Republic of the Philippines

Supreme Court
Manila

Thus, the present petition.

Petitioner lists the following as grounds for his petition:
I
THE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER'S
CLAIM
FOR
REFUND
HAS
PRESCRIBED, DESPITE FAILURE OF RESPONDENT
AND THE COURT OF TAX APPEALS TO RAISE THE
ISSUE OF PRESCRIPTION IN RESPONDENT'S
ANSWER OR IN THE CTA'S ORIGINAL DECISION
DATED 16 SEPTEMBER 1998.

SECOND DIVISION

ATLAS CONSOLIDATED MINING AND G.R. No. 159471

DEVELOPMENT CORPORATION,
Petitioner,
Present:

II
THE COURT OF APPEALS ERRED IN UPHOLDING
THE COURT OF TAX APPEALS' FINDING IN ITS
DECISION
DATED 24
AUGUST
1998 THAT
PETITIONER, IN NOT SUBMITTING ITS EXPORT
DOCUMENTS, FAILED TO PRESENT ADEQUATE
PROOF THAT ITS INPUT TAXES ARE DIRECTLY
ATTRIBUTABLE TO ITS EXPORT SALES.

CARPIO, J., Chairperson,

PERALTA,
ABAD,
PEREZ,* and
MENDOZA, JJ.

- versus -

COMMISSIONER
REVENUE,
Respondent.

OF

INTERNAL

Promulgated:
January 26, 2011

III
THE COURT OF APPEALS ERRED IN UPHOLDING
THE COURT OF TAX APPEALS FINDING THAT
PETITIONER FAILED TO PRESENT ADEQUATE
PROOF THAT IT HAD NOT APPLIED THE CLAIMED
INPUT TAX TO ITS OUTPUT TAXES FROM PRIOR
AND SUCCEEDING QUARTERS.[11]

x-----------------------------------------------------------------------------------x
DECISION
PERALTA, J.:
For this Court's resolution is the Petition for Review on Certiorari under
Rule 45 of the Revised Rules of Civil Procedure assailing the
Decision[1] dated April 19, 2001 and Resolution[2] dated August 6,
2003 of the Court of Appeals (CA).
The facts, as shown in the records, are the following:
Under Section 100 of the Tax Code of the Philippines, petitioner is a
zero-rated Value Added Tax (VAT) person for being an exporter of
copper concentrates. According to petitioner, on January 20, 1994, it
filed its VAT return for the fourth quarter of 1993, showing a total input
tax of P863,556,963.74 and an excess VAT credit of P842,336,291.60
and, on January 25, 1996, it applied for a tax refund or a tax credit
certificate for the latter amount with respondent Commissioner of
Internal Revenue (CIR). On the same date, petitioner filed the same
claim for refund with the Court of Tax Appeals (CTA), claiming that the
two-year prescriptive period provided for under Section 230 of the Tax
Code for claiming a refund was about to expire. The CIR failed to file
his answer with the CTA; thus, the former declared the latter in default.
On August 24, 1998, the CTA rendered its Decision[3] denying
petitioner's claim for refund due to petitioner's failure to comply with
the documentary requirements prescribed under Section 16 of
Revenue Regulations No. 5-87, as amended by Revenue Regulations
No. 3-88, dated April 7, 1988. The dispositive portion of the Decision
reads:

Petitioner herein had, in the past, similar petitions with this Court
regarding the denial of its claims for tax refund of the input VAT on its
purchases of capital goods and on its zero-rated sales. In Atlas
Consolidated Mining and Development Corporation v. CIR,[12] petitioner
filed with the Bureau of Internal Revenue (BIR) its VAT Return for the
first quarter of 1992 and also alleged that it 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. Its application for refund/credit remained having
been unresolved by the BIR, petitioner filed with the CTA, on April 20,
1994, a Petition for Review. Claiming to be a zero-rated VAT person,
petitioner prayed that the CTA order the CIR to refund/credit petitioner
with the amount of P26,030,460.00, representing the input VAT it had
paid for the first quarter of 1992. Both, the CTA and the CA denied the
claims of petitioner, ratiocinating that its claim has been filed beyond
the prescriptive period provided by law and that evidence presented
was insufficient.
In the present case, petitioner is basically asking this Court to review
the factual findings of the CTA and the CA. Petitioner insists that it had
presented the necessary documents or copies thereof with the CTA
that would prove that it is entitled to a tax refund.Again, citing the
earlier case of Atlas Consolidated Mining and Development
Corporation v. CIR,[13] this Court has expounded the nature and bases
of claiming tax refund, thus:

WHEREFORE, in view of the foregoing, the instant

Petition for Review is hereby DISMISSED for lack
of merit.
SO ORDERED.[4]
Petitioner filed a Motion for Reconsideration [5] praying for the reopening
of the case in order for it to present the required documents, together
with its proof of non-availment for prior and succeeding quarters of the
input VAT subject of petitioner's claim for refund. The CTA granted the
motion in its Resolution[6] dated October 29, 1998. Thereafter, in a
Resolution[7] dated June 21, 2000, the CTA denied petitioner's claim. It
ruled that the action has already prescribed and that petitioner has
failed to substantiate its claim that it has not applied its alleged excess
input taxes to any of its subsequent quarter's output tax liability.
The CTA's Decision and Resolution were questioned in the
CA. However, the CA affirmed in toto the said Decision and Resolution,
disposing the case as follows:
WHEREFORE, the petition is DISMISSED
for lack of merit. The questioned Decision of the
CTA dated August 24, 1998 and the Resolution
dated June 21, 2000 are AFFIRMED in toto.
SO ORDERED.[8]
Subsequently, petitioner's Motion for Reconsideration[9] of the CA's
Decision was denied in a Resolution[10] dated August 6, 2003.

