VAT refund or
credit is due.[134] This is a non sequitur. By the VATs very nature as a tax on
consumption, the capital goods and services respondent has purchased are
subject to the VAT, although at zero rate. Registration does not determine
taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts.
Having failed to present evidence to support its contentions against
the income tax holiday privilege of respondent,[135] petitioner is deemed to have

conceded. It is a cardinal rule that issues and arguments not adequately and
seriously brought below cannot be raised for the first time on appeal.[136]This is
a matter of procedure[137] and a question of fairness.[138] Failure to assert
within a reasonable time warrants a presumption that the party entitled to
assert it either has abandoned or declined to assert it.[139]
The BIR regulations additionally requiring an approved prior application for
effective zero rating[140] cannot prevail over the clear VAT nature of
respondents transactions. The scope of such regulations is not within the
statutory authority x x x granted by the legislature.[141]
First, a mere administrative issuance, like a BIR regulation, cannot amend
the law; the former cannot purport to do any more than interpret the latter.
[142]
The courts will not countenance one that overrides the statute it seeks to
apply and implement.[143]
Other than the general registration of a taxpayer the VAT status of which is
aptly determined, no provision under our VAT law requires an additional
application to be made for such taxpayers transactions to be considered
effectively zero-rated. An effectively zero-rated transaction does not and
cannot become exempt simply because an application therefor was not made
or, if made, was denied. To allow the additional requirement is to give
unfettered discretion to those officials or agents who, without fluid
consideration, are bent on denying a valid application. Moreover, the State
can never be estopped by the omissions, mistakes or errors of its officials or
agents.[144]
Second, grantia argumenti that such an application is required by law,
there is still the presumption of regularity in the performance of official duty.
[145]
Respondents registration carries with it the presumption that, in the
absence of contradictory evidence, an application for effective zero rating was
also filed and approval thereof given. Besides, it is also presumed that the
law has been obeyed[146] by both the administrative officials and the applicant.
Third, even though such an application was not made, all the
special laws we have tackled exempt respondent not only from internal
revenue laws but also from the regulations issued pursuant thereto. Leniency
in the implementation of the VAT in ecozones is an imperative, precisely to
spur economic growth in the country and attain global competitiveness as
envisioned in those laws.
A VAT-registered status, as well as compliance with the invoicing
requirements,[147] is sufficient for the effective zero rating of the transactions of
a taxpayer. The nature of its business and transactions can easily be perused

from, as already clearly indicated in, its VAT registration papers and
photocopied documents attached thereto. Hence, its transactions cannot be
exempted by its mere failure to apply for their effective zero rating. Otherwise,
their VAT exemption would be determined, not by their nature, but by the
taxpayers negligence -- a result not at all contemplated. Administrative
convenience cannot thwart legislative mandate.
Tax Refund or
Credit in Order
Having determined that respondents purchase transactions are subject to
a zero VAT rate, the tax refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent had
chosen the fiscal incentives in EO 226 over those in RA 7916 and PD 66. It
opted for the income tax holiday regime instead of the 5 percent preferential
tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration
under the PEZA law,[148] for EO 226[149] also has provisions to contend with.
These two regimes are in fact incompatible and cannot be availed of
simultaneously by the same entity. While EO 226 merely exempts it from
income taxes, the PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but
only from the payment of income tax for a certain number of years, depending
on its registration as a pioneer or a non-pioneer enterprise. Besides, the
remittance of the aforesaid 5 percent of gross income earned in lieu of local
and national taxes imposable upon business establishments within the
ecozone cannot outrightly determine a VAT exemption. Being subject to VAT,
payments erroneously collected thereon may then be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential
tax regime in RA 7916, Section 24 thereof does not preclude the VAT. One
can, therefore, counterargue that such provision merely exempts respondent
from taxes imposed on business. To repeat, the VAT is a tax imposed on
consumption, not on business. Although respondent as an entity is exempt,
the transactions it enters into are not necessarily so. The VAT payments
made in excess of the zero rate that is imposable may certainly be refunded
or credited.
Compliance with All Requisites
for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the
requisites for claiming a VAT refund or credit.[150]
First, respondent is a VAT-registered entity. This fact alone distinguishes
the present case from Contex, in which this Court held that the petitioner
therein was registered as a non-VAT taxpayer.[151] Hence, for being merely
VAT-exempt, the petitioner in that case cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent are duly
supported by VAT invoices and have not been offset against any output
taxes. Although enterprises registered with the BOI after December 31, 1994
would no longer enjoy the tax credit incentives on domestic capital equipment
-- as provided for under Article 39(d), Title III, Book I of EO 226 [152] -- starting
January 1, 1996, respondent would still have the same benefit under a
general and express exemption contained in both Article 77(1), Book VI of EO
226; and Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones
by RA 7916.
There was a very clear intent on the part of our legislators, not only to
exempt investors in ecozones from national and local taxes, but also to grant
them tax credits. This fact was revealed by the sponsorship speeches in
Congress during the second reading of House Bill No. 14295, which later
became RA 7916, as shown below:
MR. RECTO. x x x Some of the incentives that this bill provides are exemption
from national and local taxes; x x x tax credit for locally-sourced inputs x x x.
xxx

xxx

xxx

MR. DEL MAR. x x x To advance its cause in encouraging investments and creating
an environment conducive for investors, the bill offers incentives such as the
exemption from local and national taxes, x x x tax credits for locally sourced inputs x
x x.[153]
And third, no question as to either the filing of such claims within the
prescriptive period or the validity of the VAT returns has been raised. Even if
such a question were raised, the tax exemption under all the special laws
cited above is broad enough to cover even the enforcement of internal
revenue laws, including prescription.[154]
Summary

To summarize, special laws expressly grant preferential tax treatment to

business establishments registered and operating within an ecozone, which
by law is considered as a separate customs territory. As such, respondent is
exempt from all internal revenue taxes, including the VAT, and regulations
pertaining thereto. It has opted for the income tax holiday regime, instead of
the 5 percent preferential tax regime. As a matter of law and procedure, its
registration status entitling it to such tax holiday can no longer be questioned.
Its sales transactions intended for export may not be exempt, but like its
purchase transactions, they are zero-rated. No prior application for the
effective zero rating of its transactions is necessary. Being VAT-registered and
having satisfactorily complied with all the requisites for claiming a tax refund of
or credit for the input VAT paid on capital goods purchased, respondent is
entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No
pronouncement as to costs.
SO ORDERED.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOSHIBA

INFORMATION EQUIPMENT (PHILS.), INC., respondent.
DECISION
CHICO-NAZARIO, J.:

In this Petition for Review under Rule 45 of the Rules of Court, petitioner
Commissioner of Internal Revenue (CIR) prays for the reversal of the decision
of the Court of Appeals in CA-G.R. SP No. 59106, [1] affirming the order of the
Court of Tax Appeals (CTA) in CTA Case No. 5593, [2] which ordered said
petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to
respondent Toshiba Information Equipment (Phils.), Inc. (Toshiba), in the
amount of P16,188,045.44, representing unutilized input value-added tax
(VAT) payments for the first and second quarters of 1996.
There is hardly any dispute as to the facts giving rise to the present
Petition.
Respondent Toshiba was organized and established as a domestic
corporation, duly-registered with the Securities and Exchange Commission on
07 July 1995,[3] with the primary purpose of engaging in the business of
manufacturing and exporting of electrical and mechanical machinery,
equipment, systems, accessories, parts, components, materials and goods of

all kinds, including, without limitation, to those relating to office automation

and information technology, and all types of computer hardware and software,
such as HDD, CD-ROM and personal computer printed circuit boards.[4]
On 27 September 1995, respondent Toshiba also registered with the
Philippine Economic Zone Authority (PEZA) as an ECOZONE Export
Enterprise, with principal office in Laguna Technopark, Bian, Laguna.
[5]
Finally, on 29 December 1995, it registered with the Bureau of Internal
Revenue (BIR) as a VAT taxpayer and a withholding agent.[6]
Respondent Toshiba filed its VAT returns for the first and second quarters
of taxable year 1996, reporting input VAT in the amount
of P13,118,542.00[7] and P5,128,761.94,[8] respectively,
or
a
total
of P18,247,303.94. It alleged that the said input VAT was from its purchases
of capital goods and services which remained unutilized since it had not yet
engaged in any business activity or transaction for which it may be liable for
any output VAT.[9] Consequently, on 27 March 1998, respondent Toshiba filed
with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center
of the Department of Finance (DOF) applications for tax credit/refund of its
unutilized input VAT for 01 January to 31 March 1996 in the amount
of P14,176,601.28,[10] and for 01 April to 30 June 1996 in the amount
of P5,161,820.79,[11] for a total of P19,338,422.07. To toll the running of the
two-year prescriptive period for judicially claiming a tax credit/refund,
respondent Toshiba, on 31 March 1998, filed with the CTA a Petition for
Review. It would subsequently file an Amended Petition for Review on 10
November 1998 so as to conform to the evidence presented before the CTA
during the hearings.
In his Answer to the Amended Petition for Review before the CTA,
petitioner CIR raised several Special and Affirmative Defenses, to wit
5. Assuming without admitting that petitioner filed a claim for refund/tax credit,
the same is subject to investigation by the Bureau of Internal Revenue.
6. Taxes are presumed to have been collected in accordance with law. Hence,
petitioner must prove that the taxes sought to be refunded were erroneously or
illegally collected.
7. Petitioner must prove the allegations supporting its entitlement to a refund.
8. Petitioner must show that it has complied with the provisions of Sections
204(c) and 229 of the 1997 Tax Code on the filing of a written claim for
refund within two (2) years from the date of payment of the tax.

9. Claims for refund of taxes are construed strictly against claimants, the same
being in the nature of an exemption from taxation. [12]
After evaluating the evidence submitted by respondent Toshiba, [13] the
CTA, in its Decision dated 10 March 2000, ordered petitioner CIR to refund, or
in the alternative, to issue a tax credit certificate to respondent Toshiba in the
amount ofP16,188,045.44.[14]
In a Resolution, dated 24 May 2000, the CTA denied petitioner CIRs
Motion for Reconsideration for lack of merit.[15]
The Court of Appeals, in its Decision dated 27 September 2001, dismissed
petitioner CIRs Petition for Review and affirmed the CTA Decision dated 10
March 2000.
Comes now petitioner CIR before this Court assailing the abovementioned Decision of the Court of Appeals based on the following grounds
1. The Court of Appeals erred in holding that petitioners failure to raise in the
Tax Court the arguments relied upon by him in the petition, is fatal to his
cause.
2. The Court of Appeals erred in not holding that respondent being registered
with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export
Enterprise, its business is not subject to VAT pursuant to Section 24 of
Republic Act No. 7916 in relation to Section 103 (now 109) of the Tax Code.
3. The Court of Appeals erred in not holding that since respondents business is
not subject to VAT, the capital goods and services it purchased are considered
not used in VAT taxable business, and, therefore, it is not entitled to refund of
input taxes on such capital goods pursuant to Section 4.106-1 of Revenue
Regulations No. 7-95 and of input taxes on services pursuant to Section
4.103-1 of said Regulations.
4. The Court of Appeals erred in holding that respondent is entitled to a refund
or tax credit of input taxes it paid on zero-rated transactions. [16]
Ultimately, however, the issue still to be resolved herein shall be whether
respondent Toshiba is entitled to the tax credit/refund of its input VAT on its
purchases of capital goods and services, to which this Court answers in the
affirmative.
I

An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and

services by persons from the Customs Territory to ECOZONE enterprises shall be
subject to VAT at zero percent (0%).
Respondent Toshiba bases its claim for tax credit/refund on Section 106(b)
of the Tax Code of 1977, as amended, which reads:
SEC. 106. Refunds or tax credits of creditable input tax.

(b) Capital goods. A VAT-registered person may apply for the issuance of a tax
credit certificate or refund of input taxes paid on capital goods imported or locally
purchased, to the extent that such input taxes have not been applied against output
taxes. The application may be made only within two (2) years after the close of the
taxable quarter when the importation or purchase was made. [17]
Petitioner CIR, on the other hand, opposes such claim on account of
Section 4.106-1(b) of Revenue Regulations (RR) No. 7-95, otherwise known
as the VAT Regulations, as amended, which provides as follows
Sec. 4.106-1. Refunds or tax credits of input tax.
...
(b) Capital Goods. -- Only a VAT-registered person may apply for issuance of a tax
credit certificate or refund of input taxes paid on capital goods imported or locally
purchased. The refund shall be allowed to the extent that such input taxes have not
been applied against output taxes. The application should be made within two (2)
years after the close of the taxable quarter when the importation or purchase was
made.
Refund of input taxes on capital goods shall be allowed only to the extent that such
capital goods are used in VAT taxable business. If it is also used in exempt operations,
the input tax refundable shall only be the ratable portion corresponding to the taxable
operations.
Capital goods or properties refer to goods or properties with estimated useful life
greater than one year and which are treated as depreciable assets under Section 29(f),
used directly or indirectly in the production or sale of taxable goods or services.
(Underscoring ours.)

Petitioner CIR argues that although respondent Toshiba may be a VATregistered taxpayer, it is not engaged in a VAT-taxable business. According to
petitioner CIR, respondent Toshiba is actually VAT-exempt, invoking the
following provision of the Tax Code of 1977, as amended
SEC. 103. Exempt transactions. The following shall be exempt from value-added
tax.

(q) Transactions which are exempt under special laws, except those granted under
Presidential Decree No. 66, 529, 972, 1491, and 1590, and non-electric cooperatives
under Republic Act No. 6938, or international agreements to which the Philippines is
a signatory.[18]
Since respondent Toshiba is a PEZA-registered enterprise, it is subject to
the five percent (5%) preferential tax rate imposed under Chapter III, Section
24 of Republic Act No. 7916, otherwise known as The Special Economic Zone
Act of 1995, as amended. According to the said section, [e]xcept for real
property taxes on land owned by developers, no taxes, local and national,
shall be imposed on business establishments operating within the
ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by
all business enterprises within the ECOZONE shall be paid The five
percent (5%) preferential tax rate imposed on the gross income of a PEZAregistered enterprise shall be in lieu of all national taxes, including VAT. Thus,
petitioner CIR contends that respondent Toshiba is VAT-exempt by virtue of a
special law, Rep. Act No. 7916, as amended.
It would seem that petitioner CIR failed to differentiate between VATexempt transactions from VAT-exempt entities. In the case of Commissioner
of Internal Revenue v. Seagate Technology (Philippines),[19] this Court already
made such distinction
An exempt transaction, on the one hand, involves goods or services which, by their
nature, are specifically listed in and expressly exempted from the VAT under the Tax
Code, without regard to the tax status VAT-exempt or not of the party to the
transaction
An exempt party, on the other hand, is a person or entity granted VAT exemption
under the Tax Code, a special law or an international agreement to which the
Philippines is a signatory, and by virtue of which its taxable transactions become
exempt from VAT

Section 103(q) of the Tax Code of 1977, as amended, relied upon by

petitioner CIR, relates to VAT-exempt transactions. These are transactions
exempted from VAT by special laws or international agreements to which the
Philippines is a signatory. Since such transactions are not subject to VAT, the
sellers cannot pass on any output VAT to the purchasers of goods, properties,
or services, and they may not claim tax credit/refund of the input VAT they had
paid thereon.
Section 103(q) of the Tax Code of 1977, as amended, cannot apply to
transactions of respondent Toshiba because although the said section
recognizes that transactions covered by special laws may be exempt from
VAT, the very same section provides that those falling under Presidential
Decree No. 66 are not. Presidential Decree No. 66, creating the Export
Processing Zone Authority (EPZA), is the precursor of Rep. Act No. 7916, as
amended,[20] under which the EPZA evolved into the PEZA. Consequently, the
exception of Presidential Decree No. 66 from Section 103(q) of the Tax Code
of 1977, as amended, extends likewise to Rep. Act No. 7916, as amended.
This Court agrees, however, that PEZA-registered enterprises, which
would necessarily be located within ECOZONES, are VAT-exempt entities, not
because of Section 24 of Rep. Act No. 7916, as amended, which imposes the
five percent (5%) preferential tax rate on gross income of PEZA-registered
enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same
statute which establishes the fiction that ECOZONES are foreign territory.
It is important to note herein that respondent Toshiba is located within an
ECOZONE. An ECOZONE or a Special Economic Zone has been described
as
. . . [S]elected areas with highly developed or which have the potential to be
developed into agro-industrial, industrial, tourist, recreational, commercial, banking,
investment and financial centers whose metes and bounds are fixed or delimited by
Presidential Proclamations. An ECOZONE may contain any or all of the following:
industrial estates (IEs), export processing zones (EPZs), free trade zones and
tourist/recreational centers.[21]
The national territory of the Philippines outside of the proclaimed borders of
the ECOZONE shall be referred to as the Customs Territory.[22]
Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA
shall manage and operate the ECOZONES as a separate customs territory;
[23]
thus, creating the fiction that the ECOZONE is a foreign territory.[24] As a
result, sales made by a supplier in the Customs Territory to a purchaser in the
ECOZONE shall be treated as an exportation from the Customs Territory.

Conversely, sales made by a supplier from the ECOZONE to a purchaser in

the Customs Territory shall be considered as an importation into the Customs
Territory.
Given the preceding discussion, what would be the VAT implication of
sales made by a supplier from the Customs Territory to an ECOZONE
enterprise?
The Philippine VAT system adheres to the Cross Border Doctrine,
according to which, no VAT shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial border of the taxing
authority. Hence, actual export of goods and services from the Philippines to
a foreign country must be free of VAT; while, those destined for use or
consumption within the Philippines shall be imposed with ten percent (10%)
VAT.[25]
Applying said doctrine to the sale of goods, properties, and services to and
from the ECOZONES,[26] the BIR issued Revenue Memorandum Circular
(RMC) No. 74-99, on 15 October 1999. Of particular interest to the present
Petition is Section 3 thereof, which reads
SECTION 3. Tax Treatment Of Sales Made By a VAT Registered Supplier from
The Customs Territory, To a PEZA Registered Enterprise.
(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax
regime, in lieu of all taxes, except real property tax, pursuant to R.A. No. 7916, as
amended:
(a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence,
considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC
and Sec. 23 of R.A. No. 7916, in relation to ART. 77(2) of the Omnibus Investments
Code.
(b) Sale of service. This shall be treated subject to zero percent (0%) VAT under
the cross border doctrine of the VAT System, pursuant to VAT Ruling No. 032-98
dated Nov. 5, 1998.
(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special
tax regime, hence, subject to taxes under the NIRC, e.g., Service Establishments
which are subject to taxes under the NIRC rather than the 5% special tax regime:
(a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence,
considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC

and Sec. 23 of R.A. No. 7916 in relation to ART. 77(2) of the Omnibus Investments
Code.
(b) Sale of Service. This shall be treated subject to zero percent (0%) VAT under
the cross border doctrine of the VAT System, pursuant to VAT Ruling No. 032-98
dated Nov. 5, 1998.
(3) In the final analysis, any sale of goods, property or services made by a VAT
registered supplier from the Customs Territory to any registered enterprise operating
in the ecozone, regardless of the class or type of the latters PEZA registration, is
actually qualified and thus legally entitled to the zero percent (0%) VAT. Accordingly,
all sales of goods or property to such enterprise made by a VAT registered supplier
from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec.
106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus Investments Code,
while all sales of services to the said enterprises, made by VAT registered suppliers
from the Customs Territory, shall be treated effectively subject to the 0% VAT,
pursuant to Section 108(B)(3), NIRC, in relation to the provisions of R.A. No. 7916
and the Cross Border Doctrine of the VAT system.
This Circular shall serve as a sufficient basis to entitle such supplier of goods,
property or services to the benefit of the zero percent (0%) VAT for sales made to the
aforementioned ECOZONE enterprises and shall serve as sufficient compliance to the
requirement for prior approval of zero-rating imposed by Revenue Regulations No. 795 effective as of the date of the issuance of this Circular.
Indubitably, no output VAT may be passed on to an ECOZONE enterprise
since it is a VAT-exempt entity. The VAT treatment of sales to it, however,
varies depending on whether the supplier from the Customs Territory is VATregistered or not.
Sales of goods, properties and services by a VAT-registered supplier from
the Customs Territory to an ECOZONE enterprise shall be treated as export
sales. If such sales are made by a VAT-registered supplier, they shall be
subject to VAT at zero percent (0%). In zero-rated transactions, the VATregistered supplier shall not pass on any output VAT to the ECOZONE
enterprise, and at the same time, shall be entitled to claim tax credit/refund of
its input VAT attributable to such sales. Zero-rating of export sales primarily
intends to benefit the exporter (i.e., the supplier from the Customs Territory),
who is directly and legally liable for the VAT, making it internationally
competitive by allowing it to credit/refund the input VAT attributable to its
export sales.

Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or

unregistered supplier would only be exempt from VAT and the supplier shall
not be able to claim credit/refund of its input VAT.
Even conceding, however, that respondent Toshiba, as a PEZA-registered
enterprise, is a VAT-exempt entity that could not have engaged in a VATtaxable business, this Court still believes, given the particular circumstances
of the present case, that it is entitled to a credit/refund of its input VAT.
II

Prior to RMC No. 74-99, however, PEZA-registered enterprises availing of the

income tax holiday under Executive Order No. 226, as amended, were deemed subject
to VAT.
In his Petition, petitioner CIR opposed the grant of tax credit/refund to
respondent Toshiba, reasoning thus
In the first place, respondent could not have paid input taxes on its purchases of goods
and services from VAT-registered suppliers because such purchases being zero-rated,
that is, no output tax was paid by the suppliers, no input tax was shifted or passed on
to respondent. The VAT 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
(Section 105, 1997 Tax Code).

Secondly, Section 4.100-2 of Revenue Regulations No. 7-95 provides:

SEC. 4.100-2. Zero-rated sales. A zero-rated sale by a VAT-registered person, which
is a taxable transaction for VAT purposes, shall not result in any output tax. However,
the input tax on his purchases of goods, properties or services related to such zerorated sale shall be available as tax credit or refund in accordance with these
regulations.
From the foregoing, the VAT-registered person who can avail as tax credit or refund of
the input tax on his purchases of goods, services or properties is the seller whose sale
is zero-rated. Applying the foregoing provision to the case at bench, the VATregistered supplier, whose sale of goods and services to respondent is zero-rated, can
avail as tax credit or refund the input taxes on its (supplier) own purchases of goods
and services related to its zero-rated sale of goods and services to respondent. On the
other hand, respondent, as the buyer in such zero-rated sale of goods and services,
could not have paid input taxes for which it can claim as tax credit or refund. [27]

Before anything else, this Court wishes to point out that petitioner CIR is
working on the erroneous premise that respondent Toshiba is claiming tax
credit or refund of input VAT based on Section 4.100-2,[28] in relation to Section
4.106-1(a),[29] of RR No. 7-95, as amended, which allows the tax credit/refund
of input VAT on zero-rated sales of goods, properties or services. Instead,
respondent Toshiba is basing its claim for tax credit or refund on Sec. 4.1061(b) of the same regulations, which allows a VAT-registered person to apply
for tax credit/refund of the input VAT on its capital goods. While in the former,
the seller of the goods, properties or services is the one entitled to the tax
credit/refund; in the latter, it is the purchaser of the capital goods.
Nevertheless, regardless of his mistake as to the basis for respondent
Toshibas application for tax credit/refund, petitioner CIR validly raised the
question of whether any output VAT was actually passed on to respondent
Toshiba which it could claim as input VAT subject to credit/refund. If the VATregistered supplier from the Customs Territory did not charge any output VAT
to respondent Toshiba believing that it is exempt from VAT or it is subject to
zero-rated VAT, then respondent Toshiba did not pay any input VAT on its
purchase of capital goods and it could not claim any tax credit/refund thereof.
The rule that any sale by a VAT-registered supplier from the Customs
Territory to a PEZA-registered enterprise shall be considered an export sale
and subject to zero percent (0%) VAT was clearly established only on 15
October 1999, upon the issuance of RMC No. 74-99. Prior to the said date,
however, whether or not a PEZA-registered enterprise was VAT-exempt
depended on the type of fiscal incentives availed of by the said enterprise.
This old rule on VAT-exemption or liability of PEZA-registered enterprises,
followed by the BIR, also recognized and affirmed by the CTA, the Court of
Appeals, and even this Court,[30] cannot be lightly disregarded considering the
great number of PEZA-registered enterprises which did rely on it to determine
its tax liabilities, as well as, its privileges.
According to the old rule, Section 23 of Rep. Act No. 7916, as amended,
gives the PEZA-registered enterprise the option to choose between two sets
of fiscal incentives: (a) The five percent (5%) preferential tax rate on its gross
income under Rep. Act No. 7916, as amended; and (b) the income tax holiday
provided under Executive Order No. 226, otherwise known as the Omnibus
Investment Code of 1987, as amended.[31]
The five percent (5%) preferential tax rate on gross income under Rep. Act
No. 7916, as amended, is in lieu of all taxes. Except for real property taxes,
no other national or local tax may be imposed on a PEZA-registered

enterprise availing of this particular fiscal incentive, not even an indirect tax
like VAT.
Alternatively, Book VI of Exec. Order No. 226, as amended, grants income
tax holiday to registered pioneer and non-pioneer enterprises for six-year and
four-year periods, respectively.[32] Those availing of this incentive are exempt
only from income tax, but shall be subject to all other taxes, including the ten
percent (10%) VAT.
This old rule clearly did not take into consideration the Cross Border
Doctrine essential to the VAT system or the fiction of the ECOZONE as a
foreign territory. It relied totally on the choice of fiscal incentives of the PEZAregistered enterprise. Again, for emphasis, the old VAT rule for PEZAregistered enterprises was based on their choice of fiscal incentives: (1) If the
PEZA-registered enterprise chose the five percent (5%) preferential tax on its
gross income, in lieu of all taxes, as provided by Rep. Act No. 7916, as
amended, then it would be VAT-exempt; (2) If the PEZA-registered enterprise
availed of the income tax holiday under Exec. Order No. 226, as amended, it
shall be subject to VAT at ten percent (10%). Such distinction was abolished
by RMC No. 74-99, which categorically declared that all sales of goods,
properties, and services made by a VAT-registered supplier from the Customs
Territory to an ECOZONE enterprise shall be subject to VAT, at zero percent
(0%) rate, regardless of the latters type or class of PEZA registration; and,
thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise as
a VAT-exempt entity.
The sale of capital goods by suppliers from the Customs Territory to
respondent Toshiba in the present Petition took place during the first and
second quarters of 1996, way before the issuance of RMC No. 74-99, and
when the old rule was accepted and implemented by no less than the BIR
itself. Since respondent Toshiba opted to avail itself of the income tax holiday
under Exec. Order No. 226, as amended, then it was deemed subject to the
ten percent (10%) VAT. It was very likely therefore that suppliers from the
Customs Territory had passed on output VAT to respondent Toshiba, and the
latter, thus, incurred input VAT. It bears emphasis that the CTA, with the help
of SGV & Co., the independent accountant it commissioned to make a report,
already thoroughly reviewed the evidence submitted by respondent Toshiba
consisting of receipts, invoices, and vouchers, from its suppliers from the
Customs Territory. Accordingly, this Court gives due respect to and adopts
herein the CTAs findings that the suppliers of capital goods from the Customs
Territory did pass on output VAT to respondent Toshiba and the amount of
input VAT which respondent Toshiba could claim as credit/refund.

Moreover, in another circular, Revenue Memorandum Circular (RMC) No.

42-2003, issued on 15 July 2003, the BIR answered the following question
Q-5:

Under Revenue Memorandum Circular (RMC) No. 74-99, purchases

by PEZA-registered firms automatically qualify as zero-rated without
seeking prior approval from the BIR effective October 1999.
1) Will the OSS-DOF Center still accept applications from PEZAregistered claimants who were allegedly billed VAT by their suppliers
before and during the effectivity of the RMC by issuing VAT
invoices/receipts?

A-5(1):

If the PEZA-registered enterprise is paying the 5% preferential tax in

lieu of all other taxes, the said PEZA-registered taxpayer cannot claim
TCC or refund for the VAT paid on purchases. However, if the taxpayer
is availing of the income tax holiday, it can claim VAT credit provided:
a. The taxpayer-claimant is VAT-registered;
b. Purchases are evidenced by VAT invoices or receipts, whichever is
applicable, with shifted VAT to the purchaser prior to the
implementation of RMC No. 74-99; and
c. The supplier issues a sworn statement under penalties of perjury that
it shifted the VAT and declared the sales to the PEZA-registered
purchaser as taxable sales in its VAT returns.
For invoices/receipts issued upon the effectivity of RMC No. 74-99, the
claims for input VAT by PEZA-registered companies, regardless of the
type or class of PEZA registration, should be denied.

Under RMC No. 42-2003, the DOF would still accept applications for tax
credit/refund filed by PEZA-registered enterprises, availing of the income tax
holiday, for input VAT on their purchases made prior to RMC No. 74-99.
Acceptance of applications essentially implies processing and possible
approval thereof depending on whether the given conditions are met.
Respondent Toshibas claim for tax credit/refund arose from the very same
circumstances recognized by Q-5(1) and A-5(1) of RMC No. 42-2003. It
therefore seems irrational and unreasonable for petitioner CIR to oppose
respondent Toshibas application for tax credit/refund of its input VAT, when

such claim had already been determined and approved by the CTA after due
hearing, and even affirmed by the Court of Appeals; while it could accept,
process, and even approve applications filed by other similarly-situated PEZAregistered enterprises at the administrative level.
III

Findings of fact by the CTA are respected and adopted by this Court.
Finally, petitioner CIR, in a last desperate attempt to block respondent
Toshibas claim for tax credit/refund, challenges the allegation of said
respondent that it availed of the income tax holiday under Exec. Order No.
226, as amended, rather than the five percent (5%) preferential tax rate under
Rep. Act No. 7916, as amended. Undoubtedly, this is a factual matter that
should have been raised and threshed out in the lower courts. Giving it
credence would belie petitioner CIRs assertion that it is raising only issues of
law in its Petition that may be resolved without need for reception of additional
evidences. Once more, this Court respects and adopts the finding of the CTA,
affirmed by the Court of Appeals, that respondent Toshiba had indeed availed
of the income tax holiday under Exec. Order No. 226, as amended.
WHEREFORE, based on the foregoing, this Court AFFIRMS the decision
of the Court of Appeals in CA-G.R. SP. No. 59106, and the order of the CTA in
CTA Case No. 5593, ordering said petitioner CIR to refund or, in the
alternative, to issue a tax credit certificate to respondent Toshiba, in the
amount of P16,188,045.44, representing unutilized input VAT for the first and
second quarters of 1996.
SO ORDERED.

G.R. No. 152609

June 29, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), Respondent.
DECISION
PANGANIBAN, J.:

As a general rule, the value-added tax (VAT) system uses the destination principle.
However, our VAT law itself provides for a clear exception, under which the supply of
service shall be zero-rated when the following requirements are met: (1) the service is
performed in the Philippines; (2) the service falls under any of the categories provided in
Section 102(b) of the Tax Code; and (3) it is paid for in acceptable foreign currency that is
accounted for in accordance with the regulations of the Bangko Sentral ng Pilipinas. Since
respondents services meet these requirements, they are zero-rated. Petitioners Revenue
Regulations that alter or revoke the above requirements are ultra vires and invalid.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the
February 28, 2002 Decision2of the Court of Appeals (CA) in CA-GR SP No. 62727. The
assailed Decision disposed as follows:
"WHEREFORE, premises considered, the petition is hereby DISMISSED for lack of merit.
The assailed decision of the Court of Tax Appeals (CTA) is AFFIRMED in toto."3
The Facts
Quoting the CTA, the CA narrated the undisputed facts as follows:
"[Respondent] is a Philippine branch of American Express International, Inc., a corporation
duly organized and existing under and by virtue of the laws of the State of Delaware,
U.S.A., with office in the Philippines at the Ground Floor, ACE Building, corner Rada and de
la Rosa Streets, Legaspi Village, Makati City. It is a servicing unit of American Express
International, Inc. - Hongkong Branch (Amex-HK) and is engaged primarily to facilitate the
collections of Amex-HK receivables from card members situated in the Philippines and
payment to service establishments in the Philippines.
"Amex Philippines registered itself with the Bureau of Internal Revenue (BIR), Revenue
District Office No. 47 (East Makati) as a value-added tax (VAT) taxpayer effective March
1988 and was issued VAT Registration Certificate No. 088445 bearing VAT Registration No.
32A-3-004868. For the period January 1, 1997 to December 31, 1997, [respondent] filed
with the BIR its quarterly VAT returns as follows:
Exhibit

Period Covered

Date Filed

1997 1st Qtr.

April 18, 1997

2nd Qtr.

July 21, 1997

3rd Qtr.

October 2, 1997

4th Qtr.

January 20, 1998

"On March 23, 1999, however, [respondent] amended the aforesaid returns and declared
the following:

Exh
1997

Taxable
Sales

Output
VAT

I 1st qtr

P59,597.20

J 2nd
qtr

67,517.20

6,751.72

K 3rd
qtr

51,936.60

L 4th
qtr

67,994.30

Total

Zero-rated
Sales

P5,959.72 P17,513,801.11

Domestic
Purchases

Input
VAT

P6,778,182.30

P677,818.23

17,937,361.51

9,333,242.90

933,324.29

5,193.66

19,627,245.36

8,438,357.00

843,835.70

6,799.43

25,231,225.22

13,080,822.10

1,308,082.21

P247,045.30 P24,704.53 P80,309,633.20 P37,630,604.30 P3,763,060.43

"On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997
excess input taxes in the amount of P3,751,067.04, which amount was arrived at after
deducting from its total input VAT paid ofP3,763,060.43 its applied output VAT liabilities only
for the third and fourth quarters of 1997 amounting toP5,193.66 and P6,799.43,
respectively. [Respondent] cites as basis therefor, Section 110 (B) of the 1997 Tax Code, to
state:
Section 110. Tax Credits. xxxxxxxxx
(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds
the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds
the output tax, the excess shall be carried over to the succeeding quarter or quarters. Any
input tax attributable to the purchase of capital goods or to zero-rated sales by a VATregistered person may at his option be refunded or credited against other internal revenue
taxes, subject to the provisions of Section 112.
"There being no immediate action on the part of the [petitioner], [respondents] petition was
filed on April 15, 1999.
"In support of its Petition for Review, the following arguments were raised by [respondent]:
A. Export sales by a VAT-registered person, the consideration for which is paid for in
acceptable foreign currency inwardly remitted to the Philippines and accounted for in
accordance with existing regulations of the Bangko Sentral ng Pilipinas, are subject to [VAT]
at zero percent (0%). According to [respondent], being a VAT-registered entity, it is subject
to the VAT imposed under Title IV of the Tax Code, to wit:
Section 102.(sic) Value-added tax on sale of services.- (a) Rate and base of tax. - There
shall be levied, assessed and collected, a value-added tax equivalent to 10% percent of
gross receipts derived by any person engaged in the sale of services. The phrase "sale of

services" means the performance of all kinds of services for others for a fee, remuneration
or consideration, including those performed or rendered by construction and service
contractors: stock, real estate, commercial, customs and immigration brokers; lessors of
personal property; lessors or distributors of cinematographic films; persons engaged in
milling, processing, manufacturing or repacking goods for others; and similar services
regardless of whether o[r] not the performance thereof calls for the exercise or use of the
physical or mental faculties: Provided That the following services performed in the
Philippines by VAT-registered persons shall be subject to 0%:
(1) x x x
(2) Services other than those mentioned in the preceding subparagraph, the
consideration is paid for in acceptable foreign currency which is remitted inwardly to
the Philippines and accounted for in accordance with the rules and regulations of the
BSP. x x x.
In addition, [respondent] relied on VAT Ruling No. 080-89, dated April 3, 1989, the pertinent
portion of which reads as follows:
In Reply, please be informed that, as a VAT registered entity whose service is paid for in
acceptable foreign currency which is remitted inwardly to the Philippines and accounted for
in accordance with the rules and regulations of the Central [B]ank of the Philippines, your
service income is automatically zero rated effective January 1, 1998. [Section 102(a)(2) of
the Tax Code as amended].4 For this, there is no need to file an application for zero-rate.
B. Input taxes on domestic purchases of taxable goods and services related to zero-rated
revenues are available as tax refund in accordance with Section 106 (now Section 112) of
the [Tax Code] and Section 8(a) of [Revenue] Regulations [(RR)] No. 5-87, to state:
Section 106. Refunds or tax credits of input tax. (A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered person, except those
covered by paragraph (a) above, whose sales are zero-rated or are effectively zero-rated,
may, within two (2) years after the close of the taxable quarter when such sales were made,
apply for the issuance of tax credit certificate or refund of the input taxes due or attributable
to such sales, to the extent that such input tax has not been applied against output tax. x x
x. [Section 106(a) of the Tax Code]5
Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable transaction for
value-added tax purposes. A sale by a VAT-registered person of goods and/or services
taxed at zero rate shall not result in any output tax. The input tax on his purchases of goods
or services related to such zero-rated sale shall be available as tax credit or refundable in
accordance with Section 16 of these Regulations. x x x. [Section 8(a), [RR] 5-87]. 6
"[Petitioner], in his Answer filed on May 6, 1999, claimed by way of Special and Affirmative
Defenses that:
7. The claim for refund is subject to investigation by the Bureau of Internal Revenue;

8. Taxes paid and collected are presumed to have been made in accordance with laws and
regulations, hence, not refundable. Claims for tax refund are construed strictly against the
claimant as they partake of the nature of tax exemption from tax and it is incumbent upon
the [respondent] to prove that it is entitled thereto under the law and he who claims
exemption must be able to justify his claim by the clearest grant of organic or statu[t]e law.
An exemption from the common burden [cannot] be permitted to exist upon vague
implications;
9. Moreover, [respondent] must prove that it has complied with the governing rules with
reference to tax recovery or refund, which are found in Sections 204(c) and 229 of the Tax
Code, as amended, which are quoted as follows:
Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit
Taxes. - The Commissioner may - x x x.
(C) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or change unused stamps that
have been rendered unfit for use and refund their value upon proof of destruction. No credit
or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after payment of the tax or
penalty:Provided, however, That a return filed with an overpayment shall be considered a
written claim for credit or refund.
Section 229. Recovery of tax erroneously or illegally collected.- No suit or proceeding
shall be maintained in any court for the recovery of any national internal revenue tax
hereafter 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 excessively or in any manner wrongfully collected, until a claim for refund or credit has
been duly filed with the Commissioner; but such suit or proceeding may be maintained,
whether or not such tax, penalty or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be begun (sic) after the expiration of two (2)
years from the date of payment of the tax or penalty regardless of any supervening cause
that may arise after payment: Provided, however, That the Commissioner may, even without
written claim therefor, refund or credit any tax, where on the face of the return upon which
payment was made, such payment appears clearly to have been erroneously paid.
"From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta rendered a
decision7 in favor of the herein respondent holding that its services are subject to zero-rate
pursuant to Section 108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of
Revenue Regulations 5-96, the decretal portion of which reads as follows:
WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious and in
accordance with law. Accordingly, [petitioner] is hereby ORDERED to REFUND to
[respondent] the amount of P3,352,406.59 representing the latters excess input VAT paid
for the year 1997."8

Ruling of the Court of Appeals

In affirming the CTA, the CA held that respondents services fell under the first type
enumerated in Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96. More
particularly, its "services were not of the same class or of the same nature as project
studies, information, or engineering and architectural designs" for non-resident foreign
clients; rather, they were "services other than the processing, manufacturing or repacking of
goods for persons doing business outside the Philippines." The consideration in both types
of service, however, was paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas.
Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98 was unwarranted. By
requiring that respondents services be consumed abroad in order to be zero-rated,
petitioner went beyond the sphere of interpretation and into that of legislation. Even granting
that it is valid, the ruling cannot be given retroactive effect, for it will be harsh and
oppressive to respondent, which has already relied upon VAT Ruling No. 080-89 for zero
rating.
Hence, this Petition.9
The Issue
Petitioner raises this sole issue for our consideration:
"Whether or not the Court of Appeals committed reversible error in holding that respondent
is entitled to the refund of the amount of P3,352,406.59 allegedly representing excess input
VAT for the year 1997."10
The Courts Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement to Tax Refund
Section 102 of the Tax Code11 provides:
"Sec. 102. 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 (10%) of gross receipts derived from the sale or exchange of
services x x x.
"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, including those
performed or rendered by x x x persons engaged in milling, processing, manufacturing or
repacking goods for others; x x x services of banks, non-bank financial intermediaries and
finance companies; x x x and similar services regardless of whether or not the performance

thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or
exchange of services' shall likewise include:
xxxxxxxxx
(3) The supply of x x x commercial knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a
means of enabling the application or enjoyment of x x x any such knowledge or information
as is mentioned in subparagraph (3);
xxxxxxxxx
(6) The supply of technical advice, assistance or services rendered in connection with
technical management or administration of any x x x commercial undertaking, venture,
project or scheme;
xxxxxxxxx
"The term 'gross receipts means the total amount of money or its equivalent representing
the contract price, compensation, service fee, rental or royalty, including the amount
charged for materials supplied with the services and deposits and advanced payments
actually or constructively received during the taxable quarter for the services performed or
to be performed for another person, excluding value-added tax.
"(b) Transactions subject to zero percent (0%) rate. -- The following services performed in
the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate[:]
(1) Processing, manufacturing or repacking goods for other persons doing business outside
the Philippines which goods are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding subparagraph, the consideration
for which is paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the [BSP];"
xxxxxxxxx
Zero Rating of "Other" Services
The law is very clear. Under the last paragraph quoted above, services performed by VATregistered persons in the Philippines (other than the processing, manufacturing or repacking
of goods for persons doing business outside the Philippines), when paid in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the BSP,
are zero-rated.

Respondent is a VAT-registered person that facilitates the collection and payment of

receivables belonging to its non-resident foreign client, for which it gets paid in acceptable
foreign currency inwardly remitted and accounted for in conformity with BSP rules and
regulations. Certainly, the service it renders in the Philippines is not in the same category as
"processing, manufacturing or repacking of goods" and should, therefore, be zero-rated. In
reply to a query of respondent, the BIR opined in VAT Ruling No. 080-89 that the income
respondent earned from its parent companys regional operating centers (ROCs) was
automatically zero-rated effective January 1, 1988. 12
Service has been defined as "the art of doing something useful for a person or company for
a fee"13 or "useful labor or work rendered or to be rendered by one person to another." 14 For
facilitating in the Philippines the collection and payment of receivables belonging to its Hong
Kong-based foreign client, and getting paid for it in duly accounted acceptable foreign
currency, respondent renders service falling under the category of zero rating. Pursuant to
the Tax Code, a VAT of zero percent should, therefore, be levied upon the supply of that
service.15
The Credit Card System and Its Components
For sure, the ancillary business of facilitating the said collection is different from
the main business of issuing credit cards.16 Under the credit card system, the credit card
company extends credit accommodations to its card holders for the purchase of goods and
services from its member establishments, to be reimbursed by them later on upon proper
billing. Given the complexities of present-day business transactions, the components of this
system can certainly function as separate billable services.
Under RA 8484,17 the credit card that is issued by banks18 in general, or by non-banks in
particular, refers to "any card x x x or other credit device existing for the purpose of
obtaining x x x goods x x x or services x x x on credit;" 19 and is being used "usually on a
revolving basis."20 This means that the consumer-credit arrangement that exists between
the issuer and the holder of the credit card enables the latter to procure goods or services
"on a continuing basis as long as the outstanding balance does not exceed a specified
limit."21 The card holder is, therefore, given "the power to obtain present control of goods or
service on a promise to pay for them in the future." 22
Business establishments may extend credit sales through the use of the credit card facilities
of a non-bank credit card company to avoid the risk of uncollectible accounts from their
customers. Under this system, the establishments do not deposit in their bank accounts the
credit card drafts23 that arise from the credit sales. Instead, they merely record their
receivables from the credit card company and periodically send the drafts evidencing those
receivables to the latter.
The credit card company, in turn, sends checks as payment to these business
establishments, but it does not redeem the drafts at full price. The agreement between them
usually provides for discounts to be taken by the company upon its redemption of the
drafts.24 At the end of each month, it then bills its credit card holders for their respective
drafts redeemed during the previous month. If the holders fail to pay the amounts owed, the
company sustains the loss.25

In the present case, respondents role in the consumer credit 26 process described above
primarily consists of gathering the bills and credit card drafts of different service
establishments located in the Philippines and forwarding them to the ROCs outside the
country. Servicing the bill is not the same as billing. For the former type of service alone,
respondent already gets paid.
The parent company -- to which the ROCs and respondent belong -- takes charge not only
of redeeming the drafts from the ROCs and sending the checks to the service
establishments, but also of billing the credit card holders for their respective drafts that it
has redeemed. While it usually imposes finance charges 27 upon the holders, none may be
exacted by respondent upon either the ROCs or the card holders.
Branch and Home Office
By designation alone, respondent and the ROCs are operated as branches. This means
that each of them is a unit, "an offshoot, lateral extension, or division" 28 located at some
distance from the home office29 of the parent company; carrying separate inventories;
incurring their own expenses; and generating their respective incomes. Each may conduct
sales operations in any locality as an extension of the principal office. 30
The extent of accounting activity at any of these branches depends upon company
policy,31 but the financial reports of the entire business enterprise -- the credit card company
to which they all belong -- must always show its financial position, results of operation, and
changes in its financial position as a single unit. 32 Reciprocal accounts are reconciled or
eliminated, because they lose all significance when the branches and home office are
viewed as a single entity.33 In like manner, intra-company profits or losses must be offset
against each other for accounting purposes.
Contrary to petitioners assertion,34 respondent can sell its services to another branch of the
same parent company.35 In fact, the business concept of a transfer price allows goods and
services to be sold between and among intra-company units at cost or above cost. 36 A
branch may be operated as a revenue center, cost center, profit center or investment center,
depending upon the policies and accounting system of its parent company. 37Furthermore,
the latter may choose not to make any sale itself, but merely to function as a control center,
where most or all of its expenses are allocated to any of its branches. 38
Gratia argumenti that the sending of drafts and bills by service establishments to
respondent is equivalent to the act of sending them directly to its parent company abroad,
and that the parent companys subsequent redemption of these drafts and billings of credit
card holders is also attributable to respondent, then with greater reason should the service
rendered by respondent be zero-rated under our VAT system. The service partakes of the
nature of export sales as applied to goods, 39 especially when rendered in the Philippines by
a VAT-registered person40 that gets paid in acceptable foreign currency accounted for in
accordance with BSP rules and regulations.
VAT Requirements for the Supply of Service

The VAT is a tax on consumption41 "expressed as a percentage of the value added to goods
or services"42purchased by the producer or taxpayer.43 As an indirect tax44 on services,45 its
main object is the transaction46itself or, more concretely, the performance of all kinds of
services47 conducted in the course of trade or business in the Philippines. 48 These services
must be regularly conducted in this country; undertaken in "pursuit of a commercial or an
economic activity;"49 for a valuable consideration; and not exempt under the Tax Code, other
special laws, or any international agreement. 50
Without doubt, the transactions respondent entered into with its Hong Kong-based client
meet all these requirements.
First, respondent regularly renders in the Philippines the service of facilitating the
collection and payment of receivables belonging to a foreign company that is a
clearly separate and distinct entity.
Second, such service is commercial in nature; carried on over a sustained period of
time; on a significant scale; with a reasonable degree of frequency; and not at
random, fortuitous or attenuated.
Third, for this service, respondent definitely receives consideration in foreign
currency that is accounted for in conformity with law.
Finally, respondent is not an entity exempt under any of our laws or international
agreements.
Services Subject to Zero VAT
As a general rule, the VAT system uses the destination principle as a basis for the
jurisdictional reach of the tax. 51Goods and services are taxed only in the country where they
are consumed. Thus, exports are zero-rated, while imports are taxed.
Confusion in zero rating arises because petitioner equates the performance of a particular
type of service with theconsumption of its output abroad. In the present case, the facilitation
of the collection of receivables is different from the utilization or consumption of the
outcome of such service. While the facilitation is done in the Philippines, the consumption is
not. Respondent renders assistance to its foreign clients -- the ROCs outside the country -by receiving the bills of service establishments located here in the country and forwarding
them to the ROCs abroad. The consumption contemplated by law, contrary to petitioners
administrative interpretation,52 does not imply that the service be done abroad in order to be
zero-rated.
Consumption is "the use of a thing in a way that thereby exhausts it." 53 Applied to services,
the term means the performance or "successful completion of a contractual duty, usually
resulting in the performers release from any past or future liability x x x." 54 The services
rendered by respondent are performed or successfully completed upon its sending to its
foreign client the drafts and bills it has gathered from service establishments here. Its
services, having been performed in the Philippines, are therefore also consumed in the
Philippines.

