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G.R. No.

81311 June 30, 1988 is not alledgedly within the powers of the President; that the VAT is oppressive, discriminatory, regressive, and
violates the due process and equal protection clauses and other provisions of the 1987 Constitution.
KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC., HERMINIGILDO C. DUMLAO,
GERONIMO Q. QUADRA, and MARIO C. VILLANUEVA, petitioners, The Solicitor General prays for the dismissal of the petitions on the ground that the petitioners have failed to
vs. show justification for the exercise of its judicial powers, viz. (1) the existence of an appropriate case; (2) an
HON. BIENVENIDO TAN, as Commissioner of Internal Revenue, respondent. interest, personal and substantial, of the party raising the constitutional questions; (3) the constitutional
question should be raised at the earliest opportunity; and (4) the question of constitutionality is directly and
G.R. No. 81820 June 30, 1988 necessarily involved in a justiciable controversy and its resolution is essential to the protection of the rights of
the parties. According to the Solicitor General, only the third requisite — that the constitutional question should
be raised at the earliest opportunity — has been complied with. He also questions the legal standing of the
KILUSANG MAYO UNO LABOR CENTER (KMU), its officers and affiliated labor federations and
petitioners who, he contends, are merely asking for an advisory opinion from the Court, there being no
alliances, petitioners,
justiciable controversy for resolution.
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL REVENUE, and
SECRETARY OF BUDGET, respondents. Objections to taxpayers' suit for lack of sufficient personality standing, or interest are, however, in the main
procedural matters. Considering the importance to the public of the cases at bar, and in keeping with the Court's
duty, under the 1987 Constitution, to determine wether or not the other branches of government have kept
G.R. No. 81921 June 30, 1988
themselves within the limits of the Constitution and the laws and that they have not abused the discretion given
to them, the Court has brushed aside technicalities of procedure and has taken cognizance of these petitions.
INTEGRATED CUSTOMS BROKERS ASSOCIATION OF THE PHILIPPINES and JESUS B. BANAL, petitioners,
vs.
But, before resolving the issues raised, a brief look into the tax law in question is in order.
The HON. COMMISSIONER, BUREAU OF INTERNAL REVENUE, respondent.

The VAT is a tax levied on a wide range of goods and services. It is a tax on the value, added by every seller, with
G.R. No. 82152 June 30, 1988
aggregate gross annual sales of articles and/or services, exceeding P200,00.00, to his purchase of goods and
services, unless exempt. VAT is computed at the rate of 0% or 10% of the gross selling price of goods or gross
RICARDO C. VALMONTE, petitioner, receipts realized from the sale of services.
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, COMMISSIONER OF INTERNAL REVENUE and SECRETARY
The VAT is said to have eliminated privilege taxes, multiple rated sales tax on manufacturers and producers,
OF BUDGET, respondent.
advance sales tax, and compensating tax on importations. The framers of EO 273 that it is principally aimed to
rationalize the system of taxing goods and services; simplify tax administration; and make the tax system more
Franklin S. Farolan for petitioner Kapatiran in G.R. No. 81311. equitable, to enable the country to attain economic recovery.

Jaime C. Opinion for individual petitioners in G.R. No. 81311. The VAT is not entirely new. It was already in force, in a modified form, before EO 273 was issued. As pointed out
by the Solicitor General, the Philippine sales tax system, prior to the issuance of EO 273, was essentially a single
Banzuela, Flores, Miralles, Rañeses, Sy, Taquio and Associates for petitioners in G.R. No 81820. stage value added tax system computed under the "cost subtraction method" or "cost deduction method" and
was imposed only on original sale, barter or exchange of articles by manufacturers, producers, or importers.
Union of Lawyers and Advocates for Peoples Right collaborating counsel for petitioners in G.R. No 81820. Subsequent sales of such articles were not subject to sales tax. However, with the issuance of PD 1991 on 31
October 1985, a 3% tax was imposed on a second sale, which was reduced to 1.5% upon the issuance of PD 2006
on 31 December 1985, to take effect 1 January 1986. Reduced sales taxes were imposed not only on the second
Jose C. Leabres and Joselito R. Enriquez for petitioners in G.R. No. 81921. sale, but on every subsequent sale, as well. EO 273 merely increased the VAT on every sale to 10%, unless zero-
rated or exempt.

PADILLA, J.: Petitioners first contend that EO 273 is unconstitutional on the Ground that the President had no authority to
issue EO 273 on 25 July 1987.
These four (4) petitions, which have been consolidated because of the similarity of the main issues involved
therein, seek to nullify Executive Order No. 273 (EO 273, for short), issued by the President of the Philippines on The contention is without merit.
25 July 1987, to take effect on 1 January 1988, and which amended certain sections of the National Internal
Revenue Code and adopted the value-added tax (VAT, for short), for being unconstitutional in that its enactment
It should be recalled that under Proclamation No. 3, which decreed a Provisional Constitution, sole legislative of the term of office of the members of Congress, they should have so stated (but did not) in clear and
authority was vested upon the President. Art. II, sec. 1 of the Provisional Constitution states: unequivocal terms. The Court has not power to re-write the Constitution and give it a meaning different from
that intended.
Sec. 1. Until a legislature is elected and convened under a new Constitution, the President
shall continue to exercise legislative powers. The Court also finds no merit in the petitioners' claim that EO 273 was issued by the President in grave abuse of
discretion amounting to lack or excess of jurisdiction. "Grave abuse of discretion" has been defined, as follows:
On 15 October 1986, the Constitutional Commission of 1986 adopted a new Constitution for the Republic of the
Philippines which was ratified in a plebiscite conducted on 2 February 1987. Article XVIII, sec. 6 of said Grave abuse of discretion" implies such capricious and whimsical exercise of judgment as is
Constitution, hereafter referred to as the 1987 Constitution, provides: equivalent to lack of jurisdiction (Abad Santos vs. Province of Tarlac, 38 Off. Gaz. 834), or, in
other words, where the power is exercised in an arbitrary or despotic manner by reason of
Sec. 6. The incumbent President shall continue to exercise legislative powers until the first passion or personal hostility, and it must be so patent and gross as to amount to an evasion
Congress is convened. of positive duty or to a virtual refusal to perform the duty enjoined or to act at all in
contemplation of law. (Tavera-Luna, Inc. vs. Nable, 38 Off. Gaz. 62). 2
It should be noted that, under both the Provisional and the 1987 Constitutions, the President is vested with
legislative powers until a legislature under a new Constitution is convened. The first Congress, created and Petitioners have failed to show that EO 273 was issued capriciously and whimsically or in an arbitrary or despotic
elected under the 1987 Constitution, was convened on 27 July 1987. Hence, the enactment of EO 273 on 25 July manner by reason of passion or personal hostility. It appears that a comprehensive study of the VAT had been
1987, two (2) days before Congress convened on 27 July 1987, was within the President's constitutional power extensively discussed by this framers and other government agencies involved in its implementation, even under
and authority to legislate. the past administration. As the Solicitor General correctly sated. "The signing of E.O. 273 was merely the last
stage in the exercise of her legislative powers. The legislative process started long before the signing when the
data were gathered, proposals were weighed and the final wordings of the measure were drafted, revised and
Petitioner Valmonte claims, additionally, that Congress was really convened on 30 June 1987 (not 27 July 1987).
finalized. Certainly, it cannot be said that the President made a jump, so to speak, on the Congress, two days
He contends that the word "convene" is synonymous with "the date when the elected members of Congress
before it convened." 3
assumed office."

Next, the petitioners claim that EO 273 is oppressive, discriminatory, unjust and regressive, in violation of the
The contention is without merit. The word "convene" which has been interpreted to mean "to call together,
provisions of Art. VI, sec. 28(1) of the 1987 Constitution, which states:
cause to assemble, or convoke," 1 is clearly different from assumption of office by the individual members of
Congress or their taking the oath of office. As an example, we call to mind the interim National Assembly created
under the 1973 Constitution, which had not been "convened" but some members of the body, more particularly Sec. 28 (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a
the delegates to the 1971 Constitutional Convention who had opted to serve therein by voting affirmatively for progressive system of taxation.
the approval of said Constitution, had taken their oath of office.
The petitioners" assertions in this regard are not supported by facts and circumstances to warrant their
To uphold the submission of petitioner Valmonte would stretch the definition of the word "convene" a bit too conclusions. They have failed to adequately show that the VAT is oppressive, discriminatory or unjust. Petitioners
far. It would also defeat the purpose of the framers of the 1987 Constitutional and render meaningless some merely rely upon newspaper articles which are actually hearsay and have evidentiary value. To justify the
other provisions of said Constitution. For example, the provisions of Art. VI, sec. 15, requiring Congress nullification of a law. there must be a clear and unequivocal breach of the Constitution, not a doubtful and
to convene once every year on the fourth Monday of July for its regular session would be a contrariety, since argumentative implication. 4
Congress would already be deemed to be in session after the individual members have taken their oath of office.
A portion of the provisions of Art. VII, sec. 10, requiring Congress to convene for the purpose of enacting a law As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. The court, in City of Baguio
calling for a special election to elect a President and Vice-President in case a vacancy occurs in said offices, would vs. De Leon, 5 said:
also be a surplusage. The portion of Art. VII, sec. 11, third paragraph, requiring Congress to convene, if not in
session, to decide a conflict between the President and the Cabinet as to whether or not the President and the ... In Philippine Trust Company v. Yatco (69 Phil. 420), Justice Laurel, speaking for the Court,
Cabinet as to whether or not the President can re-assume the powers and duties of his office, would also be stated: "A tax is considered uniform when it operates with the same force and effect in every
redundant. The same is true with the portion of Art. VII, sec. 18, which requires Congress to convene within place where the subject may be found."
twenty-four (24) hours following the declaration of martial law or the suspension of the privilage of the writ of
habeas corpus.
There was no occasion in that case to consider the possible effect on such a constitutional
requirement where there is a classification. The opportunity came in Eastern Theatrical Co. v.
The 1987 Constitution mentions a specific date when the President loses her power to legislate. If the framers of Alfonso (83 Phil. 852, 862). Thus: "Equality and uniformity in taxation means that all taxable
said Constitution had intended to terminate the exercise of legislative powers by the President at the beginning articles or kinds of property of the same class shall be taxed at the same rate. The taxing
power has the authority to make reasonable and natural classifications for purposes of and immigration brokers; lessors of personal property; lessors or distributors of
taxation; . . ." About two years later, Justice Tuason, speaking for this Court in Manila Race cinematographic films; persons engaged in milling, processing, manufacturing or repacking
Horses Trainers Assn. v. de la Fuente (88 Phil. 60, 65) incorporated the above excerpt in his goods for others; and similar services regardless of whether or not the performance thereof
opinion and continued; "Taking everything into account, the differentiation against which the call for the exercise or use of the physical or mental faculties: ...
plaintiffs complain conforms to the practical dictates of justice and equity and is not
discriminatory within the meaning of the Constitution." With the insertion of the clarificatory phrase "except customs brokers" in Sec. 103(r), a potential conflict
between the two sections, (Secs. 102 and 103), insofar as customs brokers are concerned, is averted.
To satisfy this requirement then, all that is needed as held in another case decided two years
later, (Uy Matias v. City of Cebu, 93 Phil. 300) is that the statute or ordinance in question At any rate, the distinction of the customs brokers from the other professionals who are subject to occupation
"applies equally to all persons, firms and corporations placed in similar situation." This Court tax under the Local Tax Code is based upon material differences, in that the activities of customs brokers (like
is on record as accepting the view in a leading American case (Carmichael v. Southern Coal those of stock, real estate and immigration brokers) partake more of a business, rather than a profession and
and Coke Co., 301 US 495) that "inequalities which result from a singling out of one particular were thus subjected to the percentage tax under Sec. 174 of the National Internal Revenue Code prior to its
class for taxation or exemption infringe no constitutional limitation." (Lutz v. Araneta, 98 Phil. amendment by EO 273. EO 273 abolished the percentage tax and replaced it with the VAT. If the petitioner
148, 153). Association did not protest the classification of customs brokers then, the Court sees no reason why it should
protest now.
The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public, which are not
exempt, at the constant rate of 0% or 10%. The Court takes note that EO 273 has been in effect for more than five (5) months now, so that the fears
expressed by the petitioners that the adoption of the VAT will trigger skyrocketing of prices of basic commodities
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engage in and services, as well as mass actions and demonstrations against the VAT should by now be evident. The fact
business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-sari stores are that nothing of the sort has happened shows that the fears and apprehensions of the petitioners appear to be
consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products, more imagined than real. It would seem that the VAT is not as bad as we are made to believe.
spared as they are from the incidence of the VAT, are expected to be relatively lower and within the reach of the
general public. 6 In any event, if petitioners seriously believe that the adoption and continued application of the VAT are
prejudicial to the general welfare or the interests of the majority of the people, they should seek recourse and
The Court likewise finds no merit in the contention of the petitioner Integrated Customs Brokers Association of relief from the political branches of the government. The Court, following the time-honored doctrine of
the Philippines that EO 273, more particularly the new Sec. 103 (r) of the National Internal Revenue Code, unduly separation of powers, cannot substitute its judgment for that of the President as to the wisdom, justice and
discriminates against customs brokers. The contested provision states: advisability of the adoption of the VAT. The Court can only look into and determine whether or not EO 273 was
enacted and made effective as law, in the manner required by, and consistent with, the Constitution, and to
Sec. 103. Exempt transactions. — The following shall be exempt from the value-added tax: make sure that it was not issued in grave abuse of discretion amounting to lack or excess of jurisdiction; and, in
this regard, the Court finds no reason to impede its application or continued implementation.
xxx xxx xxx
WHEREFORE, the petitions are DISMISSED. Without pronouncement as to costs.
(r) Service performed in the exercise of profession or calling (except customs brokers) subject
to the occupation tax under the Local Tax Code, and professional services performed by SO ORDERED.
registered general professional partnerships;
G.R. No. 115455 October 30, 1995
The phrase "except customs brokers" is not meant to discriminate against customs brokers. It was inserted in
Sec. 103(r) to complement the provisions of Sec. 102 of the Code, which makes the services of customs brokers ARTURO M. TOLENTINO, petitioner,
subject to the payment of the VAT and to distinguish customs brokers from other professionals who are subject vs.
to the payment of an occupation tax under the Local Tax Code. Pertinent provisions of Sec. 102 read: THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, respondents.

Sec. 102. Value-added tax on sale of services. — There shall be levied, assessed and collected, G.R. No. 115525 October 30, 1995
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 JUAN T. DAVID, petitioner,
services for others for a fee, remuneration or consideration, including those performed or vs.
rendered by construction and service contractors; stock, real estate, commercial, customs TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as Secretary of Finance;
LIWAYWAY VINZONS-CHATO, as Commissioner of Internal Revenue; and their AUTHORIZED AGENTS OR COOPERATIVE UNION OF THE PHILIPPINES, petitioner,
REPRESENTATIVES, respondents. vs.
HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal Revenue, HON. TEOFISTO T.
G.R. No. 115543 October 30, 1995 GUINGONA, JR., in his capacity as Executive Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity as
Secretary of Finance, respondents.
RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners,
vs. G.R. No. 115931 October 30, 1995
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE BUREAU OF INTERNAL
REVENUE AND BUREAU OF CUSTOMS, respondents. PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and ASSOCIATION OF PHILIPPINE BOOK
SELLERS, petitioners,
G.R. No. 115544 October 30, 1995 vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V. CHATO, as the Commissioner
of Internal Revenue; and HON. GUILLERMO PARAYNO, JR., in his capacity as the Commissioner of
PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; KAMAHALAN PUBLISHING CORPORATION;
Customs, respondents.
PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L. DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue; HON. TEOFISTO T. RESOLUTION
GUINGONA, JR., in his capacity as Executive Secretary; and HON. ROBERTO B. DE OCAMPO, in his capacity as
Secretary of Finance, respondents.
MENDOZA, J.:
G.R. No. 115754 October 30, 1995
These are motions seeking reconsideration of our decision dismissing the petitions filed in these cases for the
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA), petitioner, declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded Value-Added Tax Law. The
vs. motions, of which there are 10 in all, have been filed by the several petitioners in these cases, with the exception
THE COMMISSIONER OF INTERNAL REVENUE, respondent. of the Philippine Educational Publishers Association, Inc. and the Association of Philippine Booksellers,
petitioners in G.R. No. 115931.
G.R. No. 115781 October 30, 1995
The Solicitor General, representing the respondents, filed a consolidated comment, to which the Philippine
Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute, Inc., petitioner in G.R. No. 115544,
KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C. CAPULONG, JR., JOSE T.
and Juan T. David, petitioner in G.R. No. 115525, each filed a reply. In turn the Solicitor General filed on June 1,
APOLO, EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL
1995 a rejoinder to the PPI's reply.
G. FERNANDO, RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF ATTORNEYS
FOR BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT COALITION,
INC., and PHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO TAÑADA, petitioners, On June 27, 1995 the matter was submitted for resolution.
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL REVENUE and I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners (Tolentino, Kilosbayan,
THE COMMISSIONER OF CUSTOMS, respondents. Inc., Philippine Airlines (PAL), Roco, and Chamber of Real Estate and Builders Association (CREBA)) reiterate
previous claims made by them that R.A. No. 7716 did not "originate exclusively" in the House of Representatives
G.R. No. 115852 October 30, 1995 as required by Art. VI, §24 of the Constitution. Although they admit that H. No. 11197 was filed in the House of
Representatives where it passed three readings and that afterward it was sent to the Senate where after first
reading it was referred to the Senate Ways and Means Committee, they complain that the Senate did not pass it
PHILIPPINE AIRLINES, INC., petitioner,
on second and third readings. Instead what the Senate did was to pass its own version (S. No. 1630) which it
vs.
approved on May 24, 1994. Petitioner Tolentino adds that what the Senate committee should have done was to
THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL REVENUE, respondents.
amend H. No. 11197 by striking out the text of the bill and substituting it with the text of S. No. 1630. That way,
it is said, "the bill remains a House bill and the Senate version just becomes the text (only the text) of the House
G.R. No. 115873 October 30, 1995 bill."

The contention has no merit.


The enactment of S. No. 1630 is not the only instance in which the Senate proposed an amendment to a House THIS PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS
revenue bill by enacting its own version of a revenue bill. On at least two occasions during the Eighth Congress, AMENDED (February 24, 1993)
the Senate passed its own version of revenue bills, which, in consolidation with House bills earlier passed,
became the enrolled bills. These were: House Bill No. 1470, October 20, 1992

R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BY EXTENDING FROM FIVE (5) Senate Bill No. 35, November 19, 1992
YEARS TO TEN YEARS THE PERIOD FOR TAX AND DUTY EXEMPTION AND TAX CREDIT ON CAPITAL EQUIPMENT)
which was approved by the President on April 10, 1992. This Act is actually a consolidation of H. No. 34254,
4. R.A. NO. 7649
which was approved by the House on January 29, 1992, and S. No. 1920, which was approved by the Senate on
February 3, 1992.
AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL SUBDIVISIONS,
INSTRUMENTALITIES OR AGENCIES INCLUDING GOVERNMENT-OWNED OR CONTROLLED
R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE REWARD TO ANY FILIPINO
CORPORATIONS (GOCCS) TO DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE AT THE
ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) which was approved by the President on May 22, 1992. This
RATE OF THREE PERCENT (3%) ON GROSS PAYMENT FOR THE PURCHASE OF GOODS AND SIX
Act is a consolidation of H. No. 22232, which was approved by the House of Representatives on August 2, 1989,
PERCENT (6%) ON GROSS RECEIPTS FOR SERVICES RENDERED BY CONTRACTORS (April 6,
and S. No. 807, which was approved by the Senate on October 21, 1991.
1993)

On the other hand, the Ninth Congress passed revenue laws which were also the result of the consolidation of
House Bill No. 5260, January 26, 1993
House and Senate bills. These are the following, with indications of the dates on which the laws were approved
by the President and dates the separate bills of the two chambers of Congress were respectively passed:
Senate Bill No. 1141, March 30, 1993
1. R.A. NO. 7642
5. R.A. NO. 7656
AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING FOR THIS PURPOSE THE
PERTINENT SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992). AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS TO DECLARE
DIVIDENDS UNDER CERTAIN CONDITIONS TO THE NATIONAL GOVERNMENT, AND FOR
OTHER PURPOSES (November 9, 1993)
House Bill No. 2165, October 5, 1992

House Bill No. 11024, November 3, 1993


Senate Bill No. 32, December 7, 1992

Senate Bill No. 1168, November 3, 1993


2. R.A. NO. 7643

6. R.A. NO. 7660


AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE TO REQUIRE THE
PAYMENT OF THE VALUE-ADDED TAX EVERY MONTH AND TO ALLOW LOCAL GOVERNMENT
UNITS TO SHARE IN VAT REVENUE, AMENDING FOR THIS PURPOSE CERTAIN SECTIONS OF AN ACT RATIONALIZING FURTHER THE STRUCTURE AND ADMINISTRATION OF THE
THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992) DOCUMENTARY STAMP TAX, AMENDING FOR THE PURPOSE CERTAIN PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, ALLOCATING FUNDS FOR SPECIFIC
PROGRAMS, AND FOR OTHER PURPOSES (December 23, 1993)
House Bill No. 1503, September 3, 1992

House Bill No. 7789, May 31, 1993


Senate Bill No. 968, December 7, 1992

Senate Bill No. 1330, November 18, 1993


3. R.A. NO. 7646

7. R.A. NO. 7717


AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE TO PRESCRIBE THE
PLACE FOR PAYMENT OF INTERNAL REVENUE TAXES BY LARGE TAXPAYERS, AMENDING FOR
AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF SHARES OF STOCK LISTED Nor is there merit in petitioners' contention that, with regard to revenue bills, the Philippine Senate possesses
AND TRADED THROUGH THE LOCAL STOCK EXCHANGE OR THROUGH INITIAL PUBLIC less power than the U.S. Senate because of textual differences between constitutional provisions giving them the
OFFERING, AMENDING FOR THE PURPOSE THE NATIONAL INTERNAL REVENUE CODE, AS power to propose or concur with amendments.
AMENDED, BY INSERTING A NEW SECTION AND REPEALING CERTAIN SUBSECTIONS THEREOF
(May 5, 1994) Art. I, §7, cl. 1 of the U.S. Constitution reads:

House Bill No. 9187, November 3, 1993 All Bills for raising Revenue shall originate in the House of Representatives; but the Senate
may propose or concur with amendments as on other Bills.
Senate Bill No. 1127, March 23, 1994
Art. VI, §24 of our Constitution reads:
Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the exercise of its power to
propose amendments to bills required to originate in the House, passed its own version of a House revenue All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of
measure. It is noteworthy that, in the particular case of S. No. 1630, petitioners Tolentino and Roco, as members local application, and private bills shall originate exclusively in the House of Representatives,
of the Senate, voted to approve it on second and third readings. but the Senate may propose or concur with amendments.

On the other hand, amendment by substitution, in the manner urged by petitioner Tolentino, concerns a mere The addition of the word "exclusively" in the Philippine Constitution and the decision to drop the phrase "as on
matter of form. Petitioner has not shown what substantial difference it would make if, as the Senate actually did other Bills" in the American version, according to petitioners, shows the intention of the framers of our
in this case, a separate bill like S. No. 1630 is instead enacted as a substitute measure, "taking into Constitution to restrict the Senate's power to propose amendments to revenue bills. Petitioner Tolentino
Consideration . . . H.B. 11197." contends that the word "exclusively" was inserted to modify "originate" and "the words 'as in any other bills'
(sic) were eliminated so as to show that these bills were not to be like other bills but must be treated as a special
Indeed, so far as pertinent, the Rules of the Senate only provide: kind."

RULE XXIX The history of this provision does not support this contention. The supposed indicia of constitutional intent are
nothing but the relics of an unsuccessful attempt to limit the power of the Senate. It will be recalled that the
AMENDMENTS 1935 Constitution originally provided for a unicameral National Assembly. When it was decided in 1939 to
change to a bicameral legislature, it became necessary to provide for the procedure for lawmaking by the Senate
and the House of Representatives. The work of proposing amendments to the Constitution was done by the
xxx xxx xxx
National Assembly, acting as a constituent assembly, some of whose members, jealous of preserving the
Assembly's lawmaking powers, sought to curtail the powers of the proposed Senate. Accordingly they proposed
§68. Not more than one amendment to the original amendment shall be considered. the following provision:

No amendment by substitution shall be entertained unless the text thereof is submitted in All bills appropriating public funds, revenue or tariff bills, bills of local application, and private
writing. bills shall originate exclusively in the Assembly, but the Senate may propose or concur with
amendments. In case of disapproval by the Senate of any such bills, the Assembly may repass
Any of said amendments may be withdrawn before a vote is taken thereon. the same by a two-thirds vote of all its members, and thereupon, the bill so repassed shall be
deemed enacted and may be submitted to the President for corresponding action. In the
§69. No amendment which seeks the inclusion of a legislative provision foreign to the subject event that the Senate should fail to finally act on any such bills, the Assembly may, after
matter of a bill (rider) shall be entertained. thirty days from the opening of the next regular session of the same legislative term,
reapprove the same with a vote of two-thirds of all the members of the Assembly. And upon
such reapproval, the bill shall be deemed enacted and may be submitted to the President for
xxx xxx xxx corresponding action.

§70-A. A bill or resolution shall not be amended by substituting it with another which covers The special committee on the revision of laws of the Second National Assembly vetoed the proposal. It deleted
a subject distinct from that proposed in the original bill or resolution. (emphasis added). everything after the first sentence. As rewritten, the proposal was approved by the National Assembly and
embodied in Resolution No. 38, as amended by Resolution No. 73. (J. ARUEGO, KNOW YOUR CONSTITUTION 65-
66 (1950)). The proposed amendment was submitted to the people and ratified by them in the elections held on (1) to endorse the bill without changes; (2) to make changes in the bill omitting or adding
June 18, 1940. sections or altering its language; (3) to make and endorse an entirely new bill as a substitute,
in which case it will be known as a committee bill; or (4) to make no report at all.
This is the history of Art. VI, §18 (2) of the 1935 Constitution, from which Art. VI, §24 of the present Constitution
was derived. It explains why the word "exclusively" was added to the American text from which the framers of (A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))
the Philippine Constitution borrowed and why the phrase "as on other Bills" was not copied. Considering the
defeat of the proposal, the power of the Senate to propose amendments must be understood to be full, plenary To except from this procedure the amendment of bills which are required to originate in the House by
and complete "as on other Bills." Thus, because revenue bills are required to originate exclusively in the House of prescribing that the number of the House bill and its other parts up to the enacting clause must be preserved
Representatives, the Senate cannot enact revenue measures of its own without such bills. After a revenue bill is although the text of the Senate amendment may be incorporated in place of the original body of the bill is to
passed and sent over to it by the House, however, the Senate certainly can pass its own version on the same insist on a mere technicality. At any rate there is no rule prescribing this form. S. No. 1630, as a substitute
subject matter. This follows from the coequality of the two chambers of Congress. measure, is therefore as much an amendment of H. No. 11197 as any which the Senate could have made.

That this is also the understanding of book authors of the scope of the Senate's power to concur is clear from the II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they assume that S. No. 1630 is
following commentaries: an independent and distinct bill. Hence their repeated references to its certification that it was passed by the
Senate "in substitution of S.B. No. 1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197," implying
The power of the Senate to propose or concur with amendments is apparently without that there is something substantially different between the reference to S. No. 1129 and the reference to H. No.
restriction. It would seem that by virtue of this power, the Senate can practically re-write a 11197. From this premise, they conclude that R.A. No. 7716 originated both in the House and in the Senate and
bill required to come from the House and leave only a trace of the original bill. For example, a that it is the product of two "half-baked bills because neither H. No. 11197 nor S. No. 1630 was passed by both
general revenue bill passed by the lower house of the United States Congress contained houses of Congress."
provisions for the imposition of an inheritance tax . This was changed by the Senate into a
corporation tax. The amending authority of the Senate was declared by the United States In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mere amendments of the
Supreme Court to be sufficiently broad to enable it to make the alteration. [Flint v. Stone corresponding provisions of H. No. 11197. The very tabular comparison of the provisions of H. No. 11197 and S.
Tracy Company, 220 U.S. 107, 55 L. ed. 389]. No. 1630 attached as Supplement A to the basic petition of petitioner Tolentino, while showing differences
between the two bills, at the same time indicates that the provisions of the Senate bill were precisely intended
(L. TAÑADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES 247 (1961)) to be amendments to the House bill.

The above-mentioned bills are supposed to be initiated by the House of Representatives Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate bill was a mere
because it is more numerous in membership and therefore also more representative of the amendment of the House bill, H. No. 11197 in its original form did not have to pass the Senate on second and
people. Moreover, its members are presumed to be more familiar with the needs of the three readings. It was enough that after it was passed on first reading it was referred to the Senate Committee
country in regard to the enactment of the legislation involved. on Ways and Means. Neither was it required that S. No. 1630 be passed by the House of Representatives before
the two bills could be referred to the Conference Committee.
The Senate is, however, allowed much leeway in the exercise of its power to propose or
concur with amendments to the bills initiated by the House of Representatives. Thus, in one There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630. When the House
case, a bill introduced in the U.S. House of Representatives was changed by the Senate to bill and Senate bill, which became R.A. No. 1405 (Act prohibiting the disclosure of bank deposits), were referred
make a proposed inheritance tax a corporation tax. It is also accepted practice for the Senate to a conference committee, the question was raised whether the two bills could be the subject of such
to introduce what is known as an amendment by substitution, which may entirely replace the conference, considering that the bill from one house had not been passed by the other and vice versa. As
bill initiated in the House of Representatives. Congressman Duran put the question:

(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)). MR. DURAN. Therefore, I raise this question of order as to procedure: If a House bill is passed
by the House but not passed by the Senate, and a Senate bill of a similar nature is passed in
In sum, while Art. VI, §24 provides that all appropriation, revenue or tariff bills, bills authorizing increase of the the Senate but never passed in the House, can the two bills be the subject of a conference,
public debt, bills of local application, and private bills must "originate exclusively in the House of and can a law be enacted from these two bills? I understand that the Senate bill in this
Representatives," it also adds, "but the Senate may propose or concur with amendments." In the exercise of this particular instance does not refer to investments in government securities, whereas the bill
power, the Senate may propose an entirely new bill as a substitute measure. As petitioner Tolentino states in a in the House, which was introduced by the Speaker, covers two subject matters: not only
high school text, a committee to which a bill is referred may do any of the following: investigation of deposits in banks but also investigation of investments in government
securities. Now, since the two bills differ in their subject matter, I believe that no law can be
enacted.
Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said: This provision of the 1973 document, with slight modification, was adopted in Art. VI, §26 (2) of the present
Constitution, thus:
THE SPEAKER. The report of the conference committee is in order. It is precisely in cases like
this where a conference should be had. If the House bill had been approved by the Senate, (2) No bill passed by either House shall become a law unless it has passed three readings on
there would have been no need of a conference; but precisely because the Senate passed separate days, and printed copies thereof in its final form have been distributed to its
another bill on the same subject matter, the conference committee had to be created, and Members three days before its passage, except when the President certifies to the necessity
we are now considering the report of that committee. of its immediate enactment to meet a public calamity or emergency. Upon the last reading of
a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken
(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added)) immediately thereafter, and the yeas and nays entered in the Journal.

III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630 are distinct and The exception is based on the prudential consideration that if in all cases three readings on separate days are
unrelated measures also accounts for the petitioners' (Kilosbayan's and PAL's) contention that because the required and a bill has to be printed in final form before it can be passed, the need for a law may be rendered
President separately certified to the need for the immediate enactment of these measures, his certification was academic by the occurrence of the very emergency or public calamity which it is meant to address.
ineffectual and void. The certification had to be made of the version of the same revenue bill which at the
moment was being considered. Otherwise, to follow petitioners' theory, it would be necessary for the President Petitioners further contend that a "growing budget deficit" is not an emergency, especially in a country like the
to certify as many bills as are presented in a house of Congress even though the bills are merely versions of the Philippines where budget deficit is a chronic condition. Even if this were the case, an enormous budget deficit
bill he has already certified. It is enough that he certifies the bill which, at the time he makes the certification, is does not make the need for R.A. No. 7716 any less urgent or the situation calling for its enactment any less an
under consideration. Since on March 22, 1994 the Senate was considering S. No. 1630, it was that bill which had emergency.
to be certified. For that matter on June 1, 1993 the President had earlier certified H. No. 9210 for immediate
enactment because it was the one which at that time was being considered by the House. This bill was later Apparently, the members of the Senate (including some of the petitioners in these cases) believed that there
substituted, together with other bills, by H. No. 11197. was an urgent need for consideration of S. No. 1630, because they responded to the call of the President by
voting on the bill on second and third readings on the same day. While the judicial department is not bound by
As to what Presidential certification can accomplish, we have already explained in the main decision that the the Senate's acceptance of the President's certification, the respect due coequal departments of the government
phrase "except when the President certifies to the necessity of its immediate enactment, etc." in Art. VI, §26 (2) in matters committed to them by the Constitution and the absence of a clear showing of grave abuse of
qualifies not only the requirement that "printed copies [of a bill] in its final form [must be] distributed to the discretion caution a stay of the judicial hand.
members three days before its passage" but also the requirement that before a bill can become a law it must
have passed "three readings on separate days." There is not only textual support for such construction but At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate where it was
historical basis as well. discussed for six days. Only its distribution in advance in its final printed form was actually dispensed with by
holding the voting on second and third readings on the same day (March 24, 1994). Otherwise, sufficient time
Art. VI, §21 (2) of the 1935 Constitution originally provided: between the submission of the bill on February 8, 1994 on second reading and its approval on March 24, 1994
elapsed before it was finally voted on by the Senate on third reading.
(2) No bill shall be passed by either House unless it shall have been printed and copies
thereof in its final form furnished its Members at least three calendar days prior to its The purpose for which three readings on separate days is required is said to be two-fold: (1) to inform the
passage, except when the President shall have certified to the necessity of its immediate members of Congress of what they must vote on and (2) to give them notice that a measure is progressing
enactment. Upon the last reading of a bill, no amendment thereof shall be allowed and the through the enacting process, thus enabling them and others interested in the measure to prepare their
question upon its passage shall be taken immediately thereafter, and positions with reference to it. (1 J. G. SUTHERLAND, STATUTES AND STATUTORY CONSTRUCTION §10.04, p. 282
the yeas and nays entered on the Journal. (1972)). These purposes were substantially achieved in the case of R.A. No. 7716.

When the 1973 Constitution was adopted, it was provided in Art. VIII, §19 (2): IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the Movement of
Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in violation of the constitutional policy
(2) No bill shall become a law unless it has passed three readings on separate days, and of full public disclosure and the people's right to know (Art. II, §28 and Art. III, §7) the Conference Committee
printed copies thereof in its final form have been distributed to the Members three days met for two days in executive session with only the conferees present.
before its passage, except when the Prime Minister certifies to the necessity of its immediate
enactment to meet a public calamity or emergency. Upon the last reading of a bill, no As pointed out in our main decision, even in the United States it was customary to hold such sessions with only
amendment thereto shall be allowed, and the vote thereon shall be taken immediately the conferees and their staffs in attendance and it was only in 1975 when a new rule was adopted requiring open
thereafter, and the yeas and nays entered in the Journal.
sessions. Unlike its American counterpart, the Philippine Congress has not adopted a rule prescribing open as a whole; but when the entire bill itself is copied verbatim in the conference report, that is
hearings for conference committees. not necessary. So when the reason for the Rule does not exist, the Rule does not exist.

It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, at least staff (2 CONG. REC. NO. 2, p. 4056. (emphasis added))
members were present. These were staff members of the Senators and Congressmen, however, who may be
presumed to be their confidential men, not stenographers as in this case who on the last two days of the Congressman Tolentino was sustained by the chair. The record shows that when the ruling was appealed, it was
conference were excluded. There is no showing that the conferees themselves did not take notes of their upheld by viva voce and when a division of the House was called, it was sustained by a vote of 48 to 5. (Id.,
proceedings so as to give petitioner Kilosbayan basis for claiming that even in secret diplomatic negotiations p. 4058)
involving state interests, conferees keep notes of their meetings. Above all, the public's right to know was fully
served because the Conference Committee in this case submitted a report showing the changes made on the
Nor is there any doubt about the power of a conference committee to insert new provisions as long as these are
differing versions of the House and the Senate.
germane to the subject of the conference. As this Court held in Philippine Judges Association v. Prado, 227 SCRA
703 (1993), in an opinion written by then Justice Cruz, the jurisdiction of the conference committee is not limited
Petitioners cite the rules of both houses which provide that conference committee reports must contain "a to resolving differences between the Senate and the House. It may propose an entirely new provision. What is
detailed, sufficiently explicit statement of the changes in or other amendments." These changes are shown in the important is that its report is subsequently approved by the respective houses of Congress. This Court ruled that
bill attached to the Conference Committee Report. The members of both houses could thus ascertain what it would not entertain allegations that, because new provisions had been added by the conference committee,
changes had been made in the original bills without the need of a statement detailing the changes. there was thereby a violation of the constitutional injunction that "upon the last reading of a bill, no amendment
thereto shall be allowed."
The same question now presented was raised when the bill which became R.A. No. 1400 (Land Reform Act of
1955) was reported by the Conference Committee. Congressman Bengzon raised a point of order. He said: Applying these principles, we shall decline to look into the petitioners' charges that an
amendment was made upon the last reading of the bill that eventually became R.A. No. 7354
MR. BENGZON. My point of order is that it is out of order to consider the report of the and that copies thereof in its final form were not distributed among the members of each
conference committee regarding House Bill No. 2557 by reason of the provision of Section House. Both the enrolled bill and the legislative journals certify that the measure was duly
11, Article XII, of the Rules of this House which provides specifically that the conference enacted i.e., in accordance with Article VI, Sec. 26 (2) of the Constitution. We are bound by
report must be accompanied by a detailed statement of the effects of the amendment on the such official assurances from a coordinate department of the government, to which we owe,
bill of the House. This conference committee report is not accompanied by that detailed at the very least, a becoming courtesy.
statement, Mr. Speaker. Therefore it is out of order to consider it.
(Id. at 710. (emphasis added))
Petitioner Tolentino, then the Majority Floor Leader, answered:
It is interesting to note the following description of conference committees in the Philippines in a 1979 study:
MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in connection with the
point of order raised by the gentleman from Pangasinan. Conference committees may be of two types: free or instructed. These committees may be
given instructions by their parent bodies or they may be left without instructions. Normally
There is no question about the provision of the Rule cited by the gentleman from the conference committees are without instructions, and this is why they are often critically
Pangasinan, but this provision applies to those cases where only portions of the bill have been referred to as "the little legislatures." Once bills have been sent to them, the conferees have
amended. In this case before us an entire bill is presented; therefore, it can be easily seen almost unlimited authority to change the clauses of the bills and in fact sometimes introduce
from the reading of the bill what the provisions are. Besides, this procedure has been an new measures that were not in the original legislation. No minutes are kept, and members'
established practice. activities on conference committees are difficult to determine. One congressman known for
his idealism put it this way: "I killed a bill on export incentives for my interest group [copra] in
After some interruption, he continued: the conference committee but I could not have done so anywhere else." The conference
committee submits a report to both houses, and usually it is accepted. If the report is not
accepted, then the committee is discharged and new members are appointed.
MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the reason for the
provisions of the Rules, and the reason for the requirement in the provision cited by the
gentleman from Pangasinan is when there are only certain words or phrases inserted in or (R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND LEGISLATURES: A
deleted from the provisions of the bill included in the conference report, and we cannot COMPARATIVE ANALYSIS 163 (J. D. LEES AND M. SHAW, eds.)).
understand what those words and phrases mean and their relation to the bill. In that case, it
is necessary to make a detailed statement on how those words and phrases will affect the bill
In citing this study, we pass no judgment on the methods of conference committees. We cite it only to say that RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED AND FOR OTHER
conference committees here are no different from their counterparts in the United States whose vast powers we PURPOSES," Congress thereby clearly expresses its intention to amend any provision of the NIRC which stands in
noted in Philippine Judges Association v. Prado, supra. At all events, under Art. VI, §16(3) each house has the the way of accomplishing the purpose of the law.
power "to determine the rules of its proceedings," including those of its committees. Any meaningful change in
the method and procedures of Congress or its committees must therefore be sought in that body itself. PAL asserts that the amendment of its franchise must be reflected in the title of the law by specific reference to
P.D. No. 1590. It is unnecessary to do this in order to comply with the constitutional requirement, since it is
V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates Art. VI, §26 (1) of the already stated in the title that the law seeks to amend the pertinent provisions of the NIRC, among which is
Constitution which provides that "Every bill passed by Congress shall embrace only one subject which shall be §103(q), in order to widen the base of the VAT. Actually, it is the bill which becomes a law that is required to
expressed in the title thereof." PAL contends that the amendment of its franchise by the withdrawal of its express in its title the subject of legislation. The titles of H. No. 11197 and S. No. 1630 in fact specifically referred
exemption from the VAT is not expressed in the title of the law. to §103 of the NIRC as among the provisions sought to be amended. We are satisfied that sufficient notice had
been given of the pendency of these bills in Congress before they were enacted into what is now R.A.
Pursuant to §13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu of all other taxes, No. 7716.
duties, royalties, registration, license and other fees and charges of any kind, nature, or description, imposed,
levied, established, assessed or collected by any municipal, city, provincial or national authority or government In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PAL was rejected. R.A.
agency, now or in the future." No. 7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL CORPORATION, DEFINING ITS POWERS,
FUNCTIONS AND RESPONSIBILITIES, PROVIDING FOR REGULATION OF THE INDUSTRY AND FOR OTHER PURPOSES
PAL was exempted from the payment of the VAT along with other entities by §103 of the National Internal CONNECTED THEREWITH. It contained a provision repealing all franking privileges. It was contended that the
Revenue Code, which provides as follows: withdrawal of franking privileges was not expressed in the title of the law. In holding that there was sufficient
description of the subject of the law in its title, including the repeal of franking privileges, this Court held:
§103. Exempt transactions. — The following shall be exempt from the value-added tax:
To require every end and means necessary for the accomplishment of the general objectives
of the statute to be expressed in its title would not only be unreasonable but would actually
xxx xxx xxx
render legislation impossible. [Cooley, Constitutional Limitations, 8th Ed., p. 297] As has been
correctly explained:
(q) Transactions which are exempt under special laws or international agreements to which
the Philippines is a signatory.
The details of a legislative act need not be specifically stated in its title,
but matter germane to the subject as expressed in the title, and adopted
R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by amending §103, as to the accomplishment of the object in view, may properly be included in
follows: the act. Thus, it is proper to create in the same act the machinery by
which the act is to be enforced, to prescribe the penalties for its
§103. Exempt transactions. — The following shall be exempt from the value-added tax: infraction, and to remove obstacles in the way of its execution. If such
matters are properly connected with the subject as expressed in the title,
xxx xxx xxx it is unnecessary that they should also have special mention in the title.
(Southern Pac. Co. v. Bartine, 170 Fed. 725)

(q) Transactions which are exempt under special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . . (227 SCRA at 707-708)

The amendment of §103 is expressed in the title of R.A. No. 7716 which reads: VI. Claims of press freedom and religious liberty. We have held that, as a general proposition, the press is not
exempt from the taxing power of the State and that what the constitutional guarantee of free press prohibits are
laws which single out the press or target a group belonging to the press for special treatment or which in any
AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE way discriminate against the press on the basis of the content of the publication, and R.A. No. 7716 is none of
AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND these.
REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED, AND FOR OTHER PURPOSES.
Now it is contended by the PPI that by removing the exemption of the press from the VAT while maintaining
those granted to others, the law discriminates against the press. At any rate, it is averred, "even
By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT) SYSTEM [BY] WIDENING ITS nondiscriminatory taxation of constitutionally guaranteed freedom is unconstitutional."
TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING THE
With respect to the first contention, it would suffice to say that since the law granted the press a privilege, the (d) Educational services, medical, dental, hospital and veterinary services, and services
law could take back the privilege anytime without offense to the Constitution. The reason is simple: by granting rendered under employer-employee relationship.
exemptions, the State does not forever waive the exercise of its sovereign prerogative.
(e) Works of art and similar creations sold by the artist himself.
Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to which other
businesses have long ago been subject. It is thus different from the tax involved in the cases invoked by the PPI. (f) Transactions exempted under special laws, or international agreements.
The license tax in Grosjean v. American Press Co., 297 U.S. 233, 80 L. Ed. 660 (1936) was found to be
discriminatory because it was laid on the gross advertising receipts only of newspapers whose weekly circulation
(g) Export-sales by persons not VAT-registered.
was over 20,000, with the result that the tax applied only to 13 out of 124 publishers in Louisiana. These large
papers were critical of Senator Huey Long who controlled the state legislature which enacted the license tax. The
censorial motivation for the law was thus evident. (h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.

On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S. 575, 75 L. Ed. 2d (Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)
295 (1983), the tax was found to be discriminatory because although it could have been made liable for the sales
tax or, in lieu thereof, for the use tax on the privilege of using, storing or consuming tangible goods, the press The PPI asserts that it does not really matter that the law does not discriminate against the press because "even
was not. Instead, the press was exempted from both taxes. It was, however, later made to pay a special use tax nondiscriminatory taxation on constitutionally guaranteed freedom is unconstitutional." PPI cites in support of
on the cost of paper and ink which made these items "the only items subject to the use tax that were component this assertion the following statement in Murdock v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):
of goods to be sold at retail." The U.S. Supreme Court held that the differential treatment of the press "suggests
that the goal of regulation is not related to suppression of expression, and such goal is presumptively The fact that the ordinance is "nondiscriminatory" is immaterial. The protection afforded by
unconstitutional." It would therefore appear that even a law that favors the press is constitutionally suspect. the First Amendment is not so restricted. A license tax certainly does not acquire
(See the dissent of Rehnquist, J. in that case) constitutional validity because it classifies the privileges protected by the First Amendment
along with the wares and merchandise of hucksters and peddlers and treats them all alike.
Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn "absolutely and Such equality in treatment does not save the ordinance. Freedom of press, freedom of
unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those previously granted to PAL, speech, freedom of religion are in preferred position.
petroleum concessionaires, enterprises registered with the Export Processing Zone Authority, and many more
are likewise totally withdrawn, in addition to exemptions which are partially withdrawn, in an effort to broaden The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for regulation. Its
the base of the tax. imposition on the press is unconstitutional because it lays a prior restraint on the exercise of its right. Hence,
although its application to others, such those selling goods, is valid, its application to the press or to religious
The PPI says that the discriminatory treatment of the press is highlighted by the fact that transactions, which are groups, such as the Jehovah's Witnesses, in connection with the latter's sale of religious books and pamphlets, is
profit oriented, continue to enjoy exemption under R.A. No. 7716. An enumeration of some of these transactions unconstitutional. As the U.S. Supreme Court put it, "it is one thing to impose a tax on income or property of a
will suffice to show that by and large this is not so and that the exemptions are granted for a purpose. As the preacher. It is quite another thing to exact a tax on him for delivering a sermon."
Solicitor General says, such exemptions are granted, in some cases, to encourage agricultural production and, in
other cases, for the personal benefit of the end-user rather than for profit. The exempt transactions are: A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil. 386 (1957) which
invalidated a city ordinance requiring a business license fee on those engaged in the sale of general merchandise.
(a) Goods for consumption or use which are in their original state (agricultural, marine and It was held that the tax could not be imposed on the sale of bibles by the American Bible Society without
forest products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, restraining the free exercise of its right to propagate.
fish, prawn livestock and poultry feeds) and goods or services to enhance agriculture (milling
of palay, corn, sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege, much less a
for the manufacture of feeds). constitutional right. It is imposed on the sale, barter, lease or exchange of goods or properties or the sale or
exchange of services and the lease of properties purely for revenue purposes. To subject the press to its
(b) Goods used for personal consumption or use (household and personal effects of citizens payment is not to burden the exercise of its right any more than to make the press pay income tax or subject it
returning to the Philippines) or for professional use, like professional instruments and to general regulation is not to violate its freedom under the Constitution.
implements, by persons coming to the Philippines to settle here.
Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds derived from the
(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of sales are used to subsidize the cost of printing copies which are given free to those who cannot afford to pay so
petroleum products subject to excise tax and services subject to percentage tax. that to tax the sales would be to increase the price, while reducing the volume of sale. Granting that to be the
case, the resulting burden on the exercise of religious freedom is so incidental as to make it difficult to
differentiate it from any other economic imposition that might make the right to disseminate religious doctrines taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one particular class
costly. Otherwise, to follow the petitioner's argument, to increase the tax on the sale of vestments would be to for taxation, or exemption infringe no constitutional limitation.'" (Lutz v. Araneta, 98 Phil. 148, 153
lay an impermissible burden on the right of the preacher to make a sermon. (1955). Accord, City of Baguio v. De Leon, 134 Phil. 912 (1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984);
Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).
On the other hand the registration fee of P1,000.00 imposed by §107 of the NIRC, as amended by §7 of R.A. No.
7716, although fixed in amount, is really just to pay for the expenses of registration and enforcement of Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI, §28(1) which
provisions such as those relating to accounting in §108 of the NIRC. That the PBS distributes free bibles and provides that "The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
therefore is not liable to pay the VAT does not excuse it from the payment of this fee because it also sells some system of taxation."
copies. At any rate whether the PBS is liable for the VAT must be decided in concrete cases, in the event it is
assessed this tax by the Commissioner of Internal Revenue. Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class be taxed
at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes
VII. Alleged violations of the due process, equal protection and contract clauses and the rule on taxation. CREBA of taxation. To satisfy this requirement it is enough that the statute or ordinance applies equally to all persons,
asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies transactions as covered or forms and corporations placed in similar situation. (City of Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra)
exempt without reasonable basis and (3) violates the rule that taxes should be uniform and equitable and that
Congress shall "evolve a progressive system of taxation." Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted. R.A. No. 7716
merely expands the base of the tax. The validity of the original VAT Law was questioned in Kapatiran ng
With respect to the first contention, it is claimed that the application of the tax to existing contracts of the sale Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383 (1988) on grounds similar to those made in
of real property by installment or on deferred payment basis would result in substantial increases in the monthly these cases, namely, that the law was "oppressive, discriminatory, unjust and regressive in violation of Art. VI,
amortizations to be paid because of the 10% VAT. The additional amount, it is pointed out, is something that the §28(1) of the Constitution." (At 382) Rejecting the challenge to the law, this Court held:
buyer did not anticipate at the time he entered into the contract.
As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. . . .
The short answer to this is the one given by this Court in an early case: "Authorities from numerous sources are
cited by the plaintiffs, but none of them show that a lawful tax on a new subject, or an increased tax on an old The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the
one, interferes with a contract or impairs its obligation, within the meaning of the Constitution. Even though public, which are not exempt, at the constant rate of 0% or 10%.
such taxation may affect particular contracts, as it may increase the debt of one person and lessen the security of
another, or may impose additional burdens upon one class and release the burdens of another, still the tax must
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by
be paid unless prohibited by the Constitution, nor can it be said that it impairs the obligation of any existing
persons engaged in business with an aggregate gross annual sales exceeding P200,000.00.
contract in its true legal sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574 (1919)).
Small corner sari-sari stores are consequently exempt from its application. Likewise exempt
Indeed not only existing laws but also "the reservation of the essential attributes of sovereignty, is . . . read into
from the tax are sales of farm and marine products, so that the costs of basic food and other
contracts as a postulate of the legal order." (Philippine-American Life Ins. Co. v. Auditor General, 22 SCRA 135,
necessities, spared as they are from the incidence of the VAT, are expected to be relatively
147 (1968)) Contracts must be understood as having been made in reference to the possible exercise of the
lower and within the reach of the general public.
rightful authority of the government and no obligation of contract can extend to the defeat of that authority.
(Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)).
(At 382-383)
It is next pointed out that while §4 of R.A. No. 7716 exempts such transactions as the sale of agricultural
products, food items, petroleum, and medical and veterinary services, it grants no exemption on the sale of real The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative Union of the Philippines,
property which is equally essential. The sale of real property for socialized and low-cost housing is exempted Inc. (CUP), while petitioner Juan T. David argues that the law contravenes the mandate of Congress to provide
from the tax, but CREBA claims that real estate transactions of "the less poor," i.e., the middle class, who are for a progressive system of taxation because the law imposes a flat rate of 10% and thus places the tax burden
equally homeless, should likewise be exempted. on all taxpayers without regard to their ability to pay.