Page 1 of 22

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

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:

3. Effectively zero-rated
sale of goods and services.
i) photocopy 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.

1. The party who desires to

introduce as evidence such
voluminous documents must,
after motion and approval by
the Court, present:

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
photocopy of import entry
document
for
internal
revenue tax purposes and the
confirmation receipt issued by
the Bureau of Customs for the
payment
of
the
valueadded tax.

(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.

5. In applicable cases,
where the applicants zerorated
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.

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.[14]

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
x
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

As to the evidence that must be presented, the provisions of the

pertinent laws provide:
Section 106, Tax Code
Refunds or tax credits of input tax. - (a) Any VATregistered person, whose sales are zero-rated,
may, within two (2) years after the close of the

In the interest of speedy

administration of justice, the

Page 2 of 22

taxable quarter when the sales were made, apply

for the issuance of a tax credit certificate or
refund 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 case of zero-rated sales under
Section 100 (a) (2) (A) (I), (ii) and (b) and Section
102 (b) (1) and (2), the acceptable foreign
currency exchange proceeds thereof have been
duly accounted for in accordance with the
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.

Lastly, We cannot grant petitioner's claim for

credit or refund of input taxes due to its failure to
show convincingly that the same has not been
applied to any of its output tax liability as
provided under Section 106 (a) of the Tax
Code. There is no evidence to show that the
amount herein claimed for refund when applied
for on January 25, 1996 has not been priorly or
thereafter applied to its output tax liability.[15]
The above factual findings of the CTA were even bolstered when it
granted petitioner's motion for reconsideration allowing petitioner to
submit the necessary documents and other pieces of evidence, so as
to comply with the requirements provided for by law. However, despite
such allowance, petitioner still failed to comply. Thus, in its
Resolution[16] dated June 21, 2000, the CTA finally disposed the case by
ruling that:
The Court finds and so holds that
Petitioner failed again to present proof that it has
not applied the alleged excess input taxes to any
of its subsequent quarter's output tax liability. In
this Court's decision dated August 24, 1998, We
already mentioned that petitioner failed to
convince us that its input taxes have not been
applied to any of its output tax liability as
provided under Section 106 (a). Now on its
second opportunity to substantiate its claim,
Petitioner again failed to prove this particular
allegation. Petitioner
merely
presented
in
evidence the following documents to show that it
has not applied the amount of P4,534,933.74,
subject of the claim, to its 1994 first quarter
output tax liability, to wit:
Exhibits
1.) Output/Input VAT (Per Return) Listings T
for the first quarter of 1994
2.) Schedule of Output Taxes for the month U, U-1
to U-2
of January 1994 U-3 to U-5
3.) Schedule of Materials and Supplies for V, V-1
to V-9
for the first quarter of 1994
4.) Schedule of Output Taxes for the month W, W1 to W-4
of February 1994

Section 16 of Revenue Regulations No. 5-87, as

amended by Revenue Regulations No. 3-88,
dated April 7, 1988
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:
1. Export Sales
i)
Photocopy
of
export
document
showing
the
amount of export, the date
and destination of the goods
exported. With respect to
foreign
currency
denominated
sale,
the
photocopy of the invoice or
receipt evidencing the sale of
the goods, as well as the
name of the person to whom
the goods were delivered.
ii) Statement from the Central
Bank or any of its accredited
agent
banks
that
the
proceeds of the sale in
acceptable foreign currency
has been inwardly remitted
and
accounted
for
in
accordance with applicable
banking regulations.

Nowhere in all the documents submitted to this

Court by the Petitioner can We find its 1994 first
quarter VAT return which, to Our mind and as
repeatedly ruled in a litany of cases, is necessary
for purposes of determining with particular
certainty whether or not the claimed input taxes
were applied to any of its output tax liability in
the first quarter or in the succeeding quarters of
1994. And there is no reason at this point for Us
to digress from this ruling.[17]

xxxx
The above factual findings were affirmed and accorded respect by the
CA. Nevertheless, petitioner insists that it has submitted documents
and other pieces of evidence, except those required by law, that would
establish the existence of the input VAT for the fourth quarter of 1993
and that the excess input VAT claimed for refund or tax credit has not
been applied to its output tax liability for prior and succeeding
quarters.