Unlike goods, services cannot be physically used in or bound for a specific place when their
destination is determined. Instead, there can only be a "predetermined end of a
course"55 when determining the service "location or position x x x for legal
purposes."56 Respondents facilitation service has no physical existence, yet takes place
upon rendition, and therefore upon consumption, in the Philippines. Under the destination
principle, as petitioner asserts, such service is subject to VAT at the rate of 10 percent.
Respondents Services Exempt from the Destination Principle
However, the law clearly provides for an exception to the destination principle; that is, for a
zero percent VAT rate for services that are performed in the Philippines, "paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations
of the [BSP]."57 Thus, for the supply of service to be zero-rated as an exception, the law
merely requires that first, the service be performed in the Philippines; second, the service
fall under any of the categories in Section 102(b) of the Tax Code; and, third, it be paid in
acceptable foreign currency accounted for in accordance with BSP rules and regulations.
Indeed, these three requirements for exemption from the destination principle are met by
respondent. Its facilitation service is performed in the Philippines. It falls under the second
category found in Section 102(b) of the Tax Code, because it is a service other than
"processing, manufacturing or repacking of goods" as mentioned in the provision.
Undisputed is the fact that such service meets the statutory condition that it be paid in
acceptable foreign currency duly accounted for in accordance with BSP rules. Thus, it
should be zero-rated.
Performance of Service versus Product Arising from Performance
Again, contrary to petitioners stand, for the cost of respondents service to be zero-rated, it
need not be tacked in as part of the cost of goods exported. 58 The law neither imposes such
requirement nor associates services with exported goods. It simply states that
the services performed by VAT-registered persons in the Philippines -- services other than
the processing, manufacturing or repacking of goods for persons doing business outside
this country -- if paid in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the BSP, are zero-rated. The service rendered by respondent is
clearly different from the product that arises from the rendition of such service. The activity
that creates the income must not be confused with the main business in the course of which
that income is realized.59
Tax Situs of a Zero-Rated Service
The law neither makes a qualification nor adds a condition in determining the tax situs of a
zero-rated service. Under this criterion, the place where the service is rendered determines
the jurisdiction60 to impose the VAT.61Performed in the Philippines, such service is
necessarily subject to its jurisdiction,62 for the State necessarily has to have "a substantial
connection"63 to it, in order to enforce a zero rate.64 The place of payment is
immaterial;65much less is the place where the output of the service will be further or
ultimately used.

Statutory Construction or Interpretation Unnecessary

As mentioned at the outset, Section 102(b)(2) of the Tax Code is very clear. Therefore, no
statutory construction or interpretation is needed. Neither can conditions or limitations be
introduced where none is provided for. Rewriting the law is a forbidden ground that only
Congress may tread upon.
The Court may not construe a statute that is free from doubt. 66 "[W]here the law speaks in
clear and categorical language, there is no room for interpretation. There is only room for
application."67 The Court has no choice but to "see to it that its mandate is obeyed." 68
No Qualifications Under RR 5-87
In implementing the VAT provisions of the Tax Code, RR 5-87 provides for the zero rating of
services other than the processing, manufacturing or repacking of goods -- in general and
without qualifications -- when paid for by the person to whom such services are rendered in
acceptable foreign currency inwardly remitted and duly accounted for in accordance with
the BSP (then Central Bank) regulations. Section 8 of RR 5-87 states:
"SECTION 8. Zero-rating. -- (a) In general. -- A zero-rated sale is a taxable transaction for
value-added tax purposes. A sale by a VAT-registered person of goods and/or services
taxed at zero rate shall not result in any output tax. The input tax on his purchases of goods
or services related to such zero-rated sale shall be available as tax credit or refundable in
accordance with Section 16 of these Regulations.
xxxxxxxxx
" (c) Zero-rated sales of services. -- The following services rendered by VAT-registered
persons are zero-rated:
(1) Services in connection with the processing, manufacturing or repacking of goods for
persons doing business outside the Philippines, where such goods are actually shipped out
of the Philippines to said persons or their assignees and the services are paid for in
acceptable foreign currency inwardly remitted and duly accounted for under the regulations
of the Central Bank of the Philippines.
xxxxxxxxx
(3) Services performed in the Philippines other than those mentioned in subparagraph (1)
above which are paid for by the person or entity to whom the service is rendered in
acceptable foreign currency inwardly remitted and duly accounted for in accordance with
Central Bank regulations. Where the contract involves payment in both foreign and local
currency, only the service corresponding to that paid in foreign currency shall enjoy zerorating. The portion paid for in local currency shall be subject to VAT at the rate of 10%."
RR 7-95 Broad Enough

RR 7-95, otherwise known as the "Consolidated VAT Regulations," 69 reiterates the abovequoted provision and further presents as examples only the services performed in the
Philippines by VAT-registered hotels and other service establishments. Again, the condition
remains that these services must be paid in acceptable foreign currency inwardly remitted
and accounted for in accordance with the rules and regulations of the BSP. The term "other
service establishments" is obviously broad enough to cover respondents facilitation service.
Section 4.102-2 of RR 7-95 provides thus:
"SECTION 4.102-2. Zero-Rating. -- (a) In general. -- A zero-rated sale by a VAT registered
person, which is a taxable transaction for VAT purposes, shall not result in any output tax.
However, the input tax on his purchases of goods, properties or services related to such
zero-rated sale shall be available as tax credit or refund in accordance with these
regulations.
"(b) Transaction subject to zero-rate. -- The following services performed in the Philippines
by VAT-registered persons shall be subject to 0%:
(1) Processing, manufacturing or repacking goods for other persons doing business
outside the Philippines which goods are subsequently exported, where the services
are paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the BSP;
(2) Services other than those mentioned in the preceding subparagraph, e.g. those
rendered by hotels and other service establishments, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the BSP;"
xxxxxxxxx
Meaning of "as well as" in RR 5-96
Section 4.102-2(b)(2) of RR 7-95 was subsequently amended by RR 5-96 to read as
follows:
"Section 4.102-2(b)(2) -- Services other than processing, manufacturing or repacking for
other persons doing business outside the Philippines for goods which are subsequently
exported, as well as services by a resident to a non-resident foreign client such as project
studies, information services, engineering and architectural designs and other similar
services, the consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP."
Aside from the already scopious coverage of services in Section 4.102-2(b)(2) of RR 7-95,
the amendment introduced by RR 5-96 further enumerates specific services entitled to zero
rating. Although superfluous, these sample services are meant to be merely illustrative. In
this provision, the use of the term "as well as" is not restrictive. As a prepositional phrase
with an adverbial relation to some other word, it simply means "in addition to, besides, also
or too."70

Neither the law nor any of the implementing revenue regulations aforequoted categorically
defines or limits the services that may be sold or exchanged for a fee, remuneration or
consideration. Rather, both merely enumerate the items of service that fall under the term
"sale or exchange of services."71
Ejusdem Generis
Inapplicable
The canon of statutory construction known as ejusdem generis or "of the same kind or
specie" does not apply to Section 4.102-2(b)(2) of RR 7-95 as amended by RR 5-96.
First, although the regulatory provision contains an enumeration of particular or
specific words, followed by the general phrase "and other similar services," such
words do not constitute a readily discernible class and are patently not of the same
kind.72 Project studies involve investments or marketing; information services focus
on data technology; engineering and architectural designs require creativity. Aside
from calling for the exercise or use of mental faculties or perhaps producing written
technical outputs, no common denominator to the exclusion of all others
characterizes these three services. Nothing sets them apart from other and similar
general services that may involve advertising, computers, consultancy, health care,
management, messengerial work -- to name only a few.
Second, there is the regulatory intent to give the general phrase "and other similar
services" a broader meaning.73 Clearly, the preceding phrase "as well as" is not
meant to limit the effect of "and other similar services."
Third, and most important, the statutory provision upon which this regulation is based
is by itself not restrictive. The scope of the word "services" in Section 102(b)(2) of the
Tax Code is broad; it is not susceptible of narrow interpretation. 74
1avvphi1.zw+

VAT Ruling Nos. 040-98 and 080-89

VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the
administrative level,75rendered by the BIR commissioner upon request of a taxpayer to
clarify certain provisions of the VAT law. As correctly held by the CA, when this ruling states
that the service must be "destined for consumption outside of the Philippines" 76 in order to
qualify for zero rating, it contravenes both the law and the regulations issued pursuant to
it.77 This portion of VAT Ruling No. 040-98 is clearly ultra vires and invalid.78
Although "[i]t is widely accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great respect by the
courts,"79 this interpretation is not conclusive and will have to be "ignored if judicially found
to be erroneous"80 and "clearly absurd x x x or improper."81 An administrative issuance that
overrides the law it merely seeks to interpret, instead of remaining consistent and in
harmony with it, will not be countenanced by this Court. 82

In the present case, respondent has relied upon VAT Ruling No. 080-89, which clearly
recognizes its zero rating. Changing this status will certainly deprive respondent of a refund
of the substantial amount of excess input taxes to which it is entitled.
Again, assuming arguendo that VAT Ruling No. 040-98 revoked VAT Ruling No. 080-89,
such revocation could not be given retroactive effect if the application of the latter ruling
would only be prejudicial to respondent.83Section 246 of the Tax Code categorically declares
that "[a]ny revocation x x x of x x x any of the rulings x x x promulgated by the
Commissioner shall not be given retroactive application if the revocation x x x will be
prejudicial to the taxpayers." 84
It is also basic in law that "no x x x rule x x x shall be given retrospective effect 85 unless
explicitly stated."86 No indication of such retroactive application to respondent does the
Court find in VAT Ruling No. 040-98. Neither do the exceptions enumerated in Section
24687 of the Tax Code apply.
Though vested with the power to interpret the provisions of the Tax Code 88 and not bound by
predecessors acts or rulings, the BIR commissioner may render a different construction to a
statute89 only if the new interpretation is in congruence with the law. Otherwise, no amount
of interpretation can ever revoke, repeal or modify what the law says.
"Consumed Abroad" Not Required by Legislature
Interpellations on the subject in the halls of the Senate also reveal a clear intent on the part
of the legislators not to impose the condition of being "consumed abroad" in order
for services performed in the Philippines by a VAT-registered person to be zero-rated. We
quote the relevant portions of the proceedings:
"Senator Maceda: Going back to Section 102 just for the moment. Will the Gentleman
kindly explain to me - I am referring to the lower part of the first paragraph with the
Provided. Section 102. Provided that the following services performed in the Philippines by
VAT registered persons shall be subject to zero percent. There are three here. What is the
difference between the three here which is subject to zero percent and Section 103 which is
exempt transactions, to being with?
"Senator Herrera: Mr. President, in the case of processing and manufacturing or repacking
goods for persons doing business outside the Philippines which are subsequently exported,
and where the services are paid for in acceptable foreign currencies inwardly remitted, this
is considered as subject to 0%. But if these conditions are not complied with, they are
subject to the VAT.
"In the case of No. 2, again, as the Gentleman pointed out, these three are zero-rated and
the other one that he indicated are exempted from the very beginning. These three
enumerations under Section 102 are zero-rated provided that these conditions indicated in
these three paragraphs are also complied with. If they are not complied with, then they are
not entitled to the zero ratings. Just like in the export of minerals, if these are not exported,
then they cannot qualify under this provision of zero rating.

"Senator Maceda: Mr. President, just one small item so we can leave this. Under the
proviso, it is required that the following services be performed in the Philippines.
"Under No. 2, services other than those mentioned above includes, let us say,
manufacturing computers and computer chips or repacking goods for persons doing
business outside the Philippines. Meaning to say, we ship the goods to them in Chicago or
Washington and they send the payment inwardly to the Philippines in foreign currency, and
that is, of course, zero-rated.
lawphil.net

"Now, when we say services other than those mentioned in the preceding subsection[,]
may I have some examples of these?
"Senator Herrera: Which portion is the Gentleman referring to?
"Senator Maceda: I am referring to the second paragraph, in the same Section 102. The
first paragraph is when one manufactures or packages something here and he sends it
abroad and they pay him, that is covered. That is clear to me. The second paragraph says
Services other than those mentioned in the preceding subparagraph, the consideration of
which is paid for in acceptable foreign currency
"One example I could immediately think of -- I do not know why this comes to my mind
tonight -- is for tourism or escort services. For example, the services of the tour operator or
tour escort -- just a good name for all kinds of activities -- is made here at the Midtown
Ramada Hotel or at the Philippine Plaza, but the payment is made from outside and
remitted into the country.
"Senator Herrera: What is important here is that these services are paid in acceptable
foreign currency remitted inwardly to the Philippines.
"Senator Maceda: Yes, Mr. President. Like those Japanese tours which include $50 for the
services of a woman or a tourist guide, it is zero-rated when it is remitted here.
"Senator Herrera: I guess it can be interpreted that way, although this tourist guide should
also be considered as among the professionals. If they earn more than P200,000, they
should be covered.
xxxxxxxxx
Senator Maceda: So, the services by Filipino citizens outside the Philippines are subject to
VAT, and I am talking of all services. Do big contractual engineers in Saudi Arabia pay VAT?
"Senator Herrera: This provision applies to a VAT-registered person. When he performs
services in the Philippines, that is zero-rated.
"Senator Maceda: That is right."90
Legislative Approval By Reenactment

Finally, upon the enactment of RA 8424, which substantially carries over the particular
provisions on zero rating of services under Section 102(b) of the Tax Code, the principle of
legislative approval of administrative interpretation by reenactment clearly obtains. This
principle means that "the reenactment of a statute substantially unchanged is persuasive
indication of the adoption by Congress of a prior executive construction." 91
The legislature is presumed to have reenacted the law with full knowledge of the contents of
the revenue regulations then in force regarding the VAT, and to have approved or confirmed
them because they would carry out the legislative purpose. The particular provisions of the
regulations we have mentioned earlier are, therefore, re-enforced. "When a statute is
susceptible of the meaning placed upon it by a ruling of the government agency charged
with its enforcement and the [l]egislature thereafter [reenacts] the provisions [without]
substantial change, such action is to some extent confirmatory that the ruling carries out the
legislative purpose."92
In sum, having resolved that transactions of respondent are zero-rated, the Court upholds
the formers entitlement to the refund as determined by the appellate court. Moreover, there
is no conflict between the decisions of the CTA and CA. This Court respects the findings
and conclusions of a specialized court like the CTA "which, by the nature of its functions, is
dedicated exclusively to the study and consideration of tax cases and has necessarily
developed an expertise on the subject."93
Furthermore, under a zero-rating scheme, the sale or exchange of a particular service is
completely freed from the VAT, because the seller is entitled to recover, by way of a refund
or as an input tax credit, the tax that is included in the cost of purchases attributable to the
sale or exchange.94 "[T]he tax paid or withheld is not deducted from the tax base." 95 Having
been applied for within the reglementary period, 96 respondents refund is in order.
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision AFFIRMED. No
pronouncement as to costs.
SO ORDERED.

[G.R. No. 150154. August 9, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOSHIBA

INFORMATION EQUIPMENT (PHILS.), INC., respondent.
DECISION
CHICO-NAZARIO, J.:

In this Petition for Review under Rule 45 of the Rules of Court, petitioner
Commissioner of Internal Revenue (CIR) prays for the reversal of the decision
of the Court of Appeals in CA-G.R. SP No. 59106, [1] affirming the order of the
Court of Tax Appeals (CTA) in CTA Case No. 5593, [2] which ordered said
petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to
respondent Toshiba Information Equipment (Phils.), Inc. (Toshiba), in the
amount of P16,188,045.44, representing unutilized input value-added tax
(VAT) payments for the first and second quarters of 1996.
There is hardly any dispute as to the facts giving rise to the present
Petition.
Respondent Toshiba was organized and established as a domestic
corporation, duly-registered with the Securities and Exchange Commission on
07 July 1995,[3] with the primary purpose of engaging in the business of
manufacturing and exporting of electrical and mechanical machinery,
equipment, systems, accessories, parts, components, materials and goods of
all kinds, including, without limitation, to those relating to office automation
and information technology, and all types of computer hardware and software,
such as HDD, CD-ROM and personal computer printed circuit boards.[4]
On 27 September 1995, respondent Toshiba also registered with the
Philippine Economic Zone Authority (PEZA) as an ECOZONE Export
Enterprise, with principal office in Laguna Technopark, Bian, Laguna.
[5]
Finally, on 29 December 1995, it registered with the Bureau of Internal
Revenue (BIR) as a VAT taxpayer and a withholding agent.[6]
Respondent Toshiba filed its VAT returns for the first and second quarters
of taxable year 1996, reporting input VAT in the amount
of P13,118,542.00[7] and P5,128,761.94,[8] respectively,
or
a
total
of P18,247,303.94. It alleged that the said input VAT was from its purchases
of capital goods and services which remained unutilized since it had not yet
engaged in any business activity or transaction for which it may be liable for
any output VAT.[9] Consequently, on 27 March 1998, respondent Toshiba filed
with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center
of the Department of Finance (DOF) applications for tax credit/refund of its
unutilized input VAT for 01 January to 31 March 1996 in the amount
of P14,176,601.28,[10] and for 01 April to 30 June 1996 in the amount
of P5,161,820.79,[11] for a total of P19,338,422.07. To toll the running of the
two-year prescriptive period for judicially claiming a tax credit/refund,
respondent Toshiba, on 31 March 1998, filed with the CTA a Petition for
Review. It would subsequently file an Amended Petition for Review on 10

November 1998 so as to conform to the evidence presented before the CTA

during the hearings.
In his Answer to the Amended Petition for Review before the CTA,
petitioner CIR raised several Special and Affirmative Defenses, to wit
5. Assuming without admitting that petitioner filed a claim for refund/tax credit,
the same is subject to investigation by the Bureau of Internal Revenue.
6. Taxes are presumed to have been collected in accordance with law. Hence,
petitioner must prove that the taxes sought to be refunded were erroneously or
illegally collected.
7. Petitioner must prove the allegations supporting its entitlement to a refund.
8. Petitioner must show that it has complied with the provisions of Sections
204(c) and 229 of the 1997 Tax Code on the filing of a written claim for
refund within two (2) years from the date of payment of the tax.
9. Claims for refund of taxes are construed strictly against claimants, the same
being in the nature of an exemption from taxation. [12]
After evaluating the evidence submitted by respondent Toshiba, [13] the
CTA, in its Decision dated 10 March 2000, ordered petitioner CIR to refund, or
in the alternative, to issue a tax credit certificate to respondent Toshiba in the
amount ofP16,188,045.44.[14]
In a Resolution, dated 24 May 2000, the CTA denied petitioner CIRs
Motion for Reconsideration for lack of merit.[15]
The Court of Appeals, in its Decision dated 27 September 2001, dismissed
petitioner CIRs Petition for Review and affirmed the CTA Decision dated 10
March 2000.
Comes now petitioner CIR before this Court assailing the abovementioned Decision of the Court of Appeals based on the following grounds
1. The Court of Appeals erred in holding that petitioners failure to raise in the
Tax Court the arguments relied upon by him in the petition, is fatal to his
cause.
2. The Court of Appeals erred in not holding that respondent being registered
with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export

Enterprise, its business is not subject to VAT pursuant to Section 24 of

Republic Act No. 7916 in relation to Section 103 (now 109) of the Tax Code.
3. The Court of Appeals erred in not holding that since respondents business is
not subject to VAT, the capital goods and services it purchased are considered
not used in VAT taxable business, and, therefore, it is not entitled to refund of
input taxes on such capital goods pursuant to Section 4.106-1 of Revenue
Regulations No. 7-95 and of input taxes on services pursuant to Section
4.103-1 of said Regulations.
4. The Court of Appeals erred in holding that respondent is entitled to a refund
or tax credit of input taxes it paid on zero-rated transactions. [16]
Ultimately, however, the issue still to be resolved herein shall be whether
respondent Toshiba is entitled to the tax credit/refund of its input VAT on its
purchases of capital goods and services, to which this Court answers in the
affirmative.
I

An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and

services by persons from the Customs Territory to ECOZONE enterprises shall be
subject to VAT at zero percent (0%).
Respondent Toshiba bases its claim for tax credit/refund on Section 106(b)
of the Tax Code of 1977, as amended, which reads:
SEC. 106. Refunds or tax credits of creditable input tax.

(b) Capital goods. A VAT-registered person may apply for the issuance of a tax
credit certificate or refund of input taxes paid on capital goods imported or locally
purchased, to the extent that such input taxes have not been applied against output
taxes. The application may be made only within two (2) years after the close of the
taxable quarter when the importation or purchase was made. [17]
Petitioner CIR, on the other hand, opposes such claim on account of
Section 4.106-1(b) of Revenue Regulations (RR) No. 7-95, otherwise known
as the VAT Regulations, as amended, which provides as follows
Sec. 4.106-1. Refunds or tax credits of input tax.

...
(b) Capital Goods. -- Only a VAT-registered person may apply for issuance of a tax
credit certificate or refund of input taxes paid on capital goods imported or locally
purchased. The refund shall be allowed to the extent that such input taxes have not
been applied against output taxes. The application should be made within two (2)
years after the close of the taxable quarter when the importation or purchase was
made.
Refund of input taxes on capital goods shall be allowed only to the extent that such
capital goods are used in VAT taxable business. If it is also used in exempt operations,
the input tax refundable shall only be the ratable portion corresponding to the taxable
operations.
Capital goods or properties refer to goods or properties with estimated useful life
greater than one year and which are treated as depreciable assets under Section 29(f),
used directly or indirectly in the production or sale of taxable goods or services.
(Underscoring ours.)
Petitioner CIR argues that although respondent Toshiba may be a VATregistered taxpayer, it is not engaged in a VAT-taxable business. According to
petitioner CIR, respondent Toshiba is actually VAT-exempt, invoking the
following provision of the Tax Code of 1977, as amended
SEC. 103. Exempt transactions. The following shall be exempt from value-added
tax.

(q) Transactions which are exempt under special laws, except those granted under
Presidential Decree No. 66, 529, 972, 1491, and 1590, and non-electric cooperatives
under Republic Act No. 6938, or international agreements to which the Philippines is
a signatory.[18]
Since respondent Toshiba is a PEZA-registered enterprise, it is subject to
the five percent (5%) preferential tax rate imposed under Chapter III, Section
24 of Republic Act No. 7916, otherwise known as The Special Economic Zone
Act of 1995, as amended. According to the said section, [e]xcept for real
property taxes on land owned by developers, no taxes, local and national,
shall be imposed on business establishments operating within the
ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by
all business enterprises within the ECOZONE shall be paid The five

percent (5%) preferential tax rate imposed on the gross income of a PEZAregistered enterprise shall be in lieu of all national taxes, including VAT. Thus,
petitioner CIR contends that respondent Toshiba is VAT-exempt by virtue of a
special law, Rep. Act No. 7916, as amended.
It would seem that petitioner CIR failed to differentiate between VATexempt transactions from VAT-exempt entities. In the case of Commissioner
of Internal Revenue v. Seagate Technology (Philippines),[19] this Court already
made such distinction
An exempt transaction, on the one hand, involves goods or services which, by their
nature, are specifically listed in and expressly exempted from the VAT under the Tax
Code, without regard to the tax status VAT-exempt or not of the party to the
transaction
An exempt party, on the other hand, is a person or entity granted VAT exemption
under the Tax Code, a special law or an international agreement to which the
Philippines is a signatory, and by virtue of which its taxable transactions become
exempt from VAT
Section 103(q) of the Tax Code of 1977, as amended, relied upon by
petitioner CIR, relates to VAT-exempt transactions. These are transactions
exempted from VAT by special laws or international agreements to which the
Philippines is a signatory. Since such transactions are not subject to VAT, the
sellers cannot pass on any output VAT to the purchasers of goods, properties,
or services, and they may not claim tax credit/refund of the input VAT they had
paid thereon.
Section 103(q) of the Tax Code of 1977, as amended, cannot apply to
transactions of respondent Toshiba because although the said section
recognizes that transactions covered by special laws may be exempt from
VAT, the very same section provides that those falling under Presidential
Decree No. 66 are not. Presidential Decree No. 66, creating the Export
Processing Zone Authority (EPZA), is the precursor of Rep. Act No. 7916, as
amended,[20] under which the EPZA evolved into the PEZA. Consequently, the
exception of Presidential Decree No. 66 from Section 103(q) of the Tax Code
of 1977, as amended, extends likewise to Rep. Act No. 7916, as amended.
This Court agrees, however, that PEZA-registered enterprises, which
would necessarily be located within ECOZONES, are VAT-exempt entities, not
because of Section 24 of Rep. Act No. 7916, as amended, which imposes the
five percent (5%) preferential tax rate on gross income of PEZA-registered

enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same
statute which establishes the fiction that ECOZONES are foreign territory.
It is important to note herein that respondent Toshiba is located within an
ECOZONE. An ECOZONE or a Special Economic Zone has been described
as
. . . [S]elected areas with highly developed or which have the potential to be
developed into agro-industrial, industrial, tourist, recreational, commercial, banking,
investment and financial centers whose metes and bounds are fixed or delimited by
Presidential Proclamations. An ECOZONE may contain any or all of the following:
industrial estates (IEs), export processing zones (EPZs), free trade zones and
tourist/recreational centers.[21]
The national territory of the Philippines outside of the proclaimed borders of
the ECOZONE shall be referred to as the Customs Territory.[22]
Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA
shall manage and operate the ECOZONES as a separate customs territory;
[23]
thus, creating the fiction that the ECOZONE is a foreign territory.[24] As a
result, sales made by a supplier in the Customs Territory to a purchaser in the
ECOZONE shall be treated as an exportation from the Customs Territory.
Conversely, sales made by a supplier from the ECOZONE to a purchaser in
the Customs Territory shall be considered as an importation into the Customs
Territory.
Given the preceding discussion, what would be the VAT implication of
sales made by a supplier from the Customs Territory to an ECOZONE
enterprise?
The Philippine VAT system adheres to the Cross Border Doctrine,
according to which, no VAT shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial border of the taxing
authority. Hence, actual export of goods and services from the Philippines to
a foreign country must be free of VAT; while, those destined for use or
consumption within the Philippines shall be imposed with ten percent (10%)
VAT.[25]
Applying said doctrine to the sale of goods, properties, and services to and
from the ECOZONES,[26] the BIR issued Revenue Memorandum Circular
(RMC) No. 74-99, on 15 October 1999. Of particular interest to the present
Petition is Section 3 thereof, which reads

SECTION 3. Tax Treatment Of Sales Made By a VAT Registered Supplier from

The Customs Territory, To a PEZA Registered Enterprise.
(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax
regime, in lieu of all taxes, except real property tax, pursuant to R.A. No. 7916, as
amended:
(a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence,
considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC
and Sec. 23 of R.A. No. 7916, in relation to ART. 77(2) of the Omnibus Investments
Code.
(b) Sale of service. This shall be treated subject to zero percent (0%) VAT under
the cross border doctrine of the VAT System, pursuant to VAT Ruling No. 032-98
dated Nov. 5, 1998.
(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special
tax regime, hence, subject to taxes under the NIRC, e.g., Service Establishments
which are subject to taxes under the NIRC rather than the 5% special tax regime:
(a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence,
considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC
and Sec. 23 of R.A. No. 7916 in relation to ART. 77(2) of the Omnibus Investments
Code.
(b) Sale of Service. This shall be treated subject to zero percent (0%) VAT under
the cross border doctrine of the VAT System, pursuant to VAT Ruling No. 032-98
dated Nov. 5, 1998.
(3) In the final analysis, any sale of goods, property or services made by a VAT
registered supplier from the Customs Territory to any registered enterprise operating
in the ecozone, regardless of the class or type of the latters PEZA registration, is
actually qualified and thus legally entitled to the zero percent (0%) VAT. Accordingly,
all sales of goods or property to such enterprise made by a VAT registered supplier
from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec.
106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus Investments Code,
while all sales of services to the said enterprises, made by VAT registered suppliers
from the Customs Territory, shall be treated effectively subject to the 0% VAT,
pursuant to Section 108(B)(3), NIRC, in relation to the provisions of R.A. No. 7916
and the Cross Border Doctrine of the VAT system.

This Circular shall serve as a sufficient basis to entitle such supplier of goods,
property or services to the benefit of the zero percent (0%) VAT for sales made to the
aforementioned ECOZONE enterprises and shall serve as sufficient compliance to the
requirement for prior approval of zero-rating imposed by Revenue Regulations No. 795 effective as of the date of the issuance of this Circular.
Indubitably, no output VAT may be passed on to an ECOZONE enterprise
since it is a VAT-exempt entity. The VAT treatment of sales to it, however,
varies depending on whether the supplier from the Customs Territory is VATregistered or not.
Sales of goods, properties and services by a VAT-registered supplier from
the Customs Territory to an ECOZONE enterprise shall be treated as export
sales. If such sales are made by a VAT-registered supplier, they shall be
subject to VAT at zero percent (0%). In zero-rated transactions, the VATregistered supplier shall not pass on any output VAT to the ECOZONE
enterprise, and at the same time, shall be entitled to claim tax credit/refund of
its input VAT attributable to such sales. Zero-rating of export sales primarily
intends to benefit the exporter (i.e., the supplier from the Customs Territory),
who is directly and legally liable for the VAT, making it internationally
competitive by allowing it to credit/refund the input VAT attributable to its
export sales.
Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or
unregistered supplier would only be exempt from VAT and the supplier shall
not be able to claim credit/refund of its input VAT.
Even conceding, however, that respondent Toshiba, as a PEZA-registered
enterprise, is a VAT-exempt entity that could not have engaged in a VATtaxable business, this Court still believes, given the particular circumstances
of the present case, that it is entitled to a credit/refund of its input VAT.
II

Prior to RMC No. 74-99, however, PEZA-registered enterprises availing of the

income tax holiday under Executive Order No. 226, as amended, were deemed subject
to VAT.
In his Petition, petitioner CIR opposed the grant of tax credit/refund to
respondent Toshiba, reasoning thus
In the first place, respondent could not have paid input taxes on its purchases of goods
and services from VAT-registered suppliers because such purchases being zero-rated,
that is, no output tax was paid by the suppliers, no input tax was shifted or passed on

to respondent. The VAT 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
(Section 105, 1997 Tax Code).

Secondly, Section 4.100-2 of Revenue Regulations No. 7-95 provides:

SEC. 4.100-2. Zero-rated sales. A zero-rated sale by a VAT-registered person, which
is a taxable transaction for VAT purposes, shall not result in any output tax. However,
the input tax on his purchases of goods, properties or services related to such zerorated sale shall be available as tax credit or refund in accordance with these
regulations.
From the foregoing, the VAT-registered person who can avail as tax credit or refund of
the input tax on his purchases of goods, services or properties is the seller whose sale
is zero-rated. Applying the foregoing provision to the case at bench, the VATregistered supplier, whose sale of goods and services to respondent is zero-rated, can
avail as tax credit or refund the input taxes on its (supplier) own purchases of goods
and services related to its zero-rated sale of goods and services to respondent. On the
other hand, respondent, as the buyer in such zero-rated sale of goods and services,
could not have paid input taxes for which it can claim as tax credit or refund. [27]
Before anything else, this Court wishes to point out that petitioner CIR is
working on the erroneous premise that respondent Toshiba is claiming tax
credit or refund of input VAT based on Section 4.100-2,[28] in relation to Section
4.106-1(a),[29] of RR No. 7-95, as amended, which allows the tax credit/refund
of input VAT on zero-rated sales of goods, properties or services. Instead,
respondent Toshiba is basing its claim for tax credit or refund on Sec. 4.1061(b) of the same regulations, which allows a VAT-registered person to apply
for tax credit/refund of the input VAT on its capital goods. While in the former,
the seller of the goods, properties or services is the one entitled to the tax
credit/refund; in the latter, it is the purchaser of the capital goods.
Nevertheless, regardless of his mistake as to the basis for respondent
Toshibas application for tax credit/refund, petitioner CIR validly raised the
question of whether any output VAT was actually passed on to respondent
Toshiba which it could claim as input VAT subject to credit/refund. If the VATregistered supplier from the Customs Territory did not charge any output VAT
to respondent Toshiba believing that it is exempt from VAT or it is subject to
zero-rated VAT, then respondent Toshiba did not pay any input VAT on its
purchase of capital goods and it could not claim any tax credit/refund thereof.

The rule that any sale by a VAT-registered supplier from the Customs
Territory to a PEZA-registered enterprise shall be considered an export sale
and subject to zero percent (0%) VAT was clearly established only on 15
October 1999, upon the issuance of RMC No. 74-99. Prior to the said date,
however, whether or not a PEZA-registered enterprise was VAT-exempt
depended on the type of fiscal incentives availed of by the said enterprise.
This old rule on VAT-exemption or liability of PEZA-registered enterprises,
followed by the BIR, also recognized and affirmed by the CTA, the Court of
Appeals, and even this Court,[30] cannot be lightly disregarded considering the
great number of PEZA-registered enterprises which did rely on it to determine
its tax liabilities, as well as, its privileges.
According to the old rule, Section 23 of Rep. Act No. 7916, as amended,
gives the PEZA-registered enterprise the option to choose between two sets
of fiscal incentives: (a) The five percent (5%) preferential tax rate on its gross
income under Rep. Act No. 7916, as amended; and (b) the income tax holiday
provided under Executive Order No. 226, otherwise known as the Omnibus
Investment Code of 1987, as amended.[31]
The five percent (5%) preferential tax rate on gross income under Rep. Act
No. 7916, as amended, is in lieu of all taxes. Except for real property taxes,
no other national or local tax may be imposed on a PEZA-registered
enterprise availing of this particular fiscal incentive, not even an indirect tax
like VAT.
Alternatively, Book VI of Exec. Order No. 226, as amended, grants income
tax holiday to registered pioneer and non-pioneer enterprises for six-year and
four-year periods, respectively.[32] Those availing of this incentive are exempt
only from income tax, but shall be subject to all other taxes, including the ten
percent (10%) VAT.
This old rule clearly did not take into consideration the Cross Border
Doctrine essential to the VAT system or the fiction of the ECOZONE as a
foreign territory. It relied totally on the choice of fiscal incentives of the PEZAregistered enterprise. Again, for emphasis, the old VAT rule for PEZAregistered enterprises was based on their choice of fiscal incentives: (1) If the
PEZA-registered enterprise chose the five percent (5%) preferential tax on its
gross income, in lieu of all taxes, as provided by Rep. Act No. 7916, as
amended, then it would be VAT-exempt; (2) If the PEZA-registered enterprise
availed of the income tax holiday under Exec. Order No. 226, as amended, it
shall be subject to VAT at ten percent (10%). Such distinction was abolished
by RMC No. 74-99, which categorically declared that all sales of goods,
properties, and services made by a VAT-registered supplier from the Customs

Territory to an ECOZONE enterprise shall be subject to VAT, at zero percent

(0%) rate, regardless of the latters type or class of PEZA registration; and,
thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise as
a VAT-exempt entity.
The sale of capital goods by suppliers from the Customs Territory to
respondent Toshiba in the present Petition took place during the first and
second quarters of 1996, way before the issuance of RMC No. 74-99, and
when the old rule was accepted and implemented by no less than the BIR
itself. Since respondent Toshiba opted to avail itself of the income tax holiday
under Exec. Order No. 226, as amended, then it was deemed subject to the
ten percent (10%) VAT. It was very likely therefore that suppliers from the
Customs Territory had passed on output VAT to respondent Toshiba, and the
latter, thus, incurred input VAT. It bears emphasis that the CTA, with the help
of SGV & Co., the independent accountant it commissioned to make a report,
already thoroughly reviewed the evidence submitted by respondent Toshiba
consisting of receipts, invoices, and vouchers, from its suppliers from the
Customs Territory. Accordingly, this Court gives due respect to and adopts
herein the CTAs findings that the suppliers of capital goods from the Customs
Territory did pass on output VAT to respondent Toshiba and the amount of
input VAT which respondent Toshiba could claim as credit/refund.
Moreover, in another circular, Revenue Memorandum Circular (RMC) No.
42-2003, issued on 15 July 2003, the BIR answered the following question
Q-5:

Under Revenue Memorandum Circular (RMC) No. 74-99, purchases

by PEZA-registered firms automatically qualify as zero-rated without
seeking prior approval from the BIR effective October 1999.
1) Will the OSS-DOF Center still accept applications from PEZAregistered claimants who were allegedly billed VAT by their suppliers
before and during the effectivity of the RMC by issuing VAT
invoices/receipts?

A-5(1):

If the PEZA-registered enterprise is paying the 5% preferential tax in

lieu of all other taxes, the said PEZA-registered taxpayer cannot claim
TCC or refund for the VAT paid on purchases. However, if the taxpayer
is availing of the income tax holiday, it can claim VAT credit provided:
a. The taxpayer-claimant is VAT-registered;

b. Purchases are evidenced by VAT invoices or receipts, whichever is

applicable, with shifted VAT to the purchaser prior to the
implementation of RMC No. 74-99; and
c. The supplier issues a sworn statement under penalties of perjury that
it shifted the VAT and declared the sales to the PEZA-registered
purchaser as taxable sales in its VAT returns.
For invoices/receipts issued upon the effectivity of RMC No. 74-99, the
claims for input VAT by PEZA-registered companies, regardless of the
type or class of PEZA registration, should be denied.
Under RMC No. 42-2003, the DOF would still accept applications for tax
credit/refund filed by PEZA-registered enterprises, availing of the income tax
holiday, for input VAT on their purchases made prior to RMC No. 74-99.
Acceptance of applications essentially implies processing and possible
approval thereof depending on whether the given conditions are met.
Respondent Toshibas claim for tax credit/refund arose from the very same
circumstances recognized by Q-5(1) and A-5(1) of RMC No. 42-2003. It
therefore seems irrational and unreasonable for petitioner CIR to oppose
respondent Toshibas application for tax credit/refund of its input VAT, when
such claim had already been determined and approved by the CTA after due
hearing, and even affirmed by the Court of Appeals; while it could accept,
process, and even approve applications filed by other similarly-situated PEZAregistered enterprises at the administrative level.
III

Findings of fact by the CTA are respected and adopted by this Court.
Finally, petitioner CIR, in a last desperate attempt to block respondent
Toshibas claim for tax credit/refund, challenges the allegation of said
respondent that it availed of the income tax holiday under Exec. Order No.
226, as amended, rather than the five percent (5%) preferential tax rate under
Rep. Act No. 7916, as amended. Undoubtedly, this is a factual matter that
should have been raised and threshed out in the lower courts. Giving it
credence would belie petitioner CIRs assertion that it is raising only issues of
law in its Petition that may be resolved without need for reception of additional
evidences. Once more, this Court respects and adopts the finding of the CTA,
affirmed by the Court of Appeals, that respondent Toshiba had indeed availed
of the income tax holiday under Exec. Order No. 226, as amended.

WHEREFORE, based on the foregoing, this Court AFFIRMS the decision

of the Court of Appeals in CA-G.R. SP. No. 59106, and the order of the CTA in
CTA Case No. 5593, ordering said petitioner CIR to refund or, in the
alternative, to issue a tax credit certificate to respondent Toshiba, in the
amount of P16,188,045.44, representing unutilized input VAT for the first and
second quarters of 1996.
SO ORDERED.

G.R. No. 149073

February 16, 2005

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
CEBU TOYO CORPORATION, respondent.
DECISION
QUISUMBING, J.:
In its Decision1 dated July 6, 2001, the Court of Appeals, in CA-G.R. SP No. 60304,
affirmed the Resolutionsdated May 31, 20002 and August 2, 2000,3 of the Court of Tax
Appeals (CTA) ordering the Commissioner of Internal Revenue (CIR) to allow a partial
refund or, alternatively, to issue a tax credit certificate in favor of Cebu Toyo Corporation in
the sum of P2,158,714.46, representing the unutilized input value-added tax (VAT)
payments.
The facts, as culled from the records, are as follows:
Respondent Cebu Toyo Corporation is a domestic corporation engaged in the manufacture
of lenses and various optical components used in television sets, cameras, compact discs
and other similar devices. Its principal office is located at the Mactan Export Processing
Zone (MEPZ) in Lapu-Lapu City, Cebu. It is a subsidiary of Toyo Lens Corporation, a nonresident corporation organized under the laws of Japan. Respondent is a zone export
enterprise registered with the Philippine Economic Zone Authority (PEZA), pursuant to the
provisions of Presidential Decree No. 66.4 It is also registered with the Bureau of Internal
Revenue (BIR) as a VAT taxpayer.5
As an export enterprise, respondent sells 80% of its products to its mother corporation, the
Japan-based Toyo Lens Corporation, pursuant to an Agreement of Offsetting. The rest are
sold to various enterprises doing business in the MEPZ. Inasmuch as both sales are
considered export sales subject to Value-Added Tax (VAT) at 0% rate under Section 106(A)
(2)(a)6 of the National Internal Revenue Code, as amended, respondent filed its quarterly
VAT returns from April 1, 1996 to December 31, 1997 showing a total input VAT
of P4,462,412.63.