The sale of food items, petroleum, medical and veterinary services, etc., which are essential goods and services The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive.
was already exempt under §103, pars. (b) (d) (1) of the NIRC before the enactment of R.A. No. 7716. Petitioner is What it simply provides is that Congress shall "evolve a progressive system of taxation." The constitutional
in error in claiming that R.A. No. 7716 granted exemption to these transactions, while subjecting those of provision has been interpreted to mean simply that "direct taxes are . . . to be preferred [and] as much as
petitioner to the payment of the VAT. Moreover, there is a difference between the "homeless poor" and the possible, indirect taxes should be minimized." (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221
"homeless less poor" in the example given by petitioner, because the second group or middle class can afford to (Second ed. (1977)). Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax system.
rent houses in the meantime that they cannot yet buy their own homes. The two social classes are thus Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have been prohibited with the
differently situated in life. "It is inherent in the power to tax that the State be free to select the subjects of
proclamation of Art. VIII, §17(1) of the 1973 Constitution from which the present Art. VI, §28(1) was taken. Sales The problem with CREBA's petition is that it presents broad claims of constitutional violations by tendering issues
taxes are also regressive. not at retail but at wholesale and in the abstract. There is no fully developed record which can impart to
adjudication the impact of actuality. There is no factual foundation to show in the concrete the application of the
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to law to actual contracts and exemplify its effect on property rights. For the fact is that petitioner's members have
avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law not even been assessed the VAT. Petitioner's case is not made concrete by a series of hypothetical questions
minimizes the regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No. asked which are no different from those dealt with in advisory opinions.
7716, §3, amending §102 (b) of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, §4,
amending §103 of the NIRC). The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere
allegation, as here, does not suffice. There must be a factual foundation of such
Thus, the following transactions involving basic and essential goods and services are exempted from the VAT: unconstitutional taint. Considering that petitioner here would condemn such a provision as
void on its face, he has not made out a case. This is merely to adhere to the authoritative
doctrine that where the due process and equal protection clauses are invoked, considering
(a) Goods for consumption or use which are in their original state (agricultural, marine and
that they are not fixed rules but rather broad standards, there is a need for proof of such
forest products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings,
persuasive character as would lead to such a conclusion. Absent such a showing, the
fish, prawn livestock and poultry feeds) and goods or services to enhance agriculture (milling
presumption of validity must prevail.
of palay, corn sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used
for the manufacture of feeds).
(Sison, Jr. v. Ancheta, 130 SCRA at 661)
(b) Goods used for personal consumption or use (household and personal effects of citizens
returning to the Philippines) and or professional use, like professional instruments and Adjudication of these broad claims must await the development of a concrete case. It may be that
implements, by persons coming to the Philippines to settle here. postponement of adjudication would result in a multiplicity of suits. This need not be the case, however.
Enforcement of the law may give rise to such a case. A test case, provided it is an actual case and not an abstract
or hypothetical one, may thus be presented.
(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of
petroleum products subject to excise tax and services subject to percentage tax.
Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues. Otherwise,
adjudication would be no different from the giving of advisory opinion that does not really settle legal issues.
(d) Educational services, medical, dental, hospital and veterinary services, and services
rendered under employer-employee relationship.
We are told that it is our duty under Art. VIII, §1, ¶2 to decide whenever a claim is made that "there has been a
grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality
(e) Works of art and similar creations sold by the artist himself.
of the government." This duty can only arise if an actual case or controversy is before us. Under Art . VIII, §5 our
jurisdiction is defined in terms of "cases" and all that Art. VIII, §1, ¶2 can plausibly mean is that in the exercise of
(f) Transactions exempted under special laws, or international agreements. that jurisdiction we have the judicial power to determine questions of grave abuse of discretion by any branch or
instrumentality of the government.
(g) Export-sales by persons not VAT-registered.
Put in another way, what is granted in Art. VIII, §1, ¶2 is "judicial power," which is "the power of a court to hear
(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00. and decide cases pending between parties who have the right to sue and be sued in the courts of law and
equity" (Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as distinguished from legislative and executive power. This
(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60) power cannot be directly appropriated until it is apportioned among several courts either by the Constitution, as
in the case of Art. VIII, §5, or by statute, as in the case of the Judiciary Act of 1948 (R.A. No. 296) and the
Judiciary Reorganization Act of 1980 (B.P. Blg. 129). The power thus apportioned constitutes the court's
On the other hand, the transactions which are subject to the VAT are those which involve goods and services "jurisdiction," defined as "the power conferred by law upon a court or judge to take cognizance of a case, to the
which are used or availed of mainly by higher income groups. These include real properties held primarily for exclusion of all others." (United States v. Arceo, 6 Phil. 29 (1906)) Without an actual case coming within its
sale to customers or for lease in the ordinary course of trade or business, the right or privilege to use patent, jurisdiction, this Court cannot inquire into any allegation of grave abuse of discretion by the other departments
copyright, and other similar property or right, the right or privilege to use industrial, commercial or scientific of the government.
equipment, motion picture films, tapes and discs, radio, television, satellite transmission and cable television
time, hotels, restaurants and similar places, securities, lending investments, taxicabs, utility cars for rent, tourist
buses, and other common carriers, services of franchise grantees of telephone and telegraph. VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative Union of the
Philippines (CUP), after briefly surveying the course of legislation, argues that it was to adopt a definite policy of
granting tax exemption to cooperatives that the present Constitution embodies provisions on cooperatives. To
subject cooperatives to the VAT would therefore be to infringe a constitutional policy. Petitioner claims that in CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperatives the equal
1973, P.D. No. 175 was promulgated exempting cooperatives from the payment of income taxes and sales taxes protection of the law because electric cooperatives are exempted from the VAT. The classification between
but in 1984, because of the crisis which menaced the national economy, this exemption was withdrawn by P.D. electric and other cooperatives (farmers cooperatives, producers cooperatives, marketing cooperatives, etc.)
No. 1955; that in 1986, P.D. No. 2008 again granted cooperatives exemption from income and sales taxes until apparently rests on a congressional determination that there is greater need to provide cheaper electric power
December 31, 1991, but, in the same year, E.O. No. 93 revoked the exemption; and that finally in 1987 the to as many people as possible, especially those living in the rural areas, than there is to provide them with other
framers of the Constitution "repudiated the previous actions of the government adverse to the interests of the necessities in life. We cannot say that such classification is unreasonable.
cooperatives, that is, the repeated revocation of the tax exemption to cooperatives and instead upheld the policy
of strengthening the cooperatives by way of the grant of tax exemptions," by providing the following in Art. XII: We have carefully read the various arguments raised against the constitutional validity of R.A. No. 7716. We have
in fact taken the extraordinary step of enjoining its enforcement pending resolution of these cases. We have now
§1. The goals of the national economy are a more equitable distribution of opportunities, come to the conclusion that the law suffers from none of the infirmities attributed to it by petitioners and that
income, and wealth; a sustained increase in the amount of goods and services produced by its enactment by the other branches of the government does not constitute a grave abuse of discretion. Any
the nation for the benefit of the people; and an expanding productivity as the key to raising question as to its necessity, desirability or expediency must be addressed to Congress as the body which is
the quality of life for all, especially the underprivileged. electorally responsible, remembering that, as Justice Holmes has said, "legislators are the ultimate guardians of
the liberties and welfare of the people in quite as great a degree as are the courts." (Missouri, Kansas & Texas Ry.
The State shall promote industrialization and full employment based on sound agricultural Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is not right, as petitioner in G.R. No. 115543 does in
development and agrarian reform, through industries that make full and efficient use of arguing that we should enforce the public accountability of legislators, that those who took part in passing the
human and natural resources, and which are competitive in both domestic and foreign law in question by voting for it in Congress should later thrust to the courts the burden of reviewing measures in
markets. However, the State shall protect Filipino enterprises against unfair foreign the flush of enactment. This Court does not sit as a third branch of the legislature, much less exercise a veto
competition and trade practices. power over legislation.

In the pursuit of these goals, all sectors of the economy and all regions of the country shall be WHEREFORE, the motions for reconsideration are denied with finality and the temporary restraining order
given optimum opportunity to develop. Private enterprises, including corporations, previously issued is hereby lifted.
cooperatives, and similar collective organizations, shall be encouraged to broaden the base
of their ownership. SO ORDERED.

§15. The Congress shall create an agency to promote the viability and growth of cooperatives G.R. No. 168056 September 1, 2005
as instruments for social justice and economic development.
ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S.
Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled out cooperatives ALBANO, Petitioners,
by withdrawing their exemption from income and sales taxes under P.D. No. 175, §5. What P.D. No. 1955, §1 did vs.
was to withdraw the exemptions and preferential treatments theretofore granted to private business enterprises THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY OF THE DEPARTMENT
in general, in view of the economic crisis which then beset the nation. It is true that after P.D. No. 2008, §2 had OF FINANCE CESAR PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL REVENUE GUILLERMO
restored the tax exemptions of cooperatives in 1986, the exemption was again repealed by E.O. No. 93, §1, but PARAYNO, JR., Respondent.
then again cooperatives were not the only ones whose exemptions were withdrawn. The withdrawal of tax
incentives applied to all, including government and private entities. In the second place, the Constitution does x-------------------------x
not really require that cooperatives be granted tax exemptions in order to promote their growth and viability.
Hence, there is no basis for petitioner's assertion that the government's policy toward cooperatives had been
G.R. No. 168207
one of vacillation, as far as the grant of tax privileges was concerned, and that it was to put an end to this
indecision that the constitutional provisions cited were adopted. Perhaps as a matter of policy cooperatives
should be granted tax exemptions, but that is left to the discretion of Congress. If Congress does not grant AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. ESTRADA, PANFILO M. LACSON, ALFREDO
exemption and there is no discrimination to cooperatives, no violation of any constitutional policy can be S. LIM, JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEÑA III, Petitioners,
charged. vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA, SECRETARY OF FINANCE, GUILLERMO L.
PARAYNO, JR., COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE, Respondent.
Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are exempt from
taxation. Such theory is contrary to the Constitution under which only the following are exempt from taxation:
charitable institutions, churches and parsonages, by reason of Art. VI, §28 (3), and non-stock, non-profit x-------------------------x
educational institutions by reason of Art. XIV, §4 (3).
G.R. No. 168461 BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner,
vs.
ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its President, ROSARIO ANTONIO; PETRON HON. EDUARDO R. ERMITA, in his capacity as the Executive Secretary; HON. MARGARITO TEVES, in his capacity
DEALERS’ ASSOCIATION represented by its President, RUTH E. BARBIBI; ASSOCIATION OF CALTEX DEALERS’ OF as Secretary of Finance; HON. JOSE MARIO BUNAG, in his capacity as the OIC Commissioner of the Bureau of
THE PHILIPPINES represented by its President, MERCEDITAS A. GARCIA; ROSARIO ANTONIO doing business under Internal Revenue; and HON. ALEXANDER AREVALO, in his capacity as the OIC Commissioner of the Bureau of
the name and style of "ANB NORTH SHELL SERVICE STATION"; LOURDES MARTINEZ doing business under the Customs, Respondent.
name and style of "SHELL GATE – N. DOMINGO"; BETHZAIDA TAN doing business under the name and style of
"ADVANCE SHELL STATION"; REYNALDO P. MONTOYA doing business under the name and style of "NEW DECISION
LAMUAN SHELL SERVICE STATION"; EFREN SOTTO doing business under the name and style of "RED FIELD SHELL
SERVICE STATION"; DONICA CORPORATION represented by its President, DESI TOMACRUZ; RUTH E. MARBIBI AUSTRIA-MARTINEZ, J.:
doing business under the name and style of "R&R PETRON STATION"; PETER M. UNGSON doing business under
the name and style of "CLASSIC STAR GASOLINE SERVICE STATION"; MARIAN SHEILA A. LEE doing business under
The expenses of government, having for their object the interest of all, should be borne by everyone, and the
the name and style of "NTE GASOLINE & SERVICE STATION"; JULIAN CESAR P. POSADAS doing business under the
more man enjoys the advantages of society, the more he ought to hold himself honored in contributing to those
name and style of "STARCARGA ENTERPRISES"; ADORACION MAÑEBO doing business under the name and style
expenses.
of "CMA MOTORISTS CENTER"; SUSAN M. ENTRATA doing business under the name and style of "LEONA’S
GASOLINE STATION and SERVICE CENTER"; CARMELITA BALDONADO doing business under the name and style of
"FIRST CHOICE SERVICE CENTER"; MERCEDITAS A. GARCIA doing business under the name and style of "LORPED -Anne Robert Jacques Turgot (1727-1781)
SERVICE CENTER"; RHEAMAR A. RAMOS doing business under the name and style of "RJRAM PTT GAS STATION";
MA. ISABEL VIOLAGO doing business under the name and style of "VIOLAGO-PTT SERVICE CENTER"; MOTORISTS’ French statesman and economist
HEART CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; MOTORISTS’
HARVARD CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased emoluments
MOTORISTS’ HERITAGE CORPORATION represented by its Vice-President for Operations, JOSELITO F. for health workers, and wider coverage for full value-added tax benefits … these are the reasons why Republic
FLORDELIZA; PHILIPPINE STANDARD OIL CORPORATION represented by its Vice-President for Operations, Act No. 9337 (R.A. No. 9337)1 was enacted. Reasons, the wisdom of which, the Court even with its extensive
JOSELITO F. FLORDELIZA; ROMEO MANUEL doing business under the name and style of "ROMMAN GASOLINE constitutional power of review, cannot probe. The petitioners in these cases, however, question not only the
STATION"; ANTHONY ALBERT CRUZ III doing business under the name and style of "TRUE SERVICE STATION", wisdom of the law, but also perceived constitutional infirmities in its passage.
Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of the Department of Finance and GUILLERMO L. PARAYNO, Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding, petitioners
JR., in his capacity as Commissioner of Internal Revenue, Respondent. failed to justify their call for the invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional.

x-------------------------x LEGISLATIVE HISTORY

G.R. No. 168463 R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705, and Senate Bill
No. 1950.
FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA, RODOLFO G. PLAZA,
DARLENE ANTONINO-CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C. AGARAO, JR. JUAN EDGARDO M. House Bill No. 35552 was introduced on first reading on January 7, 2005. The House Committee on Ways and
ANGARA, JUSTIN MARC SB. CHIPECO, FLORENCIO G. NOEL, MUJIV S. HATAMAN, RENATO B. MAGTUBO, JOSEPH Means approved the bill, in substitution of House Bill No. 1468, which Representative (Rep.) Eric D. Singson
A. SANTIAGO, TEOFISTO DL. GUINGONA III, RUY ELIAS C. LOPEZ, RODOLFO Q. AGBAYANI and TEODORO A. introduced on August 8, 2004. The President certified the bill on January 7, 2005 for immediate enactment. On
CASIÑO, Petitioners, January 27, 2005, the House of Representatives approved the bill on second and third reading.
vs.
CESAR V. PURISIMA, in his capacity as Secretary of Finance, GUILLERMO L. PARAYNO, JR., in his capacity as House Bill No. 37053 on the other hand, substituted House Bill No. 3105 introduced by Rep. Salacnib F. Baterina,
Commissioner of Internal Revenue, and EDUARDO R. ERMITA, in his capacity as Executive and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its "mother bill" is House Bill No. 3555. The House
Secretary,Respondent. Committee on Ways and Means approved the bill on February 2, 2005. The President also certified it as urgent
on February 8, 2005. The House of Representatives approved the bill on second and third reading on February
x-------------------------x 28, 2005.

G.R. No. 168730


Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 19504 on March 7, 2005, "in J. PANGANIBAN : . . . mitigating measures . . .
substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into consideration House Bill Nos. 3555 and 3705."
Senator Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were both ATTY. BANIQUED : Yes, Your Honor.
sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The President certified the bill
on March 11, 2005, and was approved by the Senate on second and third reading on April 13, 2005.
J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of the Excise Tax
and the import duties. That is why, it is not correct to say that the VAT as to petroleum dealers increased prices
On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives for a by 10%.
committee conference on the disagreeing provisions of the proposed bills.
ATTY. BANIQUED : Yes, Your Honor.
Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555, House Bill No.
3705, and Senate Bill No. 1950, "after having met and discussed in full free and conference," recommended the
J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to cover the E-Vat
approval of its report, which the Senate did on May 10, 2005, and with the House of Representatives agreeing
tax. If you consider the excise tax and the import duties, the Net Tax would probably be in the neighborhood of
thereto the next day, May 11, 2005.
7%? We are not going into exact figures I am just trying to deliver a point that different industries, different
products, different services are hit differently. So it’s not correct to say that all prices must go up by 10%.
On May 23, 2005, the enrolled copy of the consolidated House and Senate version was transmitted to the
President, who signed the same into law on May 24, 2005. Thus, came R.A. No. 9337.
ATTY. BANIQUED : You’re right, Your Honor.

July 1, 2005 is the effectivity date of R.A. No. 9337.5 When said date came, the Court issued a temporary
J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present imposed a Sales
restraining order, effective immediately and continuing until further orders, enjoining respondents from
Tax of 3%. When this E-Vat law took effect the Sales Tax was also removed as a mitigating measure. So,
enforcing and implementing the law.
therefore, there is no justification to increase the fares by 10% at best 7%, correct?

Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking through Mr.
ATTY. BANIQUED : I guess so, Your Honor, yes.
Justice Artemio V. Panganiban, voiced the rationale for its issuance of the temporary restraining order on July 1,
2005, to wit:
J. PANGANIBAN : There are other products that the people were complaining on that first day, were being
increased arbitrarily by 10%. And that’s one reason among many others this Court had to issue TRO because of
J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little background.
the confusion in the implementation. That’s why we added as an issue in this case, even if it’s tangentially taken
You know when the law took effect on July 1, 2005, the Court issued a TRO at about 5 o’clock in the afternoon.
up by the pleadings of the parties, the confusion in the implementation of the E-vat. Our people were subjected
But before that, there was a lot of complaints aired on television and on radio. Some people in a gas station were
to the mercy of that confusion of an across the board increase of 10%, which you yourself now admit and I think
complaining that the gas prices went up by 10%. Some people were complaining that their electric bill will go up
even the Government will admit is incorrect. In some cases, it should be 3% only, in some cases it should be 6%
by 10%. Other times people riding in domestic air carrier were complaining that the prices that they’ll have to
depending on these mitigating measures and the location and situation of each product, of each service, of each
pay would have to go up by 10%. While all that was being aired, per your presentation and per our own
company, isn’t it?
understanding of the law, that’s not true. It’s not true that the e-vat law necessarily increased prices by 10%
uniformly isn’t it?
ATTY. BANIQUED : Yes, Your Honor.
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : Alright. So that’s one reason why we had to issue a TRO pending the clarification of all these
and we wish the government will take time to clarify all these by means of a more detailed implementing rules,
J. PANGANIBAN : It is not?
in case the law is upheld by this Court. . . .6

ATTY. BANIQUED : It’s not, because, Your Honor, there is an Executive Order that granted the Petroleum
The Court also directed the parties to file their respective Memoranda.
companies some subsidy . . . interrupted

G.R. No. 168056


J. PANGANIBAN : That’s correct . . .

Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for prohibition on
ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted
May 27, 2005. They question the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections
106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on
sale of goods and properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6 imposes a 2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input tax to be
10% VAT on sale of services and use or lease of properties. These questioned provisions contain a credited against the output tax; and
uniform proviso authorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT
rate to 12%, effective January 1, 2006, after any of the following conditions have been satisfied, to wit: 3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its political
subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5% final withholding tax on gross
. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, payments of goods and services, which are subject to 10% VAT under Sections 106 (sale of goods and properties)
raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been and 108 (sale of services and use or lease of properties) of the NIRC.
satisfied:
Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive, and
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two confiscatory.
and four-fifth percent (2 4/5%); or
Petitioners’ argument is premised on the constitutional right of non-deprivation of life, liberty or property
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 without due process of law under Article III, Section 1 of the Constitution. According to petitioners, the contested
½%). sections impose limitations on the amount of input tax that may be claimed. Petitioners also argue that the input
tax partakes the nature of a property that may not be confiscated, appropriated, or limited without due process
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive of law. Petitioners further contend that like any other property or property right, the input tax credit may be
authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution. transferred or disposed of, and that by limiting the same, the government gets to tax a profit or value-added
even if there is no profit or value-added.
G.R. No. 168207
Petitioners also believe that these provisions violate the constitutional guarantee of equal protection of the law
under Article III, Section 1 of the Constitution, as the limitation on the creditable input tax if: (1) the entity has a
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing the
high ratio of input tax; or (2) invests in capital equipment; or (3) has several transactions with the government, is
constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.
not based on real and substantial differences to meet a valid classification.

Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to 12%, on the
Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI, Section 28(1) of
ground that it amounts to an undue delegation of legislative power, petitioners also contend that the increase in
the Constitution, and that it is the smaller businesses with higher input tax to output tax ratio that will suffer the
the VAT rate to 12% contingent on any of the two conditions being satisfied violates the due process clause
consequences thereof for it wipes out whatever meager margins the petitioners make.
embodied in Article III, Section 1 of the Constitution, as it imposes an unfair and additional tax burden on the
people, in that: (1) the 12% increase is ambiguous because it does not state if the rate would be returned to the
original 10% if the conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as the people are G.R. No. 168463
unsure of the applicable VAT rate from year to year; and (3) the increase in the VAT rate, which is supposed to be
an incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this petition
only be based on fiscal adequacy. for certiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on the following grounds:

Petitioners further claim that the inclusion of a stand-by authority granted to the President by the Bicameral 1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in violation of Article
Conference Committee is a violation of the "no-amendment rule" upon last reading of a bill laid down in Article VI, Section 28(2) of the Constitution;
VI, Section 26(2) of the Constitution.
2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass on provisions present
G.R. No. 168461 in Senate Bill No. 1950 and House Bill No. 3705; and

Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell Dealers, 3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121, 125, 7 148, 151,
Inc., et al., assailing the following provisions of R.A. No. 9337: 236, 237 and 288, which were present in Senate Bill No. 1950, violates Article VI, Section 24(1) of the
Constitution, which provides that all appropriation, revenue or tariff bills shall originate exclusively in the House
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable goods shall be of Representatives
amortized over a 60-month period, if the acquisition, excluding the VAT components, exceeds One Million Pesos
(₱1, 000,000.00); G.R. No. 168730
On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on July 20, 2005, 1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the
alleging unconstitutionality of the law on the ground that the limitation on the creditable input tax in effect following provisions of the Constitution:
allows VAT-registered establishments to retain a portion of the taxes they collect, thus violating the principle
that tax collection and revenue should be solely allocated for public purposes and expenditures. Petitioner a. Article VI, Section 28(1), and
Garcia further claims that allowing these establishments to pass on the tax to the consumers is inequitable, in
violation of Article VI, Section 28(1) of the Constitution.
b. Article VI, Section 28(2)

RESPONDENTS’ COMMENT
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of
R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:
The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily, respondents
contend that R.A. No. 9337 enjoys the presumption of constitutionality and petitioners failed to cast doubt on its
a. Article VI, Section 28(1), and
validity.

b. Article III, Section 1


Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA

RULING OF THE COURT


630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the bicameral
proceedings, exclusive origination of revenue measures and the power of the Senate concomitant thereto, have
already been settled. With regard to the issue of undue delegation of legislative power to the President, As a prelude, the Court deems it apt to restate the general principles and concepts of value-added tax (VAT), as
respondents contend that the law is complete and leaves no discretion to the President but to increase the rate the confusion and inevitably, litigation, breeds from a fallacious notion of its nature.
to 12% once any of the two conditions provided therein arise.
The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or
Respondents also refute petitioners’ argument that the increase to 12%, as well as the 70% limitation on the properties and services.8 Being an indirect tax on expenditure, the seller of goods or services may pass on the
creditable input tax, the 60-month amortization on the purchase or importation of capital goods exceeding amount of tax paid to the buyer,9 with the seller acting merely as a tax collector.10 The burden of VAT is intended
₱1,000,000.00, and the 5% final withholding tax by government agencies, is arbitrary, oppressive, and to fall on the immediate buyers and ultimately, the end-consumers.
confiscatory, and that it violates the constitutional principle on progressive taxation, among others.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in,
Finally, respondents manifest that R.A. No. 9337 is the anchor of the government’s fiscal reform agenda. A without transferring the burden to someone else.11 Examples are individual and corporate income taxes, transfer
reform in the value-added system of taxation is the core revenue measure that will tilt the balance towards a taxes, and residence taxes.12
sustainable macroeconomic environment necessary for economic growth.
In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different
ISSUES mode. Prior to 1978, the system was a single-stage tax computed under the "cost deduction method" and was
payable only by the original sellers. The single-stage system was subsequently modified, and a mixture of the
"cost deduction method" and "tax credit method" was used to determine the value-added tax payable.13 Under
The Court defined the issues, as follows:
the "tax credit method," an entity can credit against or subtract from the VAT charged on its sales or outputs the
VAT paid on its purchases, inputs and imports.14
PROCEDURAL ISSUE
It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT system was
Whether R.A. No. 9337 violates the following provisions of the Constitution: rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the "tax credit method."15

a. Article VI, Section 24, and E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law, 16 R.A. No. 8241 or the Improved VAT
Law,17 R.A. No. 8424 or the Tax Reform Act of 1997,18 and finally, the presently beleaguered R.A. No. 9337, also
b. Article VI, Section 26(2) referred to by respondents as the VAT Reform Act.

SUBSTANTIVE ISSUES The Court will now discuss the issues in logical sequence.

PROCEDURAL ISSUE
I. ...

Whether R.A. No. 9337 violates the following provisions of the Constitution: The Chairman of the House panel may be interpellated on the Conference Committee Report prior to the voting
thereon. The House shall vote on the Conference Committee Report in the same manner and procedure as it
a. Article VI, Section 24, and votes on a bill on third and final reading.

b. Article VI, Section 26(2) Rule XII, Section 35 of the Rules of the Senate states:

A. The Bicameral Conference Committee Sec. 35. In the event that the Senate does not agree with the House of Representatives on the provision of any
bill or joint resolution, the differences shall be settled by a conference committee of both Houses which shall
meet within ten (10) days after their composition. The President shall designate the members of the Senate
Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee exceeded its
Panel in the conference committee with the approval of the Senate.
authority by:

Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the changes in,
1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;
or amendments to the subject measure, and shall be signed by a majority of the members of each House panel,
voting separately.
2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;
A comparative presentation of the conflicting House and Senate provisions and a reconciled version thereof with
3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax; the explanatory statement of the conference committee shall be attached to the report.
and
...
4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition
to the value-added tax.
The creation of such conference committee was apparently in response to a problem, not addressed by any
constitutional provision, where the two houses of Congress find themselves in disagreement over changes or
Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee. amendments introduced by the other house in a legislative bill. Given that one of the most basic powers of the
legislative branch is to formulate and implement its own rules of proceedings and to discipline its members, may
It should be borne in mind that the power of internal regulation and discipline are intrinsic in any legislative body the Court then delve into the details of how Congress complies with its internal rules or how it conducts its
for, as unerringly elucidated by Justice Story, "[i]f the power did not exist, it would be utterly impracticable to business of passing legislation? Note that in the present petitions, the issue is not whether provisions of the rules
transact the business of the nation, either at all, or at least with decency, deliberation, and order."19 Thus, of both houses creating the bicameral conference committee are unconstitutional, but whether the bicameral
Article VI, Section 16 (3) of the Constitution provides that "each House may determine the rules of its conference committee has strictly complied with the rules of both houses, thereby remaining within the
proceedings." Pursuant to this inherent constitutional power to promulgate and implement its own rules of jurisdiction conferred upon it by Congress.
procedure, the respective rules of each house of Congress provided for the creation of a Bicameral Conference
Committee. In the recent case of Fariñas vs. The Executive Secretary,20 the Court En Banc, unanimously reiterated and
emphasized its adherence to the "enrolled bill doctrine," thus, declining therein petitioners’ plea for the Court to
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows: go behind the enrolled copy of the bill. Assailed in said case was Congress’s creation of two sets of bicameral
conference committees, the lack of records of said committees’ proceedings, the alleged violation of said
Sec. 88. Conference Committee. – In the event that the House does not agree with the Senate on the amendment committees of the rules of both houses, and the disappearance or deletion of one of the provisions in the
to any bill or joint resolution, the differences may be settled by the conference committees of both chambers. compromise bill submitted by the bicameral conference committee. It was argued that such irregularities in the
passage of the law nullified R.A. No. 9006, or the Fair Election Act.

In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to and support
the House Bill. If the differences with the Senate are so substantial that they materially impair the House Bill, the Striking down such argument, the Court held thus:
panel shall report such fact to the House for the latter’s appropriate action.
Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the Senate President and
Sec. 89. Conference Committee Reports. – . . . Each report shall contain a detailed, sufficiently explicit statement the certification of the Secretaries of both Houses of Congress that it was passed are conclusive of its due
of the changes in or amendments to the subject measure. enactment. A review of cases reveals the Court’s consistent adherence to the rule. The Court finds no reason to
deviate from the salutary rule in this case where the irregularities alleged by the petitioners mostly involved
the internal rules of Congress, e.g., creation of the 2nd or 3rd Bicameral Conference Committee by the 12% VAT on importation of locally manufactured goods and NIRC), 10% VAT on sale of
House. This Court is not the proper forum for the enforcement of these internal rules of Congress, whether goods (amending Sec. 107 of petroleum products and raw services including sale of
House or Senate. Parliamentary rules are merely procedural and with their observance the courts have no NIRC); and 12% VAT on sale of materials to be used in the electricity by generation
concern. Whatever doubts there may be as to the formal validity of Rep. Act No. 9006 must be resolved in its services and use or lease of manufacture thereof (amending Sec. companies, transmission and
favor.The Court reiterates its ruling in Arroyo vs. De Venecia, viz.: properties (amending Sec. 108 106 of NIRC); 12% VAT on distribution companies, and use
of NIRC) importation of goods and reduced or lease of properties (amending
But the cases, both here and abroad, in varying forms of expression, all deny to the courts the power to rates for certain imported products Sec. 108 of NIRC)
inquire into allegations that, in enacting a law, a House of Congress failed to comply with its own rules, in the including petroleum products
absence of showing that there was a violation of a constitutional provision or the rights of private (amending Sec. 107 of NIRC); and
individuals. In Osmeña v. Pendatun, it was held: "At any rate, courts have declared that ‘the rules adopted by 12% VAT on sale of services and use
deliberative bodies are subject to revocation, modification or waiver at the pleasure of the body adopting or lease of properties and a reduced
them.’ And it has been said that "Parliamentary rules are merely procedural, and with their observance, the rate for certain services including
courts have no concern. They may be waived or disregarded by the legislative body." Consequently, "mere power generation (amending Sec.
failure to conform to parliamentary usage will not invalidate the action (taken by a deliberative body) when 108 of NIRC)
the requisite number of members have agreed to a particular measure."21 (Emphasis supplied) With regard to the "no pass-on" provision
No similar provision Provides that the VAT imposed on Provides that the VAT imposed
The foregoing declaration is exactly in point with the present cases, where petitioners allege irregularities power generation and on the sale of on sales of electricity by
committed by the conference committee in introducing changes or deleting provisions in the House and Senate petroleum products shall be generation companies and
bills. Akin to the Fariñas case,22 the present petitions also raise an issue regarding the actions taken by the absorbed by generation companies services of transmission
conference committee on matters regarding Congress’ compliance with its own internal rules. As stated earlier, or sellers, respectively, and shall not companies and distribution
one of the most basic and inherent power of the legislature is the power to formulate rules for its proceedings be passed on to consumers companies, as well as those of
and the discipline of its members. Congress is the best judge of how it should conduct its own business franchise grantees of electric
expeditiously and in the most orderly manner. It is also the sole utilities shall not apply to
residential
concern of Congress to instill discipline among the members of its conference committee if it believes that said
members violated any of its rules of proceedings. Even the expanded jurisdiction of this Court cannot apply to end-users. VAT shall be absorbed
questions regarding only the internal operation of Congress, thus, the Court is wont to deny a review of the by generation, transmission, and
internal proceedings of a co-equal branch of government. distribution companies.
With regard to 70% limit on input tax credit
Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of Finance,23 the Provides that the input tax No similar provision Provides that the input tax credit
Court already made the pronouncement that "[i]f a change is desired in the practice [of the Bicameral credit for capital goods on for capital goods on which a VAT
Conference Committee] it must be sought in Congress since this question is not covered by any constitutional which a VAT has been paid shall has been paid shall be equally
provision but is only an internal rule of each house." 24 To date, Congress has not seen it fit to make such be equally distributed over 5 distributed over 5 years or the
changes adverted to by the Court. It seems, therefore, that Congress finds the practices of the bicameral years or the depreciable life of depreciable life of such capital
conference committee to be very useful for purposes of prompt and efficient legislative action. such capital goods; the input tax goods; the input tax credit for
credit for goods and services goods and services other than
other than capital goods shall capital goods shall not exceed
Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the bicameral
not exceed 5% of the total 90% of the output VAT.
conference committees, the Court deems it necessary to dwell on the issue. The Court observes that there was a
amount of such goods and
necessity for a conference committee because a comparison of the provisions of House Bill Nos. 3555 and 3705
services; and for persons
on one hand, and Senate Bill No. 1950 on the other, reveals that there were indeed disagreements. As pointed
engaged in retail trading of
out in the petitions, said disagreements were as follows:
goods, the allowable input tax
credit shall not exceed 11% of
House Bill No. 3555 House Bill No.3705 Senate Bill No. 1950 the total amount of goods
With regard to "Stand-By Authority" in favor of President purchased.
Provides for 12% VAT on every Provides for 12% VAT in general on Provides for a single rate of 10% With regard to amendments to be made to NIRC provisions regarding income and excise taxes
sale of goods or properties sales of goods or properties and VAT on sale of goods or No similar provision No similar provision Provided for amendments to sev
(amending Sec. 106 of NIRC); reduced rates for sale of certain properties (amending Sec. 106 of
(B) Excess Output or Input Tax. – If at the end of any taxable quarter the output tax exceeds the input tax, the
NIRC provisions regarding corporate
income, percentage, franchise excess
and shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be
excise taxes carried over to the succeeding quarter or quarters: PROVIDED that the input tax inclusive of input VAT carried
The disagreements between the provisions in the House bills and the Senate bill were with regard to (1) what over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of
rate of VAT is to be imposed; (2) whether only the VAT imposed on electricity generation, transmission and the output VAT: PROVIDED, HOWEVER, THAT any input tax attributable to zero-rated sales by a VAT-registered
distribution companies should not be passed on to consumers, as proposed in the Senate bill, or both the VAT person may at his option be refunded or credited against other internal revenue taxes, . . .
imposed on electricity generation, transmission and distribution companies and the VAT imposed on sale of
petroleum products should not be passed on to consumers, as proposed in the House bill; (3) in what manner 4. With regard to the amendments to other provisions of the NIRC on corporate income tax, franchise,
input tax credits should be limited; (4) and whether the NIRC provisions on corporate income taxes, percentage, percentage and excise taxes, the conference committee decided to include such amendments and basically
franchise and excise taxes should be amended. adopted the provisions found in Senate Bill No. 1950, with some changes as to the rate of the tax to be imposed.

There being differences and/or disagreements on the foregoing provisions of the House and Senate bills, the Under the provisions of both the Rules of the House of Representatives and Senate Rules, the Bicameral
Bicameral Conference Committee was mandated by the rules of both houses of Congress to act on the same by Conference Committee is mandated to settle the differences between the disagreeing provisions in the House
settling said differences and/or disagreements. The Bicameral Conference Committee acted on the disagreeing bill and the Senate bill. The term "settle" is synonymous to "reconcile" and "harmonize." 25 To reconcile or
provisions by making the following changes: harmonize disagreeing provisions, the Bicameral Conference Committee may then (a) adopt the specific
provisions of either the House bill or Senate bill, (b) decide that neither provisions in the House bill or the
1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the Conference provisions in the Senate bill would
Committee Report that the Bicameral Conference Committee tried to bridge the gap in the difference between
the 10% VAT rate proposed by the Senate, and the various rates with 12% as the highest VAT rate proposed by be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the disagreeing
the House, by striking a compromise whereby the present 10% VAT rate would be retained until certain provisions.
conditions arise, i.e., the value-added tax collection as a percentage of gross domestic product (GDP) of the
previous year exceeds 2 4/5%, or National Government deficit as a percentage of GDP of the previous year
In the present case, the changes introduced by the Bicameral Conference Committee on disagreeing provisions
exceeds 1½%, when the President, upon recommendation of the Secretary of Finance shall raise the rate of VAT
were meant only to reconcile and harmonize the disagreeing provisions for it did not inject any idea or intent
to 12% effective January 1, 2006.
that is wholly foreign to the subject embraced by the original provisions.

2. With regard to the disagreement on whether only the VAT imposed on electricity generation, transmission The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted by the Senate is
and distribution companies should not be passed on to consumers or whether both the VAT imposed on
retained until such time that certain conditions arise when the 12% VAT wanted by the House shall be imposed,
electricity generation, transmission and distribution companies and the VAT imposed on sale of petroleum appears to be a compromise to try to bridge the difference in the rate of VAT proposed by the two houses of
products may be passed on to consumers, the Bicameral Conference Committee chose to settle such
Congress. Nevertheless, such compromise is still totally within the subject of what rate of VAT should be
disagreement by altogether deleting from its Report any no pass-on provision.
imposed on taxpayers.

3. With regard to the disagreement on whether input tax credits should be limited or not, the Bicameral
The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the Bicameral
Conference Committee decided to adopt the position of the House by putting a limitation on the amount of Conference Committee held on May 10, 2005, Sen. Ralph Recto, Chairman of the Senate Panel, explained the
input tax that may be credited against the output tax, although it crafted its own language as to the amount of
reason for deleting the no pass-on provision in this wise:
the limitation on input tax credits and the manner of computing the same by providing thus:

. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking that no sector should
(A) Creditable Input Tax. – . . .
be a beneficiary of legislative grace, neither should any sector be discriminated on. The VAT is an indirect tax. It
is a pass on-tax. And let’s keep it plain and simple. Let’s not confuse the bill and put a no pass-on provision. Two-
... thirds of the world have a VAT system and in this two-thirds of the globe, I have yet to see a VAT with a no pass-
though provision. So, the thinking of the Senate is basically simple, let’s keep the VAT simple. 26 (Emphasis
Provided, The input tax on goods purchased or imported in a calendar month for use in trade or business for supplied)
which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of
acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding Rep. Teodoro Locsin further made the manifestation that the no pass-on provision "never really enjoyed the
the VAT component thereof, exceeds one million Pesos (₱1,000,000.00): PROVIDED, however, that if the support of either House."27
estimated useful life of the capital good is less than five (5) years, as used for depreciation purposes, then the
input VAT shall be spread over such shorter period: . . .
With regard to the amount of input tax to be credited against output tax, the Bicameral Conference Committee Nor is there any reason for requiring that the Committee’s Report in these cases must have undergone three
came to a compromise on the percentage rate of the limitation or cap on such input tax credit, but again, the readings in each of the two houses. If that be the case, there would be no end to negotiation since each house
change introduced by the Bicameral Conference Committee was totally within the intent of both houses to put a may seek modification of the compromise bill. . . .
cap on input tax that may be
Art. VI. § 26 (2) must, therefore, be construed as referring only to bills introduced for the first time in either
credited against the output tax. From the inception of the subject revenue bill in the House of Representatives, house of Congress, not to the conference committee report.32 (Emphasis supplied)
one of the major objectives was to "plug a glaring loophole in the tax policy and administration by creating vital
restrictions on the claiming of input VAT tax credits . . ." and "[b]y introducing limitations on the claiming of tax The Court reiterates here that the "no-amendment rule" refers only to the procedure to be followed by each
credit, we are capping a major leakage that has placed our collection efforts at an apparent disadvantage."28 house of Congress with regard to bills initiated in each of said respective houses, before said bill is transmitted
to the other house for its concurrence or amendment. Verily, to construe said provision in a way as to proscribe
As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Senate Bill No. any further changes to a bill after one house has voted on it would lead to absurdity as this would mean that the
1950, since said provisions were among those referred to it, the conference committee had to act on the same other house of Congress would be deprived of its constitutional power to amend or introduce changes to said
and it basically adopted the version of the Senate. bill. Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to mean that the introduction by the Bicameral
Conference Committee of amendments and modifications to disagreeing provisions in bills that have been acted
Thus, all the changes or modifications made by the Bicameral Conference Committee were germane to subjects upon by both houses of Congress is prohibited.
of the provisions referred
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive Origination of Revenue
to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion amounting to Bills
lack or excess of jurisdiction committed by the Bicameral Conference Committee. In the earlier cases
of Philippine Judges Association vs. Prado29 and Tolentino vs. Secretary of Finance,30 the Court recognized the Coming to the issue of the validity of the amendments made regarding the NIRC provisions on corporate income
long-standing legislative practice of giving said conference committee ample latitude for compromising taxes and percentage, excise taxes. Petitioners refer to the following provisions, to wit:
differences between the Senate and the House. Thus, in the Tolentino case, it was held that:
Section 27 Rates of Income Tax on Domestic Corporation
. . . it is within the power of a conference committee to include in its report an entirely new provision that is not 28(A)(1) Tax on Resident Foreign Corporation
found either in the House bill or in the Senate bill. If the committee can propose an amendment consisting of 28(B)(1) Inter-corporate Dividends
one or two provisions, there is no reason why it cannot propose several provisions, collectively considered as an
34(B)(1) Inter-corporate Dividends
"amendment in the nature of a substitute," so long as such amendment is germane to the subject of the bills
before the committee. After all, its report was not final but needed the approval of both houses of Congress to 116 Tax on Persons Exempt from VAT
become valid as an act of the legislative department. The charge that in this case the Conference Committee 117 Percentage Tax on domestic carriers and keepers of Garage
acted as a third legislative chamber is thus without any basis.31 (Emphasis supplied) 119 Tax on franchises
121 Tax on banks and Non-Bank Financial Intermediaries
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the "No-Amendment Rule" 148 Excise Tax on manufactured oils and other fuels
151 Excise Tax on mineral products
Article VI, Sec. 26 (2) of the Constitution, states: 236 Registration requirements
237 Issuance of receipts or sales or commercial invoices
No bill passed by either House shall become a law unless it has passed three readings on separate days, and 288 Disposition of Incremental Revenue
printed copies thereof in its final form have been distributed to its Members three days before its passage, Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the House.
except when the President certifies to the necessity of its immediate enactment to meet a public calamity or They aver that House Bill No. 3555 proposed amendments only regarding Sections 106, 107, 108, 110 and 114 of
emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall the NIRC, while House Bill No. 3705 proposed amendments only to Sections 106, 107,108, 109, 110 and 111 of
be taken immediately thereafter, and the yeas and nays entered in the Journal. the NIRC; thus, the other sections of the NIRC which the Senate amended but which amendments were not
found in the House bills are not intended to be amended by the House of Representatives. Hence, they argue
Petitioners’ argument that the practice where a bicameral conference committee is allowed to add or delete that since the proposed amendments did not originate from the House, such amendments are a violation of
provisions in the House bill and the Senate bill after these had passed three readings is in effect a circumvention Article VI, Section 24 of the Constitution.
of the "no amendment rule" (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince the Court to deviate
from its ruling in the Tolentino case that: The argument does not hold water.
Article VI, Section 24 of the Constitution reads: Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been touched in
the House bills are still in furtherance of the intent of the House in initiating the subject revenue bills. The
Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local Explanatory Note of House Bill No. 1468, the very first House bill introduced on the floor, which was later
application, and private bills shall originate exclusively in the House of Representatives but the Senate may substituted by House Bill No. 3555, stated:
propose or concur with amendments.
One of the challenges faced by the present administration is the urgent and daunting task of solving the
In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that initiated the move country’s serious financial problems. To do this, government expenditures must be strictly monitored and
for amending provisions of the NIRC dealing mainly with the value-added tax. Upon transmittal of said House controlled and revenues must be significantly increased. This may be easier said than done, but our fiscal
bills to the Senate, the Senate came out with Senate Bill No. 1950 proposing amendments not only to NIRC authorities are still optimistic the government will be operating on a balanced budget by the year 2009. In fact,
provisions on the value-added tax but also amendments to NIRC provisions on other kinds of taxes. Is the several measures that will result to significant expenditure savings have been identified by the administration. It
introduction by the Senate of provisions not dealing directly with the value- added tax, which is the only kind of is supported with a credible package of revenue measures that include measures to improve tax
tax being amended in the House bills, still within the purview of the constitutional provision authorizing the administration and control the leakages in revenues from income taxes and the value-added tax (VAT).
Senate to propose or concur with amendments to a revenue bill that originated from the House? (Emphasis supplied)

The foregoing question had been squarely answered in the Tolentino case, wherein the Court held, thus: Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:

. . . To begin with, it is not the law – but the revenue bill – which is required by the Constitution to "originate In the budget message of our President in the year 2005, she reiterated that we all acknowledged that on top of
exclusively" in the House of Representatives. It is important to emphasize this, because a bill originating in the our agenda must be the restoration of the health of our fiscal system.
House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. . . . At
this point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced. To In order to considerably lower the consolidated public sector deficit and eventually achieve a balanced budget by
insist that a revenue statute – and not only the bill which initiated the legislative process culminating in the the year 2009, we need to seize windows of opportunities which might seem poignant in the beginning, but in
enactment of the law – must substantially be the same as the House bill would be to deny the Senate’s power the long run prove effective and beneficial to the overall status of our economy. One such opportunity is a
not only to "concur with amendments" but also to "propose amendments." It would be to violate the review of existing tax rates, evaluating the relevance given our present conditions.34 (Emphasis supplied)
coequality of legislative power of the two houses of Congress and in fact make the House superior to the Senate.
Notably therefore, the main purpose of the bills emanating from the House of Representatives is to bring in
… sizeable revenues for the government

…Given, then, the power of the Senate to propose amendments, the Senate can propose its own version even to supplement our country’s serious financial problems, and improve tax administration and control of the
with respect to bills which are required by the Constitution to originate in the House. leakages in revenues from income taxes and value-added taxes. As these house bills were transmitted to the
Senate, the latter, approaching the measures from the point of national perspective, can introduce amendments
... within the purposes of those bills. It can provide for ways that would soften the impact of the VAT measure on
the consumer, i.e., by distributing the burden across all sectors instead of putting it entirely on the shoulders of
the consumers. The sponsorship speech of Sen. Ralph Recto on why the provisions on income tax on corporation
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills
were included is worth quoting:
authorizing an increase of the public debt, private bills and bills of local application must come from the House of
Representatives on the theory that, elected as they are from the districts, the members of the House can be
expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are All in all, the proposal of the Senate Committee on Ways and Means will raise ₱64.3 billion in additional
elected at large, are expected to approach the same problems from the national perspective. Both views are revenues annually even while by mitigating prices of power, services and petroleum products.
thereby made to bear on the enactment of such laws.33 (Emphasis supplied)
However, not all of this will be wrung out of VAT. In fact, only ₱48.7 billion amount is from the VAT on twelve
Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate goods and services. The rest of the tab – ₱10.5 billion- will be picked by corporations.
was acting within its
What we therefore prescribe is a burden sharing between corporate Philippines and the consumer. Why should
constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No. the latter bear all the pain? Why should the fiscal salvation be only on the burden of the consumer?
1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of
the Constitution does not contain any prohibition or limitation on the extent of the amendments that may be
introduced by the Senate to the House revenue bill.
The corporate world’s equity is in form of the increase in the corporate income tax from 32 to 35 percent, but up SUBSTANTIVE ISSUES
to 2008 only. This will raise ₱10.5 billion a year. After that, the rate will slide back, not to its old rate of 32
percent, but two notches lower, to 30 percent. I.

Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency provision that Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the
will be in effect for 1,200 days, while we put our fiscal house in order. This fiscal medicine will have an expiry following provisions of the Constitution:
date.
a. Article VI, Section 28(1), and
For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their sacrifice brief.
We would like to assure them that not because there is a light at the end of the tunnel, this government will
b. Article VI, Section 28(2)
keep on making the tunnel long.

A. No Undue Delegation of Legislative Power


The responsibility will not rest solely on the weary shoulders of the small man. Big business will be there to share
the burden.35
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in common that
Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC giving the
As the Court has said, the Senate can propose amendments and in fact, the amendments made on provisions in
President the stand-by authority to raise the VAT rate from 10% to 12% when a certain condition is met,
the tax on income of corporations are germane to the purpose of the house bills which is to raise revenues for
constitutes undue delegation of the legislative power to tax.
the government.