In all cases, the amount of refund or tax credit

that may be granted shall be limited to the
amount of 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.
The CTA, applying the abovementioned rules, in its Decision
dated August 24, 1998, came out with the following factual findings:
The formal offer of evidence of the petitioner
failed to include photocopy of its export
documents, as required. There is no way
therefore, in determining the kind of goods and
actual amount of export sales it allegedly made
during the quarter involved. This finding is very
crucial when we try to relate it with the
requirement of the aforementioned regulations
that the input tax being claimed for refund or tax
credit must be shown to be entirely attributable
to the zero-rated transaction, in this case, export
sales of goods. Without the export documents,
the purchase invoice/receipts submitted by the
petitioner as proof of its input taxes cannot be
verified as being directly attributable to the
goods so exported.

The above argument, however, is flawed. It must be remembered that

when claiming tax 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 tax refund/credit must be
accompanied by copies of the taxpayers VAT return/s for the taxable
quarter/s concerned.[18] The CTA and the CA, based on their
appreciation of the evidence presented, committed no error when they
declared that petitioner failed to prove that it is entitled to a tax refund
and this Court, not being a trier of facts, must defer to their
findings. Again, as aptly ruled by this Court in Atlas:[19]
This Court is, therefore, bound by the foregoing
facts, as found by the appellate court, for wellsettled 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

Page 3 of 22

conclusive. 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.
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."
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, 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.[20]

RENATO V. DIAZ and G.R. No. 193007

AURORA MA. F. TIMBOL,
Petitioners, Present:
CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
- versus THE SECRETARY OF FINANCE
and THE COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondents. July 19, 2011

Taxation is a destructive power which interferes with the personal and

property rights of the people and takes from them a portion of their
property for the support of the government. And, since taxes are what
we pay for civilized society, or are the lifeblood of the nation, the law
frowns against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimi jurisagainst the taxpayer
and liberally in favor of the taxing authority. A claim of refund or
exemption from tax payments must be clearly shown and be based on
language in the law too plain to be mistaken. Elsewise stated, taxation
is the rule, exemption therefrom is the exception.[21]

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

Anent the issue of prescription, wherein petitioner questions the ruling

of the CA that the former's claim for refund has prescribed,
disregarding the failure of respondent Commissioner of Internal
Revenue and the CTA to raise the said issue in their answer and
original decision, respectively, this Court finds the same moot and
academic. Although it may appear that the CTA only brought up the
issue of prescription in its later resolution and not in its original
decision, its ruling on the merits of the application for refund, could
only imply that the issue of prescription was not the main
consideration for the denial of petitioner's claim for tax
refund.Otherwise, the CTA would have just denied the application on
the ground of prescription.
WHEREFORE, the Petition is hereby DENIED for lack of
merit. The Decision and Resolution of the Court of Appeals, dated April
19, 2001 and August 6, 2003, respectively, are hereby AFFIRMED.

The Facts and the Case

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

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

Page 4 of 22

on public service; and that, since VAT was never factored into the
formula for computing toll fees, its imposition would violate the nonimpairment 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. JacintoHenares, 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 non-impairment 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 nonimpairment 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 63-2010 (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.

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 Code 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. (Underscoring supplied)

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.

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

Page 5 of 22

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 governmentapproved 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:
or real;

1. Lessors of property, whether personal

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.

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]

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]

Page 6 of 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.
TheMIAA Airport Lands and
Buildings
constitute a port constructed by the State.
Under Article 420 of the Civil Code,
the MIAAAirport 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 nonimpairment 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. Non-observance 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

Page 7 of 22

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.

Page 8 of 22

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 183505
February 26, 2010
COMMISSIONER
OF
INTERNAL
REVENUE, Petitioner,
vs.
SM PRIME HOLDINGS, INC. and FIRST ASIA REALTY
DEVELOPMENT CORPORATION, Respondents.
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 Decision5 and the June 24, 2008 Resolution6 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 dated July
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 of P35,823,680.93 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
Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT
deficiency.19 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, entitled "Joint 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-00000098,
VT-99-000057,
VT-00-000122,
003-03
and
008-02
are ORDEREDcancelled 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 denied36 the Petition for
Review and dismissed37 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

Page 9 of 22

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) 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 A SALE
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.
(2) 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. 28-2001.38
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. 282001 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 x40
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 1143 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 197746 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

Page 10 of 22

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 8-88, 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 only the 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 amendments52 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
tax53 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.1auuphil
(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.
On this point, it is apropos to quote the case of Roxas v. Court of Tax
Appeals,57 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

Page 11 of 22

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. 28-2001 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.62Thus, 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 AppealsEn 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.
MARIANO
C.
DEL
CASTILLO
Associate Justice