On March 30, 1998, respondent filed with the Tax and Revenue Group of the One-Stop
Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance, an
application for tax credit/refund of VAT paid for the period April 1, 1996 to December 31,
1997 amounting to P4,439,827.21 representing excess VAT input payments.
Respondent, however, did not bother to wait for the Resolution of its claim by the CIR.
Instead, on June 26, 1998, it filed a Petition for Review with the CTA to toll the running of
the two-year prescriptive period pursuant to Section 230 7 of the Tax Code.
Before the CTA, the respondent posits that as a VAT-registered exporter of goods, it is
subject to VAT at the rate of 0% on its export sales that do not result in any output tax.
Hence, the unutilized VAT input taxes on its purchases of goods and services related to
such zero-rated activities are available as tax credits or refunds.
The petitioners position is that respondent was not entitled to a refund or tax credit since:
(1) it failed to show that the tax was erroneously or illegally collected; (2) the taxes paid and
collected are presumed to have been made in accordance with law; and (3) claims for
refund are strictly construed against the claimant as these partake of the nature of tax
exemption.
Initially, the CTA denied the petition for insufficiency of evidence. 8 The tax court sustained
respondents argument that it was a VAT-registered entity. It also found that the petition was
timely, as it was filed within the prescription period. The CTA also ruled that the
respondents sales to Toyo Lens Corporation and to certain establishments in the Mactan
Export Processing Zone were export sales subject to VAT at 0% rate. It found that the input
VAT covered by respondents claim was not applied against any output VAT. However, the
tax court decreed that the petition should nonetheless be denied because of the
respondents failure to present documentary evidence to show that there were foreign
currency exchange proceeds from its export sales. The CTA also observed that respondent
failed to submit the approval by Bangko Sentral ng Pilipinas (BSP) of its Agreement of
Offsetting with Toyo Lens Corporation and the certification of constructive inward
remittance.
Undaunted, respondent filed on February 21, 2000, a Motion for Reconsideration arguing
that: (1) proof of its inward remittance was not required by law; (2) BSP and BIR regulations
do not require BSP approval on its Agreement of Offsetting nor do they require certification
on the amount constructively remitted; (3) it was not legally required to prove foreign
currency payments on the remaining sales to MEPZ enterprises; and (4) it had complied
with the substantiation requirements under Section 106(A)(2)(a) of the Tax Code. Hence, it
was entitled to a refund of unutilized VAT input tax.
On May 31, 2000, the tax court partly granted the motion for reconsideration in
a Resolution, to wit:
WHEREFORE, finding the motion of petitioner to be meritorious, the same is hereby
partially granted. Accordingly, the Court hereby MODIFIES its decision in the above-entitled
case, the dispositive portion of which shall now read as follows:

WHEREFORE, finding the petition for review partially meritorious, respondent is hereby
ORDERED to REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in
favor of Petitioner in the amount ofP2,158,714.46 representing unutilized input tax
payments.
SO ORDERED.9
In granting partial reconsideration, the tax court found that there was no need for BSP
approval of the Agreement of Offsetting since the same may be categorized as an intercompany open account offset arrangement. Hence, the respondent need not present proof
of foreign currency exchange proceeds from its sales to MEPZ enterprises pursuant to
Section 106(A)(2)(a)10 of the Tax Code. However, the CTA stressed that respondent must
still prove that there was an actual offsetting of accounts to prove that constructive foreign
currency exchange proceeds were inwardly remitted as required under Section 106(A)(2)
(a).
The CTA found that only the amount of Y274,043,858.00 covering respondents sales to
Toyo Lens Corporation and purchases from said mother company for the period August 7,
1996 to August 26, 1997 were actually offset against respondents related accounts
receivable and accounts payable as shown by the Agreement for Offsetting dated August
30, 1997. Resort to the respondents Accounts Receivable and Accounts Payable subsidiary
ledgers corroborated the amount. The tax court also found that out of the total export sales
for the period April 1, 1996 to December 31, 1997 amounting to Y700,654,606.15,
respondents sales to MEPZ enterprises amounted only toY136,473,908.05 of said total.
Thus, allocating the input taxes supported by receipts to the export sales, the CTA
determined that the refund/credit amounted to only P2,158,714.46,11 computed as follows:
Total Input Taxes Claimed by respondent

P4,439,827.21

Less: Exceptions made by SGV

a.) 1996

P651,256.17

b.) 1997

104,129.13

Validly Supported Input Taxes

755,385.30
P3,684,441.91

Allocation:
Verified Zero-Rated Sales
a.) Toyo Lens Corporation
b.) MEPZ Enterprises
Divided by Total Zero-Rated Sales
Quotient
Multiply by Allowable Input Tax

Y274,043,858.00
136,473,908.05

Y410,517,766.05
Y700,654,606.15
0.5859
P3,684,441.91

Amount Refundable

P2,158,714.[52]12

On June 21, 2000, petitioner Commissioner filed a Motion for Reconsideration arguing
that respondent was not entitled to a refund because as a PEZA-registered enterprise, it
was not subject to VAT pursuant to Section 2413of Republic Act No. 7916,14 as amended by
Rep. Act No. 8748.15 Thus, since respondent was not subject to VAT, the Commissioner
contended that the capital goods it purchased must be deemed not used in VAT taxable
business and therefore it was not entitled to refund of input taxes on such capital goods
pursuant to Section 4.106-1 of Revenue Regulations No. 7-95. 16
Petitioner filed a Motion for Reconsideration on June 21, 2000 based on the following
theories: (1) that respondent being registered with the PEZA as an ecozone enterprise is
not subject to VAT pursuant to Sec. 24 of Rep. Act No. 7916; and (2) since respondents
business is not subject to VAT, the capital goods it purchased are considered not used in a
VAT taxable business and therefore is not entitled to a refund of input taxes. 17
The respondent opposed the Commissioners Motion for Reconsideration and prayed that
the CTA resolution be modified so as to grant it the entire amount of tax refund or credit it
was seeking.
On August 2, 2000, the Court of Tax Appeals denied the petitioners motion for
reconsideration. It held that the grounds relied upon were only raised for the first time and
that Section 24 of Rep. Act No. 7916 was not applicable since respondent has availed of the
income tax holiday incentive under Executive Order No. 226 or the Omnibus Investment
Code of 1987 pursuant to Section 2318 of Rep. Act No. 7916. The tax court pointed out that
E.O. No. 226 granted PEZA-registered enterprises an exemption from payment of income
taxes for 4 or 6 years depending on whether the registration was as a pioneer or as a nonpioneer enterprise, but subject to other national taxes including VAT.
The petitioner then filed a Petition for Review with the Court of Appeals (CA), docketed as
CA-G.R. SP No. 60304, praying for the reversal of the CTA Resolutions dated May 31, 2000
and August 2, 2000, and reiterating its claim that respondent is not entitled to a refund of
input taxes since it is VAT-exempt.
On July 6, 2001, the appellate court decided CA-G.R. SP No. 60304 in respondents favor,
thus:
WHEREFORE, finding no merit in the petition, this Court DISMISSES it and AFFIRMS the
Resolutions dated May 31, 2000 and August 2, 2000 . . . of the Court of Tax Appeals.
SO ORDERED.19
The Court of Appeals found no reason to set aside the conclusions of the Court of Tax
Appeals. The appellate court held as untenable herein petitioners argument that
respondent is not entitled to a refund because it is VAT-exempt since the evidence showed
that it is a VAT-registered enterprise subject to VAT at the rate of 0%. It agreed with the
ruling of the tax court that respondent had two options under Section 23 of Rep. Act No.

7916, namely: (1) to avail of an income tax holiday under E.O. No. 226 and be subject to
VAT at the rate of 0%; or (2) to avail of the 5% preferential tax under P.D. No. 66 and enjoy
VAT exemption. Since respondent availed of the incentives under E.O. No. 226, then the
0% VAT rate would be applicable to it and any unutilized input VAT should be refunded to
respondent upon proper application with and substantiation by the BIR.
1awphi1.nt

Hence, the instant petition for review now before us, with herein petitioner alleging that:
I. RESPONDENT BEING REGISTERED WITH THE PHILIPPINE ECONOMIC ZONE
AUTHORITY (PEZA) AS AN ECOZONE EXPORT ENTERPRISE, ITS BUSINESS IS NOT
SUBJECT TO VAT PURSUANT TO SECTION 24 OF REPUBLIC ACT NO. 7916 IN
RELATION TO SECTION 103 OF THE TAX CODE, AS AMENDED BY RA NO. 7716.
II. SINCE RESPONDENTS BUSINESS IS NOT SUBJECT TO VAT, IT IS NOT ENTITLED
TO REFUND OF INPUT TAXES PURSUANT TO SECTION 4.103-1 OF REVENUE
REGULATIONS NO. 7-95.20
In our view, the main issue for our resolution is whether the Court of Appeals erred in
affirming the Court of Tax Appeals resolution granting a refund in the amount
of P2,158,714.46 representing unutilized input VAT on goods and services for the period
April 1, 1996 to December 31, 1997.
Both the Commissioner of Internal Revenue and the Office of the Solicitor General argue
that respondent Cebu Toyo Corporation, as a PEZA-registered enterprise, is exempt from
national and local taxes, including VAT, under Section 24 of Rep. Act No. 7916 and Section
10921 of the NIRC. Thus, they contend that respondent Cebu Toyo Corporation is not
entitled to any refund or credit on input taxes it previously paid as provided under Section
4.103-122 of Revenue Regulations No. 7-95, notwithstanding its registration as a VAT
taxpayer. For petitioner claims that said registration was erroneous and did not confer upon
the respondent any right to claim recognition of the input tax credit.
The respondent counters that it availed of the income tax holiday under E.O. No. 226 for
four years from August 7, 1995 making it exempt from income tax but not from other taxes
such as VAT. Hence, according to respondent, its export sales are not exempt from VAT,
contrary to petitioners claim, but its export sales is subject to 0% VAT. Moreover, it argues
that it was able to establish through a report certified by an independent Certified Public
Accountant that the input taxes it incurred from April 1, 1996 to December 31, 1997 were
directly attributable to its export sales. Since it did not have any output tax against which
said input taxes may be offset, it had the option to file a claim for refund/tax credit of its
unutilized input taxes.
Considering the submission of the parties and the evidence on record, we find the petition
bereft of merit.
Petitioners contention that respondent is not entitled to refund for being exempt from VAT is
untenable. This argument turns a blind eye to the fiscal incentives granted to PEZAregistered enterprises under Section 23 of Rep. Act No. 7916. Note that under said statute,
the respondent had two options with respect to its tax burden. It could avail of an income tax

holiday pursuant to provisions of E.O. No. 226, thus exempt it from income taxes for a
number of years but not from other internal revenue taxes such as VAT; or it could avail of
the tax exemptions on all taxes, including VAT under P.D. No. 66 and pay only the
preferential tax rate of 5% under Rep. Act No. 7916. Both the Court of Appeals and the
Court of Tax Appeals found that respondent availed of the income tax holiday for four (4)
years starting from August 7, 1995, as clearly reflected in its 1996 and 1997 Annual
Corporate Income Tax Returns, where respondent specified that it was availing of the tax
relief under E.O. No. 226. Hence, respondent is not exempt from VAT and it correctly
registered itself as a VAT taxpayer. In fine, it is engaged in taxable rather than exempt
transactions.
Taxable transactions are those transactions which are subject to value-added tax either at
the rate of ten percent (10%) or zero percent (0%). In taxable transactions, the seller shall
be entitled to tax credit for the value-added tax paid on purchases and leases of goods,
properties or services.23
An exemption means that the sale of goods, properties or services and the use or lease of
properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on
VAT (input tax) previously paid. The person making the exempt sale of goods, properties or
services shall not bill any output tax to his customers because the said transaction is not
subject to VAT. Thus, a VAT-registered purchaser of goods, properties or services that are
VAT-exempt, is not entitled to any input tax on such purchases despite the issuance of a
VAT invoice or receipt.24
Now, having determined that respondent is engaged in taxable transactions subject to VAT,
let us then proceed to determine whether it is subject to 10% or zero (0%) rate of VAT. To
begin with, it must be recalled that generally, sale of goods and supply of services
performed in the Philippines are taxable at the rate of 10%. However, export sales, or sales
outside the Philippines, shall be subject to value-added tax at 0% if made by a VATregistered person.25 Under the value-added tax system, a zero-rated sale by a VATregistered person, which is a taxable transaction for VAT purposes, shall not result in any
output tax. However, the input tax on his purchase of goods, properties or services related
to such zero-rated sale shall be available as tax credit or refund. 26
1awphi1.nt

In principle, the purpose of applying a zero percent (0%) rate on a taxable transaction is to
exempt the transaction completely from VAT previously collected on inputs. It is thus the
only true way to ensure that goods are provided free of VAT. While the zero rating and the
exemption are computationally the same, they actually differ in several aspects, to wit:
(a) A zero-rated sale is a taxable transaction but does not result in an output tax
while an exempted transaction is not subject to the output tax;
(b) The input VAT on the purchases of a VAT-registered person with zero-rated sales
may be allowed as tax credits or refunded while the seller in an exempt transaction is
not entitled to any input tax on his purchases despite the issuance of a VAT invoice
or receipt.

(c) Persons engaged in transactions which are zero-rated, being subject to VAT, are
required to register while registration is optional for VAT-exempt persons.
In this case, it is undisputed that respondent is engaged in the export business and is
registered as a VAT taxpayer per Certificate of Registration of the BIR. 27 Further, the records
show that the respondent is subject to VAT as it availed of the income tax holiday under
E.O. No. 226. Perforce, respondent is subject to VAT at 0% rate and is entitled to a refund
or credit of the unutilized input taxes, which the Court of Tax Appeals computed
atP2,158,714.46, but which we findafter recomputationshould be P2,158,714.52.
The Supreme Court will not set aside lightly the conclusions reached by the Court of Tax
Appeals which, by the very nature of its functions, is dedicated exclusively to the resolution
of tax problems and has accordingly developed an expertise on the subject, unless there
has been an abuse or improvident exercise of authority.28 In this case, we find no cogent
reason to deviate from this well-entrenched principle. Thus, we are persuaded that indeed
the Court of Appeals committed no reversible error in affirming the assailed ruling of the
Court of Tax Appeals.
WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision dated July
6, 2001 of the Court of Appeals, in CA-G.R. SP No. 60304 is AFFIRMED with very slight
modification. Petitioner is hereby ORDERED to REFUND or, in the alternative, to ISSUE a
TAX CREDIT CERTIFICATE in favor of respondent in the amount ofP2,158,714.52
representing unutilized input tax payments. No pronouncement as to costs.
l^vvphi1.net

SO ORDERED.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE

TECHNOLOGY (PHILIPPINES),respondent.
DECISION
PANGANIBAN, J.:

Business companies registered in and operating from the Special

Economic Zone in Naga, Cebu -- like herein respondent -- are entities exempt
from all internal revenue taxes and the implementing rules relevant thereto,
including the value-added taxes or VAT. Although export sales are not
deemed exempt transactions, they are nonetheless zero-rated. Hence, in the
present
case,
the
distinction
between
exempt entities and
exempt transactions has little significance, because the net result is that the
taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise,
has complied with all requisites for claiming a tax refund of or credit for the
input VAT it paid on capital goods it purchased. Thus, the Court of Tax

Appeals and the Court of Appeals did not err in ruling that it is entitled to such
refund or credit.
The Case
Before us is a Petition for Review [1] under Rule 45 of the Rules of Court,
seeking to set aside the May 27, 2002 Decision [2] of the Court of Appeals (CA)
in CA-GR SP No. 66093. The decretal portion of the Decision reads as
follows:
WHEREFORE, foregoing premises considered, the petition for review
is DENIED for lack of merit.[3]
The Facts
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as
follows:
As jointly stipulated by the parties, the pertinent facts x x x involved in this case are
as follows:
1. [Respondent] is a resident foreign corporation duly registered with the Securities
and Exchange Commission to do business in the Philippines, with principal office
address at the new Cebu Township One, Special Economic Zone, Barangay
Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and
empowered to perform the duties of his office, including, among others, the duty to
act and approve claims for refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and
has been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No.
66, as amended, to engage in the manufacture of recording components primarily
used in computers for export. Such registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT
Registration Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by
[respondent];
6.

An administrative claim for refund of VAT input taxes in the amount

of P28,369,226.38 with supporting documents (inclusive of theP12,267,981.04 VAT
input taxes subject of this Petition for Review), was filed on 4 October 1999 with
Revenue District Office No. 83, Talisay Cebu;

7. No final action has been received by [respondent] from [petitioner] on [respondents]

claim for VAT refund.

The administrative claim for refund by the [respondent] on October 4, 1999 was not
acted upon by the [petitioner] prompting the [respondent] to elevate the case to [the
CTA] on July 21, 2000 by way of Petition for Review in order to toll the running of
the two-year prescriptive period.
For his part, [petitioner] x x x raised the following Special and Affirmative Defenses,
to wit:
1. [Respondents] alleged claim for tax refund/credit is subject to administrative
routinary investigation/examination by [petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and
regulations, the [respondent] has the burden of proof that the taxes sought to be
refunded were erroneously or illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court
ruled that:
A claimant has the burden of proof to establish the factual
basis of his or her claim for tax credit/refund.
4. Claims for tax refund/tax credit are construed in strictissimi juris against the
taxpayer. This is due to the fact that claims for refund/credit [partake of] the nature
of an exemption from tax. Thus, it is incumbent upon the [respondent] to prove that
it is indeed entitled to the refund/credit sought. Failure on the part of the
[respondent] to prove the same is fatal to its claim for tax credit. He who claims
exemption must be able to justify his claim by the clearest grant of organic or
statutory law. An exemption from the common burden cannot be permitted to exist
upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone
Authority (PEZA) registered Ecozone Enterprise, then its business is not subject to
VAT pursuant to Section 24 of Republic Act No. ([RA]) 7916 in relation to Section
103 of the Tax Code, as amended. As [respondents] business is not subject to VAT,
the capital goods and services it alleged to have purchased are considered not used
in VAT taxable business. As such, [respondent] is not entitled to refund of input
taxes on such capital goods pursuant to Section 4.106.1 of Revenue Regulations
No. ([RR])7-95, and of input taxes on services pursuant to Section 4.103 of said
regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229
of the 1997 Tax Code on filing of a written claim for refund within two (2) years from
the date of payment of tax.

On July 19, 2001, the Tax Court rendered a decision granting the claim for refund. [4]
Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA granting the claim for refund or
issuance of a tax credit certificate (TCC) in favor of respondent in the reduced

amount of P12,122,922.66. This sum represented the unutilized but

substantiated input VAT paid on capital goods purchased for the period
covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the
fiscal incentives under Executive Order No. (EO) 226 (otherwise known as the
Omnibus Investment Code of 1987), not of those under both Presidential
Decree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent
was, therefore, considered exempt only from the payment of income tax when
it opted for the income tax holiday in lieu of the 5 percent preferential tax on
gross income earned. As a VAT-registered entity, though, it was still subject to
the payment of other national internal revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor
Sections 4.106-1 and 4.103-1 of RR 7-95 were applicable. Having paid the
input VAT on the capital goods it purchased, respondent correctly filed the
administrative and judicial claims for its refund within the two-year prescriptive
period. Such payments were -- to the extent of the refundable value -- duly
supported by VAT invoices or official receipts, and were not yet offset against
any output VAT liability.
Hence this Petition.[5]
Sole Issue
Petitioner submits this sole issue for our consideration:
Whether or not respondent is entitled to the refund or issuance of Tax Credit
Certificate in the amount of P12,122,922.66 representing alleged unutilized input VAT
paid on capital goods purchased for the period April 1, 1998 to June 30, 1999. [6]
The Courts Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to
a Refund of or Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a special economic
zone,[7] respondent is entitled to the fiscal incentives and benefits [8] provided
for in either PD 66[9] or EO 226.[10] It shall, moreover, enjoy all privileges,

benefits, advantages or exemptions under both Republic Act Nos. (RA)

7227[11] and 7844.[12]
Preferential Tax Treatment
Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other laws to
the contrary, respondent shall not be subject to internal revenue laws and
regulations for raw materials, supplies, articles, equipment, machineries,
spare parts and wares, except those prohibited by law, brought into the zone
to be stored, broken up, repacked, assembled, installed, sorted, cleaned,
graded or otherwise processed, manipulated, manufactured, mixed or used
directly or indirectly in such activities.[13] Even so, respondent would enjoy a
net-operating loss carry over; accelerated depreciation; foreign exchange and
financial assistance; and exemption from export taxes, local taxes and
licenses.[14]
Comparatively, the same exemption from internal revenue laws and
regulations applies if EO 226[15] is chosen. Under this law, respondent shall
further be entitled to an income tax holiday; additional deduction for labor
expense; simplification of customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing warehouse system; privileges
for foreign nationals employed; tax credits on domestic capital equipment, as
well as for taxes and duties on raw materials; and exemption from contractors
taxes, wharfage dues, taxes and duties on imported capital equipment and
spare parts, export taxes, duties, imposts and fees, [16] local taxes and licenses,
and real property taxes.[17]
A privilege available to respondent under the provision in RA 7227 on tax
and duty-free importation of raw materials, capital and equipment [18] -- is, ipso
facto, also accorded to the zone[19] under RA 7916. Furthermore, the latter law
-- notwithstanding other existing laws, rules and regulations to the contrary -extends[20] to that zone the provision stating that no local or national taxes shall
be imposed therein.[21] No exchange control policy shall be applied; and free
markets for foreign exchange, gold, securities and future shall be allowed and
maintained.[22] Banking and finance shall also be liberalized under minimum
Bangko Sentral regulation with the establishment of foreign currency
depository units of local commercial banks and offshore banking units of
foreign banks.[23]
In the same vein, respondent benefits under RA 7844 from negotiable tax
credits[24] for locally-produced materials used as inputs. Aside from the other

incentives possibly already granted to it by the Board of Investments, it also

enjoys preferential credit facilities[25] and exemption from PD 1853.[26]
From the above-cited laws, it is immediately clear that petitioner enjoys
preferential tax treatment.[27] It is not subject to internal revenue laws and
regulations and is even entitled to tax credits. The VAT on capital goods is an
internal revenue tax from which petitioner as an entity is exempt. Although
the transactions involving such tax are not exempt, petitioner as a VATregistered person,[28] however, is entitled to their credits.
Nature of the VAT and
the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0
percent to 10 percent levied on every importation of goods, whether or not in
the course of trade or business, or imposed on each sale, barter, exchange or
lease of goods or properties or on each rendition of services in the course of
trade or business[29] as they pass along the production and distribution chain,
the tax being limited only to the value added [30] to such goods, properties or
services by the seller, transferor or lessor.[31]It is an indirect tax that may be
shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services.[32] As such, it should be understood not in the context of
the person or entity that is primarily, directly and legally liable for its payment,
but in terms of its nature as a tax on consumption. [33] In either case, though,
the same conclusion is arrived at.
The law[34] that originally imposed the VAT in the country, as well as the
subsequent amendments of that law, has been drawn from the tax credit
method.[35] Such method adopted the mechanics and self-enforcement
features of the VAT as first implemented and practiced in Europe and
subsequently adopted in New Zealand and Canada.[36] Under the present
method that relies on invoices, an entity can credit against or subtract from the
VAT charged on its sales or outputs the VAT paid on its purchases, inputs and
imports.[37]
If at the end of a taxable quarter the output taxes[38] charged by a
seller[39] are equal to the input taxes[40] passed on by the suppliers, no payment
is required. It is when the output taxes exceed the input taxes that the excess
has to be paid.[41] If, however, the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or quarters. [42]Should
the input taxes result from zero-rated or effectively zero-rated transactions or
from the acquisition of capital goods,[43] any excess over the output taxes shall

instead be refunded[44] to the taxpayer or credited[45] against other internal

revenue taxes.[46]
Zero-Rated and Effectively
Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated transactions
differ from effectively zero-rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and
supply of services.[47] The tax rate is set at zero. [48]When applied to the tax
base, such rate obviously results in no tax chargeable against the purchaser.
The seller of such transactions charges no output tax, [49] but can claim a
refund of or a tax credit certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods [50] or
supply of services[51] to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a signatory
effectively subjects such transactions to a zero rate. [52] Again, as applied to the
tax base, such rate does not yield any tax chargeable against the purchaser.
The seller who charges zero output tax on such transactions can also claim a
refund of or a tax credit certificate for the VAT previously charged by suppliers.
Zero Rating and
Exemption
In terms of the VAT computation, zero rating and exemption are the same,
but the extent of relief that results from either one of them is not.
Applying the destination principle[53] to the exportation of goods, automatic
zero rating[54] is primarily intended to be enjoyed by the seller who is directly
and legally liable for the VAT, making such seller internationally competitive by
allowing the refund or credit of input taxes that are attributable to export sales.
[55]
Effective zero rating, on the contrary, is intended to benefit the purchaser
who, not being directly and legally liable for the payment of the VAT, will
ultimately bear the burden of the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from
the burden of the tax.[56] But in an exemption there is only partial relief,
[57]
because the purchaser is not allowed any tax refund of or credit for input
taxes paid.[58]
Exempt Transaction

and Exempt Party

The object of exemption from the VAT may either be the transaction itself
or any of the parties to the transaction.[59]
An exempt transaction, on the one hand, involves goods or services
which, by their nature, are specifically listed in and expressly exempted from
the VAT under the Tax Code, without regard to the tax status -- VAT-exempt or
not -- of the party to thetransaction.[60] Indeed, such transaction is not subject
to the VAT, but the seller is not allowed any tax refund of or credit for any input
taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT
exemption under the Tax Code, a special law or an international agreement to
which the Philippines is a signatory, and by virtue of which its taxable
transactions become exempt from the VAT.[61] Such party is also not subject to
the VAT, but may be allowed a tax refund of or credit for input taxes paid,
depending on its registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of
which may be shifted or passed on by the seller to the purchaser of the goods,
properties or services.[62] While the liability is imposed on one person,
the burden may be passed on to another. Therefore, if a special law merely
exempts a party as a seller from its direct liability for payment of the VAT, but
does not relieve the same party as a purchaser from its indirect burden of the
VAT shifted to it by its VAT-registered suppliers, the purchase transaction is
not exempt. Applying this principle to the case at bar, the purchase
transactions entered into by respondent are not VAT-exempt.
Special laws may certainly exempt transactions from the VAT.[63] However,
the Tax Code provides that those falling under PD 66 are not. PD 66 is the
precursor of RA 7916 -- the special law under which respondent was
registered. The purchasetransactions it entered into are, therefore, not VATexempt. These are subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the
standard rate of 10 percent,[64] depending again on the application of
the destination principle.[65]
If respondent enters into such sales transactions with a purchaser -usually in a foreign country -- for use or consumption outside the Philippines,
these shall be subject to 0 percent.[66] If entered into with a purchaser for use
or consumption in the Philippines, then these shall be subject to 10 percent,

unless the purchaser is exempt from the indirect burden of the VAT, in
which case it shall also be zero-rated.
[67]

Since the purchases of respondent are not exempt from the VAT, the rate
to be applied is zero. Its exemption under both PD 66 and RA 7916 effectively
subjects such transactions to a zero rate, [68] because the ecozone within which
it is registered is managed and operated by the PEZA as a separate customs
territory.[69] This means that in such zone is created the legal fiction of foreign
territory.[70] Under the cross-border principle[71] of the VAT system being
enforced by the Bureau of Internal Revenue (BIR),[72] no VAT shall be imposed
to form part of the cost of goods destined for consumption outside of the
territorial border of the taxing authority. If exports of goods and services from
the Philippines to a foreign country are free of the VAT,[73] then the same rule
holds for such exports from the national territory -- except specifically declared
areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a
PEZA-registered entity are considered exports to a foreign country;
conversely, sales by a PEZA-registered entity to a VAT-registered person in
the customs territory are deemed imports from a foreign country.[74] An
ecozone -- indubitably a geographical territory of the Philippines -- is,
however, regarded in law as foreign soil.[75] This legal fiction is necessary to
give meaningful effect to the policies of the special law creating the zone. [76] If
respondent is located in an export processing zone [77] within that ecozone,
sales to the export processing zone, even without being actually exported,
shall in fact be viewed as constructively exported under EO 226.[78] Considered
as export sales,[79] such purchase transactions by respondent would indeed be
subject to a zero rate.[80]
Tax Exemptions
Broad and Express
Applying the special laws we have earlier discussed, respondent as an
entity is exempt from internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the
very nature of the VAT as a tax on consumption, for which the direct liability is
imposed on one person but the indirect burden is passed on to another.
Respondent, as an exempt entity, can neither be directly charged for the VAT
on its sales nor indirectly made to bear, as added cost to such sales, the
equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere
debemus. Where the law does not distinguish, we ought not to distinguish.

Moreover, the exemption is both express and pervasive for the following
reasons:
First, RA 7916 states that no taxes, local and national, shall be imposed
on business establishments operating within the ecozone.[81] Since this law
does not exclude the VAT from the prohibition, it is deemed
included. Exceptio firmat regulam in casibus non exceptis. An exception
confirms the rule in cases not excepted; that is, a thing not being excepted
must be regarded as coming within the purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the
transaction, it may still be passed on and, therefore, indirectly imposed on the
same entity -- a patent circumvention of the law. That no VAT shall be
imposed directly upon business establishments operating within the ecozone
under RA 7916 also means that no VAT may be passed on and imposed
indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum.
When anything is prohibited directly, it is also prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same
prohibition applied, except for real property taxes that presently are imposed
on land owned by developers.[82] This similar and repeated prohibition is an
unambiguous ratification of the laws intent in not imposing local or national
taxes on business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and
the like shall not be subject to x x x internal revenue laws and regulations
under PD 66[83] -- the original charter of PEZA (then EPZA) that was later
amended by RA 7916.[84] No provisions in the latter law modify such
exemption.
Although this exemption puts the government at an initial disadvantage,
the reduced tax collection ultimately redounds to the benefit of the national
economy by enticing more business investments and creating more
employment opportunities.[85]
Fourth, even the rules implementing the PEZA law clearly reiterate that
merchandise -- except those prohibited by law -- shall not be subject to x x x
internal revenue laws and regulations x x x[86] if brought to the ecozones
restricted area[87] for manufacturing by registered export enterprises,[88] of
which respondent is one. These rules also apply to all enterprises registered
with the EPZA prior to the effectivity of such rules.[89]
Fifth, export processing zone enterprises registered[90] with the Board of
Investments (BOI) under EO 226 patently enjoy exemption from national
internal revenue taxes on imported capital equipment reasonably needed and

exclusively used for the manufacture of their products;[91] on required supplies

and spare part for consigned equipment;[92] and on foreign and domestic
merchandise, raw materials, equipment and the like -- except those prohibited
by law -- brought into the zone for manufacturing.[93] In addition, they are given
credits for the value of the national internal revenue taxes imposed on
domestic capital equipment also reasonably needed and exclusively used for
the manufacture of their products,[94] as well as for the value of such taxes
imposed on domestic raw materials and supplies that are used in the
manufacture of their export products and that form part thereof.[95]
Sixth, the exemption from local and national taxes granted under RA
7227[96] are ipso facto accorded to ecozones.[97] In case of doubt, conflicts with
respect to such tax exemption privilege shall be resolved in favor of the
ecozone.[98]
And seventh, the tax credits under RA 7844 -- given for imported raw
materials primarily used in the production of export goods, [99] and for locally
produced raw materials, capital equipment and spare parts used by exporters
of non-traditional products[100] -- shall also be continuously enjoyed by similar
exporters within the ecozone.[101] Indeed, the latter exporters are likewise
entitled to such tax exemptions and credits.
Tax Refund as
Tax Exemption
To be sure, statutes that grant tax exemptions are construed strictissimi
juris[102] against the taxpayer[103] and liberally in favor of the taxing authority.[104]
Tax refunds are in the nature of such exemptions.[105] Accordingly, the
claimants of those refunds bear the burden of proving the factual basis of their
claims;[106] and of showing, by words too plain to be mistaken, that the
legislature intended to exempt them.[107] In the present case, all the cited legal
provisions are teeming with life with respect to the grant of tax exemptions too
vivid to pass unnoticed. In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions
which are not exempt. The end result, however, is that it is not subject to the
VAT. The non-taxability of transactions that are otherwise taxable is merely a
necessary incident to the tax exemption conferred by law upon it as an entity,
not upon the transactions themselves.[108] Nonetheless, its exemption as an
entity and the non-exemption of its transactions lead to the same result for the
following considerations:

First, the contemporaneous construction of our tax laws by BIR authorities

who are called upon to execute or administer such laws [109] will have to be
adopted. Their prior tax issuances have held inconsistent positions brought
about by their probable failure to comprehend and fully appreciate the nature
of the VAT as a tax on consumption and the application of the destination
principle.[110] Revenue Memorandum Circular No. (RMC) 74-99, however, now
clearly and correctly provides that any VAT-registered suppliers sale of goods,
property or services from the customs territory to any registered enterprise
operating in the ecozone -- regardless of the class or type of the latters PEZA
registration -- is legally entitled to a zero rate.[111]
Second, the policies of the law should prevail. Ratio legis est anima. The
reason for the law is its very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as
well as the establishment of export processing zones, seeks to encourage
and promote foreign commerce as a means of x x x strengthening our export
trade and foreign exchange position, of hastening industrialization, of reducing
domestic unemployment, and of accelerating the development of the
country.[112]
RA 7916, as amended by RA 8748, declared that by creating the PEZA
and integrating the special economic zones, the government shall actively
encourage, promote, induce and accelerate a sound and balanced industrial,
economic and social development of the country x x x through the
establishment, among others, of special economic zones x x x that shall
effectively attract legitimate and productive foreign investments.[113]
Under EO 226, the State shall encourage x x x foreign investments in
industry x x x which shall x x x meet the tests of international
competitiveness[,] accelerate development of less developed regions of the
country[,] and result in increased volume and value of exports for the
economy.[114] Fiscal incentives that are cost-efficient and simple to administer
shall be devised and extended to significant projects to compensate for
market imperfections, to reward performance contributing to economic
development,[115] and to stimulate the establishment and assist initial
operations of the enterprise.[116]
Wisely accorded to ecozones created under RA 7916 [117] was the
governments policy -- spelled out earlier in RA 7227 -- of converting into
alternative productive uses[118] the former military reservations and their
extensions,[119] as well as of providing them incentives[120] to enhance the
benefits that would be derived from them[121] in promoting economic and social
development.[122]

Finally, under RA 7844, the State declares the need to evolve export
development into a national effort[123] in order to win international markets. By
providing many export and tax incentives,[124] the State is able to drive home
the point that exporting is indeed the key to national survival and the means
through which the economic goals of increased employment and enhanced
incomes can most expeditiously be achieved.[125]
The Tax Code itself seeks to promote sustainable economic growth x x x;
x x x increase economic activity; and x x x create a robust environment for
business to enable firms to compete better in the regional as well as the
global market.[126] After all, international competitiveness requires economic
and tax incentives to lower the cost of goods produced for export. State
actions that affect global competition need to be specific and selective in the
pricing of particular goods or services.[127]
All these statutory policies are congruent to the constitutional mandates of
providing incentives to needed investments,[128] as well as of promoting the
preferential use of domestic materials and locally produced goods and
adopting measures to help make these competitive.[129] Tax credits for
domestic inputs strengthen backward linkages. Rightly so, the rule of law
and the existence of credible and efficient public institutions are essential
prerequisites for sustainable economic development.[130]
VAT Registration, Not Application
for Effective Zero Rating,
Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT law.
Petitioner alleges that respondent did register for VAT purposes with the
appropriate Revenue District Office. However, it is now too late in the day for
petitioner to challenge the VAT-registered status of respondent, given the
latters prior representation before the lower courts and the mode of appeal
taken by petitioner before this Court.
[131]

The PEZA law, which carried over the provisions of the EPZA law, is clear
in exempting from internal revenue laws and regulations the equipment -including capital goods -- that registered enterprises will use, directly or
indirectly, in manufacturing.[132] EO 226 even reiterates this privilege among
the incentives it gives to such enterprises. [133] Petitioner merely asserts that by
virtue of the PEZA registration alone of respondent, the latter is not subject to
the VAT. Consequently, the capital goods and services respondent has
purchased are not considered used in the VAT business, and no VAT refund or
credit is due.[134] This is a non sequitur. By the VATs very nature as a tax on

consumption, the capital goods and services respondent has purchased are
subject to the VAT, although at zero rate. Registration does not determine
taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts.
Having failed to present evidence to support its contentions against
the income tax holiday privilege of respondent,[135] petitioner is deemed to have
conceded. It is a cardinal rule that issues and arguments not adequately and
seriously brought below cannot be raised for the first time on appeal.[136]This is
a matter of procedure[137] and a question of fairness.[138] Failure to assert
within a reasonable time warrants a presumption that the party entitled to
assert it either has abandoned or declined to assert it.[139]
The BIR regulations additionally requiring an approved prior application for
effective zero rating[140] cannot prevail over the clear VAT nature of
respondents transactions. The scope of such regulations is not within the
statutory authority x x x granted by the legislature.[141]
First, a mere administrative issuance, like a BIR regulation, cannot amend
the law; the former cannot purport to do any more than interpret the latter.
[142]
The courts will not countenance one that overrides the statute it seeks to
apply and implement.[143]
Other than the general registration of a taxpayer the VAT status of which is
aptly determined, no provision under our VAT law requires an additional
application to be made for such taxpayers transactions to be considered
effectively zero-rated. An effectively zero-rated transaction does not and
cannot become exempt simply because an application therefor was not made
or, if made, was denied. To allow the additional requirement is to give
unfettered discretion to those officials or agents who, without fluid
consideration, are bent on denying a valid application. Moreover, the State
can never be estopped by the omissions, mistakes or errors of its officials or
agents.[144]
Second, grantia argumenti that such an application is required by law,
there is still the presumption of regularity in the performance of official duty.
[145]
Respondents registration carries with it the presumption that, in the
absence of contradictory evidence, an application for effective zero rating was
also filed and approval thereof given. Besides, it is also presumed that the
law has been obeyed[146] by both the administrative officials and the applicant.
Third, even though such an application was not made, all the
special laws we have tackled exempt respondent not only from internal
revenue laws but also from the regulations issued pursuant thereto. Leniency

in the implementation of the VAT in ecozones is an imperative, precisely to

spur economic growth in the country and attain global competitiveness as
envisioned in those laws.
A VAT-registered status, as well as compliance with the invoicing
requirements,[147] is sufficient for the effective zero rating of the transactions of
a taxpayer. The nature of its business and transactions can easily be perused
from, as already clearly indicated in, its VAT registration papers and
photocopied documents attached thereto. Hence, its transactions cannot be
exempted by its mere failure to apply for their effective zero rating. Otherwise,
their VAT exemption would be determined, not by their nature, but by the
taxpayers negligence -- a result not at all contemplated. Administrative
convenience cannot thwart legislative mandate.
Tax Refund or
Credit in Order
Having determined that respondents purchase transactions are subject to
a zero VAT rate, the tax refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent had
chosen the fiscal incentives in EO 226 over those in RA 7916 and PD 66. It
opted for the income tax holiday regime instead of the 5 percent preferential
tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration
under the PEZA law,[148] for EO 226[149] also has provisions to contend with.
These two regimes are in fact incompatible and cannot be availed of
simultaneously by the same entity. While EO 226 merely exempts it from
income taxes, the PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but
only from the payment of income tax for a certain number of years, depending
on its registration as a pioneer or a non-pioneer enterprise. Besides, the
remittance of the aforesaid 5 percent of gross income earned in lieu of local
and national taxes imposable upon business establishments within the
ecozone cannot outrightly determine a VAT exemption. Being subject to VAT,
payments erroneously collected thereon may then be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential
tax regime in RA 7916, Section 24 thereof does not preclude the VAT. One
can, therefore, counterargue that such provision merely exempts respondent
from taxes imposed on business. To repeat, the VAT is a tax imposed on
consumption, not on business. Although respondent as an entity is exempt,

the transactions it enters into are not necessarily so. The VAT payments
made in excess of the zero rate that is imposable may certainly be refunded
or credited.
Compliance with All Requisites
for VAT Refund or Credit
As further enunciated by the Tax Court, respondent complied with all the
requisites for claiming a VAT refund or credit.[150]
First, respondent is a VAT-registered entity. This fact alone distinguishes
the present case from Contex, in which this Court held that the petitioner
therein was registered as a non-VAT taxpayer.[151] Hence, for being merely
VAT-exempt, the petitioner in that case cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent are duly
supported by VAT invoices and have not been offset against any output
taxes. Although enterprises registered with the BOI after December 31, 1994
would no longer enjoy the tax credit incentives on domestic capital equipment
-- as provided for under Article 39(d), Title III, Book I of EO 226 [152] -- starting
January 1, 1996, respondent would still have the same benefit under a
general and express exemption contained in both Article 77(1), Book VI of EO
226; and Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones
by RA 7916.
There was a very clear intent on the part of our legislators, not only to
exempt investors in ecozones from national and local taxes, but also to grant
them tax credits. This fact was revealed by the sponsorship speeches in
Congress during the second reading of House Bill No. 14295, which later
became RA 7916, as shown below:
MR. RECTO. x x x Some of the incentives that this bill provides are exemption
from national and local taxes; x x x tax credit for locally-sourced inputs x x x.
xxx

xxx

xxx

MR. DEL MAR. x x x To advance its cause in encouraging investments and creating
an environment conducive for investors, the bill offers incentives such as the
exemption from local and national taxes, x x x tax credits for locally sourced inputs x
x x.[153]
And third, no question as to either the filing of such claims within the
prescriptive period or the validity of the VAT returns has been raised. Even if

such a question were raised, the tax exemption under all the special laws
cited above is broad enough to cover even the enforcement of internal
revenue laws, including prescription.[154]
Summary
To summarize, special laws expressly grant preferential tax treatment to
business establishments registered and operating within an ecozone, which
by law is considered as a separate customs territory. As such, respondent is
exempt from all internal revenue taxes, including the VAT, and regulations
pertaining thereto. It has opted for the income tax holiday regime, instead of
the 5 percent preferential tax regime. As a matter of law and procedure, its
registration status entitling it to such tax holiday can no longer be questioned.
Its sales transactions intended for export may not be exempt, but like its
purchase transactions, they are zero-rated. No prior application for the
effective zero rating of its transactions is necessary. Being VAT-registered and
having satisfactorily complied with all the requisites for claiming a tax refund of
or credit for the input VAT paid on capital goods purchased, respondent is
entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No
pronouncement as to costs.
SO ORDERED.

EN BANC

FORT BONIFACIO DEVELOPMENT

G.R. No. 158885

CORPORATION,
Petitioner,

Present:

PUNO, C.J.,
QUISUMBING,

YNARES-SANTIAGO,
CARPIO,
AUSTRIA-MARTINEZ,
CORONA,
- versus -

CARPIO MORALES,
TINGA,
CHICO-NAZARIO,
VELASCO, JR.,

NACHURA,
LEONARDO DE CASTRO,
BRION, and
COMMISSIONER OF INTERNAL

PERALTA, JJ.

REVENUE, REGIONAL DIRECTOR,

REVENUE REGION NO. 8, and
CHIEF, ASSESSMENT DIVISION,

Promulgated:

REVENUE REGION NO. 8, BIR,

Respondents.

April 2, 2009

x--------------------------------------------------------------------------- x

FORT BONIFACIO DEVELOPMENT

CORPORATION,
Petitioner,

G.R. No. 170680

versus -

COMMISSIONER OF INTERNAL REVENUE

and REVENUE DISTRICT OFFICER,
REVENUE DISTRICT NO. 44, TAGUIG
and PATEROS, BUREAU OF INTERNAL
REVENUE,
Respondents.

x---------------------------------------------------------------------------x

DECISION

TINGA, J.:

The value-added tax (VAT) system was first introduced in the Philippines on
1 January 1988, with the tax imposable on any person who, in the course of trade
or business, sells, barters or exchanges goods, renders services, or engages in
similar transactions and any person who imports goods.[1] The first VAT law is
found in Executive Order No. 273 (E.O. 273), which amended several provisions of
the then National Internal Revenue Code of 1986 (Old NIRC). E.O. No. 273 likewise
accommodated the potential burdens of the shift to the VAT system by allowing
newly liable VAT-registered persons to avail of a transitional input tax credit, as
provided for in Section 105 of the old NIRC, as amended by E.O. No. 273. Said
Section 105 is quoted, thus:

SEC. 105. Transitional input tax credits. A person who becomes liable to valueadded tax or any person who elects to be a VAT-registered person shall, subject to
the filing of an inventory as prescribed by regulations, be allowed input tax on his
beginning inventory of goods, materials and supplies equivalent to 8% of the value
of such inventory or the actual value-added tax paid on such goods, materials and
supplies, whichever is higher, which shall be creditable against the output tax.[2]

There are other measures contained in E.O. No. 273 which were similarly intended
to ease the shift to the VAT system. These measures also took the form of
transitional input taxes which can be credited against output tax,[3] and are found
in Section 25 of E.O. No. 273, the section entitled Transitory Provisions. Said
transitory provisions, which were never incorporated in the Old NIRC, read:

Sec. 25. Transitory provisions. (a) All VAT-registered persons shall be allowed
transitional input taxes which can be credited against output tax in the same
manner as provided in Sections 104 of the National Internal Revenue Code as
follows:
1) The balance of the deferred sales tax credit account as of December 31, 1987
which are accounted for in accordance with regulations prescribed therefor;
2) A presumptive input tax equivalent to 8% of the value of the inventory as of
December 31, 1987 of materials and supplies which are not for sale, the tax on
which was not taken up or claimed as deferred sales tax credit; and

3) A presumptive input tax equivalent to 8% of the value of the inventory as of

December 31, 1987 as goods for sale, the tax on which was not taken up or claimed
as deferred sales tax credit.
Tax credit prescribed in paragraphs (2) and (3) above shall be allowed only to a VATregistered person who files an inventory of the goods referred to in said paragraphs
as provided in regulations.
(b) Any unused tax credit certificate issued prior to January 1, 1988 for excess tax
credits which are applicable against advance sales tax shall be surrendered to, and
replaced by the Commissioner with new tax credit certificates which can be used in
payment for value-added tax liabilities.
(c) Any person already engaged in business whose gross sales or receipts for a 12month period from September 1, 1986 to August 1, 1987, exceed the amount of
P200,000.00, or any person who has been in business for less than 12 months as of
August 1, 1987 but expects his gross sales or receipts to exceed P200,000 on or
before December 31, 1987, shall apply for registration on or before October 29,
1987.[4]

On 1 January 1996, Republic Act (Rep. Act) No. 7716 took effect.[5] It amended
provisions of the Old NIRC principally by restructuring the VAT system. It was under
Rep. Act No. 7716 that VAT was imposed for the first time on the sale of real
properties. This was accomplished by amending Section 100 of the NIRC to include
real properties among the goods or properties, the sale, barter or exchange of
which is made subject to VAT. The relevant portions of Section 100, as amended by
Rep. Act No. 7716, thus read:

Sec. 100. Value-added-tax on sale of goods or properties.