The assailed provisions read as follows:


Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the reforms to
the VAT system, as these sections would cushion the effects of VAT on consumers. Considering that certain
goods and services which were subject to percentage tax and excise tax would no longer be VAT-exempt, the SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:
consumer would be burdened more as they would be paying the VAT in addition to these taxes. Thus, there is a
need to amend these sections to soften the impact of VAT. Again, in his sponsorship speech, Sen. Recto said: SEC. 106. Value-Added Tax on Sale of Goods or Properties. –

However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker fuel, to lessen (A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale, barter or exchange of
the effect of a VAT on this product. goods or properties, a value-added tax equivalent to ten percent (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
For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT. transferor: provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following
conditions has been satisfied.
And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the VAT chain, we
will however bring down the excise tax on socially sensitive products such as diesel, bunker, fuel and kerosene.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds
two and four-fifth percent (2 4/5%) or
...

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent
What do all these exercises point to? These are not contortions of giving to the left hand what was taken from
(1 ½%).
the right. Rather, these sprang from our concern of softening the impact of VAT, so that the people can cushion
the blow of higher prices they will have to pay as a result of VAT.36
SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:
The other sections amended by the Senate pertained to matters of tax administration which are necessary for
the implementation of the changes in the VAT system. SEC. 107. Value-Added Tax on Importation of Goods. –

To reiterate, the sections introduced by the Senate are germane to the subject matter and purposes of the house (A) In General. – There shall be levied, assessed and collected on every importation of goods a value-added tax
bills, which is to supplement our country’s fiscal deficit, among others. Thus, the Senate acted within its power to equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff
propose those amendments. and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the
importer prior to the release of such goods from customs custody: Provided, That where the customs duties are
determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create the conditions
landed cost plus excise taxes, if any: provided, further, that the President, upon the recommendation of the provided by the law to bring about either or both the conditions precedent.
Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%)
after any of the following conditions has been satisfied. On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the imposition of the
12% rate would be subject to the whim of the Secretary of Finance, an unelected bureaucrat, contrary to the
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds principle of no taxation without representation. They submit that the Secretary of Finance is not mandated to
two and four-fifth percent (2 4/5%) or give a favorable recommendation and he may not even give his recommendation. Moreover, they allege that no
guiding standards are provided in the law on what basis and as to how he will make his recommendation. They
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent claim, nonetheless, that any recommendation of the Secretary of Finance can easily be brushed aside by the
(1 ½%). President since the former is a mere alter ego of the latter, such that, ultimately, it is the President who decides
whether to impose the increased tax rate or not.
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
A brief discourse on the principle of non-delegation of powers is instructive.
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties –
The principle of separation of powers ordains that each of the three great branches of government has exclusive
cognizance of and is supreme in matters falling within its own constitutionally allocated sphere.37 A logical
(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: provided, that the President,
upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value- corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the
added tax to twelve percent (12%), after any of the following conditions has been satisfied. Latin maxim: potestas delegata non delegari potest which means "what has been delegated, cannot be
delegated."38 This doctrine is based on the ethical principle that such as delegated power constitutes not only a
right but a duty to be performed by the delegate through the instrumentality of his own judgment and not
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds
through the intervening mind of another.39
two and four-fifth percent (2 4/5%) or

With respect to the Legislature, Section 1 of Article VI of the Constitution provides that "the Legislative power
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent
shall be vested in the Congress of the Philippines which shall consist of a Senate and a House of Representatives."
(1 ½%). (Emphasis supplied)
The powers which Congress is prohibited from delegating are those which are strictly, or inherently and
exclusively, legislative. Purely legislative power, which can never be delegated, has been described as
Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate is a virtual the authority to make a complete law – complete as to the time when it shall take effect and as to whom it
abdication by Congress of its exclusive power to tax because such delegation is not within the purview of Section shall be applicable – and to determine the expediency of its enactment.40 Thus, the rule is that in order that a
28 (2), Article VI of the Constitution, which provides: court may be justified in holding a statute unconstitutional as a delegation of legislative power, it must appear
that the power involved is purely legislative in nature – that is, one appertaining exclusively to the legislative
The Congress may, by law, authorize the President to fix within specified limits, and may impose, tariff rates, department. It is the nature of the power, and not the liability of its use or the manner of its exercise, which
import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the determines the validity of its delegation.
national development program of the government.
Nonetheless, the general rule barring delegation of legislative powers is subject to the following recognized
They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as well as on the limitations or exceptions:
sale or exchange of services, which cannot be included within the purview of tariffs under the exempted
delegation as the latter refers to customs duties, tolls or tribute payable upon merchandise to the government (1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;
and usually imposed on goods or merchandise imported or exported.
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution;
Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the legislative
power to tax is contrary to republicanism. They insist that accountability, responsibility and transparency should
(3) Delegation to the people at large;
dictate the actions of Congress and they should not pass to the President the decision to impose taxes. They also
argue that the law also effectively nullified the President’s power of control, which includes the authority to set
aside and nullify the acts of her subordinates like the Secretary of Finance, by mandating the fixing of the tax rate (4) Delegation to local governments; and
by the President upon the recommendation of the Secretary of Finance.
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid only specified contingencies leaving to some other person or body the power to determine when the specified
if the law (a) is complete in itself, setting forth therein the policy to be executed, carried out, or implemented by contingency has arisen. (Emphasis supplied).46
the delegate;41 and (b) fixes a standard — the limits of which are sufficiently determinate and determinable — to
which the delegate must conform in the performance of his functions.42 A sufficient standard is one which In Edu vs. Ericta,47 the Court reiterated:
defines legislative policy, marks its limits, maps out its boundaries and specifies the public agency to apply it. It
indicates the circumstances under which the legislative command is to be effected. 43 Both tests are intended to
What cannot be delegated is the authority under the Constitution to make laws and to alter and repeal them;
prevent a total transference of legislative authority to the delegate, who is not allowed to step into the shoes of
the test is the completeness of the statute in all its terms and provisions when it leaves the hands of the
the legislature and exercise a power essentially legislative.44
legislature. To determine whether or not there is an undue delegation of legislative power, the inquiry must be
directed to the scope and definiteness of the measure enacted. The legislative does not abdicate its functions
In People vs. Vera,45 the Court, through eminent Justice Jose P. Laurel, expounded on the concept and extent of when it describes what job must be done, who is to do it, and what is the scope of his authority. For a complex
delegation of power in this wise: economy, that may be the only way in which the legislative process can go forward. A distinction has rightfully
been made between delegation of power to make the laws which necessarily involves a discretion as to what
In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual to inquire it shall be, which constitutionally may not be done, and delegation of authority or discretion as to its
whether the statute was complete in all its terms and provisions when it left the hands of the legislature so that execution to be exercised under and in pursuance of the law, to which no valid objection can be made. The
nothing was left to the judgment of any other appointee or delegate of the legislature. Constitution is thus not to be regarded as denying the legislature the necessary resources of flexibility and
practicability. (Emphasis supplied).48
...
Clearly, the legislature may delegate to executive officers or bodies the power to determine certain facts or
‘The true distinction’, says Judge Ranney, ‘is between the delegation of power to make the law, which conditions, or the happening of contingencies, on which the operation of a statute is, by its terms, made to
necessarily involves a discretion as to what it shall be, and conferring an authority or discretion as to its depend, but the legislature must prescribe sufficient standards, policies or limitations on their authority. 49 While
execution, to be exercised under and in pursuance of the law. The first cannot be done; to the latter no valid the power to tax cannot be delegated to executive agencies, details as to the enforcement and administration of
objection can be made.’ an exercise of such power may be left to them, including the power to determine the existence of facts on which
its operation depends.50
...
The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of legislation is not
of itself a legislative function, but is simply ancillary to legislation. Thus, the duty of correlating information and
It is contended, however, that a legislative act may be made to the effect as law after it leaves the hands of the
making recommendations is the kind of subsidiary activity which the legislature may perform through its
legislature. It is true that laws may be made effective on certain contingencies, as by proclamation of the
members, or which it may delegate to others to perform. Intelligent legislation on the complicated problems of
executive or the adoption by the people of a particular community. In Wayman vs. Southard, the Supreme Court
modern society is impossible in the absence of accurate information on the part of the legislators, and any
of the United States ruled that the legislature may delegate a power not legislative which it may itself rightfully
reasonable method of securing such information is proper.51 The Constitution as a continuously operative
exercise. The power to ascertain facts is such a power which may be delegated. There is nothing essentially
charter of government does not require that Congress find for itself
legislative in ascertaining the existence of facts or conditions as the basis of the taking into effect of a law.
That is a mental process common to all branches of the government. Notwithstanding the apparent tendency,
however, to relax the rule prohibiting delegation of legislative authority on account of the complexity arising every fact upon which it desires to base legislative action or that it make for itself detailed determinations which
from social and economic forces at work in this modern industrial age, the orthodox pronouncement of Judge it has declared to be prerequisite to application of legislative policy to particular facts and circumstances
Cooley in his work on Constitutional Limitations finds restatement in Prof. Willoughby's treatise on the impossible for Congress itself properly to investigate.52
Constitution of the United States in the following language — speaking of declaration of legislative power to
administrative agencies: The principle which permits the legislature to provide that the administrative agent In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6 which
may determine when the circumstances are such as require the application of a law is defended upon the reads as follows:
ground that at the time this authority is granted, the rule of public policy, which is the essence of the
legislative act, is determined by the legislature. In other words, the legislature, as it is its duty to do, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise
determines that, under given circumstances, certain executive or administrative action is to be taken, and the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:
that, under other circumstances, different or no action at all is to be taken. What is thus left to the
administrative official is not the legislative determination of what public policy demands, but simply the
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two
ascertainment of what the facts of the case require to be done according to the terms of the law by which he
and four-fifth percent (2 4/5%); or
is governed. The efficiency of an Act as a declaration of legislative will must, of course, come from Congress,
but the ascertainment of the contingency upon which the Act shall take effect may be left to such agencies as
it may designate. The legislature, then, may provide that a law shall take effect upon the happening of future
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 broader perspective to properly evaluate them. His function is to gather and collate statistical data and other
½%). pertinent information and verify if any of the two conditions laid out by Congress is present. His personality in
such instance is in reality but a projection of that of Congress. Thus, being the agent of Congress and not of the
The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of President, the President cannot alter or modify or nullify, or set aside the findings of the Secretary of Finance and
facts upon which enforcement and administration of the increase rate under the law is contingent. The to substitute the judgment of the former for that of the latter.
legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or
condition. It leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely,
control of the executive. whether by December 31, 2005, the value-added tax collection as a percentage of Gross Domestic Product (GDP)
of the previous year exceeds two and four-fifth percent (24/5%) or the national government deficit as a
No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the percentage of GDP of the previous year exceeds one and one-half percent (1½%). If either of these two instances
word shall is used in the common proviso. The use of the word shall connotes a mandatory order. Its use in a has occurred, the Secretary of Finance, by legislative mandate, must submit such information to the President.
statute denotes an imperative obligation and is inconsistent with the idea of discretion.53 Where the law is clear Then the 12% VAT rate must be imposed by the President effective January 1, 2006. There is no undue
and unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it that delegation of legislative power but only of the discretion as to the execution of a law. This is constitutionally
the mandate is obeyed.54 permissible.57 Congress does not abdicate its functions or unduly delegate power when it describes what job
must be done, who must do it, and what is the scope of his authority; in our complex economy that is frequently
the only way in which the legislative process can go forward.58
Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of
the conditions specified by Congress. This is a duty which cannot be evaded by the President. Inasmuch as the
law specifically uses the word shall, the exercise of discretion by the President does not come into play. It is a As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President the legislative
clear directive to impose the 12% VAT rate when the specified conditions are present. The time of taking into power to tax is contrary to the principle of republicanism, the same deserves scant consideration. Congress did
effect of the 12% VAT rate is based on the happening of a certain specified contingency, or upon the not delegate the power to tax but the mere implementation of the law. The intent and will to increase the VAT
ascertainment of certain facts or conditions by a person or body other than the legislature itself. rate to 12% came from Congress and the task of the President is to simply execute the legislative policy. That
Congress chose to do so in such a manner is not within the province of the Court to inquire into, its task being to
interpret the law.59
The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law effectively
nullified the President’s power of control over the Secretary of Finance by mandating the fixing of the tax rate by
the President upon the recommendation of the Secretary of Finance. The Court cannot also subscribe to the The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence or create
position of petitioners the conditions to bring about either or both the conditions precedent does not deserve any merit as this
argument is highly speculative. The Court does not rule on allegations which are manifestly conjectural, as these
may not exist at all. The Court deals with facts, not fancies; on realities, not appearances. When the Court acts
Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase "upon the
on appearances instead of realities, justice and law will be short-lived.
recommendation of the Secretary of Finance." Neither does the Court find persuasive the submission of
petitioners Escudero, et al. that any recommendation by the Secretary of Finance can easily be brushed aside by
the President since the former is a mere alter ego of the latter. B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden

When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as head of Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and additional tax
the Department of Finance he is the assistant and agent of the Chief Executive. The multifarious executive and burden on the people. Petitioners also argue that the 12% increase, dependent on any of the 2 conditions set
administrative functions of the Chief Executive are performed by and through the executive departments, and forth in the contested provisions, is ambiguous because it does not state if the VAT rate would be returned to
the acts of the secretaries of such departments, such as the Department of Finance, performed and promulgated the original 10% if the rates are no longer satisfied. Petitioners also argue that such rate is unfair and
in the regular course of business, are, unless disapproved or reprobated by the Chief Executive, presumptively unreasonable, as the people are unsure of the applicable VAT rate from year to year.
the acts of the Chief Executive. The Secretary of Finance, as such, occupies a political position and holds office in
an advisory capacity, and, in the language of Thomas Jefferson, "should be of the President's bosom confidence" Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set forth therein
and, in the language of Attorney-General Cushing, is "subject to the direction of the President."55 are satisfied, the President shall increase the VAT rate to 12%. The provisions of the law are clear. It does not
provide for a return to the 10% rate nor does it empower the President to so revert if, after the rate is increased
In the present case, in making his recommendation to the President on the existence of either of the two to 12%, the VAT collection goes below the 24/5 of the GDP of the previous year or that the national government
conditions, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate. In deficit as a percentage of GDP of the previous year does not exceed 1½%.
such instance, he is not subject to the power of control and direction of the President. He is acting as the agent
of the legislative department, to determine and declare the event upon which its expressed will is to take Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations be
effect.56 The Secretary of Finance becomes the means or tool by which legislative policy is determined and introduced where none is provided for. Rewriting the law is a forbidden ground that only Congress may tread
implemented, considering that he possesses all the facilities to gather data and information and has a much upon.60
Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the Court finds The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. During the Bicameral
none, petitioners’ argument is, at best, purely speculative. There is no basis for petitioners’ fear of a fluctuating Conference Committee hearing, then Finance Secretary Purisima bluntly depicted the country’s gloomy state of
VAT rate because the law itself does not provide that the rate should go back to 10% if the conditions provided in economic affairs, thus:
Sections 4, 5 and 6 are no longer present. The rule is that where the provision of the law is clear and
unambiguous, so that there is no occasion for the court's seeking the legislative intent, the law must be taken as First, let me explain the position that the Philippines finds itself in right now. We are in a position where 90
it is, devoid of judicial addition or subtraction.61 percent of our revenue is used for debt service. So, for every peso of revenue that we currently raise, 90 goes to
debt service. That’s interest plus amortization of our debt. So clearly, this is not a sustainable situation. That’s
Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the President to the first fact.
raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should be based on fiscal adequacy.
The second fact is that our debt to GDP level is way out of line compared to other peer countries that borrow
Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is another money from that international financial markets. Our debt to GDP is approximately equal to our GDP. Again, that
condition, i.e., the national government deficit as a percentage of GDP of the previous year exceeds one and shows you that this is not a sustainable situation.
one-half percent (1 ½%).
The third thing that I’d like to point out is the environment that we are presently operating in is not as benign as
Respondents explained the philosophy behind these alternative conditions: what it used to be the past five years.

1. VAT/GDP Ratio > 2.8% What do I mean by that?

The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less than 2.8%, In the past five years, we’ve been lucky because we were operating in a period of basically global growth and low
it means that government has weak or no capability of implementing the VAT or that VAT is not effective in the interest rates. The past few months, we have seen an inching up, in fact, a rapid increase in the interest rates in
function of the tax collection. Therefore, there is no value to increase it to 12% because such action will also be the leading economies of the world. And, therefore, our ability to borrow at reasonable prices is going to be
ineffectual. challenged. In fact, ultimately, the question is our ability to access the financial markets.

2. Nat’l Gov’t Deficit/GDP >1.5% When the President made her speech in July last year, the environment was not as bad as it is now, at least
based on the forecast of most financial institutions. So, we were assuming that raising 80 billion would put us in
The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of government a position where we can then convince them to improve our ability to borrow at lower rates. But conditions have
has reached a relatively sound position or is towards the direction of a balanced budget position. Therefore, changed on us because the interest rates have gone up. In fact, just within this room, we tried to access the
there is no need to increase the VAT rate since the fiscal house is in a relatively healthy position. Otherwise market for a billion dollars because for this year alone, the Philippines will have to borrow 4 billion dollars. Of
stated, if the ratio is more than 1.5%, there is indeed a need to increase the VAT rate.62 that amount, we have borrowed 1.5 billion. We issued last January a 25-year bond at 9.7 percent cost. We were
trying to access last week and the market was not as favorable and up to now we have not accessed and we
might pull back because the conditions are not very good.
That the first condition amounts to an incentive to the President to increase the VAT collection does not render
it unconstitutional so long as there is a public purpose for which the law was passed, which in this case, is mainly
to raise revenue. In fact, fiscal adequacy dictated the need for a raise in revenue. So given this situation, we at the Department of Finance believe that we really need to front-end our deficit
reduction. Because it is deficit that is causing the increase of the debt and we are in what we call a debt spiral.
The more debt you have, the more deficit you have because interest and debt service eats and eats more of your
The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam Smith in
revenue. We need to get out of this debt spiral. And the only way, I think, we can get out of this debt spiral is
his Canons of Taxation (1776), as:
really have a front-end adjustment in our revenue base.65

IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as
The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable catastrophe.
possible over and above what it brings into the public treasury of the state.63
Whether the law is indeed sufficient to answer the state’s economic dilemma is not for the Court to judge. In
the Fariñas case, the Court refused to consider the various arguments raised therein that dwelt on the wisdom of
It simply means that sources of revenues must be adequate to meet government expenditures and their Section 14 of R.A. No. 9006 (The Fair Election Act), pronouncing that:
variations.64
. . . policy matters are not the concern of the Court. Government policy is within the exclusive dominion of the
political branches of the government. It is not for this Court to look into the wisdom or propriety of legislative
determination. Indeed, whether an enactment is wise or unwise, whether it is based on sound economic theory,
whether it is the best means to achieve the desired results, whether, in short, the legislative discretion within its Petitioners’ argument is not absolute. It assumes that the input tax exceeds 70% of the output tax, and
prescribed limits should be exercised in a particular manner are matters for the judgment of the legislature, and therefore, the input tax in excess of 70% remains uncredited. However, to the extent that the input tax is less
the serious conflict of opinions does not suffice to bring them within the range of judicial cognizance.66 than 70% of the output tax, then 100% of such input tax is still creditable.

In the same vein, the Court in this case will not dawdle on the purpose of Congress or the executive policy, given More importantly, the excess input tax, if any, is retained in a business’s books of accounts and remains
that it is not for the judiciary to "pass upon questions of wisdom, justice or expediency of legislation."67 creditable in the succeeding quarter/s. This is explicitly allowed by Section 110(B), which provides that "if the
input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters." In
II. addition, Section 112(B) allows a VAT-registered person to apply for the issuance of a tax credit certificate or
refund for any unused input taxes, to the extent that such input taxes have not been applied against the output
taxes. Such unused input tax may be used in payment of his other internal revenue taxes.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A.
No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:
The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners exaggeratedly
contend. Their analysis of the effect of the 70% limitation is incomplete and one-sided. It ends at the net effect
a. Article VI, Section 28(1), and
that there will be unapplied/unutilized inputs VAT for a given quarter. It does not proceed further to the fact that
such unapplied/unutilized input tax may be credited in the subsequent periods as allowed by the carry-over
b. Article III, Section 1 provision of Section 110(B) or that it may later on be refunded through a tax credit certificate under Section
112(B).
A. Due Process and Equal Protection Clauses
Therefore, petitioners’ argument must be rejected.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337, amending
Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending Section 114 (C) of the NIRC are arbitrary, On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the 70% limitation on
oppressive, excessive and confiscatory. Their argument is premised on the constitutional right against the input tax. According to petitioner, the limitation on the creditable input tax in effect allows VAT-registered
deprivation of life, liberty of property without due process of law, as embodied in Article III, Section 1 of the establishments to retain a portion of the taxes they collect, which violates the principle that tax collection and
Constitution. revenue should be for public purposes and expenditures

Petitioners also contend that these provisions violate the constitutional guarantee of equal protection of the law. As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he buys goods.
Output tax meanwhile is the tax due to the person when he sells goods. In computing the VAT payable, three
The doctrine is that where the due process and equal protection clauses are invoked, considering that they are possible scenarios may arise:
not fixed rules but rather broad standards, there is a need for proof of such persuasive character as would lead
to such a conclusion. Absent such a showing, the presumption of validity must prevail.68 First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input taxes that he
paid and passed on by the suppliers, then no payment is required;
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of input tax
that may be credited against the output tax. It states, in part: "[P]rovided, that the input tax inclusive of the input Second, when the output taxes exceed the input taxes, the person shall be liable for the excess, which has to be
VAT carried over from the previous quarter that may be credited in every quarter shall not exceed seventy paid to the Bureau of Internal Revenue (BIR);69 and
percent (70%) of the output VAT: …"
Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or
Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or paid by a quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions, any excess over the
VAT-registered person on the importation of goods or local purchase of good and services, including lease or use output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes, at the
of property, in the course of trade or business, from a VAT-registered person, and Output Tax is the value-added taxpayer’s option.70
tax due on the sale or lease of taxable goods or properties or services by any person registered or required to
register under the law.
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit his
input tax only up to the extent of 70% of the output tax. In layman’s term, the value-added taxes that a
Petitioners claim that the contested sections impose limitations on the amount of input tax that may be claimed. person/taxpayer paid and passed on to him by a seller can only be credited up to 70% of the value-added taxes
In effect, a portion of the input tax that has already been paid cannot now be credited against the output tax. that is due to him on a taxable transaction. There is no retention of any tax collection because the
person/taxpayer has already previously paid the input tax to a seller, and the seller will subsequently remit such
input tax to the BIR. The party directly liable for the payment of the tax is the seller. 71 What only needs to be
done is for the person/taxpayer to apply or credit these input taxes, as evidenced by receipts, against his output tax incentives provided by law, and citing the case of China, where despite a 17.5% non-creditable VAT, foreign
taxes. investments were not deterred.78 Again, for whatever is the purpose of the 60-month amortization, this involves
executive economic policy and legislative wisdom in which the Court cannot intervene.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the nature of a
property that may not be confiscated, appropriated, or limited without due process of law. With regard to the 5% creditable withholding tax imposed on payments made by the government for taxable
transactions, Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads:
The input tax is not a property or a property right within the constitutional purview of the due process clause. A
VAT-registered person’s entitlement to the creditable input tax is a mere statutory privilege. SEC. 114. Return and Payment of Value-added Tax. –

The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested (C) Withholding of Value-added Tax. – The Government or any of its political subdivisions, instrumentalities or
rights in statutory privileges. The state may change or take away rights, which were created by the law of the agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on
state, although it may not take away property, which was vested by virtue of such rights.72 account of each purchase of goods and services which are subject to the value-added tax imposed in Sections
106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the
Under the previous system of single-stage taxation, taxes paid at every level of distribution are not recoverable gross payment thereof: Provided, That the payment for lease or use of properties or property rights to
from the taxes payable, although it becomes part of the cost, which is deductible from the gross revenue. When nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes
Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all sales, it was then that the crediting of the of this Section, the payor or person in control of the payment shall be considered as the withholding agent.
input tax paid on purchase or importation of goods and services by VAT-registered persons against the output
tax was introduced.73 This was adopted by the Expanded VAT Law (R.A. No. 7716), 74 and The Tax Reform Act of The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the
1997 (R.A. No. 8424).75 The right to credit input tax as against the output tax is clearly a privilege created by law, month the withholding was made.
a privilege that also the law can remove, or in this case, limit.
Section 114(C) merely provides a method of collection, or as stated by respondents, a more simplified VAT
Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337, withholding system. The government in this case is constituted as a withholding agent with respect to their
amending Section 110(A) of the NIRC, which provides: payments for goods and services.

SEC. 110. Tax Credits. – Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be withheld -- 3% on
gross payments for purchases of goods; 6% on gross payments for services supplied by contractors other than by
(A) Creditable Input Tax. – … public works contractors; 8.5% on gross payments for services supplied by public work contractors; or 10% on
payment for the lease or use of properties or property rights to nonresident owners. Under the present Section
114(C), these different rates, except for the 10% on lease or property rights payment to nonresidents, were
Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for
deleted, and a uniform rate of 5% is applied.
which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of
acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding
the VAT component thereof, exceeds One million pesos (₱1,000,000.00): Provided, however, That if the The Court observes, however, that the law the used the word final. In tax usage, final, as opposed to creditable,
estimated useful life of the capital goods is less than five (5) years, as used for depreciation purposes, then the means full. Thus, it is provided in Section 114(C): "final value-added tax at the rate of five percent (5%)."
input VAT shall be spread over such a shorter period: Provided, finally, That in the case of purchase of services,
lease or use of properties, the input tax shall be creditable to the purchaser, lessee or license upon payment of In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of 1997), the concept of
the compensation, rental, royalty or fee. final withholding tax on income was explained, to wit:

The foregoing section imposes a 60-month period within which to amortize the creditable input tax on purchase SECTION 2.57. Withholding of Tax at Source
or importation of capital goods with acquisition cost of ₱1 Million pesos, exclusive of the VAT component. Such
spread out only poses a delay in the crediting of the input tax. Petitioners’ argument is without basis because the (A) Final Withholding Tax. – Under the final withholding tax system the amount of income tax withheld by the
taxpayer is not permanently deprived of his privilege to credit the input tax. withholding agent is constituted as full and final payment of the income tax due from the payee on the said
income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of
It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this case his failure to withhold the tax or in case of underwithholding, the deficiency tax shall be collected from the
amounts to a 4-year interest-free loan to the government.76 In the same breath, Congress also justified its move payor/withholding agent. …
by saying that the provision was designed to raise an annual revenue of 22.6 billion. 77 The legislature also
dispelled the fear that the provision will fend off foreign investments, saying that foreign investors have other
(B) Creditable Withholding Tax. – Under the creditable withholding tax system, taxes withheld on certain income Petitioners’ stance is purely hypothetical, argumentative, and again, one-sided. The Court will not engage in a
payments are intended to equal or at least approximate the tax due of the payee on said income. … Taxes legal joust where premises are what ifs, arguments, theoretical and facts, uncertain. Any disquisition by the
withheld on income payments covered by the expanded withholding tax (referred to in Sec. 2.57.2 of these Court on this point will only be, as Shakespeare describes life in Macbeth,82 "full of sound and fury, signifying
regulations) and compensation income (referred to in Sec. 2.78 also of these regulations) are creditable in nothing."
nature.
What’s more, petitioners’ contention assumes the proposition that there is no profit or value-added. It need not
As applied to value-added tax, this means that taxable transactions with the government are subject to a 5% take an astute businessman to know that it is a matter of exception that a business will sell goods or services
rate, which constitutes as full payment of the tax payable on the transaction. This represents the net VAT without profit or value-added. It cannot be overstressed that a business is created precisely for profit.
payable of the seller. The other 5% effectively accounts for the standard input VAT (deemed input VAT), in lieu of
the actual input VAT directly or attributable to the taxable transaction.79 The equal protection clause under the Constitution means that "no person or class of persons shall be deprived
of the same protection of laws which is enjoyed by other persons or other classes in the same place and in like
The Court need not explore the rationale behind the provision. It is clear that Congress intended to treat circumstances."83
differently taxable transactions with the government.80 This is supported by the fact that under the old provision,
the 5% tax withheld by the government remains creditable against the tax liability of the seller or contractor, to The power of the State to make reasonable and natural classifications for the purposes of taxation has long been
wit: established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the
amounts to be raised, the methods of assessment, valuation and collection, the State’s power is entitled to
SEC. 114. Return and Payment of Value-added Tax. – presumption of validity. As a rule, the judiciary will not interfere with such power absent a clear showing of
unreasonableness, discrimination, or arbitrariness.84
(C) Withholding of Creditable Value-added Tax. – The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall, before Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input tax, or
making payment on account of each purchase of goods from sellers and services rendered by contractors which invests in capital equipment, or has several transactions with the government, is not based on real and
are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value- substantial differences to meet a valid classification.
added tax due at the rate of three percent (3%) of the gross payment for the purchase of goods and six percent
(6%) on gross receipts for services rendered by contractors on every sale or installment payment which shall The argument is pedantic, if not outright baseless. The law does not make any classification in the subject of
be creditable against the value-added tax liability of the seller or contractor: Provided, however, That in the taxation, the kind of property, the rates to be levied or the amounts to be raised, the methods of assessment,
case of government public works contractors, the withholding rate shall be eight and one-half percent (8.5%): valuation and collection. Petitioners’ alleged distinctions are based on variables that bear different
Provided, further, That the payment for lease or use of properties or property rights to nonresident owners shall consequences. While the implementation of the law may yield varying end results depending on one’s profit
be subject to ten percent (10%) withholding tax at the time of payment. For this purpose, the payor or person in margin and value-added, the Court cannot go beyond what the legislature has laid down and interfere with the
control of the payment shall be considered as the withholding agent. affairs of business.

The valued-added tax withheld under this Section shall be remitted within ten (10) days following the end of the The equal protection clause does not require the universal application of the laws on all persons or things
month the withholding was made. (Emphasis supplied) without distinction. This might in fact sometimes result in unequal protection. What the clause requires is
equality among equals as determined according to a valid classification. By classification is meant the grouping of
As amended, the use of the word final and the deletion of the word creditable exhibits Congress’s intention to persons or things similar to each other in certain particulars and different from all others in these same
treat transactions with the government differently. Since it has not been shown that the class subject to the 5% particulars.85
final withholding tax has been unreasonably narrowed, there is no reason to invalidate the provision. Petitioners,
as petroleum dealers, are not the only ones subjected to the 5% final withholding tax. It applies to all those who Petitioners brought to the Court’s attention the introduction of Senate Bill No. 2038 by Sens. S.R. Osmeña III and
deal with the government. Ma. Ana Consuelo A.S. – Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric D. Singson. The proposed
legislation seeks to amend the 70% limitation by increasing the same to 90%. This, according to petitioners,
Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue Regulations No. supports their stance that the 70% limitation is arbitrary and confiscatory. On this score, suffice it to say that
14-2005 or the Consolidated Value-Added Tax Regulations 2005 issued by the BIR, provides that should the these are still proposed legislations. Until Congress amends the law, and absent any unequivocal basis for its
actual input tax exceed 5% of gross payments, the excess may form part of the cost. Equally, should the actual unconstitutionality, the 70% limitation stays.
input tax be less than 5%, the difference is treated as income.81
B. Uniformity and Equitability of Taxation
Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets to tax a
profit or value-added even if there is no profit or value-added. Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise rest
largely on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is equitable.
Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the
same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same C. Progressivity of Taxation
class everywhere with all people at all times.86
Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is the
In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services. smaller business with higher input tax-output tax ratio that will suffer the consequences.
Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC, provide for a
rate of 10% (or 12%) on sale of goods and properties, importation of goods, and sale of services and use or lease Progressive taxation is built on the principle of the taxpayer’s ability to pay. This principle was also lifted from
of properties. These same sections also provide for a 0% rate on certain sales and transaction. Adam Smith’s Canons of Taxation, and it states:

Neither does the law make any distinction as to the type of industry or trade that will bear the 70% limitation on I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible,
the creditable input tax, 5-year amortization of input tax paid on purchase of capital goods or the 5% final in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy
withholding tax by the government. It must be stressed that the rule of uniform taxation does not deprive under the protection of the state.
Congress of the power to classify subjects of taxation, and only demands uniformity within the particular class.87
Taxation is progressive when its rate goes up depending on the resources of the person affected. 98
R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or 12%)
does not apply to sales of goods or services with gross annual sales or receipts not exceeding
The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of progressive
₱1,500,000.00.88Also, basic marine and agricultural food products in their original state are still not subject to
taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer or business for every
the tax,89 thus ensuring that prices at the grassroots level will remain accessible. As was stated in Kapatiran ng
goods bought or services enjoyed is the same regardless of income. In
mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:90

other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in the
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged in
income earned by a person or profit margin marked by a business, such that the higher the income or profit
business with an aggregate gross annual sales exceeding ₱200,000.00. Small corner sari-sari stores are
margin, the smaller the portion of the income or profit that is eaten by VAT. A converso, the lower the income or
consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products,
profit margin, the bigger the part that the VAT eats away. At the end of the day, it is really the lower income
so that the costs of basic food and other necessities, spared as they are from the incidence of the VAT, are
group or businesses with low-profit margins that is always hardest hit.
expected to be relatively lower and within the reach of the general public.

Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it
It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly favors those
simply provides is that Congress shall "evolve a progressive system of taxation." The Court stated in the Tolentino
with high profit margins. Congress was not oblivious to this. Thus, to equalize the weighty burden the law entails,
case, thus:
the law, under Section 116, imposed a 3% percentage tax on VAT-exempt persons under Section 109(v), i.e.,
transactions with gross annual sales and/or receipts not exceeding ₱1.5 Million. This acts as a equalizer because
in effect, bigger businesses that qualify for VAT coverage and VAT-exempt taxpayers stand on equal-footing. The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive.
What it simply provides is that Congress shall ‘evolve a progressive system of taxation.’ The constitutional
provision has been interpreted to mean simply that ‘direct taxes are . . . to be preferred [and] as much as
Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax on those
possible, indirect taxes should be minimized.’ (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221
previously exempt. Excise taxes on petroleum products91 and natural gas92 were reduced. Percentage tax on
(Second ed. 1977)) Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax system.
domestic carriers was removed.93 Power producers are now exempt from paying franchise tax.94
Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have been prohibited with the
proclamation of Art. VIII, §17 (1) of the 1973 Constitution from which the present Art. VI, §28 (1) was taken.
Aside from these, Congress also increased the income tax rates of corporations, in order to distribute the burden Sales taxes are also regressive.
of taxation. Domestic, foreign, and non-resident corporations are now subject to a 35% income tax rate, from a
previous 32%.95 Intercorporate dividends of non-resident foreign corporations are still subject to 15% final
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to
withholding tax but the tax credit allowed on the corporation’s domicile was increased to 20%.96 The Philippine
avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law
Amusement and Gaming Corporation (PAGCOR) is not exempt from income taxes anymore. 97 Even the sale by an
minimizes the regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No.
artist of his works or services performed for the production of such works was not spared.
7716, §3, amending §102 (b) of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, §4
amending §103 of the NIRC)99
CONCLUSION than that utilized by the rulings under review. The fact that the sale was not in the course of the trade or
business of NDC is sufficient in itself to declare the sale as outside the coverage of VAT.
It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid
measure to resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear on the plight The facts are culled primarily from the ruling of the CTA.
of the masses. But it does not have the panacea for the malady that the law seeks to remedy. As in other cases,
the Court cannot strike down a law as unconstitutional simply because of its yokes. Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its shares in
its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC
Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the judiciary should shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels.1 The vessels were
stand ready to afford relief. There are undoubtedly many wrongs the judicature may not correct, for instance, constructed for the NDC between 1981 and 1984, then initially leased to Luzon Stevedoring Company, also its
those involving political questions. . . . wholly-owned subsidiary. Subsequently, the vessels were transferred and leased, on a bareboat basis, to the
NMC.2
Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies for all political
or social ills; We should not forget that the Constitution has judiciously allocated the powers of government to The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and conditions for
three distinct and separate compartments; and that judicial interpretation has tended to the preservation of the the public auction was that the winning bidder was to pay "a value added tax of 10% on the value of the
independence of the three, and a zealous regard of the prerogatives of each, knowing full well that one is not the vessels."3 On 3 June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the shares
guardian of the others and that, for official wrong-doing, each may be brought to account, either by and the vessels for P168,000,000.00. The bid was made by Magsaysay Lines, purportedly for a new company still
impeachment, trial or by the ballot box.100 to be formed composed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in
Hongkong (collectively, private respondents).4 The bid was approved by the Committee on Privatization, and a
The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All things considered, Notice of Award dated 1 July 1988 was issued to Magsaysay Lines.
there is no raison d'être for the unconstitutionality of R.A. No. 9337.
On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand, and
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056, 168207, Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. Paragraph 11.02 of the contract stipulated
168461, 168463, and 168730, are hereby DISMISSED. that "[v]alue-added tax, if any, shall be for the account of the PURCHASER." 5 Per arrangement, an irrevocable
confirmed Letter of Credit previously filed as bidders bond was accepted by NDC as security for the payment of
VAT, if any. By this time, a formal request for a ruling on whether or not the sale of the vessels was subject to
There being no constitutional impediment to the full enforcement and implementation of R.A. No. 9337, the
VAT had already been filed with the Bureau of Internal Revenue (BIR) by the law firm of Sycip Salazar Hernandez
temporary restraining order issued by the Court on July 1, 2005 is LIFTED upon finality of herein decision.
& Gatmaitan, presumably in behalf of private respondents. Thus, the parties agreed that should no favorable
ruling be received from the BIR, NDC was authorized to draw on the Letter of Credit upon written demand the
SO ORDERED. amount needed for the payment of the VAT on the stipulated due date, 20 December 1988.6

G.R. No. 146984 July 28, 2006 In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14 December
1988 from the BIR, holding that the sale of the vessels was subject to the 10% VAT. The ruling cited the fact that
COMMISSIONER OF INTERNAL REVENUE, petitioner, NDC was a VAT-registered enterprise, and thus its "transactions incident to its normal VAT registered activity of
vs. leasing out personal property including sale of its own assets that are movable, tangible objects which are
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN GROUP (HK) and appropriable or transferable are subject to the 10% [VAT]."7
NATIONAL DEVELOPMENT COMPANY, respondents.
Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT Ruling No. 395-88
DECISION (dated 18 August 1988), which made a similar ruling on the sale of the same vessels in response to an inquiry
from the Chairman of the Senate Blue Ribbon Committee. Their motion was denied when the BIR issued VAT
TINGA, J.: Ruling Nos. 007-89 dated 24 February 1989, reiterating the earlier VAT rulings. At this point, NDC drew on the
Letter of Credit to pay for the VAT, and the amount of P15,120,000.00 in taxes was paid on 16 March 1989.
The issue in this present petition is whether the sale by the National Development Company (NDC) of five (5) of
its vessels to the private respondents is subject to value-added tax (VAT) under the National Internal Revenue On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed by a
Code of 1986 (Tax Code) then prevailing at the time of the sale. The Court of Tax Appeals (CTA) and the Court of Supplemental Petition for Review on 14 July 1989. They prayed for the reversal of VAT Rulings No. 395-88, 568-
Appeals commonly ruled that the sale is not subject to VAT. We affirm, though on a more unequivocal rationale 88 and 007-89, as well as the refund of the VAT payment made amounting to P15,120,000.00.8 The
Commissioner of Internal Revenue (CIR) opposed the petition, first arguing that private respondents were not
the real parties in interest as they were not the transferors or sellers as contemplated in Sections 99 and 100 of
the then Tax Code. The CIR also squarely defended the VAT rulings holding the sale of the vessels liable for VAT, their respective VAT liabilities to the next link of the chain until finally the end consumer shoulders the entire tax
especially citing Section 3 of Revenue Regulation No. 5-87 (R.R. No. 5-87), which provided that "[VAT] is imposed liability.
on any sale or transactions ‘deemed sale’ of taxable goods (including capital goods, irrespective of the date of
acquisition)." The CIR argued that the sale of the vessels were among those transactions "deemed sale," as Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the
enumerated in Section 4 of R.R. No. 5-87. It seems that the CIR particularly emphasized Section 4(E)(i) of the taxpayer’s role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its
Regulation, which classified "change of ownership of business" as a circumstance that gave rise to a transaction subsequent incarnations,19 the tax is levied only on the sale, barter or exchange of goods or services by persons
"deemed sale." who engage in such activities, in the course of trade or business. These transactions outside the course of trade
or business may invariably contribute to the production chain, but they do so only as a matter of accident or
In a Decision dated 27 April 1992, the CTA rejected the CIR’s arguments and granted the petition. 9 The CTA ruled incident. As the sales of goods or services do not occur within the course of trade or business, the providers of
that the sale of a vessel was an "isolated transaction," not done in the ordinary course of NDC’s business, and such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as
was thus not subject to VAT, which under Section 99 of the Tax Code, was applied only to sales in the course of against their own accumulated VAT collections since the accumulation of output VAT arises in the first place only
trade or business. The CTA further held that the sale of the vessels could not be "deemed sale," and thus subject through the ordinary course of trade or business.
to VAT, as the transaction did not fall under the enumeration of transactions deemed sale as listed either in
Section 100(b) of the Tax Code, or Section 4 of R.R. No. 5-87. Finally, the CTA ruled that any case of doubt should That the sale of the vessels was not in the ordinary course of trade or business of NDC was appreciated by both
be resolved in favor of private respondents since Section 99 of the Tax Code which implemented VAT is not an the CTA and the Court of Appeals, the latter doing so even in its first decision which it eventually
exemption provision, but a classification provision which warranted the resolution of doubts in favor of the reconsidered.20 We cite with approval the CTA’s explanation on this point:
taxpayer.
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the
The CIR appealed the CTA Decision to the Court of Appeals,10 which on 11 March 1997, rendered a Decision term "carrying on business" does not mean the performance of a single disconnected act, but means
reversing the CTA.11 While the appellate court agreed that the sale was an isolated transaction, not made in the conducting, prosecuting and continuing business by performing progressively all the acts normally
course of NDC’s regular trade or business, it nonetheless found that the transaction fell within the classification incident thereof; while "doing business" conveys the idea of business being done, not from time to
of those "deemed sale" under R.R. No. 5-87, since the sale of the vessels together with the NMC shares brought time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH
about a change of ownership in NMC. The Court of Appeals also applied the principle governing tax exemptions ANNOTATIONS), p. 608-9 (1988)]. "Course of business" is what is usually done in the management of
that such should be strictly construed against the taxpayer, and liberally in favor of the government.12 trade or business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases,
Vol. 10, (1984)].
However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated 5
February 2001.13 This time, the appellate court ruled that the "change of ownership of business" as What is clear therefore, based on the aforecited jurisprudence, is that "course of business" or "doing
contemplated in R.R. No. 5-87 must be a consequence of the "retirement from or cessation of business" by the business" connotes regularity of activity. In the instant case, the sale was an isolated transaction. The
owner of the goods, as provided for in Section 100 of the Tax Code. The Court of Appeals also agreed with the sale which was involuntary and made pursuant to the declared policy of Government for privatization
CTA that the classification of transactions "deemed sale" was a classification statute, and not an exemption could no longer be repeated or carried on with regularity. It should be emphasized that the normal
statute, thus warranting the resolution of any doubt in favor of the taxpayer. 14 VAT-registered activity of NDC is leasing personal property.21

To the mind of the Court, the arguments raised in the present petition have already been adequately discussed This finding is confirmed by the Revised Charter22 of the NDC which bears no indication that the NDC was created
and refuted in the rulings assailed before us. Evidently, the petition should be denied. Yet the Court finds that for the primary purpose of selling real property.23
Section 99 of the Tax Code is sufficient reason for upholding the refund of VAT payments, and the subsequent
disquisitions by the lower courts on the applicability of Section 100 of the Tax Code and Section 4 of R.R. No. 5-
The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before
87 are ultimately irrelevant.
this Court,24 should have definitively settled the matter. Any sale, barter or exchange of goods or services not in
the course of trade or business is not subject to VAT.
A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on consumption, even
though it is assessed on many levels of transactions on the basis of a fixed percentage. 15 It is the end user of
Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now relied upon by the CIR,
consumer goods or services which ultimately shoulders the tax, as the liability therefrom is passed on to the end
is captioned "Value-added tax on sale of goods," and it expressly states that "[t]here shall be levied, assessed and
users by the providers of these goods or services16 who in turn may credit their own VAT liability (or input VAT)
collected on every sale, barter or exchange of goods, a value added tax x x x." Section 100 should be read in light
from the VAT payments they receive from the final consumer (or output VAT). 17 The final purchase by the end
of Section 99, which lays down the general rule on which persons are liable for VAT in the first place and on what
consumer represents the final link in a production chain that itself involves several transactions and several acts
transaction if at all. It may even be noted that Section 99 is the very first provision in Title IV of the Tax Code, the
of consumption. The VAT system assures fiscal adequacy through the collection of taxes on every level of
Title that covers VAT in the law. Before any portion of Section 100, or the rest of the law for that matter, may be
consumption,18 yet assuages the manufacturers or providers of goods and services by enabling them to pass on
applied in order to subject a transaction to VAT, it must first be satisfied that the taxpayer and transaction
involved is liable for VAT in the first place under Section 99.
It would have been a different matter if Section 100 purported to define the phrase "in the course of trade or DECISION
business" as expressed in Section 99. If that were so, reference to Section 100 would have been necessary as a
means of ascertaining whether the sale of the vessels was "in the course of trade or business," and thus subject CARPIO, J.:
to
G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on 10 March 2010 as well as the
VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is not the Resolution3 promulgated on 28 July 2010 by the Court of Tax Appeals En Banc (CTA En Banc) in CTA EB No. 513.
meaning of "in the course of trade or business," but instead the identification of the transactions which may be The CTA En Banc affirmed the 22 September 2008 Decision4 as well as the 26 June 2009 Amended Decision5 of
deemed as sale. It would become necessary to ascertain whether under those two provisions the transaction the First Division of the Court of Tax Appeals (CTA First Division) in CTA Case Nos. 7227, 7287, and 7317. The CTA
may be deemed a sale, only if it is settled that the transaction occurred in the course of trade or business in the First Division denied Mindanao II Geothermal Partnership’s (Mindanao II) claims for refund or tax credit for the
first place. If the transaction transpired outside the course of trade or business, it would be irrelevant for the first and second quarters of taxable year 2003 for being filed out of time (CTA Case Nos. 7227 and 7287). The
purpose of determining VAT liability whether the transaction may be deemed sale, since it anyway is not subject CTA First Division, however, ordered the
to VAT.
Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II unutilized input value-added tax (VAT)
Accordingly, the Court rules that given the undisputed finding that the transaction in question was not made in for the third and fourth quarters of taxable year 2003 (CTA Case No. 7317).
the course of trade or business of the seller, NDC that is, the sale is not subject to VAT pursuant to Section 99 of
the Tax Code, no matter how the said sale may hew to those transactions deemed sale as defined under Section
G.R. No. 194637 is a petition for review6 assailing the Decision7 promulgated on 31 May 2010 as well as the
100.
Amended Decision8 promulgated on 24 November 2010 by the CTA En Banc in CTA EB Nos. 476 and 483. In its
Amended Decision, the CTA En Banc reversed its 31 May 2010 Decision and granted the CIR’s petition for review
In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this case, the Court finds in CTA Case No. 476. The CTA En Banc denied Mindanao I Geothermal Partnership’s (Mindanao I) claims for
the discussions offered on this point by the CTA and the Court of Appeals (in its subsequent Resolution) refund or tax credit for the first (CTA Case No. 7228), second (CTA Case No. 7286), third, and fourth quarters
essentially correct. Section 4 (E)(i) of R.R. No. 5-87 does classify as among the transactions deemed sale those (CTA Case No. 7318) of 2003.
involving "change of ownership of business." However, Section 4(E) of R.R. No. 5-87, reflecting Section 100 of the
Tax Code, clarifies that such "change of ownership" is only an attending circumstance to "retirement from or
Both Mindanao I and II are partnerships registered with the Securities and Exchange Commission, value added
cessation of business[, ] with respect to all goods on hand [as] of the date of such retirement or
taxpayers registered with the Bureau of Internal Revenue (BIR), and Block Power Production Facilities accredited
cessation."25 Indeed, Section 4(E) of R.R. No. 5-87 expressly characterizes the "change of ownership of business"
by the Department of Energy. Republic Act No. 9136, or the Electric Power Industry Reform Act of 2000 (EPIRA),
as only a "circumstance" that attends those transactions "deemed sale," which are otherwise stated in the same
effectively amended Republic Act No. 8424, or the Tax Reform Act of 1997 (1997 Tax Code), 9 when it decreed
section.26
that sales of power by generation companies shall be subjected to a zero rate of VAT.10 Pursuant to EPIRA,
Mindanao I and II filed with the CIR claims for refund or tax credit of accumulated unutilized and/or excess input
WHEREFORE, the petition is DENIED. No costs. taxes due to VAT zero-rated sales in 2003. Mindanao I and II filed their claims in 2005.

SO ORDERED. G.R. No. 193301


Mindanao II v. CIR
G.R. No. 193301 March 11, 2013
The Facts
MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner,
vs. G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227, 7287, and 7317, which were
COMMISSIONER OF INTERNAL REVENUE, Respondent. consolidated as CTA EB No. 513. CTA Case Nos. 7227, 7287, and 7317 claim a tax refund or credit of Mindanao
II’s alleged excess or unutilized input taxes due to VAT zero-rated sales. In CTA Case No. 7227, Mindanao II claims
x-----------------------x a tax refund or credit of ₱3,160,984.69 for the first quarter of 2003. In CTA Case No. 7287, Mindanao II claims a
tax refund or credit of ₱1,562,085.33 for the second quarter of 2003. In CTA Case No. 7317, Mindanao II claims a
G.R. No. 194637 tax refund or credit of ₱3,521,129.50 for the third and fourth quarters of 2003.

MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner, The CTA First Division’s narration of the pertinent facts is as follows:
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent. xxxx
On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-Transfer (BOT) contract with the In its 22 September 2008 Decision,12 the CTA First Division found that Mindanao II satisfied the twin
Philippine National Oil Corporation – Energy Development Company (PNOC-EDC) for finance, engineering, requirements for VAT zero rating under EPIRA: (1) it is a generation company, and (2) it derived sales from power
supply, installation, testing, commissioning, operation, and maintenance of a 48.25 megawatt geothermal power generation. The CTA First Division also stated that Mindanao II complied with five requirements to be entitled to
plant, provided that PNOC-EDC shall supply and deliver steam to Mindanao II at no cost. In turn, Mindanao II a refund:
shall convert the steam into electric capacity and energy for PNOC-EDC and shall deliver the same to the
National Power Corporation (NPC) for and in behalf of PNOC-EDC. Mindanao II alleges that its sale of generated 1. There must be zero-rated or effectively zero-rated sales;
power and delivery of electric capacity and energy of Mindanao II to NPC for and in behalf of PNOC-EDC is its
only revenue-generating activity which is in the ambit of VAT zero-rated sales under the EPIRA Law, x x x.
2. That input taxes were incurred or paid;

xxxx
3. That such input VAT payments are directly attributable to zero-rated sales or effectively zero-rated
sales;
Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated power by
generation companies from ten (10%) percent to zero (0%) percent.
4. That the input VAT payments were not applied against any output VAT liability; and

In the course of its operation, Mindanao II makes domestic purchases of goods and services and accumulates
5. That the claim for refund was filed within the two-year prescriptive period.13
therefrom creditable input taxes. Pursuant to the provisions of the National Internal Revenue Code (NIRC),
Mindanao II alleges that it can use its accumulated input tax credits to offset its output tax liability. Considering,
however that its only revenue-generating activity is VAT zero-rated under RA No. 9136, Mindanao II’s input tax With respect to the fifth requirement, the CTA First Division tabulated the dates of filing of Mindanao II’s return
credits remain unutilized. as well as its administrative and judicial claims, and concluded that Mindanao II’s administrative and judicial
claims were timely filed in compliance with this Court’s ruling in Atlas Consolidated Mining and Development
Corporation v. Commissioner of Internal Revenue (Atlas).14 The CTA First Division declared that the two-year
Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II adopted the VAT zero-rating of the
prescriptive period for filing a VAT refund claim should not be counted from the close of the quarter but from
EPIRA in computing for its VAT payable when it filed its Quarterly VAT Returns on the following dates:
the date of the filing of the VAT return. As ruled in Atlas, VAT liability or entitlement to a refund can only be
determined upon the filing of the quarterly VAT return.
CTA Case No. Period Covered Date of Filing
(2003)
Original Return Amended Return CTA Period Date Filing
Case No. Covered
7227 1st Quarter April 23, 2003 July 3, 2002 (sic), (2003) Original Amended Administrative Judicial Claim
April 1, 2004 & Return Return Return
October 22, 2004
7227 1st Quarter 23 April 2003 1 April 2004 13 April 2005 22 April 2005
7287 2nd Quarter July 22, 2003 April 1, 2004
7287 2nd Quarter 22 July 2003 1 April 2004 13 April 2005 7 July 2005
7317 3rd Quarter Oct. 27, 2003 April 1, 2004
7317 3rd Quarter 25 Oct. 2003 1 April 2004 13 April 2005 9 Sept. 2005
7317 4th Quarter Jan. 26, 2004 April 1, 2204
7317 4th Quarter 26 Jan. 2004 1 April 2004 13 April 2005 9 Sept. 200515
Considering that it has accumulated unutilized creditable input taxes from its only income-generating activity,
Thus, counting from 23 April 2003, 22 July 2003, 25 October 2003, and 26 January 2004, when Mindanao II filed
Mindanao II filed an application for refund and/or issuance of tax credit certificate with the BIR’s Revenue
its VAT returns, its administrative claim filed on 13 April 2005 and judicial claims filed on 22 April 2005, 7 July
District Office at Kidapawan City on April 13, 2005 for the four quarters of 2003.
2005, and 9 September 2005 were timely filed in accordance with Atlas.

To date (September 22, 2008), the application for refund by Mindanao II remains unacted upon by the CIR.
The CTA First Division found that Mindanao II is entitled to a refund in the modified amount of ₱7,703,957.79,
Hence, these three petitions filed on April 22, 2005 covering the 1st quarter of 2003; July 7, 2005 for the 2nd
after disallowing ₱522,059.91 from input VAT16 and deducting ₱18,181.82 from Mindanao II’s sale of a fully
quarter of 2003; and September 9, 2005 for the 3rd and 4th quarters of 2003. At the instance of Mindanao II,
depreciated ₱200,000.00 Nissan Patrol. The input taxes amounting to ₱522,059.91 were disallowed for failure to
these petitions were consolidated on March 15, 2006 as they involve the same parties and the same subject
meet invoicing requirements, while the input VAT on the sale of the Nissan Patrol was reduced by ₱18,181.82
matter. The only difference lies with the taxable periods involved in each petition.11
because the output VAT for the sale was not included in the VAT declarations.

The Court of Tax Appeals’ Ruling: Division


The dispositive portion of the CTA First Division’s 22 September 2008 Decision reads:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby ORDERED to zero-rated sales shall be counted from the close of the taxable quarter when the sales were made; (2) the Atlas
REFUND or to ISSUE A TAX CREDIT CERTIFICATE in the modified amount of SEVEN MILLION SEVEN HUNDRED and Mirant cases applied different tax codes: Atlas applied the 1977 Tax Code while Mirant applied the 1997 Tax
THREE THOUSAND NINE HUNDRED FIFTY SEVEN AND 79/100 PESOS (₱7,703,957.79) representing its unutilized Code; (3) the sale of the fully-depreciated Nissan Patrol is incidental to Mindanao II’s VAT zero-rated transactions
input VAT for the four (4) quarters of the taxable year 2003. pursuant to Section 105; (4) Mindanao II failed to comply with the substantiation requirements provided under
Section 113(A) in relation to Section 237 of the 1997 Tax Code as implemented by Section 4.104-1, 4.104-5, and
SO ORDERED.17 4.108-1 of Revenue Regulation No. 7-95; and (5) the doctrine of strictissimi juris on tax exemptions cannot be
relaxed in the present case.
Mindanao II filed a motion for partial reconsideration.18 It stated that the sale of the fully depreciated Nissan
Patrol is a one-time transaction and is not incidental to its VAT zero-rated operations. Moreover, the disallowed The dispositive portion of the CTA En Banc’s 10 March 2010 Decision reads:
input taxes substantially complied with the requirements for refund or tax credit.
WHEREFORE, on the basis of the foregoing considerations, the Petition for Review en banc is DISMISSED for lack
The CIR also filed a motion for partial reconsideration. It argued that the judicial claims for the first and second of merit. Accordingly, the Decision dated September 22, 2008 and the Amended Decision dated June 26, 2009
quarters of 2003 were filed beyond the period allowed by law, as stated in Section 112(A) of the 1997 Tax Code. issued by the First Division are AFFIRMED.
The CIR further stated that Section 229 is a general provision, and governs cases not covered by Section 112(A).
The CIR countered the CTA First Division’s 22 September 2008 decision by citing this Court’s ruling in SO ORDERED.24
Commisioner of Internal Revenue v. Mirant Pagbilao Corporation (Mirant), 19 which stated that unutilized input
VAT payments must be claimed within two years reckoned from the close of the taxable quarter when the The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack of merit Mindanao II’s Motion for
relevant sales were made regardless of whether said tax was paid. Reconsideration.26 The CTA En Banc highlighted the following bases of their previous ruling:

The CTA First Division denied Mindanao II’s motion for partial reconsideration, found the CIR’s motion for partial 1. The Supreme Court has long decided that the claim for refund of unutilized input VAT must be filed
reconsideration partly meritorious, and rendered an Amended Decision20 on 26 June 2009. The CTA First Division within two (2) years after the close of the taxable quarter when such sales were made.
stated that the claim for refund or credit with the BIR and the subsequent appeal to the CTA must be filed within
the two-year period prescribed under Section 229. The two-year prescriptive period in Section 229 was
2. The Supreme Court is the ultimate arbiter whose decisions all other courts should take bearings.
denominated as a mandatory statute of limitations. Therefore, Mindanao II’s claims for refund for the first and
second quarters of 2003 had already prescribed.
3. The words of the law are clear, plain, and free from ambiguity; hence, it must be given its literal
meaning and applied without any interpretation.27
The CTA First Division found that the records of Mindanao II’s case are bereft of evidence that the sale of the
Nissan Patrol is not incidental to Mindanao II’s VAT zero-rated operations. Moreover, Mindanao II’s submitted
documents failed to substantiate the requisites for the refund or credit claims. G.R. No. 194637
Mindanao I v. CIR
The CTA First Division modified its 22 September 2008 Decision to read as follows:
The Facts
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby ORDERED to
REFUND or to ISSUE A TAX CREDIT CERTIFICATE to Mindanao II Geothermal Partnership in the modified amount G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case Nos. 476 and 483. Both CTA EB cases
of TWO MILLION NINE HUNDRED EIGHTY THOUSAND EIGHT HUNDRED EIGHTY SEVEN AND 77/100 PESOS consolidate three cases from the CTA Second Division: CTA Case Nos. 7228, 7286, and 7318. CTA Case Nos. 7228,
(₱2,980,887.77) representing its unutilized input VAT for the third and fourth quarters of the taxable year 2003. 7286, and 7318 claim a tax refund or credit of Mindanao I’s accumulated unutilized and/or excess input taxes
due to VAT zero-rated sales. In CTA Case No. 7228, Mindanao I claims a tax refund or credit of ₱3,893,566.14 for
the first quarter of 2003. In CTA Case No. 7286, Mindanao I claims a tax refund or credit of ₱2,351,000.83 for the
SO ORDERED.21
second quarter of 2003. In CTA Case No. 7318, Mindanao I claims a tax refund or credit of ₱7,940,727.83 for the
third and fourth quarters of 2003.
Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513, before the CTA En Banc.
Mindanao I is similarly situated as Mindanao II. The CTA Second Division’s narration of the pertinent facts is as
The Court of Tax Appeals’ Ruling: En Banc follows:

On 10 March 2010, the CTA En Banc rendered its Decision23 in CTA EB No. 513 and denied Mindanao II’s petition. xxxx
The CTA En Banc ruled that (1) Section 112(A) clearly provides that the reckoning of the two-year prescriptive
period for filing the application for refund or credit of input VAT attributable to zero-rated sales or effectively
In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer (BOT) with the Philippine disallowances per the CTA Second Division’s further verification, and additional disallowances per the CTA
National Oil Corporation – Energy Development Corporation (PNOC-EDC) for the finance, design, construction, Second Division’s further verification;
testing, commissioning, operation, maintenance and repair of a 47-megawatt geothermal power plant. Under
the said BOT contract, PNOC-EDC shall supply and deliver steam to Mindanao I at no cost. In turn, Mindanao I (3) Mindanao I’s accumulated excess input VAT for the second quarter of 2003 that was carried over to the third
will convert the steam into electric capacity and energy for PNOC-EDC and shall subsequently supply and deliver quarter of 2003 is net of the claimed input VAT for the first quarter of 2003, and the same procedure was done
the same to the National Power Corporation (NPC), for and in behalf of PNOC-EDC. for the second, third, and fourth quarters of 2003; and (4) Mindanao I’s administrative claims were filed within
the two-year prescriptive period reckoned from the respective dates of filing of the quarterly VAT returns.
Mindanao I’s 47-megawatt geothermal power plant project has been accredited by the Department of Energy
(DOE) as a Private Sector Generation Facility, pursuant to the provision of Executive Order No. 215, wherein The dispositive portion of the CTA Second Division’s 24 October 2008 Decision reads:
Certificate of Accreditation No. 95-037 was issued.
WHEREFORE, premises considered, the consolidated Petitions for Review are hereby PARTIALLY GRANTED.
On June 26, 2001, Republic Act (R.A.) No. 9136 took effect, and the relevant provisions of the National Internal Accordingly, the CIR is hereby ORDERED TO ISSUE A TAX CREDIT CERTIFICATE in favor of Mindanao I in the
Revenue Code (NIRC) of 1997 were deemed modified. R.A. No. 9136, also known as the "Electric Power Industry reduced amount of TEN MILLION FIVE HUNDRED TWENTY THREE THOUSAND ONE HUNDRED SEVENTY SEVEN
Reform Act of 2001 (EPIRA), was enacted by Congress to ordain reforms in the electric power industry, PESOS AND 53/100 (₱10,523,177.53) representing Mindanao I’s unutilized input VAT for the four quarters of the
highlighting, among others, the importance of ensuring the reliability, security and affordability of the supply of taxable year 2003.
electric power to end users. Under the provisions of this Republic Act and its implementing rules and regulations,
the delivery and supply of electric energy by generation companies became VAT zero-rated, which previously
SO ORDERED.30
were subject to ten percent (10%) VAT.

Mindanao I filed a motion for partial reconsideration with motion for Clarification31 on 11 November 2008. It
xxxx
claimed that the CTA Second Division should not have allocated proportionately Mindanao I’s unutilized
creditable input taxes for the taxable year 2003, because the proportionate allocation of the amount of
The amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated power by generation creditable taxes in Section 112(A) applies only when the creditable input taxes due cannot be directly and
companies from ten (10%) percent to zero percent (0%). Thus, Mindanao I adopted the VAT zero-rating of the entirely attributed to any of the zero-rated or effectively zero-rated sales. Mindanao I claims that its unreported
EPIRA in computing for its VAT payable when it filed its VAT Returns, on the belief that its sales qualify for VAT collection is directly attributable to its VAT zero-rated sales. The CTA Second Division denied Mindanao I’s
zero-rating. motion and maintained the proportionate allocation because there was a portion of the gross receipts that was
undeclared in Mindanao I’s gross receipts.
Mindanao I reported its unutilized or excess creditable input taxes in its Quarterly VAT Returns for the first,
second, third, and fourth quarters of taxable year 2003, which were subsequently amended and filed with the The CIR also filed a motion for partial reconsideration32 on 11 November 2008. It claimed that Mindanao I failed
BIR. to exhaust administrative remedies before it filed its petition for review. The CTA Second Division denied the
CIR’s motion, and cited Atlas33 as the basis for ruling that it is more practical and reasonable to count the two-
On April 4, 2005, Mindanao I filed with the BIR separate administrative claims for the issuance of tax credit year prescriptive period for filing a claim for refund or credit of input VAT on zero-rated sales from the date of
certificate on its alleged unutilized or excess input taxes for taxable year 2003, in the accumulated amount of filing of the return and payment of the tax due.
₱14,185, 294.80.
The dispositive portion of the CTA Second Division’s 10 March 2009 Resolution reads:
Alleging inaction on the part of CIR, Mindanao I elevated its claims before this Court on April 22, 2005, July 7,
2005, and September 9, 2005 docketed as CTA Case Nos. 7228, 7286, and 7318, respectively. However, on WHEREFORE, premises considered, the CIR’s Motion for Partial Reconsideration and Mindanao I’s Motion for
October 10, 2005, Mindanao I received a copy of the letter dated September 30, 2003 (sic) of the BIR denying its Partial Reconsideration with Motion for Clarification are hereby DENIED for lack of merit.
application for tax credit/refund.28
SO ORDERED.34
The Court of Tax Appeals’ Ruling: Division
The Ruling of the Court of Tax Appeals: En Banc
On 24 October 2008, the CTA Second Division rendered its Decision29 in CTA Case Nos. 7228, 7286, and 7318. The
CTA Second Division found that (1) pursuant to Section 112(A), Mindanao I can only claim 90.27% of the amount
On 31 May 2010, the CTA En Banc rendered its Decision35 in CTA EB Case Nos. 476 and 483 and denied the
of substantiated excess input VAT because a portion was not reported in its quarterly VAT returns; (2) out of the
petitions filed by the CIR and Mindanao I. The CTA En Banc found no new matters which have not yet been
₱14,185,294.80 excess input VAT applied for refund, only ₱11,657,447.14 can be considered substantiated
considered and passed upon by the CTA Second Division in its assailed decision and resolution.
excess input VAT due to disallowances by the Independent Certified Public Accountant, adjustment on the
The dispositive portion of the CTA En Banc’s 31 May 2010 Decision reads: (4) Within 30 days from the lapse of the 120-day period or from August 3, 2005 to September 1, 2005,
Mindanao I should have elevated its claim for refund to the CTA in Division;
WHEREFORE, premises considered, the Petitions for Review are hereby DISMISSED for lack of merit. Accordingly,
the October 24, 2008 Decision and March 10, 2009 Resolution of the CTA Former Second Division in CTA Case (5) However, on July 7, 2005, Mindanao I filed its Petition for Review with this Court, docketed as CTA
Nos. 7228, 7286, and 7318, entitled "Mindanao I Geothermal Partnership vs. Commissioner of Internal Revenue" Case No. 7286, even before the 120-day period for the CIR to decide the claim for refund had lapsed on
are hereby AFFIRMED in toto. August 2, 2005. The Petition for Review was, therefore, prematurely filed and there was failure to
exhaust administrative remedies;
SO ORDERED.36
xxxx
Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En Banc’s 31 May 2010 Decision. In an
Amended Decision promulgated on 24 November 2010, the CTA En Banc agreed with the CIR’s claim that Section C.T.A. Case No. 7318:
229 of the NIRC of 1997 is inapplicable in light of this Court’s ruling in Mirant. The CTA En Banc also ruled that
the procedure prescribed under Section 112(D) now 112(C) 37 of the 1997 Tax Code should be followed first (1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the third and
before the CTA En Banc can act on Mindanao I’s claim. The CTA En Banc reconsidered its 31 May 2010 Decision in fourth quarters of 2003. Pursuant to Section 112(A) of the NIRC of 1997, as amended, Mindanao I
light of this Court’s ruling in Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi).38 therefore, has two years from September 30, 2003 and December 31, 2003, or until September 30,
2005 and December 31, 2005, respectively, within which to file its administrative claim for the third
The pertinent portions of the CTA En Banc’s 24 November 2010 Amended Decision read: and fourth quarters of 2003;

C.T.A. Case No. 7228: (2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized input VAT for
the third and fourth quarters of taxable year 2003 with the BIR, which is well within the two-year
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the First Quarter prescriptive period, provided under Section 112(A) of the NIRC of 1997, as amended;
of 2003. Pursuant to Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from
March 31, 2003 or until March 31, 2005 within which to file its administrative claim for refund; (3) From April 4, 2005, which is also presumably the date Mindanao I submitted supporting documents,
together with the aforesaid application for refund, the CIR has 120 days or until August 2, 2005, to
(2) On April 4, 2005, Mindanao I applied for an administrative claim for refund of unutilized input VAT decide the claim;
for the first quarter of taxable year 2003 with the BIR, which is beyond the two-year prescriptive period
mentioned above. (4) Within thirty (30) days from the lapse of the 120-day period or from August 3, 2005 until September
1, 2005 Mindanao I should have elevated its claim for refund to the CTA;
C.T.A. Case No. 7286:
(5) However, Mindanao I filed its Petition for Review with the CTA in Division only on September 9,
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the second 2005, which is 8 days beyond the 30-day period to appeal to the CTA.
quarter of 2003. Pursuant to
Evidently, the Petition for Review was filed way beyond the 30-day prescribed period. Thus, the Petition for
Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from June 30, 2003, within Review should have been dismissed for being filed late.
which to file its administrative claim for refund for the second quarter of 2003, or until June 30, 2005;
In recapitulation:
(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized input VAT for
the second quarter of taxable year 2003 with the BIR, which is within the two-year prescriptive period, (1) C.T.A. Case No. 7228
provided under Section 112 (A) of the NIRC of 1997, as amended;
Claim for the first quarter of 2003 had already prescribed for having been filed beyond the two-year
(3) The CIR has 120 days from April 4, 2005 (presumably the date Mindanao I submitted the supporting prescriptive period;
documents together with the application for refund) or until August 2, 2005, to decide the
administrative claim for refund; (2) C.T.A. Case No. 7286
Claim for the second quarter of 2003 should be dismissed for Mindanao I’s failure to comply with a III. The Honorable Court of Tax Appeals erred in denying the amount disallowed by the Independent
condition precedent when it failed to exhaust administrative remedies by filing its Petition for Review Certified Public Accountant as Mindanao II substantially complied with the requisites of the 1997 Tax
even before the lapse of the 120-day period for the CIR to decide the administrative claim; Code, as amended, for refund/tax credit.

(3) C.T.A. Case No. 7318 A. The amount of ₱2,090.16 was brought about by the timing difference in the recording of
the foreign currency deposit transaction.
Petition for Review was filed beyond the 30-day prescribed period to appeal to the CTA.
B. The amount of ₱2,752.00 arose from the out-of-pocket expenses reimbursed to SGV &
xxxx Company which is substantially suppoerted [sic] by an official receipt.

IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenue’s Motion for Reconsideration is hereby C. The amount of ₱487,355.93 was unapplied and/or was not included in Mindanao II’s claim
GRANTED; Mindanao I’s Motion for Partial Reconsideration is hereby DENIED for lack of merit. for refund or tax credit for the year 2004 subject matter of CTA Case No. 7507.

The May 31, 2010 Decision of this Court En Banc is hereby REVERSED. IV. The doctrine of strictissimi juris on tax exemptions should be relaxed in the present case.40

Accordingly, the Petition for Review of the Commissioner of Internal Revenue in CTA EB No. 476 is hereby G.R. No. 194637
GRANTED and the entire claim of Mindanao I Geothermal Partnership for the first, second, third and fourth Mindanao I v. CIR
quarters of 2003 is hereby DENIED.
Mindanao I raised the following grounds in its Petition for Review:
SO ORDERED.39
I. The administrative claim and judicial claim in CTA Case No. 7228 were timely filed pursuant to the
The Issues case of Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal
Revenue, which was then the controlling ruling at the time of filing.
G.R. No. 193301
Mindanao II v. CIR A. The recent ruling in the Commissioner of Internal Revenue vs. Mirant Pagbilao
Mindanao II raised the following grounds in its Petition for Review: Corporation, which uses the end of the taxable quarter when the sales were made as the
reckoning date in counting the two-year prescriptive period, cannot be applied retroactively
in the case of Mindanao I.
I. The Honorable Court of Tax Appeals erred in holding that the claim of Mindanao II for the 1st and
2nd quarters of year 2003 has already prescribed pursuant to the Mirant case.
B. The Atlas case promulgated by the Third Division of this Honorable Court on June 8, 2007
was not and cannot be superseded by the Mirant Pagbilao case promulgated by the Second
A. The Atlas case and Mirant case have conflicting interpretations of the law as to the
Division of this Honorable Court on September 12, 2008 in light of the explicit provision of
reckoning date of the two year prescriptive period for filing claims for VAT refund.
Section 4(3), Article VIII of the 1987 Constitution.

B. The Atlas case was not and cannot be superseded by the Mirant case in light of Section
II. Likewise, the recent ruling of this Honorable Court in Commissioner of Internal Revenue vs. Aichi
4(3), Article VIII of the 1987 Constitution.
Forging Company of Asia, Inc., cannot be applied retroactively to Mindanao I in the present case. 41

C. The ruling of the Mirant case, which uses the close of the taxable quarter when the sales
In a Resolution dated 14 December 2011,42 this Court resolved to consolidate G.R. Nos. 193301 and 194637 to
were made as the reckoning date in counting the two-year prescriptive period cannot be
avoid conflicting rulings in related cases.
applied retroactively in the case of Mindanao II.

The Court’s Ruling


II. The Honorable Court of Tax Appeals erred in interpreting Section 105 of the 1997 Tax Code, as
amended in that the sale of the fully depreciated Nissan Patrol is a one-time transaction and is not
incidental to the VAT zero-rated operation of Mindanao II. Determination of Prescriptive Period
G.R. Nos. 193301 and 194637 both raise the question of the determination of the prescriptive period, or the amount made refund/tax credit with the claim)
interpretation of Section 112 of the 1997 Tax Code, in light of our rulings in Atlas and Mirant. credit CIR
certificate (administrative
Mindanao II’s unutilized input VAT tax credit for the first and second quarters of 2003, in the amounts of with the claim)44
₱3,160,984.69 and ₱1,562,085.33, respectively, are covered by G.R. No. 193301, while Mindanao I’s unutilized CIR
input VAT tax credit for the first, second, third, and fourth quarters of 2003, in the amounts of ₱3,893,566.14,
₱2,351,000.83, and ₱7,940,727.83, respectively, are covered by G.R. No. 194637. 7227 1st Quarter, 31 March 31 March 13 April 2005 12 September 22 April 2005
₱3,160,984.69 2003 2005 2005
Section 112 of the 1997 Tax Code 7287 2nd Quarter, 30 June 30 June 13 April 2005 12 September 7 July 2005
₱1,562,085.33 2003 2005 2005
The pertinent sections of the 1997 Tax Code, the law applicable at the time of Mindanao II’s and Mindanao I’s
7317 3rd and 4th 30 30 13 April 2005 12 September 9 September
administrative and judicial claims, provide:
Quarters, September September 2005 2005
₱3,521,129.50 2003 2005
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 31 2 January
taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of December 2006
creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such 2003 (31
input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under December
Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange 2005 being
proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko a Saturday)
Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero- The relevant dates for G.R. No. 194637 (Minadanao I) are:
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. CTA Period Close of Last day Actual date of Last day for Actual Date
Case covered by quarter for filing filing filing case of filing case
xxxx No. VAT Sales in when sales application application for with CTA47 with CTA
2003 and were of tax tax refund/ (judicial
amount made refund/tax credit with the claim)
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the Commissioner credit CIR
shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) certificate (administrative
days from the date of submission of complete documents in support of the application filed in accordance with with the claim)46
Subsections (A) and (B) hereof. CIR

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the 7227 1st Quarter, 31 March 31 March 4 April 2005 1 September 22 April 2005
Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within ₱3,893,566.14 2003 2005 2005
thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred
7287 2nd Quarter, 30 June 30 June 4 April 2005 1 September 7 July 2005
twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.
₱2,351,000.83 2003 2005 2005

x x x x 43 (Underscoring supplied) 7317 3rd 30 30 4 April 2005 1 September 9 September


and 4th September September 2005 2005
The relevant dates for G.R. No. 193301 (Mindanao II) are: Quarters, 2003 2005
₱7,940,727.83
31 2 January
CTA Period Close of Last day Actual date of Last day for Actual Date December 2006
Case No. covered by quarter for filing filing filing case of filing case 2003 (31
VAT Sales in when sales application application for with CTA45 with CTA December
2003 and were of tax tax refund/ (judicial 2005 being
a Saturday)
When Mindanao II and Mindanao I filed their respective administrative and judicial claims in 2005, neither Atlas VAT, or that the tax was admittedly illegally, erroneously or excessively collected from him, does not entitle him
nor Mirant has been promulgated. Atlas was promulgated on 8 June 2007, while Mirant was promulgated on 12 as a matter of right to a tax refund or credit. Strict compliance with the mandatory and jurisdictional conditions
September 2008. It is therefore misleading to state that Atlas was the controlling doctrine at the time of filing of prescribed by law to claim such tax refund or credit is essential and necessary for such claim to prosper. Well-
the claims. The 1997 Tax Code, which took effect on 1 January 1998, was the applicable law at the time of filing settled is the rule that tax refunds or credits, just like tax exemptions, are strictly construed against the taxpayer.
of the claims in issue. As this Court explained in the recent consolidated cases of Commissioner of Internal
Revenue v. San Roque Power Corporation, Taganito Mining Corporation v. Commissioner of Internal Revenue, The burden is on the taxpayer to show that he has strictly complied with the conditions for the grant of the tax
and Philex Mining Corporation v. Commissioner of Internal Revenue (San Roque):48 refund or credit.

Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly given by law to the This Court cannot disregard mandatory and jurisdictional conditions mandated by law simply because the
Commissioner to decide whether to grant or deny San Roque’s application for tax refund or credit. It is Commissioner chose not to contest the numerical correctness of the claim for tax refund or credit of the
indisputable that compliance with the 120-day waiting period is mandatory and jurisdictional. The waiting taxpayer. Non-compliance with mandatory periods, non-observance of prescriptive periods, and non-adherence
period, originally fixed at 60 days only, was part of the provisions of the first VAT law, Executive Order No. 273, to exhaustion of administrative remedies bar a taxpayer’s claim for tax refund or credit, whether or not the
which took effect on 1 January 1988. The waiting period was extended to 120 days effective 1 January 1998 Commissioner questions the numerical correctness of the claim of the taxpayer. This Court should not establish
under RA 8424 or the Tax Reform Act of 1997. Thus, the waiting period has been in our statute books for more the precedent that non-compliance with mandatory and jurisdictional conditions can be excused if the claim is
than fifteen (15) years before San Roque filed its judicial claim. otherwise meritorious, particularly in claims for tax refunds or credit. Such precedent will render meaningless
compliance with mandatory and jurisdictional requirements, for then every tax refund case will have to be
Failure to comply with the 120-day waiting period violates a mandatory provision of law. It violates the doctrine decided on the numerical correctness of the amounts claimed, regardless of non-compliance with mandatory
of exhaustion of administrative remedies and renders the petition premature and thus without a cause of action, and jurisdictional conditions.
with the effect that the CTA does not acquire jurisdiction over the taxpayer’s petition. Philippine jurisprudence is
replete with cases upholding and reiterating these doctrinal principles. San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine because San Roque filed
its petition for review with the CTA more than four years before Atlas was promulgated. The Atlas doctrine did
The charter of the CTA expressly provides that its jurisdiction is to review on appeal "decisions of the not exist at the time San Roque failed to comply with the 120-day period. Thus, San Roque cannot invoke the
Commissioner of Internal Revenue in cases involving x x x refunds of internal revenue taxes." When a taxpayer Atlas doctrine as an excuse for its failure to wait for the 120-day period to lapse. In any event, the Atlas doctrine
prematurely files a judicial claim for tax refund or credit with the CTA without waiting for the decision of the merely stated that the two-year prescriptive period should be counted from the date of payment of the output
Commissioner, there is no "decision" of the Commissioner to review and thus the CTA as a court of special VAT, not from the close of the taxable quarter when the sales involving the input VAT were made. The Atlas
jurisdiction has no jurisdiction over the appeal. The charter of the CTA also expressly provides that if the doctrine does not interpret, expressly or impliedly, the 120+30 day periods.49 (Emphases in the original; citations
Commissioner fails to decide within "a specific period" required by law, such "inaction shall be deemed a denial" omitted)
of the application for tax refund or credit. It is the Commissioner’s decision, or inaction "deemed a denial," that
the taxpayer can take to the CTA for review. Without a decision or an "inaction x x x deemed a denial" of the Prescriptive Period for
Commissioner, the CTA has no jurisdiction over a petition for review. the Filing of Administrative Claims

San Roque’s failure to comply with the 120-day mandatory period renders its petition for review with the CTA In determining whether the administrative claims of Mindanao I and Mindanao II for 2003 have prescribed, we
void. Article 5 of the Civil Code provides, "Acts executed against provisions of mandatory or prohibitory laws see no need to rely on either Atlas or Mirant. Section 112(A) of the 1997 Tax Code is clear: "Any VAT-registered
shall be void, except when the law itself authorizes their validity." San Roque’s void petition for review cannot be person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the
legitimized by the CTA or this Court because Article 5 of the Civil Code states that such void petition cannot be taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of
legitimized "except when the law itself authorizes its validity." There is no law authorizing the petition’s validity. creditable input tax due or paid attributable to such sales x x x."

It is hornbook doctrine that a person committing a void act contrary to a mandatory provision of law cannot We rule on Mindanao I and II’s administrative claims for the first, second, third, and fourth quarters of 2003 as
claim or acquire any right from his void act. A right cannot spring in favor of a person from his own void or illegal follows:
act. This doctrine is repeated in Article 2254 of the Civil Code, which states, "No vested or acquired right can
arise from acts or omissions which are against the law or which infringe upon the rights of others." For violating a
(1) The last day for filing an application for tax refund or credit with the CIR for the first quarter of 2003
mandatory provision of law in filing its petition with the CTA, San Roque cannot claim any right arising from such
was on 31 March 2005. Mindanao II filed its administrative claim before the CIR on 13 April 2005, while
void petition. Thus, San Roque’s petition with the CTA is a mere scrap of paper.
Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims have prescribed,
pursuant to Section 112(A) of the 1997 Tax Code.
This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of the 120-day period
just because the Commissioner merely asserts that the case was prematurely filed with the CTA and does not
question the entitlement of San Roque to the refund. The mere fact that a taxpayer has undisputed excess input
(2) The last day for filing an application for tax refund or credit with the CIR for the second quarter of This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law should be
2003 was on 30 June 2005. Mindanao II filed its administrative claim before the CIR on 13 April 2005, applied exactly as worded since it is clear, plain, and unequivocal. As this law states, the taxpayer may, if he
while Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims were filed on wishes, appeal the decision of the Commissioner to the CTA within 30 days from receipt of the Commissioner’s
time, pursuant to Section 112(A) of the 1997 Tax Code. decision, or if the Commissioner does not act on the taxpayer’s claim within the 120-day period, the taxpayer
may appeal to the CTA within 30 days from the expiration of the 120-day period.
(3) The last day for filing an application for tax refund or credit with the CIR for the third quarter of
2003 was on 30 September 2005. Mindanao II filed its administrative claim before the CIR on 13 April xxxx
2005, while Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims were
filed on time, pursuant to Section 112(A) of the 1997 Tax Code. There are three compelling reasons why the 30-day period need not necessarily fall within the two-year
prescriptive period, as long as the administrative claim is filed within the two-year prescriptive period.
(4) The last day for filing an application for tax refund or credit with the CIR for the fourth quarter of
2003 was on 2 January 2006. Mindanao II filed its administrative claim before the CIR on 13 April 2005, First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "may, within two (2) years
while Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims were filed on after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate
time, pursuant to Section 112(A) of the 1997 Tax Code. or refund of the creditable input tax due or paid to such sales." In short, the law states that the taxpayer may
apply with the Commissioner for a refund or credit "within two (2) years," which means at anytime within two
Prescriptive Period for years. Thus, the application for refund or credit may be filed by the taxpayer with the Commissioner on the last
the Filing of Judicial Claims day of the two-year prescriptive period and it will still strictly comply with the law. The two-year prescriptive
period is a grace period in favor of the taxpayer and he can avail of the full period before his right to apply for a
In determining whether the claims for the second, third and fourth quarters of 2003 have been properly tax refund or credit is barred by prescription.
appealed, we still see no need to refer to either Atlas or Mirant, or even to Section 229 of the 1997 Tax Code.
The second paragraph of Section 112(C) of the 1997 Tax Code is clear: "In case of full or partial denial of the Second, Section 112(C) provides that the Commissioner shall decide the application for refund or credit "within
claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within one hundred twenty (120) days from the date of submission of complete documents in support of the
the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision application filed in accordance with Subsection (A)." The reference in Section 112(C) of the submission of
denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the documents "in support of the application filed in accordance with Subsection A" means that the application in
unacted claim with the Court of Tax Appeals." Section 112(A) is the administrative claim that the Commissioner must decide within the 120-day period. In
short, the two-year prescriptive period in Section 112(A) refers to the period within which the taxpayer can file
The mandatory and jurisdictional nature of the 120+30 day periods was explained in San Roque: an administrative claim for tax refund or credit. Stated otherwise, the two-year prescriptive period does not
refer to the filing of the judicial claim with the CTA but to the filing of the administrative claim with the
Commissioner. As held in Aichi, the "phrase ‘within two years x x x apply for the issuance of a tax credit or
At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory periods were already
refund’ refers to applications for refund/credit with the CIR and not to appeals made to the CTA."
in the law. Section 112(C) expressly grants the Commissioner 120 days within which to decide the taxpayer’s
claim. The law is clear, plain, and unequivocal: "x x x the Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive period (equivalent
complete documents." Following the verba legis doctrine, this law must be applied exactly as worded since it is to 730 days), then the taxpayer must file his administrative claim for refund or credit within the first 610 days of
clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the CTA without waiting for the the two-year prescriptive period. Otherwise, the filing of the administrative claim beyond the first 610 days will
Commissioner’s decision within the 120-day mandatory and jurisdictional period. The CTA will have no result in the appeal to the CTA being filed beyond the two-year prescriptive period. Thus, if the taxpayer files his
jurisdiction because there will be no "decision" or "deemed a denial" decision of the Commissioner for the CTA administrative claim on the 611th day, the Commissioner, with his 120-day period, will have until the 731st day
to review. In San Roque’s case, it filed its petition with the CTA a mere 13 days after it filed its administrative to decide the claim. If the Commissioner decides only on the 731st day, or does not decide at all, the taxpayer
claim with the Commissioner. Indisputably, San Roque knowingly violated the mandatory 120-day period, and it can no longer file his judicial claim with the CTA because the two-year prescriptive period (equivalent to 730
cannot blame anyone but itself. days) has lapsed. The 30-day period granted by law to the taxpayer to file an appeal before the CTA becomes
utterly useless, even if the taxpayer complied with the law by filing his administrative claim within the two-year
prescriptive period.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the decision or inaction of
the Commissioner, thus:
The theory that the 30-day period must fall within the two-year prescriptive period adds a condition that is not
found in the law. It results in truncating 120 days from the 730 days that the law grants the taxpayer for filing his
x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after
administrative claim with the Commissioner. This Court cannot interpret a law to defeat, wholly or even partly, a
the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of
remedy that the law expressly grants in clear, plain, and unequivocal language.
Tax Appeals. (Emphasis supplied)
Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal language. The taxpayer Mindanao I filed its administrative claims for the second, third, and fourth quarters of 2003 on 4 April 2005.
can file his administrative claim for refund or credit at anytime within the two-year prescriptive period. If he files Counting 120 days after filing of the administrative claim with the CIR (2 August 2005) and 30 days after the CIR’s
his claim on the last day of the two-year prescriptive denial by inaction,52 the last day for filing a judicial claim with the CTA for the second, third, and fourth quarters
of 2003 was on 1 September 2005. However, the judicial claim cannot be filed earlier than 2 August 2005, which
period, his claim is still filed on time. The Commissioner will have 120 days from such filing to decide the claim. If is the expiration of the 120-day period for the Commissioner to act on the claim.
the Commissioner decides the claim on the 120th day, or does not decide it on that day, the taxpayer still has 30
days to file his judicial claim with the CTA. This is not only the plain meaning but also the only logical (1) Mindanao I filed its judicial claim for the second quarter of 2003 before the CTA on 7 July 2005,
interpretation of Section 112(A) and (C).50 (Emphases in the original; citations omitted) before the expiration of the 120-day period. Pursuant to Section 112(C) of the 1997 Tax Code,
Mindanao I’s judicial claim for the second quarter of 2003 was prematurely filed. However, pursuant to
In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its San Roque’s recognition of the effect of BIR Ruling No. DA-489-03, we rule that Mindanao I’s judicial
issuance on 10 December 2003 up to its reversal in Aichi on 6 October 2010, where this Court held that the claim for the second quarter of 2003 qualifies under the exception to the strict application of the
120+30 day periods are mandatory and jurisdictional."51 We shall discuss later the effect of San Roque’s 120+30 day periods.
recognition of BIR Ruling No. DA-489-03 on claims filed between 10 December 2003 and 6 October 2010.
Mindanao I and II filed their claims within this period. (2) Mindanao I filed its judicial claim for the third quarter of 2003 before the CTA on 9 September 2005.
Mindanao I’s judicial claim for the third quarter of 2003 was thus filed after the prescriptive period,
We rule on Mindanao I and II’s judicial claims for the second, third, and fourth quarters of 2003 as follows: pursuant to Section 112(C) of the 1997 Tax Code.

G.R. No. 193301 (3) Mindanao I filed its judicial claim for the fourth quarter of 2003 before the CTA on 9 September
Mindanao II v. CIR 2005. Mindanao I’s judicial claim for the fourth quarter of 2003 was thus filed after the prescriptive
period, pursuant to Section 112(C) of the 1997 Tax Code.
Mindanao II filed its administrative claims for the second, third, and fourth quarters of 2003 on 13 April 2005.
Counting 120 days after filing of the administrative claim with the CIR (11 August 2005) and 30 days after the San Roque: Recognition of BIR Ruling No. DA-489-03
CIR’s denial by inaction, the last day for filing a judicial claim with the CTA for the second, third, and fourth
quarters of 2003 was on 12 September 2005. However, the judicial claim cannot be filed earlier than 11 August In the consolidated cases of San Roque, the Court En Banc 53 examined and ruled on the different claims for tax
2005, which is the expiration of the 120-day period for the Commissioner to act on the claim. refund or credit of three different companies. In San Roque, we reiterated that "following the verba legis
doctrine, Section 112(C) must be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer
(1) Mindanao II filed its judicial claim for the second quarter of 2003 before the CTA on 7 July 2005, cannot simply file a petition with the CTA without waiting for the Commissioner’s decision within the 120-day
before the expiration of the 120-day period. Pursuant to Section 112(C) of the 1997 Tax Code, mandatory and jurisdictional period. The CTA will have no jurisdiction because there will be no ‘decision’ or
Mindanao II’s judicial claim for the second quarter of 2003 was prematurely filed. ‘deemed a denial decision’ of the Commissioner for the CTA to review."

However, pursuant to San Roque’s recognition of the effect of BIR Ruling No. DA-489-03, we rule that Notwithstanding a strict construction of any claim for tax exemption or refund, the Court in San Roque
Mindanao II’s judicial claim for the second quarter of 2003 qualifies under the exception to the strict recognized that BIR Ruling No. DA-489-03 constitutes equitable estoppel54 in favor of taxpayers. BIR Ruling No.
application of the 120+30 day periods. DA-489-03 expressly states that the "taxpayer-claimant need not wait for the lapse of the 120-day period before
it could seek judicial relief with the CTA by way of Petition for Review." This Court discussed BIR Ruling No. DA-
489-03 and its effect on taxpayers, thus:
(2) Mindanao II filed its judicial claim for the third quarter of 2003 before the CTA on 9 September
2005. Mindanao II’s judicial claim for the third quarter of 2003 was thus filed on time, pursuant to
Section 112(C) of the 1997 Tax Code. Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a
difficult question of law. The abandonment of the Atlas doctrine by Mirant and Aichi is proof that the reckoning
of the prescriptive periods for input VAT tax refund or credit is a difficult question of law. The abandonment of
(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before the CTA on 9 September
the Atlas doctrine did not result in Atlas, or other taxpayers similarly situated, being made to return the tax
2005. Mindanao II’s judicial claim for the fourth quarter of 2003 was thus filed on time, pursuant to
refund or credit they received or could have received under Atlas prior to its abandonment. This Court is
Section 112(C) of the 1997 Tax Code.
applying Mirant and Aichi prospectively. Absent fraud, bad faith or misrepresentation, the reversal by this Court
of a general interpretative rule issued by the Commissioner, like the reversal of a specific BIR ruling under
G.R. No. 194637 Section 246, should also apply prospectively. x x x.
Mindanao I v. CIR
xxxx
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all Administrative Judicial Claim Action on Claim
taxpayers or a specific ruling applicable only to a particular taxpayer. Claim

BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not by a 1st Quarter, 2003 Filed late -- Deny, pursuant to
particular taxpayer, but by a government agency tasked with processing tax refunds and credits, that is, the One Section 112(A) of the
Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance. This government agency 1997 Tax Code
is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this government
2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to
agency mentions in its query to the Commissioner the administrative claim of Lazi Bay Resources Development,
BIR Ruling No. DA-489-03
Inc., the agency was in fact asking the Commissioner what to do in cases like the tax claim of Lazi Bay Resources
Development, Inc., where the taxpayer did not wait for the lapse of the 120-day period. 3rd Quarter, 2003 Filed on time Filed late Grant, pursuant to
Section 112(C) of the
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR Ruling No. 1997 Tax Code
DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6
4th Quarter, 2003 Filed on time Filed late Grant, pursuant to
October 2010, where this Court held that the 120+30 day periods are mandatory and jurisdictional.
Section 112(C) of the
1997 Tax Code
xxxx
Summary of Rules on Prescriptive Periods Involving VAT

Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the issuance of BIR Ruling No.
DA-489-03 on 10 December 2003. Truly, Taganito can claim that in filing its judicial claim prematurely without We summarize the rules on the determination of the prescriptive period for filing a tax refund or credit of
unutilized input VAT as provided in Section 112 of the 1997 Tax Code, as follows:
waiting for the 120-day period to expire, it was misled by BIR Ruling No. DA-489-03. Thus, Taganito can claim the
benefit of BIR Ruling No. DA-489-03, which shields the filing of its judicial claim from the vice of prematurity.
(Emphasis in the original) (1) An administrative claim must be filed with the CIR within two years after the close of the taxable
quarter when the zero-rated or effectively zero-rated sales were made.
Summary of Administrative and Judicial Claims
(2) The CIR has 120 days from the date of submission of complete documents in support of the
administrative claim within which to decide whether to grant a refund or issue a tax credit certificate.
G.R. No. 193301
Mindanao II v. CIR The 120-day period may extend beyond the two-year period from the filing of the administrative claim
if the claim is filed in the later part of the two-year period. If the 120-day period expires without any
decision from the CIR, then the administrative claim may be considered to be denied by inaction.
Administrative Judicial Claim Action on Claim
Claim (3) A judicial claim must be filed with the CTA within 30 days from the receipt of the CIR’s decision
denying the administrative claim or from the expiration of the 120-day period without any action from
1st Quarter, 2003 Filed late -- Deny, pursuant to
the CIR.
Section 112(A) of the
1997 Tax Code
(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10
2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to December 2003 up to its reversal by this Court in Aichi on 6 October 2010, as an exception to the
BIR Ruling No. DA-489-03 mandatory and jurisdictional 120+30 day periods.
3rd Quarter, 2003 Filed on time Filed on time Grant, pursuant to
Section 112(C) of the "Incidental" Transaction
1997 Tax Code
Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental transaction in the course
4th Quarter, 2003 Filed on time Filed on time Grant, pursuant to of its business; hence, it is an isolated transaction that should not have been subject to 10% VAT.
Section 112(C) of the
1997 Tax Code
Section 105 of the 1997 Tax Code does not support Mindanao II’s position:
G.R. No. 194637
Mindanao I v. CIR
SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges, leases the CTA En Banc’s finding of fact, which in turn affirmed the finding of the CTA First Division. We see no reason
goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax to overturn their findings.
(VAT) imposed in Sections 106 to 108 of this Code.
WHEREFORE, we PARTIALLY GRANT the petitions. The Decision of the Court of Tax Appeals En Bane in CT A EB
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, No. 513 promulgated on 10 March 2010, as well as the Resolution promulgated on 28 July 2010, and the
transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale Decision of the Court of Tax Appeals En Bane in CTA EB Nos. 476 and 483 promulgated on 31 May 2010, as well
or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. as the Amended Decision promulgated on 24 November 2010, are AFFIRMED with MODIFICATION.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for the first quarter of 2003 is DENIED
economic activity, including transactions incidental thereto, by any person regardless of whether or not the while its claims for the second, third, and fourth quarters of 2003 are GRANTED. For G.R. No. 19463 7, the claims
person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net of Mindanao I Geothermal Partnership for the first, third, and fourth quarters of 2003 are DENIED while its claim
income and whether or not it sells exclusively to members or their guests), or government entity. for the second quarter of 2003 is GRANTED.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the SO ORDERED.
Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or
business. (Emphasis supplied) G.R. No. L-19707 August 17, 1967

Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay) 55 and Imperial v. PHILIPPINE ACETYLENE CO., INC., petitioner,
Collector of Internal Revenue (Imperial)56 to justify its position. Magsaysay, decided under the NIRC of 1986, vs.
involved the sale of vessels of the National Development Company (NDC) to Magsaysay Lines, Inc. We ruled that COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
the sale of vessels was not in the course of NDC’s trade or business as it was involuntary and made pursuant to
the Government’s policy for privatization. Magsaysay, in quoting from the CTA’s decision, imputed upon Imperial
Ponce Enrile, Siguion Reyna, Montecillo and Belo, for petitioner.
the definition of "carrying on business." Imperial, however, is an unreported case that merely stated that "‘to
Office of the Solicitor General for respondents.
engage’ is to embark in a business or to employ oneself therein."57

CASTRO, J.:
Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction.1âwphi1 However, it does not follow
that an isolated transaction cannot be an incidental transaction for purposes of VAT liability. Indeed, a reading of
Section 105 of the 1997 Tax Code would show that a transaction "in the course of trade or business" includes The petitioner is a corporation engaged in the manufacture and sale of oxygen and acetylene gases. During the
"transactions incidental thereto." period from June 2, 1953 to June 30, 1958, it made various sales of its products to the National Power
Corporation, an agency of the Philippine Government, and to the Voice of America an agency of the United
States Government. The sales to the NPC amounted to P145,866.70, while those to the VOA amounted to
Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC into electricity and to deliver the
P1,683, on account of which the respondent Commission of Internal Revenue assessed against, and demanded
electricity to NPC. In the course of its business, Mindanao II bought and eventually sold a Nissan Patrol. Prior to
from, the petitioner the payment of P12,910.60 as deficiency sales tax and surcharge, pursuant to the following-
the sale, the Nissan Patrol was part of Mindanao II’s property, plant, and equipment. Therefore, the sale of the
provisions of the National Internal Revenue Code:
Nissan Patrol is an incidental transaction made in the course of Mindanao II’s business which should be liable for
VAT.
Sec. 186. Percentage tax on sales of other articles.—There shall be levied, assessed and collected once
only on every original sale, barter, exchange, and similar transaction either for nominal or valuable
Substantiation Requirements
considerations, intended to transfer ownership of, or title to, the articles not enumerated in sections
one hundred and eighty-four and one hundred and eighty-five a tax equivalent to seven per centum of
Mindanao II claims that the CTA’s disallowance of a total amount of ₱492,198.09 is improper as it has the gross selling price or gross value in money of the articles so sold, bartered exchanged, or
substantially complied with the substantiation requirements of Section 113(A)58 in relation to Section 23759 of transferred, such tax to be paid by the manufacturer or producer: . . . .
the 1997 Tax Code, as implemented by Section 4.104-1, 4.104-5 and 4.108-1 of Revenue Regulation No. 7-95.60
Sec. 183. Payment of percentage taxes.—(a) In general.—It shall be the duty of every person
We are constrained to state that Mindanao II’s compliance with the substantiation requirements is a finding of conducting business on which a percentage tax is imposed under this Title, to make a true and
fact. The CTA En Banc evaluated the records of the case and found that the transactions in question are complete return of the amount of his, her, or its gross monthly sales, receipts or earnings, or gross
purchases for services and that Mindanao II failed to comply with the substantiation requirements. We affirm value of output actually removed from the factory or mill warehouse and within twenty days after the
end of each month, pay the tax due thereon: Provided, That any person retiring from a business
subject to the percentage tax shall notify the nearest internal revenue officer thereof, file his return or But it is argued that a sales tax is ultimately passed on to the purchaser, and that, so far as the purchaser is an
declaration and pay the tax due thereon within twenty days after closing his business. entity like the NPC which is exempt from the payment of "all taxes, except real property tax," the tax cannot be
collected from sales.
If the percentage tax on any business is not paid within the time specified above, the amount of the tax
shall be increased by twenty-five per centum, the increment to be a part of the tax. Many years ago, Mr. Justice Oliver Wendell Holmes expressed dissatisfaction with the use of the phrase "pass
the tax on." Writing the opinion of the U.S. Supreme Court in Lash's Products v. United States,6 he said: "The
The petitioner denied liability for the payment of the tax on the ground that both the NPC and the VOA are phrase 'passed the tax on' is inaccurate, as obviously the tax is laid and remains on the manufacturer and on him
exempt from taxation. It asked for a reconsideration of the assessment and, failing to secure one, appealed to alone. The purchaser does not really pay the tax. He pays or may pay the seller more for the goods because of
the Court of Tax Appeals. the seller's obligation, but that is all. . . . The price is the sum total paid for the goods. The amount added
because of the tax is paid to get the goods and for nothing else. Therefore it is part of the price . . .".
The court ruled that the tax on the sale of articles or goods in section 186 of the Code is a tax on the
manufacturer and not on the buyer with the result that the "petitioner Philippine Acetylene Company, the It may indeed be that the incidence of the tax ultimately settles on the purchaser, but it is not for that reason
manufacturer or producer of oxygen and acetylene gases sold to the National Power Corporation, cannot claim alone that one may validly argue that it is a tax on the purchaser. The exemption granted to the NPC may be
exemption from the payment of sales tax simply because its buyer — the National Power Corporation — is likened to the immunity of the Federal Government from state taxation and vice versa in the federal system of
exempt from the payment of all taxes." With respect to the sales made to the VOA, the court held that goods government of the United States. In the early case of Panhandle Oil Co. v. Mississippi7 the doctrine of
purchased by the American Government or its agencies from manufacturers or producers are exempt from the intergovernment mental tax immunity was held as prohibiting the imposition of a tax on sales of gasoline made
payment of the sales tax under the agreement between the Government of the Philippines and that of the to the Federal Government. Said the Supreme court of the United States:
United States, provided the purchases are supported by certificates of exemption, and since purchases
amounting to only P558, out of a total of P1,683, were not covered by certificates of exemption, only the sales in A charge at the prescribed. rate is made on account of every gallon acquired by the United States. It is
the sum of P558 were subject to the payment of tax. Accordingly, the assessment was revised and the immaterial that the seller and not the purchaser is required to report and make payment to the state.
petitioner's liability was reduced from P12,910.60, as assessed by the respondent commission, to P12,812.16. 1 Sale and purchase constitute a transaction by which the tax is measured and on which the burden
rests. . . . The necessary operation of these enactments when so construed is directly to retard, impede
The petitioner appealed to this Court. Its position is that it is not liable for the payment of tax on the sales it and burden the exertion by the United States, of its constitutional powers to operate the fleet and
made to the NPC and the VOA because both entities are exempt from taxation. hospital. . . . To use the number of gallons sold the United States as a measure of the privilege tax is in
substance and legal effect to tax the sale. . . . And that is to tax the United States — to exact tribute on
its transactions and apply the same to the support of the state.1äwphï1.ñët
I

Justice Holmes did not agree. In a powerful dissent joined by Justices Brandeis and Stone, he said:
The NPC enjoys tax exemption by virtue of an act2 of Congress which provides as follows:

If the plaintiff in error had paid the tax and added it to the price the government would have nothing
Sec. 2. To facilitate the payment of its indebtedness, the National Power Corporation shall be exempt
to say. It could take the gasoline or leave it but it could not require the seller to abate his charge even if
from all taxes, except real property tax, and from all duties, fees, imposts, charges, and restrictions of
it had been arbitrarily increased in the hope of getting more from the government than could be got
the Republic of the Philippines, its provinces, cities and municipalities.
from the public at large. . . . It does not appear that the government would have refused to pay a price
that included the tax if demanded, but if the government had refused it would not have exonerated
It is contended that the immunity thus given to the NPC would be impaired by the imposition of a tax on sales the seller. . . .
made to it because while the tax is paid by the manufacturer or producer, the tax is ultimately shifted by the
latter to the former. The petitioner invokes in support of its position a 1954 opinion of the Secretary of Justice
. . . I am not aware that the President, the Members of the Congress, the Judiciary or to come nearer to
which ruled that the NPC is exempt from the payment of all taxes "whether direct or indirect."
the case at hand, the Coast Guard or the officials of the Veterans' Hospital [to which the sales were
made], because they are instrumentalities of government and cannot function naked and unfed,
We begin with an analysis of the nature of the percentage (sales) tax imposed by section 186 of the Code. Is it a hitherto have been held entitled to have their bills for food and clothing cut down so far as their
tax on the producer or on the purchaser? Statutes of the type under consideration, which impose a tax on sales, butchers and tailors have been taxed on their sales; and I had not supposed that the butchers and
have been described as "act[s] with schizophrenic symptoms,"3 as they apparently have two faces — one that of tailors could omit from their tax returns all receipts from the large class of customers to which I have
a vendor tax, the other, a vendee tax. Fortunately for us the provisions of the Code throw some light on the referred. The question of interference with Government, I repeat, is one of reasonableness and degree
problem. The Code states that the sales tax "shall be paid by the manufacturer or producer," 4 who must "make a and it seems to me that the interference in this case is too remote.
true and complete return of the amount of his, her or its gross monthly sales, receipts or earnings or gross value
of output actually removed from the factory or mill warehouse and within twenty days after the end of each
But time was not long in coming to confirm the soundness of Holmes' position. Soon it became obvious that to
month, pay the tax due thereon."5
test the constitutionality of a statute by determining the party on which the legal incidence of the tax fell was an
unsatisfactory way of doing things. The fall of the bastion was signalled by Chief Justice Hughes' statement rested on the economic ground of the ultimate incidence of the burden being on the Government, but
in James v. Dravo Constructing Co.8 that "These cases [referring to Panhandle and Indian Motorcycle Co. v. this condemnation still leaves open the question whether either the state or the United States when
United States, 283 U.S. 570 (1931)] have been distinguished and must be deemed to be limited to their particular acting in governmental matters may be made legally liable to the other for a tax imposed on it as
facts." vendee.