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 173425

September 4, 2012

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT
OFFICER, REVENUE DISTRICT NO. 44, TAGUIG and PATEROS,
BUREAU OF INTERNAL REVENUE, Respondents.
DECISION
DEL CASTILLO, J.:
Courts cannot limit the application or coverage of a law, nor can it
impose conditions not provided therein. To do so constitutes judicial
legislation.
This Petition for Review on Certiorari under Rule 45 of the Rules of
Court assails the July 7, 2006 Decision 1 of the Court of Appeals (CA) in
CA-G.R. SP No. 61436, the dispositive portion of which reads.
WHEREFORE,
the
instant
petition
is
hereby DISMISSED.
ACCORDINGLY, the Decision dated October 12, 2000 of the Court of
Tax Appeals in CTA Case No. 5735, denying petitioners claim for refund
in the amount of Three Hundred Fifty-Nine Million Six Hundred Fifty-Two
Thousand Nine Pesos and Forty-Seven Centavos (P 359,652,009.47), is
hereby AFFIRMED.
SO ORDERED.2
Factual Antecedents
Petitioner Fort Bonifacio Development Corporation (FBDC) is a duly
registered domestic corporation engaged in the development and sale
of real property.3 The Bases Conversion Development Authority (BCDA),
a wholly owned government corporation created under Republic Act
(RA) No. 7227,4 owns 45% of petitioners issued and outstanding
capital stock; while the Bonifacio Land Corporation, a consortium of
private domestic corporations, owns the remaining 55%.5
On February 8, 1995, by virtue of RA 7227 and Executive Order No.
40,6 dated December 8, 1992, petitioner purchased from the national
government a portion of the Fort Bonifacio reservation, now known as
the Fort Bonifacio Global City (Global City).7
On January 1, 1996, RA 7716 8 restructured the Value-Added Tax (VAT)
system by amending certain provisions of the old National Internal
Revenue Code (NIRC). RA 7716 extended the coverage of VAT to real
properties held primarily for sale to customers or held for lease in the
ordinary course of trade or business.9

Page 12 of 22

On September 19, 1996, petitioner submitted to the Bureau of Internal

Revenue (BIR) Revenue District No. 44, Taguig and Pateros, an
inventory of all its real properties, the book value of which
aggregated P71,227,503,200.10 Based on this value, petitioner claimed
that
it
is
entitled
to
a
transitional
input
tax
credit
of P5,698,200,256,11 pursuant to Section 10512 of the old NIRC.
In October 1996, petitioner started selling Global City lots to interested
buyers.13
For the first quarter of 1997, petitioner generated a total amount
of P 3,685,356,539.50 from its sales and lease of lots, on which the
output VAT payable was P 368,535,653.95.14 Petitioner paid the output
VAT by making cash payments to the BIR totalling P 359,652,009.47
and crediting its unutilized input tax credit on purchases of goods and
services of P 8,883,644.48.15
Realizing that its transitional input tax credit was not applied in
computing its output VAT for the first quarter of 1997, petitioner on
November 17, 1998 filed with the BIR a claim for refund of the amount
of P 359,652,009.47 erroneously paid as output VAT for the said
period.16
Ruling of the Court of Tax Appeals
On February 24, 1999, due to the inaction of the respondent
Commissioner of Internal Revenue (CIR), petitioner elevated the matter
to the Court of Tax Appeals (CTA) via a Petition for Review. 17
In opposing the claim for refund, respondents interposed the following
special and affirmative defenses:

Aggrieved, petitioner filed a Petition for Review 23 under Rule 43 of the

Rules of Court before the CA.
On July 7, 2006, the CA affirmed the decision of the CTA. The CA
agreed that petitioner is not entitled to the 8% transitional input tax
credit since it did not pay any VAT when it purchased the Global City
property.24 The CA opined that transitional input tax credit is allowed
only when business taxes have been paid and passed-on as part of the
purchase price.25 In arriving at this conclusion, the CA relied heavily on
the historical background of transitional input tax credit. 26 As to the
validity of RR 7-95, which limited the 8% transitional input tax to the
value of the improvements on the land, the CA said that it is entitled to
great weight as it was issued pursuant to Section 245 27 of the old
NIRC.28
Issues
Hence, the instant petition with the principal issue of whether
petitioner is entitled to a refund of P 359,652,009.47 erroneously paid
as output VAT for the first quarter of 1997, the resolution of which
depends on:
3.05.a. Whether Revenue Regulations No. 6-97 effectively repealed or
repudiated Revenue Regulations No. 7-95 insofar as the latter limited
the transitional/presumptive input tax credit which may be claimed
under Section 105 of the National Internal Revenue Code to the
"improvements" on real properties.
3.05.b. Whether Revenue Regulations No. 7-95 is a valid
implementation of Section 105 of the National Internal Revenue Code.

xxxx

3.05.c. Whether the issuance of Revenue Regulations No. 7-95 by the

Bureau of Internal Revenue, and declaration of validity of said
Regulations by the Court of Tax Appeals and Court of Appeals, were in
violation of the fundamental principle of separation of powers.

8. Under Revenue Regulations No. 7-95, implementing Section 105 of

the Tax Code as amended by E.O. 273, the basis of the presumptive
input tax, in the case of real estate dealers, is the improvements, such
as buildings, roads, drainage systems, and other similar structures,
constructed on or after January 1, 1988.

3.05.d. Whether there is basis and necessity to interpret and construe

the provisions of Section 105 of the National Internal Revenue Code.