(a) Rate and base of tax. There shall be levied, assessed and collected on every
sale, barter or exchange of goods or properties, a value-added tax equivalent to
10% of the gross selling price or gross value in money of the goods, or properties
sold, bartered or exchanged, such tax to be paid by the seller or transferor.

(1) The term 'goods or properties' shall mean all tangible and intangible objects
which are capable of pecuniary estimation and shall include:

(A) Real properties held primarily for sale to customers or held for lease in the
ordinary course of trade or business; xxx[6]

The provisions of Section 105 of the NIRC, on the transitional input tax credit, had
remained intact despite the enactment of Rep. Act No. 7716. Said provisions would
however be amended following the passage of the new National Internal Revenue
Code of 1997 (New NIRC), also officially known as Rep Act No. 8424. The section on
the transitional input tax credit was renumbered from Section 105 of the Old NIRC to
Section 111(A) of the New NIRC. The new amendments on the transitional input tax
credit are relatively minor, hardly material to the case at bar. They are highlighted
below for easy reference:

Section 111. Transitional/Presumptive Input Tax Credits. (A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax
or any person who elects to be a VAT-registered person shall, subject to the filing of
an inventory according to rules and regulations prescribed by the Secretary of
finance, upon recommendation of the Commissioner, be allowed input tax on his
beginning inventory of goods, materials and supplies equivalent for eight percent
(8%) of the value of such inventory or the actual value-added tax paid on such
goods, materials and supplies, whichever is higher, which shall be creditable against
the output tax.[7] (Emphasis supplied).

Rep. Act No. 8424 also made part of the NIRC, for the first time, the concept
of presumptive input tax credits, with Section 111(b) of the New NIRC providing as
follows:
(B) Presumptive Input Tax Credits. (1) Persons or firms engaged in the processing of sardines, mackerel and milk, and
in manufacturing refined sugar and cooking oil, shall be allowed a presumptive

input tax, creditable against the output tax, equivalent to one and one-half percent
(1 1/2%) of the gross value in money of their purchases of primary agricultural
products which are used as inputs to their production.
As used in this Subsection, the term 'processing' shall mean pasteurization, canning
and activities which through physical or chemical process alter the exterior texture
or form or inner substance of a product in such manner as to prepare it for special
use to which it could not have been put in its original form or condition.

(2) Public works contractors shall be allowed a presumptive input tax equivalent to
one and one-half percent (1 1/2%) of the contract price with respect to government
contracts only in lieu of actual input taxes therefrom.[8]

What we have explained above are the statutory antecedents that underlie
the present petitions for review. We now turn to the factual antecedents.

I.

Petitioner Fort Bonifacio Development Corporation (FBDC) is engaged in the

development and sale of real property. On 8 February 1995, FBDC acquired by way
of sale from the national government, a vast tract of land that formerly formed part
of the Fort Bonifacio military reservation, located in what is now the Fort Bonifacio
Global City (Global City) in Taguig City.[9] Since the sale was consummated prior to
the enactment of Rep. Act No. 7716, no VAT was paid thereon. FBDC then proceeded
to develop the tract of land, and from October, 1966 onwards it has been selling lots
located in the Global City to interested buyers.[10]

Following the effectivity of Rep. Act No. 7716, real estate transactions such as those
regularly engaged in by FBDC have since been made subject to VAT. As the vendor,
FBDC from thereon has become obliged to remit to the Bureau of Internal Revenue
(BIR) output VAT payments it received from the sale of its properties to the Bureau

of Internal Revenue (BIR). FBDC likewise invoked its right to avail of the transitional
input tax credit and accordingly submitted an inventory list of real properties it
owned, with a total book value of P71,227,503,200.00.[11]

On 14 October 1996, FBDC executed in favor of Metro Pacific Corporation two (2)
contracts to sell, separately conveying two (2) parcels of land within the Global City
in consideration of the purchase prices at P1,526,298,949.00 and P785,009,018.00,
both payable in installments.[12] For the fourth quarter of 1996, FBDC earned a
total of P3,498,888,713.60 from the sale of its lots, on which the output VAT payable
to the BIR was P318,080,792.14. In the context of remitting its output VAT payments
to the BIR, FBDC paid a total of P269,340,469.45 and utilized (a) P28,413,783.00
representing a portion of its then total transitional/presumptive input tax credit of
P5,698,200,256.00, which petitioner allocated for the two (2) lots sold to Metro
Pacific; and (b) its regular input tax credit of P20,326,539.69 on the purchase of
goods and services.[13]

Between July and October 1997, FBDC sent two (2) letters to the BIR requesting
appropriate action on whether its use of its presumptive input VAT on its land
inventory, to the extent of P28,413,783.00 in partial payment of its output VAT for
the fourth quarter of 1996, was in order. After investigating the matter, the BIR
recommended that the claimed presumptive input tax credit be disallowed.[14]
Consequently, the BIR issued to FBDC a Pre-Assessment Notice (PAN) dated 23
December 1997 for deficiency VAT for the 4th quarter of 1996. This was followed by
a letter of respondent Commissioner of Internal Revenue (CIR),[15] addressed to
and received by FBDC on 5 March 1998, disallowing the presumptive input tax
credit arising from the land inventory on the basis of Revenue Regulation 7-95 (RR
7-95) and Revenue Memorandum Circular 3-96 (RMC 3-96). Section 4.105-1 of RR 795 provided the basis in main for the CIRs opinion, the section reading, thus:

Sec. 4.105-1. Transitional input tax on beginning inventories. Taxpayers who

became VAT-registered persons upon effectivity of RA No. 7716 who have exceeded
the minimum turnover of P500,000.00 or who voluntarily register even if their
turnover does not exceed P500,000.00 shall be entitled to a presumptive input tax
on the inventory on hand as of December 31, 1995 on the following: (a) goods
purchased for resale in their present condition; (b) materials purchased for further
processing, but which have not yet undergone processing; (c) goods which have

been manufactured by the taxpayer; (d) goods in process and supplies, all of which
are for sale or for use in the course of the taxpayers trade or business as a VATregistered person.

However, in the case of real estate dealers, the basis of the presumptive input tax
shall be the improvements, such as buildings, roads, drainage systems, and other
similar structures, constructed on or after the effectivity of EO 273 (January 1,
1988).

The transitional input tax shall be 8% of the value of the inventory or actual VAT
paid, whichever is higher, which amount may be allowed as tax credit against the
output tax of the VAT-registered person.

The CIR likewise cited from the Transitory Provisions of RR 7-95, particularly the
following:

(a) Presumptive Input Tax Credits -

xxx

(iii) For real estate dealers, the presumptive input tax of 8% of the book value of
improvements on or after January 1, 1988 (the effectivity of E.O. 273) shall be
allowed.

For purposes of sub-paragraphs (i), (ii) and (iii) above, an inventory as of December
31, 1995 of such goods or properties and improvements showing the quantity,
description and amount filed with the RDO not later than Janaury 31, 1996.

xxx

Consequently, FBDC received an Assessment Notice in the amount of

P45,188,708.08, representing deficiency VAT for the 4th quarter of 1996, including
surcharge, interest and penalty. After respondent Regional Director denied FBDCs
motion for reconsideration/protest, FBDC filed a petition for review with the Court of
Tax Appeals (CTA), docketed as C.T.A. Case No. 5665.[16] On 11 August 2000, the
CTA rendered a decision affirming the assessment made by the respondents.[17]
FBDC assailed the CTA decision through a petition for review filed with the Court of
Appeals, docketed as CA-G.R. SP No. 60477. On 15 November 2002, the Court of
Appeals rendered a decision affirming the CTA decision, but removing the
surcharge, interests and penalties, thus reducing the amount due to
P28,413,783.00.[18] From said decision, FBDC filed a petition for review with this
Court, the first of the two petitions now before us, seeking the reversal of the CTA
decision dated 11 August 2000 and a pronouncement that FBDC is entitled to the
transitional/presumptive input tax credit of P28,413,783.00. This petition has been
docketed as G.R. No. 158885.

The second petition, which is docketed as G.R. No. 170680, involves the same
parties and legal issues, but concerns the claim of FBDC that it is entitled to claim a
similar transitional/presumptive input tax credit, this time for the third quarter of
1997. A brief recital of the anteceding facts underlying this second claim is in order.

For the third quarter of 1997, FBDC derived the total amount of P3,591,726,328.11
from its sales and lease of lots, on which the output VAT payable to the BIR was
P359,172,632.81.[19] Accordingly, FBDC made cash payments totaling
P347,741,695.74 and utilized its regular input tax credit of P19,743,565.73 on
purchases of goods and services.[20] On 11 May 1999, FBDC filed with the BIR a
claim for refund of the amount of P347,741,695.74 which it had paid as VAT for the
third quarter of 1997.[21] No action was taken on the refund claim, leading FBDC to
file a petition for review with the CTA, docketed as CTA Case No. 5926. Utilizing the
same valuation[22] of 8% of the total book value of its beginning inventory of real
properties (or P71,227,503,200.00) FBDC argued that its input tax credit was more
than enough to offset the VAT paid by it for the third quarter of 1997.[23]

On 17 October 2000, the CTA promulgated its decision[24] in CTA Case No. 5926,
denying the claim for refund. FBDC then filed a petition for review with the Court of
Appeals, docketed as CA-G.R. SP No. 61517. On 3 October 2003, the Court of

Appeals rendered a decision[25] affirming the judgment of the CTA. As a result,

FBDC filed its second petition, docketed as G.R. No. 170680.

II.

The two petitions were duly consolidated[26] and called for oral argument on 18
April 2006. During the oral arguments, the parties were directed to discuss the
following issues:

1.
In determining the 10% value-added tax in Section 100 of the
[Old NIRC] on the sale of real properties by real estate dealers, is the 8% transitional
input tax credit in Section 105 applied only to the improvements on the real
property or is it applied on the value of the entire real property?

2.
Are Section 4.105.1 and paragraph (a)(III) of the Transitory
Provisions of Revenue Regulations No. 7-95 valid in limiting the 8% transitional input
tax to the improvements on the real property?

While the two issues are linked, the main issue is evidently whether Section 105 of
the Old NIRC may be interpreted in such a way as to restrict its application in the
case of real estate dealers only to the improvements on the real property belonging
to their beginning inventory, and not the entire real property itself. There would be
no controversy before us if the Old NIRC had itself supplied that limitation, yet the
law is tellingly silent in that regard. RR 7-95, which imposes such restrictions on real
estate dealers, is discordant with the Old NIRC, so it is alleged.

III.

On its face, there is nothing in Section 105 of the Old NIRC that prohibits the
inclusion of real properties, together with the improvements thereon, in the
beginning inventory of goods, materials and supplies, based on which inventory the
transitional input tax credit is computed. It can be conceded that when it was
drafted Section 105 could not have possibly contemplated concerns specific to real
properties, as real estate transactions were not originally subject to VAT. At the
same time, when transactions on real properties were finally made subject to VAT
beginning with Rep. Act No. 7716, no corresponding amendment was adopted as
regards Section 105 to provide for a differentiated treatment in the application of
the transitional input tax credit with respect to real properties or real estate dealers.

It was Section 100 of the Old NIRC, as amended by Rep. Act No. 7716, which
made real estate transactions subject to VAT for the first time. Prior to the
amendment, Section 100 had imposed the VAT on every sale, barter or exchange
of goods, without however specifying the kind of properties that fall within or under
the generic class goods subject to the tax.

Rep. Act No. 7716, which significantly is also known as the Expanded Value-Added
Tax (EVAT) law, expanded the coverage of the VAT by amending Section 100 of the
Old NIRC in several respects, some of which we will enumerate. First, it made every
sale, barter or exchange of goods or properties subject to VAT.[27] Second, it
generally defined goods or properties as all tangible and intangible objects which
are capable of pecuniary estimation.[28] Third, it included a non-exclusive
enumeration of various objects that fall under the class goods or properties
subject to VAT, including [r]eal properties held primarily for sale to customers or
held for lease in the ordinary course of trade or business.[29]

From these amendments to Section 100, is there any differentiated VAT treatment
on real properties or real estate dealers that would justify the suggested limitations
on the application of the transitional input tax on them? We see none.

Rep. Act No. 7716 clarifies that it is the real properties held primarily for sale to
customers or held for lease in the ordinary course of trade or business that are
subject to the VAT, and not when the real estate transactions are engaged in by
persons who do not sell or lease properties in the ordinary course of trade or
business. It is clear that those regularly engaged in the real estate business are
accorded the same treatment as the merchants of other goods or properties

available in the market. In the same way that a milliner considers hats as his goods
and a rancher considers cattle as his goods, a real estate dealer holds real property,
whether or not it contains improvements, as his goods.

Had Section 100 itself supplied any differentiation between the treatment of real
properties or real estate dealers and the treatment of the transactions involving
other commercial goods, then such differing treatment would have constituted the
statutory basis for the CIR to engage in such differentiation which said respondent
did seek to accomplish in this case through Section 4.105-1 of RR 7-95. Yet the
amendments introduced by Rep. Act No. 7716 to Section 100, coupled with the fact
that the said law left Section 105 intact, reveal the lack of any legislative intention
to make persons or entities in the real estate business subject to a VAT treatment
different from those engaged in the sale of other goods or properties or in any other
commercial trade or business.

If the plain text of Rep. Act No. 7716 fails to supply any apparent justification for
limiting the beginning inventory of real estate dealers only to the improvements on
their properties, how then were the CIR and the courts a quo able to justify such a
view?

IV.

The fact alone that the denial of FBDCs claims is in accord with Section 4.105-1 of
RR 7-95 does not, of course, put this inquiry to rest. If Section 4.105-1 is itself
incongruent to Rep. Act No. 7716, the incongruence cannot by itself justify the
denial of the claims. We need to inquire into the rationale behind Section 4.105-1,
as well as the question whether the interpretation of the law embodied therein is
validated by the law itself.

The CTA, in its rulings, proceeded from a thesis which is not readily apparent from
the texts of the laws we have cited. The transitional input tax credit is conditioned
on the prior payment of sales taxes or the VAT, so the CTA observed. The
introduction of the VAT through E.O. No. 273 and its subsequent expansion through
Rep. Act No. 7716 subjected various persons to the tax for the very first time,
leaving them unable to claim the input tax credit based on their purchases before

they became subject to the VAT. Hence, the transitional input tax credit was
designed to alleviate that relatively iniquitous loss. Given that rationale, according
to the CTA, it would be improper to allow FBDC, which had acquired its properties
through a tax-free purchase, to claim the transitional input tax credit. The CTA
added that Section 105.4.1 of RR 7-95 is consonant with its perceived rationale
behind the transitional input tax credit since the materials used for the construction
of improvements would have most likely involved the payment of VAT on their
purchase.

Concededly, this theory of the CTA has some sense, extravagantly extrapolated as it
is though from the seeming silence on the part of the provisions of the law. Yet
ultimately, the theory is woefully limited in perspective.

It is correct, as pointed out by the CTA, that upon the shift from sales taxes to VAT in
1987 newly-VAT registered people would have been prejudiced by the inability to
credit against the output VAT their payments by way of sales tax on their existing
stocks in trade. Yet that inequity was precisely addressed by a transitory provision
in E.O. No. 273 found in Section 25 thereof. The provision authorized VAT-registered
persons to invoke a presumptive input tax equivalent to 8% of the value of the
inventory as of December 31, 1987 of materials and supplies which are not for sale,
the tax on which was not taken up or claimed as deferred sales tax credit, and a
similar presumptive input tax equivalent to 8% of the value of the inventory as of
December 31, 1987 of goods for sale, the tax on which was not taken up or claimed
as deferred sales tax credit.[30]

Section 25 of E.O. No. 273 perfectly remedies the problem assumed by the CTA as
the basis for the introduction of transitional input tax credit in 1987. If the core
purpose of the tax credit is only, as hinted by the CTA, to allow for some mode of
accreditation of previously-paid sales taxes, then Section 25 alone would have
sufficed. Yet E.O. No. 273 amended the Old NIRC itself by providing for the
transitional input tax credit under Section 105, thereby assuring that the tax credit
would endure long after the last goods made subject to sales tax have been
consumed.

If indeed the transitional input tax credit is integrally related to previously paid sales
taxes, the purported causal link between those two would have been nonetheless
extinguished long ago. Yet Congress has reenacted the transitional input tax credit

several times; that fact simply belies the absence of any relationship between such
tax credit and the long-abolished sales taxes. Obviously then, the purpose behind
the transitional input tax credit is not confined to the transition from sales tax to
VAT.
There is hardly any constricted definition of "transitional" that will limit its possible
meaning to the shift from the sales tax regime to the VAT regime. Indeed, it could
also allude to the transition one undergoes from not being a VAT-registered person
to becoming a VAT-registered person. Such transition does not take place merely by
operation of law, E.O. No. 273 or Rep. Act No. 7716 in particular. It could also occur
when one decides to start a business. Section 105 states that the transitional input
tax credits become available either to (1) a person who becomes liable to VAT; or
(2) any person who elects to be VAT-registered. The clear language of the law
entitles new trades or businesses to avail of the tax credit once they become VATregistered. The transitional input tax credit, whether under the Old NIRC or the New
NIRC, may be claimed by a newly-VAT registered person such as when a business as
it commences operations. If we view the matter from the perspective of a starting
entrepreneur, greater clarity emerges on the continued utility of the transitional
input tax credit.

Following the theory of the CTA, the new enterprise should be able to claim the
transitional input tax credit because it has presumably paid taxes, VAT in particular,
in the purchase of the goods, materials and supplies in its beginning inventory.
Consequently, as the CTA held below, if the new enterprise has not paid VAT in its
purchases of such goods, materials and supplies, then it should not be able to claim
the tax credit. However, it is not always true that the acquisition of such goods,
materials and supplies entail the payment of taxes on the part of the new business.
In fact, this could occur as a matter of course by virtue of the operation of various
provisions of the NIRC, and not only on account of a specially legislated exemption.

Let us cite a few examples drawn from the New NIRC. If the goods or properties are
not acquired from a person in the course of trade or business, the transaction would
not be subject to VAT under Section 105.[31] The sale would be subject to capital
gains taxes under Section 24(D),[32] but since capital gains is a tax on passive
income it is the seller, not the buyer, who generally would shoulder the tax.

If the goods or properties are acquired through donation, the acquisition

would not be subject to VAT but to donors tax under Section 98 instead.[33] It is the
donor who would be liable to pay the donors tax,[34] and the donation would be

exempt if the donors total net gifts during the calendar year does not exceed
P100,000.00.[35]

If the goods or properties are acquired through testate or intestate

succession, the transfer would not be subject to VAT but liable instead for estate tax
under Title III of the New NIRC.[36] If the net estate does not exceed P200,000.00,
no estate tax would be assessed.[37]

The interpretation proffered by the CTA would exclude goods and properties which
are acquired through sale not in the ordinary course of trade or business, donation
or through succession, from the beginning inventory on which the transitional input
tax credit is based. This prospect all but highlights the ultimate absurdity of the
respondents' position. Again, nothing in the Old NIRC (or even the New NIRC) speaks
of such a possibility or qualifies the previous payment of VAT or any other taxes on
the goods, materials and supplies as a pre-requisite for inclusion in the beginning
inventory.

It is apparent that the transitional input tax credit operates to benefit newly VATregistered persons, whether or not they previously paid taxes in the acquisition of
their beginning inventory of goods, materials and supplies. During that period of
transition from non-VAT to VAT status, the transitional input tax credit serves to
alleviate the impact of the VAT on the taxpayer. At the very beginning, the VATregistered taxpayer is obliged to remit a significant portion of the income it derived
from its sales as output VAT. The transitional input tax credit mitigates this initial
diminution of the taxpayers income by affording the opportunity to offset the losses
incurred through the remittance of the output VAT at a stage when the person is yet
unable to credit input VAT payments.

There is another point that weighs against the CTAs interpretation. Under Section
105 of the Old NIRC, the rate of the transitional input tax credit is 8% of the value
of such inventory or the actual value-added tax paid on such goods, materials and
supplies, whichever is higher.[38] If indeed the transitional input tax credit is
premised on the previous payment of VAT, then it does not make sense to afford the
taxpayer the benefit of such credit based on 8% of the value of such inventory
should the same prove higher than the actual VAT paid. This intent that the CTA
alluded to could have been implemented with ease had the legislature shared such

intent by providing the actual VAT paid as the sole basis for the rate of the
transitional input tax credit.

The CTA harped on the circumstance that FBDC was excused from paying any tax
on the purchase of its properties from the national government, even claiming that
to allow the transitional input tax credit is "tantamount to giving an undeserved
bonus to real estate dealers similarly situated as [FBDC] which the Government
cannot afford to provide." Yet the tax laws in question, and all tax laws in general,
are designed to enforce uniform tax treatment to persons or classes of persons who
share minimum legislated standards. The common standard for the application of
the transitional input tax credit, as enacted by E.O. No. 273 and all subsequent tax
laws which reinforced or reintegrated the tax credit, is simply that the taxpayer in
question has become liable to VAT or has elected to be a VAT-registered person. E.O.
No. 273 and the subsequent tax laws are all decidedly neutral and accommodating
in ascertaining who should be entitled to the tax credit, and it behooves the CIR and
the CTA to adopt a similarly judicious perspective.

IV.

Given the fatal flaws in the theory offered by the CTA as supposedly underlying the
transitional input tax credit, is there any other basis to justify the limitations
imposed by the CIR through RR 7-95? We discern nothing more. As seen in our
discussion, there is no logic that coheres with either E.O. No. 273 or Rep. Act No.
7716 which supports the restriction imposed on real estate brokers and their ability
to claim the transitional input tax credit based on the value of their real properties.
In addition, the very idea of excluding the real properties itself from the beginning
inventory simply runs counter to what the transitional input tax credit seeks to
accomplish for persons engaged in the sale of goods, whether or not such goods
take the form of real properties or more mundane commodities.

Under Section 105, the beginning inventory of goods forms part of the valuation
of the transitional input tax credit. Goods, as commonly understood in the business
sense, refers to the product which the VAT-registered person offers for sale to the
public. With respect to real estate dealers, it is the real properties themselves which

constitute their goods. Such real properties are the operating assets of the real
estate dealer.

Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of goods or

properties such real properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business. Said definition was taken from
the very statutory language of Section 100 of the Old NIRC. By limiting the definition
of goods to improvements in Section 4.105-1, the BIR not only contravened the
definition of goods as provided in the Old NIRC, but also the definition which the
same revenue regulation itself has provided.

The Court of Tax Appeals claimed that under Section 105 of the Old NIRC the basis
for the inventory of goods, materials and supplies upon which the transitional input
VAT would be based shall be left to regulation by the appropriate administrative
authority. This is based on the phrase filing of an inventory as prescribed by
regulations found in Section 105. Nonetheless, Section 105 does include the
particular properties to be included in the inventory, namely goods, materials and
supplies. It is questionable whether the CIR has the power to actually redefine the
concept of goods, as she did when she excluded real properties from the class of
goods which real estate companies in the business of selling real properties may
include in their inventory. The authority to prescribe regulations can pertain to more
technical matters, such as how to appraise the value of the inventory or what
papers need to be filed to properly itemize the contents of such inventory. But such
authority cannot go as far as to amend Section 105 itself, which the Commissioner
had unfortunately accomplished in this case.

It is of course axiomatic that a rule or regulation must bear upon, and be consistent
with, the provisions of the enabling statute if such rule or regulation is to be valid.
[39] In case of conflict between a statute and an administrative order, the former
must prevail.[40] Indeed, the CIR has no power to limit the meaning and coverage
of the term goods in Section 105 of the Old NIRC absent statutory authority or
basis to make and justify such limitation. A contrary conclusion would mean the CIR
could very well moot the law or arrogate legislative authority unto himself by
retaining sole discretion to provide the definition and scope of the term goods.

V.

At this juncture, we turn to some of the points raised in the dissent of the
esteemed Justice Antonio T. Carpio.

The dissent adopts the CTAs thesis that the transitional input tax credit
applies only when taxes were previously paid on the properties in the beginning
inventory. Had the dissenting view won, it would have introduced a new requisite to
the application of the transitional input tax credit and required the taxpayer to
supply proof that it had previously paid taxes on the acquisition of goods, materials
and supplies comprising its beginning inventory. We have sufficiently rebutted this
thesis, but the dissent adds a twist to the argument by using the term presumptive
input tax credit to imply that the transitional input tax credit involves a
presumption that there was a previous payment of taxes.

Let us clarify the distinction between the presumptive input tax credit and the
transitional input tax credit. As with the transitional input tax credit, the
presumptive input tax credit is creditable against the output VAT. It necessarily has
come into existence in our tax structure only after the introduction of the VAT. As
quoted earlier,[41] E.O. No. 273 provided for a presumptive input tax credit as
one of the transitory measures in the shift from sales taxes to VAT, but such
presumptive input tax credit was never integrated in the NIRC itself. It was only in
1997, or eleven years after the VAT was first introduced, that the presumptive input
tax credit was first incorporated in the NIRC, more particularly in Section 111(B) of
the New NIRC. As borne out by the text of the provision,[42] it is plain that the
presumptive input tax credit is highly limited in application as it may be claimed
only by persons or firms engaged in the processing of sardines, mackerel and milk,
and in manufacturing refined sugar and cooking oil;[43] and public works
contractors.[44]

Clearly, for more than a decade now, the term presumptive input tax credit
has contemplated a particularly idiosyncratic tax credit far divorced from its original
usage in the transitory provisions of E.O. No. 273. There is utterly no sense then in
latching on to the term as having any significant meaning for the purpose of the
cases at bar.

The dissent, in arguing for the effectivity of Section 4.105-1 of RR 7-95, ratiocinates
in this manner: (1) Section 4.105-1 finds basis in Section 105 of the Old NIRC, which
provides that the input tax is allowed on the beginning inventory of goods,
materials and supplies; (2) input taxes must have been paid on such goods,

materials and supplies; (3) unlike real property itself, the improvements thereon
were already subject to VAT even prior to the passage of Rep. Act No. 7716; (4)
since no VAT was paid on the real property prior to the passage of Rep. Act No.
7716, it could not form part of the beginning inventory of goods, materials and
supplies.

This chain of premises have already been debunked. It is apparent that the dissent
believes that only those goods, materials and supplies on which input VAT was
paid could form the basis of valuation of the input tax credit. Thus, if the VATregistered person acquired all the goods, materials and supplies of the beginning
inventory through a sale not in the ordinary course of trade or business, or through
succession or donation, said person would be unable to receive a transitional input
tax credit. Yet even RR 7-95, which imposes the restriction only on real estate
dealers permits such other persons who obtained their beginning inventory through
tax-free means to claim the transitional input tax credit. The dissent thus betrays a
view that is even more radical and more misaligned with the language of the law
than that expressed by the CIR.

VI.

A final observation. Section 4.105.1 of RR No. 7-95, insofar as it disallows real

estate dealers from including the value of their real properties in the beginning
inventory of goods, materials and supplies, has in fact already been repealed. The
offending provisions were deleted with the enactment of Revenue Regulation No. 697 (RR 6-97) dated 2 January 1997, which amended RR 7-95.[45] The repeal of the
basis for the present assessments by RR 6-97 only highlights the continuing
absurdity of the position of the BIR towards FBDC.

FBDC points out that while the transactions involved in G.R. No. 158885 took place
during the effectivity of RR 7-95, the transactions involved in G.R. No. 170680 in
fact took place after RR No. 6-97 had taken effect. Indeed, the assessments subject
of G.R. No. 170680 were for the third quarter of 1997, or several months after the
effectivity of RR 6-97. That fact provides additional reason to sustain FBDCs claim
for refund of its 1997 Third Quarter VAT payments. Nevertheless, since the assailed
restrictions implemented by RR 7-95 were not sanctioned by law in the first place
there is no longer need to dwell on such fact.

WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court
of Tax Appeals and the Court of Appeals are REVERSED and SET ASIDE. Respondents
are hereby (1) restrained from collecting from petitioner the amount of
P28,413,783.00 representing the transitional input tax credit due it for the fourth
quarter of 1996; and (2) directed to refund to petitioner the amount of
P347,741,695.74 paid as output VAT for the third quarter of 1997 in light of the
persisting transitional input tax credit available to petitioner for the said quarter, or
to issue a tax credit corresponding to such amount. No pronouncement as to costs.

SO ORDERED.

G.R. No. 151135

July 2, 2004

CONTEX CORPORATION, petitioner,

vs.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

QUISUMBING, J.:
For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in CA-G.R.
SP No. 62823, which reversed and set aside the decision 2 dated October 13, 2000, of the
Court of Tax Appeals (CTA). The CTA had ordered the Commissioner of Internal Revenue
(CIR) to refund the sum of P683,061.90 to petitioner as erroneously paid input value-added
tax (VAT) or in the alternative, to issue a tax credit certificate for said amount. Petitioner also
assails the appellate courts Resolution,3 dated December 19, 2001, denying the motion for
reconsideration.
Petitioner is a domestic corporation engaged in the business of manufacturing hospital
textiles and garments and other hospital supplies for export. Petitioners place of business is
at the Subic Bay Freeport Zone (SBFZ). It is duly registered with the Subic Bay Metropolitan
Authority (SBMA) as a Subic Bay Freeport Enterprise, pursuant to the provisions of
Republic Act No. 7227.4 As an SBMA-registered firm, petitioner is exempt from all local and
national internal revenue taxes except for the preferential tax provided for in Section 12
(c)5 of Rep. Act No. 7227. Petitioner also registered with the Bureau of Internal Revenue
(BIR) as a non-VAT taxpayer under Certificate of Registration RDO Control No. 95-180000133.

From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and
materials necessary in the conduct of its manufacturing business. The suppliers of these
goods shifted unto petitioner the 10% VAT on the purchased items, which led the petitioner
to pay input taxes in the amounts of P539,411.88 and P504,057.49 for 1997 and 1998,
respectively.6
Acting on the belief that it was exempt from all national and local taxes, including VAT,
pursuant to Rep. Act No. 7227, petitioner filed two applications for tax refund or tax credit of
the VAT it paid. Mr. Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied the
first application letter, dated December 29, 1998.
Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax
refund/credit, this time directly with Atty. Alberto Pagabao, the regional director of BIR
Revenue Region No. 4. The second letter sought a refund or issuance of a tax credit
certificate in the amount of P1,108,307.72, representing erroneously paid input VAT for the
period January 1, 1997 to November 30, 1998.
When no response was forthcoming from the BIR Regional Director, petitioner then
elevated the matter to the Court of Tax Appeals, in a petition for review docketed as CTA
Case No. 5895. Petitioner stressed that Section 112(A) 7 if read in relation to Section 106(A)
(2)(a)8 of the National Internal Revenue Code, as amended and Section 12(b) 9 and (c) of
Rep. Act No. 7227 would show that it was not liable in any way for any value-added tax.
In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule
that claims for refund are strictly construed against the taxpayer. Since petitioner failed to
establish both its right to a tax refund or tax credit and its compliance with the rules on tax
refund as provided for in Sections 20410 and 22911 of the Tax Code, its claim should be
denied, according to the BIR.
On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:
WHEREFORE, in view of the foregoing, the Petition for Review is hereby
PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or in the
alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the sum
of P683,061.90, representing erroneously paid input VAT.
SO ORDERED.12
In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and
112(A) of the Tax Code. The tax court stressed that these provisions apply only to those
entities registered as VAT taxpayers whose sales are zero-rated. Petitioner does not fall
under this category, since it is a non-VAT taxpayer as evidenced by the Certificate of
Registration RDO Control No. 95-180-000133 issued by RDO Rosemarie Ragasa of BIR
RDO No. 18 of the Subic Bay Freeport Zone and thus it is exempt from VAT, pursuant to
Rep. Act No. 7227, said the CTA.
Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on
its purchases of supplies and materials. It pointed out that under Section 12(c) of Rep. Act

No. 7227 and the Implementing Rules and Regulations of the Bases Conversion and
Development Act of 1992, all that petitioner is required to pay as a SBFZ-registered
enterprise is a 5% preferential tax.
The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29,
1997 for being barred by the two-year prescriptive period under Section 229 of the Tax
Code. The tax court also limited the refund only to the input VAT paid by the petitioner on
the supplies and materials directly used by the petitioner in the manufacture of its goods. It
struck down all claims for input VAT paid on maintenance, office supplies, freight charges,
and all materials and supplies shipped or delivered to the petitioners Makati and Pasay City
offices.
Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the
CTA decision by the Court of Appeals. Respondent maintained that the exemption of Contex
Corp. under Rep. Act No. 7227 was limited only to direct taxes and not to indirect taxes
such as the input component of the VAT. The Commissioner pointed out that from its very
nature, the value-added tax is a burden passed on by a VAT registered person to the end
users; hence, the direct liability for the tax lies with the suppliers and not Contex.
Finding merit in the CIRs arguments, the appellate court decided CA-G.R. SP No. 62823 in
his favor, thus:
WHEREFORE, premises considered, the appealed decision is hereby REVERSED
AND SET ASIDE. Contexs claim for refund of erroneously paid taxes is DENIED
accordingly.
SO ORDERED.13
In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on
the importation of raw materials, capital, and equipment of SBFZ-registered enterprises
under Rep. Act No. 7227 and its implementing rules covers only "the VAT imposable under
Section 107 of the [Tax Code], which is a direct liability of the importer, and in no way
includes the value-added tax of the seller-exporter the burden of which was passed on to
the importer as an additional costs of the goods." 14 This was because the exemption
granted by Rep. Act No. 7227 relates to the act of importation and Section 107 15 of the Tax
Code specifically imposes the VAT on importations. The appellate court applied the principle
that tax exemptions are strictly construed against the taxpayer. The Court of Appeals
pointed out that under the implementing rules of Rep. Act No. 7227, the exemption of SBFZregistered enterprises from internal revenue taxes is qualified as pertaining only to those for
which they may be directly liable. It then stated that apparently, the legislative intent behind
Rep. Act No. 7227 was to grant exemptions only to direct taxes, which SBFZ-registered
enterprise may be liable for and only in connection with their importation of raw materials,
capital, and equipment as well as the sale of their goods and services.
Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion
was denied.
Hence, the instant petition raising as issues for our resolution the following:

A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL

INTERNAL REVENUE TAXES PROVIDED IN REPUBLIC ACT NO. 7227 COVERS
THE VALUE ADDED TAX PAID BY PETITIONER, A SUBIC BAY FREEPORT
ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND MATERIALS.
B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT
PETITIONER IS ENTITLED TO A TAX CREDIT OR REFUND OF THE VAT PAID ON
ITS PURCHASES OF SUPPLIES AND RAW MATERIALS FOR THE YEARS 1997
AND 1998.16
Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding
of the Court of Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not
apply to petitioner as a purchaser; and (2) the entitlement of the petitioner to a tax refund on
its purchases of supplies and raw materials for 1997 and 1998.
On the first issue, petitioner argues that the appellate courts restrictive interpretation of
petitioners VAT exemption as limited to those covered by Section 107 of the Tax Code is
erroneous and devoid of legal basis. It contends that the provisions of Rep. Act No. 7227
clearly and unambiguously mandate that no local and national taxes shall be imposed upon
SBFZ-registered firms and hence, said law should govern the case. Petitioner calls our
attention to regulations issued by both the SBMA and BIR clearly and categorically
providing that the tax exemption provided for by Rep. Act No. 7227 includes exemption from
the imposition of VAT on purchases of supplies and materials.
The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does
grant tax exemptions, such grant is not all-encompassing but is limited only to those taxes
for which a SBFZ-registered business may be directly liable. Hence, SBFZ locators are not
relieved from the indirect taxes that may be shifted to them by a VAT-registered seller.
At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of
tax paid on the goods, properties or services bought, transferred, or leased may be shifted
or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee. 17 Unlike a
direct tax, such as the income tax, which primarily taxes an individuals ability to pay based
on his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of
goods, services, or certain transactions involving the same. The VAT, thus, forms a
substantial portion of consumer expenditures.
Further, in indirect taxation, there is a need to distinguish between the liability for the tax
and the burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or
passed on by the seller to the buyer. What is transferred in such instances is not the liability
for the tax, but the tax burden. In adding or including the VAT due to the selling price, the
seller remains the person primarily and legally liable for the payment of the tax. What is
shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of
the tax.18 Stated differently, a seller who is directly and legally liable for payment of an
indirect tax, such as the VAT on goods or services is not necessarily the person who
ultimately bears the burden of the same tax. It is the final purchaser or consumer of such
goods or services who, although not directly and legally liable for the payment thereof,
ultimately bears the burden of the tax. 19

Exemptions from VAT are granted by express provision of the Tax Code or special laws.
Under VAT, the transaction can have preferential treatment in the following ways:
(a) VAT Exemption. An exemption means that the sale of goods or properties and/or
services and the use or lease of properties is not subject to VAT (output tax) and the
seller is not allowed any tax credit on VAT (input tax) previously paid. 20 This is a case
wherein the VAT is removed at the exempt stage (i.e., at the point of the sale, barter
or exchange of the goods or properties).
The person making the exempt sale of goods, properties or services shall not bill any
output tax to his customers because the said transaction is not subject to VAT. On
the other hand, a VAT-registered purchaser of VAT-exempt goods/properties or
services which are exempt from VAT is not entitled to any input tax on such purchase
despite the issuance of a VAT invoice or receipt. 21
(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject
to 0% rate, meaning the tax burden is not passed on to the purchaser. A zero-rated
sale by a VAT-registered person, which is a taxable transaction for VAT purposes,
shall not result in any output tax. However, the input tax on his purchases of goods,
properties or services related to such zero-rated sale shall be available as tax credit
or refund in accordance with these regulations. 22
Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast,
exemption only removes the VAT at the exempt stage, and it will actually increase, rather
than reduce the total taxes paid by the exempt firms business or non-retail customers. It is
for this reason that a sharp distinction must be made between zero-rating and exemption in
designating a value-added tax.23
Apropos, the petitioners claim to VAT exemption in the instant case for its purchases of
supplies and raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No.
7227, which basically exempts them from all national and local internal revenue taxes,
including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95. 24
On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not
controverted by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per
Certificate of Registration25 issued by the BIR. As such, it is exempt from VAT on all its sales
and importations of goods and services.
Petitioners claim, however, for exemption from VAT for its purchases of supplies and raw
materials is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities
can claim Input VAT Credit/Refund.
The point of contention here is whether or not the petitioner may claim a refund on the Input
VAT erroneously passed on to it by its suppliers.
While it is true that the petitioner should not have been liable for the VAT inadvertently
passed on to it by its supplier since such is a zero-rated sale on the part of the supplier, the
petitioner is not the proper party to claim such VAT refund.

Section 4.100-2 of BIRs Revenue Regulations 7-95, as amended, or the "Consolidated

Value-Added Tax Regulations" provide:
Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which
is a taxable transaction for VAT purposes, shall not result in any output tax. However,
the input tax on his purchases of goods, properties or services related to such zerorated sale shall be available as tax credit or refund in accordance with these
regulations.
The following sales by VAT-registered persons shall be subject to 0%:
(a) Export Sales
"Export Sales" shall mean
...
(5) Those considered export sales under Articles 23 and 77 of Executive
Order No. 226, otherwise known as the Omnibus Investments Code of 1987,
and other special laws, e.g. Republic Act No. 7227, otherwise known as the
Bases Conversion and Development Act of 1992.
...
(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No.
7227 duly registered and accredited enterprises with Subic Bay Metropolitan
Authority (SBMA) and Clark Development Authority (CDA), R. A. No. 7916,
Philippine Economic Zone Authority (PEZA), or international agreements, e.g. Asian
Development Bank (ADB), International Rice Research Institute (IRRI), etc. to which
the Philippines is a signatory effectively subject such sales to zero-rate."
Since the transaction is deemed a zero-rated sale, petitioners supplier may claim an Input
VAT credit with no corresponding Output VAT liability. Congruently, no Output VAT may be
passed on to the petitioner.
On the second issue, it may not be amiss to re-emphasize that the petitioner is registered
as a NON-VAT taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not
allowed any tax credit on VAT (input tax) previously paid. In fine, even if we are to assume
that exemption from the burden of VAT on petitioners purchases did exist, petitioner is still
not entitled to any tax credit or refund on the input tax previously paid as petitioner is an
exempt VAT taxpayer.
Rather, it is the petitioners suppliers who are the proper parties to claim the tax credit and
accordingly refund the petitioner of the VAT erroneously passed on to the latter.
Accordingly, we find that the Court of Appeals did not commit any reversible error of law in
holding that petitioners VAT exemption under Rep. Act No. 7227 is limited to the VAT on

which it is directly liable as a seller and hence, it cannot claim any refund or exemption for
any input VAT it paid, if any, on its purchases of raw materials and supplies.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3,
2001, of the Court of Appeals in CA-G.R. SP No. 62823, as well as its Resolution of
December 19, 2001 are AFFIRMED. No pronouncement as to costs.
SO ORDERED.

THIRD DIVISION

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION,

Petitioner,

- versus-

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

G.R. Nos. 141104 & 148763

Present:

YNARES-SANTIAGO, J.
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO, and
NACHURA, JJ.

Promulgated:

June 8, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

Before this Court are the consolidated cases involving the unsuccessful claims of
herein petitioner Atlas Consolidated Mining and Development Corporation
(petitioner corporation) for the refund/credit of the input Value Added Tax (VAT) on

its purchases of capital goods and on its zero-rated sales in the taxable quarters of
the years 1990 and 1992, the denial of which by the Court of Tax Appeals (CTA), was
affirmed by the Court of Appeals.

Petitioner corporation is engaged in the business of mining, production, and

sale of various mineral products, such as gold, pyrite, and copper concentrates. It is
a VAT-registered taxpayer. It was initially issued VAT Registration No. 32-A-6002224, dated 1 January 1988, but it had to register anew with the appropriate
revenue district office (RDO) of the Bureau of Internal Revenue (BIR) when it moved
its principal place of business, and it was re-issued VAT Registration No. 32-0004622, dated 15 August 1990.[1]

G.R. No. 141104

Petitioner corporation filed with the BIR its VAT Return for the first quarter of
1992.[2] It alleged that it likewise filed with the BIR the corresponding application
for the refund/credit of its input VAT on its purchases of capital goods and on its
zero-rated sales in the amount of P26,030,460.00.[3] When its application for
refund/credit remained unresolved by the BIR, petitioner corporation filed on 20
April 1994 its Petition for Review with the CTA, docketed as CTA Case No. 5102.
Asserting that it was a zero-rated VAT person, it prayed that the CTA order herein
respondent Commissioner of Internal Revenue (respondent Commissioner) to
refund/credit petitioner corporation with the amount of P26,030,460.00,
representing the input VAT it had paid for the first quarter of 1992. The respondent
Commissioner opposed and sought the dismissal of the petition for review of
petitioner corporation for failure to state a cause of action. After due trial, the CTA
promulgated its Decision[4] on 24 November 1997 with the following disposition

WHEREFORE, in view of the foregoing, the instant claim for refund is hereby DENIED
on the ground of prescription, insufficiency of evidence and failure to comply with
Section 230 of the Tax Code, as amended. Accordingly, the petition at bar is hereby
DISMISSED for lack of merit.

The CTA denied the motion for reconsideration of petitioner corporation in a

Resolution[5] dated 15 April 1998.

When the case was elevated to the Court of Appeals as CA-G.R. SP No. 47607,
the appellate court, in its Decision,[6] dated 6 July 1999, dismissed the appeal of
petitioner corporation, finding no reversible error in the CTA Decision, dated 24
November 1997. The subsequent motion for reconsideration of petitioner
corporation was also denied by the Court of Appeals in its Resolution,[7] dated 14
December 1999.

Thus, petitioner corporation comes before this Court, via a Petition for Review
on Certiorari under Rule 45 of the Revised Rules of Court, assigning the following
errors committed by the Court of Appeals

THE COURT OF APPEALS ERRED IN AFFIRMING THE REQUIREMENT OF REVENUE

REGULATIONS NO. 2-88 THAT AT LEAST 70% OF THE SALES OF THE [BOARD OF
INVESTMENTS (BOI)]-REGISTERED FIRM MUST CONSIST OF EXPORTS FOR ZERORATING TO APPLY.

II

THE COURT OF APPEALS ERRED IN AFFIRMING THAT PETITIONER FAILED TO SUBMIT

SUFFICIENT EVIDENCE SINCE FAILURE TO SUBMIT PHOTOCOPIES OF VAT INVOICES
AND RECEIPTS IS NOT A FATAL DEFECT.

III

THE COURT OF APPEALS ERRED IN RULING THAT THE JUDICIAL CLAIM WAS FILED
BEYOND THE PRESCRIPTIVE PERIOD SINCE THE JUDICIAL CLAIM WAS FILED WITHIN
TWO (2) YEARS FROM THE FILING OF THE VAT RETURN.