In 1941, Alabama v. King & Boozer9 held that the constitutional immunity of the United States from state The carefully chosen language of the Chief Justice keeps these cases from foreclosing the issue. . . . Yet
taxation was not infringed by the imposition of a state sales tax with which the seller was chargeable but which at the time it would have been a rash man who would find in this a dictum that a sales tax clearly on
he was required to collect from the buyer, in respect of materials purchased by a contractor with the United the Government as purchaser is invalid or a dictum that Congress may immunize its contractors.13
States on a cost-plus basis for use in carrying out its contract, despite the fact that the economic burden of the
tax was borne by the United States. If a claim of exemption from sales tax based on state immunity cannot command assent, much less can a claim
resting on statutory grant.
The asserted right of the one to be free of taxation by the other does not spell immunity from paying
the added costs, attributable to the taxation of those who furnish supplies to the Government and who It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the tax
have been granted no tax immunity. So far as a different view has prevailed, see Panhandle Oil Co. v. becomes a part of the price which the purchaser must pay. It does not matter that an additional amount is billed
Mississippi and Graves v. Texas Co., supra, we think it no longer tenable. as tax to the purchaser. The method of listing the price and the tax separately and defining taxable gross receipts
as the amount received less the amount of the tax added, merely avoids payment by the seller of a tax on the
Further inroads into the doctrine of Panhandle were made in 1943 when the U.S. Supreme Court held that amount of the tax. The effect is still the same, namely, that the purchaser does not pay the tax. He pays or may
immunity from state regulation in the performance of governmental functions by Federal officers and agencies pay the seller more for the goods because of the seller's obligation, but that is all and the amount added because
did not extend to those who merely contracted to furnish supplies or render services to the government even of the tax is paid to get the goods and for nothing else.14
though as a result of an increase in the price of such supplies or services attributable to the state regulation, its
ultimate effect may be to impose an additional economic burden on the Government.10 But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden of the tax is
largely a matter of economics.15 Then it can no longer be contended that a sales tax is a tax on the purchaser.
But if a complete turnabout from the rule announced in Panhandle was yet to be made, it was so made in 1952
in Esso Standard Oil v. Evans11 which held that a contractor is not exempt from the payment of a state privilege We therefore hold that the tax imposed by section 186 of the National Internal Revenue Code is a tax on the
tax on the business of storing gasoline simply because the Federal Government with which it has a contract for manufacturer or producer and not a tax on the purchaser except probably in a very remote and inconsequential
the storage of gasoline is immune from state taxation. sense. Accordingly its levy on the sales made to tax-exempt entities like the NPC is permissible.

This tax was imposed because Esso stored gasoline. It is not . . . based on the worth of the government II
property. Instead, the amount collected is graduated in accordance with the exercise of Esso's privilege
to engage in such operations; so it is not "on" the federal property. . . . Federal ownership of the fuel
This conclusion should dispose of the same issue with respect to sales made to the VOA, except that a claim is
will not immunize such a private contractor from the tax on storage. It may generally, as it did here,
here made that the exemption of such sales from taxation rests on stronger grounds. Even the Court of Tax
burden the United States financially. But since James vs. Dravo Contracting Co., 302 U.S. 134, 151, 82 L.
Appeals appears to share this view as is evident from the following portion of its decision:
ed. 155, 167, 58 S. Ct. 208, 114 ALR 318, this has been no fatal flaw. . . . 12

With regard to petitioner's sales to the Voice of America, it appears that the petitioner and the
We have determined the current status of the doctrine of intergovernmental tax immunity in the United States,
respondent are in agreement that the Voice of America is an agency of the United States Government
by showing the drift of the decisions following announcement of the original rule, to point up the that fact that
and as such, all goods purchased locally by it directly from manufacturers or producers are exempt
even in those cases where exemption from tax was sought on the ground of state immunity, the attempt has not
from the payment of the sales tax under the provisions of the agreement between the Government of
met with success.
the Philippines and the Government of the United States, (See Commonwealth Act No. 733) provided
such purchases are supported by serially numbered Certificates of Tax Exemption issued by the
As Thomas Reed Powell noted in 1945 in reviewing the development of the doctrine: vendee-agency, as required by General Circular No. V-41, dated October 16, 1947. . . .

Since the Dravo case settled that it does not matter that the economic burden of the gross receipts tax The circular referred to reads:
may be shifted to the Government, it could hardly matter that the shift comes about by explicit
agreement covering taxes rather than by being absorbed in a higher contract price by bidders for a
Goods purchased locally by U.S. civilian agencies directly from manufacturers, producers or importers
contract. The situation differed from that in the Panhandle and similar cases in that they involved but
shall be exempt from the sales tax.
two parties whereas here the transaction was tripartite. These cases are condemned in so far as they
It was issued purportedly to implement the Agreement between the Republic of the Philippines and the United
States of America Concerning Military Bases,16 but we find nothing in the language of the Agreement to warrant
the general exemption granted by that circular. 7% sales tax due thereon P 10,328.48

The pertinent provisions of the Agreement read: Add: 25% surcharge P 2,582.12

ARTICLE V. — Exemption from Customs and Other Duties Total amount due and collectible P 12,910.60

No import, excise, consumption or other tax, duty or impost shall be charged on material, equipment,
Accordingly, the decision a quo is modified by ordering the petitioner to pay to the respondent Commission the
supplies or goods, including food stores and clothing, for exclusive use in the construction,
amount of P12,910.60 as sales tax and surcharge, with costs against the petitioner.
maintenance, operation or defense of the bases, consigned to, or destined for, the United States
authorities and certified by them to be for such purposes.
G.R. No. L-19667 November 29, 1966
ARTICLE XVIII.—Sales and Services Within the Bases
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
1. It is mutually agreed that the United States Shall have the right to establish on bases, free of all
AMERICAN RUBBER COMPANY and COURT OF TAX APPEALS, respondents.
licenses; fees; sales, excise or other taxes, or imposts; Government agencies, including concessions,
such as sales commissaries and post exchanges, messes and social clubs, for the exclusive use of the
United States military forces and authorized civilian personnel and their families. The merchandise or G.R. No. L-19801-03 November 29, 1966
services sold or dispensed by such agencies shall be free of all taxes, duties and inspection by the
Philippine authorities. . . . AMERICAN RUBBER COMPANY, petitioner,
vs.
Thus only sales made "for exclusive use in the construction, maintenance, operation or defense of the bases," in THE COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.
a word, only sales to the quartermaster, are exempt under article V from taxation. Sales of goods to any other Nos. L-19667:
party even if it be an agency of the United States, such as the VOA, or even to the quartermaster but for a Office of the Solicitor General for petitioner.
different purpose, are not free from the payment of the tax. Ozaeta, Gibbs and Ozaeta for respondents.

On the other hand, article XVIII exempts from the payment of the tax sales made within the base by (not sales to) Nos. L-19801-03:
commissaries and the like in recognition of the principle that a sales tax is a tax on the seller and not on the Ozaeta, Gibbs and Ozaeta for petitioner.
purchaser. Office of the Solicitor General for respondents.

It is a familiar learning in the American law of taxation that tax exemption must be strictly construed and that the REYES, J.B.L., J.:
exemption will not be held to be conferred unless the terms under which it is granted clearly and distinctly show
that such was the intention of the parties. 17 Hence, in so far as the circular of the Bureau of Internal Revenue These cases are brought on appeal from the Court of Tax Appeals by the State (G.R. No. L-19667) as well as by
would give the tax exemptions in the Agreement an expansive construction it is void. the American Rubber Company (G.R. Nos. L-19801, 19802, 19803).

We hold, therefore, that sales to the VOA are subject to the payment of percentage taxes under section 186 of The factual background is the same in all four cases, and is not in controversy, having been stipulated between
the Code. The petitioner is thus liable for P12,910.60, computed as follows: the parties.

Sales to NPC P145,866.70 Petitioner, American Rubber Company, a domestic corporation, from January 1, 1955 to December 1, 1958, was
engaged in producing rubber from its approximately 900 hectare rubber tree plantation, which it owned and
Sales to VOA P 1,683.00 operated in Latuan, Isabela, City of Basilan. Its products, known in the market as Preserved Latex, Pale Crepe No.
1, Pale Crepe No. 2, Ribbed Smoked Sheets Nos. 1 and 2, Flat Bark Rubber, 2X Brown Crepe and 3X Brown Crepe,
are turned out in the following manner:
Total sales subject to tax
P147,549.70
The initial step common to the production of all the foregoing rubber products is tapping, i.e., the collection of The petitioner's rollers are powered by engines although they could be turned by hand as it is done in small
latex (rubber juice) from rubber trees. This is done by the daily cutting, early in the morning, of a spiral incision in rubber plantations. If Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2 are not air-dried and
the bark of rubber trees and placing a cup below the lower end of the incision to receive the flow of latex. The smoked they deteriorate, get spoiled, and the color varies.
collecting cup is filled after two hours. The tapper then collects the latex into buckets and carries them to the
collecting shed. The tapper subsequently pours the latex collected into big milk cans. The filled milk cans are Flat Bark Rubber
then taken in motor vehicles to a coagulating shed, also within the premises of petitioner's plantation, where the
latex is strained into coagulating tanks to remove foreign matter such as leaves and dirt. After these initial steps,
Each morning after a tapper makes a fresh incision in the bark of a rubber tree, he gathers the latex dripping
the processes vary in the production of the various rubber products mentioned above. Said processes are
from the ground around the tree, called "ground rubber", as well as the dried latex from the incisions made the
described hereunder.
previous day, called "bark rubber". Ground and bark rubber are not intentionally produced. No chemicals are
added to the latex transformed into ground and bark rubber. This kind of dried latex is spoiled and has a bad
Preserved Rubber Latex odor.

Fresh latex is diluted with 5 to 5-1/4 ounces of ammonia per gallon of latex. The mixture is thoroughly stirred Ground and bark rubber when gathered in sufficient quantities are passed numerous times through the rollers or
and then poured into metal drums. The addition of ammonia preserves the latex in liquid form and prevents its mills until they form a uniform mass or sheet which, finally is called Flat Bark Rubber. No chemical is used to
deterioration or its acquisition of a repulsive smell, and at the same time preserves its uniform color. Latex which coagulate the dried ground and bark rubber because they are already coagulated. They are formed into sheets
has been thus artificially preserved in its liquid form generally lasts for about a month without spoiling. On the by means only of pressure of the mills or rollers through which they are passed. Flat Bark Rubber commands the
other hand, fresh latex in its original state lasts for only about two hours, after which it becomes spoiled. lowest prices in the rubber market.

Petitioner sells preserved latex only upon previous orders of customers who supply empty metal drum 3X Brown Crepe
containers.
Every morning, before a fresh incision is made in the bark of the rubber trees, the tapper collects not only
Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2 ground and bark rubber but removes and collects the latex in the cups, known as "cup rubber". The cup rubber
coagulates and dries through natural processes and, when gathered in sufficient quantities, is milled and rolled
To produce Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2, the petitioner adds to the latex in through a series of rollers until by force of pressure it is formed into a mass of the desired thickness called "3X
the coagulating tank about 15 or 16 ounces of glacial acetic acid per gallon of latex. The mixture is stirred Brown Crepe." Like ground and bark rubber, no chemicals are added to cup rubber to produce 3X Brown Crepe.
thoroughly. Thereafter aluminum partitions are placed crosswise inside the tank so that the latex will coagulate Cup rubber in its original form, like ground and bark rubber, is spoiled and has a bad odor.
into uniform slabs. Acetic acid is added to the latex to hasten coagulation which otherwise takes place naturally,
and to preserve its fresh state and color. The similarity in the production of Pale Crepe Nos. 1 and 2 and Ribbed 2X Brown Crepe
Smoked Sheets Nos. 1 and 2 ends at the point of removing the coagulum (coagulated rubber sheets) from the
coagulating tanks.
2X Brown Crepe is obtained by milling or rolling the excess pieces of coagulated rubber latex which had been cut
or trimmed from the from the ribbed smoked sheets No. 2 into a uniform mass. 2X Brown Crepe is produced in
To produce Pale Crepe No. 1, the coagulum is passed through a series of rollers until the desired thickness is the same manner as the other sheets of crepe rubber, i.e., without the addition of any chemicals.
attained, whereupon it is removed to the air-drying house situated inside petitioner's plantation and hung for a
period of about twelve or thirteen days to dry. There are no mechanical driers used; the air-drying is done
Petitioner during the said period sold its foregoing rubber products locally and as prescribed by the respondent's
naturally. As soon as the Pale Crepe is dried, the sheets are sorted; those which are of uniform pale color are
regulations declared same for tax purposes which respondent accordingly assessed. Petitioner paid, under
classified as Pale Crepe No. 2, whereupon they are baled and stored, ready for market.
protest, the corresponding sales taxes thereon claiming exemption therefrom under Section 188 (b) of the
National Internal Revenue Code.
Ribbed & Smoked Sheets Nos. 1 and 2 are produced practically in the same manner as Pale Crepe, except that
the coagulum is passed only once through a roller provided with ribs after which the flattened and ribbed
The following sales taxes on the aforementioned rubber products were paid under protest —
coagulum is removed to petitioner's smoke-house where it is hung and cured by exposure to heat and smoke
from wood fires for about six or seven days. The resulting smoked sheets are sorted and classified dependent
upon color and opaqueness into ribbed smoked sheets (RSS) No. 1 and No. 2, baled, and stored ready for the From Jan. 1, 1955 to Dec. 31, 1956 P83,193.48
market. No mechanical equipment is used in generating the smoke in the smoke-house.
From Jan. 1, 1957 to June 30, 1957 P20,504.99

From July 1, 1957 to Dec. 31, 1958 P52,378.90


It is further stipulated that the sales tax collected from petitioner American Rubber Company on the local sales agricultural production that incidentally required resort to preservative processes designed to increase or
of its rubber products, following Internal Revenue General Circulars Nos. 431 and 440, had been separately prolong marketability of the product.
itemized and billed by petitioner Company in the invoices issued to the customers, that paid both the value of
the rubber articles and the separately itemized sales tax, from January 1, 1955 to August 2, 1957. In the case before us, the parties have stipulated that fresh latex directly obtained from the rubber tree, which is
clearly an agricultural product, becomes spoiled after only two hours. It has, therefore, a severely limited
After paying under protest, the petitioner claimed refund of the sales taxes paid by it on the ground that under marketability. The addition of ammonia prevents its deterioration for about a month, and we see no reason why
section 188, paragraph b, of the Internal Revenue Code, as amended, 1 its rubber products were agricultural this preservative process should wrest away from the preserved latex the protective mantle of the tax
products exempt from sales tax, and upon refusal of the Commissioner of Internal Revenue, brought the case on exemption.
appeal to the Court of Tax Appeals (C.T.A. Nos. 356, 440,, 632). The respondent Commissioner interposed
defenses, denying that petitioner's products were agricultural ones within the exemption; claiming that there Taking also into account the great distance that separates the plaintiff's plantation from the main rubber
had been no exhaustion of administrative remedies; and argued that the sales tax having been passed to the processing centers in Japan, the United States and Europe, and the difficulty in handling products in liquid form,
buyers during the period that elapsed from January 1, 1955 to August 2, 1957, the petitioner did not have it can be discerned without difficulty that preserved, latex, with its 30-day spoilage limit, is still severely
personality to demand, sue for and recover the aforesaid sales taxes, plus interest. handicapped for export and dollar earning purposes.

In its decision, now under appeal, the Tax Court held Preserved Latex, Flat Bark Rubber, and 3X Brown Crepe to To overcome these shortcomings, and extend its useful life almost indefinitely, it becomes necessary to separate
be agricultural products, "because the labor employed in the processing thereof is agricultural labor", and hence, and solidify the rubber granules diffused in the latex, and hence, according to the stipulation of facts and the
the sales of such products were exempt from sales tax, but declared Pale Crepe No. 1, Ribbed Smoked Sheets evidence, acetic acid is added to hasten coagulation. There is nothing on record to show that the acetic acid in
Nos. 1 and 3, as well as 2X Brown Crepe (which is obtained from rolling excess pieces of Smoked Sheets) to be way produces anything that was not originally in the source, the liquid latex. The coagulum is then rolled and
manufactured products, sales of which were subject to the tax. It overruled the defense of non-exhaustion of compacted and afterwards air dried to make Pale Crepe(1 and 2), or else cured and smoked to produce rubber
administrative remedies and upheld the Revenue Commissioner's stand that petitioner Company was not sheets. Once again we see nothing in this processing to alter the agricultural nature of the result; what takes
entitled to recover the sales tax that had been separately billed to its customers, and paid by the latter. Hence, it place is merely an accelerated coagulation and dessication that would naturally occur anyway, only within a
dismissed the appeal in C.T.A. Nos. 356 and 440 and ordered respondent Commissioner to refund only P3,916.49 longer period of time, coupled with greater spoilage of the product.
without interest, or costs.
Thus the operations carried out by plaintiff appear to be purely preservative in nature, made necessary, by its
Both parties then duly appealed to this. production of fresh rubber latex in a large scale. they are purely incidental to the latter, just as the canning of
skinned and cored pineapples in syrup was held to be incidental to the large-scale cultivation of the fruit in the
The issues posed on these appeals are: Philippine Packing Corporation case (ante). Being necessary to suit the product to the demands of the market,
the operations in both cases should lead to the same result, non-taxability of the sales of the respective
(1) Whether the plaintiff's rubber products above described should be considered agricultural or agricultural products. In not so holding, the Tax Court was in error.
manufactured for purposes of their subjection to the sales tax;
Even less justifiable is the position taken by the Revenue Commissioner in his appeal against the finding of the
(2) Whether plaintiff is or is not entitled to recover the sales tax paid by it, but passed on to and paid Tax Court that Flat Bark 3X Brown Crepe rubber are agricultural products. According to the record, these sheets
by the buyers of its products; and result from the drippings and waste rubber that have dried naturally, that are rolled and compacted into the
desired thickness, without any other processing.
(3) Whether plaintiff is or is not entitled to interest on the sales tax paid by it under protest, in case
recovery thereof is allowed. As to 2X Brown Crepe which is compacted out of the trimmings and waste left over from the production of
ribbed smoked sheets, no reason is seen why it should be treated differently from the ribbed smoked sheets
themselves.
The first issue, in our opinion, is governed by the principles laid down by this Court in Philippine Packing
Corporation vs. Collector of Internal Revenue, 100 Phil. 545 et seq. We there ruled that the exemption from sales
tax established in section 188 (b) of the Internal Revenue Tax Code in favor of sales of agricultural products, In his appeal, the Revenue Commissioner contends that all of plaintiff's products should be deemed
whether in their original form or not, made by the producer or owner of the land where produced is not taken manufactured articles, on the strength of section 194 (n) of the Revenue Code defining a "manufacturer" as
away merely because the produce undergoes processing at the hand of said producer or owner for the purpose
of working his product into a more convenient and valuable form suited to meet the demand of an expanded every person who by physical or chemical process alters the exterior texture or form or inner
market; that the exemption was not designed in favor of the small agricultural producer, already exempted by substances of any raw material or manufactured or partially manufactured product in such manner as
the subsequent paragraphs of the same section 188, but that said exemption is not incompatible with large scale to prepare it for a special use or uses to which it could not have been put to in its original condition, or
who . . . alters the quality of any such raw material . . . as to reduce it to marketable shape . . . .
But, as pointed out in the Philippine Packing Corporation case, this definition is not applicable to the exemption if a manufacturer, producer, or importer, in fixing the gross selling price of an article sold by him, has
of agricultural products, "whether in their original form or not". The use of this last phrase in the statute clearly included an amount intended to cover the sales tax in the gross selling price of the article, the sales tax
indicates that the agricultural product may be altered in texture or form without being divested of the shall be based on the gross selling price less the amount intended to cover the tax, if the same is billed
exemption (cas cit. 100 Phil., p. 548). The exception would be sales of agricultural products while Republic Act to the purchaser as a separate item in the invoice. . . . (Emphasis supplied)
No. 1612 was in effect because under this Act the freedom from sales tax became restricted to agricultural
products "in their original form" only. So that plaintiff's sales from August 24, 1956 (approval of Republic Act In other words, the separate itemization of the sales tax in the invoices was permitted to avoid the taxpayer
1612) to June 22, 1957 (when Republic Act 1856 became effective and restored the exemption to agricultural being compelled to pay a sales tax on the tax itself. It does not seem either just or proper that a step suggested
products "whether in their original form or not") became properly taxable. Under paragraphs (A)2 and B(4) of by the Internal Revenue authorities themselves to protect the taxpayer from paying a double tax should now be
the additional stipulation of facts (CTA Rec. pp. 261-262, G.R. L-19801), the sales tax properly collected during used to block his action to recover taxes collected without legal sanction.
this period of plaintiff's transactions amounted to P18,187.19 from August 24 to December 31, 1956; and
P18,888.28 from January 1 to June 21, 1957, or a total of P37,075.47. This last amount is, therefore non-
Finally, a more important reason that militates against extensive and indiscriminate application of the Medina vs.
recoverable.2
City of Baguio ruling is that it would tend to perpetuate illegal taxation; for the individual customers to whom the
tax is ultimately shifted will ordinarily not care to sue for its recovery, in view of the small amount paid by each
The second issue in this appeal concerns the holding of the Court of Tax Appeals that the plaintiff Company is not and the high cost of litigation for the reclaiming of an illegal tax. In so far, therefore, as it favors the imposition,
entitled to recover the sales tax paid by it from January, 1955 to August 2, 1957, because during that period the collection and retention of illegal taxes, and encourages a multiplicity of suits, the Tax Court's ruling under
plaintiff had separately invoiced and billed the corresponding sales tax to the buyers of its products. In so appeal violates morals and public policy.
holding, the Tax Court relied on our decisions in Medina vs. City of Baguio, 91 Phil. 854; Mendoza, Santos & Co.
vs. Municipality of Meycawayan, L-6069-6070, April 30, 1954 (94 Phil. 1047); and Zosimo Rojas & Bros. vs. City of
The plaintiff Company also urges that the refund of the taxes should include interest thereon. While this Court
Cavite, L-10730, May 27, 1958.
has allowed recovery of interest in some cases, it has done so only in cases of patent arbitrariness on the part of
the Revenue authorities; and in this instance we agree with the Tax Court that no such patent arbitrariness has
The basic ruling is that of Medina vs. City of Baguio, supra, where this Court affirmed the ruling of the court of been shown.
First Instance to the effect that —
IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals is affirmed in Case G.R. No. L-19667 and
"The amount collected from the theatergoers as additional price of admission tickets is not the modified in cases G.R. Nos. L-19801, L-19802 and L-19803, by declaring the sales taxes therein involved to have
property of plaintiffs or any of them. It is paid by the public. If anybody has the right to claim it, it is been improperly denied levied and collected and ordering respondent Commissioner of Internal Revenue to
those who paid it. Only owners of property has the right to claim said property. The cine owner acted refund the same, except the taxes corresponding to the period from August 24, 1956 to June 22, 1957, during
as mere agents of the city in collecting additional price charged in the sale of admission tickets." which Republic Act No. 1612 was in force. The amount of P37,075.47 paid by the taxpayer for this period is
(Medina vs. City of Baguio, 91 Phil. 854) (Emphasis supplied) hereby declared properly collected and not refundable. Without special pronouncement as to costs.

We agree with the plaintiff-appellant that the Medina ruling is not applicable to the present case, since the G.R. No. L-31092 February 27, 1987
municipal taxes therein imposed were taxes on the admission tickets sold, so that, in effect, they were levies
upon the theatergoers who bought them; so much so that (as the decision expressly ruled) the tax was collected
COMMISSIONER OF INTERNAL REVENUE, petitioner,
by the theater owners as agents of the respective municipal treasurers. This does not obtain in the case at bar.
vs.
The Medina ruling was merely followed in Rojas & Bros. vs. Cavite, supra; and in Mendoza, Santos & Co. vs.
JOHN GOTAMCO & SONS, INC. and THE COURT OF TAX APPEALS, respondents.
Municipality of Meycawayan, 94 Phil. 1047.

By contrast with the municipal taxes involved in the preceding cases, the sales tax is by law imposed directly, not
YAP, J.:
on the thing sold, but on the act (sale) of the manufacturer, producer or importer (Op. of the Secretary of Justice,
June 15, 1946; 47 C.J.S., p. 1141), who is exclusively made liable for its timely payment. There is no proof that the
tax paid by plaintiff is the very money paid by its customers. Where the tax money paid by the plaintiff came The question involved in this petition is whether respondent John Gotamco & Sons, Inc. should pay the 3%
from is really no concern of the Government, but solely a matter between the plaintiff and its customers. contractor's tax under Section 191 of the National Internal Revenue Code on the gross receipts it realized from
Anyway, once recovered, the plaintiff must hold the refund taxes in trust for the individual purchasers who the construction of the World Health Organization office building in Manila.
advanced payment thereof, and whose names must appear in plaintiff's records.
The World Health Organization (WHO for short) is an international organization which has a regional office in
Moreover, the separate billing of the sales tax in appellant's invoices was a direct result of the respondent Manila. As an international organization, it enjoys privileges and immunities which are defined more specifically
Commissioner's General Circular No. 440, providing that — in the Host Agreement entered into between the Republic of the Philippines and the said Organization on July
22, 1951. Section 11 of that Agreement provides, inter alia, that "the Organization, its assets, income and other
properties shall be: (a) exempt from all direct and indirect taxes. It is understood, however, that the Organization On January 17, 1961, the Commissioner of Internal Revenue sent a letter of demand to Gotamco demanding
will not claim exemption from taxes which are, in fact, no more than charges for public utility services; . . . payment of P 16,970.40, representing the 3% contractor's tax plus surcharges on the gross receipts it received
from the WHO in the construction of the latter's building.
When the WHO decided to construct a building to house its own offices, as well as the other United Nations
offices stationed in Manila, it entered into a further agreement with the Govermment of the Republic of the Respondent Gotamco appealed the Commissioner's decision to the Court of Tax Appeals, which after trial
Philippines on November 26, 1957. This agreement contained the following provision (Article III, paragraph 2): rendered a decision, in favor of Gotamco and reversed the Commissioner's decision. The Court of Tax Appeal's
decision is now before us for review on certiorari.
The Organization may import into the country materials and fixtures required for the
construction free from all duties and taxes and agrees not to utilize any portion of the In his first assignment of error, petitioner questions the entitlement of the WHO to tax exemption, contending
international reserves of the Government. that the Host Agreement is null and void, not having been ratified by the Philippine Senate as required by the
Constitution. We find no merit in this contention. While treaties are required to be ratified by the Senate under
Article VIII of the above-mentioned agreement referred to the Host Agreement concluded on July 22, 1951 which the Constitution, less formal types of international agreements may be entered into by the Chief Executive and
granted the Organization exemption from all direct and indirect taxes. become binding without the concurrence of the legislative body. 1 The Host Agreement comes within the latter
category; it is a valid and binding international agreement even without the concurrence of the Philippine
Senate.
In inviting bids for the construction of the building, the WHO informed the bidders that the building to be
constructed belonged to an international organization with diplomatic status and thus exempt from the payment
of all fees, licenses, and taxes, and that therefore their bids "must take this into account and should not include The privileges and immunities granted to the WHO under the Host Agreement have been recognized by this
items for such taxes, licenses and other payments to Government agencies." Court as legally binding on Philippine authorities. 2

The construction contract was awarded to respondent John Gotamco & Sons, Inc. (Gotamco for short) on Petitioner maintains that even assuming that the Host Agreement granting tax exemption to the WHO is valid
February 10, 1958 for the stipulated price of P370,000.00, but when the building was completed the price and enforceable, the 3% contractor's tax assessed on Gotamco is not an "indirect tax" within its purview.
reached a total of P452,544.00. Petitioner's position is that the contractor's tax "is in the nature of an excise tax which is a charge imposed upon
the performance of an act, the enjoyment of a privilege or the engaging in an occupation. . . It is a tax due
primarily and directly on the contractor, not on the owner of the building. Since this tax has no bearing upon the
Sometime in May 1958, the WHO received an opinion from the Commissioner of the Bureau of Internal Revenue
WHO, it cannot be deemed an indirect taxation upon it."
stating that "as the 3% contractor's tax is an indirect tax on the assets and income of the Organization, the gross
receipts derived by contractors from their contracts with the WHO for the construction of its new building, are
exempt from tax in accordance with . . . the Host Agreement." Subsequently, however, on June 3, 1958, the We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. Said the respondent court:
Commissioner of Internal Revenue reversed his opinion and stated that "as the 3% contractor's tax is not a direct
nor an indirect tax on the WHO, but a tax that is primarily due from the contractor, the same is not covered by . . In context, direct taxes are those that are demanded from the very person who, it is intended
. the Host Agreement." or desired, should pay them; while indirect taxes are those that are demanded in the first
instance from one person in the expectation and intention that he can shift the burden to
On January 2, 1960, the WHO issued a certification state 91 inter alia,: someone else. (Pollock vs. Farmers, L & T Co., 1957 US 429, 15 S. Ct. 673, 39 Law. Ed. 759.)
The contractor's tax is of course payable by the contractor but in the last analysis it is the
owner of the building that shoulders the burden of the tax because the same is shifted by the
When the request for bids for the construction of the World Health Organization office
contractor to the owner as a matter of self-preservation. Thus, it is an indirect tax. And it is
building was called for, contractors were informed that there would be no taxes or fees
an indirect tax on the WHO because, although it is payable by the petitioner, the latter can
levied upon them for their work in connection with the construction of the building as this
shift its burden on the WHO. In the last analysis it is the WHO that will pay the tax indirectly
will be considered an indirect tax to the Organization caused by the increase of the
through the contractor and it certainly cannot be said that 'this tax has no bearing upon the
contractor's bid in order to cover these taxes. This was upheld by the Bureau of Internal
World Health Organization.
Revenue and it can be stated that the contractors submitted their bids in good faith with the
exemption in mind.
Petitioner claims that under the authority of the Philippine Acetylene Company versus Commissioner of Internal
Revenue, et al., 3 the 3% contractor's tax fans directly on Gotamco and cannot be shifted to the WHO. The Court
The undersigned, therefore, certifies that the bid of John Gotamco & Sons, made under the
of Tax Appeals, however, held that the said case is not controlling in this case, since the Host Agreement
condition stated above, should be exempted from any taxes in connection with the
specifically exempts the WHO from "indirect taxes." We agree. The Philippine Acetylene case involved a tax on
construction of the World Health Organization office building.
sales of goods which under the law had to be paid by the manufacturer or producer; the fact that the
manufacturer or producer might have added the amount of the tax to the price of the goods did not make the
sales tax "a tax on the purchaser." The Court held that the sales tax must be paid by the manufacturer or
producer even if the sale is made to tax-exempt entities like the National Power Corporation, an agency of the THE FACTS:
Philippine Government, and to the Voice of America, an agency of the United States Government.
On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734) authorizing certain
The Host Agreement, in specifically exempting the WHO from "indirect taxes," contemplates taxes which, revenue officers to examine Sony’s books of accounts and other accounting records regarding revenue taxes
although not imposed upon or paid by the Organization directly, form part of the price paid or to be paid by it. for "the period 1997 and unverified prior years." On December 6, 1999, a preliminary assessment for 1997
This is made clear in Section 12 of the Host Agreement which provides: deficiency taxes and penalties was issued by the CIR which Sony protested. Thereafter, acting on the protest, the
CIR issued final assessment notices, the formal letter of demand and the details of discrepancies. 4 Said details of
While the Organization will not, as a general rule, in the case of minor purchases, claim the deficiency taxes and penalties for late remittance of internal revenue taxes are as follows:
exemption from excise duties, and from taxes on the sale of movable and immovable
property which form part of the price to be paid, nevertheless, when the Organization is DEFICIENCY VALUE -ADDED TAX (VAT)
making important purchases for official use of property on which such duties and taxes have
been charged or are chargeable the Government of the Republic of the Philippines shall (Assessment No. ST-VAT-97-0124-2000)
make appropriate administrative arrangements for the remission or return of the amount of
duty or tax. (Emphasis supplied). Basic Tax Due P 7,958,700.00

Add: Penalties
The above-quoted provision, although referring only to purchases made by the WHO, elucidates the clear
intention of the Agreement to exempt the WHO from "indirect" taxation. Interest up to 3-31-2000 P 3,157,314.41

Compromise 25,000.00 3,182,314.41


The certification issued by the WHO, dated January 20, 1960, sought exemption of the contractor, Gotamco,
from any taxes in connection with the construction of the WHO office building. The 3% contractor's tax would be Deficiency VAT Due P 11,141,014.41
within this category and should be viewed as a form of an "indirect tax" On the Organization, as the payment
thereof or its inclusion in the bid price would have meant an increase in the construction cost of the building.
DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)
Accordingly, finding no reversible error committed by the respondent Court of Tax Appeals, the appealed
decision is hereby affirmed. (Assessment No. ST-EWT-97-0125-2000)

Basic Tax Due P 1,416,976.90


SO ORDERED.
Add: Penalties
G.R. No. 178697 November 17, 2010 Interest up to 3-31-2000 P 550,485.82

Compromise 25,000.00 575,485.82


COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs. Deficiency EWT Due P 1,992,462.72
SONY PHILIPPINES, INC., Respondent.

DECISION DEFICIENCY OF VAT ON ROYALTY PAYMENTS

MENDOZA, J.: (Assessment No. ST-LR1-97-0126-2000)

Basic Tax Due P


This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5, 2007 Resolution
of the Court of Tax Appeals – En Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming the October 26, 2004 Decision of Add: Penalties
the CTA-First Division2 which, in turn, partially granted the petition for review of respondent Sony Philippines,
Surcharge P 359,177.80
Inc. (Sony). The CTA-First Division decision cancelled the deficiency assessment issued by petitioner
Commissioner of Internal Revenue (CIR) against Sony for Value Added Tax (VAT) but upheld the deficiency Interest up to 3-31-2000 87,580.34
assessment for expanded withholding tax (EWT) in the amount of ₱1,035,879.70 and the penalties for late
remittance of internal revenue taxes in the amount of ₱1,269, 593.90.3 Compromise 16,000.00 462,758.14
Penalties Due P 462,758.14 professional fees paid to general professional partnerships. It also assessed the amounts paid to sales agents as
commissions with five percent (5%) EWT pursuant to Section 1(g) of Revenue Regulations No. 6-85. The CTA-First
Division, however, disallowed the EWT assessment on rental expense since it found that the total rental deposit
of ₱10,523,821.99 was incurred from January to March 1998 which was again beyond the coverage of LOA
LATE REMITTANCE OF FINAL WITHHOLDING TAX 19734. Except for the compromise penalties, the CTA-First Division also upheld the penalties for the late
(Assessment No. ST-LR2-97-0127-2000) payment of VAT on royalties, for late remittance of final withholding tax on royalty as of December 1997 and for
the late remittance of EWT by some of Sony’s branches.8 In sum, the CTA-First Division partly granted Sony’s
Basic Tax Due P petition by cancelling the deficiency VAT assessment but upheld a modified deficiency EWT assessment as well
as the penalties. Thus, the dispositive portion reads:
Add: Penalties

Surcharge P 1,729,690.71 WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED to CANCEL and
WITHDRAW the deficiency assessment for value-added tax for 1997 for lack of merit. However, the deficiency
Interest up to 3-31-2000 508,783.07 assessments for expanded withholding tax and penalties for late remittance of internal revenue taxes are
UPHELD.
Compromise 50,000.00 2,288,473.78

Penalties Due P 2,288,473.78 Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding tax in the
amount of ₱1,035,879.70 and the following penalties for late remittance of internal revenue taxes in the sum of
₱1,269,593.90:
LATE REMITTANCE OF INCOME PAYMENTS

(Assessment No. ST-LR3-97-0128-2000) 1. VAT on Royalty P 429,242.07

Basic Tax Due P 2. Withholding Tax on Royalty 831,428.20

Add: Penalties 3. EWT of Petitioner's Branches 8,923.63

25 % Surcharge P 8,865.34 Total P 1,269,593.90


Interest up to 3-31-2000 58.29 Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)(3) of the 1997
Tax Code.
Compromise 2,000.00 10,923.60

Penalties Due P 10,923.60 SO ORDERED.9

The CIR sought a reconsideration of the above decision and submitted the following grounds in support thereof:

A. The Honorable Court committed reversible error in holding that petitioner is not liable for the
GRAND TOTAL P 15,895,632.655 deficiency VAT in the amount of ₱11,141,014.41;

Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2, 2000. Sony B. The Honorable court committed reversible error in holding that the commission expense in the
submitted relevant documents in support of its protest on the 16th of that same month.6 amount of P2,894,797.00 should be subjected to 5% withholding tax instead of the 10% tax rate;

On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said supporting C. The Honorable Court committed a reversible error in holding that the withholding tax assessment
documents to the CIR, Sony filed a petition for review before the CTA.7 with respect to the 5% withholding tax on rental deposit in the amount of ₱10,523,821.99 should be
cancelled; and

After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized advertising
expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT credit. As regards the D. The Honorable Court committed reversible error in holding that the remittance of final withholding
EWT, the CTA-First Division maintained the deficiency EWT assessment on Sony’s motor vehicles and on tax on royalties covering the period January to March 1998 was filed on time.10
On April 28, 2005, the CTA-First Division denied the motion for reconsideration.1avvphi1 Unfazed, the CIR filed a Upon filing of Sony’s comment, the Court ordered the CIR to file its reply thereto. The CIR subsequently filed a
petition for review with the CTA-EB raising identical issues: manifestation informing the Court that it would no longer file a reply. Thus, on December 3, 2008, the Court
resolved to give due course to the petition and to decide the case on the basis of the pleadings filed. 13
1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of P11,141,014.41;
The Court finds no merit in the petition.
2. Whether or not the commission expense in the amount of ₱2,894,797.00 should be subjected to
10% withholding tax instead of the 5% tax rate; The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years," should be
understood to mean the fiscal year ending in March 31, 1998.14 The Court cannot agree.
3. Whether or not the withholding assessment with respect to the 5% withholding tax on rental
deposit in the amount of ₱10,523,821.99 is proper; and Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the appropriate
revenue officer assigned to perform assessment functions. It empowers or enables said revenue officer to
4. Whether or not the remittance of final withholding tax on royalties covering the period January to examine the books of account and other accounting records of a taxpayer for the purpose of collecting the
March 1998 was filed outside of time.11 correct amount of tax.15 The very provision of the Tax Code that the CIR relies on is unequivocal with regard to its
power to grant authority to examine and assess a taxpayer.
Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed CIR’s petition on
May 17, 2007. CIR’s motion for reconsideration was denied by the CTA-EB on July 5, 2007. SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax
Administration and Enforcement. –
The CIR is now before this Court via this petition for review relying on the very same grounds it raised before the
CTA-First Division and the CTA-EB. The said grounds are reproduced below: (A)Examination of Returns and Determination of tax Due. – After a return has been filed as required under the
provisions of this Code, the Commissioner or his duly authorized representative may authorize the examination
of any taxpayer and the assessment of the correct amount of tax: Provided, however, That failure to file a return
GROUNDS FOR THE ALLOWANCE OF THE PETITION
shall not prevent the Commissioner from authorizing the examination of any taxpayer. x x x [Emphases supplied]

I
Clearly, there must be a grant of authority before any revenue officer can conduct an examination or
assessment. Equally important is that the revenue officer so authorized must not go beyond the authority given.
THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR DEFICIENCY VAT IN THE AMOUNT In the absence of such an authority, the assessment or examination is a nullity.
OF PHP11,141,014.41.
As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said reason, the CIR acting
II through its revenue officers went beyond the scope of their authority because the deficiency VAT assessment
they arrived at was based on records from January to March 1998 or using the fiscal year which ended in March
AS TO RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF PHP1,992,462.72: 31, 1998. As pointed out by the CTA-First Division in its April 28, 2005 Resolution, the CIR knew which period
should be covered by the investigation. Thus, if CIR wanted or intended the investigation to include the year
A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN THE AMOUNT 1998, it should have done so by including it in the LOA or issuing another LOA.
OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A WITHHOLDING TAX OF 5% INSTEAD OF
THE 10% TAX RATE. Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase "and unverified
prior years," violated Section C of Revenue Memorandum Order No. 43-90 dated September 20, 1990, the
B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH RESPECT TO THE 5% pertinent portion of which reads:
WITHHOLDING TAX ON RENTAL DEPOSIT IN THE AMOUNT OF PHP10,523,821.99 IS NOT
PROPER. 3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of issuing
L/As covering audit of "unverified prior years is hereby prohibited. If the audit of a taxpayer shall include more
III than one taxable period, the other periods or years shall be specifically indicated in the L/A. 16 [Emphasis
supplied]

THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON ROYALTIES COVERING THE
PERIOD JANUARY TO MARCH 1998 WAS FILED ON TIME.12 On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may, the CIR’s
argument, that Sony’s advertising expense could not be considered as an input VAT credit because the same was
eventually reimbursed by Sony International Singapore (SIS), is also erroneous.
The CIR contends that since Sony’s advertising expense was reimbursed by SIS, the former never incurred any not SIS. SIS just gave assistance to Sony in the amount equivalent to the latter’s advertising expense but never
advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR continues, the said received any goods, properties or service from Sony.
advertising expense should be for the account of SIS, and not Sony.17
Regarding the deficiency EWT assessment, more particularly Sony’s commission expense, the CIR insists that said
The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-EB, Sony’s deficiency EWT assessment is subject to the ten percent (10%) rate instead of the five percent (5%) citing
deficiency VAT assessment stemmed from the CIR’s disallowance of the input VAT credits that should have been Revenue Regulation No. 2-98 dated April 17, 1998.24 The said revenue regulation provides that the 10% rate is
realized from the advertising expense of the latter.18 It is evident under Section 11019 of the 1997 Tax Code that applied when the recipient of the commission income is a natural person. According to the CIR, Sony’s schedule
an advertising expense duly covered by a VAT invoice is a legitimate business expense. This is confirmed by no of Selling, General and Administrative expenses shows the commission expense as "commission/dealer salesman
less than CIR’s own witness, Revenue Officer Antonio Aluquin.20 There is also no denying that Sony incurred incentive," emphasizing the word salesman.
advertising expense. Aluquin testified that advertising companies issued invoices in the name of Sony and the
latter paid for the same.21 Indubitably, Sony incurred and paid for advertising expense/ services. Where the On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on Section 1(g)
money came from is another matter all together but will definitely not change said fact. of Revenue Regulations No. 6-85 which provides:

The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and, thus, taxable. (g) Amounts paid to certain Brokers and Agents. – On gross payments to customs, insurance, real estate and
In support of this, the CIR cited a portion of Sony’s protest filed before it: commercial brokers and agents of professional entertainers – five per centum (5%).25