9. Petitioner, by submitting its inventory listing of real properties only

on September 19, 1996, failed to comply with the aforesaid revenue
regulations mandating that for purposes of availing the presumptive
input tax credits under its Transitory Provisions, "an inventory as of
December 31, 1995, of such goods or properties and improvements
showing the quantity, description, and amount should be filed with the
RDO no later than January 31, 1996. x x x"18
On October 12, 2000, the CTA denied petitioners claim for refund.
According to the CTA, "the benefit of transitional input tax credit comes
with the condition that business taxes should have been paid first." 19 In
this case, since petitioner acquired the Global City property under a
VAT-free sale transaction, it cannot avail of the transitional input tax
credit.20 The CTA likewise pointed out that under Revenue Regulations
No. (RR) 7-95, implementing Section 105 of the old NIRC, the 8%
transitional input tax credit should be based on the value of the
improvements on land such as buildings, roads, drainage system and
other similar structures, constructed on or after January 1, 1998, and
not on the book value of the real property. 21 Thus, the CTA disposed of
the case in this manner:
WHEREFORE, in view of all the foregoing, the claim for refund
representing alleged overpaid value-added tax covering the first
quarter of 1997 is hereby DENIED for lack of merit.
SO ORDERED.22
Ruling of the Court of Appeals

3.05.e. Whether there must have been previous payment of business

tax by petitioner on its land before it may claim the input tax credit
granted by Section 105 of the National Internal Revenue Code.
3.05.f. Whether the Court of Appeals and Court of Tax Appeals merely
speculated on the purpose of the transitional/presumptive input tax
provided for in Section 105 of the National Internal Revenue Code.
3.05.g. Whether the economic and social objectives in the acquisition
of the subject property by petitioner from the Government should be
taken into consideration.29
Petitioners Arguments
Petitioner claims that it is entitled to recover the amount
of P 359,652,009.47 erroneously paid as output VAT for the first
quarter
of
1997
since
its
transitional
input
tax
credit
of P 5,698,200,256 is more than sufficient to cover its output VAT
liability for the said period.30
Petitioner assails the pronouncement of the CA that prior payment of
taxes is required to avail of the 8% transitional input tax
credit.31 Petitioner contends that there is nothing in Section 105 of the
old NIRC to support such conclusion.32
Petitioner further argues that RR 7-95, which limited the 8%
transitional input tax credit to the value of the improvements on the
land, is invalid because it goes against the express provision of Section
105 of the old NIRC, in relation to Section 100 33 of the same Code, as
amended by RA 7716.34

Page 13 of 22

Respondents Arguments
Respondents, on the other hand, maintain that petitioner is not entitled
to a transitional input tax credit because no taxes were paid in the
acquisition of the Global City property.35 Respondents assert that prior
payment of taxes is inherent in the nature of a transitional input
tax.36 Regarding RR 7-95, respondents insist that it is valid because it
was issued by the Secretary of Finance, who is mandated by law to
promulgate all needful rules and regulations for the implementation of
Section 105 of the old NIRC.37
Our Ruling
The petition is meritorious.
The issues before us are no longer new or novel as these have been
resolved in the related case of Fort Bonifacio Development Corporation
v. Commissioner of Internal Revenue.38
Prior
payment
of
for
a
taxpayer
transitional input tax credit

taxes
to

is
avail

not
of

the

required
8%

Section 105 of the old NIRC reads:

SEC. 105. 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 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. (Emphasis supplied.)
Contrary to the view of the CTA and the CA, there is nothing in the
above-quoted provision to indicate that prior payment of taxes is
necessary for the availment of the 8% transitional input tax credit.
Obviously, all that is required is for the taxpayer to file a beginning
inventory with the BIR.
To require prior payment of taxes, as proposed in the Dissent is not
only tantamount to judicial legislation but would also render nugatory
the provision in Section 105 of the old NIRC that the transitional input
tax credit shall be "8% of the value of [the beginning] inventory or the
actual [VAT] paid on such goods, materials and supplies, whichever is
higher" because the actual VAT (now 12%) paid on the goods,
materials, and supplies would always be higher than the 8% (now 2%)
of the beginning inventory which, following the view of Justice Carpio,
would have to exclude all goods, materials, and supplies where no
taxes were paid. Clearly, limiting the value of the beginning inventory
only to goods, materials, and supplies, where prior taxes were paid,
was not the intention of the law. Otherwise, it would have specifically
stated that the beginning inventory excludes goods, materials, and
supplies where no taxes were paid. As retired Justice Consuelo YnaresSantiago has pointed out in her Concurring Opinion in the earlier case
of Fort Bonifacio:
If the intent of the law were to limit the input tax to cases where actual
VAT was paid, it could have simply said that the tax base shall be the
actual value-added tax paid. Instead, the law as framed contemplates
a situation where a transitional input tax credit is claimed even if there
was no actual payment of VAT in the underlying transaction. In such
cases, the tax base used shall be the value of the beginning inventory
of goods, materials and supplies.39
Moreover, prior payment of taxes is not required to avail of the
transitional input tax credit because it is not a tax refund per se but a
tax credit. Tax credit is not synonymous to tax refund. Tax refund is
defined as the money that a taxpayer overpaid and is thus returned by
the taxing authority.40 Tax credit, on the other hand, is an amount
subtracted directly from ones total tax liability.41 It is any amount given