IV

THE COURT OF APPEALS ERRED IN NOT ORDERING CTA TO ALLOW THE RE-OPENING
OF THE CASE FOR PETITIONER TO PRESENT ADDITIONAL EVIDENCE.[8]

G.R. No. 148763

G.R. No. 148763 involves almost the same set of facts as in G.R. No. 141104
presented above, except that it relates to the claims of petitioner corporation for
refund/credit of input VAT on its purchases of capital goods and on its zero-rated
sales made in the last three taxable quarters of 1990.

Petitioner corporation filed with the BIR its VAT Returns for the second, third, and
fourth quarters of 1990, on 20 July 1990, 18 October 1990, and 20 January 1991,
respectively. It submitted separate applications to the BIR for the refund/credit of
the input VAT paid on its purchases of capital goods and on its zero-rated sales, the
details of which are presented as follows

Date of Application
Period Covered
Amount Applied For

21 August 1990

2nd Quarter, 1990

54,014,722.04

21 November 1990
3rd Quarter, 1990

75,304,774.77
19 February 1991
4th Quarter, 1990
43,829,766.10

When the BIR failed to act on its applications for refund/credit, petitioner
corporation filed with the CTA the following petitions for review

Date Filed
Period Covered
CTA Case No.

20 July 1992

2nd Quarter, 1990

4831
9 October 1992
3rd Quarter, 1990
4859
14 January 1993
4th Quarter, 1990
4944

which were eventually consolidated. The respondent Commissioner contested the

foregoing Petitions and prayed for the dismissal thereof. The CTA ruled in favor of

respondent Commissioner and in its Decision,[9] dated 30 October 1997, dismissed

the Petitions mainly on the ground that the prescriptive periods for filing the same
had expired. In a Resolution,[10] dated 15 January 1998, the CTA denied the motion
for reconsideration of petitioner corporation since the latter presented no new
matter not already discussed in the courts prior Decision. In the same Resolution,
the CTA also denied the alternative prayer of petitioner corporation for a new trial
since it did not fall under any of the grounds cited under Section 1, Rule 37 of the
Revised Rules of Court, and it was not supported by affidavits of merits required by
Section 2 of the same Rule.

Petitioner corporation appealed its case to the Court of Appeals, where it was
docketed as CA-G.R. SP No. 46718. On 15 September 2000, the Court of Appeals
rendered its Decision,[11] finding that although petitioner corporation timely filed
its Petitions for Review with the CTA, it still failed to substantiate its claims for the
refund/credit of its input VAT for the last three quarters of 1990. In its Resolution,
[12] dated 27 June 2001, the appellate court denied the motion for reconsideration
of petitioner corporation, finding no cogent reason to reverse its previous Decision.

Aggrieved, petitioner corporation filed with this Court another Petition for
Review on Certiorari under Rule 45 of the Revised Rules of Court, docketed as G.R.
No. 148763, raising the following issues

A.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONERS

CLAIM IS BARRED UNDER REVENUE REGULATIONS NOS. 2-88 AND 3-88 I.E., FOR
FAILURE TO PTOVE [sic] THE 70% THRESHOLD FOR ZERO-RATING TO APPLY AND
FOR FAILURE TO ESTABLISH THE FACTUAL BASIS FOR THE INSTANT CLAIM.

B.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN FINDING THAT THERE IS NO

BASIS TO GRANT PETITIONERS MOTION FOR NEW TRIAL.

There being similarity of parties, subject matter, and issues, G.R. Nos. 141104 and
148763 were consolidated pursuant to a Resolution, dated 4 September 2006,
issued by this Court. The ruling of this Court in these cases hinges on how it will
resolve the following key issues: (1) prescription of the claims of petitioner
corporation for input VAT refund/credit; (2) validity and applicability of Revenue
Regulations No. 2-88 imposing upon petitioner corporation, as a requirement for the
VAT zero-rating of its sales, the burden of proving that the buyer companies were
not just BOI-registered but also exporting 70% of their total annual production; (3)
sufficiency of evidence presented by petitioner corporation to establish that it is
indeed entitled to input VAT refund/credit; and (4) legal ground for granting the
motion of petitioner corporation for re-opening of its cases or holding of new trial
before the CTA so it could be given the opportunity to present the required
evidence.

Prescription

The prescriptive period for filing an application for tax refund/credit of input
VAT on zero-rated sales made in 1990 and 1992 was governed by Section 106(b)
and (c) of the Tax Code of 1977, as amended, which provided that

SEC. 106. Refunds or tax credits of input tax. x x x.

(b) Zero-rated or effectively zero-rated sales. Any person, except those covered by
paragraph (a) above, whose sales are zero-rated may, within two years after the
close of the quarter when such sales were made, apply for the issuance of a tax
credit certificate or refund of the input taxes attributable to such sales to the extent
that such input tax has not been applied against output tax.

xxxx

(e) Period within which refund of input taxes may be made by the Commissioner.
The Commissioner shall refund input taxes within 60 days from the date the
application for refund was filed with him or his duly authorized representative. No
refund of input taxes shall be allowed unless the VAT-registered person files an

application for refund within the period prescribed in paragraphs (a), (b) and (c) as
the case may be.

By a plain reading of the foregoing provision, the two-year prescriptive period for
filing the application for refund/credit of input VAT on zero-rated sales shall be
determined from the close of the quarter when such sales were made.

Petitioner contends, however, that the said two-year prescriptive period

should be counted, not from the close of the quarter when the zero-rated sales were
made, but from the date of filing of the quarterly VAT return and payment of the tax
due 20 days thereafter, in accordance with Section 110(b) of the Tax Code of 1977,
as amended, quoted as follows

SEC. 110. Return and payment of value-added tax. x x x.

(b) Time for filing of return and payment of tax. The return shall be filed and the
tax paid within 20 days following the end of each quarter specifically prescribed for
a VAT-registered person under regulations to be promulgated by the Secretary of
Finance: Provided, however, That any person whose registration is cancelled in
accordance with paragraph (e) of Section 107 shall file a return within 20 days from
the cancellation of such registration.

It is already well-settled that the two-year prescriptive period for instituting a

suit or proceeding for recovery of corporate income tax erroneously or illegally paid
under Section 230[13] of the Tax Code of 1977, as amended, was to be counted
from the filing of the final adjustment return. This Court already set out in ACCRA
Investments Corporation v. Court of Appeals,[14] the rationale for such a rule, thus

Clearly, there is the need to file a return first before a claim for refund can
prosper inasmuch as the respondent Commissioner by his own rules and regulations
mandates that the corporate taxpayer opting to ask for a refund must show in its
final adjustment return the income it received from all sources and the amount of

withholding taxes remitted by its withholding agents to the Bureau of Internal

Revenue. The petitioner corporation filed its final adjustment return for its 1981
taxable year on April 15, 1982. In our Resolution dated April 10, 1989 in the case of
Commissioner of Internal Revenue v. Asia Australia Express, Ltd. (G.R. No. 85956),
we ruled that the two-year prescriptive period within which to claim a refund
commences to run, at the earliest, on the date of the filing of the adjusted final tax
return. Hence, the petitioner corporation had until April 15, 1984 within which to file
its claim for refund.

Considering that ACCRAIN filed its claim for refund as early as December 29,
1983 with the respondent Commissioner who failed to take any action thereon and
considering further that the non-resolution of its claim for refund with the said
Commissioner prompted ACCRAIN to reiterate its claim before the Court of Tax
Appeals through a petition for review on April 13, 1984, the respondent appellate
court manifestly committed a reversible error in affirming the holding of the tax
court that ACCRAIN's claim for refund was barred by prescription.

It bears emphasis at this point that the rationale in computing the two-year
prescriptive period with respect to the petitioner corporation's claim for refund from
the time it filed its final adjustment return is the fact that it was only then that
ACCRAIN could ascertain whether it made profits or incurred losses in its business
operations. The "date of payment", therefore, in ACCRAIN's case was when its tax
liability, if any, fell due upon its filing of its final adjustment return on April 15, 1982.

In another case, Commissioner of Internal Revenue v. TMX Sales, Inc.,[15] this Court
further expounded on the same matter

A re-examination of the aforesaid minute resolution of the Court in the Pacific

Procon case is warranted under the circumstances to lay down a categorical
pronouncement on the question as to when the two-year prescriptive period in
cases of quarterly corporate income tax commences to run. A full-blown decision in
this regard is rendered more imperative in the light of the reversal by the Court of
Tax Appeals in the instant case of its previous ruling in the Pacific Procon case.

Section 292 (now Section 230) of the National Internal Revenue Code should be
interpreted in relation to the other provisions of the Tax Code in order to give effect
the legislative intent and to avoid an application of the law which may lead to
inconvenience and absurdity. In the case of People vs. Rivera (59 Phil. 236 [1933]),
this Court stated that statutes should receive a sensible construction, such as will
give effect to the legislative intention and so as to avoid an unjust or an absurd
conclusion. INTERPRETATIO TALIS IN AMBIGUIS SEMPER FRIENDA EST, UT EVITATUR
INCONVENIENS ET ABSURDUM. Where there is ambiguity, such interpretation as will
avoid inconvenience and absurdity is to be adopted. Furthermore, courts must give
effect to the general legislative intent that can be discovered from or is unraveled
by the four corners of the statute, and in order to discover said intent, the whole
statute, and not only a particular provision thereof, should be considered. (Manila
Lodge No. 761, et al. vs. Court of Appeals, et al. 73 SCRA 162 [1976) Every section,
provision or clause of the statute must be expounded by reference to each other in
order to arrive at the effect contemplated by the legislature. The intention of the
legislator must be ascertained from the whole text of the law and every part of the
act is to be taken into view. (Chartered Bank vs. Imperial, 48 Phil. 931 [1921]; Lopez
vs. El Hoger Filipino, 47 Phil. 249, cited in Aboitiz Shipping Corporation vs. City of
Cebu, 13 SCRA 449 [1965]).

Thus, in resolving the instant case, it is necessary that we consider not only Section
292 (now Section 230) of the National Internal Revenue Code but also the other
provisions of the Tax Code, particularly Sections 84, 85 (now both incorporated as
Section 68), Section 86 (now Section 70) and Section 87 (now Section 69) on
Quarterly Corporate Income Tax Payment and Section 321 (now Section 232) on
keeping of books of accounts. All these provisions of the Tax Code should be
harmonized with each other.

xxxx

Therefore, the filing of a quarterly income tax returns required in Section 85 (now
Section 68) and implemented per BIR Form 1702-Q and payment of quarterly
income tax should only be considered mere installments of the annual tax due.
These quarterly tax payments which are computed based on the cumulative figures
of gross receipts and deductions in order to arrive at a net taxable income, should
be treated as advances or portions of the annual income tax due, to be adjusted at
the end of the calendar or fiscal year. This is reinforced by Section 87 (now Section
69) which provides for the filing of adjustment returns and final payment of income
tax. Consequently, the two-year prescriptive period provided in Section 292 (now

Section 230) of the Tax Code should be computed from the time of filing the
Adjustment Return or Annual Income Tax Return and final payment of income tax.

In the case of Collector of Internal Revenue vs. Antonio Prieto (2 SCRA 1007 [1961]),
this Court held that when a tax is paid in installments, the prescriptive period of two
years provided in Section 306 (Section 292) of the National Internal Revenue Code
should be counted from the date of the final payment. This ruling is reiterated in
Commissioner of Internal Revenue vs. Carlos Palanca (18 SCRA 496 [1966]), wherein
this Court stated that where the tax account was paid on installment, the
computation of the two-year prescriptive period under Section 306 (Section 292) of
the Tax Code, should be from the date of the last installment.

In the instant case, TMX Sales, Inc. filed a suit for a refund on March 14, 1984. Since
the two-year prescriptive period should be counted from the filing of the Adjustment
Return on April 15,1982, TMX Sales, Inc. is not yet barred by prescription.

The very same reasons set forth in the afore-cited cases concerning the two-year
prescriptive period for claims for refund of illegally or erroneously collected income
tax may also apply to the Petitions at bar involving the same prescriptive period for
claims for refund/credit of input VAT on zero-rated sales.

It is true that unlike corporate income tax, which is reported and paid on installment
every quarter, but is eventually subjected to a final adjustment at the end of the
taxable year, VAT is computed and paid on a purely quarterly basis without need for
a final adjustment at the end of the taxable year. However, it is also equally true
that until and unless the VAT-registered taxpayer prepares and submits to the BIR its
quarterly VAT return, there is no way of knowing with certainty just how much input
VAT[16] the taxpayer may apply against its output VAT;[17] how much output VAT it
is due to pay for the quarter or how much excess input VAT it may carry-over to the
following quarter; or how much of its input VAT it may claim as refund/credit. It
should be recalled that not only may a VAT-registered taxpayer directly apply
against his output VAT due the input VAT it had paid on its importation or local
purchases of goods and services during the quarter; the taxpayer is also given the
option to either (1) carry over any excess input VAT to the succeeding quarters for
application against its future output VAT liabilities, or (2) file an application for
refund or issuance of a tax credit certificate covering the amount of such input VAT.
[18] Hence, even in the absence of a final adjustment return, the determination of

any output VAT payable necessarily requires that the VAT-registered taxpayer make
adjustments in its VAT return every quarter, taking into consideration the input VAT
which are creditable for the present quarter or had been carried over from the
previous quarters.

Moreover, when claiming refund/credit, the VAT-registered taxpayer must be able to

establish that it does have refundable or creditable input VAT, and the same has not
been applied against its output VAT liabilities information which are supposed to
be reflected in the taxpayers VAT returns. Thus, an application for refund/credit
must be accompanied by copies of the taxpayers VAT return/s for the taxable
quarter/s concerned.

Lastly, although the taxpayers refundable or creditable input VAT may not be
considered as illegally or erroneously collected, its refund/credit is a privilege
extended to qualified and registered taxpayers by the very VAT system adopted by
the Legislature. Such input VAT, the same as any illegally or erroneously collected
national internal revenue tax, consists of monetary amounts which are currently in
the hands of the government but must rightfully be returned to the taxpayer.
Therefore, whether claiming refund/credit of illegally or erroneously collected
national internal revenue tax, or input VAT, the taxpayer must be given equal
opportunity for filing and pursuing its claim.

For the foregoing reasons, it is more practical and reasonable to count the two-year
prescriptive period for filing a claim for refund/credit of input VAT on zero-rated
sales from the date of filing of the return and payment of the tax due which,
according to the law then existing, should be made within 20 days from the end of
each quarter. Having established thus, the relevant dates in the instant cases are
summarized and reproduced below

Period Covered
Date of Filing
(Return w/ BIR)

Date of Filing
(Application w/ BIR)
Date of Filing
(Case w/ CTA)

2nd Quarter, 1990

20 July 1990

21 August 1990

20 July 1992
3rd Quarter, 1990
18 October 1990
21 November 1990
9 October 1992
4th Quarter, 1990
20 January 1991
19 February 1991
14 January 1993
1st Quarter, 1992
20 April 1992
-20 April 1994

The above table readily shows that the administrative and judicial claims of
petitioner corporation for refund of its input VAT on its zero-rated sales for the last
three quarters of 1990 were all filed within the prescriptive period.

However, the same cannot be said for the claim of petitioner corporation for refund
of its input VAT on its zero-rated sales for the first quarter of 1992. Even though it
may seem that petitioner corporation filed in time its judicial claim with the CTA,
there is no showing that it had previously filed an administrative claim with the BIR.
Section 106(e) of the Tax Code of 1977, as amended, explicitly provided that no
refund of input VAT shall be allowed unless the VAT-registered taxpayer filed an
application for refund with respondent Commissioner within the two-year
prescriptive period. The application of petitioner corporation for refund/credit of its
input VAT for the first quarter of 1992 was not only unsigned by its supposed
authorized representative, Ma. Paz R. Semilla, Manager-Finance and Treasury, but it
was not dated, stamped, and initialed by the BIR official who purportedly received
the same. The CTA, in its Decision,[19] dated 24 November 1997, in CTA Case No.
5102, made the following observations

This Court, likewise, rejects any probative value of the Application for Tax
Credit/Refund of VAT Paid (BIR Form No. 2552) [Exhibit B] formally offered in
evidence by the petitioner on account of the fact that it does not bear the BIR
stamp showing the date when such application was filed together with the signature
or initial of the receiving officer of respondents Bureau. Worse still, it does not
show the date of application and the signature of a certain Ma. Paz R. Semilla
indicated in the form who appears to be petitioners authorized filer.

A review of the records reveal that the original of the aforecited application was lost
during the time petitioner transferred its office (TSN, p. 6, Hearing of December 9,
1994). Attempt was made to prove that petitioner exerted efforts to recover the
original copy, but to no avail. Despite this, however, We observe that petitioner
completely failed to establish the missing dates and signatures abovementioned.
On this score, said application has no probative value in demonstrating the fact of
its filing within two years after the [filing of the VAT return for the quarter] when
petitioners sales of goods were made as prescribed under Section 106(b) of the Tax
Code. We believe thus that petitioner failed to file an application for refund in due
form and within the legal period set by law at the administrative level. Hence, the
case at bar has failed to satisfy the requirement on the prior filing of an application
for refund with the respondent before the commencement of a judicial claim for
refund, as prescribed under Section 230 of the Tax Code. This fact constitutes
another one of the many reasons for not granting petitioners judicial claim.

As pointed out by the CTA, in serious doubt is not only the fact of whether petitioner
corporation timely filed its administrative claim for refund of its input VAT for the
first quarter of 1992, but also whether petitioner corporation actually filed such
administrative claim in the first place. For failing to prove that it had earlier filed
with the BIR an application for refund/credit of its input VAT for the first quarter of
1992, within the period prescribed by law, then the case instituted by petitioner
corporation with the CTA for the refund/credit of the very same tax cannot prosper.

Revenue Regulations No. 2-88 and the 70% export requirement

Under Section 100(a) of the Tax Code of 1977, as amended, a 10% VAT was
imposed on the gross selling price or gross value in money of goods sold, bartered
or exchanged. Yet, the same provision subjected the following sales made by VATregistered persons to 0% VAT

(1) Export sales; and

(2) Sales to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such sales to
zero-rate.

Export Sales means the sale and shipment or exportation of goods from the
Philippines to a foreign country, irrespective of any shipping arrangement that may
be agreed upon which may influence or determine the transfer of ownership of the
goods so exported, or foreign currency denominated sales. Foreign currency
denominated sales, means sales to nonresidents of goods assembled or
manufactured in the Philippines, for delivery to residents in the Philippines and paid
for in convertible foreign currency remitted through the banking system in the
Philippines.

These are termed zero-rated sales. A zero-rated sale is still considered a taxable
transaction for VAT purposes, although the VAT rate applied is 0%. A sale by a VAT-

registered taxpayer of goods and/or services taxed at 0% shall not result in any
output VAT, while the input VAT on its purchases of goods or services related to such
zero-rated sale shall be available as tax credit or refund.[20]

Petitioner corporation questions the validity of Revenue Regulations No. 2-88

averring that the said regulations imposed additional requirements, not found in the
law itself, for the zero-rating of its sales to Philippine Smelting and Refining
Corporation (PASAR) and Philippine Phosphate, Inc. (PHILPHOS), both of which are
registered not only with the BOI, but also with the then Export Processing Zone
Authority (EPZA).[21]

The contentious provisions of Revenue Regulations No. 2-88 read

SEC. 2. Zero-rating. (a) Sales of raw materials to BOI-registered exporters. Sales

of raw materials to export-oriented BOI-registered enterprises whose export sales,
under rules and regulations of the Board of Investments, exceed seventy percent
(70%) of total annual production, shall be subject to zero-rate under the following
conditions:

(1) The seller shall file an application with the BIR, ATTN.: Division, applying for
zero-rating for each and every separate buyer, in accordance with Section 8(d) of
Revenue Regulations No. 5-87. The application should be accompanied with a
favorable recommendation from the Board of Investments.

(2) The raw materials sold are to be used exclusively by the buyer in the
manufacture, processing or repacking of his own registered export product;

(3) The words Zero-Rated Sales shall be prominently indicated in the sales
invoice. The exporter (buyer) can no longer claim from the Bureau of Internal
Revenue or any other government office tax credits on their zero-rated purchases;

(b) Sales of raw materials to foreign buyer. Sales of raw materials to a nonresident
foreign buyer for delivery to a resident local export-oriented BOI-registered
enterprise to be used in manufacturing, processing or repacking of the said buyers

goods and paid for in foreign currency, inwardly remitted in accordance with Central
Bank rules and regulations shall be subject to zero-rate.

It is the position of the respondent Commissioner, affirmed by the CTA and the Court
of Appeals, that Section 2 of Revenue Regulations No. 2-88 should be applied in the
cases at bar; and to be entitled to the zero-rating of its sales to PASAR and
PHILPHOS, petitioner corporation, as a VAT-registered seller, must be able to prove
not only that PASAR and PHILPHOS are BOI-registered corporations, but also that
more than 70% of the total annual production of these corporations are actually
exported. Revenue Regulations No. 2-88 merely echoed the requirement imposed
by the BOI on export-oriented corporations registered with it.

While this Court is not prepared to strike down the validity of Revenue
Regulations No. 2-88, it finds that its application must be limited and placed in the
proper context. Note that Section 2 of Revenue Regulations No. 2-88 referred only
to the zero-rated sales of raw materials to export-oriented BOI-registered
enterprises whose export sales, under BOI rules and regulations, should exceed
seventy percent (70%) of their total annual production.

Section 2 of Revenue Regulations No. 2-88, should not have been applied to
the zero-rating of the sales made by petitioner corporation to PASAR and PHILPHOS.
At the onset, it must be emphasized that PASAR and PHILPHOS, in addition to being
registered with the BOI, were also registered with the EPZA and located within an
export-processing zone. Petitioner corporation does not claim that its sales to
PASAR and PHILPHOS are zero-rated on the basis that said sales were made to
export-oriented BOI-registered corporations, but rather, on the basis that the sales
were made to EPZA-registered enterprises operating within export processing zones.
Although sales to export-oriented BOI-registered enterprises and sales to EPZAregistered enterprises located within export processing zones were both deemed
export sales, which, under Section 100(a) of the Tax Code of 1977, as amended,
shall be subject to 0% VAT distinction must be made between these two types of
sales because each may have different substantiation requirements.

The Tax Code of 1977, as amended, gave a limited definition of export sales, to wit:
The sale and shipment or exportation of goods from the Philippines to a foreign
country, irrespective of any shipping arrangement that may be agreed upon which
may influence or determine the transfer of ownership of the goods so exported, or

foreign currency denominated sales. Executive Order No. 226, otherwise known as
the Omnibus Investments Code of 1987 - which, in the years concerned (i.e., 1990
and 1992), governed enterprises registered with both the BOI and EPZA, provided a
more comprehensive definition of export sales, as quoted below:

ART. 23. Export sales shall mean the Philippine port F.O.B. value, determined
from invoices, bills of lading, inward letters of credit, landing certificates, and other
commercial documents, of export products exported directly by a registered export
producer or the net selling price of export product sold by a registered export
producer or to an export trader that subsequently exports the same: Provided, That
sales of export products to another producer or to an export trader shall only be
deemed export sales when actually exported by the latter, as evidenced by landing
certificates of similar commercial documents: Provided, further, That without actual
exportation the following shall be considered constructively exported for purposes
of this provision: (1) sales to bonded manufacturing warehouses of export-oriented
manufacturers; (2) sales to export processing zones; (3) sales to registered export
traders operating bonded trading warehouses supplying raw materials used in the
manufacture of export products under guidelines to be set by the Board in
consultation with the Bureau of Internal Revenue and the Bureau of Customs; (4)
sales to foreign military bases, diplomatic missions and other agencies and/or
instrumentalities granted tax immunities, of locally manufactured, assembled or
repacked products whether paid for in foreign currency or not: Provided, further,
That export sales of registered export trader may include commission income; and
Provided, finally, That exportation of goods on consignment shall not be deemed
export sales until the export products consigned are in fact sold by the consignee.

Sales of locally manufactured or assembled goods for household and personal use
to Filipinos abroad and other non-residents of the Philippines as well as returning
Overseas Filipinos under the Internal Export Program of the government and paid
for in convertible foreign currency inwardly remitted through the Philippine banking
systems shall also be considered export sales. (Underscoring ours.)

The afore-cited provision of the Omnibus Investments Code of 1987

recognizes as export sales the sales of export products to another producer or to an
export trader, provided that the export products are actually exported. For
purposes of VAT zero-rating, such producer or export trader must be registered with
the BOI and is required to actually export more than 70% of its annual production.

Without actual exportation, Article 23 of the Omnibus Investments Code of 1987

also considers constructive exportation as export sales. Among other types of
constructive exportation specifically identified by the said provision are sales to
export processing zones. Sales to export processing zones are subjected to special
tax treatment. Article 77 of the same Code establishes the tax treatment of goods
or merchandise brought into the export processing zones. Of particular relevance
herein is paragraph 2, which provides that Merchandise purchased by a registered
zone enterprise from the customs territory and subsequently brought into the zone,
shall be considered as export sales and the exporter thereof shall be entitled to the
benefits allowed by law for such transaction.

Such tax treatment of goods brought into the export processing zones are only
consistent with the Destination Principle and Cross Border Doctrine to which the
Philippine VAT system adheres. According to the Destination Principle,[22] goods
and services are taxed only in the country where these are consumed. In
connection with the said principle, the Cross Border Doctrine[23] mandates that no
VAT shall be imposed to form part of the cost of the goods destined for consumption
outside the territorial border of the taxing authority. Hence, actual export of goods
and services from the Philippines to a foreign country must be free of VAT, while
those destined for use or consumption within the Philippines shall be imposed with
10% VAT.[24] Export processing zones[25] are to be managed as a separate
customs territory from the rest of the Philippines and, thus, for tax purposes, are
effectively considered as foreign territory. For this reason, sales by persons from
the Philippine customs territory to those inside the export processing zones are
already taxed as exports.

Plainly, sales to enterprises operating within the export processing zones are export
sales, which, under the Tax Code of 1977, as amended, were subject to 0% VAT. It is
on this ground that petitioner corporation is claiming refund/credit of the input VAT
on its zero-rated sales to PASAR and PHILPHOS.

The distinction made by this Court in the preceding paragraphs between the
zero-rated sales to export-oriented BOI-registered enterprises and zero-rated sales
to EPZA-registered enterprises operating within export processing zones is actually
supported by subsequent development in tax laws and regulations. In Revenue
Regulations No. 7-95, the Consolidated VAT Regulations, as amended,[26] the BIR
defined with more precision what are zero-rated export sales

(1) The sale and actual shipment of goods from the Philippines to a foreign country,
irrespective of any shipping arrangement that may be agreed upon which may
influence or determine the transfer of ownership of the goods so exported paid for
in acceptable foreign currency or its equivalent in goods or services, and accounted
for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);

(2) The sale of raw materials or packaging materials to a non-resident buyer for
delivery to a resident local export-oriented enterprise to be used in manufacturing,
processing, packing or repacking in the Philippines of the said buyers goods and
paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) The sale of raw materials or packaging materials to an export-oriented

enterprise whose export sales exceed seventy percent (70%) of total annual
production;

Any enterprise whose export sales exceed 70% of the total annual production of the
preceding taxable year shall be considered an export-oriented enterprise upon
accreditation as such under the provisions of the Export Development Act (R.A.
7844) and its implementing rules and regulations;

(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and

(5) Those considered export sales under Articles 23 and 77 of Executive Order No.
226, otherwise known as the Omnibus Investments Code of 1987, and other special
laws, e.g. Republic Act No. 7227, otherwise known as the Bases Conversion and
Development Act of 1992.

The Tax Code of 1997, as amended,[27] later adopted the foregoing definition of
export sales, which are subject to 0% VAT.

This Court then reiterates its conclusion that Section 2 of Revenue

Regulations No. 2-88, which applied to zero-rated export sales to export-oriented
BOI-registered enterprises, should not be applied to the applications for
refund/credit of input VAT filed by petitioner corporation since it based its
applications on the zero-rating of export sales to enterprises registered with the
EPZA and located within export processing zones.

Sufficiency of evidence

There can be no dispute that the taxpayer-claimant has the burden of proving the
legal and factual bases of its claim for tax credit or refund, but once it has
submitted all the required documents, it is the function of the BIR to assess these
documents with purposeful dispatch.[28] It therefore falls upon herein petitioner
corporation to first establish that its sales qualify for VAT zero-rating under the
existing laws (legal basis), and then to present sufficient evidence that said sales
were actually made and resulted in refundable or creditable input VAT in the amount
being claimed (factual basis).

It would initially appear that the applications for refund/credit filed by petitioner
corporation cover only input VAT on its purportedly zero-rated sales to PASAR and
PHILPHOS; however, a more thorough perusal of its applications, VAT returns,
pleadings, and other records of these cases would reveal that it is also claiming
refund/credit of its input VAT on purchases of capital goods and sales of gold to the
Central Bank of the Philippines (CBP).

This Court finds that the claims for refund/credit of input VAT of petitioner
corporation have sufficient legal bases.

As has been extensively discussed herein, Section 106(b)(2), in relation to Section

100(a)(2) of the Tax Code of 1977, as amended, allowed the refund/credit of input
VAT on export sales to enterprises operating within export processing zones and
registered with the EPZA, since such export sales were deemed to be effectively
zero-rated sales.[29] The fact that PASAR and PHILPHOS, to whom petitioner
corporation sold its products, were operating inside an export processing zone and
duly registered with EPZA, was never raised as an issue herein. Moreover, the same
fact was already judicially recognized in the case Atlas Consolidated Mining &
Development Corporation v. Commissioner of Internal Revenue.[30] Section 106(c)

of the same Code likewise permitted a VAT-registered taxpayer to apply for

refund/credit of the input VAT paid on capital goods imported or locally purchased to
the extent that such input VAT has not been applied against its output VAT.
Meanwhile, the effective zero-rating of sales of gold to the CBP from 1989 to
1991[31] was already affirmed by this Court in Commissioner of Internal Revenue v.
Benguet Corporation,[32] wherein it ruled that

At the time when the subject transactions were consummated, the prevailing BIR
regulations relied upon by respondent ordained that gold sales to the Central Bank
were zero-rated. The BIR interpreted Sec. 100 of the NIRC in relation to Sec. 2 of
E.O. No. 581 s. 1980 which prescribed that gold sold to the Central Bank shall be
considered export and therefore shall be subject to the export and premium duties.
In coming out with this interpretation, the BIR also considered Sec. 169 of Central
Bank Circular No. 960 which states that all sales of gold to the Central Bank are
considered constructive exports. x x x.

This Court now comes to the question of whether petitioner corporation has
sufficiently established the factual bases for its applications for refund/credit of
input VAT. It is in this regard that petitioner corporation has failed, both in the
administrative and judicial level.

Applications for refund/credit of input VAT with the BIR must comply with the
appropriate revenue regulations. As this Court has already ruled, Revenue
Regulations No. 2-88 is not relevant to the applications for refund/credit of input VAT
filed by petitioner corporation; nonetheless, the said applications must have been in
accordance with Revenue Regulations No. 3-88, amending Section 16 of Revenue
Regulations No. 5-87, which provided as follows

SECTION 16. Refunds or tax credits of input tax.

xxxx

(c) Claims for tax credits/refunds. Application for Tax Credit/Refund of Value-Added
Tax Paid (BIR Form No. 2552) shall be filed with the Revenue District Office of the
city or municipality where the principal place of business of the applicant is located
or directly with the Commissioner, Attention: VAT Division.

A photocopy of the purchase invoice or receipt evidencing the value added tax paid
shall be submitted together with the application. The original copy of the said
invoice/receipt, however, shall be presented for cancellation prior to the issuance of
the Tax Credit Certificate or refund. In addition, the following documents shall be
attached whenever applicable:

xxxx

3.

Effectively zero-rated sale of goods and services.

i)

photo copy of approved application for zero-rate if filing for the first time.

ii)
sales invoice or receipt showing name of the person or entity to whom the
sale of goods or services were delivered, date of delivery, amount of consideration,
and description of goods or services delivered.

iii)

evidence of actual receipt of goods or services.

4.

Purchase of capital goods.

i)
original copy of invoice or receipt showing the date of purchase, purchase
price, amount of value-added tax paid and description of the capital equipment
locally purchased.

ii)
with respect to capital equipment imported, the photo copy of import entry
document for internal revenue tax purposes and the confirmation receipt issued by
the Bureau of Customs for the payment of the value-added tax.

5.

In applicable cases,

where the applicants zero-rated transactions are regulated by certain government

agencies, a statement therefrom showing the amount and description of sale of
goods and services, name of persons or entities (except in case of exports) to whom
the goods or services were sold, and date of transaction shall also be submitted.

In all cases, the amount of refund or tax credit that may be granted shall be
limited to the amount of the value-added tax (VAT) paid directly and entirely
attributable to the zero-rated transaction during the period covered by the
application for credit or refund.

Where the applicant is engaged in zero-rated and other taxable and exempt
sales of goods and services, and the VAT paid (inputs) on purchases of goods and
services cannot be directly attributed to any of the aforementioned transactions,
the following formula shall be used to determine the creditable or refundable input
tax for zero-rated sale:

Amount of Zero-rated Sale

Total Sales

Total Amount of Input Taxes

= Amount Creditable/Refundable

In case the application for refund/credit of input VAT was denied or remained
unacted upon by the BIR, and before the lapse of the two-year prescriptive period,
the taxpayer-applicant may already file a Petition for Review before the CTA. If the
taxpayers claim is supported by voluminous documents, such as receipts, invoices,
vouchers or long accounts, their presentation before the CTA shall be governed by
CTA Circular No. 1-95, as amended, reproduced in full below

In the interest of speedy administration of justice, the Court hereby promulgates the
following rules governing the presentation of voluminous documents and/or long
accounts, such as receipts, invoices and vouchers, as evidence to establish certain
facts pursuant to Section 3(c), Rule 130 of the Rules of Court and the doctrine
enunciated in Compania Maritima vs. Allied Free Workers Union (77 SCRA 24), as
well as Section 8 of Republic Act No. 1125:

1. The party who desires to introduce as evidence such voluminous documents

must, after motion and approval by the Court, present:
(a) a Summary containing, among others, a chronological listing of the numbers,
dates and amounts covered by the invoices or receipts and the amount/s of tax
paid; and (b) a Certification of an independent Certified Public Accountant attesting
to the correctness of the contents of the summary after making an examination,
evaluation and audit of the voluminous receipts and invoices. The name of the
accountant or partner of the firm in charge must be stated in the motion so that
he/she can be commissioned by the Court to conduct the audit and, thereafter,
testify in Court relative to such summary and certification pursuant to Rule 32 of the
Rules of Court.

2.
The method of individual presentation of each and every receipt, invoice or
account for marking, identification and comparison with the originals thereof need
not be done before the Court or Clerk of Court anymore after the introduction of the
summary and CPA certification. It is enough that the receipts, invoices, vouchers or
other documents covering the said accounts or payments to be introduced in
evidence must be pre-marked by the party concerned and submitted to the Court in
order to be made accessible to the adverse party who desires to check and verify
the correctness of the summary and CPA certification. Likewise, the originals of the
voluminous receipts, invoices or accounts must be ready for verification and

comparison in case doubt on the authenticity thereof is raised during the hearing or
resolution of the formal offer of evidence.

Since CTA Cases No. 4831, 4859, 4944,[33] and 5102,[34] were still pending before
the CTA when the said Circular was issued, then petitioner corporation must have
complied therewith during the course of the trial of the said cases.

In Commissioner of Internal Revenue v. Manila Mining Corporation,[35] this Court

denied the claim of therein respondent, Manila Mining Corporation, for refund of the
input VAT on its supposed zero-rated sales of gold to the CBP because it was unable
to substantiate its claim. In the same case, this Court emphasized the importance
of complying with the substantiation requirements for claiming refund/credit of
input VAT on zero-rated sales, to wit

For a judicial claim for refund to prosper, however, respondent must not only prove
that it is a VAT registered entity and that it filed its claims within the prescriptive
period. It must substantiate the input VAT paid by purchase invoices or official
receipts.

This respondent failed to do.

Revenue Regulations No. 3-88 amending Revenue Regulations No. 5-87 provides the
requirements in claiming tax credits/refunds.

xxxx

Under Section 8 of RA1125, the CTA is described as a court of record. As cases filed
before it are litigated de novo, party litigants should prove every minute aspect of
their cases. No evidentiary value can be given the purchase invoices or receipts
submitted to the BIR as the rules on documentary evidence require that these
documents must be formally offered before the CTA.

This Court thus notes with approval the following findings of the CTA:

x x x [S]ale of gold to the Central Bank should not be subject to the 10% VAT-output
tax but this does not ipso fact mean that [the seller] is entitled to the amount of
refund sought as it is required by law to present evidence showing the input taxes it
paid during the year in question. What is being claimed in the instant petition is the
refund of the input taxes paid by the herein petitioner on its purchase of goods and
services. Hence, it is necessary for the Petitioner to show proof that it had indeed
paid the input taxes during the year 1991. In the case at bar, Petitioner failed to
discharge this duty. It did not adduce in evidence the sales invoice, receipts or
other documents showing the input value added tax on the purchase of goods and
services.

xxx

Section 8 of Republic Act 1125 (An Act Creating the Court of Tax Appeals) provides
categorically that the Court of Tax Appeals shall be a court of record and as such it
is required to conduct a formal trial (trial de novo) where the parties must present
their evidence accordingly if they desire the Court to take such evidence into
consideration. (Emphasis and italics supplied)

A sales or commercial invoice is a written account of goods sold or services

rendered indicating the prices charged therefor or a list by whatever name it is
known which is used in the ordinary course of business evidencing sale and transfer
or agreement to sell or transfer goods and services.

A receipt on the other hand is a written acknowledgment of the fact of payment in

money or other settlement between seller and buyer of goods, debtor or creditor, or
person rendering services and client or customer.

These sales invoices or receipts issued by the supplier are necessary to substantiate
the actual amount or quantity of goods sold and their selling price, and taken
collectively are the best means to prove the input VAT payments.[36]

Although the foregoing decision focused only on the proof required for the applicant
for refund/credit to establish the input VAT payments it had made on its purchases
from suppliers, Revenue Regulations No. 3-88 also required it to present evidence
proving actual zero-rated VAT sales to qualified buyers, such as (1) photocopy of the
approved application for zero-rate if filing for the first time; (2) sales invoice or
receipt showing the name of the person or entity to whom the goods or services
were delivered, date of delivery, amount of consideration, and description of goods
or services delivered; and (3) the evidence of actual receipt of goods or services.

Also worth noting in the same decision is the weight given by this Court to the
certification by the independent certified public accountant (CPA), thus

Respondent contends, however, that the certification of the independent CPA

attesting to the correctness of the contents of the summary of suppliers invoices or
receipts which were examined, evaluated and audited by said CPA in accordance
with CTA Circular No. 1-95 as amended by CTA Circular No. 10-97 should
substantiate its claims.

There is nothing, however, in CTA Circular No. 1-95, as amended by CTA Circular No.
10-97, which either expressly or impliedly suggests that summaries and schedules
of input VAT payments, even if certified by an independent CPA, suffice as evidence
of input VAT payments.

xxxx

The circular, in the interest of speedy administration of justice, was promulgated to

avoid the time-consuming procedure of presenting, identifying and marking of
documents before the Court. It does not relieve respondent of its imperative task of
pre-marking photocopies of sales receipts and invoices and submitting the same to
the court after the independent CPA shall have examined and compared them with
the originals. Without presenting these pre-marked documents as evidence from
which the summary and schedules were based, the court cannot verify the
authenticity and veracity of the independent auditors conclusions.

There is, moreover, a need to subject these invoices or receipts to examination by

the CTA in order to confirm whether they are VAT invoices. Under Section 21 of

Revenue Regulation, No. 5-87, all purchases covered by invoices other than a VAT
invoice shall not be entitled to a refund of input VAT.

xxxx

While the CTA is not governed strictly by technical rules of evidence, as rules of
procedure are not ends in themselves but are primarily intended as tools in the
administration of justice, the presentation of the purchase receipts and/or invoices
is not mere procedural technicality which may be disregarded considering that it is
the only means by which the CTA may ascertain and verify the truth of the
respondents claims.

The records further show that respondent miserably failed to substantiate its claims
for input VAT refund for the first semester of 1991. Except for the summary and
schedules of input VAT payments prepared by respondent itself, no other evidence
was adduced in support of its claim.

As for respondents claim for input VAT refund for the second semester of 1991, it
employed the services of Joaquin Cunanan & Co. on account of which it (Joaquin
Cunanan & Co.) executed a certification that:

We have examined the information shown below concerning the input tax payments
made by the Makati Office of Manila Mining Corporation for the period from July 1 to
December 31, 1991. Our examination included inspection of the pertinent
suppliers invoices and official receipts and such other auditing procedures as we
considered necessary in the circumstances. x x x

As the certification merely stated that it used auditing procedures considered

necessary and not auditing procedures which are in accordance with generally
accepted auditing principles and standards, and that the examination was made on
input tax payments by the Manila Mining Corporation, without specifying that the
said input tax payments are attributable to the sales of gold to the Central Bank,
this Court cannot rely thereon and regard it as sufficient proof of the respondents
input VAT payments for the second semester.[37]

As for the Petition in G.R. No. 141104, involving the input VAT of petitioner
corporation on its zero-rated sales in the first quarter of 1992, this Court already
found that the petitioner corporation failed to comply with Section 106(b) of the Tax
Code of 1977, as amended, imposing the two-year prescriptive period for the filing
of the application for refund/credit thereof. This bars the grant of the application for
refund/credit, whether administratively or judicially, by express mandate of Section
106(e) of the same Code.

Granting arguendo that the application of petitioner corporation for the

refund/credit of the input VAT on its zero-rated sales in the first quarter of 1992 was
actually and timely filed, petitioner corporation still failed to present together with
its application the required supporting documents, whether before the BIR or the
CTA. As the Court of Appeals ruled

In actions involving claims for refund of taxes assessed and collected, the burden of
proof rests on the taxpayer. As clearly discussed in the CTAs decision, petitioner
failed to substantiate its claim for tax refunds. Thus:

We note, however, that in the cases at bar, petitioner has relied totally on Revenue
Regulations No. 2-88 in determining compliance with the documentary requirements
for a successful refund or issuance of tax credit. Unmentioned is the applicable and
specific amendment later introduced by Revenue Regulations No. 3-88 dated April
7, 1988 (issued barely after two months from the promulgation of Revenue
Regulations No. 2-88 on February 15, 1988), which amended Section 16 of Revenue
Regulations No. 5-87 on refunds or tax credits of input tax. x x x.

xxxx

A thorough examination of the evidence submitted by the petitioner before this

court reveals outright the failure to satisfy documentary requirements laid down
under the above-cited regulations. Specifically, petitioner was not able to present
the following documents, to wit:

a)

sales invoices or receipts;

b)

purchase invoices or receipts;

c)

evidence of actual receipt of goods;

d)

BOI statement showing the amount and description of sale of goods, etc.

e)
original or attested copies of invoice or receipt on capital equipment locally
purchased; and

f)
photocopy of import entry document and confirmation receipt on imported
capital equipment.

There is the need to examine the sales invoices or receipts in order to ascertain
the actual amount or quantity of goods sold and their selling price. Without them,
this Court cannot verify the correctness of petitioners claim inasmuch as the
regulations require that the input taxes being sought for refund should be limited to
the portion that is directly and entirely attributable to the particular zero-rated
transaction. In this instance, the best evidence of such transaction are the said
sales invoices or receipts.

Also, even if sales invoices are produced, there is the further need to submit
evidence that such goods were actually received by the buyer, in this case, by CBP,
Philp[h]os and PASAR.

xxxx

Lastly, this Court cannot determine whether there were actual local and imported
purchase of capital goods as well as domestic purchase of non-capital goods without
the required purchase invoice or receipt, as the case may be, and confirmation
receipts.

There is, thus, the imperative need to submit before this Court the original or
attested photocopies of petitioners invoices or receipts, confirmation receipts and
import entry documents in order that a full ascertainment of the claimed amount
may be achieved.

Petitioner should have taken the foresight to introduce in evidence all of the
missing documents abovementioned. Cases filed before this Court are litigated de
novo. This means that party litigants should endeavor to prove at the first instance
every minute aspect of their cases strictly in accordance with the Rules of Court,
most especially on documentary evidence. (pp. 37-42, Rollo)

Tax refunds are in the nature of tax exemptions. It is regarded as in derogation of

the sovereign authority, and should be construed in strictissimi juris against the
person or entity claiming the exemption. The taxpayer who claims for exemption
must justify his claim by the clearest grant of organic or statute law and should not
be permitted to stand on vague implications (Asiatic Petroleum Co. v. Llanes, 49
Phil. 466; Northern Phil. Tobacco Corp. v. Mun. of Agoo, La Union, 31 SCRA 304;
Reagan v. Commissioner, 30 SCRA 968; Asturias Sugar Central, Inc. v. Commissioner
of Customs, 29 SCRA 617; Davao Light and Power Co., Inc. v. Commissioner of
Customs, 44 SCRA 122).

There is no cogent reason to fault the CTAs conclusion that the SGVs certificate is
self-destructive, as it finds comfort in the very SGVs stand, as follows:

It is our understanding that the above procedure are sufficient for the purpose of
the Company. We make no presentation regarding the sufficiency of these
procedures for such purpose. We did not compare the total of the input tax claimed
each quarter against the pertinent VAT returns and books of accounts. The above
procedures do not constitute an audit made in accordance with generally accepted
auditing standards. Accordingly, we do not express an opinion on the companys
claim for input VAT refund or credit. Had we performed additional procedures, or
had we made an audit in accordance with generally accepted auditing standards,
other matters might have come to our attention that we would have accordingly
reported on.