The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a subsidy equivalent In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First Division, held:
to the latter’s advertising expenses will not affect the validity of the input taxes from such expenses. Thus, at the
most, this is an additional income of our client subject to income tax. We submit further that our client is not
x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker is subject to
subject to VAT on the subsidy income as this was not derived from the sale of goods or services.22
5% withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the commission expense in
the schedule of Selling, General and Administrative expenses submitted by petitioner (SPI) to the BIR is
Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to income tax, the captioned as "commission/dealer salesman incentive" the same does not justify the automatic imposition of flat
Court agrees. However, the Court does not agree that the same subsidy should be subject to the 10% VAT. To 10% rate. As itemized by petitioner, such expense is composed of "Commission Expense" in the amount of
begin with, the said subsidy termed by the CIR as reimbursement was not even exclusively earmarked for Sony’s P10,200.00 and ‘Broker Dealer’ of P2,894,797.00.26
advertising expense for it was but an assistance or aid in view of Sony’s dire or adverse economic conditions, and
was only "equivalent to the latter’s (Sony’s) advertising expenses."
The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the applicable rule is
Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, which was the applicable rule
Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus: during the subject period of examination and assessment as specified in the LOA. Revenue Regulations No. 2-98,
cited by the CIR, was only adopted in April 1998 and, therefore, cannot be applied in the present case. Besides,
SEC. 106. Value-added Tax on Sale of Goods or Properties. – the withholding tax on brokers and agents was only increased to 10% much later or by the end of July 2001
under Revenue Regulations No. 6-2001.27 Until then, the rate was only 5%.
(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale, barter or exchange of
goods or properties, value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency EWT
money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. assessment on the rental deposit. According to their findings, Sony incurred the subject rental deposit in the
amount of ₱10,523,821.99 only from January to March 1998. As stated earlier, in the absence of the appropriate
Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied. Certainly, LOA specifying the coverage, the CIR’s deficiency EWT assessment from January to March 1998, is not valid and
there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It was but a dole out by SIS and must be disallowed.
not in payment for goods or properties sold, bartered or exchanged by Sony.
Finally, the Court now proceeds to the third ground relied upon by the CIR.
In the case of CIR v. Court of Appeals (CA),23 the Court had the occasion to rule that services rendered for a fee
even on reimbursement-on-cost basis only and without realizing profit are also subject to VAT. The case, The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on royalties (i) as of
however, is not applicable to the present case. In that case, COMASERCO rendered service to its affiliates and, in December 1997; and (ii) for the period from January to March 1998. Again, the Court agrees with the CTA-First
turn, the affiliates paid the former reimbursement-on-cost which means that it was paid the cost or expense that Division when it upheld the CIR with respect to the royalties for December 1997 but cancelled that from January
it incurred although without profit. This is not true in the present case. Sony did not render any service to SIS at to March 1998.
all. The services rendered by the advertising companies, paid for by Sony using SIS dole-out, were for Sony and
The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and Sections 2.57.4 and 2.58(A)(2)(a)29 of REYES,, J.:
Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on royalties from January to March
of 1998. At the same time, it downplays the relevance of the Manufacturing License Agreement (MLA) between This appeal by Petition for Review1 seeks to reverse and set aside the Decision2 dated September 2, 2015 and
Sony and Sony-Japan, particularly in the payment of royalties. Resolution3 dated January 29, 2016 of the Court of Tax Appeals (CTA) en bane in CTA EB No. 1224, affirming with
modification the Decision4 dated June 5, 2014 and the Resolution5 dated September 15, 2014.in CTA Case No.
The above revenue regulations provide the manner of withholding remittance as well as the payment of final tax 7948 of the CTA Third Division, ordering petitioner Medicard Philippines, Inc. (MEDICARD), to pay respondent
on royalty. Based on the same, Sony is required to deduct and withhold final taxes on royalty payments when Commissioner of Internal Revenue (CIR) the deficiency
the royalty is paid or is payable. After which, the corresponding return and remittance must be made within 10
days after the end of each month. The question now is when does the royalty become payable? Value-Added Tax. (VAT) assessment in the aggregate amount of ₱220,234,609.48, plus 20% interest per
annum starting January 25, 2007, until fully paid, pursuant to Section 249(c)6 of the National Internal Revenue
Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty payments were Code (NIRC) of 1997.
agreed upon:
The Facts
(5)Within two (2) months following each semi-annual period ending June 30 and December 31, the LICENSEE
shall furnish to the LICENSOR a statement, certified by an officer of the LICENSEE, showing quantities of the MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and medical insurance
MODELS sold, leased or otherwise disposed of by the LICENSEE during such respective semi-annual period and coverage to its clients. Individuals enrolled in its health care programs pay an annual membership fee and are
amount of royalty due pursuant this ARTICLE X therefore, and the LICENSEE shall pay the royalty hereunder to entitled to various preventive, diagnostic and curative medical services provided by duly licensed physicians,
the LICENSOR concurrently with the furnishing of the above statement.30 specialists and other professional technical staff participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.7
Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period which ends in
June 30 and December 31. However, the CTA-First Division found that there was accrual of royalty by the end of MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic Filing and Payment System
December 1997 as well as by the end of June 1998. Given this, the FWTs should have been paid or remitted by (EFPS) on April 20, 2006, July 25, 2006 and October 20, 2006, respectively, and its Fourth Quarterly VAT Return
Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it was correct for the CTA-First Division and the CTA- on January 25, 2007.8
EB in ruling that the FWT for the royalty from January to March 1998 was seasonably filed. Although the royalty
from January to March 1998 was well within the semi-annual period ending June 30, which meant that the
Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR) and VAT Returns, the CIR
royalty may be payable until August 1998 pursuant to the MLA, the FWT for said royalty had to be paid on or
informed MEDICARD and issued a Letter Notice (LN) No. 122-VT-06-00-00020 dated
before July 10, 1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony remitted the same on
July 8, 1998, it was not yet late.
September 20, 2007. Subsequently, the CIR also issued a Preliminary Assessment Notice (PAN) against
MEDICARD for deficiency VAT. A Memorandum dated December 10, 2007 was likewise issued recommending
In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.
the issuance of a Formal Assessment Notice (FAN) against MEDICARD.9 On. January 4, 2008, MEDICARD received
CIR's FAN dated December' 10, 2007 for alleged deficiency VAT for taxable year 2006 in the total amount of Pl
WHEREFORE, the petition is DENIED. 96,614,476.69,10 inclusive of penalties. 11

SO ORDERED. According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts without any deduction
under Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005. Citing Commissioner of Internal Revenue v.
April 5, 2017 Philippine Health Care Providers, Inc., 12 the CIR argued that since MEDICARD. does not actually provide medical
and/or hospital services, but merely arranges for the same, its services are not VAT exempt.13
G.R. No. 222743
MEDICARD argued that: (1) the services it render is not limited merely to arranging for the provision of medical
MEDICARD PHILIPPINES, INC., Petitioner, and/or hospital services by hospitals and/or clinics but include actual and direct rendition of medical and
vs. laboratory services; in fact, its 2006 audited balance sheet shows that it owns x-ray and laboratory facilities
COMMISSIONER OF INTERNAL REVENUE, Respondent. which it used in providing medical and laboratory services to its members; (2) out of the ₱l .9 Billion membership
fees, ₱319 Million was received from clients that are registered with the Philippine Export Zone Authority (PEZA)
and/or Bureau of Investments; (3) the processing fees amounting to ₱l 1.5 Million should be excluded from gross
DECISION
receipts because P5.6 Million of which represent advances for professional fees due from clients which were
paid by MEDICARD while the remainder was already previously subjected to VAT; (4) the professional fees in the
amount of Pl 1 Million should also be excluded because it represents the amount of medical services actually and computed from June 19, 2009 until full payment thereof pursuant to Section 249(C) of the NIRC of
directly rendered by MEDICARD and/or its subsidiary company; and (5) even assuming that it is liable to pay for 1997.
the VAT, the 12% VAT rate should not be applied on the entire amount but only for the period when the 12%
VAT rate was already in effect, i.e., on February 1, 2006. It should not also be held liable for surcharge and SO ORDERED.19
deficiency interest because it did not pass on the VAT to its members.14
The CTA Division held that: (1) the determination of deficiency VAT is not limited to the issuance of Letter of
On February 14, 2008, the CIR issued a Tax Verification Notice authorizing Revenue Officer Romualdo Plocios to Authority (LOA) alone as the CIR is granted vast powers to perform examination and assessment functions; (2) in
verify the supporting documents of MEDICARD's Protest. MEDICARD also submitted additional supporting lieu of an LOA, an LN was issued to MEDICARD informing it· of the discrepancies between its ITRs and VAT
documentary evidence in aid of its Protest thru a letter dated March 18, 2008.15 Returns and this procedure is authorized under Revenue Memorandum Order (RMO) No. 30-2003 and 42-2003;
(3) MEDICARD is estopped from questioning the validity of the assessment on the ground of lack of LOA since the
On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed Assessment dated May 15, 2009, denying assessment issued against MEDICARD contained the requisite legal and factual bases that put MEDICARD on
MEDICARD's protest, to wit: notice of the deficiencies and it in fact availed of the remedies provided by law without questioning the nullity of
the assessment; (4) the amounts that MEDICARD earmarked , and eventually paid to doctors, hospitals and
IN VIEW HEREOF, we deny your letter protest and hereby reiterate in toto assessment of deficiency [VAT] in clinics cannot be excluded from · the computation of its gross receipts under the provisions of RR No. 4-2007
total sum of ₱196,614,476.99. It is requested that you pay said deficiency taxes immediately. Should payment be because the act of earmarking or allocation is by itself an act of ownership and management over the funds by
made later, adjustment has to be made to impose interest until date of payment. This is olir final decision. If you MEDICARD which is beyond the contemplation of RR No. 4-2007; (5) MEDICARD's earnings from its clinics and
disagree, you may take an appeal to the [CTA] within the period provided by law, otherwise, said assessment laboratory facilities cannot be excluded from its gross receipts because the operation of these clinics and
shall become final, executory and demandable. 16 laboratory is merely an incident to MEDICARD's main line of business as HMO and there is no evidence that
MEDICARD segregated the amounts pertaining to this at the time it received the premium from its members;
and (6) MEDICARD was not able to substantiate the amount pertaining to its January 2006 income and therefore
On July 20, 2009, MEDICARD proceeded to file a petition for review before the CT A, reiterating its position
has no basis to impose a 10% VAT rate.20
before the tax authorities. 17

Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied. Hence, MEDICARD elevated the
On June 5, 2014, the CTA Division rendered a Decision18 affirming with modifications the CIR's deficiency VAT
matter to the CTA en banc.
assessment covering taxable year 2006, viz.:

In a Decision21 dated September 2, 2015, the CTA en banc partially granted the petition only insofar as the 10%
WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against [MEDICARD] covering
VAT rate for January 2006 is concerned but sustained the findings of the CTA Division in all other matters, thus:
taxable year 2006 ·is hereby AFFIRMED WITH MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR]
the amount of P223,l 73,208.35, inclusive of the twenty-five percent (25%) surcharge imposed under -Section
248(A)(3) of the NIRC of 1997, as amended, computed as follows: WHEREFORE, in view thereof, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the
Decision date June 5, 2014 is hereby MODIFIED, as follows:

Basic Deficiency VAT ₱l78,538,566.68 "WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against
Add: 25% Surcharge 44,634,641.67
[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH MODIFICATIONS. Accordingly, [MEDICARD]
Total ₱223.173.208.35 is ordered to pay [CIR] the amount of ₱220,234,609.48, inclusive of the 25% surcharge imposed under Section
248(A)(3) of the NIRC of 1997, as amended, computed as follows:
In addition, [MEDICARD] is ordered to pay:
Basic Deficiency VAT ₱76,187,687.58
a. Deficiency interest at the rate of twenty percent (20%) per annum on the basis deficiency VAT of Pl
78,538,566.68 computed from January 25, 2007 until full payment thereof pursuant to Section 249(B) Add: 25% Surcharge 44,046,921.90
of the NIRC of 1997, as amended; and
Total ₱220,234.609.48

b. Delinquency interest at the rate of twenty percent (20%) per annum on the total amount of In addition, [MEDICARD] is ordered to pay:
₱223,173,208.35 representing basic deficiency VAT of ₱l78,538,566.68 and· 25% surcharge of
₱44,634,64 l .67 and on the 20% deficiency interest which have accrued as afore-stated in (a),
(a) Deficiency interest at the rate of 20% per annum on the basic deficiency VAT of ₱l 76,187,687.58 Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself or by his duly
computed from January 25, 2007 until full payment thereof pursuant to Section 249(B) of the NIRC of authorized representative, through an LOA, an examination of the taxpayer cannot ordinarily be undertaken. The
1997, as amended; and circumstances contemplated under Section 6 where the taxpayer may be assessed through best-evidence
obtainable, inventory-taking, or surveillance among others has nothing to do with the LOA. These are simply
(b) Delinquency interest at the rate of 20% per annum on the total amount of ₱220,234,609.48 methods of examining the taxpayer in order to arrive at .the correct amount of taxes. Hence, unless undertaken
(representing basic deficiency VAT of ₱l76,187,687.58 and 25% surcharge of ₱44,046,921.90) and on by the CIR himself or his duly authorized representatives, other tax agents may not validly conduct any of these
the deficiency interest which have accrued as afore-stated in (a), computed from June 19, 2009 until kinds of examinations without prior authority.
full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended."
With the advances in information and communication technology, the Bureau of Internal Revenue (BIR)
SO ORDERED.22 promulgated RMO No. 30-2003 to lay down the policies and guidelines once its then incipient centralized Data
Warehouse (DW) becomes fully operational in conjunction with its Reconciliation of Listing for Enforcement
System (RELIEF System).26 This system can detect tax leaks by matching the data available under the BIR's
Disagreeing with the CTA en bane's decision, MEDICARD filed a motion for reconsideration but it was
Integrated Tax System (ITS) with data gathered from third-party sources. Through the consolidation and cross-
denied.23Hence, MEDICARD now seeks recourse to this Court via a petition for review on certiorari.
referencing of third-party information, discrepancy reports on sales and purchases can be generated to uncover
under declared income and over claimed purchases of Goods and services.
The Issues
Under this RMO, several offices of the BIR are tasked with specific functions relative to the RELIEF System,
l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and particularly with regard to LNs. Thus, the Systems Operations Division (SOD) under the Information Systems
Group (ISG) is responsible for: (1) coming up with the List of Taxpayers with discrepancies within the threshold
2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND EVENTUALLY PAID TO THE MEDICAL amount set by management for the issuance of LN and for the system-generated LNs; and (2) sending the same
SERVICE PROVIDERS SHOULD STILL FORM PART OF ITS GROSS RECEIPTS FOR VAT PURPOSES. 24 to the taxpayer and to the Audit Information, Tax Exemption and Incentives Division (AITEID). After receiving the
LNs, the AITEID under the Assessment
Ruling of the Court
Service (AS), in coordination with the concerned offices under the ISG, shall be responsible for transmitting the
The petition is meritorious. LNs to the investigating offices [Revenue District Office (RDO)/Large Taxpayers District Office (LTDO)/Large
Taxpayers Audit and Investigation Division (LTAID)]. At the level of these investigating offices, the appropriate
action on the LN s issued to taxpayers with RELIEF data discrepancy would be determined.
The absence of an LOA violated
MEDICARD's right to due process
RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the "no-contact-audit approach" in
the CIR's exercise of its ·power to authorize any examination of taxpayer arid the assessment of the correct
An LOA is the authority given to the appropriate revenue officer assigned to perform assessment functions. It amount of tax. The no-contact-audit approach includes the process of computerized matching of sales and
empowers or enables said revenue officer to examine the books of account and other accounting records of a purchases data contained in the Schedules of Sales and Domestic Purchases and Schedule of Importation
taxpayer for the purpose of collecting the correct amount of tax. 25 An LOA is premised on the fact that the submitted by VAT taxpayers under the RELIEF System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-
examination of a taxpayer who has already filed his tax returns is a power that statutorily belongs only to the CIR 99 and 8-2002. This may also include the matching of data from other information or returns filed by the
himself or his duly authorized representatives. Section 6 of the NIRC clearly provides as follows: taxpayers with the BIR such as Alphalist of Payees subject to Final or Creditable Withholding Taxes.

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Under this policy, even without conducting a detailed examination of taxpayer's books and records, if the
Administration and Enforcement. – computerized/manual matching of sales and purchases/expenses appears to reveal discrepancies, the same shall
be communicated to the concerned taxpayer through the issuance of LN. The LN shall serve as a discrepancy
(A) Examination of Return and Determination of Tax Due.- After a return has been filed as required under the notice to taxpayer similar to a Notice for Informal Conference to the concerned taxpayer. Thus, under the RELIEF
provisions of this Code, the Commissioner or his duly authorized representative may authorize the System, a revenue officer may begin an examination of the taxpayer even prior to the issuance of an LN or even
examinationof any taxpayer and the assessment of the correct amount of tax: Provided, however, That failure in the absence of an LOA with the aid of a computerized/manual matching of taxpayers': documents/records.
to file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer. Accordingly, under the RELIEF System, the presumption that the tax returns are in accordance with law and are
presumed correct since these are filed under the penalty of perjury27 are easily rebutted and the taxpayer
x x x x (Emphasis and underlining ours) becomes instantly burdened to explain a purported discrepancy.
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory requirement of an LOA Decision 11 G.R. No. 222743
before any investigation or examination of the taxpayer may be conducted. As provided in the RMO No. 42-
2003, the LN is merely similar to a Notice for Informal Conference. However, for a Notice of Informal Conference, xxxx
which generally precedes the issuance of an assessment notice to be valid, the same presupposes that the
revenue officer who issued the same is properly authorized in the first place.
10. Transmit the approved/signed LAs, together with the duly accomplished/approved Summary List of LNs for
conversion to LAs, to the concerned investigating offices for the encoding of the required information x x x and
With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as supplemented by RMO No. 42- for service to the concerned taxpayers.
2003, was amended by RMO No. 32-2005 to fine tune existing procedures in handing assessments against
taxpayers'· issued LNs by reconciling various revenue issuances which conflict with the NIRC. Among the
xxxx
objectives in the issuance of RMO No. 32-2005 is to prescribe procedure in the resolution of LN discrepancies,
conversion of LNs to LOAs and assessment and collection of deficiency taxes.
C. At the RDO x x x
IV. POLICIES AND GUIDELINES
xxxx
xxxx
11. If the LN discrepancies remained unresolved within One Hundred and Twenty (120) days from issuance
thereof, prepare a summary list of said LN s for conversion to LAs x x x.
8. In the event a taxpayer who has been issued an LN refutes the discrepancy shown in the LN, the concerned
taxpayer will be given an opportunity to reconcile its records with those of the BIR within
xxxx
One Hundred and Twenty (120) days from the date of the issuance of the LN. However, the subject taxpayer
shall no longer be entitled to the abatement of interest and penalties after the lapse of the sixty (60)-day period 16. Effect the service of the above LAs to the concerned taxpayers.28
from the LN issuance.
In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN and FAN against MED
9. In case the above discrepancies remained unresolved at the end of the One Hundred and Twenty (120)-day ICARD. Therefore no LOA was also served on MEDICARD. The LN that was issued earlier was also not converted
period, the revenue officer (RO) assigned to handle the LN shall recommend the issuance of [LOA) to replace into an LOA contrary to the above quoted provision. Surprisingly, the CIR did not even dispute the applicability of
the LN. The head of the concerned investigating office shall submit a summary list of LNs for conversion to LAs the above provision of RMO 32-2005 in the present case which is clear and unequivocal on the necessity of an
(using the herein prescribed format in Annex "E" hereof) to the OACIR-LTS I ORD for the preparation of the LOA for the· assessment proceeding to be valid. Hence, the CTA's disregard of MEDICARD's right to due process
corresponding LAs with the notation "This LA cancels LN_________ No. " warrant the reversal of the assailed decision and resolution.

xxxx In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,29 the Court said that:

V. PROCEDURES Clearly, there must be a grant of authority before any revenue officer can conduct an examination or
assessment. Equally important is that the revenue officer so authorized must not go beyond the authority
given. In the absence of such an authority, the assessment or examination is a nullity.30 (Emphasis and
xxxx
underlining ours)

B. At the Regional Office/Large Taxpayers Service


The Court cannot convert the LN into the LOA required under the law even if the same was issued by the CIR
himself. Under RR No. 12-2002, LN is issued to a person found to have underreported sales/receipts per data
xxxx generated under the RELIEF system. Upon receipt of the LN, a taxpayer may avail of the BIR's Voluntary
Assessment and Abatement Program. If a taxpayer fails or refuses to avail of the said program, the BIR may avail
7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO x x x prior to approval. of administrative and criminal .remedies, particularly closure, criminal action, or audit and investigation. Since
the law specifically requires an LOA and RMO No. 32-2005 requires the conversion of the previously issued LN to
8. Upon approval of the above list, prepare/accomplish and sign the corresponding LAs. an LOA, the absence thereof cannot be simply swept under the rug, as the CIR would have it. In fact Revenue
Memorandum Circular No. 40-2003 considers an LN as a notice of audit or investigation only for the purpose of
disqualifying the taxpayer from amending his returns.
xxxx
The following differences between an LOA and LN are crucial. First, an LOA addressed to a revenue officer is and dental practitioners. MEDICARD explains that its business as an HMO involves two different although
specifically required under the NIRC before an examination of a taxpayer may be had while an LN is not found in interrelated contracts. One is between a corporate client and MEDICARD, with the corporate client's employees
the NIRC and is only for the purpose of notifying the taxpayer that a discrepancy is found based on the BIR's being considered as MEDICARD members; and the other is between the health care institutions/healthcare
RELIEF System. Second, an LOA is valid only for 30 days from date of issue while an LN has no such limitation. professionals and MED ICARD.
Third, an LOA gives the revenue officer only a period of 10days from receipt of LOA to conduct his examination
of the taxpayer whereas an LN does not contain such a limitation.31 Simply put, LN is entirely different and serves Under the first, MEDICARD undertakes to make arrangements with healthcare institutions/healthcare
a different purpose than an LOA. Due process demands, as recognized under RMO No. 32-2005, that after an LN professionals for the coverage of MEDICARD members under specific health related services for a specified
has serve its purpose, the revenue officer should have properly secured an LOA before proceeding with the period of time in exchange for payment of a more or less fixed membership fee. Under its contract with its
further examination and assessment of the petitioner. Unfortunarely, this was not done in this case. corporate clients, MEDICARD expressly provides that 20% of the membership fees per individual, regardless of
the amount involved, already includes the VAT of 10%/20% excluding the remaining 80o/o because MED ICARD
Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just because none of the financial would earmark this latter portion for medical utilization of its members. Lastly, MEDICARD also assails CIR's
books or records being physically kept by MEDICARD was examined. To begin with, Section 6 of the NIRC inclusion in its gross receipts of its earnings from medical services which it actually and directly rendered to its
requires an authority from the CIR or from his duly authorized representatives before an examination "of a members.
taxpayer" may be made. The requirement of authorization is therefore not dependent on whether the taxpayer
may be required to physically open his books and financial records but only on whether a taxpayer is being Since an HMO like MEDICARD is primarily engaged m arranging for coverage or designated managed care
subject to examination. services that are needed by plan holders/members for fixed prepaid membership fees and for a specified period
of time, then MEDICARD is principally engaged in the sale of services. Its VAT base and corresponding liability is,
The BIR's RELIEF System has admittedly made the BIR's assessment and collection efforts much easier and faster. thus, determined under Section 108(A)32 of the Tax Code, as amended by Republic Act No. 9337.
The ease by which the BIR's revenue generating objectives is achieved is no excuse however for its non-
compliance with the statutory requirement under Section 6 and with its own administrative issuance. In fact, Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes as a dealer in securities
apart from being a statutory requirement, an LOA is equally needed even under the BIR's RELIEF System because whose gross receipts is the amount actually received as contract price without allowing any deduction from the
the rationale of requirement is the same whether or not the CIR conducts a physical examination of the gross receipts.33 This restrictive tenor changed under RR No. 16-2005. Under this RR, an HMO's gross receipts
taxpayer's records: to prevent undue harassment of a taxpayer and level the playing field between the and gross receipts in general were defined, thus:
government' s vast resources for tax assessment, collection and enforcement, on one hand, and the solitary
taxpayer's dual need to prosecute its business while at the same time responding to the BIR exercise of its
Section 4.108-3. xxx
statutory powers. The balance between these is achieved by ensuring that any examination of the taxpayer by
the BIR' s revenue officers is properly authorized in the first place by those to whom the discretion to exercise
the power of examination is given by the statute. xxxx

That the BIR officials herein were not shown to have acted unreasonably is beside the point because the issue of HMO's gross receipts shall be the total amount of money or its equivalent representing the service fee actually
their lack of authority was only brought up during the trial of the case. What is crucial is whether the proceedings or constructively received during the taxable period for the services performed or to be performed for another
that led to the issuance of VAT deficiency assessment against MEDICARD had the prior approval and person, excluding the value-added tax. The compensation for their services representing their service fee, is
authorization from the CIR or her duly authorized representatives. Not having authority to examine MEDICARD in presumed to be the total amount received as enrollment fee from their members plus other charges received.
the first place, the assessment issued by the CIR is inescapably void.
Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or its equivalent representing the
At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court still partially finds merit in contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied
MEDICARD's substantive arguments. with the services and deposits applied as payments for services rendered, and advance payments actually or
constructively received during the taxable period for the services performed or to be performed for another
person, excluding the VAT. 34
The amounts earmarked and
eventually paid by MEDICARD to
the medical service providers do not In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005, including the definition of gross
form part of gross receipts.for VAT receipts in general.35
purposes
According to the CTA en banc, the entire amount of membership fees should form part of MEDICARD's gross
MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the CT A Division that the gross receipts because the exclusions to the gross receipts under RR No. 4-2007 does not apply to MEDICARD. What
receipts of an HMO for VAT purposes shall be the total amount of money or its equivalent actually received from applies to MEDICARD is the definition of gross receipts of an HMO under RR No. 16-2005 and not the modified
members undiminished by any amount paid or payable to the owners/operators of hospitals, clinics and medical definition of gross receipts in general under the RR No. 4-2007.
The CTA en banc overlooked that the definition of gross receipts under. RR No. 16-2005 merely presumed that insurance and therefore liable for documentary stamp tax. The Court held therein that an HMO engaged in
the amount received by an HMO as membership fee is the HMO's compensation for their services. As a mere preventive, diagnostic and curative medical services is not engaged in the business of an insurance, thus:
presumption, an HMO is, thus, allowed to establish that a portion of the amount it received as membership fee
does NOT actually compensate it but some other person, which in this case are the medical service providers To summarize, the distinctive features of the cooperative are the rendering of service, its extension, the bringing
themselves. It is a well-settled principle of legal hermeneutics that words of a statute will be interpreted in their of physician and patient together, the preventive features, the regularization of service as well as payment,
natural, plain and ordinary acceptation and signification, unless it is evident that the legislature intended a the substantial reduction in cost by quantity purchasing in short, getting the medical job done and paid for;
technical or special legal meaning to those words. The Court cannot read the word "presumed" in any other way. not, except incidentally to these features, the indemnification for cost after .the services is rendered. Except
the last, these are not distinctive or generally characteristic of the insurance arrangement. There is, therefore,
It is notable in this regard that the term gross receipts as elsewhere mentioned as the tax base under the NIRC a substantial difference between contracting in this way for the rendering of service, even on the contingency
does not contain any specific definition.36 Therefore, absent a statutory definition, this Court has construed the that it be needed, and contracting merely to stand its cost when or after it is rendered.39 (Emphasis ours)
term gross receipts in its plain and ordinary meaning, that is, gross receipts is understood as comprising the
entire receipts without any deduction.37 Congress, under Section 108, could have simply left the term gross In sum, the Court said that the main difference between an HMO arid an insurance company is that HMOs
receipts similarly undefined and its interpretation subjected to ordinary acceptation,. Instead of doing so, undertake to provide or arrange for the provision of medical services through participating physicians while
Congress limited the scope of the term gross receipts for VAT purposes only to the amount that the taxpayer insurance companies simply undertake to indemnify the insured for medical expenses incurred up to a pre-
received for the services it performed or to the amount it received as advance payment for the services it will agreed limit. In the present case, the VAT is a tax on the value added by the performance of the service by the
render in the future for another person. taxpayer. It is, thus, this service and the value charged thereof by the taxpayer that is taxable under the NIRC.

In the proceedings ·below, the nature of MEDICARD's business and the extent of the services it rendered are not To be sure, there are pros and cons in subjecting the entire amount of membership fees to VAT. 40 But the Court's
seriously disputed. As an HMO, MEDICARD primarily acts as an intermediary between the purchaser of task however is not to weigh these policy considerations but to determine if these considerations in favor of
healthcare services (its members) and the healthcare providers (the doctors, hospitals and clinics) for a fee. By taxation can even be implied from the statute where the CIR purports to derive her authority. This Court rules
enrolling membership with MED ICARD, its members will be able to avail of the pre-arranged medical services that they cannot because the language of the NIRC is pretty straightforward and clear. As this Court previously
from its accredited healthcare providers without the necessary protocol of posting cash bonds or deposits prior ruled:
to being attended to or admitted to hospitals or clinics, especially during emergencies, at any given time. Apart
from this, MEDICARD may also directly provide medical, hospital and laboratory services, which depends upon its
What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not
member's choice.
the similar doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will
not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be
Thus, in the course of its business as such, MED ICARD members can either avail of medical services from imposed without clear and express words for that purpose. Accordingly, the general rule of requiring
MEDICARD's accredited healthcare providers or directly from MEDICARD. In the former, MEDICARD members adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of
obviously knew that beyond the agreement to pre-arrange the healthcare needs of its ·members, MEDICARD a taxing act are not to be extended by implication. In answering the question of who is subject to tax statutes, it
would not actually be providing the actual healthcare service. Thus, based on industry practice, MEDICARD is basic that in case of doubt, such statutes are to be construed most strongly against the government and in
informs its would-be member beforehand that 80% of the amount would be earmarked for medical utilization favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond
and only the remaining 20% comprises its service fee. In the latter case, MEDICARD's sale of its services is what statutes expressly and clearly import. As burdens, taxes should not be unduly exacted nor assumed beyond
exempt from VAT under Section 109(G). the plain meaning of the tax laws. 41 (Citation omitted and emphasis and underlining ours)

The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108 of the NIRC that would For this Court to subject the entire amount of MEDICARD's gross receipts without exclusion, the authority should
extend the definition of gross receipts even to amounts that do not only pertain to the services to be performed: have been reasonably founded from the language of the statute. That language is wanting in this case. In the
by another person, other than the taxpayer, but even to amounts that were indisputably utilized not by MED scheme of judicial tax administration, the need for certainty and predictability in the implementation of tax laws
ICARD itself but by the medical service providers. is crucial. Our tax authorities fill in the details that Congress may not have the opportunity or competence to
provide. The regulations these authorities issue are relied upon by taxpayers, who are certain that these will be
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be followed by the courts. Courts, however, will not uphold these authorities' interpretations when dearly absurd,
considered surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which erroneous or improper.42 The CIR's interpretation of gross receipts in the present case is patently erroneous for
renders every word operative is preferred over that which makes some words idle and nugatory. This principle is lack of both textual and non-textual support.
expressed in the maxim Ut magisvaleat quam pereat, that is, we choose the interpretation which gives effect to
the whole of the statute – it’s every word. As to the CIR's argument that the act of earmarking or allocation is by itself an act of ownership and
management over the funds, the Court does not agree.1âwphi1 On the contrary, it is MEDICARD's act of
In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,38the Court adopted the principal earmarking or allocating 80% of the amount it received as membership fee at the time of payment that weakens
object and purpose object in determining whether the MEDICARD therein is engaged in the business of the ownership imputed to it. By earmarking or allocating 80% of the amount, MEDICARD unequivocally
recognizes that its possession of the funds is not in the concept of owner but as a mere administrator of the REYES, J. B. L., J.:
same. For this reason, at most, MEDICARD's right in relation to these amounts is a mere inchoate owner which
Appellant Philippine Packing Corporation is a domestic corporation engaged in the growing and canning of
would ripen into actual ownership if, and only if, there is underutilization of the membership fees at the end of
pineapples in Mindanao for sale locally and abroad. Approximately 120,000 tons of pineapple every year are
the fiscal year. Prior to that, MEDI CARD is bound to pay from the amounts it had allocated as an administrator
produced by Appellant from its plantations, out of which it sells or gives away in fresh state 50,000 tons which
once its members avail of the medical services of MEDICARD's healthcare providers.
are not suitable for canning, for which it is not taxed, and the rest are canned into sliced pineapple, pineapple
chunks, crushed pineapple, and pineapple juice.
Before the Court, the parties were one in submitting the legal issue of whether the amounts MEDICARD
earmarked, corresponding to 80% of its enrollment fees, and paid to the medical service providers should form According to the decision of the Court of Tax Appeals, the Appellant subjects the fresh fruit to the following
part of its gross receipt for VAT purposes, after having paid the VAT on the amount comprising the 20%. It is process:chanroblesvirtuallawlibrary
significant to note in this regard that MEDICARD established that upon receipt of payment of membership fee it “Pineapple fruits are harvested from the plants. After they are washed, peeled and sorted, then sliced, cubed, or
actually issued two official receipts, one pertaining to the VAT able portion, representing compensation for its crushed, the raw materials are placed in cans. The residual air is removed and heavy syrup, made up from a
services, and the other represents the non-vatable portion pertaining to the amount earmarked for medical mixture of juice and sugar, is added. The cans are closed. Heat is applied to sterilize the contents, after which the
utilization.: Therefore, the absence of an actual and physical segregation of the amounts pertaining to two cans are cooled rapidly. With respect to the canned pineapple juice, no sugar is added. Unless preserved in tin
different kinds · of fees cannot arbitrarily disqualify MEDICARD from rebutting the presumption under the law cans, fresh pineapple fruits are very perishable and will not keep longer than two days.” (Annex “A” p. 13)
and from proving that indeed services were rendered by its healthcare providers for which it paid the amount it
sought to be excluded from its gross receipts. On October 15, 1948, Appellant sent the then Collector of Internal Revenue Bibiano Meer a letter quoted as
follows:chanroblesvirtuallawlibrary
With the foregoing discussions on the nullity of the assessment on due process grounds and violation of the “We wish to refer to your letter dated July 20, 1948 in which you have requested that we file a bond to cover any
NIRC, on one hand, and the utter lack of legal basis of the CIR's position on the computation of MEDICARD's possible sales of our pineapple products in the Philippines.
gross receipts, the Court finds it unnecessary, nay useless, to discuss the rest of the parties' arguments and
counter-arguments. We have recently taken some orders for canned pineapple here in Manila and we will be shipping the goods
from Bugo early next week.
In fine, the foregoing discussion suffices for the reversal of the assailed decision and resolution of the CTA en According to your letter we have to pay 5% tax prior to shipping these goods, however, we are of the opinion it is
banc grounded as it is on due process violation. The Court likewise rules that for purposes of determining the not necessary for us to pay this tax under Section 188 (b) of the Internal Revenue Code, since our operation is
VAT liability of an HMO, the amounts earmarked and actually spent for medical utilization of its members should entirely agricultural. We will appreciate receiving your decision on the above at your earliest convenience and
not be included in the computation of its gross receipts. we would like to take this opportunity to thank you for your kind attention to our matters in the past.” (Exhibit
“A”)
WHEREFORE, in consideration of the foregoing disquisitions, the petition is hereby GRANTED. The Decision to which Collector Meer replied:chanroblesvirtuallawlibrary
dated September 2, 2015 and Resolution dated January 29, 2016 issued by the Court of Tax Appeals en bane in
CTA EB No. 1224 are REVERSED and SET ASIDE. The definition of gross receipts under Revenue Regulations Nos. “In reply to your letter dated October 15, 1948, I have the honor to inform you that sales in this country of the
16-2005 and 4-2007, in relation to Section 108(A) of the National Internal Revenue Code, as amended by pineapple products which you produce herein are exempt from the sales tax imposed in section 186 of the
Republic Act No. 9337, for purposes of determining its Value-Added Tax liability, is hereby declared National Internal Revenue Code, in accordance with section 188 (b) of the same code.” (Exhibit “B”)
to EXCLUDE the eighty percent (80%) of the amount of the contract price earmarked as fiduciary funds for the Six years later, on January 13, 1954, Appellant received a letter from the Appellee Collector of Internal Revenue
medical utilization of its members. Further, the Value-Added Tax deficiency assessment issued against Medicard through Deputy Collector Silverio Blaquera, demanding payment of P196,060.69 as fixed and percentage taxes
Philippines, Inc. is hereby declared unauthorized for having been issued without a Letter of Authority by the and surcharges on its domestic sales of pineapple products since October, 1948 to September, 1953, plus the
Commissioner of Internal Revenue or his duly authorized representatives. additional sum of P1,000 as penalty for alleged violation of the Internal Revenue Law. From the decision of the
Collector, Appellant appealed to the defunct Board of Tax Appeals, which was succeeded by the Court of Tax
SO ORDERED. Appeals under Republic Act No. 1125. On January 31, 1955, the Court of Tax Appeals affirmed the decision of the
Collector of Internal Revenue and on April 11, 1955 denied Appellant’s motion for reconsideration.
EN BANC Wherefore, Appellant filed before this Court a petition for review.

[G.R. No. L-9040. December 26, 1956.] The main issue is whether the domestic sales of pineapples and pineapple products grown and canned
by Appellants are exempted from tax under Section 188 (b) of the Internal Revenue Code,
PHILIPPINE PACKING CORPORATION, Petitioner-Appellant, vs. THE COLLECTOR OF INTERNAL providing:chanroblesvirtuallawlibrary
REVENUE, Respondent-Appellee.
“SEC. 188. Transactions and persons not subject to percentage tax. — In computing the tax imposed in sections
one hundred eighty- four, one hundred eighty-five, and one hundred eighty-six, transactions in the following
DECISION commodities shall be excluded:chanroblesvirtuallawlibrary
“(b) Agricultural products and the ordinary salt when sold, bartered, or exchanged in this country by the unproductive, which might be made fruitful by cultivation, and that large sums of money go abroad every year
producer or owner of the land where produced, as well as fish and its by-products when sold, bartered or for the purchase of food substances which might be grown here. Every dollar’s worth of food which the farmer
exchanged by the fisherman or fishing operator, whether in their original state or not.” (Emphasis supplied) process and sells in these Islands adds directly to the wealth of the country. On the other hand, in the process of
distribution of commodities to the ultimate consumer, no direct increase in value results solely from their
We find ourselves unable to agree with the Court of Tax Appeals that because the manipulations to
transfer from one person to another in the course of commercial transactions. It is fairly to be inferred from the
which Appellant subjects the fresh pineapple fruit grown by it amount to a manufacturing process, that the sale
statute that the object and purpose of the Legislature was, in general terms, to levy the tax in question,
of the canned products becomes a taxable sale of manufactured goods, and not an exempt sale of agricultural
significantly termed the ‘merchant’s tax,’ upon all persons engaged in making a profit upon goods produced by
products. The very text of the law, in exempting “agricultural products — whether in their original state or not,”
others, but to exempt from the tax all persons directly producing goods from the land. In order to accomplish
makes it clear that the exemption is not divested merely because the products themselves have undergone
this purpose the Legislature, instead of attempting an enumeration of exempted products, has grouped them all
processing of some kind. At what particular stage the extent of the manufacturing process extinguishes or
under the general designation of ‘agricultural products.’“
supersedes the agricultural character of the product cannot be predetermined in advance. But such uncertainties
are no obstacle to the application or refusal of the exemption in specific cases. We believe the case before us can The position of Appellant corporation comes squarely under this ruling. It directly produces its goods from the
be determined following the test set by this Court in Central Azucarera de Bais vs. Trinidad, 46 Phil. 492, cultivation of land, merely engaging in the suitable preservative processes for the purpose of making the product
499:chanroblesvirtuallawlibrary available at all times, without regard to seasons, and in markets that would not be accessible to the fresh
fruit. Appellants does not make its profit upon goods produced by others, and there is no reason why it should
“A planter who devotes himself to the production of sugar cane and as an incident to such production works his
not be given the protection that the law affords.
product into a more convenient and valuable form is primarily a planter; chan roblesvirtualawlibraryhis
manufacturing is merely an incident to the management of his plantation. His case is manifestly different from “Public policy has long favored the exemption of agricultural producers from the taxation of the methods
that of the Plaintiff corporation which, in effect, buys its raw materials and devotes itself exclusively to employed by them to put their products upon the market, for the preparation, transportation, and direct sale by
converting it into finished merchandise. It may, perhaps, not always be easy to draw the line of demarcation the farmer of produce raised by himself is not engagement in a trade, but incident to his business of production.
between one business and the other, but difficulties of that sort are frequently encountered in the interpretation Thus, the exemption or especially favorable classification of farmers, their produce, or their vehicles hauling
of the law.” agricultural products to markets in statutes imposing business occupational, and sales taxes, in statutory trade
license provisions, and in highway transportation tax or registration laws, has in a number of cases been held to
The facts on record in the case before us clearly indicate that the canning of Appellant’s products is a mere
be based upon a reasonable classification.” (2 Am. Jur. pp. 399-400).
incident and consequence of its large scale production of pineapples. Appellant perforce had to resort to a
preserving process, for the volume of its products (170,000 tons) made it impossible to dispose of the same in The interpretation adopted by the Court of Tax Appeals would limit the benefits of the tax exemption under
the local market. The pineapples could not be sold in the open market unless properly ripened; chan section 188 (b) of the Tax Code to small scale farmers and producers, who can dispose of their products within a
roblesvirtualawlibraryon the other hand, once ripened, the fruit would quickly deteriorate, and become short time after the ripening of the fruit. Where this the legislative intent, the exemption for agricultural
unsalable, unless the deterioration was arrested by some preservative process, which thus becomes an essential products would have been unnecessary, since the same section already exempts, directly and expressly, —
part of the production and disposition of the fruit. We believe that the legislature, in providing a tax exemption
“(a) Persons whose gross quarterly sales or receipts do not exceed four hundred fifty pesos.
for agricultural products, “whether in their original state or not”, had precisely in mind that fruit crops could not
be raised and sold on a large scale without resort to some process to prevent their deterioration. (b) All persons engaged in public market places exclusively in the sale at retail of domestic meat, fruits,
vegetables, game, poultry, fish and other domestic food products.
The state has not shown that the canned products of Appellant corporation have acquired, as a consequence of
the processing to which they are subjected, any use to which the original fruit was not suited, or could not be (c) Peddlers and sellers at fixed stands and other similar selling places engaged exclusively in the sale at retail of
devoted. It is practically admitted (and the Court may well take judicial cognizance thereof) that the nature, domestic meat, fruits, vegetables, game, poultry, fish, and similar domestic food products, whose total stock in
qualities and texture of the product are in no way altered, and it distinctly remains an agricultural product. trade in any one day does not reach a retail value of fifty pesos.
Certainly the canned pineapples as compared to the original fruit have undergone much less change than that
found in the case of centrifugal sugar obtained from the sugar cane or of abaca-fiber when compared with the (d) Producers of commodities of all classes working in their own homes, consisting of parents and children living
raw plant stalks. And yet the state admits that the sugar from the cane is exempt from the tax under sec. 188(b) as one family, when the value of each day’s production by each person capable of working is not in excess of five
of the Internal Revenue Code. pesos.”

That the purpose of the tax exemption now in question was to foster agriculture and the utilization of idle lands With the small producers and merchants already guarded and fostered by the provisions above quoted, we see
was recognized in Molina vs. Rafferty, 38 Phil. 167. Passing upon this very exemption, the Court said (p. 169- no reason why the further exemption of agricultural products “whether in their original state or not” should not
170):chanroblesvirtuallawlibrary apply to large scale agricultural production and its incidental processes.

“The first inquiry, therefore, must relate to the purpose of the Legislative had in mind in establishing the The decision in Bermejo vs. Collector of Internal Revenue, 47 Off. Gaz. (No. 12 Suppl.) p. 292, (upon which the
exemption contained in the clause now under consideration. It seems reasonable to assume that it was due to state relies as overruling Central Azucarera de Bais vs. Trinidad, 46 Phil. 492, and Pampanga Sugar Mills vs.
the belief on the part of the law making body that by exempting agricultural products from this tax the farming Trinidad, 53 Phil. 750), did not consider or discuss the tax exemption under section 188 (b) of the Internal
industry would be favored and the development of the resources of the country encourage. It is a fact, of which Revenue Code, and therefore is not controlling here. Similarly, the American authorities cited for the State refer
we take judicial cognizance, that there are immense tracts of public land in this country, at present wholly to manufacturers that are not the growers of the products processed by them, which is precisely the reason why
the sugar mills or centrals exclusively devoted to processing the planter’s sugar cane, are not exempted from the
tax, being, as they are, primarily manufacturers and not producers of agricultural crops. The Appellant’s situation As a result, Regional Director Galanto no longer required the advance payment of VAT from UCSFA-MPC and
is just the contrary. began issuing AARRS in its favor, thereby allowing the cooperative to withdraw its refined sugar from the
refinery. But, in November 2008, the administrative legal opinion notwithstanding, Regional Director Galanto,
Wherefore, the decision of the Court of Tax Appeals is reversed, and the domestic sale of pineapple products
again demanded the payment of advance VAT from UCSFA-MPC. Unable to withdraw its refined sugar from the
of Appellant, Philippine Packing Corporation, held exempt from sales tax. Without costs. SO ORDERED.
refinery/mill for its operations, UCSFA-MPC was forced to pay advance VAT under protest.
SECOND DIVISION
On November 11, 2009, UCSFA-MPC filed an administrative claim for refund with the BIR, asserting that it had
G.R. No. 209776, December 07, 2016 been granted tax exemption under Article 61 of Republic Act No. (RA) 6938, otherwise known as the Cooperative
Code of the Philippines (Cooperative Code),12 and Section 109(1) of the NIRC.13
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. UNITED CADIZ SUGAR FARMERS ASSOCIATION MULTI-
PURPOSE COOPERATIVE, Respondent. On November 16, 2009, it likewise filed a judicial claim for refund before the CTA division. During the trial,
UCSFA-MPC presented, among other documents, its Certificates of Registration14 and Good Standing15 issued by
DECISION the CDA; Certificate of Tax Exemption,16 and BIR Ruling No. ECCP-015-08 issued by the BIR,17 as well as its
Summary of VAT Payments Under Protest, Certificates of Advance Payment, official receipts, and payment forms
to substantiate its claim.
BRION, J.:
The CTA division ruled in UCSFA-MPC's favor,18 thus upholding the cooperative's exemption from the payment of
Before us is the petition for review on certiorari1 (under Rule 45 of the Rules of Court) filed by the Commissioner VAT; the division held that the amount of P3,469,734.00 representing advance VAT on 34,017 LKG bags of
of Internal Revenue (CIR) to assail the June 5, 2013 decision2 and the October 30, 2013 resolution3 of the Court refined sugar withdrawn from the refinery, was illegally or erroneously collected by the BIR. The CIR moved but
of Tax Appeals (CTA) en banc in CTA EB No. 846 (CTA Case No. 7995). failed to obtain reconsideration of the CTA division ruling.

In the assailed decision and resolution, the CTA en banc affirmed the decision4 and resolution5 of the CTA Second The CIR then sought recourse before the CTA en banc. In its assailed decision,19 the CTA en bancaffirmed the CTA
Division (CTA division). division's ruling and ruled that UCSFA-MPC successfully proved its entitlement to tax exemption through its
Certificate of Tax Exemption and BIR Ruling No. ECCP-015-08 (which confirmed its status as a tax-exempt
The Facts cooperative). The CTA en banc also held that both its administrative and judicial claims for refund were timely
filed, having been filed within the two-year prescriptive period,20 in accordance with the requirements of
By law, the CIR is empowered, among others, to act on and approve claims for tax refunds or credits. Sections 204(C) and 229 of the NIRC.

The respondent United Cadiz Sugar Farmers Association Multi-purpose Cooperative (UCSFA-MPC) is a multi- In denying the CIR's motion for reconsideration,21 the CTA en banc further ruled that the payment of VAT on
purpose cooperative with a Certificate of Registration issued by the Cooperative Development Authority (CDA) sales necessarily includes the exemption from the payment of advance VAT. It also struck down the argument
dated January 14, 2004.6 questioning the validity of UCSFA-MPC's Certificate of Good Standing for having been raised belatedly and thus
considered waived.
In accordance with Revenue Regulations (RR) No. 20-2001, the Bureau of Internal Revenue (BIR) issued BIR
Ruling No. RR12-08-2004,7 otherwise known as the "Certificate of Tax Exemption" in favor of UCSFA-MPC. Finally, it also held that as a tax-exempt cooperative, UCSFA-MPC is not required to file monthly VAT
declarations. The presentation of these documents is therefore not essential in proving its claim for refund.
In November 2007, BIR Regional Director Rodita B. Galanto of BIR Region 12 - Bacolod City required UCSFA-MPC
to pay in advance the value-added tax (VAT) before her office could issue the Authorization Allowing Release of These developments gave rise to the present petition.
Refined Sugar (AARRS) from the sugar refinery/mill. This was the first instance that the Cooperative was required
to do so. This prompted the cooperative to confirm with the BIR 8 whether it is exempt from the payment of VAT The Court's Ruling
pursuant to Section 109(1) of the National Internal Revenue Code (NIRC).9
We find the petition unmeritorious.
The BIR responded favorably to UCSFA-MPC's query. In BIR Ruling No. ECCP-015-08,10 the CIR11 ruled that the
cooperative "is considered as the actual producer of the members' sugarcane production, because it primarily We have consistently ruled that claims for tax refunds, when based on statutes granting tax exemption, partake
provided the various inputs (fertilizers), capital, technology transfer, and farm management." (emphasis of the nature of an exemption.22 Tax refunds and exemptions are exceptions rather than the rule and for this
supplied) The CIR thus confirmed that UCSFA-MPC's sale of produce to members and non-members is exempt reason are highly disfavored.23 Hence, in evaluating a claim for refund, the rule of strict interpretation applies.
from the payment of VAT.
This rule requires the claimant to prove not only his entitlement to a refund, but also his due observance of the For internal revenue purposes, the sale of raw cane sugar is exempt from VAT40 because it is considered to be in
reglementary periods within which he must file his administrative and judicial claims for refund. 24Non- its original state.41 On the other hand, refined sugar is an agricultural product that can no longer be considered
compliance with these substantive and procedural due process requirements results in the denial of the to be in its original state because it has undergone the refining process; its sale is thus subject to VAT.
claim.25cralawred It is then essential for us to discuss each requirement and evaluate whether these have been
duly complied with in the present case. Although the sale of refined sugar is generally subject to VAT, such transaction may nevertheless qualify as a
VAT-exempt transaction if the sale is made by a cooperative. Under Section 109(1) of the NIRC,42sales by
Procedural requirements: Present agricultural cooperatives are exempt from VAT provided the following conditions concur, viz:
claim for refund was timely filed.
First, the seller must be an agricultural cooperative duly registered with the CDA. 43 An agricultural cooperative is
UCSFA-MPC s claim for refund - grounded as it is on payments of advance VAT alleged to have beenillegally and "duly registered" when it has been issued a certificate of registration by the CDA. This certificate is conclusive
erroneously collected from November 15, 2007 to February 13, 2009 - is governed by Sections 204(C)26 and evidence of its registration.44
22927 of the NIRC. These provisions are clear: within two years from the date of payment of tax, the claimant
must first file an administrative claim with the CIR28 before filing itsjudicial claim with the courts of law.29 Both Second, the cooperative must sell either:
claims must be filed within a two-year reglementary period.30 Timeliness of the filing of the claim is mandatory
and jurisdictional. The court31 cannot take cognizance of a judicial claim for refund filed either prematurely or
1) exclusively to its members; or
out of time.

2) to both members and non-members, its produce, whether in its original state or processed form.45
In the present case, the court a quo found that while the judicial claim was filed merely five days after filing the
administrative claim, both claims were filed within the two-year reglementary period. Thus, the CTA correctly
exercised jurisdiction over the judicial claim filed by UCSFA-MPC. The second requisite differentiates cooperatives according to its customers. If the cooperative transacts only
with members, all its sales are VAT-exempt, regardless of what it sells. On the other hand, if it transacts with
both members and non-members, the product sold must be the cooperative's own produce in order to be VAT-
Substantive requirements: UCSFA
exempt. Stated differently, if the cooperative only sells its produce or goods that it manufactures on its own, its
MPC proved its entitlement to refund
entire sales is VAT-exempt.46

As mentioned, the rule on strict interpretation requires the claimant to sufficiently establish his entitlement to a
A cooperative is the producer of the sugar if it owns or leases the land tilled, incurs the cost of agricultural
tax refund. If the claimant asserts that he should be refunded the amount of tax he has previously paid because
production of the sugar, and produces the sugar cane to be refined. 47 It should not have merely purchased the
he is exempted from paying the tax,32 he must point to the specific legal provision of law granting him the
sugar cane from its planters-members.48
exemption. His right cannot be based on mere implication.33

UCSFA-MPC satisfies these requisites in the present case.