to a taxpayer as a subsidy, a refund, or an incentive to encourage

investment. Thus, unlike a tax refund, prior payment of taxes is not a
prerequisite to avail of a tax credit. In fact, in Commissioner of Internal
Revenue v. Central Luzon Drug Corp.,42 we declared that prior payment
of taxes is not required in order to avail of a tax credit. 43 Pertinent
portions of the Decision read:
While a tax liability is essential to the availment or use of any tax
credit, prior tax payments are not. On the contrary, for the existence or
grant solely of such credit, neither a tax liability nor a prior tax
payment is needed. The Tax Code is in fact replete with provisions
granting or allowing tax credits, even though no taxes have been
previously paid.
For example, in computing the estate tax due, Section 86(E) allows a
tax credit -- subject to certain limitations -- for estate taxes paid to a
foreign country. Also found in Section 101(C) is a similar provision for
donors taxes -- again when paid to a foreign country -- in computing
for the donors tax due. The tax credits in both instances allude to the
prior payment of taxes, even if not made to our government.
Under Section 110, a VAT (Value-Added Tax) - registered person
engaging in transactions -- whether or not subject to the VAT -- is also
allowed a tax credit that includes a ratable portion of any input tax not
directly attributable to either activity. This input tax may either be the
VAT on the purchase or importation of goods or services that is merely
due from -- not necessarily paid by -- such VAT-registered person in the
course of trade or business; or the transitional input tax determined in
accordance with Section 111(A). The latter type may in fact be an
amount equivalent to only eight percent of the value of a VATregistered persons beginning inventory of goods, materials and
supplies, when such amount -- as computed -- is higher than the actual
VAT paid on the said items. Clearly from this provision, the tax credit
refers to an input tax that is either due only or given a value by mere
comparison with the VAT actually paid -- then later prorated. No tax is
actually paid prior to the availment of such credit.
In Section 111(B), a one and a half percent input tax credit that is
merely presumptive is allowed. For the purchase of primary agricultural
products used as inputs -- either in the processing of sardines,
mackerel and milk, or in the manufacture of refined sugar and cooking
oil -- and for the contract price of public works contracts entered into
with the government, again, no prior tax payments are needed for the
use of the tax credit.
More important, a VAT-registered person whose sales are zero-rated or
effectively zero-rated may, under Section 112(A), apply for the
issuance of a tax credit certificate for the amount of creditable input
taxes merely due -- again not necessarily paid to -- the government
and attributable to such sales, to the extent that the input taxes have
not been applied against output taxes. Where a taxpayer is engaged in
zero-rated or effectively zero-rated sales and also in taxable or exempt
sales, the amount of creditable input taxes due that are not directly
and entirely attributable to any one of these transactions shall be
proportionately allocated on the basis of the volume of sales. Indeed,
in availing of such tax credit for VAT purposes, this provision -- as well
as the one earlier mentioned -- shows that the prior payment of taxes
is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is another
illustration of a tax credit allowed, even though no prior tax payments
are not required. Specifically, in this provision, the imposition of a final
withholding tax rate on cash and/or property dividends received by a
nonresident foreign corporation from a domestic corporation is
subjected to the condition that a foreign tax credit will be given by the
domiciliary country in an amount equivalent to taxes that are merely
deemed paid. Although true, this provision actually refers to the tax
credit as a condition only for the imposition of a lower tax rate, not as a
deduction from the corresponding tax liability. Besides, it is not our
government but the domiciliary country that credits against the income
tax payable to the latter by the foreign corporation, the tax to be
foregone or spared.