The SGVs disclaimer of opinion carries much weight as it is petitioners

independent auditor. Indeed, SGV expressed that it did not compare the total of
the input tax claimed each quarter against the VAT returns and books of
accounts.[38]

Moving on to the Petition in G.R. No. 148763, concerning the input VAT of
petitioner corporation on its zero-rated sales in the second, third, and fourth
quarters of 1990, the appellate court likewise found that petitioner corporation
failed to sufficiently establish its claims. Already disregarding the declarations
made by the Court of Appeals on its erroneous application of Revenue Regulations
No. 2-88, quoted hereunder is the rest of the findings of the appellate court after
evaluating the evidence submitted in accordance with the requirements under
Revenue Regulations No. 3-88

The Secretary of Finance validly adopted Revenue Regulations [No.] x x x 3-98

pursuant to Sec. 245 of the National Internal Revenue Code, which recognized his
power to promulgate all needful rules and regulations for the effective enforcement
of the provisions of this Code. Thus, it is incumbent upon a taxpayer intending to
file a claim for refund of input VATs or the issuance of a tax credit certificate with the
BIR x x x to prove sales to such buyers as required by Revenue Regulations No. 398. Logically, the same evidence should be presented in support of an action to
recover taxes which have been paid.

x x x Neither has [herein petitioner corporation] presented sales invoices or receipts

showing sales of gold, copper concentrates, and pyrite to the CBP, [PASAR], and
[PHILPHOS], respectively, and the dates and amounts of the same, nor any evidence
of actual receipt by the said buyers of the mineral products. It merely presented
receipts of purchases from suppliers on which input VATs were allegedly paid. Thus,
the Court of Tax Appeals correctly denied the claims for refund of input VATs or the
issuance of tax credit certificates of petitioner [corporation]. Significantly, in the
resolution, dated 7 June 2000, this Court directed the parties to file memoranda
discussing, among others, the submission of proof for its [petitioners] sales of
gold, copper concentrates, and pyrite to buyers. Nevertheless, the parties,
including the petitioner, failed to address this issue, thereby necessitating the
affirmance of the ruling of the Court of Tax Appeals on this point.[39]

This Court is, therefore, bound by the foregoing facts, as found by the appellate
court, for well-settled is the general rule that the jurisdiction of this Court in cases
brought before it from the Court of Appeals, by way of a Petition for Review on
Certiorari under Rule 45 of the Revised Rules of Court, is limited to reviewing or
revising errors of law; findings of fact of the latter are conclusive.[40] This Court is
not a trier of facts. It is not its function to review, examine and evaluate or weigh
the probative value of the evidence presented.[41]

The distinction between a question of law and a question of fact is clear-cut. It has
been held that "[t]here is a question of law in a given case when the doubt or
difference arises as to what the law is on a certain state of facts; there is a question
of fact when the doubt or difference arises as to the truth or falsehood of alleged
facts."[42]

Whether petitioner corporation actually made zero-rated sales; whether it paid input
VAT on these sales in the amount it had declared in its returns; whether all the input
VAT subject of its applications for refund/credit can be attributed to its zero-rated
sales; and whether it had not previously applied the input VAT against its output VAT
liabilities, are all questions of fact which could only be answered after reviewing,
examining, evaluating, or weighing the probative value of the evidence it presented,
and which this Court does not have the jurisdiction to do in the present Petitions for
Review on Certiorari under Rule 45 of the revised Rules of Court.

Granting that there are exceptions to the general rule, when this Court looked into
questions of fact under particular circumstances,[43] none of these exist in the
instant cases. The Court of Appeals, in both cases, found a dearth of evidence to
support the claims for refund/credit of the input VAT of petitioner corporation, and
the records bear out this finding. Petitioner corporation itself cannot dispute its
non-compliance with the requirements set forth in Revenue Regulations No. 3-88
and CTA Circular No. 1-95, as amended. It concentrated its arguments on its
assertion that the substantiation requirements under Revenue Regulations No. 2-88
should not have applied to it, while being conspicuously silent on the evidentiary
requirements mandated by other relevant regulations.

Re-opening of cases/holding of new trial before the CTA

This Court now faces the final issue of whether the prayer of petitioner corporation
for the re-opening of its cases or holding of new trial before the CTA for the
reception of additional evidence, may be granted. Petitioner corporation prays that
the Court exercise its discretion on the matter in its favor, consistent with the policy
that rules of procedure be liberally construed in pursuance of substantive justice.

This Court, however, cannot grant the prayer of petitioner corporation.

An aggrieved party may file a motion for new trial or reconsideration of a judgment
already rendered in accordance with Section 1, Rule 37 of the revised Rules of
Court, which provides

SECTION 1. Grounds of and period for filing motion for new trial or reconsideration.
Within the period for taking an appeal, the aggrieved party may move the trial
court to set aside the judgment or final order and grant a new trial for one or more
of the following causes materially affecting the substantial rights of said party:

(a) Fraud, accident, mistake or excusable negligence which ordinary prudence

could not have guarded against and by reason of which such aggrieved party has
probably been impaired in his rights; or

(b) Newly discovered evidence, which he could not, with reasonable diligence, have
discovered and produced at the trial, and which if presented would probably alter
the result.

Within the same period, the aggrieved party may also move fore reconsideration
upon the grounds that the damages awarded are excessive, that the evidence is
insufficient to justify the decision or final order, or that the decision or final order is
contrary to law.

In G.R. No. 148763, petitioner corporation attempts to justify its motion for the reopening of its cases and/or holding of new trial before the CTA by contending that
the [f]ailure of its counsel to adduce the necessary evidence should be construed

as excusable negligence or mistake which should constitute basis for such reopening of trial as for a new trial, as counsel was of the belief that such evidence
was rendered unnecessary by the presentation of unrebutted evidence indicating
that respondent [Commissioner] has acknowledged the sale of [sic] PASAR and
[PHILPHOS] to be zero-rated. [44]
The CTA denied such motion on the ground
that it was not accompanied by an affidavit of merit as required by Section 2, Rule
37 of the revised Rules of Court. The Court of Appeals affirmed the denial of the
motion, but apart from this technical defect, it also found that there was no
justification to grant the same.

On the matter of the denial of the motion of the petitioner corporation for the reopening of its cases and/or holding of new trial based on the technicality that said
motion was unaccompanied by an affidavit of merit, this Court rules in favor of the
petitioner corporation. The facts which should otherwise be set forth in a separate
affidavit of merit may, with equal effect, be alleged and incorporated in the motion
itself; and this will be deemed a substantial compliance with the formal
requirements of the law, provided, of course, that the movant, or other individual
with personal knowledge of the facts, take oath as to the truth thereof, in effect
converting the entire motion for new trial into an affidavit.[45] The motion of
petitioner corporation was prepared and verified by its counsel, and since the
ground for the motion was premised on said counsels excusable negligence or
mistake, then the obvious conclusion is that he had personal knowledge of the facts
relating to such negligence or mistake. Hence, it can be said that the motion of
petitioner corporation for the re-opening of its cases and/or holding of new trial was
in substantial compliance with the formal requirements of the revised Rules of
Court.

Even so, this Court finds no sufficient ground for granting the motion of petitioner
corporation for the re-opening of its cases and/or holding of new trial.

In G.R. No. 141104, petitioner corporation invokes the Resolution,[46] dated 20 July
1998, by the CTA in another case, CTA Case No. 5296, involving the claim of
petitioner corporation for refund/credit of input VAT for the third quarter of 1993.
The said Resolution allowed the re-opening of CTA Case No. 5296, earlier dismissed
by the CTA, to give the petitioner corporation the opportunity to present the missing
export documents.

The rule that the grant or denial of motions for new trial rests on the discretion of
the trial court,[47] may likewise be extended to the CTA. When the denial of the
motion rests upon the discretion of a lower court, this Court will not interfere with its
exercise, unless there is proof of grave abuse thereof.[48]

That the CTA granted the motion for re-opening of one case for the presentation of
additional evidence and, yet, deny a similar motion in another case filed by the
same party, does not necessarily demonstrate grave abuse of discretion or
arbitrariness on the part of the CTA. Although the cases involve identical parties,
the causes of action and the evidence to support the same can very well be
different. As can be gleaned from the Resolution, dated 20 July 1998, in CTA Case
No. 5296, petitioner corporation was claiming refund/credit of the input VAT on its
zero-rated sales, consisting of actual export sales, to Mitsubishi Metal Corporation in
Tokyo, Japan. The CTA took into account the presentation by petitioner corporation
of inward remittances of its export sales for the quarter involved, its Supply
Contract with Mitsubishi Metal Corporation, its 1993 Annual Report showing its sales
to the said foreign corporation, and its application for refund. In contrast, the
present Petitions involve the claims of petitioner corporation for refund/credit of the
input VAT on its purchases of capital goods and on its effectively zero-rated sales to
CBP and EPZA-registered enterprises PASAR and PHILPHOS for the second, third,
and fourth quarters of 1990 and first quarter of 1992. There being a difference as
to the bases of the claims of petitioner corporation for refund/credit of input VAT in
CTA Case No. 5926 and in the Petitions at bar, then, there are resulting variances as
to the evidence required to support them.

Moreover, the very same Resolution, dated 20 July 1998, in CTA Case No. 5296,
invoked by petitioner corporation, emphasizes that the decision of the CTA to allow
petitioner corporation to present evidence is applicable pro hac vice or in this
occasion only as it is the finding of [the CTA] that petitioner [corporation] has
established a few of the aforementioned material points regarding the possible
existence of the export documents together with the prior and succeeding returns
for the quarters involved, x x x [Emphasis supplied.] Therefore, the CTA, in the
present cases, cannot be bound by its ruling in CTA Case No. 5296, when these
cases do not involve the exact same circumstances that compelled it to grant the
motion of petitioner corporation for re-opening of CTA Case No. 5296.

Finally, assuming for the sake of argument that the non-presentation of the
required documents was due to the fault of the counsel of petitioner corporation,
this Court finds that it does not constitute excusable negligence or mistake which
would warrant the re-opening of the cases and/or holding of new trial.

Under Section 1, Rule 37 of the Revised Rules of Court, the negligence must be
excusable and generally imputable to the party because if it is imputable to the
counsel, it is binding on the client. To follow a contrary rule and allow a party to
disown his counsels conduct would render proceedings indefinite, tentative, and
subject to re-opening by the mere subterfuge of replacing the counsel. What the
aggrieved litigant should do is seek administrative sanctions against the erring
counsel and not ask for the reversal of the courts ruling.[49]

As elucidated by this Court in another case,[50] the general rule is that the client is
bound by the action of his counsel in the conduct of his case and he cannot
therefore complain that the result of the litigation might have been otherwise had
his counsel proceeded differently. It has been held time and again that blunders
and mistakes made in the conduct of the proceedings in the trial court as a result of
the ignorance, inexperience or incompetence of counsel do not qualify as a ground
for new trial. If such were to be admitted as valid reasons for re-opening cases,
there would never be an end to litigation so long as a new counsel could be
employed to allege and show that the prior counsel had not been sufficiently
diligent, experienced or learned.

Moreover, negligence, to be excusable, must be one which ordinary diligence and

prudence could not have guarded against.[51] Revenue Regulations No. 3-88,
which was issued on 15 February 1988, had been in effect more than two years
prior to the filing by petitioner corporation of its earliest application for refund/credit
of input VAT involved herein on 21 August 1990. CTA Circular No. 1-95 was issued
only on 25 January 1995, after petitioner corporation had filed its Petitions before
the CTA, but still during the pendency of the cases of petitioner corporation before
the tax court. The counsel of petitioner corporation does not allege ignorance of
the foregoing administrative regulation and tax court circular, only that he no longer
deemed it necessary to present the documents required therein because of the
presentation of alleged unrebutted evidence of the zero-rated sales of petitioner
corporation. It was a judgment call made by the counsel as to which evidence to
present in support of his clients cause, later proved to be unwise, but not
necessarily negligent.

Neither is there any merit in the contention of petitioner corporation that the nonpresentation of the required documentary evidence was due to the excusable
mistake of its counsel, a ground under Section 1, Rule 37 of the revised Rules of
Court for the grant of a new trial. Mistake, as it is referred to in the said rule,

must be a mistake of fact, not of law, which relates to the case.[52] In the present
case, the supposed mistake made by the counsel of petitioner corporation is one of
law, for it was grounded on his interpretation and evaluation that Revenue
Regulations No. 3-88 and CTA Circular No. 1-95, as amended, did not apply to his
clients cases and that there was no need to comply with the documentary
requirements set forth therein. And although the counsel of petitioner corporation
advocated an erroneous legal position, the effects thereof, which did not amount to
a deprivation of his clients right to be heard, must bind petitioner corporation. The
question is not whether petitioner corporation succeeded in establishing its
interests, but whether it had the opportunity to present its side.[53]

Besides, litigation is a not a trial and error proceeding. A party who moves
for a new trial on the ground of mistake must show that ordinary prudence could not
have guarded against it. A new trial is not a refuge for the obstinate.[54] Ordinary
prudence in these cases would have dictated the presentation of all available
evidence that would have supported the claims for refund/credit of input VAT of
petitioner corporation. Without sound legal basis, counsel for petitioner corporation
concluded that Revenue Regulations No. 3-88, and later on, CTA Circular No. 1-95,
as amended, did not apply to its clients claims. The obstinacy of petitioner
corporation and its counsel is demonstrated in their failure, nay, refusal, to comply
with the appropriate administrative regulations and tax court circular in pursuing
the claims for refund/credit, now subject of G.R. Nos. 141104 and 148763, even
though these were separately instituted in a span of more than two years. It is also
evident in the failure of petitioner corporation to address the issue and to present
additional evidence despite being given the opportunity to do so by the Court of
Appeals. As pointed out by the appellate court, in its Decision, dated 15 September
2000, in CA-G.R. SP No. 46718

x x x Significantly, in the resolution, dated 7 June 2000, this Court directed the
parties to file memoranda discussing, among others, the submission of proof for its
[petitioners] sales of gold, copper concentrates, and pyrite to buyers.
Nevertheless, the parties, including the petitioner, failed to address this issue,
thereby necessitating the affirmance of the ruling of the Court of Tax Appeals on this
point.[55]

Summary

Hence, although this Court agreed with the petitioner corporation that the two-year
prescriptive period for the filing of claims for refund/credit of input VAT must be
counted from the date of filing of the quarterly VAT return, and that sales to EPZAregistered enterprises operating within economic processing zones were effectively
zero-rated and were not covered by Revenue Regulations No. 2-88, it still denies the
claims of petitioner corporation for refund of its input VAT on its purchases of capital
goods and effectively zero-rated sales during the second, third, and fourth quarters
of 1990 and the first quarter of 1992, for not being established and substantiated by
appropriate and sufficient evidence. Petitioner corporation is also not entitled to the
re-opening of its cases and/or holding of new trial since the non-presentation of the
required documentary evidence before the BIR and the CTA by its counsel does not
constitute excusable negligence or mistake as contemplated in Section 1, Rule 37 of
the revised Rules of Court.

WHEREFORE, premises considered, the instant Petitions for Review are hereby
DENIED, and the Decisions, dated 6 July 1999 and 15 September 2000, of the Court
of Appeals in CA-G.R. SP Nos. 47607 and 46718, respectively, are hereby AFFIRMED.
Costs against petitioner.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

COMMISSIONER OF
INTERNAL REVENUE,

G.R. No. 172129

Petitioner,

Present:

- versus QUISUMBING, J.,

Chairperson,
MIRANT PAGBILAO
CORPORATION (Formerly
SOUTHERN ENERGY
QUEZON, INC.),
Respondent.

CARPIO MORALES,
TINGA,
VELASCO, JR., and
BRION, JJ.

Promulgated:

September 12, 2008

x-----------------------------------------------------------------------------------------x
DECISION

VELASCO, JR., J.:

Before us is a Petition for Review on Certiorari under Rule 45 assailing and
seeking to set aside the Decision [1] dated December 22, 2005 of the Court of
Appeals (CA) in CA-G.R. SP No. 78280 which modified the March 18, 2003
Decision[2] of the Court of Tax Appeals (CTA) in CTA Case No. 6133
entitled Mirant Pagbilao Corporation (Formerly Southern Energy Quezon, Inc.) v.

Commissioner of Internal Revenue and ordered the Bureau of Internal Revenue

(BIR) to refund or issue a tax credit certificate (TCC) in favor of respondent
Mirant Pagbilao Corporation (MPC) in the amount representing its unutilized input
value added tax (VAT) for the second quarter of 1998. Also assailed is the CAs
Resolution[3] of March 31, 2006 denying petitioners motion for reconsideration.
The Facts
MPC, formerly Southern Energy Quezon, Inc., and also formerly known as
Hopewell (Phil.) Corporation, is a domestic firm engaged in the generation of
power which it sells to the National Power Corporation (NPC). For the
construction of the electrical and mechanical equipment portion of its Pagbilao,
Quezon plant, which appears to have been undertaken from 1993 to 1996, MPC
secured the services of Mitsubishi Corporation (Mitsubishi) of Japan.
Under Section 13[4] of Republic Act No. (RA) 6395, the NPCs revised
charter, NPC is exempt from all taxes. InMaceda v. Macaraig,[5] the Court
construed the exemption as covering both direct and indirect taxes.
In the light of the NPCs tax exempt status, MPC, on the belief that its sale
of power generation services to NPC is, pursuant to Sec. 108(B)(3) of the Tax
Code,[6] zero-rated for VAT purposes, filed on December 1, 1997 with Revenue
District Office (RDO) No. 60 in Lucena City an Application for Effective Zero
Rating. The application covered the construction and operation of its Pagbilao
power station under a Build, Operate, and Transfer scheme.
Not getting any response from the BIR district office, MPC refiled its
application in the form of a request for ruling with the VAT Review Committee
at the BIR national office on January 28, 1999. On May 13, 1999, the
Commissioner of Internal Revenue issued VAT Ruling No. 052-99, stating that the
supply of electricity by Hopewell Phil. to the NPC, shall be subject to the zero

percent (0%) VAT, pursuant to Section 108 (B) (3) of the National Internal
Revenue Code of 1997.
It must be noted at this juncture that consistent with its belief to be zerorated, MPC opted not to pay the VAT component of the progress billings from
Mitsubishi for the period covering April 1993 to September 1996for the E & M
Equipment Erection Portion of MPCs contract with Mitsubishi. This prompted
Mitsubishi to advance the VAT component as this serves as its output VAT which is
essential for the determination of its VAT payment. Apparently, it was only on
April 14, 1998 that MPC paid Mitsubishi the VAT component for the progress
billings from April 1993 to September 1996, and for which Mitsubishi issued
Official Receipt (OR) No. 0189 in the aggregate amount of PhP 135,993,570.
On August 25, 1998, MPC, while awaiting approval of its application
aforestated, filed its quarterly VAT return for the second quarter of 1998 where it
reflected an input VAT of PhP 148,003,047.62, which included PhP 135,993,570
supported by OR No. 0189. Pursuant to the procedure prescribed in Revenue
Regulations No. 7-95, MPC filed onDecember 20, 1999 an administrative claim
for refund of unutilized input VAT in the amount of PhP 148,003,047.62.
Since the BIR Commissioner failed to act on its claim for refund and
obviously to forestall the running of the two-year prescriptive period under Sec.
229 of the National Internal Revenue Code (NIRC), MPC went to the CTA via a
petition for review, docketed as CTA Case No. 6133.
Answering the petition, the BIR Commissioner, citing Kumagai-Gumi Co.
Ltd. v. CIR,[7] asserted that MPCs claim for refund cannot be granted for this main
reason: MPCs sale of electricity to NPC is not zero-rated for its failure to secure
an approved application for zero-rating.
Before the CTA, among the issues stipulated by the parties for resolution
were, in gist, the following:

1. Whether or not [MPC] has unapplied or unutilized creditable input VAT

for the 2nd quarter of 1998 attributable to zero-rated sales to NPC which are proper
subject for refund pursuant to relevant provisions of the NIRC;
2. Whether the creditable input VAT of MPC for said period, if any, is
substantiated by documents; and
3. Whether the unutilized creditable input VAT for said quarter, if any, was
applied against any of the VAT output tax of MPC in the subsequent quarter.

To provide support to the CTA in verifying and analyzing documents and

figures and entries contained therein, the Sycip Gorres & Velayo (SGV), an
independent auditing firm, was commissioned.
The Ruling of the CTA
On the basis of its affirmative resolution of the first issue, the CTA, by its
Decision dated March 18, 2003, granted MPCs claim for input VAT refund or
credit, but only for the amount of PhP 10,766,939.48. The fallo of the CTAs
decision reads:
In view of all the foregoing, the instant petition is PARTIALLY
GRANTED. Accordingly, respondent is hereby ORDERED to REFUND or in
the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner
its unutilized input VAT payments directly attributable to its effectively zero-rated
sales for the second quarter of 1998 in the reduced amount of P10,766,939.48,
computed as follows:
Claimed Input VAT

P148,003,047.62

Less: Disallowances
a.) As summarized by SGV & Co. in its initial report (Exh. P)
I. Input Taxes on Purchases of Services:
1. Supported by documents
other than VAT Ors
P 10,629.46
2. Supported by photocopied VAT OR
879.09
II. Input Taxes on Purchases of Goods:
1. Supported by documents other than
VAT invoices
165,795.70
2. Supported by Invoices with TIN only
1,781.82
3. Supported by photocopied VAT

invoices
3,153.62
III. Input Taxes on Importation of Goods:
1. Supported by photocopied documents
[IEDs and/or Bureau of Customs
(BOC) Ors]
716,250.00
2. Supported by brokers computations
91,601.00
b.) Input taxes without supporting documents as
summarized in Annex A of SGV & Co.s
supplementary report (CTA records, page 134)

252,447.45

c.) Claimed input taxes on purchases of services from

Mitsubishi Corp. for being substantiated by dubious OR
Refundable Input

990,090.69

135,996,570.00[8]

P10,766,939.48

SO ORDERED.[9]

Explaining the disallowance of over PhP 137 million claimed input VAT, the
CTA stated that most of MPCs purchases upon which it anchored its claims for
refund or tax credit have not been amply substantiated by pertinent documents,
such as but not limited to VAT ORs, invoices, and other supporting documents.
Wrote the CTA:
We agree with the above SGV findings that out of the remaining taxes of
P136,246,017.45, the amount of P252,477.45 was not supported by any document
and should therefore be outrightly disallowed.
As to the claimed input tax of P135,993,570.00 (P136,246,017.45 less
P252,477.45 ) on purchases of services from Mitsubishi Corporation, Japan, the
same is found to be of doubtful veracity. While it is true that said amount is
substantiated by a VAT official receipt with Serial No. 0189 dated April 14, 1998
x x x, it must be observed, however, that said VAT allegedly paid pertains to the
services which were rendered for the period 1993 to 1996. x x x

The Ruling of the CA

Aggrieved, MPC appealed the CTAs Decision to the CA via a petition for
review under Rule 43, docketed as CA-G.R. SP No. 78280. On December 22,
2005, the CA rendered its assailed decision modifying that of the CTA decision by
granting most of MPCs claims for tax refund or credit. And in a Resolution

of March 31, 2006, the CA denied the BIR Commissioners motion for
reconsideration. The decretal portion of the CA decision reads:
WHEREFORE, premises considered, the instant petition is
GRANTED. The assailed Decision of the Court of Tax Appeals dated March 18,
2003 is hereby MODIFIED. Accordingly, respondent Commissioner of Internal
Revenue is ordered to refund or issue a tax credit certificate in favor of petitioner
Mirant Pagbilao Corporation its unutilized input VAT payments directly
attributable to its effectively zero-rated sales for the second quarter of 1998 in the
total amount of P146,760,509.48.
SO ORDERED.[10]

The CA agreed with the CTA on MPCs entitlement to (1) a zero-rating for
VAT purposes for its sales and services to tax-exempt NPC; and (2) a refund or tax
credit for its unutilized input VAT for the second quarter of 1998. Their
disagreement, however, centered on the issue of proper documentation, particularly
the evidentiary value of OR No. 0189.
The CA upheld the disallowance of PhP 1,242,538.14 representing zerorated input VAT claims supported only by photocopies of VAT OR/Invoice,
documents other than VAT Invoice/OR, and mere brokers computations. But the
CA allowed MPCs refund claim of PhP 135,993,570 representing input VAT
payments for purchases of goods and/or services from Mitsubishi supported by OR
No. 0189. The appellate court ratiocinated that the CTA erred in disallowing said
claim since the OR from Mitsubishi was the best evidence for the payment of input
VAT by MPC to Mitsubishi as required under Sec. 110(A)(1)(b) of the NIRC. The
CA ruled that the legal requirement of a VAT Invoice/OR to substantiate creditable
input VAT was complied with through OR No. 0189 which must be viewed as
conclusive proof of the payment of input VAT. To the CA, OR No. 0189
represented an undisputable acknowledgment and receipt by Mitsubishi of the
input VAT payment of MPC.
The CA brushed aside the CTAs ruling and disquisition casting doubt on the
veracity and genuineness of the Mitsubishi-issued OR No. 0189. It reasoned that

the issuance date of the said receipt, April 14, 1998, must be taken conclusively to
represent the input VAT payments made by MPC to Mitsubishi as MPC had no real
control on the issuance of the OR. The CA held that the use of a different
exchange rate reflected in the OR is of no consequence as what the OR undeniably
attests and acknowledges was Mitsubishis receipt of MPCs input VAT payment.
The Issue
Hence, the instant petition on the sole issue of whether or not respondent
[MPC] is entitled to the refund of its input VAT payments made from 1993 to 1996
amounting to [PhP] 146,760,509.48.[11]
The Courts Ruling
As a preliminary matter, it should be stressed that the BIR Commissioner,
while making reference to the figure PhP 146,760,509.48, joins the CA and the
CTA on their disposition on the propriety of the refund of or the issuance of a TCC
for the amount of PhP 10,766,939.48. In fine, the BIR Commissioner trains his
sight and focuses his arguments on the core issue of whether or not MPC is entitled
to a refund for PhP 135,993,570 (PhP 146,760,509.48 - PhP 10,766,939.48 = PhP
135,993,570) it allegedly paid as creditable input VAT for services and goods
purchased from Mitsubishi during the 1993 to 1996 stretch.

The divergent factual findings and rulings of the CTA and CA impel us to
evaluate the evidence adduced below, particularly the April 14, 1998 OR 0189 in
the amount of PhP 135,996,570 [for US$ 5,190,000 at US$1: PhP 26.203 rate of
exchange]. Verily, a claim for tax refund may be based on a statute granting tax
exemption, or, as Commissioner of Internal Revenue v. Fortune Tobacco
Corporation[12] would have it, the result of legislative grace. In such case, the
claim is to be construed strictissimi juris against the taxpayer,[13] meaning that the

claim cannot be made to rest on vague inference. Where the rule of strict
interpretation against the taxpayer is applicable as the claim for refund partakes of
the nature of an exemption, the claimant must show that he clearly falls under the
exempting statute. On the other hand, a tax refund may be, as usually it is,
predicated on tax refund provisions allowing a refund of erroneous or excess
payment of 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.[14]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.[15]
We apply the foregoing elementary principles in our evaluation on whether
OR 0189, in the backdrop of the factual antecedents surrounding its issuance,
sufficiently proves the alleged unutilized input VAT claimed by MPC.
The Court can review issues of fact where there are
divergent findings by the trial and appellate courts
As a matter of sound practice, the Court refrains from reviewing the factual
determinations of the CA or reevaluate the evidence upon which its decision is
founded. One exception to this rule is when the CA and the trial court diametrically
differ in their findings,[16] as here. In such a case, it is incumbent upon the Court to
review and determine if the CA might have overlooked, misunderstood, or
misinterpreted certain facts or circumstances of weight, which, if properly
considered, would justify a different conclusion.[17] In the instant case, the CTA,
unlike the CA, doubted the veracity of OR No. 0189 and did not appreciate the
same to support MPCs claim for tax refund or credit.
Petitioner BIR Commissioner, echoing the CTAs stand, argues against the
sufficiency of OR No. 0189 to prove unutilized input VAT payment by MPC. He
states in this regard that the BIR can require additional evidence to prove and
ascertain payment of creditable input VAT, or that the claim for refund or tax credit

was filed within the prescriptive period, or had not previously been refunded to the
taxpayer.
To bolster his position on the dubious character of OR No. 0189, or its
insufficiency to prove input VAT payment by MPC, petitioner proffers the
following arguments:
(1) The input tax covered by OR No. 0189 pertains to purchases by MPC
from Mitsubishi covering the period from 1993 to 1996; however, MPCs claim
for tax refund or credit was filed on December 20, 1999, clearly way beyond the
two-year prescriptive period set in Sec. 112 of the NIRC;
(2) MPC failed to explain why OR No. 0189 was issued by Mitsubishi
(Manila) when the invoices which the VAT were originally billed came from the
Mitsubishis head office in Japan;
(3) The exchange rate used in OR No. 0189 was pegged at PhP 26.203:
USD 1 or the exchange rate prevailing in 1993 to 1996, when, on April 14, 1998,
the date OR No. 0189 was issued, the exchange rate was already PhP 38.01 to a US
dollar;
(4) OR No. 0189 does not show or include payment of accrued interest
which Mitsubishi was charging and demanded from MPC for having advanced a
considerable amount of VAT. The demand, per records, is embodied in theMay 12,
1995 letter of Mitsubishi to MPC;
(5) MPC failed to present to the CTA its VAT returns for the second and
third quarters of 1995, when the bulk of the VAT payment covered by OR No. 0189
specifically PhP 109,329,135.17 of the total amount of PhP 135,993,570was
billed by Mitsubishi, when such return is necessary to ascertain that the total
amount covered by the receipt or a large portion thereof was not previously
refunded or credited; and

(6) No other documents proving said input VAT payment were presented
except OR No. 0189 which, considering the fact that OR No. 0188 was likewise
issued by Mitsubishi and presented before the CTA but admittedly for payments
made by MPC on progress billings covering service purchases from 1993 to 1996,
does not clearly show if such input VAT payment was also paid for the period 1993
to 1996 and would be beyond the two-year prescriptive period.
The petition is partly meritorious.
Belated payment by MPC of its obligation for creditable input VAT
As no less found by the CTA, citing the SGVs report, the payments covered
by OR No. 0189 were for goods and service purchases made by MPC through the
progress billings from Mitsubishi for the period covering April 1993 to September
1996for the E & M Equipment Erection Portion of MPCs contract with
Mitsubishi.[18] It is likewise undisputed that said payments did not include
payments for the creditable input VAT of MPC. This fact is shown by theMay 12,
1995 letter[19] from Mitsubishi where, as earlier indicated, it apprised MPC of the
advances Mitsubishi made for the VAT payments, i.e., MPCs creditable input VAT,
and for which it was holding MPC accountable for interest therefor.
In net effect, MPC did not, for the VATable MPC-Mitsubishi 1993 to 1996
transactions adverted to, immediately pay the corresponding input VAT. OR No.
0189 issued on April 14, 1998 clearly reflects the belated payment of input VAT
corresponding to the payment of the progress billings from Mitsubishi for the
period covering April 7, 1993 to September 6, 1996. SGV found that OR No.
0189 in the amount of PhP 135,993,570 (USD 5,190,000) was duly supported by
bank statement evidencing payment to Mitsubishi (Japan).[20] Undoubtedly, OR
No. 0189 proves payment by MPC of its creditable input VAT relative to its
purchases from Mitsubishi.
OR No. 0189 by itself sufficiently proves payment of VAT

The CA, citing Sec. 110(A)(1)(B) of the NIRC, held that OR No. 0189
constituted sufficient proof of payment of creditable input VAT for the progress
billings from Mitsubishi for the period covering April 7, 1993 to September 6,
1996. Sec. 110(A)(1)(B) of the NIRC pertinently provides:
Section 110. Tax Credits.
A. Creditable Input Tax.
(1) Any input tax evidenced by a VAT invoice or official receipt issued in
accordance with Section 113 hereof on the following transactions shall be
creditable against the output tax:
(a) Purchase or importation of goods:
xxxx
(b) Purchase of services on which a value-added tax has been actually
paid. (Emphasis ours.)

Without necessarily saying that the BIR is precluded from requiring

additional evidence to prove that input tax had indeed paid or, in fine, that the
taxpayer is indeed entitled to a tax refund or credit for input VAT, we agree with
the CAs above disposition. As the Court distinctly notes, the law considers a dulyexecuted VAT invoice or OR referred to in the above provision as sufficient
evidence to support a claim for input tax credit. And any doubt as to what OR No.
0189 was for or tended to prove should reasonably be put to rest by the SGV report
on which the CTA notably placed much reliance. The SGV report stated that [OR]
No. 0189 dated April 14, 1998 is for the payment of the VAT on the progress
billings from Mitsubishi Japan for the period April 7, 1993 to September 6, 1996
for the E & M Equipment Erection Portion of the Companys contract with
Mitsubishi Corporation (Japan).[21]
VAT presumably paid on April 14, 1998

While available records do not clearly indicate when MPC actually paid the
creditable input VAT amounting to PhP 135,993,570 (USD 5,190,000) for the
aforesaid 1993 to 1996 service purchases, the presumption is that payment was
made on the date appearing on OR No. 0189, i.e., April 14, 1998. In fact, said
creditable input VAT was reflected in MPCs VAT return for the second quarter of
1998.
The aforementioned May 12, 1995 letter from Mitsubishi to MPC provides
collaborating proof of the belated payment of the creditable input VAT angle. To
reiterate, Mitsubishi, via said letter, apprised MPC of the VAT component of the
service purchases MPC made and reminded MPC that Mitsubishi had advanced
VAT payments to which Mitsubishi was entitled and from which it was demanding
interest payment. Given the scenario depicted in said letter, it is understandable
why Mitsubishi, in its effort to recover the amount it advanced, used the PhP
26.203: USD 1 exchange formula in OR No. 0189 for USD 5,190,000.
No showing of interest payment not fatal to claim for refund
Contrary to petitioners posture, the matter of nonpayment by MPC of the
interests demanded by Mitsubishi is not an argument against the fact of payment
by MPC of its creditable input VAT or of the authenticity or genuineness of OR
No. 0189; for at the end of the day, the matter of interest payment was between
Mitsubishi and MPC and may very well be covered by another receipt. But the
more important consideration is the fact that MPC, as confirmed by the SGV, paid
its obligation to Mitsubishi, and the latter issued to MPC OR No. 0189, for the
VAT component of its 1993 to 1996 service purchases.
The next question is, whether or not MPC is entitled to a refund or a TCC
for the alleged unutilized input VAT of PhP 135,993,570 covered by OR No. 0189
which sufficiently proves payment of the input VAT.
We answer the query in the negative.

Claim for refund or tax credit filed out of time

The claim for refund or tax credit for the creditable input VAT payment
made by MPC embodied in OR No. 0189 was filed beyond the period provided by
law for such claim. Sec. 112(A) of the NIRC pertinently reads:
(A) Zero-rated or Effectively Zero-rated Sales. Any VAT-registered
person, whose sales are zero-rated or effectively zero-rated may, within two (2)
years after the close of the taxable quarter when the sales were made, apply
for the issuance of a tax credit certificate or refund of creditable input
tax due or paid attributable to such sales, except transitional input tax, to the
extent that such input tax has not been applied against output tax: x x
x. (Emphasis ours.)

The above proviso clearly provides in no uncertain terms that unutilized

input VAT payments not otherwise used for any internal revenue tax due the
taxpayer must be claimed within two years reckoned from the close of the
taxable quarter when the relevant sales were made pertaining to the input
VAT regardless of whether said tax was paid or not. As the CA aptly puts it,
albeit it erroneously applied the aforequoted Sec. 112(A), [P]rescriptive period
commences from the close of the taxable quarter when the sales were made and not
from the time the input VAT was paid nor from the time the official receipt was
issued.[22] Thus, when a zero-rated VAT taxpayer pays its input VAT a year after
the pertinent transaction, said taxpayer only has a year to file a claim for refund or
tax credit of the unutilized creditable input VAT. The reckoning frame would
always be the end of the quarter when the pertinent sales or transaction was made,
regardless when the input VAT was paid. Be that as it may, and given that the last
creditable input VAT due for the period covering the progress billing of September
6, 1996 is the third quarter of 1996 ending on September 30, 1996, any claim for
unutilized creditable input VAT refund or tax credit for said quarter prescribed two
years after September 30, 1996 or, to be precise, on September 30,
1998. Consequently, MPCs claim for refund or tax credit filed on December 10,
1999 had already prescribed.
Reckoning for prescriptive period under

Secs. 204(C) and 229 of the NIRC inapplicable

To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or
229 of the NIRC which, for the purpose of refund, prescribes a different starting
point for the two-year prescriptive limit for the filing of a claim therefor. Secs.
204(C) and 229 respectively provide:
Sec. 204. Authority of the Commissioner to Compromise, Abate and
Refund or Credit Taxes. The Commissioner may
xxxx
(c) Credit or refund taxes erroneously or illegally received or penalties
imposed without authority, refund the value of internal revenue stamps when they
are returned in good condition by the purchaser, and, in his discretion, redeem or
change unused stamps that have been rendered unfit for use and refund their value
upon proof of destruction. No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with the Commissioner a claim
for credit or refundwithin two (2) years after the payment of the tax or
penalty: Provided, however, That a return filed showing an overpayment shall be
considered as a written claim for credit or refund.
xxxx
Sec. 229. Recovery of Tax Erroneously or Illegally Collected. No suit or
proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without
authority, of any sum alleged to have been excessively or in any manner
wrongfully collected without authority, or of any sum alleged to have been
excessively or in any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner; but such suit or proceeding
may be maintained, whether or not such tax, penalty, or sum has been paid under
protest or duress.
In any case, no such suit or proceeding shall be filed after
the expiration of two (2) years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without a written claim
therefor, refund or credit any tax, where on the face of the return upon which
payment was made, such payment appears clearly to have been erroneously
paid. (Emphasis ours.)

Notably, the above provisions also set a two-year prescriptive period,

reckoned from date of payment of the tax or penalty, for the filing of a claim of
refund or tax credit. Notably too, both provisions apply only to instances of
erroneous payment or illegal collection of internal revenue taxes.
MPCs creditable input VAT not erroneously paid
For perspective, under Sec. 105 of the NIRC, creditable input VAT is an
indirect tax which can be shifted or passed on to the buyer, transferee, or lessee of
the goods, properties, or services of the taxpayer. The fact that the subsequent sale
or transaction involves a wholly-tax exempt client, resulting in a zero-rated or
effectively zero-rated transaction, does not, standing alone, deprive the taxpayer of
its right to a refund for any unutilized creditable input VAT, albeit the erroneous,
illegal, or wrongful payment angle does not enter the equation.
In Commissioner of Internal Revenue v. Seagate Technology
(Philippines), the Court explained the nature of the VAT and the entitlement to tax
refund or credit of a zero-rated taxpayer:
Viewed broadly, the VAT is a uniform tax x x x levied on every
importation of goods, whether or not in the course of trade or business,
or imposed on each sale, barter, exchange or lease of goods or
properties or on each rendition of services in the course of trade or
business as they pass along the production and distribution chain, the
tax being limited only to the value added to such goods, properties or
services by the seller, transferor or lessor. It is an indirect tax that may
be shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services. As such, it should be understood not in the
context of the person or entity that is primarily, directly and legally
liable for its payment, but in terms of its nature as a tax on
consumption. In either case, though, the same conclusion is arrived at.

The law that originally imposed the VAT in the country, as well
as the subsequent amendments of that law, has been drawn from
the tax credit method. Such method adopted the mechanics and selfenforcement features of the VAT as first implemented and practiced
in Europe x x x. Under the present method that relies on invoices, an

entity can credit against or subtract from the VAT charged on its sales
or outputs the VAT paid on its purchases, inputs and imports.

If at the end of a taxable quarter the output taxes charged by a

seller are equal to the input taxes passed on by the suppliers, no
payment is required. It is when the output taxes exceed the input
taxes that the excess has to be paid. If, however, the input taxes
exceed the output taxes, the excess shall be carried over to the
succeeding quarter or quarters. Should the input taxes result from
zero-rated or effectively zero-rated transactions or from the acquisition
of capital goods, any excess over the output taxes shall instead be
refunded to the taxpayer or credited against other internal revenue
taxes.

xxxx

Zero-rated transactions generally refer to the export sale of

goods and supply of services. The tax rate is set at zero. When
applied to the tax base, such rate obviously results in no tax
chargeable against the purchaser. The seller of such transactions
charges no output tax, but can claim a refund of or a tax credit
certificate for the VAT previously charged by suppliers.
[23]
(Emphasis added.)

Considering the foregoing discussion, it is clear that Sec. 112(A) of the

NIRC, providing a two-year prescriptive period reckoned from the close of the
taxable quarter when the relevant sales or transactions were made pertaining to the
creditable input VAT, applies to the instant case, and not to the other actions which
refer to erroneous payment of taxes.
As a final consideration, the Court wishes to remind the BIR and other tax
agencies of their duty to treat claims for refunds and tax credits with proper
attention and urgency. Had RDO No. 60 and, later, the BIR proper acted, instead of
sitting, on MPCs underlying application for effective zero rating, the matter of
addressing MPCs right, or lack of it, to tax credit or refund could have plausibly

been addressed at their level and perchance freed the taxpayer and the government
from the rigors of a tedious litigation.
The all too familiar complaint is that the government acts with dispatch
when it comes to tax collection, but pays little, if any, attention to tax claims for
refund or exemption. It is high time our tax collectors prove the cynics wrong.
WHEREFORE, the petition is PARTLY GRANTED. The Decision dated
December 22, 2005 and the Resolution dated March 31, 2006 of the CA in CAG.R. SP No. 78280 are AFFIRMED with the MODIFICATION that the claim of
respondent MPC for tax refund or credit to the extent of PhP 135,993,570,
representing its input VAT payments for service purchases from Mitsubishi
Corporation of Japan for the construction of a portion of its Pagbilao, Quezon
power station, isDENIED on the ground that the claim had
prescribed. Accordingly, petitioner Commissioner of Internal Revenue is ordered
to refund or, in the alternative, issue a tax credit certificate in favor of MPC, its
unutilized input VAT payments directly attributable to its effectively zero-rated
sales for the second quarter in the total amount of PhP 10,766,939.48.
No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

Supreme Court
Manila

FIRST DIVISION

COMMISSIONER OF INTERNAL

G.R. No. 184823

REVENUE,

Petitioner,

Present:

CORONA, C. J., Chairperson,

- versus -

VELASCO, JR.,

LEONARDO-DE CASTRO,

DEL CASTILLO, and

PEREZ, JJ.
AICHI FORGING COMPANY OF

ASIA, INC.,

Promulgated:
Respondent.

October 6, 2010
x------------------------------------------------------------------x

DECISION

DEL CASTILLO, J.:

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.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to
set aside the July 30, 2008 Decision[1] and the October 6, 2008 Resolution[2] of the
Court of Tax Appeals (CTA) En Banc.
Factual Antecedents

Respondent Aichi Forging Company of Asia, Inc., a corporation duly organized and
existing under the laws of the Republic of the Philippines, is engaged in the
manufacturing, producing, and processing of steel and its by-products.[3] It is
registered with the Bureau of Internal Revenue (BIR) as a Value-Added Tax (VAT)
entity[4] and its products, close impression die steel forgings and tool and dies,
are registered with the Board of Investments (BOI) as a pioneer status.[5]

On September 30, 2004, respondent filed a claim for refund/credit of input VAT for
the period July 1, 2002 to September 30, 2002 in the total amount of P3,891,123.82
with the petitioner Commissioner of Internal Revenue (CIR), through the Department
of Finance (DOF) One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center.
[6]

Proceedings before the Second Division of the CTA

On even date, respondent filed a Petition for Review[7] with the CTA for the
refund/credit of the same input VAT. The case was docketed as CTA Case No. 7065
and was raffled to the Second Division of the CTA.

In the Petition for Review, respondent alleged that for the period July 1, 2002 to
September 30, 2002, it generated and recorded zero-rated sales in the amount of
P131,791,399.00,[8] which was paid pursuant to Section 106(A) (2) (a) (1), (2) and
(3) of the National Internal Revenue Code of 1997 (NIRC);[9] that for the said period,
it incurred and paid input VAT amounting to P3,912,088.14 from purchases and

importation attributable to its zero-rated sales;[10] and that in its application for
refund/credit filed with the DOF One-Stop Shop Inter-Agency Tax Credit and Duty
Drawback Center, it only claimed the amount of P3,891,123.82.[11]

In response, petitioner filed his Answer[12] raising the following special and
affirmative defenses, to wit:

4.
Petitioners alleged claim for refund is subject to administrative
investigation by the Bureau;

5.
Petitioner must prove that it paid VAT input taxes for the period in
question;

6.
Petitioner must prove that its sales are export sales contemplated under
Sections 106(A) (2) (a), and 108(B) (1) of the Tax Code of 1997;

7.
Petitioner must prove that the claim was filed within the two (2) year
period prescribed in Section 229 of the Tax Code;

8.
In an action for refund, the burden of proof is on the taxpayer to
establish its right to refund, and failure to sustain the burden is fatal to the claim
for refund; and

9.
Claims for refund are construed strictly against the claimant for the same
partake of the nature of exemption from taxation.[13]

Trial ensued, after which, on January 4, 2008, the Second Division of the CTA
rendered a Decision partially granting respondents claim for refund/credit.
Pertinent portions of the Decision read:

For a VAT registered entity whose sales are zero-rated, to validly claim a refund,
Section 112 (A) of the NIRC of 1997, as amended, provides:

SEC. 112. Refunds or Tax Credits of Input Tax.