In this case, the cooperative claims that it is exempted — based on Section 61 of R.A. 6938 and Section 109(1) of
the NIRC — from paying advance VAT when it withdraws refined sugar from the refinery/mill as required by RR.
No. 6-2007. UCSFA-MPC thus alleges that the amounts of advance VAT it paid under protest from November 15, First, UCSFA-MPC presented its Certificate of Registration issued by the CDA. It does not appear in the records
2007 to February 13, 2009, were illegally arid erroneously collected. that the CIR ever objected to the authenticity or validity of this certificate. Thus, the certificate is conclusive
proof that the cooperative is duly registered with the CDA.49
UCSFA-MPC 's sale of refined sugar
is VAT-exempt. While its certificate of registration is sufficient to establish the cooperative's due registration, we note that it also
presented the Certificate of Good Standing that the CDA issued. This further corroborates its claim that it is duly
registered with the CDA.
As a general rule under the NIRC, a seller shall be liable for VAT 34 on the sale of goods or properties based on the
gross selling price or gross value in money of the thing sold.35 However, certain transactions are exempted from
the imposition of VAT.36 One exempted transaction is the sale of agricultural food products in their original Second, the cooperative also presented BIR Ruling No. ECCP-015-08, which states that UCSFA-MPC "is considered
state.37 Agricultural food products that have undergone simple processes of preparation or preservation for the as the actual producer of the members' sugar cane production because it primarily provided the various
market are nevertheless considered to be in their original state.38 productions inputs (fertilizers), capital, technology transfer, and farm management." It concluded that the
cooperative "has direct participation in the sugar cane production of its farmers-members."
Sugar is an agricultural food product. Notably, tax regulations differentiate between raw sugar andrefined
sugar.39
Thus, the BIR itself acknowledged and confirmed that UCSFA-MPC is the producer of the refined sugar it sells. of refined sugar shall be allowed as credit against their output tax on the actual gross selling price of refined
Under the principle of equitable estoppel,50 the petitioner is now precluded from unilaterally revoking its own sugar.59
pronouncement and unduly depriving the cooperative of an exemption clearly granted by law.
Recall in this regard that VAT is a transaction tax imposed at every stage of the distribution process: on the sale,
With the UCSFA-MPC established as a duly registered cooperative and the producer of sugar cane, its sale of barter, exchange, or lease of goods or services.60 Simply stated, VAT generally arises because an actual sale,
refined sugar is exempt from VAT, whether the sale is made to members or to non-members. barter, or exchange has been consummated.

The VAT-exempt nature of the sales made by agricultural cooperatives under the NIRC is consistent with the tax In the sugar industry, raw sugar is processed in a refinery/mill which thereafter transforms the raw sugar into
exemptions granted to qualified cooperatives under the Cooperative Code which grants cooperatives exemption refined sugar. The refined sugar is then withdrawn or taken out of the refinery/mill and sold to
from sales tax51 on transactions with members and non-members.52 customers.61 Under this flow, the withdrawal of refined sugar evidently takes place prior to its sale.

These conclusions reduce the issue in the case to whether the granted exemption also covers the payment of The VAT implications of the withdrawal of refined sugar from the sugar refinery/mill and the actual sale of
advance VAT upon withdrawal of refined sugar from the refinery or mill. refined sugar are different. While the sale is the actual transaction upon which VAT is imposed, the withdrawal
gives rise to the obligation to pay the VAT due, albeit in advance. Therefore, the requirement for the advance
Exemption from VAT on sale of payment of VAT for refined sugar creates a special situation: While the transaction giving rise to the imposition
refined sugar by an agricultural of VAT — the actual sale of refined sugar — has not yet taken place, the VAT that would be due from the
cooperative includes the exemption subsequent sale is, nonetheless, already required to be paid earlier, which is before the withdrawal of the goods
from the requirement of advance from the sugar refinery/mill.
payment thereof.
To be clear, the transaction subject to VAT is still the sale of refined sugar. The withdrawal of sugar is not a
The CTA en banc ruled that the cooperative is exempted from the payment of advance VAT.53 It also ruled that separate transaction subject to VAT. It is only the payment thereof that is required to be made in advance.
the exemption from the payment of VAT on sales necessarily includes the exemption from the payment of
advance VAT.54 While the payment of advance VAT on the sale of refined sugar is, in general, required before these goods may
be withdrawn from the refinery/mill, cooperatives are exempt from this requirement because they are
The CIR argues that the exemption granted by the Cooperative Code and NIRC, on which the Certificate of Tax cooperatives.
Exemption and BIR Ruling No. ECC-015-08 issued in favor of UCSFA-MPC were based, only covers VAT on
the sale of produced sugar. It does not include the exemption from the payment of advance VAT in Revenue regulations specifically provide that such withdrawal shall not be subject to the payment of advance
the withdrawal of refined sugar from the sugar mill.55 VAT if the following requisites are present, viz:

The CIR's argument fails to persuade us. First, the withdrawal is made by a duly accredited and registered agricultural cooperative in good standing.62 It
was later clarified that a cooperative is in good standing if it is a holder of a certificate of good standing issued
As we discussed above, the sale of refined sugar by an agricultural cooperative is exempt from VAT. To fully by the CDA.63
understand the difference between VAT on the sale of refined sugar and the advance VAT upon withdrawal of
refined sugar, we distinguish between the tax liability that arises from the imposition of VAT and the obligation Second, the cooperative should also the producer of the sugar being withdrawn.64
of the taxpayer to pay the same.
Third, the cooperative withdrawing the refined sugar should subsequently sell the same to either its members or
Persons liable for VAT on the sale of goods shall pay the VAT due, in general, on a monthly basis. VAT accruing another agricultural cooperative.65
from the sale of goods in the current month shall be payable the following month.56 However, there are
instances where VAT is required to be paid in advance,57 such as in the sale of refined sugar.58 In sum, the sale of refined sugar by an agricultural cooperative duly registered with the CDA is exempt from VAT.
A qualified cooperative also enjoys exemption from the requirement of advance payment of VAT upon
To specifically address the policies and procedures governing the advance payment of VAT on the sale of refined withdrawal from the refinery/mill. The agricultural cooperative's exemption from the requirement of advance
sugar, RR Nos. 6-2007 and 13-2008 were issued. payment is a logical consequence of the exemption from VAT of its sales of refined sugar. We elaborate on this
point as follows:
Under these regulations, VAT on the sale of refined sugar that, under regular circumstances, is payable within
the month following the actual sale of refined sugar, shall nonetheless be paid in advance before the refined
sugar can even be withdrawn from the sugar refinery/mill by the sugar owner. Any advance VAT paid by sellers
First, the VAT required to be paid in advance (upon withdrawal) is the same VAT to be imposed on the when the cooperative's certificate of tax exemption was issued in 2004, it had already obtained its certificate of
subsequent sale of refined sugar. If the very transaction (sale of refined sugar) is VAT-exempt, there is no VAT to good standing from the CDA.
be paid in advance because, simply, there is no transaction upon which VAT is to be imposed.
The fact that its certificate of good standing was dated August 25, 2009, should not be detrimental to UCSFA-
Second, any advance VAT paid upon withdrawal shall be allowed as credit against its output tax arising from its MPC's case. As it correctly points out, a certificate of good standing is renewed and issued annually by the CDA.
sales of refined sugar. If all sales by a cooperative are VAT-exempt, no output tax shall materialize. It is simply Its renewal simply shows that it has remained to be in good standing with the CDA since its original registration.
absurd to require a cooperative to make advance VAT payments if it will not have any output tax against which it More importantly, no evidence was presented to show that either the certificate of registration or certificate of
can use/credit its advance payments. good standing had been previously revoked.

Thus, we sustain the CTA en banc's ruling that if the taxpayer is exempt from VAT on the sale of refined sugar, Third, as discussed earlier, the exemption from VAT on the sale of refined sugar carries with it the exemption
necessarily, it is also exempt from the advance payment of such tax. from the payment of advance VAT before the withdrawal of refined sugar from the refinery/mill.

Tax regulations cannot impose Section 109(1) of the NIRC clearly sets forth only two requisites for the exemption of the sale of refined sugar
additional requirements other than from VAT. Tax regulations implementing Sections 61 and 62 of the Cooperative Code as well as Section 109(1) of
what is required under the law as a the NIRC must be read together, and read as well to be consistent with the laws from which they have been
condition for tax exemption. derived. Thus, RR 20-2001 must be understood to implement the same principle as the Cooperative Code and
the NIRC and not add to the existing requirements provided by these laws.
Insisting that UCSFA-MPC does not enjoy exemption from the payment of advance VAT, the CIR questions the
cooperative's compliance with tax regulations that require cooperatives to make additional documentary We must remember that regulations may not enlarge, alter, or restrict the provisions of the law it administers; it
submissions to the BIR prior to the issuance of a certificate of tax exemption. cannot engraft additional requirements not contemplated by the legislature. 70 A taxpayer-claimant should not be
required to submit additional documents beyond what is required by the law; the taxpayer-claimant should
According to the CIR, RR No. 13-2008 requires an agricultural producer cooperative duly registered with the CDA enjoy the exemption it has, by law, always been entitled to.
to be in good standing before it can avail of the exemption from the advance payment of VAT. It claims that the
cooperative failed to present any certificate of good standing. While it did present a certificate of good standing, Hence, once the cooperative has sufficiently shown that it has satisfied the requirements under Section 109(1) of
the cooperative only acquired this certificate on August 25, 2009. Hence, it was not exempt from advance the NIRC for the exemption from VAT on its sale of refined sugar (i.e., that it is duly registered with the CDA and
payment of VAT during the period subject of its refund, or between November 15, 2007 to February 15, 2009.66 it is the producer of the sugar cane from which refined sugar is derived), its exemption from the advance
payment of VAT should automatically be granted and recognized.
We disagree with this CIR submission.
On these bases, we reject the CIR's insistence that RR No. 13-2008 requires the submission of a certificate of
First, the CTA observed that the petitioner questioned the cooperative's certificate of good standing for the first good standing as a condition to a cooperative's exemption from the requirement of advance payment of VAT. In
time in its motion for reconsideration filed before the CTA en banc. Thus, the CTA en banc was correct in ruling the same vein, the petitioner's argument that the submission of monthly VAT declarations and quarterly VAT
that under the Rules of Court the argument is deemed waived, having been belatedly raised. No new issue in a returns is essential to a claim for tax refund must also fail.
case can be raised in a pleading, which issue, by due diligence, could have been raised in previous pleadings. 67
The Certificate of Tax Exemption and
Second, the certificate of good standing is one of the requirements for the issuance of a certificate of tax BIR Ruling No. ECCP-015-2008 have
exemption under RR No. 20-2001. not been revoked.

Article 2(d) of the Cooperative Code defines a certificate of tax exemption as "the ruling granting exemption to Finally, the CIR questions the validity of the certificate of exemption and BIR Ruling No. ECCP-015-08 used by
the cooperative" issued by the BIR. In turn, under RR No. 20-2001, the cooperative shall file a letter-application UCSFA-MPC to prove its exemption from tax. Citing Commissioner of Internal Revenue v. Burmeister and Wain
for the issuance of certificate of tax exemption, attaching thereto its certificates of registration and good Scandinavian Contractor Mindanao, Inc.,71 the CIR insists that the BIR rulings on which the cooperative anchors
standing duly issued by the CDA.68 The certificate of tax exemption shall remain valid so long as the cooperative its exemption were, in the first place, deemed revoked when it filed an Answer to the cooperative's judicial claim
is "in good standing" as ascertained by the CDA.69 for refund before the CTA Division.72

In line with the presumption of regularity in the performance of duties of public officers, the issuance of the On the other hand, UCSFA-MPC points out that, while the case cited held that the filing of an answer by the CIR
certificate of tax exemption in favor of UCSFA-MPC presupposes that the cooperative submitted to the BIR the is a revocation of prior rulings issued in favor of the taxpayer-claimant, it has a recognized exception: the
complete documentary requirements for application, including its certificate of good standing. Simply stated, principle of non-retroactivity of rulings under Section 246 of the NIRC.73
We agree with UCSFA-MPC. zero-rated or effectively zero-rated sales. Hence, on 20 June 2000 and 13 June 2001, WMPC filed with the
Commissioner of Internal Revenue (CIR) applications for a tax credit certificate of its input VAT covering the
The basic rule is that if any BIR ruling or issuance promulgated by the CIR is subsequently revoked or nullified by taxable
the CIR herself or by the court, the revocation/nullification cannot be applied retroactively to the prejudice of 3rd and 4th quarters of 1999 (amounting to ₱ 3,675,026.67)5 and all the taxable quarters of 2000 (amounting to
the taxpayers. Hence, even if we consider that the CIR had revoked the rulings previously issued in favor of ₱ 5,649,256.81).6
UCSFA-MPC upon the filing of her answer, it cannot effectively deprive UCSFA-MPC of its rights under the rulings
prior to their revocation. Noting that the CIR was not acting on its application, and fearing that its claim would soon be barred by
prescription, WMPC on 28 September 2001 filed with the Court of Tax Appeals (CTA) in Division a Petition for
We note that, as pointed out by UCSFA-MPC, this principle was recognized as an exception in the very case the Review docketed as C.T.A. Case No. 6335, seeking refund/tax credit certificates for the total amount of ₱
CIR cited, although the CIR opted to omit this portion of the cited case. 9,324,283.30.

Being exempt from VAT on the sale of refined sugar and the requirement of advance payment of VAT, the The CIR filed its Comment on the CTA Petition, arguing that WMPC was not entitled to the latter’s claim for a tax
amounts that UCSFA-MPC had paid from November 15, 2007 to February 13, 2009, were illegally and refund in view of its failure to comply with the invoicing requirements under Section 113 of the NIRC in relation
erroneously collected. Accordingly, a refund is in order. to Section 4.108-1 of RR 7-95, which provides:

WHEREFORE, we DENY the petition and accordingly AFFIRM the June 5, 2013 decision and the October 30, 2013 SECTION 4.108-1. Invoicing Requirements — All VAT-registered persons shall, for every sale or lease of goods or
resolution of the CTA en banc in CTA EB No. 846. properties or services, issue duly registered receipts or sales or commercial invoices which must show:

SO ORDERED. 1. the name, TIN and address of seller;

G.R. No. 181136 June 13, 2012 2. date of transaction;

WESTERN MINDANAO POWER CORPORATION, Petitioner, 3. quantity, unit cost and description of merchandise or nature of service;
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent. 4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or
client;
DECISION
5. the word "zero rated" imprinted on the invoice covering zero-rated sales; and
SERENO, J.:
6. the invoice value or consideration.
This is a Petition for Review under Rule 45 seeking the reversal of the 15 November 2007 Decision and 9 January
2008 Resolution of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 272, 1 which upheld the Court of Tax In the case of sale of real property subject to VAT and where the zonal or market value is higher than the actual
Appeals Second Division’s denial of the Petition for refund of unutilized input Value Added Tax (VAT) on the consideration, the VAT shall be separately indicated in the invoice or receipt.
ground that the Official Receipts of petitioner Western Mindanao Power Corporation (WMPC) did not contain
the phrase "zero-rated," as required under Revenue Regulations No. 7-95 (RR 7-95). Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoice or
receipts and this shall be considered as a "VAT Invoice." All purchases covered by invoices other than "VAT"
Petitioner WMPC is a domestic corporation engaged in the production and sale of electricity. It is registered with Invoice" shall not give rise to any input tax.
the Bureau of Internal Revenue (BIR) as a VAT taxpayer. Petitioner alleges that it sells electricity solely to the
National Power Corporation (NPC), which is in turn exempt from the payment of all forms of taxes, duties, fees If the taxable person is also engaged in exempt operations, he should issue separate invoices or receipts for the
and imposts, pursuant to Section 132 of Republic Act (R.A.) No. 6395 (An Act Revising the Charter of the National taxable and exempt operations. A "VAT Invoice" shall be issued only for sales of goods, properties or services
Power Corporation). In view thereof and pursuant to Section 108(B) (3) of the National Internal Revenue Code subject to VAT imposed in Sections 100 and 102 of the Code.
(NIRC),3petitioner’s power generation services to NPC is zero-rated.
The invoice or receipt shall be prepared at least in duplicate, the original to be given to the buyer and the
Under Section 112(A) of the NIRC,4 a VAT-registered taxpayer may, within two years after the close of the taxable duplicate to be retained by the seller as part of his accounting records. (Underscoring supplied.)
quarter, apply for the issuance of a tax credit or refund of creditable input tax due or paid and attributable to
WMPC countered that the invoicing and accounting requirements laid down in RR 7-95 were merely "compliance imprinting of the phrase "zero-rated" on an invoice or official receipt for the document to be considered valid for
requirements," which were not indispensable to establish the claim for refund of excess and unutilized input the purpose of claiming a refund or an issuance of a tax credit certificate. Hence, the absence of the term "zero-
VAT. Also, Section 113 of the NIRC prevailing at the time the sales transactions were made did not expressly rated" in an invoice or official receipt does not affect its admissibility or competency as evidence in support of a
state that failure to comply with all the invoicing requirements would result in the disallowance of a tax credit refund claim. Also, assuming that stamping the term "zero-rated" on an invoice or official receipt is a
refund. 7 The express requirement – that "the term ‘zero-rated sale’ shall be written or printed prominently" on requirement of the current NIRC, the denial of a refund claim is not the imposable penalty for failure to comply
the VAT invoice or official receipt for sales subject to zero percent (0%) VAT – appeared in Section 113 of the with that requirement.
NIRC only after it was amended by Section 11 of R.A. 9337.8 This amendment cannot be applied retroactively,
considering that it took effect only on 1 July 2005, or long after petitioner filed its claim for a tax refund, and Nevertheless, Justice Acosta agreed with the "decision to deny the claim due to petitioner’s failure to prove the
considering further that the RR 7-95 is punitive in nature. Further, since there was no statutory requirement for input taxes it paid on its domestic purchases of goods and services during the period involved."
imprinting the phrase "zero-rated" on official receipts prior to 1 July 2005, the RR 7-95 constituted undue
expansion of the scope of the legislation it sought to implement.
WMPC filed a Motion for Reconsideration, which was denied by the CTA En Banc in a Resolution dated 9 January
2008.13
CTA Second Division Decision
Hence, the present Petition.
On 1 September 2006, the CTA Second Division dismissed9 the Petition. It held that while petitioner submitted in
evidence its Quarterly VAT Returns for the periods applied for, "the same do not reflect any zero-rated or
Issue
effectively zero-rated sales allegedly incurred during said periods. The spaces provided for such amounts were
left blank, which only shows that there existed no zero-rated or effectively zero-rated sales for the 3rd and 4th
quarters of 1999 and the four quarters of 2000." 10 Moreover, it found that petitioner’s VAT Invoices and Official Whether the CTA En Banc seriously erred in dismissing the claim of petitioner for a refund or tax credit on input
Receipts did not contain on their face the phrase "zero-rated," contrary to Section 4.108-1 of RR 7-95. tax on the ground that the latter’s Official Receipts do not contain the phrase "zero-rated"

Petitioner moved for reconsideration, but the motion was denied by the CTA in Division in its Resolution dated Our Ruling
30 January 2007.11
We deny the Petition.
CTA En Banc Decision
Being a derogation of the sovereign authority, a statute granting tax exemption is strictly construed against the
On 13 March 2007, WMPC appealed to the CTA En Banc, which on 15 November 2007 issued a Decision person or entity claiming the exemption. When based on such statute, a claim for tax refund partakes of the
dismissing the appeal and affirming the CTA ruling. The CTA En Banc held that the receipts and evidence nature of an exemption. Hence, the same rule of strict interpretation against the taxpayer-claimant applies to
presented by petitioner failed to fully substantiate the existence of the latter’s effectively zero-rated sales to NPC the claim.14
for the 3rd and 4th quarters of taxable year 1999 and the four quarters of taxable year 2000. The CTA En Banc
quoted the CTA Second Division finding that the Quarterly VAT Returns that petitioner adduced in evidence did In the present case, petitioner’s claim for a refund or tax credit of input VAT is anchored on Section 112(A) of the
not reflect any zero-rated or effectively zero-rated sales allegedly incurred during the said period, to wit: NIRC, viz:

Petitioner submitted in evidence its Quarterly Value Added Tax Returns for the 3rd and 4th quarters of 1999 and Section 112. Refunds or Tax Credits of Input Tax. -
the four quarters of 2000 to prove that it had duly reported the input taxes paid on its domestic purchases of
goods and services (Exhibits ‘E’ to ‘J’). However, a closer examination of the returns clearly shows that the same (A) Zero-rated or Effectively Zero-rated Sales. - any VAT-registered person, whose sales are zero-rated or
do not reflect any zero-rated or effectively zero-rated sales allegedly incurred during the said periods. The spaces effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made,
provided for such amounts were left blank, which only shows that there existed no zero-rated or effectively zero- apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such
rated sales for the 3rd and 4th quarters of 1999 and the four quarters of 2000. 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
In addition, the CTA En Banc noted that petitioner’s Official Receipts and VAT Invoices did not have the word (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in
"zero-rated" imprinted/stamped thereon, contrary to the clear mandate of Section 4.108-1 of RR 7-95. 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 of
CTA Presiding Justice Ernesto Acosta filed a Concurring and Dissenting Opinion. Justice Acosta disagreed with the properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely
majority’s view regarding the supposed mandatory requirement of imprinting the term "zero-rated" on official attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of
receipts or invoices. He opined that Section 113 in relation to Section 237 12 of the NIRC does not require the sales.
Thus, a taxpayer engaged in zero-rated or effectively zero-rated sale may apply for the issuance of a tax credit G.R. No. 172378 January 17, 2011
certificate, or refund of creditable input tax due or paid, attributable to the sale.
SILICON PHILIPPINES, INC., (Formerly INTEL PHILIPPINES MANUFACTURING, INC.), Petitioner,
In a claim for tax refund or tax credit, the applicant must prove not only entitlement to the grant of the claim vs.
under substantive law. It must also show satisfaction of all the documentary and evidentiary requirements for an COMMISSIONER OF INTERNAL REVENUE, Respondent.
administrative claim for a refund or tax credit.15 Hence, the mere fact that petitioner’s application for zero-rating
has been approved by the CIR does not, by itself, justify the grant of a refund or tax credit. The taxpayer claiming DECISION
the refund must further comply with the invoicing and accounting requirements mandated by the NIRC, as well
as by revenue regulations implementing them. 16
DEL CASTILLO, J.:

Under the NIRC, a creditable input tax should be evidenced by a VAT invoice or official receipt, 17 which may only
The burden of proving entitlement to a refund lies with the claimant.
be considered as such when it complies with the requirements of RR 7-95, particularly Section 4.108-1. This
section requires, among others, that "(i)f the sale is subject to zero percent (0%) value-added tax, the term ‘zero-
rated sale’ shall be written or printed prominently on the invoice or receipt." This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the September 30,
2005 Decision1 and the April 20, 2006 Resolution2 of the Court of Tax Appeals (CTA) En Banc.
We are not persuaded by petitioner’s argument that RR 7-95 constitutes undue expansion of the scope of the
legislation it seeks to implement on the ground that the statutory requirement for imprinting the phrase "zero- Factual Antecedents
rated" on VAT official receipts appears only in Republic Act No. 9337. This law took effect on 1 July 2005, or long
after petitioner had filed its claim for a refund.1âwphi1 Petitioner Silicon Philippines, Inc., a corporation duly organized and existing under and by virtue of the laws of
the Republic of the Philippines, is engaged in the business of designing, developing, manufacturing and exporting
RR 7-95, which took effect on 1 January 1996, proceeds from the rule-making authority granted to the Secretary advance and large-scale integrated circuit components or "IC’s."3 Petitioner is registered with the Bureau of
of Finance by the NIRC for the efficient enforcement of the same Tax Code and its amendments. In Panasonic Internal Revenue (BIR) as a Value Added Tax (VAT) taxpayer 4 and with the Board of Investments (BOI) as a
Communications Imaging Corporation of the Philippines v. Commissioner of Internal Revenue, 18 we ruled that preferred pioneer enterprise.5
this provision is "reasonable and is in accord with the efficient collection of VAT from the covered sales of goods
and services." Moreover, we have held in Kepco Philippines Corporation v. Commissioner of Internal On May 21, 1999, petitioner filed with the respondent Commissioner of Internal Revenue (CIR), through the One-
Revenue19 that the subsequent incorporation of Section 4.108-1 of RR 7-95 in Section 113 (B) (2) (c) of R.A. 9337 Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance (DOF), an
actually confirmed the validity of the imprinting requirement on VAT invoices or official receipts – a case falling application for credit/refund of unutilized input VAT for the period October 1, 1998 to December 31, 1998 in the
under the principle of legislative approval of administrative interpretation by reenactment. amount of ₱31,902,507.50, broken down as follows:

In fact, this Court has consistently held as fatal the failure to print the word "zero-rated" on the VAT invoices or Amount
official receipts in claims for a refund or credit of input VAT on zero-rated sales, even if the claims were made Tax Paid on Imported/Locally Purchased ₱ 15,170,082.00
prior to the effectivity of R.A. 9337.20 Clearly then, the present Petition must be denied. Capital Equipment
Total VAT paid on Purchases per Invoices 16,732,425.50
In addition, it is notable that the CTA Second Division and the CTA En Banc, including Presiding Justice Acosta in Received During the Period for which
his Concurring and Dissenting Opinion, both found that petitioner failed to sufficiently substantiate the existence this Application is Filed
of its effectively zero-rated sales to NPC for the 3rd and 4th quarters of taxable year 1999, as well as all four Amount of Tax Credit/Refund Applied For ₱ 31,902,507.506
quarters of taxable year 2000. It must also be noted that the CTA is a highly specialized court dedicated Proceedings before the CTA Division
exclusively to the study and consideration of revenue-related problems, in which it has necessarily developed an
expertise.21 Hence, its factual findings, when supported by substantial evidence, will not be disturbed on
appeal.22 We find no sufficient reason to exempt the present case from this general rule. On December 27, 2000, due to the inaction of the respondent, petitioner filed a Petition for Review with the CTA
Division, docketed as CTA Case No. 6212. Petitioner alleged that for the 4th quarter of 1998, it generated and
recorded zero-rated export sales in the amount of ₱3,027,880,818.42, paid to petitioner in acceptable foreign
WHEREFORE, premises considered, we DENY the Petition and AFFIRM the Decision dated 15 November 2007 currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas; 7 and
and Resolution dated 9 January 2008 of the Court of Tax Appeals En Banc in CTA EB No. 272. that for the said period, petitioner paid input VAT in the total amount of ₱31,902,507.50, 8 which have not been
applied to any output VAT.9
SO ORDERED.
To this, respondent filed an Answer10 raising the following special and affirmative defenses, to wit:
8. The petition states no cause of action as it does not allege the dates when the taxes sought to be On its part, respondent filed a Motion for Partial Reconsideration20 contending that petitioner is not entitled to a
refunded/credited were actually paid; credit/refund of unutilized input VAT on capital goods because it failed to show that the goods
imported/purchased are indeed capital goods as defined in Section 4.106-1 of RR No. 7-95.21
9. It is incumbent upon herein petitioner to show that it complied with the provisions of Section 229 of
the Tax Code as amended; The CTA Division denied both motions in a Resolution22 dated August 10, 2004. It noted that:

10. Claims for refund are construed strictly against the claimant, the same being in the nature of [P]etitioner’s request for Permit to Adopt Computerized Accounting Documents such as Sales Invoice and Official
exemption from taxes (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95; Manila Electric Co. Receipt was approved on August 31, 2001 while the period involved in this case was October 31, 1998 to
vs. Commissioner of Internal Revenue, 67 SCRA 35); December 31, 1998 x x x. While it appears that petitioner was previously issued a permit by the BIR Makati
Branch, such permit was only limited to the use of computerized books of account x x x. It was only on August
11. One who claims to be exempt from payment of a particular tax must do so under clear and 31, 2001 that petitioner was permitted to generate computerized sales invoices and official receipts [provided
unmistakable terms found in the statute (Asiatic Petroleum vs. Llanes, 49 Phil. 466; Union Garment Co. that the BIR Permit Number is printed] in the header of the document x x x.
vs. Court of Tax Appeals, 4 SCRA 304);
xxxx
12. In an action for refund, the burden is upon the taxpayer to prove that he is entitled thereto, and
failure to sustain the same is fatal to the action for refund. Furthermore, as pointed out in the case of Thus, petitioner’s contention that it is not required to show its BIR permit number on the sales invoices runs
William Li Yao vs. Collector (L-11875, December 28, 1963), amounts sought to be recovered or credited counter to the requirements under the said "Permit." This court also wonders why petitioner was issuing
should be shown to be taxes which are erroneously or illegally collected; that is to say, their payment computer generated sales invoices during the period involved (October 1998 to December 1998) when it did not
was an independent single act of voluntary payment of a tax believed to be due and collectible and have an authority or permit. Therefore, we are convinced that such documents lack probative value and should
accepted by the government, which had therefor become part of the State moneys subject to be treated as inadmissible, incompetent and immaterial to prove petitioner’s export sales transaction.
expenditure and perhaps already spent or appropriated; and
xxxx
13. Taxes paid and collected are presumed to have been made in accordance with the law and
regulations, hence not refundable.11 ACCORDINGLY, the Motion for Reconsideration and the Supplemental Motion for Reconsideration filed by
petitioner as well as the Motion for Partial Reconsideration of respondent are hereby DENIED for lack of merit.
On November 18, 2003, the CTA Division rendered a Decision12 partially granting petitioner’s claim for refund of The pronouncement in the assailed decision is REITERATED.
unutilized input VAT on capital goods. Out of the amount of ₱15,170,082.00, only ₱9,898,867.00 was allowed to
be refunded because training materials, office supplies, posters, banners, T-shirts, books, and other similar items SO ORDERED 23
purchased by petitioner were not considered capital goods under Section 4.106-1(b) of Revenue Regulations (RR)
No. 7-95 (Consolidated Value-Added Tax Regulations).13 With regard to petitioner’s claim for credit/refund of
Ruling of the CTA En Banc
input VAT attributable to its zero-rated export sales, the CTA Division denied the same because petitioner failed
to present an Authority to Print (ATP) from the BIR;14 neither did it print on its export sales invoices the ATP and
the word "zero-rated."15 Thus, the CTA Division disposed of the case in this wise: Undaunted, petitioner elevated the case to the CTA En Banc via a Petition for Review,24 docketed as EB Case No.
23.
WHEREFORE, in view of the foregoing the instant petition for review is hereby PARTIALLY GRANTED. Respondent
is ORDERED to ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner in the reduced amount of P9,898,867.00 On September 30, 2005, the CTA En Banc issued the assailed Decision25 denying the petition for lack of merit.
representing input VAT on importation of capital goods. However, the claim for refund of input VAT attributable Pertinent portions of the Decision read:
to petitioner's alleged zero-rated sales in the amount of P16,732,425.50 is hereby DENIED for lack of merit.
This Court notes that petitioner raised the same issues which have already been thoroughly discussed in the
SO ORDERED.16 assailed Decision, as well as, in the Resolution denying petitioner's Motion for Partial Reconsideration.

Not satisfied with the Decision, petitioner moved for reconsideration. 17 It claimed that it is not required to With regard to the first assigned error, this Court reiterates that, the requirement of [printing] the BIR permit to
secure an ATP since it has a "Permit to Adopt Computerized Accounting Documents such as Sales Invoice and print on the face of the sales invoices and official receipts is a control mechanism adopted by the Bureau of
Official Receipts" from the BIR.18 Petitioner further argued that because all its finished products are exported to Internal Revenue to safeguard the interest of the government.
its mother company, Intel Corporation, a non-resident corporation and a non-VAT registered entity, the printing
of the word "zero-rated" on its export sales invoices is not necessary.19
This requirement is clearly mandated under Section 238 of the 1997 National Internal Revenue Code, which indirectly[,] in the production or sale of taxable goods or services, the same cannot be considered as capital
provides that: goods as defined above[. Consequently,] the same may not x x x then [be] claimed as such.

SEC. 238. Printing of Receipts or Sales or Commercial Invoice. – All persons who are engaged in business shall WHEREFORE, in view of the foregoing, this instant Petition for Review is hereby DENIED DUE COURSE and hereby
secure from the Bureau of Internal Revenue an authority to print receipts or sales or commercial invoices before DISMISSED for lack of merit. This Court's Decision of November 18, 2003 and Resolution of August 10, 2004 are
a printer can print the same. hereby AFFIRMED in all respects.

The above mentioned provision seeks to eliminate the use of unregistered and double or multiple sets of SO ORDERED.26
receipts by striking at the very root of the problem — the printer (H. S. de Leon, The National Internal Revenue
Code Annotated, 7th Ed., p. 901). And what better way to prove that the required permit to print was secured Petitioner sought reconsideration of the assailed Decision but the CTA En Banc denied the Motion27 in a
from the Bureau of Internal Revenue than to show or print the same on the face of the invoices. There can be no Resolution28 dated April 20, 2006.
other valid proof of compliance with the above provision than to show the Authority to Print Permit number
[printed] on the sales invoices and official receipts.
Issues

With regard to petitioner’s failure to print the word "zero-rated" on the face of its export sales invoices, it must
Hence, the instant Petition raising the following issues for resolution:
be emphasized that Section 4.108-1 of Revenue Regulations No. 7-95 specifically requires that all value-added
tax registered persons shall, for every sale or lease of goods or properties or services, issue duly registered
invoices which must show the word "zero-rated" [printed] on the invoices covering zero-rated sales. (1) whether the CTA En Banc erred in denying petitioner’s claim for credit/ refund of input VAT
attributable to its zero-rated sales in the amount of ₱16,732,425.00 due to its failure:
It is not enough that petitioner prove[s] that it is entitled to its claim for refund by way of substantial evidence.
Well settled in our jurisprudence [is] that tax refunds are in the nature of tax exemptions and as such, they are (a) to show that it secured an ATP from the BIR and to indicate the same in its export sales
regarded as in derogation of sovereign authority (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA invoices; and
95). Thus, tax refunds are construed in strictissimi juris against the person or entity claiming the
same (Commissioner of Internal Revenue vs. Procter & Gamble Philippines Manufacturing Corporation, 204 SCRA (b) to print the word "zero-rated" in its export sales invoices.29
377; Commissioner of Internal Revenue vs. Tokyo Shipping Co., Ltd., 244 SCRA 332).
(2) whether the CTA En Banc erred in ruling that only the amount of ₱9,898,867.00 can be classified as
In this case, not only should petitioner establish that it is entitled to the claim but it must most importantly show input VAT paid on capital goods.30
proof of compliance with the substantiation requirements as mandated by law or regulations.
Petitioner’s Arguments
The rest of the assigned errors pertain to the alleged errors of the First Division: in finding that the petitioner
failed to comply with the substantiation requirements provided by law in proving its claim for refund; in reducing Petitioner posits that the denial by the CTA En Banc of its claim for refund of input VAT attributable to its zero-
the amount of petitioner’s tax credit for input vat on importation of capital goods; and in denying petitioner’s rated sales has no legal basis because the printing of the ATP and the word "zero-rated" on the export sales
claim for refund of input vat attributable to petitioner’s zero-rated sales. invoices are not required under Sections 113 and 237 of the National Internal Revenue Code (NIRC). 31 And since
there is no law requiring the ATP and the word "zero-rated" to be indicated on the sales invoices,32 the absence
It is petitioner’s contention that it has clearly established its right to the tax credit or refund by way of substantial of such information in the sales invoices should not invalidate the petition33 nor result in the outright denial of a
evidence in the form of material and documentary evidence and it would be improper to set aside with haste the claim for tax credit/refund.34 To support its position, petitioner cites Intel Technology Philippines, Inc. v.
claimed input VAT on capital goods expended for training materials, office supplies, posters, banners, t-shirts, Commissioner of Internal Revenue,35 where Intel’s failure to print the ATP on the sales invoices or receipts did
books and the like because Revenue Regulations No. 7-95 defines capital goods as to include even those goods not result in the outright denial of its claim for tax credit/refund. 36 Although the cited case only dealt with the
which are indirectly used in the production or sale of taxable goods or services. printing of the ATP, petitioner submits that the reasoning in that case should also apply to the printing of the
word "zero-rated."37 Hence, failure to print of the word "zero-rated" on the sales invoices should not result in
Capital goods or properties, as defined under Section 4.106-1(b) of Revenue Regulations No. 7-95, refer "to the denial of a claim.
goods or properties with estimated useful life greater than one year and which are treated as depreciable assets
under Section 29 (f), used directly or indirectly in the production or sale of taxable goods or services." As to the claim for refund of input VAT on capital goods, petitioner insists that it has sufficiently proven through
testimonial and documentary evidence that all the goods purchased were used in the production and
Considering that the items (training materials, office supplies, posters, banners, t-shirts, books and the like) manufacture of its finished products which were sold and exported.38
purchased by petitioner as reflected in the summary were not duly proven to have been used, directly or
Respondent’s Arguments It has been settled in Intel Technology Philippines, Inc. v. Commissioner of Internal Revenue49 that the ATP need
not be reflected or indicated in the invoices or receipts because there is no law or regulation requiring it. 50 Thus,
To refute petitioner’s arguments, respondent asserts that the printing of the ATP on the export sales invoices, in the absence of such law or regulation, failure to print the ATP on the invoices or receipts should not result in
which serves as a control mechanism for the BIR, is mandated by Section 238 of the NIRC;39 while the printing of the outright denial of a claim or the invalidation of the invoices or receipts for purposes of claiming a refund.51
the word "zero-rated" on the export sales invoices, which seeks to prevent purchasers of zero-rated sales or
services from claiming non-existent input VAT credit/refund,40 is required under RR No. 7-95, promulgated ATP must be secured from the BIR
pursuant to Section 244 of the NIRC.41 With regard to the unutilized input VAT on capital goods, respondent
counters that petitioner failed to show that the goods it purchased/imported are capital goods as defined in But while there is no law requiring the ATP to be printed on the invoices or receipts, Section 238 of the NIRC
Section 4.106-1 of RR No. 7-95. 42 expressly requires persons engaged in business to secure an ATP from the BIR prior to printing invoices or
receipts. Failure to do so makes the person liable under Section 26452 of the NIRC.
Our Ruling
This brings us to the question of whether a claimant for unutilized input VAT on zero-rated sales is required to
The petition is bereft of merit. present proof that it has secured an ATP from the BIR prior to the printing of its invoices or receipts.

Before us are two types of input VAT credits. One is a credit/refund of input VAT attributable to zero-rated sales We rule in the affirmative.
under Section 112 (A) of the NIRC, and the other is a credit/refund of input VAT on capital goods pursuant to
Section 112 (B) of the same Code. Under Section 112 (A) of the NIRC, a claimant must be engaged in sales which are zero-rated or effectively zero-
rated. To prove this, duly registered invoices or receipts evidencing zero-rated sales must be presented.
Credit/refund of input VAT on zero-rated sales However, since the ATP is not indicated in the invoices or receipts, the only way to verify whether the invoices or
receipts are duly registered is by requiring the claimant to present its ATP from the BIR. Without this proof, the
In a claim for credit/refund of input VAT attributable to zero-rated sales, Section 112 (A)43 of the NIRC lays down invoices or receipts would have no probative value for the purpose of refund. In the case of Intel, we emphasized
four requisites, to wit: that:

1) the taxpayer must be VAT-registered; It bears reiterating that while the pertinent provisions of the Tax Code and the rules and regulations
implementing them require entities engaged in business to secure a BIR authority to print invoices or receipts
and to issue duly registered invoices or receipts, it is not specifically required that the BIR authority to print be
2) the taxpayer must be engaged in sales which are zero-rated or effectively zero-rated;
reflected or indicated therein. Indeed, what is important with respect to the BIR authority to print is that it has
been secured or obtained by the taxpayer, and that invoices or receipts are duly registered. 53 (Emphasis
3) the claim must be filed within two years after the close of the taxable quarter when such sales were supplied)
made; and
Failure to print the word "zero-rated" on the sales invoices is fatal to a claim for refund of input VAT1awphi1
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.
Similarly, failure to print the word "zero-rated" on the sales invoices or receipts is fatal to a claim for
credit/refund of input VAT on zero-rated sales.
To prove that it is engaged in zero-rated sales, petitioner presented export sales invoices, certifications of inward
remittance, export declarations, and airway bills of lading for the fourth quarter of 1998. The CTA Division,
In Panasonic Communications Imaging Corporation of the Philippines (formerly Matsushita Business Machine
however, found the export sales invoices of no probative value in establishing petitioner’s zero-rated sales for
Corporation of the Philippines) v. Commissioner of Internal Revenue,54 we upheld the denial of Panasonic’s claim
the purpose of claiming credit/refund of input VAT because petitioner failed to show that it has an ATP from the
for tax credit/refund due to the absence of the word "zero-rated" in its invoices. We explained that compliance
BIR and to indicate the ATP and the word "zero-rated" in its export sales invoices.44 The CTA Division cited as
with Section 4.108-1 of RR 7-95, requiring the printing of the word "zero rated" on the invoice covering zero-
basis Sections 113,4523746 and 23847 of the NIRC, in relation to Section 4.108-1 of RR No. 7-95.48
rated sales, is essential as this regulation proceeds from the rule-making authority of the Secretary of Finance
under Section 24455 of the NIRC.
We partly agree with the CTA.
All told, the non-presentation of the ATP and the failure to indicate the word "zero-rated" in the invoices or
Printing the ATP on the invoices or receipts is not required receipts are fatal to a claim for credit/refund of input VAT on zero-rated sales. The failure to indicate the ATP in
the sales invoices or receipts, on the other hand, is not. In this case, petitioner failed to present its ATP and to
print the word "zero-rated" on its export sales invoices. Thus, we find no error on the part of the CTA in denying Being assailed via petition for review on certiorari is the April 12, 2002 Decision 1 of the Court of Appeals
outright petitioner’s claim for credit/refund of input VAT attributable to its zero-rated sales. reversing that of the Court of Tax Appeals (CTA)2 which granted the claim of respondent, Manila Mining
Corporation, in consolidated CTA Case Nos. 4968 and 4991, for refund or issuance of tax credit certificates in the
Credit/refund of input VAT on capital goods amounts of ₱5,683,035.04 and ₱8,173,789.60 representing its input value added tax (VAT) payments for taxable
year 1991.
Capital goods are defined under Section 4.106-1(b) of RR No. 7-95
Respondent, a mining corporation duly organized and existing under Philippines laws, is registered with the
Bureau of Internal Revenue (BIR) as a VAT-registered enterprise under VAT Registration Certificate No. 32-6-
To claim a refund of input VAT on capital goods, Section 112 (B)56 of the NIRC requires that:
00632.3

1. the claimant must be a VAT registered person;


In 1991, respondent’s sales of gold to the Central Bank (now Bangko Sentral ng Pilipinas) amounted to
₱200,832,364.70.4 On April 22, 1991, July 23, 1991, October 21, 1991 and January 20, 1992, it filed its VAT
2. the input taxes claimed must have been paid on capital goods; Returns for the 1st, 2nd, 3rd and 4th quarters of 1991, respectively, with the BIR through the VAT Unit at
Revenue District Office No. 47 in East Makati.5
3. the input taxes must not have been applied against any output tax liability; and
Respondent, relying on a letter dated October 10, 1988 from then BIR Deputy Commissioner Victor Deoferio
4. the administrative claim for refund must have been filed within two (2) years after the close of the that:
taxable quarter when the importation or purchase was made.
xxx under Sec. 2 of E.O. 581 as amended, gold sold to the Central Bank is considered an export sale which under
Corollarily, Section 4.106-1 (b) of RR No. 7-95 defines capital goods as follows: Section 100(a)(1) of the NIRC, as amended by E.O. 273, is subject to zero-rated if such sale is made by a VAT-
registered person[,]6 (Underscoring supplied)
"Capital goods or properties" refer to goods or properties with estimated useful life greater that one year and
which are treated as depreciable assets under Section 29 (f),57 used directly or indirectly in the production or sale filed on April 7, 1992 with the Commissioner of Internal Revenue (CIR), through the BIR-VAT Division (BIR-VAT),
of taxable goods or services. an application for tax refund/credit of the input VAT it paid from July 1- December 31, 1999 in the amount of
₱8,173,789.60.
Based on the foregoing definition, we find no reason to deviate from the findings of the CTA that training
materials, office supplies, posters, banners, T-shirts, books, and the other similar items reflected in petitioner’s Petitioner subsequently filed on March 5, 1991 another application for tax refund/credit of input VAT it paid the
Summary of Importation of Goods are not capital goods. A reduction in the refundable input VAT on capital amount of ₱5,683,035.04 from January 1 – June 30, 1991. As the CIR failed to act upon respondent’s application
goods from ₱15,170,082.00 to ₱9,898,867.00 is therefore in order. within sixty (60) days from the dates of filing,7 it filed on March 22, 1993 a Petition for Review against the CIR
before the CTA which docketed it as CTA Case No. 4968,8 seeking the issuance of tax credit certificate or refund
WHEREFORE, the Petition is hereby DENIED. The assailed Decision dated September 30, 2005 and the Resolution in the amount of ₱5,683,035.04 covering its input VAT payments for the 1st and 2nd quarters of 1991. And it
dated April 20, 2006 of the Court of Tax Appeals En Banc are hereby AFFIRMED. filed on May 24, 1993 another Petition for Review, docketed as CTA Case No. 4991, seeking the issuance of tax
credit certificates in the amount of ₱8,173,789.60 covering its input VAT payments for the 3rd and 4th quarters
of 1991.9
SO ORDERED.
To the petition in CTA Case No. 4968 the CIR filed its Answer10 admitting that respondent filed its VAT returns for
G.R. No. 153204 August 31, 2005 the 1st and 2nd quarters of 1991 and an application for credit/refund of input VAT payment. It, however,
specifically denied the veracity of the amounts stated in respondent’s VAT returns and application for
COMMISSIONER OF INTERNAL REVENUE, Petitioners, credit/refund as the same continued to be under investigation.
vs.
MANILA MINING CORPORATION, Respondent. On May 26, 1993, respondent filed in CTA Case No. 4968 a "Request for Admissions"11 of, among other facts, the
following:
DECISION
xxx
CARPIO MORALES, J.:
5. That the original copies of the Official Receipts and Sales Invoices, reflected in Annex "C" ([Schedule of VAT b. VAT Registration Certificate;
INPUT on Domestic Purchase of Goods and Services for the quarter ending March 31, 1991] consisting of 24
pages) and Annex C-1 (Summary of Importation, 2 pages) were submitted to BIR-VAT, as required, for domestic c. VAT returns for the third and fourth quarters of 1990;
purchases of goods and services (1st semester, 1991) for a total net claimable of ₱5,268,401.90; while its VAT
input tax paid for importation was ₱679,853.00; (Emphasis and underscoring supplied)
d. Beginning and ending inventories of raw materials, work-in process, finished goods and materials and
supplies;
xxx
e. Zero-rated sales to Central Bank of the Philippines;
By Reply12 of August 11, 1993, the CIR specifically denied the veracity and accuracy of the amounts indicated in
respondent’s Request for Admissions,13 among other things.
f. Certification that the Company will not file any tax credit with the Board of Investments and Bureau of
Customs.
The CIR’s Reply, however, was not verified, prompting respondent to file on August 30, 1993 a "SUPPLEMENT (To
Annotation of Admission)" alleging that as the reply was not under oath, "an implied admission of [its requests]
which completely documented the petitioner’s claim for refund as required.
ar[ose]" as a consequence thereof.14

5. That the original copies of the Official Receipts and Sales Invoices, reflected in Annex "C" (consisting of 35
On September 27, 1993, the CIR filed a Motion to Admit Reply, which Reply was verified and attached to the
pages) and Annex C-1 (Summary of Importation, 2 pages) were submitted to BIR-VAT, as required, to show
motion, alleging that its Reply of August 11, 1993 was "submitted within the period for submission thereof, but,
domestic purchases of goods and services (2nd semester, 1991) which established that the total net claimable of
however, was incomplete [due to oversight] as to the signature of the administering officer in the verification."15
₱7,953,816.38; while its VAT input tax paid for importation was ₱563,503.00;

By Resolution16 of February 28, 1994, the CTA, finding that the matters subject of respondent’s Request for
x x x17
Admissions are "relevant to the facts stated in the petition for review" and there being an implied admission by
the CIR under Section 2 of Rule 26 of the then Revised Rules of Court reading:
To the Request for Admission the CIR filed a Manifestation and Motion alleging that as the issues had not yet
been joined, respondent’s request is baseless and premature18 under Section 1, Rule 26 of the Revised Rules of
Section 2. Implied Admission. – Each of the matters of which an admission is requested shall be deemed
Court.19
admittedunless xxx the party to whom the request is directed serves upon the party requesting the admission
a swornstatement either denying specifically the matters of which an admission is requested xxx. (Emphasis and
underscoring supplied), In the meantime, the CIR filed on August 16, 1993 its Answer,20 it averring that sales of gold to the Central Bank
may not be legally considered export sales for purposes of Section 100(a) in relation to Section 100(a)(1) 21 of the
Tax Code; and that assuming that a refund is proper, respondent must demonstrate that it complied with the
granted respondent’s Request for Admissions and denied the CIR’s Motion to Admit Reply.
provisions of Section 204(3) in relation to Section 230 of the Tax Code.22

With respect to CTA Case No. 4991, respondent also filed a "Request for Admissions" dated May 27, 1993 of the
The CIR subsequently filed on March 25, 1992 its Reply to respondent’s Request for Admission in CTA No. 4991,
following facts:
it admitting that respondent filed its VAT returns and VAT applications for tax credit for the 3rd and 4th quarters
of 1991, but specifically denying the correctness and veracity of the amounts indicated in the schedules and
xxx summary of importations, VAT services and goods, the total input and output taxes, including the amount of
refund claimed.23
2. Petitioner’s 3rd and 4th Quarters 1991 VAT Returns were submitted and filed with the BIR-VAT Divisions on
October 21, 1991 and January 20, 1991, respectively and subsequently, on April 7, 1993 petitioner filed and By Resolution24 of February 22, 1994, the CTA, in CTA Case No. 4991, admitted the matters covered by
submitted its application for tax credit on VAT paid for the 2nd semester of 1990; respondent’s Request for Admission except those specifically denied by the CIR. In the same Resolution, the CTA
consolidated Case Nos. 4968 and 4991, they involving the same parties and substantially the same factual and
xxx legal issues.