Page 14 of 22

In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b),

categorically allows as credits, against the income tax imposable under
Title II, the amount of income taxes merely incurred -- not necessarily
paid -- by a domestic corporation during a taxable year in any foreign
country. Moreover, Section 34(C)(5) provides that for such taxes
incurred but not paid, a tax credit may be allowed, subject to the
condition precedent that the taxpayer shall simply give a bond with
sureties satisfactory to and approved by petitioner, in such sum as
may be required; and further conditioned upon payment by the
taxpayer of any tax found due, upon petitioners redetermination of it.
In addition to the above-cited provisions in the Tax Code, there are also
tax treaties and special laws that grant or allow tax credits, even
though no prior tax payments have been made.
Under the treaties in which the tax credit method is used as a relief to
avoid double taxation, income that is taxed in the state of source is
also taxable in the state of residence, but the tax paid in the former is
merely allowed as a credit against the tax levied in the latter.
Apparently, payment is made to the state of source, not the state of
residence. No tax, therefore, has been previously paid to the latter.
Under special laws that particularly affect businesses, there can also
be tax credit incentives. To illustrate, the incentives provided for in
Article 48 of Presidential Decree No. (PD) 1789, as amended by Batas
Pambansa Blg. (BP) 391, include tax credits equivalent to either five
percent of the net value earned, or five or ten percent of the net local
content of export. In order to avail of such credits under the said law
and still achieve its objectives, no prior tax payments are necessary.
From all the foregoing instances, it is evident that prior tax payments
are not indispensable to the availment of a tax credit. Thus, the CA
correctly held that the availment under RA 7432 did not require prior
tax payments by private establishments concerned. However, we do
not agree with its finding that the carry-over of tax credits under the
said special law to succeeding taxable periods, and even their
application against internal revenue taxes, did not necessitate the
existence of a tax liability.
The examples above show that a tax liability is certainly important in
the availment or use, not the existence or grant, of a tax credit.
Regarding this matter, a private establishment reporting a net loss in
its financial statements is no different from another that presents a net
income. Both are entitled to the tax credit provided for under RA 7432,
since the law itself accords that unconditional benefit. However, for the
losing establishment to immediately apply such credit, where no tax is
due, will be an improvident usance.44
In this case, when petitioner realized that its transitional input tax
credit was not applied in computing its output VAT for the 1st quarter
of 1997, it filed a claim for refund to recover the output VAT it
erroneously or excessively paid for the 1st quarter of 1997. In filing a
claim for tax refund, petitioner is simply applying its transitional input
tax credit against the output VAT it has paid. Hence, it is merely
availing of the tax credit incentive given by law to first time VAT
taxpayers. As we have said in the earlier case of Fort Bonifacio, the
provision on transitional input tax credit was enacted to benefit first
time VAT taxpayers by mitigating the impact of VAT on the
taxpayer.45 Thus, contrary to the view of Justice Carpio, the granting of
a transitional input tax credit in favor of petitioner, which would be
paid out of the general fund of the government, would be an
appropriation authorized by law, specifically Section 105 of the old
NIRC.
The history of the transitional input tax credit likewise does not support
the ruling of the CTA and CA. In our Decision dated April 2, 2009, in the
related case of Fort Bonifacio, we explained that:
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 VAT-registered. 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. The sale would be subject to capital gains taxes under Section 24
(D), 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. It is the donor who would be liable to pay the
donors tax, and the donation would be exempt if the donors total net
gifts during the calendar year does not exceed P 100,000.00.
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. If the net estate does not
exceed P 200,000.00, no estate tax would be assessed.
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 prerequisite for inclusion in the beginning inventory.
It is apparent that the transitional input tax credit operates to benefit
newly VAT-registered 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 VAT-registered
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 taxpayer's income by affording
the opportunity to offset the losses incurred through the remittance of

Page 15 of 22

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." 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. 46
In view of the foregoing, we find petitioner entitled to the 8%
transitional input tax credit provided in Section 105 of the old NIRC.
The fact that it acquired the Global City property under a tax-free
transaction makes no difference as prior payment of taxes is not a prerequisite.
Section
inconsistent
NIRC

4.105-1
with

of
Section

RR
105

of

7-95
the

is
old

As regards Section 4.105-147 of RR 7-95 which limited the 8%

transitional input tax credit to the value of the improvements on the
land, the same contravenes the provision of Section 105 of the old
NIRC, in relation to Section 100 of the same Code, as amended by RA
7716, which defines "goods or properties," to wit:
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:

While administrative agencies, such as the Bureau of Internal Revenue,

may issue regulations to implement statutes, they are without
authority to limit the scope of the statute to less than what it provides,
or extend or expand the statute beyond its terms, or in any way modify
explicit provisions of the law. Indeed, a quasi-judicial body or an
administrative agency for that matter cannot amend an act of
Congress. Hence, in case of a discrepancy between the basic law and
an interpretative or administrative ruling, the basic law prevails.
To recapitulate, RR 7-95, insofar as it restricts the definition of "goods"
as basis of transitional input tax credit under Section 105 is a nullity. 49
As we see it then, the 8% transitional input tax credit should not be
limited to the value of the improvements on the real properties but
should include the value of the real properties as well.
In this case, since petitioner is entitled to a transitional input tax credit
of P 5,698,200,256, which is more than sufficient to cover its output
VAT liability for the first quarter of 1997, a refund of the amount
of P 359,652,009.47 erroneously paid as output VAT for the said
quarter is in order.
WHEREFORE, the petition is hereby GRANTED. The assailed Decision
dated July 7, 2006 of the Court of Appeals in CA-G.R. SP No. 61436
is REVERSED and SET ASIDE. Respondent Commissioner of Internal
Revenue is ordered to refund to petitioner Fort Bonifacio Development
Corporation the amount of P359,652,009.47 paid as output VAT for the
first quarter of 1997 in light of the transitional input tax credit available
to petitioner for the said quarter, or in the alternative, to issue a tax
credit certificate corresponding to such amount.
SO ORDERED.