(A)
Zero-rated or Effectively Zero-rated Sales. Any VAT-registered person,
whose sales are zero-rated or effectively zero-rated may, within two (2) years after
the close of the taxable quarter when the sales were made, apply for the issuance
of a tax credit certificate or refund of creditable input tax due or paid attributable to
such sales, except transitional input tax, to the extent that such input tax has not
been applied against output tax: x x x

Pursuant to the above provision, petitioner must comply with the following
requisites: (1) the taxpayer is engaged in sales which are zero-rated or effectively
zero-rated; (2) the taxpayer is VAT-registered; (3) the claim must be filed within two
years after the close of the taxable quarter when such sales were made; and (4) the
creditable input tax due or paid must be attributable to such sales, except the
transitional input tax, to the extent that such input tax has not been applied against
the output tax.

The Court finds that the first three requirements have been complied [with] by
petitioner.

With regard to the first requisite, the evidence presented by petitioner, such as the
Sales Invoices (Exhibits II to II-262, JJ to JJ-431, KK to KK-394 and LL)
shows that it is engaged in sales which are zero-rated.

The second requisite has likewise been complied with. The Certificate of
Registration with OCN 1RC0000148499 (Exhibit C) with the BIR proves that
petitioner is a registered VAT taxpayer.

In compliance with the third requisite, petitioner filed its administrative claim for
refund on September 30, 2004 (Exhibit N) and the present Petition for Review on
September 30, 2004, both within the two (2) year prescriptive period from the close

of the taxable quarter when the sales were made, which is from September 30,
2002.

As regards, the fourth requirement, the Court finds that there are some documents
and claims of petitioner that are baseless and have not been satisfactorily
substantiated.

xxxx

In sum, petitioner has sufficiently proved that it is entitled to a refund or issuance

of a tax credit certificate representing unutilized excess input VAT payments for the
period July 1, 2002 to September 30, 2002, which are attributable to its zero-rated
sales for the same period, but in the reduced amount of P3,239,119.25, computed
as follows:

Amount of Claimed Input VAT

P

3,891,123.82

Less:

Exceptions as found by the ICPA

41,020.37
Net Creditable Input VAT
P

3,850,103.45

Less:

Output VAT Due

610,984.20
Excess Creditable Input VAT
P

3,239,119.25

WHEREFORE, premises considered, the present Petition for Review is PARTIALLY

GRANTED. Accordingly, respondent is hereby ORDERED TO REFUND OR ISSUE A TAX
CREDIT CERTIFICATE in favor of petitioner [in] the reduced amount of THREE
MILLION TWO HUNDRED THIRTY NINE THOUSAND ONE HUNDRED NINETEEN AND
25/100 PESOS (P3,239,119.25), representing the unutilized input VAT incurred for
the months of July to September 2002.

SO ORDERED.[14]

Dissatisfied with the above-quoted Decision, petitioner filed a Motion for Partial
Reconsideration,[15] insisting that the administrative and the judicial claims were
filed beyond the two-year period to claim a tax refund/credit provided for under
Sections 112(A) and 229 of the NIRC. He reasoned that since the year 2004 was a
leap year, the filing of the claim for tax refund/credit on September 30, 2004 was
beyond the two-year period, which expired on September 29, 2004.[16] He cited as
basis Article 13 of the Civil Code,[17] which provides that when the law speaks of a
year, it is equivalent to 365 days. In addition, petitioner argued that the
simultaneous filing of the administrative and the judicial claims contravenes
Sections 112 and 229 of the NIRC.[18] According to the petitioner, a prior filing of an
administrative claim is a condition precedent[19] before a judicial claim can be
filed. He explained that the rationale of such requirement rests not only on the
doctrine of exhaustion of administrative remedies but also on the fact that the CTA
is an appellate body which exercises the power of judicial review over
administrative actions of the BIR. [20]

The Second Division of the CTA, however, denied petitioners Motion for Partial
Reconsideration for lack of merit. Petitioner thus elevated the matter to the CTA En
Banc via a Petition for Review.[21]

Ruling of the CTA En Banc

On July 30, 2008, the CTA En Banc affirmed the Second Divisions Decision allowing
the partial tax refund/credit in favor of respondent. However, as to the reckoning
point for counting the two-year period, the CTA En Banc ruled:

Petitioner argues that the administrative and judicial claims were filed beyond the
period allowed by law and hence, the honorable Court has no jurisdiction over the
same. In addition, petitioner further contends that respondent's filing of the
administrative and judicial [claims] effectively eliminates the authority of the
honorable Court to exercise jurisdiction over the judicial claim.

We are not persuaded.

Section 114 of the 1997 NIRC, and We quote, to wit:

SEC. 114. Return and Payment of Value-added Tax.

(A) In General. Every person liable to pay the value-added tax imposed under this
Title shall file a quarterly return of the amount of his gross sales or receipts within
twenty-five (25) days following the close of each taxable quarter prescribed for each
taxpayer: Provided, however, That VAT-registered persons shall pay the value-added
tax on a monthly basis.

[x x x x ]

Based on the above-stated provision, a taxpayer has twenty five (25) days from the
close of each taxable quarter within which to file a quarterly return of the amount of
his gross sales or receipts. In the case at bar, the taxable quarter involved was for
the period of July 1, 2002 to September 30, 2002. Applying Section 114 of the 1997
NIRC, respondent has until October 25, 2002 within which to file its quarterly return
for its gross sales or receipts [with] which it complied when it filed its VAT Quarterly
Return on October 20, 2002.

In relation to this, the reckoning of the two-year period provided under Section 229
of the 1997 NIRC should start from the payment of tax subject claim for refund. As
stated above, respondent filed its VAT Return for the taxable third quarter of 2002
on October 20, 2002. Thus, respondent's administrative and judicial claims for

refund filed on September 30, 2004 were filed on time because AICHI has until
October 20, 2004 within which to file its claim for refund.

In addition, We do not agree with the petitioner's contention that the 1997 NIRC
requires the previous filing of an administrative claim for refund prior to the judicial
claim. This should not be the case as the law does not prohibit the simultaneous
filing of the administrative and judicial claims for refund. What is controlling is that
both claims for refund must be filed within the two-year prescriptive period.

In sum, the Court En Banc finds no cogent justification to disturb the findings and
conclusion spelled out in the assailed January 4, 2008 Decision and March 13, 2008
Resolution of the CTA Second Division. What the instant petition seeks is for the
Court En Banc to view and appreciate the evidence in their own perspective of
things, which unfortunately had already been considered and passed upon.

WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and
DISMISSED for lack of merit. Accordingly, the January 4, 2008 Decision and March
13, 2008 Resolution of the CTA Second Division in CTA Case No. 7065 entitled,
AICHI Forging Company of Asia, Inc. petitioner vs. Commissioner of Internal
Revenue, respondent are hereby AFFIRMED in toto.

SO ORDERED.[22]

Petitioner sought reconsideration but the CTA En Banc denied[23] his Motion for
Reconsideration.

Issue

Hence, the present recourse where petitioner interposes the issue of whether
respondents judicial and administrative claims for tax refund/credit were filed
within the two-year prescriptive period provided in Sections 112(A) and 229 of

the NIRC.[24]

Petitioners Arguments

Petitioner maintains that respondents administrative and judicial claims for

tax refund/credit were filed in violation of Sections 112(A) and 229 of the NIRC.[25]
He posits that pursuant to Article 13 of the Civil Code,[26] since the year 2004 was
a leap year, the filing of the claim for tax refund/credit on September 30, 2004 was
beyond the two-year period, which expired on September 29, 2004.[27]

Petitioner further argues that the CTA En Banc erred in applying Section
114(A) of the NIRC in determining the start of the two-year period as the said
provision pertains to the compliance requirements in the payment of VAT.[28] He
asserts that it is Section 112, paragraph (A), of the same Code that should apply
because it specifically provides for the period within which a claim for tax refund/
credit should be made.[29]

Petitioner likewise puts in issue the fact that the administrative claim with
the BIR and the judicial claim with the CTA were filed on the same day.[30] He
opines that the simultaneous filing of the administrative and the judicial claims
contravenes Section 229 of the NIRC, which requires the prior filing of an
administrative claim.[31] He insists that such procedural requirement is based on
the doctrine of exhaustion of administrative remedies and the fact that the CTA is
an appellate body exercising judicial review over administrative actions of the CIR.
[32]

Respondents Arguments

For its part, respondent claims that it is entitled to a refund/credit of its

unutilized input VAT for the period July 1, 2002 to September 30, 2002 as a matter
of right because it has substantially complied with all the requirements provided by
law.[33] Respondent likewise defends the CTA En Banc in applying Section 114(A)
of the NIRC in computing the prescriptive period for the claim for tax refund/credit.

Respondent believes that Section 112(A) of the NIRC must be read together with
Section 114(A) of the same Code.[34]

As to the alleged simultaneous filing of its administrative and judicial claims,

respondent contends that it first filed an administrative claim with the One-Stop
Shop Inter-Agency Tax Credit and Duty Drawback Center of the DOF before it filed a
judicial claim with the CTA.[35] To prove this, respondent points out that its
Claimant Information Sheet No. 49702[36] and BIR Form No. 1914 for the third
quarter of 2002,[37] which were filed with the DOF, were attached as Annexes M
and N, respectively, to the Petition for Review filed with the CTA.[38] Respondent
further contends that the non-observance of the 120-day period given to the CIR to
act on the claim for tax refund/credit in Section 112(D) is not fatal because what is
important is that both claims are filed within the two-year prescriptive period.[39]
In support thereof, respondent cites Commissioner of Internal Revenue v. Victorias
Milling Co., Inc.[40] where it was ruled that [i]f, however, the [CIR] takes time in
deciding the claim, and the period of two years is about to end, the suit or
proceeding must be started in the [CTA] before the end of the two-year period
without awaiting the decision of the [CIR].[41] Lastly, respondent argues that even
if the period had already lapsed, it may be suspended for reasons of equity
considering that it is not a jurisdictional requirement.[42]

Our Ruling

The petition has merit.

Unutilized input VAT must be claimed within two years after the close of the taxable
quarter when the sales were made

In computing the two-year prescriptive period for claiming a refund/credit of

unutilized input VAT, the Second Division of the CTA applied Section 112(A) of the
NIRC, which states:

SEC. 112. Refunds or Tax Credits of Input Tax.

(A) Zero-rated or Effectively Zero-rated Sales Any VAT-registered

person, whose sales are zero-rated or effectively zero-rated may, within two (2)
years after the close of the taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such
input tax has not been applied against output tax: Provided, however, That in the
case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108
(B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been
duly accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in
zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods
or properties or services, and the amount of creditable input tax due or paid cannot
be directly and entirely attributed to any one of the transactions, it shall be
allocated proportionately on the basis of the volume of sales. (Emphasis supplied.)

The CTA En Banc, on the other hand, took into consideration Sections 114
and 229 of the NIRC, which read:

SEC. 114. Return and Payment of Value-Added Tax.

(A) In General. Every person liable to pay the value-added tax imposed under this
Title shall file a quarterly return of the amount of his gross sales or receipts within
twenty-five (25) days following the close of each taxable quarter prescribed for each
taxpayer: Provided, however, That VAT-registered persons shall pay the value-added
tax on a monthly basis.
Any person, whose registration has been cancelled in accordance with Section 236,
shall file a return and pay the tax due thereon within twenty-five (25) days from the
date of cancellation of registration: Provided, That only one consolidated return shall
be filed by the taxpayer for his principal place of business or head office and all
branches.
xxxx

SEC. 229. Recovery of tax erroneously or illegally collected.

No suit or proceeding shall be maintained in any court for the recovery of

any national internal revenue tax hereafter 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 excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such
tax, penalty or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2)
years from the date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment: Provided, however, That the Commissioner
may, even without written claim therefor, refund or credit any tax, where on the
face of the return upon which payment was made, such payment appears clearly to
have been erroneously paid. (Emphasis supplied.)

Hence, the CTA En Banc ruled that the reckoning of the two-year period for filing a
claim for refund/credit of unutilized input VAT should start from the date of payment
of tax and not from the close of the taxable quarter when the sales were made.[43]

The pivotal question of when to reckon the running of the two-year

prescriptive period, however, has already been resolved in Commissioner of Internal
Revenue v. Mirant Pagbilao Corporation,[44] where we ruled that Section 112(A) of
the NIRC is the applicable provision in determining the start of the two-year period
for claiming a refund/credit of unutilized input VAT, and that Sections 204(C) and
229 of the NIRC are inapplicable as both provisions apply only to instances of
erroneous payment or illegal collection of internal revenue taxes.[45] We explained
that:

The above proviso [Section 112 (A) of the NIRC] clearly provides in no uncertain
terms that unutilized input VAT payments not otherwise used for any internal
revenue tax due the taxpayer must be claimed within two years reckoned from the
close of the taxable quarter when the relevant sales were made pertaining to the
input VAT regardless of whether said tax was paid or not. As the CA aptly puts it,
albeit it erroneously applied the aforequoted Sec. 112 (A), [P]rescriptive period
commences from the close of the taxable quarter when the sales were made and
not from the time the input VAT was paid nor from the time the official receipt was
issued. Thus, when a zero-rated VAT taxpayer pays its input VAT a year after the

pertinent transaction, said taxpayer only has a year to file a claim for refund or tax
credit of the unutilized creditable input VAT. The reckoning frame would always be
the end of the quarter when the pertinent sales or transaction was made, regardless
when the input VAT was paid. Be that as it may, and given that the last creditable
input VAT due for the period covering the progress billing of September 6, 1996 is
the third quarter of 1996 ending on September 30, 1996, any claim for unutilized
creditable input VAT refund or tax credit for said quarter prescribed two years after
September 30, 1996 or, to be precise, on September 30, 1998. Consequently, MPCs
claim for refund or tax credit filed on December 10, 1999 had already prescribed.

Reckoning for prescriptive period under

Secs. 204(C) and 229 of the NIRC inapplicable

To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of
the NIRC which, for the purpose of refund, prescribes a different starting point for
the two-year prescriptive limit for the filing of a claim therefor. Secs. 204(C) and 229
respectively provide:

Sec. 204. Authority of the Commissioner to Compromise, Abate and Refund or

Credit Taxes. The Commissioner may

xxxx

(c) Credit or refund taxes erroneously or illegally received or penalties imposed

without authority, refund the value of internal revenue stamps when they are
returned in good condition by the purchaser, and, in his discretion, redeem or
change unused stamps that have been rendered unfit for use and refund their value
upon proof of destruction. No credit or refund of taxes or penalties shall be allowed
unless the taxpayer files in writing with the Commissioner a claim for credit or
refund within two (2) years after the payment of the tax or penalty: Provided,
however, That a return filed showing an overpayment shall be considered as a
written claim for credit or refund.

xxxx

Sec. 229. Recovery of Tax Erroneously or Illegally Collected. No suit or proceeding

shall be maintained in any court for the recovery of any national internal revenue
tax hereafter alleged to have been erroneously or illegally assessed or collected, or
of any penalty claimed to have been collected without authority, of any sum alleged
to have been excessively or in any manner wrongfully collected without authority,
or of any sum alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such
tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2)
years from the date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment: Provided, however, That the Commissioner
may, even without a written claim therefor, refund or credit any tax, where on the
face of the return upon which payment was made, such payment appears clearly to
have been erroneously paid.

Notably, the above provisions also set a two-year prescriptive period, reckoned from
date of payment of the tax or penalty, for the filing of a claim of refund or tax credit.
Notably too, both provisions apply only to instances of erroneous payment or illegal
collection of internal revenue taxes.

MPCs creditable input VAT not erroneously paid

For perspective, under Sec. 105 of the NIRC, creditable input VAT is an indirect tax
which can be shifted or passed on to the buyer, transferee, or lessee of the goods,
properties, or services of the taxpayer. The fact that the subsequent sale or
transaction involves a wholly-tax exempt client, resulting in a zero-rated or
effectively zero-rated transaction, does not, standing alone, deprive the taxpayer of
its right to a refund for any unutilized creditable input VAT, albeit the erroneous,
illegal, or wrongful payment angle does not enter the equation.

xxxx

Considering the foregoing discussion, it is clear that Sec. 112 (A) of the NIRC,
providing a two-year prescriptive period reckoned from the close of the taxable
quarter when the relevant sales or transactions were made pertaining to the
creditable input VAT, applies to the instant case, and not to the other actions which
refer to erroneous payment of taxes.[46] (Emphasis supplied.)

In view of the foregoing, we find that the CTA En Banc erroneously applied
Sections 114(A) and 229 of the NIRC in computing the two-year prescriptive period
for claiming refund/credit of unutilized input VAT. To be clear, Section 112 of the
NIRC is the pertinent provision for the refund/credit of input VAT. Thus, the two-year
period should be reckoned from the close of the taxable quarter when the sales
were made.

The administrative claim was timely filed

Bearing this in mind, we shall now proceed to determine whether the

administrative claim was timely filed.

Relying on Article 13 of the Civil Code,[47] which provides that a year is equivalent
to 365 days, and taking into account the fact that the year 2004 was a leap year,
petitioner submits that the two-year period to file a claim for tax refund/ credit for
the period July 1, 2002 to September 30, 2002 expired on September 29, 2004.[48]

We do not agree.

In Commissioner of Internal Revenue v. Primetown Property Group, Inc.,[49] we said

that as between the Civil Code, which provides that a year is equivalent to 365
days, and the Administrative Code of 1987, which states that a year is composed of
12 calendar months, it is the latter that must prevail following the legal maxim, Lex
posteriori derogat priori.[50] Thus:

Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the
Administrative Code of 1987 deal with the same subject matter the computation
of legal periods. Under the Civil Code, a year is equivalent to 365 days whether it be
a regular year or a leap year. Under the Administrative Code of 1987, however, a
year is composed of 12 calendar months. Needless to state, under the
Administrative Code of 1987, the number of days is irrelevant.

There obviously exists a manifest incompatibility in the manner of

computing legal periods under the Civil Code and the Administrative Code of 1987.
For this reason, we hold that Section 31, Chapter VIII, Book I of the Administrative
Code of 1987, being the more recent law, governs the computation of legal periods.
Lex posteriori derogat priori.

Applying Section 31, Chapter VIII, Book I of the Administrative Code of 1987 to this
case, the two-year prescriptive period (reckoned from the time respondent filed its
final adjusted return on April 14, 1998) consisted of 24 calendar months, computed
as follows:

Year 1 1st calendar month

April 15, 1998 to May 14, 1998
2nd calendar month
May 15, 1998 to June 14, 1998
3rd calendar month
June 15, 1998 to July 14, 1998
4th calendar month
July 15, 1998 to August 14, 1998
5th calendar month
August 15, 1998 to September 14, 1998
6th calendar month
September 15, 1998 to October 14, 1998
7th calendar month

October 15, 1998 to November 14, 1998

8th calendar month
November 15, 1998 to December 14, 1998
9th calendar month
December 15, 1998 to January 14, 1999
10th calendar month
January 15, 1999 to February 14, 1999
11th calendar month
February 15, 1999 to March 14, 1999
12th calendar month
March 15, 1999 to April 14, 1999

Year 2 13th calendar month

April 15, 1999 to May 14, 1999
14th calendar month
May 15, 1999 to June 14, 1999
15th calendar month
June 15, 1999 to July 14, 1999
16th calendar month
July 15, 1999 to August 14, 1999
17th calendar month
August 15, 1999 to September 14, 1999
18th calendar month
September 15, 1999 to October 14, 1999
19th calendar month
October 15, 1999 to November 14, 1999

20th calendar month

November 15, 1999 to December 14, 1999
21st calendar month
December 15, 1999 to January 14, 2000
22nd calendar month
January 15, 2000 to February 14, 2000
23rd calendar month
February 15, 2000 to March 14, 2000
24th calendar month
March 15, 2000 to April 14, 2000

We therefore hold that respondent's petition (filed on April 14, 2000) was filed on
the last day of the 24th calendar month from the day respondent filed its final
adjusted return. Hence, it was filed within the reglementary period.[51]

Applying this to the present case, the two-year period to file a claim for tax
refund/credit for the period July 1, 2002 to September 30, 2002 expired on
September 30, 2004. Hence, respondents administrative claim was timely filed.

The filing of the judicial claim was premature

However, notwithstanding the timely filing of the administrative claim, we

are constrained to deny respondents claim for tax refund/credit for having been
filed in violation of Section 112(D) of the NIRC, which provides that:

SEC. 112. Refunds or Tax Credits of Input Tax.

xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made.
In proper cases, the Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred twenty (120) days from the
date of submission of complete documents in support of the application filed in
accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or
the failure on the part of the Commissioner to act on the application within the
period prescribed above, the taxpayer affected may, within thirty (30) days from the
receipt of the decision denying the claim or after the expiration of the one hundred
twenty day-period, appeal the decision or the unacted claim with the Court of Tax
Appeals. (Emphasis supplied.)

Section 112(D) of the NIRC clearly provides that the CIR has 120 days, from
the date of the submission of the complete documents in support of the application
[for tax refund/credit], within which to grant or deny the claim. In case of full or
partial denial by the CIR, the taxpayers recourse is to file an appeal before the CTA
within 30 days from receipt of the decision of the CIR. However, if after the 120day period the CIR fails to act on the application for tax refund/credit, the remedy of
the taxpayer is to appeal the inaction of the CIR to CTA within 30 days.

In this case, the administrative and the judicial claims were simultaneously filed on
September 30, 2004. Obviously, respondent did not wait for the decision of the CIR
or the lapse of the 120-day period. For this reason, we find the filing of the judicial
claim with the CTA premature.

Respondents assertion that the non-observance of the 120-day period is not fatal to
the filing of a judicial claim as long as both the administrative and the judicial claims
are filed within the two-year prescriptive period[52] has no legal basis.

There is nothing in Section 112 of the NIRC to support respondents view.

Subsection (A) of the said provision states that any VAT-registered person, whose
sales are zero-rated or effectively zero-rated may, within two years after the close
of the taxable quarter when the sales were made, apply for the issuance of a tax

credit certificate or refund of creditable input tax due or paid attributable to such
sales. The phrase within two (2) years x x x apply for the issuance of a tax credit
certificate or refund refers to applications for refund/credit filed with the CIR and
not to appeals made to the CTA. This is apparent in the first paragraph of
subsection (D) of the same provision, which states that the CIR has 120 days from
the submission of complete documents in support of the application filed in
accordance with Subsections (A) and (B) within which to decide on the claim.

In fact, applying the two-year period to judicial claims would render nugatory
Section 112(D) of the NIRC, which already provides for a specific period within which
a taxpayer should appeal the decision or inaction of the CIR. The second paragraph
of Section 112(D) of the NIRC envisions two scenarios: (1) when a decision is issued
by the CIR before the lapse of the 120-day period; and (2) when no decision is made
after the 120-day period. In both instances, the taxpayer has 30 days within which
to file an appeal with the CTA. As we see it then, the 120-day period is crucial in
filing an appeal with the CTA.

With regard to Commissioner of Internal Revenue v. Victorias Milling, Co., Inc.[53]

relied upon by respondent, we find the same inapplicable as the tax provision
involved in that case is Section 306, now Section 229 of the NIRC. And as already
discussed, Section 229 does not apply to refunds/credits of input VAT, such as the
instant case.

In fine, the premature filing of respondents claim for refund/credit of input VAT
before the CTA warrants a dismissal inasmuch as no jurisdiction was acquired by the
CTA.

WHEREFORE, the Petition is hereby GRANTED. The assailed July 30, 2008 Decision
and the October 6, 2008 Resolution of the Court of Tax Appeals are hereby
REVERSED and SET ASIDE. The Court of Tax Appeals Second Division is DIRECTED to
dismiss CTA Case No. 7065 for having been prematurely filed.

SO ORDERED.

G.R. No. 187485

October 8, 2013

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SAN ROQUE POWER CORPORATION, Respondent.
x-----------------------x
G.R. No. 196113
TAGANITO MINING CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
x-----------------------x
G.R. No. 197156
PHILEX MINING CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
RESOLUTION
CARPIO, J.:
This Resolution resolves the Motion for Reconsideration and the Supplemental Motion for
Reconsideration filed by San Roque Power Corporation (San Roque) in G.R. No. 187485,
the Comment to the Motion for Reconsideration filed by the Commissioner of Internal
Revenue (CIR) in G.R. No. 187485, the Motion for Reconsideration filed by the CIR in
G.R.No. 196113, and the Comment to the Motion for Reconsideration filed by Taganito
Mining Corporation (Taganito) in G.R. No. 196113.
San Roque prays that the rule established in our 12 February 2013 Decision be given only a
prospective effect, arguing that "the manner by which the Bureau of Internal Revenue (BIR)
and the Court of Tax Appeals(CTA) actually treated the 120 + 30 day periods constitutes an
operative fact the effects and consequences of which cannot be erased or undone." 1
The CIR, on the other hand, asserts that Taganito Mining Corporation's (Taganito) judicial
claim for tax credit or refund was prematurely filed before the CTA and should be disallowed
because BIR Ruling No. DA-489-03 was issued by a Deputy Commissioner, not by the
Commissioner of Internal Revenue.
We deny both motions.
The Doctrine of Operative Fact
The general rule is that a void law or administrative act cannot be the source of legal rights
or duties. Article 7 of the Civil Code enunciates this general rule, as well as its exception:
"Laws are repealed only by subsequent ones, and their violation or non-observance shall

not be excused by disuse, or custom or practice to the contrary. When the courts declared a
law to be inconsistent with the Constitution, the former shall be void and the latter shall
govern. Administrative or executive acts, orders and regulations shall be valid only when
they are not contrary to the laws or the Constitution."
The doctrine of operative fact is an exception to the general rule, such that a judicial
declaration of invalidity may not necessarily obliterate all the effects and consequences of a
void act prior to such declaration.2 In Serrano de Agbayani v. Philippine National Bank,3 the
application of the doctrine of operative fact was discussed as follows:
The decision now on appeal reflects the orthodox view that an unconstitutional act, for that
matter an executive order or a municipal ordinance likewise suffering from that infirmity,
cannot be the source of any legal rights or duties. Nor can it justify any official act taken
under it. Its repugnancy to the fundamental law once judicially declared results in its being
to all intents and purposes a mere scrap of paper. As the new Civil Code puts it: "When the
courts declare a law to be inconsistent with the Constitution, the former shall be void and
the latter shall govern. Administrative or executive acts, orders and regulations shall be valid
only when they are not contrary to the laws of the Constitution." It is understandable why it
should be so, the Constitution being supreme and paramount. Any legislative or executive
act contrary to its terms cannot survive.
Such a view has support in logic and possesses the merit of simplicity. It may not however
be sufficiently realistic. It does not admit of doubt that prior to the declaration of nullity such
challenged legislative or executive act must have been in force and had to be complied
with. This is so as until after the judiciary, in an appropriate case, declares its invalidity, it is
entitled to obedience and respect. Parties may have acted under it and may have changed
their positions. What could be more fitting than that in a subsequent litigation regard be had
to what has been done while such legislative or executive act was in operation and
presumed to be valid in all respects. It is now accepted as a doctrine that prior to its being
nullified, its existence as a fact must be reckoned with. This is merely to reflect awareness
that precisely because the judiciary is the governmental organ which has the final say on
whether or not a legislative or executive measure is valid, a period of time may have
elapsed before it can exercise the power of judicial review that may lead to a declaration of
nullity. It would be to deprive the law of its quality of fairness and justice then, if there be no
recognition of what had transpired prior to such adjudication.
In the language of an American Supreme Court decision: "The actual existence of a statute,
prior to such a determination of unconstitutionality, is an operative fact and may have
consequences which cannot justly be ignored. The past cannot always be erased by a new
judicial declaration. The effect of the subsequent ruling as to invalidity may have to be
considered in various aspects, with respect to particular relations, individual and corporate,
and particular conduct, private and official." This language has been quoted with approval in
a resolution in Araneta v. Hill and the decision in Manila Motor Co., Inc. v. Flores. An even
more recent instance is the opinion of Justice Zaldivar speaking for the Court in Fernandez
v. Cuerva and Co. (Boldfacing and italicization supplied)
Clearly, for the operative fact doctrine to apply, there must be a "legislative or executive
measure," meaning a law or executive issuance, that is invalidated by the court. From the

passage of such law or promulgation of such executive issuance until its invalidation by the
court, the effects of the law or executive issuance, when relied upon by the public in good
faith, may have to be recognized as valid. In the present case, however, there is no such
law or executive issuance that has been invalidated by the Court except BIR Ruling No. DA489-03.
To justify the application of the doctrine of operative fact as an exemption, San Roque
asserts that "the BIR and the CTA in actual practice did not observe and did not require
refund seekers to comply with the120+30 day periods." 4 This is glaring error because an
administrative practice is neither a law nor an executive issuance. Moreover, in the present
case, there is even no such administrative practice by the BIR as claimed by San Roque.
In BIR Ruling No. DA-489-03 dated 10 December 2003, the Department of Finances OneStop Shop Inter-Agency Tax Credit and Duty Drawback Center (DOF-OSS) asked the BIR
to rule on the propriety of the actions taken by Lazi Bay Resources Development, Inc.
(LBRDI). LBRDI filed an administrative claim for refund for alleged input VAT for the four
quarters of 1998. Before the lapse of 120 days from the filing of its administrative claim,
LBRDI also filed a judicial claim with the CTA on 28March 2000 as well as a supplemental
judicial claim on 29 September 2000.In its Memorandum dated 13 August 2002 before the
BIR, the DOF-OSS pointed out that LBRDI is "not yet on the right forum in violation of the
provision of Section 112(D) of the NIRC" when it sought judicial relief before the CTA.
Section 112(D) provides for the 120+30 day periods for claiming tax refunds.
The DOF-OSS itself alerted the BIR that LBRDI did not follow the120+30 day periods. In
BIR Ruling No. DA-489-03, Deputy Commissioner Jose Mario C. Buag ruled that "a
taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek
judicial relief with the CTA by way of Petition for Review." Deputy Commissioner Buag,
citing the 7February 2002 decision of the Court of Appeals (CA) in Commissioner of Internal
Revenue v. Hitachi Computer Products (Asia) Corporation 5 (Hitachi), stated that the claim
for refund with the Commissioner could be pending simultaneously with a suit for refund
filed before the CTA.
Before the issuance of BIR Ruling No. DA-489-03 on 10 December 2003, there was no
administrative practice by the BIR that supported simultaneous filing of claims. Prior to BIR
Ruling No. DA-489-03, the BIR considered the 120+30 day periods mandatory and
jurisdictional.
Thus, prior to BIR Ruling No. DA-489-03, the BIRs actual administrative practice was to
contest simultaneous filing of claims at the administrative and judicial levels, until the CA
declared in Hitachi that the BIRs position was wrong. The CAs Hitachi decision is the basis
of BIR Ruling No. DA-489-03 dated 10 December 2003 allowing simultaneous filing. From
then on taxpayers could rely in good faith on BIR Ruling No. DA-489-03 even though it was
erroneous as this Court subsequently decided in Aichi that the 120+30 day periods were
mandatory and jurisdictional.
We reiterate our pronouncements in our Decision as follows:

At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory
periods were already in the law. Section112(C) expressly grants the Commissioner 120
days within which to decide the taxpayers claim. The law is clear, plain, and unequivocal: "x
x x the Commissioner shall grant a refund or issue the tax credit certificate for creditable
input taxes within one hundred twenty (120) days from the date of submission of complete
documents." Following the verbalegis doctrine, this law must be applied exactly as worded
since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the
CTA without waiting for the Commissioners decision within the 120-daymandatory and
jurisdictional period. The CTA will have no jurisdiction because there will be no "decision" or
"deemed a denial" decision of the Commissioner for the CTA to review. In San Roques
case, it filed its petition with the CTA a mere 13 days after it filed its administrative claim with
the Commissioner. Indisputably, San Roque knowingly violated the mandatory 120-day
period, and it cannot blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the
decision or inaction of the Commissioner x x x.
xxxx
To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly
against the taxpayer. One of the conditions for a judicial claim of refund or credit under the
VAT System is compliance with the 120+30 day mandatory and jurisdictional periods. Thus,
strict compliance with the 120+30 day periods is necessary for such a claim to prosper,
whether before, during, or after the effectivity of the Atlas doctrine, except for the period
from the issuance of BIR Ruling No. DA-489-03 on 10 December 2003 to 6 October 2010
when the Aichi doctrine was adopted, which again reinstated the 120+30 day periods as
mandatory and jurisdictional.6
1wphi1

San Roques argument must, therefore, fail. The doctrine of operative fact is an argument
for the application of equity and fair play. In the present case, we applied the doctrine of
operative fact when we recognized simultaneous filing during the period between 10
December 2003, when BIR Ruling No. DA-489-03 was issued, and 6 October 2010, when
this Court promulgated Aichi declaring the 120+30 day periods mandatory and jurisdictional,
thus reversing BIR Ruling No. DA-489-03.
The doctrine of operative fact is in fact incorporated in Section 246 of the Tax Code, which
provides:
SEC. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of
the rules and regulations promulgated in accordance with the preceding Sections or any of
the rulings or circulars promulgated by the Commissioner shall not be given retroactive
application if the revocation, modification or reversal will be prejudicial to the taxpayers,
except in the following cases:
(a) Where the taxpayer deliberately misstates or omits material facts from his return
or any document required of him by the Bureau of Internal Revenue;

(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith. (Emphasis supplied)
Under Section 246, taxpayers may rely upon a rule or ruling issued by the Commissioner
from the time the rule or ruling is issued up to its reversal by the Commissioner or this
Court. The reversal is not given retroactive effect. This, in essence, is the doctrine of
operative fact. There must, however, be a rule or ruling issued by the Commissioner that is
relied upon by the taxpayer in good faith. A mere administrative practice, not formalized into
a rule or ruling, will not suffice because such a mere administrative practice may not be
uniformly and consistently applied. An administrative practice, if not formalized as a rule or
ruling, will not be known to the general public and can be availed of only by those within
formal contacts with the government agency.
Since the law has already prescribed in Section 246 of the Tax Code how the doctrine of
operative fact should be applied, there can be no invocation of the doctrine of operative fact
other than what the law has specifically provided in Section 246. In the present case, the
rule or ruling subject of the operative fact doctrine is BIR Ruling No. DA-489-03 dated 10
December 2003. Prior to this date, there is no such rule or ruling calling for the application
of the operative fact doctrine in Section 246. Section246, being an exemption to statutory
taxation, must be applied strictly against the taxpayer claiming such exemption.
San Roque insists that this Court should not decide the present case in violation of the
rulings of the CTA; otherwise, there will be adverse effects on the national economy. In
effect, San Roques doomsday scenario is a protest against this Courts power of appellate
review. San Roque cites cases decided by the CTA to underscore that the CTA did not treat
the 120+30 day periods as mandatory and jurisdictional. However, CTA or CA rulings are
not the executive issuances covered by Section 246 of the Tax Code, which adopts the
operative fact doctrine. CTA or CA decisions are specific rulings applicable only to the
parties to the case and not to the general public. CTA or CA decisions, unlike those of this
Court, do not form part of the law of the land. Decisions of lower courts do not have any
value as precedents. Obviously, decisions of lower courts are not binding on this Court. To
hold that CTA or CA decisions, even if reversed by this Court, should still prevail is to turn
upside down our legal system and hierarchy of courts, with adverse effects far worse than
the dubious doomsday scenario San Roque has conjured.
San Roque cited cases7 in its Supplemental Motion for Reconsideration to support its
position that retroactive application of the doctrine in the present case will violate San
Roques right to equal protection of the law. However, San Roque itself admits that the cited
cases never mentioned the issue of premature or simultaneous filing, nor of compliance
with the 120+30 day period requirement. We reiterate that "any issue, whether raised or not
by the parties, but not passed upon by the Court, does not have any value as
precedent."8 Therefore, the cases cited by San Roque to bolster its claim against the
application of the 120+30 day period requirement do not have any value as precedents in
the present case.

Authority of the Commissioner

to Delegate Power
In asking this Court to disallow Taganitos claim for tax refund or credit, the CIR repudiates
the validity of the issuance of its own BIR Ruling No. DA-489-03. "Taganito cannot rely on
the pronouncements in BIR Ruling No. DA-489-03, being a mere issuance of a Deputy
Commissioner."9
Although Section 4 of the 1997 Tax Code provides that the "power to interpret the provisions
of this Code and other tax laws shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance," Section 7 of the same Code
does not prohibit the delegation of such power. Thus, "the Commissioner may delegate the
powers vested in him under the pertinent provisions of this Code to any or such subordinate
officials with the rank equivalent to a division chief or higher, subject to such limitations and
restrictions as may be imposed under rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner."
WHEREFORE, we DENY with FINALITY the Motions for Reconsideration filed by San
Roque Power Corporation in G.R. No. 187485,and the Commissioner of Internal Revenue
in G.R. No. 196113.
SO ORDERED.

G.R. No. 193301

March 11, 2013

MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
x-----------------------x
G.R. No. 194637
MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CARPIO, J.:
G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on 10 March
2010 as well as the Resolution3 promulgated on 28 July 2010 by the Court of Tax Appeals
En Banc (CTA En Banc) in CTA EB No. 513. The CTA En Banc affirmed the 22 September
2008 Decision4 as well as the 26 June 2009 Amended Decision5 of the First Division of the
Court of Tax Appeals (CTA First Division) in CTA Case Nos. 7227, 7287, and 7317. The CTA

First Division denied Mindanao II Geothermal Partnerships (Mindanao II) claims for refund
or tax credit for the first and second quarters of taxable year 2003 for being filed out of time
(CTA Case Nos. 7227 and 7287). The CTA First Division, however, ordered the
Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II unutilized input
value-added tax (VAT) for the third and fourth quarters of taxable year 2003 (CTA Case No.
7317).
G.R. No. 194637 is a petition for review6 assailing the Decision7 promulgated on 31 May
2010 as well as the Amended Decision8 promulgated on 24 November 2010 by the CTA En
Banc in CTA EB Nos. 476 and 483. In its Amended Decision, the CTA En Banc reversed its
31 May 2010 Decision and granted the CIRs petition for review in CTA Case No. 476. The
CTA En Banc denied Mindanao I Geothermal Partnerships (Mindanao I) claims for refund
or tax credit for the first (CTA Case No. 7228), second (CTA Case No. 7286), third, and
fourth quarters (CTA Case No. 7318) of 2003.
Both Mindanao I and II are partnerships registered with the Securities and Exchange
Commission, value added taxpayers registered with the Bureau of Internal Revenue (BIR),
and Block Power Production Facilities accredited by the Department of Energy. Republic
Act No. 9136, or the Electric Power Industry Reform Act of 2000 (EPIRA), effectively
amended Republic Act No. 8424, or the Tax Reform Act of 1997 (1997 Tax Code), 9 when it
decreed that sales of power by generation companies shall be subjected to a zero rate of
VAT.10 Pursuant to EPIRA, Mindanao I and II filed with the CIR claims for refund or tax credit
of accumulated unutilized and/or excess input taxes due to VAT zero-rated sales in 2003.
Mindanao I and II filed their claims in 2005.
G.R. No. 193301
Mindanao II v. CIR
The Facts
G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227, 7287, and
7317, which were consolidated as CTA EB No. 513. CTA Case Nos. 7227, 7287, and 7317
claim a tax refund or credit of Mindanao IIs alleged excess or unutilized input taxes due to
VAT zero-rated sales. In CTA Case No. 7227, Mindanao II claims a tax refund or credit
of P3,160,984.69 for the first quarter of 2003. In CTA Case No. 7287, Mindanao II claims a
tax refund or credit of P1,562,085.33 for the second quarter of 2003. In CTA Case No. 7317,
Mindanao II claims a tax refund or credit of P3,521,129.50 for the third and fourth quarters
of 2003.
The CTA First Divisions narration of the pertinent facts is as follows:
xxxx
On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-Transfer
(BOT) contract with the Philippine National Oil Corporation Energy Development
Company (PNOC-EDC) for finance, engineering, supply, installation, testing,
commissioning, operation, and maintenance of a 48.25 megawatt geothermal power plant,

provided that PNOC-EDC shall supply and deliver steam to Mindanao II at no cost. In turn,
Mindanao II shall convert the steam into electric capacity and energy for PNOC-EDC and
shall deliver the same to the National Power Corporation (NPC) for and in behalf of PNOCEDC. Mindanao II alleges that its sale of generated power and delivery of electric capacity
and energy of Mindanao II to NPC for and in behalf of PNOC-EDC is its only revenuegenerating activity which is in the ambit of VAT zero-rated sales under the EPIRA Law, x x x.
xxxx
Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable to sales of
generated power by generation companies from ten (10%) percent to zero (0%) percent.
In the course of its operation, Mindanao II makes domestic purchases of goods and
services and accumulates therefrom creditable input taxes. Pursuant to the provisions of the
National Internal Revenue Code (NIRC), Mindanao II alleges that it can use its accumulated
input tax credits to offset its output tax liability. Considering, however that its only revenuegenerating activity is VAT zero-rated under RA No. 9136, Mindanao IIs input tax credits
remain unutilized.
Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II adopted the VAT
zero-rating of the EPIRA in computing for its VAT payable when it filed its Quarterly VAT
Returns on the following dates:
CTA Case No.

Period Covered
(2003)

Date of Filing
Original Return

Amended Return

7227

1st Quarter

April 23, 2003

July 3, 2002 (sic),

April 1, 2004 &
October 22, 2004

7287

2nd Quarter

July 22, 2003

April 1, 2004

7317

3rd Quarter

Oct. 27, 2003

April 1, 2004

7317

4th Quarter

Jan. 26, 2004

April 1, 2204

Considering that it has accumulated unutilized creditable input taxes from its only incomegenerating activity, Mindanao II filed an application for refund and/or issuance of tax credit
certificate with the BIRs Revenue District Office at Kidapawan City on April 13, 2005 for the
four quarters of 2003.
To date (September 22, 2008), the application for refund by Mindanao II remains unacted
upon by the CIR. Hence, these three petitions filed on April 22, 2005 covering the 1st
quarter of 2003; July 7, 2005 for the 2nd quarter of 2003; and September 9, 2005 for the 3rd
and 4th quarters of 2003. At the instance of Mindanao II, these petitions were consolidated
on March 15, 2006 as they involve the same parties and the same subject matter. The only
difference lies with the taxable periods involved in each petition. 11
The Court of Tax Appeals Ruling: Division

In its 22 September 2008 Decision,12 the CTA First Division found that Mindanao II satisfied
the twin requirements for VAT zero rating under EPIRA: (1) it is a generation company, and
(2) it derived sales from power generation. The CTA First Division also stated that Mindanao
II complied with five requirements to be entitled to a refund:
1. There must be zero-rated or effectively zero-rated sales;
2. That input taxes were incurred or paid;
3. That such input VAT payments are directly attributable to zero-rated sales or
effectively zero-rated sales;
4. That the input VAT payments were not applied against any output VAT liability; and
5. That the claim for refund was filed within the two-year prescriptive period. 13
With respect to the fifth requirement, the CTA First Division tabulated the dates of filing of
Mindanao IIs return as well as its administrative and judicial claims, and concluded that
Mindanao IIs administrative and judicial claims were timely filed in compliance with this
Courts ruling in Atlas Consolidated Mining and Development Corporation v. Commissioner
of Internal Revenue (Atlas).14 The CTA First Division declared that the two-year prescriptive
period for filing a VAT refund claim should not be counted from the close of the quarter but
from the date of the filing of the VAT return. As ruled in Atlas, VAT liability or entitlement to a
refund can only be determined upon the filing of the quarterly VAT return.
CTA
Case
No.