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,
- versus AICHI FORGING COMPANY OF ASIA, INC.,
Respondent.
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - x
DECISION

(A) Real properties held primarily for sale to customers or

held for lease in the ordinary course of trade or business; x x
x
In fact, in our Resolution dated October 2, 2009, in the related case of
Fort Bonifacio, we ruled that Section 4.105-1 of RR 7-95, insofar as it
limits the transitional input tax credit to the value of the improvement
of the real properties, is a nullity.48 Pertinent portions of the Resolution
read:
As mandated by Article 7 of the Civil Code, an administrative rule or
regulation cannot contravene the law on which it is based. RR 7-95 is
inconsistent with Section 105 insofar as the definition of the term
"goods" is concerned. This is a legislative act beyond the authority of
the CIR and the Secretary of Finance. The rules and regulations that
administrative agencies promulgate, which are the product of a
delegated legislative power to create new and additional legal
provisions that have the effect of law, should be within the scope of the
statutory authority granted by the legislature to the objects and
purposes of the law, and should not be in contradiction to, but in
conformity with, the standards prescribed by law.
To be valid, an administrative rule or regulation must conform, not
contradict,
the
provisions
of
the
enabling
law.1wphi1 An
implementing rule or regulation cannot modify, expand, or subtract
from the law it is intended to implement. Any rule that is not consistent
with the statute itself is null and void.

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 nonobservance 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
[2]
Resolution 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 thePhilippines, is
engaged in the manufacturing, producing, and processing of steel and its byproducts.[3] It is registered with the Bureau of Internal Revenue (BIR) as a ValueAdded 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.

Page 16 of 22

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
xx

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
Less:
Exceptions as found by the ICPA
Net Creditable Input VAT
Less:
Output VAT Due
Excess Creditable Input VAT

P 3,891,123.

41,020.37
P 3,850,103.

610,984.20
P 3,239,119.

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:

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.

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.

The Court finds that the first three requirements have

been complied [with] by petitioner.

Section 114 of the 1997 NIRC, and We quote, to wit:

With regard to the first requisite, the evidence presented

by petitioner, such as the Sales Invoices (Exhibits II to II-262, JJ to JJ431, KK to KK-394 and LL) shows that it is engaged in sales which
are zero-rated.

added Tax.

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

Page 17 of 22

SEC. 114. Return and Payment of Value-

(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.

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]

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 twoyear prescriptive period.

Our Ruling. The petition has merit.

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.

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.)

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]

The CTA En Banc, on the other hand, took into consideration Sections 114 and
229 of the NIRC, which read:

Petitioners Arguments

SEC. 114. Return and Payment of Value-Added Tax.

(A) In General. Every person liable to pay the valueadded 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 VATregistered 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

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]

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.

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 CTAEn 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

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 penaltyregardless 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)

Page 18 of 22

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.

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:

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.

Page 19 of 22

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
2nd calendar month
3rd calendar month
4th calendar month
5th calendar month
6th calendar month
7th calendar month
8th calendar month
9th calendar month
10th calendar month
11th calendar month
12th calendar month
Year 2 13th calendar month
14th calendar month

April 15, 1998 to May 14

May 15, 1998 to June 14
June 15, 1998 to July 14,
July 15, 1998 to August 1
August 15, 1998 to Sept
September 15, 1998 to O
October 15, 1998 to Nov
November 15, 1998 to D
December 15, 1998 to Ja
January 15, 1999 to Febr
February 15, 1999 to Ma
March 15, 1999 to April 1
April 15, 1999 to May 1
May 15, 1999 to June 1

15th calendar month

16th calendar month
17th calendar month
18th calendar month
19th calendar month
20th calendar month
21st calendar month
22nd calendar month
23rd calendar month
24th calendar month

June 15, 1999 to July 14, 1999

With regard to Commissioner of Internal Revenue v. Victorias Milling,
July 15, 1999 to AugustCo.,
14, 1999
Inc.[53] relied upon by respondent, we find the same inapplicable as the tax
August 15, 1999
provision involved in that case is Section 306, now Section 229 of the NIRC. And
September 15, 1999 as already discussed, Section 229 does not apply to refunds/credits of input VAT,
October 15, 1999
such as the instant case.
November 15, 1999
December 15, 1999 to January 14,In
2000
fine, the premature filing of respondents claim for refund/credit of
January 15, 2000 to February
input VAT
14, 2000
before the CTA warrants a dismissal inasmuch as no jurisdiction was
February 15, 2000
acquired by the CTA.
March 15, 2000 to April 14, 2000
WHEREFORE, the Petition is hereby GRANTED. The assailed July
We therefore hold that respondent's petition (filed
30, 2008 Decision and the October 6, 2008 Resolution of the Court of Tax
on April 14, 2000) was filed on the last day of the 24th calendar
Appeals are hereby REVERSED and SET ASIDE. The Court of Tax Appeals
month from the day respondent filed its final adjusted return. Hence,
Second Division is DIRECTED to dismiss CTA Case No. 7065 for having been
[51]
it was filed within the reglementary period.
prematurely filed.
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.

SO ORDERED.

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:
xxxx

SEC. 112. Refunds or Tax Credits of Input Tax.

(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
120-day 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 120day 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.

Page 20 of 22

EN BANC
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. DA489-03 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. DA-489-03.
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 One-Stop 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

Page 21 of 22

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.1wphi1 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
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.

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