Period
Covered
(2003)

Date Filing
Original
Return

Amended Administrative
Return
Return

Judicial
Claim

7227

1st
Quarter

23 April
2003

1 April
2004

13 April 2005

22 April
2005

7287

2nd
Quarter

22 July
2003

1 April
2004

13 April 2005

7 July
2005

7317

3rd
Quarter

25 Oct.
2003

1 April
2004

13 April 2005

9 Sept.
2005

7317

4th
Quarter

26 Jan.
2004

1 April
2004

13 April 2005

9 Sept.
200515

Thus, counting from 23 April 2003, 22 July 2003, 25 October 2003, and 26 January 2004,
when Mindanao II filed its VAT returns, its administrative claim filed on 13 April 2005 and
judicial claims filed on 22 April 2005, 7 July 2005, and 9 September 2005 were timely filed in
accordance with Atlas.
The CTA First Division found that Mindanao II is entitled to a refund in the modified amount
of P7,703,957.79, after disallowing P522,059.91 from input VAT16 and deducting P18,181.82
from Mindanao IIs sale of a fully depreciated P200,000.00 Nissan Patrol. The input taxes

amounting to P522,059.91 were disallowed for failure to meet invoicing requirements, while
the input VAT on the sale of the Nissan Patrol was reduced by P18,181.82 because the
output VAT for the sale was not included in the VAT declarations.
The dispositive portion of the CTA First Divisions 22 September 2008 Decision reads:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the
CIR is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE in the
modified amount of SEVEN MILLION SEVEN HUNDRED THREE THOUSAND NINE
HUNDRED FIFTY SEVEN AND 79/100 PESOS (P7,703,957.79) representing its unutilized
input VAT for the four (4) quarters of the taxable year 2003.
SO ORDERED.17
Mindanao II filed a motion for partial reconsideration. 18 It stated that the sale of the fully
depreciated Nissan Patrol is a one-time transaction and is not incidental to its VAT zerorated operations. Moreover, the disallowed input taxes substantially complied with the
requirements for refund or tax credit.
The CIR also filed a motion for partial reconsideration. It argued that the judicial claims for
the first and second quarters of 2003 were filed beyond the period allowed by law, as stated
in Section 112(A) of the 1997 Tax Code. The CIR further stated that Section 229 is a
general provision, and governs cases not covered by Section 112(A). The CIR countered
the CTA First Divisions 22 September 2008 decision by citing this Courts ruling in
Commisioner of Internal Revenue v. Mirant Pagbilao Corporation (Mirant), 19 which stated
that unutilized input VAT payments must be claimed within two years reckoned from the
close of the taxable quarter when the relevant sales were made regardless of whether said
tax was paid.
The CTA First Division denied Mindanao IIs motion for partial reconsideration, found the
CIRs motion for partial reconsideration partly meritorious, and rendered an Amended
Decision20 on 26 June 2009. The CTA First Division stated that the claim for refund or credit
with the BIR and the subsequent appeal to the CTA must be filed within the two-year period
prescribed under Section 229. The two-year prescriptive period in Section 229 was
denominated as a mandatory statute of limitations. Therefore, Mindanao IIs claims for
refund for the first and second quarters of 2003 had already prescribed.
The CTA First Division found that the records of Mindanao IIs case are bereft of evidence
that the sale of the Nissan Patrol is not incidental to Mindanao IIs VAT zero-rated
operations. Moreover, Mindanao IIs submitted documents failed to substantiate the
requisites for the refund or credit claims.
The CTA First Division modified its 22 September 2008 Decision to read as follows:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the
CIR is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE to
Mindanao II Geothermal Partnership in the modified amount of TWO MILLION NINE
HUNDRED EIGHTY THOUSAND EIGHT HUNDRED EIGHTY SEVEN AND 77/100 PESOS

(P2,980,887.77) representing its unutilized input VAT for the third and fourth quarters of the
taxable year 2003.
SO ORDERED.21
Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513, before the CTA En
Banc.
The Court of Tax Appeals Ruling: En Banc
On 10 March 2010, the CTA En Banc rendered its Decision 23 in CTA EB No. 513 and denied
Mindanao IIs petition. The CTA En Banc ruled that (1) Section 112(A) clearly provides that
the reckoning of the two-year prescriptive period for filing the application for refund or credit
of input VAT attributable to zero-rated sales or effectively zero-rated sales shall be counted
from the close of the taxable quarter when the sales were made; (2) the Atlas and Mirant
cases applied different tax codes: Atlas applied the 1977 Tax Code while Mirant applied the
1997 Tax Code; (3) the sale of the fully-depreciated Nissan Patrol is incidental to Mindanao
IIs VAT zero-rated transactions pursuant to Section 105; (4) Mindanao II failed to comply
with the substantiation requirements provided under Section 113(A) in relation to Section
237 of the 1997 Tax Code as implemented by Section 4.104-1, 4.104-5, and 4.108-1 of
Revenue Regulation No. 7-95; and (5) the doctrine of strictissimi juris on tax exemptions
cannot be relaxed in the present case.
The dispositive portion of the CTA En Bancs 10 March 2010 Decision reads:
WHEREFORE, on the basis of the foregoing considerations, the Petition for Review en
banc is DISMISSED for lack of merit. Accordingly, the Decision dated September 22, 2008
and the Amended Decision dated June 26, 2009 issued by the First Division are
AFFIRMED.
SO ORDERED.24
The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack of merit Mindanao
IIs Motion for Reconsideration.26 The CTA En Banc highlighted the following bases of their
previous ruling:
1. The Supreme Court has long decided that the claim for refund of unutilized input
VAT must be filed within two (2) years after the close of the taxable quarter when
such sales were made.
2. The Supreme Court is the ultimate arbiter whose decisions all other courts should
take bearings.
3. The words of the law are clear, plain, and free from ambiguity; hence, it must be
given its literal meaning and applied without any interpretation. 27
G.R. No. 194637
Mindanao I v. CIR

The Facts
G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case Nos. 476
and 483. Both CTA EB cases consolidate three cases from the CTA Second Division: CTA
Case Nos. 7228, 7286, and 7318. CTA Case Nos. 7228, 7286, and 7318 claim a tax refund
or credit of Mindanao Is accumulated unutilized and/or excess input taxes due to VAT zerorated sales. In CTA Case No. 7228, Mindanao I claims a tax refund or credit
ofP3,893,566.14 for the first quarter of 2003. In CTA Case No. 7286, Mindanao I claims a
tax refund or credit ofP2,351,000.83 for the second quarter of 2003. In CTA Case No. 7318,
Mindanao I claims a tax refund or credit ofP7,940,727.83 for the third and fourth quarters of
2003.
Mindanao I is similarly situated as Mindanao II. The CTA Second Divisions narration of the
pertinent facts is as follows:
xxxx
In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer (BOT) with
the Philippine National Oil Corporation Energy Development Corporation (PNOC-EDC) for
the finance, design, construction, testing, commissioning, operation, maintenance and
repair of a 47-megawatt geothermal power plant. Under the said BOT contract, PNOC-EDC
shall supply and deliver steam to Mindanao I at no cost. In turn, Mindanao I will convert the
steam into electric capacity and energy for PNOC-EDC and shall subsequently supply and
deliver the same to the National Power Corporation (NPC), for and in behalf of PNOC-EDC.
Mindanao Is 47-megawatt geothermal power plant project has been accredited by the
Department of Energy (DOE) as a Private Sector Generation Facility, pursuant to the
provision of Executive Order No. 215, wherein Certificate of Accreditation No. 95-037 was
issued.
On June 26, 2001, Republic Act (R.A.) No. 9136 took effect, and the relevant provisions of
the National Internal Revenue Code (NIRC) of 1997 were deemed modified. R.A. No. 9136,
also known as the "Electric Power Industry Reform Act of 2001 (EPIRA), was enacted by
Congress to ordain reforms in the electric power industry, highlighting, among others, the
importance of ensuring the reliability, security and affordability of the supply of electric
power to end users. Under the provisions of this Republic Act and its implementing rules
and regulations, the delivery and supply of electric energy by generation companies
became VAT zero-rated, which previously were subject to ten percent (10%) VAT.
xxxx
The amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated
power by generation companies from ten (10%) percent to zero percent (0%). Thus,
Mindanao I adopted the VAT zero-rating of the EPIRA in computing for its VAT payable
when it filed its VAT Returns, on the belief that its sales qualify for VAT zero-rating.

Mindanao I reported its unutilized or excess creditable input taxes in its Quarterly VAT
Returns for the first, second, third, and fourth quarters of taxable year 2003, which were
subsequently amended and filed with the BIR.
On April 4, 2005, Mindanao I filed with the BIR separate administrative claims for the
issuance of tax credit certificate on its alleged unutilized or excess input taxes for taxable
year 2003, in the accumulated amount ofP14,185, 294.80.
Alleging inaction on the part of CIR, Mindanao I elevated its claims before this Court on April
22, 2005, July 7, 2005, and September 9, 2005 docketed as CTA Case Nos. 7228, 7286,
and 7318, respectively. However, on October 10, 2005, Mindanao I received a copy of the
letter dated September 30, 2003 (sic) of the BIR denying its application for tax
credit/refund.28
The Court of Tax Appeals Ruling: Division
On 24 October 2008, the CTA Second Division rendered its Decision 29 in CTA Case Nos.
7228, 7286, and 7318. The CTA Second Division found that (1) pursuant to Section 112(A),
Mindanao I can only claim 90.27% of the amount of substantiated excess input VAT
because a portion was not reported in its quarterly VAT returns; (2) out of
the P14,185,294.80 excess input VAT applied for refund, only P11,657,447.14 can be
considered substantiated excess input VAT due to disallowances by the Independent
Certified Public Accountant, adjustment on the disallowances per the CTA Second Divisions
further verification, and additional disallowances per the CTA Second Divisions further
verification;
(3) Mindanao Is accumulated excess input VAT for the second quarter of 2003 that was
carried over to the third quarter of 2003 is net of the claimed input VAT for the first quarter of
2003, and the same procedure was done for the second, third, and fourth quarters of 2003;
and (4) Mindanao Is administrative claims were filed within the two-year prescriptive period
reckoned from the respective dates of filing of the quarterly VAT returns.
The dispositive portion of the CTA Second Divisions 24 October 2008 Decision reads:
WHEREFORE, premises considered, the consolidated Petitions for Review are hereby
PARTIALLY GRANTED. Accordingly, the CIR is hereby ORDERED TO ISSUE A TAX
CREDIT CERTIFICATE in favor of Mindanao I in the reduced amount of TEN MILLION
FIVE HUNDRED TWENTY THREE THOUSAND ONE HUNDRED SEVENTY SEVEN
PESOS AND 53/100 (P10,523,177.53) representing Mindanao Is unutilized input VAT for
the four quarters of the taxable year 2003.
SO ORDERED.30
Mindanao I filed a motion for partial reconsideration with motion for Clarification 31 on 11
November 2008. It claimed that the CTA Second Division should not have allocated
proportionately Mindanao Is unutilized creditable input taxes for the taxable year 2003,
because the proportionate allocation of the amount of creditable taxes in Section 112(A)
applies only when the creditable input taxes due cannot be directly and entirely attributed to

any of the zero-rated or effectively zero-rated sales. Mindanao I claims that its unreported
collection is directly attributable to its VAT zero-rated sales. The CTA Second Division
denied Mindanao Is motion and maintained the proportionate allocation because there was
a portion of the gross receipts that was undeclared in Mindanao Is gross receipts.
The CIR also filed a motion for partial reconsideration 32 on 11 November 2008. It claimed
that Mindanao I failed to exhaust administrative remedies before it filed its petition for
review. The CTA Second Division denied the CIRs motion, and cited Atlas 33 as the basis for
ruling that it is more practical and reasonable to count the two-year prescriptive period for
filing a claim for refund or credit of input VAT on zero-rated sales from the date of filing of
the return and payment of the tax due.
The dispositive portion of the CTA Second Divisions 10 March 2009 Resolution reads:
WHEREFORE, premises considered, the CIRs Motion for Partial Reconsideration and
Mindanao Is Motion for Partial Reconsideration with Motion for Clarification are hereby
DENIED for lack of merit.
SO ORDERED.34
The Ruling of the Court of Tax Appeals: En Banc
On 31 May 2010, the CTA En Banc rendered its Decision 35 in CTA EB Case Nos. 476 and
483 and denied the petitions filed by the CIR and Mindanao I. The CTA En Banc found no
new matters which have not yet been considered and passed upon by the CTA Second
Division in its assailed decision and resolution.
The dispositive portion of the CTA En Bancs 31 May 2010 Decision reads:
WHEREFORE, premises considered, the Petitions for Review are hereby DISMISSED for
lack of merit. Accordingly, the October 24, 2008 Decision and March 10, 2009 Resolution of
the CTA Former Second Division in CTA Case Nos. 7228, 7286, and 7318, entitled
"Mindanao I Geothermal Partnership vs. Commissioner of Internal Revenue" are hereby
AFFIRMED in toto.
SO ORDERED.36
Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En Bancs 31
May 2010 Decision. In an Amended Decision promulgated on 24 November 2010, the CTA
En Banc agreed with the CIRs claim that Section 229 of the NIRC of 1997 is inapplicable in
light of this Courts ruling in Mirant. The CTA En Banc also ruled that the procedure
prescribed under Section 112(D) now 112(C) 37 of the 1997 Tax Code should be followed first
before the CTA En Banc can act on Mindanao Is claim. The CTA En Banc reconsidered its
31 May 2010 Decision in light of this Courts ruling in Commissioner of Internal Revenue v.
Aichi Forging Company of Asia, Inc. (Aichi).38
The pertinent portions of the CTA En Bancs 24 November 2010 Amended Decision read:

C.T.A. Case No. 7228:

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns
for the First Quarter of 2003. Pursuant to Section 112(A) of the NIRC of 1997, as
amended, Mindanao I has two years from March 31, 2003 or until March 31, 2005
within which to file its administrative claim for refund;
(2) On April 4, 2005, Mindanao I applied for an administrative claim for refund of
unutilized input VAT for the first quarter of taxable year 2003 with the BIR, which is
beyond the two-year prescriptive period mentioned above.
C.T.A. Case No. 7286:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns
for the second quarter of 2003. Pursuant to
Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from
June 30, 2003, within which to file its administrative claim for refund for the second
quarter of 2003, or until June 30, 2005;
(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of
unutilized input VAT for the second quarter of taxable year 2003 with the BIR, which
is within the two-year prescriptive period, provided under Section 112 (A) of the
NIRC of 1997, as amended;
(3) The CIR has 120 days from April 4, 2005 (presumably the date Mindanao I
submitted the supporting documents together with the application for refund) or until
August 2, 2005, to decide the administrative claim for refund;
(4) Within 30 days from the lapse of the 120-day period or from August 3, 2005 to
September 1, 2005, Mindanao I should have elevated its claim for refund to the CTA
in Division;
(5) However, on July 7, 2005, Mindanao I filed its Petition for Review with this Court,
docketed as CTA Case No. 7286, even before the 120-day period for the CIR to
decide the claim for refund had lapsed on August 2, 2005. The Petition for Review
was, therefore, prematurely filed and there was failure to exhaust administrative
remedies;
xxxx
C.T.A. Case No. 7318:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns
for the third and fourth quarters of 2003. Pursuant to Section 112(A) of the NIRC of
1997, as amended, Mindanao I therefore, has two years from September 30, 2003
and December 31, 2003, or until September 30, 2005 and December 31, 2005,

respectively, within which to file its administrative claim for the third and fourth
quarters of 2003;
(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of
unutilized input VAT for the third and fourth quarters of taxable year 2003 with the
BIR, which is well within the two-year prescriptive period, provided under Section
112(A) of the NIRC of 1997, as amended;
(3) From April 4, 2005, which is also presumably the date Mindanao I submitted
supporting documents, together with the aforesaid application for refund, the CIR
has 120 days or until August 2, 2005, to decide the claim;
(4) Within thirty (30) days from the lapse of the 120-day period or from August 3,
2005 until September 1, 2005 Mindanao I should have elevated its claim for refund
to the CTA;
(5) However, Mindanao I filed its Petition for Review with the CTA in Division only on
September 9, 2005, which is 8 days beyond the 30-day period to appeal to the CTA.
Evidently, the Petition for Review was filed way beyond the 30-day prescribed period. Thus,
the Petition for Review should have been dismissed for being filed late.
In recapitulation:
(1) C.T.A. Case No. 7228
Claim for the first quarter of 2003 had already prescribed for having been filed
beyond the two-year prescriptive period;
(2) C.T.A. Case No. 7286
Claim for the second quarter of 2003 should be dismissed for Mindanao Is failure to
comply with a condition precedent when it failed to exhaust administrative remedies
by filing its Petition for Review even before the lapse of the 120-day period for the
CIR to decide the administrative claim;
(3) C.T.A. Case No. 7318
Petition for Review was filed beyond the 30-day prescribed period to appeal to the
CTA.
xxxx
IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenues Motion for
Reconsideration is hereby GRANTED; Mindanao Is Motion for Partial Reconsideration is
hereby DENIED for lack of merit.
The May 31, 2010 Decision of this Court En Banc is hereby REVERSED.

Accordingly, the Petition for Review of the Commissioner of Internal Revenue in CTA EB
No. 476 is hereby GRANTED and the entire claim of Mindanao I Geothermal Partnership for
the first, second, third and fourth quarters of 2003 is hereby DENIED.
SO ORDERED.39
The Issues
G.R. No. 193301
Mindanao II v. CIR
Mindanao II raised the following grounds in its Petition for Review:
I. The Honorable Court of Tax Appeals erred in holding that the claim of Mindanao II
for the 1st and 2nd quarters of year 2003 has already prescribed pursuant to the
Mirant case.
A. The Atlas case and Mirant case have conflicting interpretations of the law
as to the reckoning date of the two year prescriptive period for filing claims for
VAT refund.
B. The Atlas case was not and cannot be superseded by the Mirant case in
light of Section 4(3), Article VIII of the 1987 Constitution.
C. The ruling of the Mirant case, which uses the close of the taxable quarter
when the sales were made as the reckoning date in counting the two-year
prescriptive period cannot be applied retroactively in the case of Mindanao II.
II. The Honorable Court of Tax Appeals erred in interpreting Section 105 of the 1997
Tax Code, as amended in that the sale of the fully depreciated Nissan Patrol is a
one-time transaction and is not incidental to the VAT zero-rated operation of
Mindanao II.
III. The Honorable Court of Tax Appeals erred in denying the amount disallowed by
the Independent Certified Public Accountant as Mindanao II substantially complied
with the requisites of the 1997 Tax Code, as amended, for refund/tax credit.
A. The amount of P2,090.16 was brought about by the timing difference in the
recording of the foreign currency deposit transaction.
B. The amount of P2,752.00 arose from the out-of-pocket expenses
reimbursed to SGV & Company which is substantially suppoerted [sic] by an
official receipt.
C. The amount of P487,355.93 was unapplied and/or was not included in
Mindanao IIs claim for refund or tax credit for the year 2004 subject matter of
CTA Case No. 7507.

IV. The doctrine of strictissimi juris on tax exemptions should be relaxed in the
present case.40
G.R. No. 194637
Mindanao I v. CIR
Mindanao I raised the following grounds in its Petition for Review:
I. The administrative claim and judicial claim in CTA Case No. 7228 were timely filed
pursuant to the case of Atlas Consolidated Mining and Development Corporation vs.
Commissioner of Internal Revenue, which was then the controlling ruling at the time
of filing.
A. The recent ruling in the Commissioner of Internal Revenue vs. Mirant
Pagbilao Corporation, which uses the end of the taxable quarter when the
sales were made as the reckoning date in counting the two-year prescriptive
period, cannot be applied retroactively in the case of Mindanao I.
B. The Atlas case promulgated by the Third Division of this Honorable Court
on June 8, 2007 was not and cannot be superseded by the Mirant Pagbilao
case promulgated by the Second Division of this Honorable Court on
September 12, 2008 in light of the explicit provision of Section 4(3), Article
VIII of the 1987 Constitution.
II. Likewise, the recent ruling of this Honorable Court in Commissioner of Internal
Revenue vs. Aichi Forging Company of Asia, Inc., cannot be applied retroactively to
Mindanao I in the present case.41
In a Resolution dated 14 December 2011, 42 this Court resolved to consolidate G.R. Nos.
193301 and 194637 to avoid conflicting rulings in related cases.
The Courts Ruling
Determination of Prescriptive Period
G.R. Nos. 193301 and 194637 both raise the question of the determination of the
prescriptive period, or the interpretation of Section 112 of the 1997 Tax Code, in light of our
rulings in Atlas and Mirant.
Mindanao IIs unutilized input VAT tax credit for the first and second quarters of 2003, in the
amounts ofP3,160,984.69 and P1,562,085.33, respectively, are covered by G.R. No.
193301, while Mindanao Is unutilized input VAT tax credit for the first, second, third, and
fourth quarters of 2003, in the amounts of P3,893,566.14,P2,351,000.83,
and P7,940,727.83, respectively, are covered by G.R. No. 194637.
Section 112 of the 1997 Tax Code

The pertinent sections of the 1997 Tax Code, the law applicable at the time of Mindanao IIs
and Mindanao Is administrative and judicial claims, provide:
SEC. 112. Refunds or Tax Credits of Input Tax. -(A) Zero-rated or Effectively Zero-rated
Sales. - Any VAT-registered person, whose sales are zero-rated or effectively zero-rated
may, within two (2) years after the close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such input tax has
not been applied against output tax: Provided, however, That in the case of zero-rated sales
under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable
foreign currency exchange proceeds thereof had been duly accounted for in accordance
with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further,
That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in
taxable or exempt sale of goods or properties or services, and the amount of creditable
input tax due or paid cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis of the volume of sales.
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper
cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable
input taxes within one hundred twenty (120) days from the date of submission of complete
documents in support of the application filed in accordance with Subsections (A) and (B)
hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the
part of the Commissioner to act on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty day-period, appeal the decision or
the unacted claim with the Court of Tax Appeals.
x x x x 43 (Underscoring supplied)
The relevant dates for G.R. No. 193301 (Mindanao II) are:
CTA
Case
No.

Period
covered by
VAT Sales in
2003 and
amount

Close of
quarter
when
sales
were
made

7227 1st Quarter,

31 March
P3,160,984.69 2003

Last day
for filing
application
of tax
refund/tax
credit
certificate
with the
CIR

Actual date of Last day

filing
for
application for filing case
tax refund/
with CTA45
credit with the
CIR
(administrative
claim)44

31 March
2005

13 April 2005

Actual
Date
of filing
case
with CTA
(judicial
claim)

12
22 April
September 2005
2005

7287 2nd Quarter,

30 June
P1,562,085.33 2003

30 June
2005

13 April 2005

7317 3rd and 4th

30
30
13 April 2005
Quarters,
September September
P3,521,129.50 2003
2005

12
7 July
September 2005
2005
12
9
September September
2005
2005

31
2 January
December 2006
2003
(31
December
2005
being
a
Saturday)
The relevant dates for G.R. No. 194637 (Minadanao I) are:
CTA Period
Case covered by
No. VAT Sales in
2003 and
amount

Close of
quarter
when
sales
were
made

Last day
for filing
application
of tax
refund/tax
credit
certificate
with the
CIR

Actual date of
filing
application for
tax refund/
credit with the
CIR
(administrative
claim)46

Last day
for
filing case
with CTA47

7227 1st Quarter,

31 March
P3,893,566.14 2003

31 March
2005

4 April 2005

1
22 April
September 2005
2005

7287 2nd Quarter,

30 June
P2,351,000.83 2003

30 June
2005

4 April 2005

1
7 July
September 2005
2005

7317 3rd
30
and 4th
September
Quarters,
2003
P7,940,727.83
31
December
2003

30
4 April 2005
September
2005
2 January
2006
(31
December
2005
being
a
Saturday)

Actual
Date
of filing
case
with CTA
(judicial
claim)

1
9
September September
2005
2005

When Mindanao II and Mindanao I filed their respective administrative and judicial claims in
2005, neither Atlas nor Mirant has been promulgated. Atlas was promulgated on 8 June
2007, while Mirant was promulgated on 12 September 2008. It is therefore misleading to
state that Atlas was the controlling doctrine at the time of filing of the claims. The 1997 Tax
Code, which took effect on 1 January 1998, was the applicable law at the time of filing of the
claims in issue. As this Court explained in the recent consolidated cases of Commissioner
of Internal Revenue v. San Roque Power Corporation, Taganito Mining Corporation v.
Commissioner of Internal Revenue, and Philex Mining Corporation v. Commissioner of
Internal Revenue (San Roque):48
Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly
given by law to the Commissioner to decide whether to grant or deny San Roques
application for tax refund or credit. It is indisputable that compliance with the 120-day
waiting period is mandatory and jurisdictional. The waiting period, originally fixed at 60 days
only, was part of the provisions of the first VAT law, Executive Order No. 273, which took
effect on 1 January 1988. The waiting period was extended to 120 days effective 1 January
1998 under RA 8424 or the Tax Reform Act of 1997. Thus, the waiting period has been in
our statute books for more than fifteen (15) years before San Roque filed its judicial claim.
Failure to comply with the 120-day waiting period violates a mandatory provision of law. It
violates the doctrine of exhaustion of administrative remedies and renders the petition
premature and thus without a cause of action, with the effect that the CTA does not acquire
jurisdiction over the taxpayers petition. Philippine jurisprudence is replete with cases
upholding and reiterating these doctrinal principles.
The charter of the CTA expressly provides that its jurisdiction is to review on appeal
"decisions of the Commissioner of Internal Revenue in cases involving x x x refunds of
internal revenue taxes." When a taxpayer prematurely files a judicial claim for tax refund or
credit with the CTA without waiting for the decision of the Commissioner, there is no
"decision" of the Commissioner to review and thus the CTA as a court of special jurisdiction
has no jurisdiction over the appeal. The charter of the CTA also expressly provides that if
the Commissioner fails to decide within "a specific period" required by law, such "inaction
shall be deemed a denial" of the application for tax refund or credit. It is the Commissioners
decision, or inaction "deemed a denial," that the taxpayer can take to the CTA for review.
Without a decision or an "inaction x x x deemed a denial" of the Commissioner, the CTA has
no jurisdiction over a petition for review.
San Roques failure to comply with the 120-day mandatory period renders its petition for
review with the CTA void. Article 5 of the Civil Code provides, "Acts executed against
provisions of mandatory or prohibitory laws shall be void, except when the law itself
authorizes their validity." San Roques void petition for review cannot be legitimized by the
CTA or this Court because Article 5 of the Civil Code states that such void petition cannot be
legitimized "except when the law itself authorizes its validity." There is no law authorizing the
petitions validity.
It is hornbook doctrine that a person committing a void act contrary to a mandatory
provision of law cannot claim or acquire any right from his void act. A right cannot spring in
favor of a person from his own void or illegal act. This doctrine is repeated in Article 2254 of

the Civil Code, which states, "No vested or acquired right can arise from acts or omissions
which are against the law or which infringe upon the rights of others." For violating a
mandatory provision of law in filing its petition with the CTA, San Roque cannot claim any
right arising from such void petition. Thus, San Roques petition with the CTA is a mere
scrap of paper.
This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of
the 120-day period just because the Commissioner merely asserts that the case was
prematurely filed with the CTA and does not question the entitlement of San Roque to the
refund. The mere fact that a taxpayer has undisputed excess input VAT, or that the tax was
admittedly illegally, erroneously or excessively collected from him, does not entitle him as a
matter of right to a tax refund or credit. Strict compliance with the mandatory and
jurisdictional conditions prescribed by law to claim such tax refund or credit is essential and
necessary for such claim to prosper. Well-settled is the rule that tax refunds or credits, just
like tax exemptions, are strictly construed against the taxpayer.
The burden is on the taxpayer to show that he has strictly complied with the conditions for
the grant of the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional conditions mandated by law
simply because the Commissioner chose not to contest the numerical correctness of the
claim for tax refund or credit of the taxpayer. Non-compliance with mandatory periods, nonobservance of prescriptive periods, and non-adherence to exhaustion of administrative
remedies bar a taxpayers claim for tax refund or credit, whether or not the Commissioner
questions the numerical correctness of the claim of the taxpayer. This Court should not
establish the precedent that non-compliance with mandatory and jurisdictional conditions
can be excused if the claim is otherwise meritorious, particularly in claims for tax refunds or
credit. Such precedent will render meaningless compliance with mandatory and
jurisdictional requirements, for then every tax refund case will have to be decided on the
numerical correctness of the amounts claimed, regardless of non-compliance with
mandatory and jurisdictional conditions.
San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine
because San Roque filed its petition for review with the CTA more than four years before
Atlas was promulgated. The Atlas doctrine did not exist at the time San Roque failed to
comply with the 120-day period. Thus, San Roque cannot invoke the Atlas doctrine as an
excuse for its failure to wait for the 120-day period to lapse. In any event, the Atlas doctrine
merely stated that the two-year prescriptive period should be counted from the date of
payment of the output VAT, not from the close of the taxable quarter when the sales
involving the input VAT were made. The Atlas doctrine does not interpret, expressly or
impliedly, the 120+30 day periods.49 (Emphases in the original; citations omitted)
Prescriptive Period for
the Filing of Administrative Claims
In determining whether the administrative claims of Mindanao I and Mindanao II for 2003
have prescribed, we see no need to rely on either Atlas or Mirant. Section 112(A) of the
1997 Tax Code is clear: "Any VAT-registered person, whose sales are zero-rated or

effectively zero-rated may, within two (2) years after the close of the taxable quarter when
the sales were made, apply for the issuance of a tax credit certificate or refund of creditable
input tax due or paid attributable to such sales x x x."
We rule on Mindanao I and IIs administrative claims for the first, second, third, and fourth
quarters of 2003 as follows:
(1) The last day for filing an application for tax refund or credit with the CIR for the
first quarter of 2003 was on 31 March 2005. Mindanao II filed its administrative claim
before the CIR on 13 April 2005, while Mindanao I filed its administrative claim
before the CIR on 4 April 2005. Both claims have prescribed, pursuant to Section
112(A) of the 1997 Tax Code.
(2) The last day for filing an application for tax refund or credit with the CIR for the
second quarter of 2003 was on 30 June 2005. Mindanao II filed its administrative
claim before the CIR on 13 April 2005, while Mindanao I filed its administrative claim
before the CIR on 4 April 2005. Both claims were filed on time, pursuant to Section
112(A) of the 1997 Tax Code.
(3) The last day for filing an application for tax refund or credit with the CIR for the
third quarter of 2003 was on 30 September 2005. Mindanao II filed its administrative
claim before the CIR on 13 April 2005, while Mindanao I filed its administrative claim
before the CIR on 4 April 2005. Both claims were filed on time, pursuant to Section
112(A) of the 1997 Tax Code.
(4) The last day for filing an application for tax refund or credit with the CIR for the
fourth quarter of 2003 was on 2 January 2006. Mindanao II filed its administrative
claim before the CIR on 13 April 2005, while Mindanao I filed its administrative claim
before the CIR on 4 April 2005. Both claims were filed on time, pursuant to Section
112(A) of the 1997 Tax Code.
Prescriptive Period for
the Filing of Judicial Claims
In determining whether the claims for the second, third and fourth quarters of 2003 have
been properly appealed, we still see no need to refer to either Atlas or Mirant, or even to
Section 229 of the 1997 Tax Code. The second paragraph of Section 112(C) of the 1997
Tax Code is clear: "In case of full or partial denial of the claim for tax refund or tax credit, or
the failure on the part of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one hundred twenty day-period,
appeal the decision or the unacted claim with the Court of Tax Appeals."
The mandatory and jurisdictional nature of the 120+30 day periods was explained in San
Roque:
At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory
periods were already in the law. Section 112(C) expressly grants the Commissioner 120

days within which to decide the taxpayers claim. The law is clear, plain, and unequivocal: "x
x x the Commissioner shall grant a refund or issue the tax credit certificate for creditable
input taxes within one hundred twenty (120) days from the date of submission of complete
documents." Following the verba legis doctrine, this law must be applied exactly as worded
since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the
CTA without waiting for the Commissioners decision within the 120-day mandatory and
jurisdictional period. The CTA will have no jurisdiction because there will be no "decision" or
"deemed a denial" decision of the Commissioner for the CTA to review. In San Roques
case, it filed its petition with the CTA a mere 13 days after it filed its administrative claim with
the Commissioner. Indisputably, San Roque knowingly violated the mandatory 120-day
period, and it cannot blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the
decision or inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one hundred twenty day-period, appeal the
decision or the unacted claim with the Court of Tax Appeals. (Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this
law should be applied exactly as worded since it is clear, plain, and unequivocal. As this law
states, the taxpayer may, if he wishes, appeal the decision of the Commissioner to the CTA
within 30 days from receipt of the Commissioners decision, or if the Commissioner does not
act on the taxpayers claim within the 120-day period, the taxpayer may appeal to the CTA
within 30 days from the expiration of the 120-day period.
xxxx
There are three compelling reasons why the 30-day period need not necessarily fall within
the two-year prescriptive period, as long as the administrative claim is filed within the twoyear prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "may,
within two (2) years after the close of the taxable quarter when the sales were made, apply
for the issuance of a tax credit certificate or refund of the creditable input tax due or paid to
such sales." In short, the law states that the taxpayer may apply with the Commissioner for
a refund or credit "within two (2) years," which means at anytime within two years. Thus, the
application for refund or credit may be filed by the taxpayer with the Commissioner on the
last day of the two-year prescriptive period and it will still strictly comply with the law. The
two-year prescriptive period is a grace period in favor of the taxpayer and he can avail of
the full period before his right to apply for a tax refund or credit is barred by prescription.
Second, Section 112(C) provides that the Commissioner shall decide the application for
refund or credit "within one hundred twenty (120) days from the date of submission of
complete documents in support of the application filed in accordance with Subsection (A)."
The reference in Section 112(C) of the submission of documents "in support of the
application filed in accordance with Subsection A" means that the application in Section
112(A) is the administrative claim that the Commissioner must decide within the 120-day

period. In short, the two-year prescriptive period in Section 112(A) refers to the period within
which the taxpayer can file an administrative claim for tax refund or credit. Stated otherwise,
the two-year prescriptive period does not refer to the filing of the judicial claim with the CTA
but to the filing of the administrative claim with the Commissioner. As held in Aichi, the
"phrase within two years x x x apply for the issuance of a tax credit or refund refers to
applications for refund/credit with the CIR and not to appeals made to the CTA."
Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive
period (equivalent to 730 days), then the taxpayer must file his administrative claim for
refund or credit within the first 610 days of the two-year prescriptive period. Otherwise, the
filing of the administrative claim beyond the first 610 days will result in the appeal to the CTA
being filed beyond the two-year prescriptive period. Thus, if the taxpayer files his
administrative claim on the 611th day, the Commissioner, with his 120-day period, will have
until the 731st day to decide the claim. If the Commissioner decides only on the 731st day,
or does not decide at all, the taxpayer can no longer file his judicial claim with the CTA
because the two-year prescriptive period (equivalent to 730 days) has lapsed. The 30-day
period granted by law to the taxpayer to file an appeal before the CTA becomes utterly
useless, even if the taxpayer complied with the law by filing his administrative claim within
the two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive period adds a
condition that is not found in the law. It results in truncating 120 days from the 730 days that
the law grants the taxpayer for filing his administrative claim with the Commissioner. This
Court cannot interpret a law to defeat, wholly or even partly, a remedy that the law expressly
grants in clear, plain, and unequivocal language.
Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal
language. The taxpayer can file his administrative claim for refund or credit at anytime
within the two-year prescriptive period. If he files his claim on the last day of the two-year
prescriptive
period, his claim is still filed on time. The Commissioner will have 120 days from such filing
to decide the claim. If the Commissioner decides the claim on the 120th day, or does not
decide it on that day, the taxpayer still has 30 days to file his judicial claim with the CTA.
This is not only the plain meaning but also the only logical interpretation of Section 112(A)
and (C).50 (Emphases in the original; citations omitted)
In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No. DA-489-03
from the time of its issuance on 10 December 2003 up to its reversal in Aichi on 6 October
2010, where this Court held that the 120+30 day periods are mandatory and
jurisdictional."51 We shall discuss later the effect of San Roques recognition of BIR Ruling
No. DA-489-03 on claims filed between 10 December 2003 and 6 October 2010. Mindanao
I and II filed their claims within this period.
We rule on Mindanao I and IIs judicial claims for the second, third, and fourth quarters of
2003 as follows:

G.R. No. 193301

Mindanao II v. CIR
Mindanao II filed its administrative claims for the second, third, and fourth quarters of 2003
on 13 April 2005. Counting 120 days after filing of the administrative claim with the CIR (11
August 2005) and 30 days after the CIRs denial by inaction, the last day for filing a judicial
claim with the CTA for the second, third, and fourth quarters of 2003 was on 12 September
2005. However, the judicial claim cannot be filed earlier than 11 August 2005, which is the
expiration of the 120-day period for the Commissioner to act on the claim.
(1) Mindanao II filed its judicial claim for the second quarter of 2003 before the CTA
on 7 July 2005, before the expiration of the 120-day period. Pursuant to Section
112(C) of the 1997 Tax Code, Mindanao IIs judicial claim for the second quarter of
2003 was prematurely filed.
However, pursuant to San Roques recognition of the effect of BIR Ruling No. DA489-03, we rule that Mindanao IIs judicial claim for the second quarter of 2003
qualifies under the exception to the strict application of the 120+30 day periods.
(2) Mindanao II filed its judicial claim for the third quarter of 2003 before the CTA on
9 September 2005. Mindanao IIs judicial claim for the third quarter of 2003 was thus
filed on time, pursuant to Section 112(C) of the 1997 Tax Code.
(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before the CTA on
9 September 2005. Mindanao IIs judicial claim for the fourth quarter of 2003 was
thus filed on time, pursuant to Section 112(C) of the 1997 Tax Code.
G.R. No. 194637
Mindanao I v. CIR
Mindanao I filed its administrative claims for the second, third, and fourth quarters of 2003
on 4 April 2005. Counting 120 days after filing of the administrative claim with the CIR (2
August 2005) and 30 days after the CIRs denial by inaction, 52 the last day for filing a judicial
claim with the CTA for the second, third, and fourth quarters of 2003 was on 1 September
2005. However, the judicial claim cannot be filed earlier than 2 August 2005, which is the
expiration of the 120-day period for the Commissioner to act on the claim.
(1) Mindanao I filed its judicial claim for the second quarter of 2003 before the CTA
on 7 July 2005, before the expiration of the 120-day period. Pursuant to Section
112(C) of the 1997 Tax Code, Mindanao Is judicial claim for the second quarter of
2003 was prematurely filed. However, pursuant to San Roques recognition of the
effect of BIR Ruling No. DA-489-03, we rule that Mindanao Is judicial claim for the
second quarter of 2003 qualifies under the exception to the strict application of the
120+30 day periods.
(2) Mindanao I filed its judicial claim for the third quarter of 2003 before the CTA on 9
September 2005. Mindanao Is judicial claim for the third quarter of 2003 was thus
filed after the prescriptive period, pursuant to Section 112(C) of the 1997 Tax Code.

(3) Mindanao I filed its judicial claim for the fourth quarter of 2003 before the CTA on
9 September 2005. Mindanao Is judicial claim for the fourth quarter of 2003 was
thus filed after the prescriptive period, pursuant to Section 112(C) of the 1997 Tax
Code.
San Roque: Recognition of BIR Ruling No. DA-489-03
In the consolidated cases of San Roque, the Court En Banc 53 examined and ruled on the
different claims for tax refund or credit of three different companies. In San Roque, we
reiterated that "following the verba legis doctrine, Section 112(C) must be applied exactly as
worded since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition
with the CTA without waiting for the Commissioners decision within the 120-day mandatory
and jurisdictional period. The CTA will have no jurisdiction because there will be no
decision or deemed a denial decision of the Commissioner for the CTA to review."
Notwithstanding a strict construction of any claim for tax exemption or refund, the Court in
San Roque recognized that BIR Ruling No. DA-489-03 constitutes equitable estoppel 54 in
favor of taxpayers. BIR Ruling No. DA-489-03 expressly states that the "taxpayer-claimant
need not wait for the lapse of the 120-day period before it could seek judicial relief with the
CTA by way of Petition for Review." This Court discussed BIR Ruling No. DA-489-03 and its
effect on taxpayers, thus:
Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner,
particularly on a difficult question of law. The abandonment of the Atlas doctrine by Mirant
and Aichi is proof that the reckoning of the prescriptive periods for input VAT tax refund or
credit is a difficult question of law. The abandonment of the Atlas doctrine did not result in
Atlas, or other taxpayers similarly situated, being made to return the tax refund or credit
they received or could have received under Atlas prior to its abandonment. This Court is
applying Mirant and Aichi prospectively. Absent fraud, bad faith or misrepresentation, the
reversal by this Court of a general interpretative rule issued by the Commissioner, like the
reversal of a specific BIR ruling under Section 246, should also apply prospectively. x x x.
xxxx
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule
applicable to all taxpayers or a specific ruling applicable only to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a
query made, not by a particular taxpayer, but by a government agency tasked with
processing tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit and
Drawback Center of the Department of Finance. This government agency is also the
addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this
government agency mentions in its query to the Commissioner the administrative claim of
Lazi Bay Resources Development, Inc., the agency was in fact asking the Commissioner
what to do in cases like the tax claim of Lazi Bay Resources Development, Inc., where the
taxpayer did not wait for the lapse of the 120-day period.

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can
rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to
its reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120+30
day periods are mandatory and jurisdictional.
xxxx
Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the
issuance of BIR Ruling No. DA-489-03 on 10 December 2003. Truly, Taganito can claim that
in filing its judicial claim prematurely without waiting for the 120-day period to expire, it was
misled by BIR Ruling No. DA-489-03. Thus, Taganito can claim the benefit of BIR Ruling
No. DA-489-03, which shields the filing of its judicial claim from the vice of prematurity.
(Emphasis in the original)
Summary of Administrative and Judicial Claims
G.R. No. 193301
Mindanao II v. CIR
Administrative
Claim

Judicial Claim

Action on Claim

1st Quarter, 2003

Filed late

--

Deny, pursuant to
Section 112(A) of the
1997 Tax Code

2nd Quarter, 2003

Filed on time

Prematurely filed

Grant, pursuant to
BIR Ruling No. DA-489-03

3rd Quarter, 2003

Filed on time

Filed on time

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

4th Quarter, 2003

Filed on time

Filed on time

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

Administrative
Claim

Judicial Claim

Action on Claim

1st Quarter, 2003

Filed late

--

Deny, pursuant to
Section 112(A) of the
1997 Tax Code

2nd Quarter, 2003

Filed on time

Prematurely filed

Grant, pursuant to
BIR Ruling No. DA-489-03

G.R. No. 194637

Mindanao I v. CIR

3rd Quarter, 2003

Filed on time

Filed late

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

4th Quarter, 2003

Filed on time

Filed late

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

Summary of Rules on Prescriptive Periods Involving VAT

We summarize the rules on the determination of the prescriptive period for filing a tax
refund or credit of unutilized input VAT as provided in Section 112 of the 1997 Tax Code, as
follows:
(1) An administrative claim must be filed with the CIR within two years after the close
of the taxable quarter when the zero-rated or effectively zero-rated sales were made.
(2) The CIR has 120 days from the date of submission of complete documents in
support of the administrative claim within which to decide whether to grant a refund
or issue a tax credit certificate. The 120-day period may extend beyond the two-year
period from the filing of the administrative claim if the claim is filed in the later part of
the two-year period. If the 120-day period expires without any decision from the CIR,
then the administrative claim may be considered to be denied by inaction.
(3) A judicial claim must be filed with the CTA within 30 days from the receipt of the
CIRs decision denying the administrative claim or from the expiration of the 120-day
period without any action from the CIR.
(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October
2010, as an exception to the mandatory and jurisdictional 120+30 day periods.
"Incidental" Transaction
Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental
transaction in the course of its business; hence, it is an isolated transaction that should not
have been subject to 10% VAT.
Section 105 of the 1997 Tax Code does not support Mindanao IIs position:
SEC. 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.
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 nonresident foreign persons shall be considered as being
rendered in the course of trade or business. (Emphasis supplied)
Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc.
(Magsaysay)55 and Imperial v. Collector of Internal Revenue (Imperial) 56 to justify its position.
Magsaysay, decided under the NIRC of 1986, involved the sale of vessels of the National
Development Company (NDC) to Magsaysay Lines, Inc. We ruled that the sale of vessels
was not in the course of NDCs trade or business as it was involuntary and made pursuant
to the Governments policy for privatization. Magsaysay, in quoting from the CTAs decision,
imputed upon Imperial the definition of "carrying on business." Imperial, however, is an
unreported case that merely stated that "to engage is to embark in a business or to employ
oneself therein."57
Mindanao IIs sale of the Nissan Patrol is said to be an isolated transaction. However, it
does not follow that an isolated transaction cannot be an incidental transaction for purposes
of VAT liability. Indeed, a reading of Section 105 of the 1997 Tax Code would show that a
transaction "in the course of trade or business" includes "transactions incidental thereto."
1wphi1

Mindanao IIs business is to convert the steam supplied to it by PNOC-EDC into electricity
and to deliver the electricity to NPC. In the course of its business, Mindanao II bought and
eventually sold a Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao
IIs property, plant, and equipment. Therefore, the sale of the Nissan Patrol is an incidental
transaction made in the course of Mindanao IIs business which should be liable for VAT.
Substantiation Requirements
Mindanao II claims that the CTAs disallowance of a total amount of P492,198.09 is
improper as it has substantially complied with the substantiation requirements of Section
113(A)58 in relation to Section 23759 of the 1997 Tax Code, as implemented by Section
4.104-1, 4.104-5 and 4.108-1 of Revenue Regulation No. 7-95. 60
We are constrained to state that Mindanao IIs compliance with the substantiation
requirements is a finding of fact. The CTA En Banc evaluated the records of the case and
found that the transactions in question are purchases for services and that Mindanao II
failed to comply with the substantiation requirements. We affirm the CTA En Bancs finding
of fact, which in turn affirmed the finding of the CTA First Division. We see no reason to
overturn their findings.

WHEREFORE, we PARTIALLY GRANT the petitions. The Decision of the Court of Tax
Appeals En Bane in CT A EB No. 513 promulgated on 10 March 2010, as well as the
Resolution promulgated on 28 July 2010, and the Decision of the Court of Tax Appeals En
Bane in CTA EB Nos. 476 and 483 promulgated on 31 May 2010, as well as the Amended
Decision promulgated on 24 November 2010, are AFFIRMED with MODIFICATION.
For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for the first quarter
of 2003 is DENIED while its claims for the second, third, and fourth quarters of 2003 are
GRANTED. For G.R. No. 19463 7, the claims of Mindanao I Geothermal Partnership for the
first, third, and fourth quarters of 2003 are DENIED while its claim for the second quarter of
2003 is GRANTED.
SO ORDERED.