4. That attached to the transmittal letter [forwarded petitioner’s application for tax refund credit] of March 31, Joint hearings of CTA Case Nos. 4968 and 4991 were thus conducted.
1992 (Annex "B") are the following documents:
Through its Chief Accountant Danilo Bautista, respondent claimed that in 1991, it sold a total of 20,288.676
a. Copies of invoices and other supporting documents; ounces of gold to the Central Bank valued at ₱200,832,364.70, as certified by the Director of the Mint and
Refinery Department of the Central Bank25 and that in support of its application for refund filed with the BIR, it Hence, the present petition for review,43 the CIR arguing that respondent’s failure to submit documentary
submitted copies of all invoices and official receipts covering its input VAT payments to the VAT Division of the evidence to confirm the veracity of its claims is fatal; and that the CTA, being a court of record, is not expected to
BIR, "the summary and schedules" of which were certified by its external auditor, the Joaquin Cunanan & Co.26 go out of its way and dig into the records of the BIR to supply the insufficient evidence presented by a party, and
in fact it may set a definite rule that only evidence formally presented will be considered in deciding cases before
Senior Audit Manager of Joaquin Cunanan & Co., Irene Ballesteros, who was also presented by respondent, it.44
declared that she conducted a special audit work for respondent for the purpose of determining its actual input
VAT payments for the second semester of 1991 and examined every original supplier’s invoice, official receipts, Respondent, in its Comment,45 avers that it complied with the provisions of Section 2(c)(1) of Revenue
and other documents supporting the payments;27 and that there were no discrepancies or errors between the Regulation No. 3-88 when it submitted the original receipts and invoices to the BIR, which fact of submission had
summaries and schedules of suppliers’ invoices prepared by respondent and the VAT invoices she examined. 28 been deemed admitted by petitioner, as confirmed by the CTA in its Resolutions in both cases granting
respondent’s Requests for Admissions therein.
Following the filing by respondent of its formal offer of evidence in both cases,29 the CTA, by Resolution30 of July
18, 1995, admitted the same. To respondent’s Comment the Office of the Solicitor General (OSG), on behalf of petitioner, filed its
Reply,46 arguing that the documents required to be submitted to the BIR under Revenue Regulation No. 3-88
Upon the issue of whether respondent’s sales of gold to the BSP during the four quarters of 1991 are subject to should likewise be presented to the CTA to prove entitlement to input tax credit.47 In addition, it argues that,
10% VAT under Section 100 of the Tax Code or should be considered zero-rated under paragraph a(2) of said contrary to respondent’s position, a certification by an independent Certified Public Accountant (CPA) as
Section 100, the CTA held that said sales are not subject to 10% output VAT, citing Atlas Consolidated Mining and provided under CTA Circulars 1-95 and 10-97 does not relieve respondent of the onus of adducing in evidence
Development Corporation v. Court of Appeals,31 Manila Mining Corporation v. Commissioner of Internal the invoices, receipts and other documents to show the input VAT paid on its purchase of goods and services.48
Revenue,32and Benguet Corporation v. Commissioner of Internal Revenue.33
The pivotal issue then is whether respondent adduced sufficient evidence to prove its claim for refund of its
Nonetheless, the CTA denied respondent’s claim for refund of input VAT for failure to prove that it paid the input VAT for taxable year 1991 in the amounts of ₱5,683,035.04 and ₱8,173,789.60.
amounts claimed as such for the year 1991, no sales invoices, receipts or other documents as required under
Section 2(c)(1) of Revenue Regulations No. 3-88 having been presented.34 The CTA explained that The petition is impressed with merit.
a mere listing of VAT invoices and receipts, even if certified to have been previously examined by an independent
certified public accountant, would not suffice to establish the truthfulness and accuracy of the contents of such In Commissioner of Internal Revenue v. Benguet Corporation,49 this Court had the occasion to note that as early
invoices and receipts unlessoffered and actually verified by it (CTA) in accordance with CTA Circular No. 1-95, as as 1988, the BIR issued several VAT rulings to the effect that sales of gold to the Central Bank by a VAT-registered
amended by CTA Circular No. 10-97, which requires that photocopies of invoices, receipts and other documents person or entity are considered export sales.
covering said accounts of payments be pre-marked by the party concerned and submitted to the court.35
The transactions in question occurred during the period from 1988 and 1991. Under Sec. 99 of the National
Respondent’s motion for reconsideration36 of the CTA decision having been denied by Resolution 37 of February Internal Revenue Code (NIRC), as amended by Executive Order (E.O.) No. 273 s. 1987, then in effect, any person
11, 1999, respondent brought the case to the Court of Appeals before which it contended that the CTA erred in who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar
denying the refund for insufficiency of evidence, it arguing that in light of the admissions by the CIR of the transactions and any person who imports goods is liable for output VAT at rates of either 10% or 0% ("zero
matters subject of it Requests for Admissions, it was relieved of the burden of submitting the purchase invoices rated") depending on the classification of the transaction under Sec. 100 of the NIRC. xxx
and/or receipts to support its claims.38
xxx
By Decision39 of April 12, 2002, the Court of Appeals reversed the decision of the CTA and granted respondent’s
claim for refund or issuance of tax credit certificates in the amounts of ₱5,683,035.04 for CTA Case No. 4968 and
In January of 1988, respondent applied for and was granted by the BIR zero-rated status on its sale of gold to the
₱8,173,789.60 for CTA Case No. 4991.
Central Bank. On 28 August 1988, Deputy Commissioner of Internal Revenue Eufracio D. Santos issued VAT
Ruling No. 3788-88, which declared that "[t]he sale of gold to Central Bank is considered as export sale subject to
In granting the refund, the appellate court held that there was no need for respondent to present the zero-rate pursuant to Section 100 of the Tax Code, as amended by Executive Order No. 273." The BIR came out
photocopies of the purchase invoices or receipts evidencing the VAT paid in view of Rule 26, Section 2 of the with at least six (6) other issuances, reiterating the zero-rating of sale of gold to the Central Bank, the latest of
Revised Rules of Court40 and the Resolutions of the CTA holding that the matters requested in respondent’s which is VAT Ruling No. 036-90 dated 14 February 1990.
Request for Admissions in CTA No. 4968 were deemed admitted by the CIR 41 in light of its failure to file a verified
reply thereto.
x x x50 (Italics in the original; underscoring supplied)

The appellate court further held that the CIR’s reliance on the best evidence rule is misplaced since this rule does
not apply to matters which have been judicially admitted.42
As export sales, the sale of gold to the Central Bank is zero-rated, hence, no tax is chargeable to it as purchaser. showing the input taxes it paid during the year in question. What is being claimed in the instant petition is the
Zero rating is primarily intended to be enjoyed by the seller – respondent herein, which charges no output VAT refund of the input taxes paid by the herein petitioner on its purchase of goods and services. Hence, it is
but can claim a refund of or a tax credit certificate for the input VAT previously charged to it by suppliers.51 necessary for the Petitioner to show proof that it had indeed paid the said input taxes during the year 1991. In
the case at bar, Petitioner failed to discharge this duty. It did not adduce in evidence the sales invoice, receipts or
For a judicial claim for refund to prosper, however, respondent must not only prove that it is a VAT registered other documents showing the input value added tax on the purchase of goods and services. 55
entity and that it filed its claims within the prescriptive period. It must substantiate the input VAT paid by
purchase invoices or official receipts.52 xxx

This respondent failed to do. Section 8 of Republic Act 1125 (An Act Creating the Court of Tax Appeals) provides categorically that the Court of
Tax Appeals shall be a court of record and as such it is required to conduct a formal trial (trial de novo) where
Revenue Regulation No. 3-88 amending Revenue Regulation No. 5-87 provides the requirements in claiming tax the parties must present their evidence accordingly if they desire the Court to take such evidence into
credits/refunds. consideration.56 (Emphasis and underscoring supplied)

Sec.2. Section 16 of Revenue Regulations 5-87 is hereby amended to read as follows: A "sales or commercial invoice" is a written account of goods sold or services rendered indicating the prices
charged therefor or a list by whatever name it is known which is used in the ordinary course of business
evidencing sale and transfer or agreement to sell or transfer goods and services.57
Sec. 16. Refunds or tax credits of input tax. -

A "receipt" on the other hand is a written acknowledgment of the fact of payment in money or other
(a) Zero-rated sales of goods and services – Only a VAT-registered person may be granted a tax credit or refund
settlementbetween seller and buyer of goods, debtor or creditor, or person rendering services and client or
of value-added taxes paid corresponding to the zero-rated sales of goods and services, to the extent that such
customer.58
taxes have not been applied against output taxes, upon showing of proof of compliance with the conditions
stated in Section 8 of these Regulations.
These sales invoices or receipts issued by the supplier are necessary to substantiate the actual amount or
quantity of goods sold and their selling price,59 and taken collectively are the best means to prove the input VAT
For export sales, the application should be filed with the Bureau of Internal Revenue within two years from the
payments.
date of exportation. For other zero-rated sales, the application should be filed within two years after the close of
the quarter when the transaction took place.
Respondent contends, however, that the certification of the independent CPA attesting to the correctness of the
contents of the summary of suppliers’ invoices or receipts which were examined, evaluated and audited by said
xxx
CPA in accordance with CTA Circular No. 1-95 as amended by CTA Circular No. 10-97 should substantiate its
claims.
(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
There is nothing, however, in CTA Circular No. 1-95, as amended by CTA Circular No. 10-97, which either
business of the applicant is located or directly with the Commissioner, Attention: VAT Division.
expressly or impliedly suggests that summaries and schedules of input VAT payments, even if certified by an
independent CPA, suffice as evidence of input VAT payments.
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
Thus CTA Circular No. 1-95 provides:
prior to the issuance of the Tax Credit Certificate or refund. xxx (Emphasis and underscoring supplied)

1. The party who desires to introduce as evidence such voluminous documents must present: (a) a Summary
Under Section 8 of RA 1125,53 the CTA is described as a court of record. As cases filed before it are litigated de
containing the total amount/s of the tax account or tax paid for the period involved and a chronological or
novo, party litigants should prove every minute aspect of their cases. No evidentiary value can be given the
numerical list of the numbers, dates and amounts covered by the invoices or receipts; and (b) a Certification of
purchase invoices or receipts submitted to the BIR as the rules on documentary evidence require that these
an independent Certified Public Accountant attesting to the correctness of the contents of the summary after
documents must be formally offered before the CTA.54
making an examination and evaluation of the voluminous receipts and invoices. Such summary and certification
must properly be identified by a competent witness from the accounting firm.
This Court thus notes with approval the following findings of the CTA:
2. The method of individual presentation of each and every receipt or invoice or other documents for marking,
xxx [S]ale of gold to the Central Bank should not be subject to the 10% VAT-output tax but this does not ipso identification and comparison with the originals thereof need not be done before the Court or the Commissioner
factomean that [the seller] is entitled to the amount of refund sought as it is required by law to present evidence anymore after the introduction of the summary and CPA certification. It is enough that the receipts, invoices and
other documents covering the said accounts or payments must be pre-marked by the party concerned and As the certification merely stated that it used "auditing procedures considered necessary" and not auditing
submitted to the Court in order to be made accessible to the adverse party whenever he/she desires to check procedures which are in accordance with generally accepted auditing principles and standards, and that the
and verify the correctness of the summary and CPA certification. However, the originals of the said receipts, examination was made on "input tax payments by the Manila Mining Corporation," without specifying that the
invoices or documents should be ready for verification and comparison in case of doubt on the authenticity of said input tax payments are attributable to the sales of gold to the Central Bank, this Court cannot rely thereon
the particular documents presented is raised during the hearing of the case.60 (Underscoring supplied) and regard it as sufficient proof of respondent’s input VAT payments for the second semester.

The circular, in the interest of speedy administration of justice, was promulgated to avoid the time-consuming Finally, respecting respondent’s argument that it need not prove the amount of input VAT it paid for the first
procedure of presenting, identifying and marking of documents before the Court. It does not relieve respondent semester of taxable year 1991 as the same was proven by the implied admission of the CIR, which was confirmed
of its imperative task of pre-marking photocopies of sales receipts and invoices and submitting the same to the by the CTA when it admitted its Request for Admission,67 the same does not lie.
court after the independent CPA shall have examined and compared them with the originals. Without presenting
these pre-marked documents as evidence – from which the summary and schedules were based, the court Respondent’s Requests for Admission do not fall within Section 2 Rule 26 of the Revised Rules of Court. 68 What
cannot verify the authenticity and veracity of the independent auditor’s conclusions. 61 respondent sought the CIR to admit are the total amount of input VAT payments it paid for the first and second
semesters of taxable year 1991, which matters have already been previously alleged in respondent’s petition and
There is, moreover, a need to subject these invoices or receipts to examination by the CTA in order to confirm specifically denied by the CIR in its Answers dated May 10, 1993 and August 16, 1993 filed in CTA Case Nos. 4869
whether they are VAT invoices. Under Section 21 of Revenue Regulation No. 5-87,62 all purchases covered by and 4991, respectively.
invoices other than a VAT invoice shall not be entitled to a refund of input VAT.
As Concrete Aggregates Corporation v. Court of Appeals69 holds, admissions by an adverse party as a mode of
The CTA disposition of the matter is thus in order. discovery contemplates of interrogatories that would clarify and tend to shed light on the truth or falsity of the
allegations in a pleading, and does not refer to a mere reiteration of what has already been alleged in the
Mere listing of VAT invoices and receipts, even if certified to have been previously examined by an independent pleadings; otherwise, it constitutes an utter redundancy and will be a useless, pointless process which petitioner
certified public accountant, would not suffice to establish the truthfulness and accuracy of the contents thereof should not be subjected to.70
unless offered and actually verified by this Court. CTA Circular No. 1-95, as amended by CTA Circular No. 10-97,
requires that the photocopies of invoices, receipts and other documents covering said accounts or payments Petitioner controverted in its Answers the matters set forth in respondent’s Petitions for Review before the CTA
must be pre-marked by the party and submitted to this Court.63 (Underscoring supplied) – the requests for admission being mere reproductions of the matters already stated in the petitions. Thus,
petitioner should not be required to make a second denial of those matters it already denied in its Answers. 71
There being then no showing of abuse or improvident exercise of the CTA’s authority, this Court is not inclined to
set aside the conclusions reached by it, which, by the very nature of its functions, is dedicated exclusively to the As observed by the CTA, petitioner did in fact file its reply to the Request for Admissions in CTA Case No. 4869
study and consideration of tax problems and has necessarily developed an expertise on the subject.64 and specifically denied the veracity and accuracy of the figures indicated in respondent’s summary. The Motion
to Admit Reply was, however, denied by the CTA as the original Reply was not made under oath.
While the CTA is not governed strictly by technical rules of evidence, 65 as rules of procedure are not ends in
themselves but are primarily intended as tools in the administration of justice, the presentation of the purchase That the Reply was not made under oath is merely a formal and not a substantive defect and may be dispensed
receipts and/or invoices is not mere procedural technicality which may be disregarded considering that it is the with.72 Although not under oath, petitioner’s reply to the request readily showed that its intent was to deny the
only means by which the CTA may ascertain and verify the truth of respondent’s claims. matters set forth in the Request for Admissions.

The records further show that respondent miserably failed to substantiate its claim for input VAT refund for As for respondent’s Request for Admission in CTA Case No. 4991, petitioner timely filed its reply and specifically
the first semester of 1991. Except for the summary and schedules of input VAT payments prepared by denied the accuracy and veracity of the contents of the schedules and summaries which listed the input VAT
respondent itself, no other evidence was adduced in support of its claim. payments allegedly paid by respondent for the second semester of 1991.

As for respondent’s claim for input VAT refund for the second semester of 1991, it employed the services of For failure of respondent then not only to strictly comply with the rules of procedure but also to establish the
Joaquin Cunanan & Co. on account of which it (Joaquin Cunanan & Co.) executed a certification that: factual basis of its claim for refund, this Court has to deny its claim. A claim for refund is in the nature of a claim
for exemption and should be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing
We have examined the information shown below concerning the input tax payments made by the Makati Office authority.73
of Manila Mining Corporation for the period from July 1 to December 31, 1991. Our examination included
inspection of the pertinent suppliers’ invoices and official receipts and such other auditing procedures as we WHEREFORE, the petition is hereby GRANTED. The assailed Decision of the Court of Appeals dated April 12, 2002
considered necessary in the circumstances. xxx66 is hereby REVERSED and SET ASIDE. The Court of Tax Appeals Decision dated November 24, 1998 is
hereby REINSTATED.
SO ORDERED. Hence, this appeal before us.

G.R. No. 185115 February 18, 2015 ISSUES

NORTHERN MINDANAO POWER CORPORATION, Petitioner, Petitioner’s appeal is anchored on the following grounds:
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent. Section 4.108-1 of Revenue Regulations (RR) No. 7-95 which expanded the statutory requirements for the
issuance of official receipts and invoices found in Section 113 of the 1997 Tax Code by providing for the
DECISION additional requirement of the imprinting of the terms "zero-rated" is unconstitutional.

SERENO, CJ: Company invoices are sufficient to establish the actual amount of sale of electric power services to the National
Power Corporation and therefore sufficient to substantiate Petitioner’s claim for refund.9
This is a Petition for Review on Certiorari1 under Rule 45 of the 1997 Rules of Civil Procedure filed by Northern
Mindanao Power Corporation (petitioner). The Petition assails the Decision2 dated 18 July 2008 and THE COURT’S RULING
Resolution3dated 27 October 2008 issued by the Court of Tax Appeals En Banc (CTA En Banc) in C.T.A. EB No.
312. To start with, this Court finds it appropriate to first determine the timeliness of petitioner’s judicial claim in order
to determine whether the tax court properly acquired jurisdiction, although the matter was never raised as an
THE FACTS issue by the parties. Well-settled is the rule that the issue of jurisdiction over the subject matter may, at any
time, be raised by the parties or considered by the Court motu proprio. 10 Therefore, the jurisdiction of the CTA
Petitioner is engaged in the production sale of electricity as an independent power producer and sells electricity over petitioner’s appeal may still be considered and determined by this Court.
to National Power Corporation (NPC). It allegedly incurred input value-added tax (VAT) on its domestic purchases
of goods and services that were used in its production and sale of electricity to NPC. For the 3rd and the 4th Section 112 of the National Internal Revenue Code (NIRC) of 1997 laid down the manner in which the refund or
quarters of taxable year 1999, petitioner’s input VAT totaled to ₱2,490,960.29, while that incurred for all the credit of input tax may be made. For a VAT-registered person whose sales are zero-rated or effectively zero-
quarters of taxable year 2000 amounted to ₱3,920,932.55.4 rated, Section 112(A) specifically provides for a two-year prescriptive period after the close of the taxable
quarter when the sales were made within which such taxpayer may apply for the issuance of a tax credit
Petitioner filed an administrative claim for a refund on 20 June 2000 for the 3rd and the 4th quarters of taxable certificate or refund of creditable input tax. In the consolidated tax cases Commissioner of Internal Revenue v.
year 1999, and on 25 July 2001 for taxable year 2000 in the sum of ₱6,411,892.84.5 San Roque Power Corporation, Taganito Mining Corporation v. Commissioner of Internal Revenue, and Philex
Mining Corporation v. Commissioner of Internal Revenue11 (hereby collectively referred to as San Roque), the
Court clarified that the two-year period refers to the filing of an administrative claim with the BIR.
Thereafter, alleging inaction of respondent on these administrative claims, petitioner filed a Petition 6 with the
CTA on 28 September 2001.
In this case, petitioner had until 30 September 2001 and 31 December 2001 for the claims covering the 3rd and
the 4th quarters of taxable year 1999; and 31 March, 30 June, 30 September and 31 December in 2002 for the
The CTA First Division denied the Petition and the subsequent Motion for Reconsideration for lack of merit. The
claims covering all four quarters of taxable year 2000 −or the close of the taxable quarter when the zero-rated
Court in Division found that the term "zero-rated" was not imprinted on the receipts or invoices presented by
sales were made −within which to file its administrative claim for a refund. On this note, we find that petitioner
petitioner in violation of Section 4.108-1 of Revenue Regulations No. 7-95. Petitioner failed to substantiate its
had sufficiently complied with the two-year prescriptive period when it filed its administrative claim for a refund
claim for a refund and to strictly comply with the invoicing requirements of the law and tax regulations. 7 In his
on 20 June 2000 covering the 3rd and the 4th quarters of taxable year 1999 and on 25 July 2001covering all the
Concurring and Dissenting Opinion, however, then Presiding Justice Ernesto D. Acosta opined that the Tax Code
quarters of taxable year 2000.
does not require that the word "zero-rated" be imprinted on the face of the receipt or invoice. He further
pointed out that the absence of that term did not affect the admissibility and competence of the receipt or
invoice as evidence to support the claim for a refund. 8 Pursuant to Section 112(D) of the NIRC of 1997, respondent had one hundred twenty (120) days from the date of
submission of complete documents in support of the application within which to decide on the administrative
claim. The burden of proving entitlement to a tax refund is on the taxpayer. Absent any evidence to the contrary,
On appeal to the CTA En Banc, the Petition was likewise denied. The court ruled that for every sale of services,
it is presumed that in order to discharge its burden, petitioner attached to its applications complete supporting
VAT shall be computed on the basis of gross receipts indicated on the official receipt. Official receipts are proofs
documents necessary to prove its entitlement to a refund.12 Thus, the 120-day period for the CIR to act on the
of sale of services and cannot be interchanged with sales invoices as the latter are used for the sale of goods.
administrative claim commenced on 20 June 2000 and 25 July 2001.
Further, the requirement of issuing duly registered VAT official receipts with the term "zero-rated" imprinted is
mandatory under the law and cannot be substituted, especially for input VAT refund purposes. Then Presiding
Justice Acosta maintained his dissent.
As laid down in San Roque, judicial claims filed from 1 January 1998 until the present should strictly adhere to DA-489-03 because Philex did not file its judicial claim prematurely but filed it long after the lapse of the 30-day
the 120+30-day period referred to in Section 112 of the NIRC of 1997.The only exception is the period 10 period following the expiration of the 120-day period. In fact, Philex filed its judicial claim 426 days after the
December 2003 until 6 October 2010. Within this period, BIR Ruling No. DA-489-03 is recognized as an equitable lapse of the 30-day period.13 (Emphasis in the original)
estoppel, during which judicial claims may be filed even before the expiration of the 120-day period granted to
the CIR to decide on a claim for a refund. Petitioner’s claim for the 3rd and the 4th quarters of taxable year 1999 was filed 319 days after the expiration of
the 30-day period. To reiterate, the right to appeal is a mere statutory privilege that requires strict compliance
For the claims covering the 3rd and the 4th quarters of taxable year 1999 and all the quarters of taxable with the conditions attached by the statute for its exercise. Like Philex, petitioner failed to comply with the
year2000, petitioner filed a Petition with the CTA on 28 September 2001. statutory conditions and must therefore bear the consequences. It already lost its right to claim a refund or
credit of its alleged excess input VAT attributable to zero-rated or effectively zero-rated sales for the 3rd and the
Both judicial claims must be disallowed. 4th quarters of taxable year 1999 by virtue of its own failure to observe the prescriptive periods.

a) Claim for a refund of input VAT b) Claim for the refund of input
covering the 3rd and the 4th VAT covering all quarters of
quarters of taxable year 1999 taxable year 2000

Counting 120 days from 20 June 2000, the CIR had until 18 October 2000 within which to decide on the claim of For the year 2000, petitioner timely filed its administrative claim on 25 July 2001within the two-year period from
petitioner for an input VAT refund attributable to its zero-rated sales for the period covering the 3rd and the 4th the close of the taxable quarter when the zero-rated sales were made. Pursuant to Section 112(D) of the NIRC of
quarters of taxable year 1999. If after the expiration of that period respondent still failed to act on the 1997, respondent had 120 days or until 22 November 2001 within which to act on petitioner’s claim. It is only
administrative claim, petitioner could elevate the matter to the court within 30 days or until 17 November 2000. when respondent failed to act on the claim after the expiration of that period that petitioner could elevate the
matter to the tax court. Records show, however, that petitioner filed its Petition with the CTA on 28 September
2001 without waiting for the expiration of the 120-day period. Barely 64 days had lapsed when the judicial claim
Petitioner belatedly filed its judicial claim with the CTA on 28 September 2001. Just like in Philex, this was a case
was filed with the CTA. The Court in San Roquehas already settled that failure of the petitioner to observe the
of late filing. The Court explained thus:
mandatory 120-day period is fatal to its judicial claim and renders the CTA devoid of jurisdiction over that claim.
On 28 September 2001 – the date on which petitioner filed its judicial claim for the period covering taxable year
Unlike San Roque and Taganito, Philex’s case is not one of premature filing but of late filing. Philex did not file 2000 −the 120+30 day mandatory period was already in the law and BIR Ruling No. DA-489-03 had not yet been
any petition with the CTA within the 120-day period. Philex did not also file any petition with the CTA within 30 issued. Considering this fact, petitioner did not have an excuse for not observing the 120+30 day period. Again, as
days after the expiration of the 120-day period. Philex filed its judicial claim long after the expiration of the 120- enunciated in San Roque, it is only the period between 10 December 2003 and 6 October 2010 that the 120-day
day period, in fact 426 days after the lapse of the 120-day period. In any event, whether governed by period may not be observed. While the ponente had disagreed with the majority ruling in San Roque, the latter is
jurisprudence before, during, or after the Atlas case, Philex’s judicial claim will have to be rejected because of now the judicial doctrine that will govern like cases.
late filing. Whether the two-year prescriptive period is counted from the date of payment of the output VAT
following the Atlas doctrine, or from the close of the taxable quarter when the sales attributable to the input
The judicial claim was thus prematurely filed for failure of petitioner to observe the 120-day waiting
VAT were made following the Mirant and Aichi doctrines, Philex’s judicial claim was indisputably filed late.
period.1âwphi1 The CTA therefore did not acquire jurisdiction over the claim for a refund of input VAT for all the
quarters of taxable year 2000.
The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of the Commissioner
on Philex’s claim during the 120-day period is, by express provision of law, "deemed a denial" of Philex’s claim.
In addition, the issue of the requirement of imprinting the word "zero-rated" has already been settled by this
Philex had 30 days from the expiration of the 120-day period to file its judicial claim with the CTA. Philex’s failure
Court in a number of cases. In Western Mindanao Power Corporation v. CIR,14 we ruled:
to do so rendered the "deemed a denial" decision of the Commissioner final and inappealable. The right to
appeal to the CTA from a decision or "deemed a denial" decision of the Commissioner is merely a statutory
privilege, not a constitutional right. The exercise of such statutory privilege requires strict compliance with the RR 7-95, which took effect on 1 January 1996, proceeds from the rule-making authority granted to the Secretary
conditions attached by the statute for its exercise. Philex failed to comply with the statutory conditions and must of Finance by the NIRC for the efficient enforcement of the same Tax Code and its amendments. In Panasonic
thus bear the consequences. Communications Imaging Corporation of the Philippines v. Commissioner of Internal Revenue, we ruled that this
provision is "reasonable and is in accord with the efficient collection of VAT from the covered sales of goods and
services." Moreover, we have held in Kepco Philippines Corporation v. Commissioner of Internal Revenue that the
xxxx
subsequent incorporation of Section 4.108-1 of RR 7-95 in Section 113 (B) (2) (c) of R.A. 9337 actually confirmed
the validity of the imprinting requirement on VAT invoices or official receipts – a case falling under the principle of
Philex’s situation is not a case of premature filing of its judicial claim but of late filing, indeed very late filing. BIR legislative approval of administrative interpretation by reenactment.
Ruling No. DA-489-03 allowed premature filing of a judicial claim, which means non-exhaustion of the 120-day
period for the Commissioner to act on an administrative claim. Philex cannot claim the benefit of BIR Ruling No.
In fact, this Court has consistently held as fatal the failure to print the word "zero-rated" on the VAT invoices or Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and garments
official receipts in claims for a refund or credit of input VAT on zero-rated sales, even if the claims were made and other hospital supplies for export. Petitioner’s place of business is at the Subic Bay Freeport Zone (SBFZ). It is
prior to the effectivity of R.A. 9337. Clearly then, the present Petition must be denied. duly registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise, pursuant
to the provisions of Republic Act No. 7227.4 As an SBMA-registered firm, petitioner is exempt from all local and
Finally, as regards the sufficiency of a company invoice to prove the sales of services to NPC, we find this claim is national internal revenue taxes except for the preferential tax provided for in Section 12 (c)5 of Rep. Act No.
without sufficient legal basis. Section 113 of the NIRC of 1997 provides that a VAT invoice is necessary for every 7227. Petitioner also registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under
sale, barter or exchange of goods or properties, while a VAT official receipt properly pertains to every lease of Certificate of Registration RDO Control No. 95-180-000133.
goods or properties; as well as to every sale, barter or exchange of services.
From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials necessary in
The Court has in fact distinguished an invoice from a receipt m Commissioner of Internal Revenue v. Manila the conduct of its manufacturing business. The suppliers of these goods shifted unto petitioner the 10% VAT on
Mining Corporation:15 the purchased items, which led the petitioner to pay input taxes in the amounts of P539,411.88 and P504,057.49
for 1997 and 1998, respectively.6
A "sales or commercial invoice" is a written account of goods sold or services rendered indicating the prices
charged therefor or a list by whatever name it is known which is used in the ordinary course of business Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep. Act No.
evidencing sale and transfer or agreement to sell or transfer goods and services. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr. Edilberto Carlos,
revenue district officer of BIR RDO No. 19, denied the first application letter, dated December 29, 1998.
A "receipt" on the other hand is a written acknowledgment of the fact of payment in money or other settlement
between seller and buyer of goods, debtor or creditor, or person rendering services and client or customer. Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this time
directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4. The second letter sought
a refund or issuance of a tax credit certificate in the amount of P1,108,307.72, representing erroneously paid
A VAT invoice is the seller's best proof of the sale of goods or services to the buyer, while a VAT receipt is the
input VAT for the period January 1, 1997 to November 30, 1998.
buyer's best evidence of the payment of goods or services received from the seller. A VAT invoice and a VAT
receipt should not be confused and made to refer to one and the same thing. Certainly, neither does the law
intend the two to be used alternatively.16 WHEREFORE, premises considered, the instant Petition is DENIED. When no response was forthcoming from the BIR Regional Director, petitioner then elevated the matter to the
Court of Tax Appeals, in a petition for review docketed as CTA Case No. 5895. Petitioner stressed that Section
112(A)7 if read in relation to Section 106(A)(2)(a)8 of the National Internal Revenue Code, as amended and
SO ORDERED.
Section 12(b)9 and (c) of Rep. Act No. 7227 would show that it was not liable in any way for any value-added tax.

G.R. No. 151135 July 2, 2004


In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that claims for refund
are strictly construed against the taxpayer. Since petitioner failed to establish both its right to a tax refund or tax
CONTEX CORPORATION, petitioner, credit and its compliance with the rules on tax refund as provided for in Sections 20410 and 22911 of the Tax Code,
vs. its claim should be denied, according to the BIR.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.
On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:

WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY GRANTED.
DECISION
Respondent is hereby ORDERED to REFUND or in the alternative to ISSUE A TAX CREDIT CERTIFICATE in
favor of Petitioner the sum of P683,061.90, representing erroneously paid input VAT.

SO ORDERED.12
QUISUMBING, J.:

In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and 112(A) of the Tax
For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP No. 62823, which
Code. The tax court stressed that these provisions apply only to those entities registered as VAT taxpayers whose
reversed and set aside the decision2 dated October 13, 2000, of the Court of Tax Appeals (CTA). The CTA had
sales are zero-rated. Petitioner does not fall under this category, since it is a non-VAT taxpayer as evidenced by
ordered the Commissioner of Internal Revenue (CIR) to refund the sum of P683,061.90 to petitioner as
the Certificate of Registration RDO Control No. 95-180-000133 issued by RDO Rosemarie Ragasa of BIR RDO No.
erroneously paid input value-added tax (VAT) or in the alternative, to issue a tax credit certificate for said
18 of the Subic Bay Freeport Zone and thus it is exempt from VAT, pursuant to Rep. Act No. 7227, said the CTA.
amount. Petitioner also assails the appellate court’s Resolution,3 dated December 19, 2001, denying the motion
for reconsideration.
Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its purchases of B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT PETITIONER IS ENTITLED TO
supplies and materials. It pointed out that under Section 12(c) of Rep. Act No. 7227 and the Implementing Rules A TAX CREDIT OR REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES AND RAW MATERIALS
and Regulations of the Bases Conversion and Development Act of 1992, all that petitioner is required to pay as a FOR THE YEARS 1997 AND 1998.16
SBFZ-registered enterprise is a 5% preferential tax.
Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of the Court of
The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for being barred by Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not apply to petitioner as a purchaser; and
the two-year prescriptive period under Section 229 of the Tax Code. The tax court also limited the refund only to (2) the entitlement of the petitioner to a tax refund on its purchases of supplies and raw materials for 1997 and
the input VAT paid by the petitioner on the supplies and materials directly used by the petitioner in the 1998.
manufacture of its goods. It struck down all claims for input VAT paid on maintenance, office supplies, freight
charges, and all materials and supplies shipped or delivered to the petitioner’s Makati and Pasay City offices. On the first issue, petitioner argues that the appellate court’s restrictive interpretation of petitioner’s VAT
exemption as limited to those covered by Section 107 of the Tax Code is erroneous and devoid of legal basis. It
Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA decision by the contends that the provisions of Rep. Act No. 7227 clearly and unambiguously mandate that no local and national
Court of Appeals. Respondent maintained that the exemption of Contex Corp. under Rep. Act No. 7227 was taxes shall be imposed upon SBFZ-registered firms and hence, said law should govern the case. Petitioner calls
limited only to direct taxes and not to indirect taxes such as the input component of the VAT. The Commissioner our attention to regulations issued by both the SBMA and BIR clearly and categorically providing that the tax
pointed out that from its very nature, the value-added tax is a burden passed on by a VAT registered person to exemption provided for by Rep. Act No. 7227 includes exemption from the imposition of VAT on purchases of
the end users; hence, the direct liability for the tax lies with the suppliers and not Contex. supplies and materials.

Finding merit in the CIR’s arguments, the appellate court decided CA-G.R. SP No. 62823 in his favor, thus: The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax exemptions,
such grant is not all-encompassing but is limited only to those taxes for which a SBFZ-registered business may be
WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET ASIDE. directly liable. Hence, SBFZ locators are not relieved from the indirect taxes that may be shifted to them by a
Contex’s claim for refund of erroneously paid taxes is DENIED accordingly. VAT-registered seller.

SO ORDERED.13 At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the goods,
properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or
lessor to the buyer, transferee or lessee.17 Unlike a direct tax, such as the income tax, which primarily taxes an
In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the importation of
individual’s ability to pay based on his income or net wealth, an indirect tax, such as the VAT, is a tax on
raw materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act No. 7227 and its
consumption of goods, services, or certain transactions involving the same. The VAT, thus, forms a substantial
implementing rules covers only "the VAT imposable under Section 107 of the [Tax Code], which is a direct liability
portion of consumer expenditures.
of the importer, and in no way includes the value-added tax of the seller-exporter the burden of which was
passed on to the importer as an additional costs of the goods." 14 This was because the exemption granted by
Rep. Act No. 7227 relates to the act of importation and Section 10715 of the Tax Code specifically imposes the Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the
VAT on importations. The appellate court applied the principle that tax exemptions are strictly construed against tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by the seller to the buyer. What is
the taxpayer. The Court of Appeals pointed out that under the implementing rules of Rep. Act No. 7227, the transferred in such instances is not the liability for the tax, but the tax burden. In adding or including the VAT due
exemption of SBFZ-registered enterprises from internal revenue taxes is qualified as pertaining only to those for to the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is
which they may be directly liable. It then stated that apparently, the legislative intent behind Rep. Act No. 7227 shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax. 18 Stated
was to grant exemptions only to direct taxes, which SBFZ-registered enterprise may be liable for and only in differently, a seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or
connection with their importation of raw materials, capital, and equipment as well as the sale of their goods and services is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or
services. consumer of such goods or services who, although not directly and legally liable for the payment thereof,
ultimately bears the burden of the tax.19
Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was denied.
Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT, the
transaction can have preferential treatment in the following ways:
Hence, the instant petition raising as issues for our resolution the following:

(a) VAT Exemption. An exemption means that the sale of goods or properties and/or services and the
A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL REVENUE TAXES
use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit
PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY PETITIONER, A SUBIC
on VAT (input tax) previously paid.20 This is a case wherein the VAT is removed at the exempt stage
BAY FREEPORT ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND MATERIALS.
(i.e., at the point of the sale, barter or exchange of the goods or properties).
The person making the exempt sale of goods, properties or services shall not bill any output tax to his (a) Export Sales
customers because the said transaction is not subject to VAT. On the other hand, a VAT-registered
purchaser of VAT-exempt goods/properties or services which are exempt from VAT is not entitled to "Export Sales" shall mean
any input tax on such purchase despite the issuance of a VAT invoice or receipt.21
...
(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0% rate, meaning
the tax burden is not passed on to the purchaser. A zero-rated sale by a VAT-registered person, which
(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226,
is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on
otherwise known as the Omnibus Investments Code of 1987, and other special laws, e.g.
his purchases of goods, properties or services related to such zero-rated sale shall be available as tax
Republic Act No. 7227, otherwise known as the Bases Conversion and Development Act of
credit or refund in accordance with these regulations.22
1992.

Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast, exemption only
...
removes the VAT at the exempt stage, and it will actually increase, rather than reduce the total taxes paid by the
exempt firm’s business or non-retail customers. It is for this reason that a sharp distinction must be made
between zero-rating and exemption in designating a value-added tax.23 (c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly registered
and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development
Authority (CDA), R. A. No. 7916, Philippine Economic Zone Authority (PEZA), or international
Apropos, the petitioner’s claim to VAT exemption in the instant case for its purchases of supplies and raw
agreements, e.g. Asian Development Bank (ADB), International Rice Research Institute (IRRI), etc. to
materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts them from all
which the Philippines is a signatory effectively subject such sales to zero-rate."
national and local internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-
95.24
Since the transaction is deemed a zero-rated sale, petitioner’s supplier may claim an Input VAT credit with no
corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner.
On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the
respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration25 issued by the
BIR. As such, it is exempt from VAT on all its sales and importations of goods and services. On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NON-VAT taxpayer
and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax)
previously paid. In fine, even if we are to assume that exemption from the burden of VAT on petitioner’s
Petitioner’s claim, however, for exemption from VAT for its purchases of supplies and raw materials is
purchases did exist, petitioner is still not entitled to any tax credit or refund on the input tax previously paid as
incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities can claim Input VAT
petitioner is an exempt VAT taxpayer.
Credit/Refund.

Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax credit and accordingly refund
The point of contention here is whether or not the petitioner may claim a refund on the Input VAT erroneously
the petitioner of the VAT erroneously passed on to the latter.
passed on to it by its suppliers.

Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding that
While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its
petitioner’s VAT exemption under Rep. Act No. 7227 is limited to the VAT on which it is directly liable as a seller
supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim
and hence, it cannot claim any refund or exemption for any input VAT it paid, if any, on its purchases of raw
such VAT refund.
materials and supplies.

Section 4.100-2 of BIR’s Revenue Regulations 7-95, as amended, or the "Consolidated Value-Added Tax
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001, of the Court of
Regulations" provide:
Appeals in CA-G.R. SP No. 62823, as well as its Resolution of December 19, 2001 are AFFIRMED. No
pronouncement as to costs.
Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which is a taxable
transaction for VAT purposes, shall not result in any output tax. However, the input tax on his
SO ORDERED.
purchases of goods, properties or services related to such zero-rated sale shall be available as tax
credit or refund in accordance with these regulations.
G.R. No. 153866 February 11, 2005
The following sales by VAT-registered persons shall be subject to 0%:
COMMISSIONER OF INTERNAL REVENUE, petitioner, 5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];
vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent. 6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with supporting
documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for Review), was filed on 4
DECISION October 1999 with Revenue District Office No. 83, Talisay Cebu;

PANGANIBAN, J.: 7. No final action has been received by [respondent] from [petitioner] on [respondent’s] claim for VAT refund.

Business companies registered in and operating from the Special Economic Zone in Naga, Cebu -- like herein "The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by the
respondent -- are entities exempt from all internal revenue taxes and the implementing rules relevant thereto, [petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way of Petition for
including the value-added taxes or VAT. Although export sales are not deemed exempt transactions, they are Review in order to toll the running of the two-year prescriptive period.
nonetheless zero-rated. Hence, in the present case, the distinction between exempt entities and
exempt transactions has little significance, because the net result is that the taxpayer is not liable for the VAT. "For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:
Respondent, a VAT-registered enterprise, has complied with all requisites for claiming a tax refund of or credit
for the input VAT it paid on capital goods it purchased. Thus, the Court of Tax Appeals and the Court of Appeals
1. [Respondent’s] alleged claim for tax refund/credit is subject to administrative routinary
did not err in ruling that it is entitled to such refund or credit.
investigation/examination by [petitioner’s] Bureau;

The Case
2. Since ‘taxes are presumed to have been collected in accordance with laws and regulations,’ the [respondent]
has the burden of proof that the taxes sought to be refunded were erroneously or illegally collected x x x;
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set aside the May 27, 2002
Decision2 of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the Decision reads as
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:
follows:

"A claimant has the burden of proof to establish the factual basis of his or her claim for tax credit/refund."
"WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit."3

4. Claims for tax refund/tax credit are construed in ‘strictissimi juris’ against the taxpayer. This is due to the fact
The Facts
that claims for refund/credit [partake of] the nature of an exemption from tax. Thus, it is incumbent upon the
[respondent] to prove that it is indeed entitled to the refund/credit sought. Failure on the part of the
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows: [respondent] to prove the same is fatal to its claim for tax credit. He who claims exemption must be able to
justify his claim by the clearest grant of organic or statutory law. An exemption from the common burden cannot
"As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows: be permitted to exist upon vague implications;

1. [Respondent] is a resident foreign corporation duly registered with the Securities and Exchange Commission to 5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA) registered
do business in the Philippines, with principal office address at the new Cebu Township One, Special Economic Ecozone Enterprise, then its business is not subject to VAT pursuant to Section 24 of Republic Act No. ([RA]) 7916
Zone, Barangay Cantao-an, Naga, Cebu; in relation to Section 103 of the Tax Code, as amended. As [respondent’s] business is not subject to VAT, the
capital goods and services it alleged to have purchased are considered not used in VAT taxable business. As such,
2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform the duties [respondent] is not entitled to refund of input taxes on such capital goods pursuant to Section 4.106.1 of
of his office, including, among others, the duty to act and approve claims for refund or tax credit; Revenue Regulations No. ([RR])7-95, and of input taxes on services pursuant to Section 4.103 of said regulations.

3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been issued PEZA 6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the 1997 Tax Code on
Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the manufacture of filing of a written claim for refund within two (2) years from the date of payment of tax.’
recording components primarily used in computers for export. Such registration was made on 6 June 1997;
"On July 19, 2001, the Tax Court rendered a decision granting the claim for refund."4
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration Certification No.
97-083-000600-V issued on 2 April 1997; Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit certificate (TCC) used directly or indirectly in such activities.13 Even so, respondent would enjoy a net-operating loss carry over;
in favor of respondent in the reduced amount of P12,122,922.66. This sum represented the unutilized but accelerated depreciation; foreign exchange and financial assistance; and exemption from export taxes, local
substantiated input VAT paid on capital goods purchased for the period covering April 1, 1998 to June 30, 1999. taxes and licenses.14

The appellate court reasoned that respondent had availed itself only of the fiscal incentives under Executive Comparatively, the same exemption from internal revenue laws and regulations applies if EO 226 15 is chosen.
Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not of those under both Under this law, respondent shall further be entitled to an income tax holiday; additional deduction for labor
Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent was, therefore, considered expense; simplification of customs procedure; unrestricted use of consigned equipment; access to a bonded
exempt only from the payment of income tax when it opted for the income tax holiday in lieu of the 5 percent manufacturing warehouse system; privileges for foreign nationals employed; tax credits on domestic capital
preferential tax on gross income earned. As a VAT-registered entity, though, it was still subject to the payment of equipment, as well as for taxes and duties on raw materials; and exemption from contractors’ taxes, wharfage
other national internal revenue taxes, like the VAT. dues, taxes and duties on imported capital equipment and spare parts, export taxes, duties, imposts and
fees,16 local taxes and licenses, and real property taxes.17
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-1 of RR 7-95
were applicable. Having paid the input VAT on the capital goods it purchased, respondent correctly filed the A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of raw
administrative and judicial claims for its refund within the two-year prescriptive period. Such payments were -- materials, capital and equipment18 -- is, ipso facto, also accorded to the zone19 under RA 7916. Furthermore, the
to the extent of the refundable value -- duly supported by VAT invoices or official receipts, and were not yet latter law -- notwithstanding other existing laws, rules and regulations to the contrary -- extends20 to that zone
offset against any output VAT liability. the provision stating that no local or national taxes shall be imposed therein.21 No exchange control policy shall
be applied; and free markets for foreign exchange, gold, securities and future shall be allowed and
Hence this Petition.5 maintained.22 Banking and finance shall also be liberalized under minimum Bangko Sentral regulation with the
establishment of foreign currency depository units of local commercial banks and offshore banking units of
foreign banks.23
Sole Issue

In the same vein, respondent benefits under RA 7844 from negotiable tax credits24 for locally-produced materials
Petitioner submits this sole issue for our consideration:
used as inputs. Aside from the other incentives possibly already granted to it by the Board of Investments, it also
enjoys preferential credit facilities25 and exemption from PD 1853.26
"Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount
of P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the period April
From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment.27 It is not
1, 1998 to June 30, 1999."6
subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on capital goods is
an internal revenue tax from which petitioner as an entity is exempt. Although the transactions involving such
The Court’s Ruling tax are not exempt, petitioner as a VAT-registered person,28 however, is entitled to their credits.

The Petition is unmeritorious. Nature of the VAT and the Tax Credit Method

Sole Issue: Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on every
importation of goods, whether or not in the course of trade or business, or imposed on each sale, barter,
Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or Credit for Input VAT exchange or lease of goods or properties or on each rendition of services in the course of trade or business 29 as
they pass along the production and distribution chain, the tax being limited only to the value added 30 to such
No doubt, as a PEZA-registered enterprise within a special economic zone,7 respondent is entitled to the fiscal goods, properties or services by the seller, transferor or lessor. 31 It is an indirect tax that may be shifted or
incentives and benefits8 provided for in either PD 669 or EO 226.10 It shall, moreover, enjoy all privileges, benefits, passed on to the buyer, transferee or lessee of the goods, properties or services. 32 As such, it should be
advantages or exemptions under both Republic Act Nos. (RA) 722711 and 7844.12 understood not in the context of the person or entity that is primarily, directly and legally liable for its payment,
but in terms of its nature as a tax on consumption.33 In either case, though, the same conclusion is arrived at.

Preferential Tax Treatment Under Special Laws


The law34 that originally imposed the VAT in the country, as well as the subsequent amendments of that law, has
been drawn from the tax credit method.35 Such method adopted the mechanics and self-enforcement features of
If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary, respondent shall not be the VAT as first implemented and practiced in Europe and subsequently adopted in New Zealand and
subject to internal revenue laws and regulations for raw materials, supplies, articles, equipment, machineries, Canada.36 Under the present method that relies on invoices, an entity can credit against or subtract from the VAT
spare parts and wares, except those prohibited by law, brought into the zone to be stored, broken up, repacked, charged on its sales or outputs the VAT paid on its purchases, inputs and imports.37
assembled, installed, sorted, cleaned, graded or otherwise processed, manipulated, manufactured, mixed or
If at the end of a taxable quarter the output taxes38 charged by a seller39 are equal to the input taxes40 passed on not -- of the party to the transaction.60 Indeed, such transaction is not subject to the VAT, but the seller is not
by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has allowed any tax refund of or credit for any input taxes paid.
to be paid.41 If, however, the input taxes exceed the output taxes, the excess shall be carried over to the
succeeding quarter or quarters.42 Should the input taxes result from zero-rated or effectively zero-rated An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special
transactions or from the acquisition of capital goods,43 any excess over the output taxes shall instead be law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable
refunded44 to the taxpayer or credited45 against other internal revenue taxes.46 transactions become exempt from the VAT.61 Such party is also not subject to the VAT, but may be allowed a tax
refund of or credit for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer.
Zero-Rated and Effectively Zero-Rated Transactions
As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or passed on by the
Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated seller to the purchaser of the goods, properties or services.62 While the liability is imposed on one person,
transactions as to their source. the burden may be passed on to another. Therefore, if a special law merely exempts a party as a seller from its
direct liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect
Zero-rated transactions generally refer to the export sale of goods and supply of services. 47 The tax rate is set at burden of the VAT shifted to it by its VAT-registered suppliers, the purchase transaction is not exempt. Applying
zero.48 When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The this principle to the case at bar, the purchase transactions entered into by respondent are not VAT-exempt.
seller of such transactions charges no output tax,49 but can claim a refund of or a tax credit certificate for the VAT
previously charged by suppliers. Special laws may certainly exempt transactions from the VAT.63 However, the Tax Code provides that those
falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which respondent was
Effectively zero-rated transactions, however, refer to the sale of goods50 or supply of services51 to persons or registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the
entities whose exemption under special laws or international agreements to which the Philippines is a signatory VAT; respondent is required to register.
effectively subjects such transactions to a zero rate.52 Again, as applied to the tax base, such rate does not yield
any tax chargeable against the purchaser. The seller who charges zero output tax on such transactions can also Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10 percent,64 depending
claim a refund of or a tax credit certificate for the VAT previously charged by suppliers. again on the application of the destination principle.65

Zero Rating and Exemption If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -- for use or
consumption outside the Philippines, these shall be subject to 0 percent.66 If entered into with a purchaser for
In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that results use or consumption in the Philippines, then these shall be subject to 10 percent,67 unless the purchaser is exempt
from either one of them is not. from the indirect burden of the VAT, in which case it shall also be zero-rated.

Applying the destination principle53 to the exportation of goods, automatic zero rating54 is primarily intended to Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption
be enjoyed by the seller who is directly and legally liable for the VAT, making such seller internationally under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate,68 because the ecozone within
competitive by allowing the refund or credit of input taxes that are attributable to export sales. 55 Effective zero which it is registered is managed and operated by the PEZA as a separate customs territory.69 This means that in
rating, on the contrary, is intended to benefit the purchaser who, not being directly and legally liable for the such zone is created the legal fiction of foreign territory.70 Under the cross-border principle71 of the VAT system
payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers. being enforced by the Bureau of Internal Revenue (BIR),72 no VAT shall be imposed to form part of the cost of
goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and
services from the Philippines to a foreign country are free of the VAT,73 then the same rule holds for such exports
In both instances of zero rating, there is total relief for the purchaser from the burden of the tax.56 But in an
from the national territory -- except specifically declared areas -- to an ecozone.
exemption there is only partial relief,57 because the purchaser is not allowed any tax refund of or credit for input
taxes paid.58
Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered
exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-registered person in the
Exempt Transaction >and Exempt Party
customs territory are deemed imports from a foreign country.74 An ecozone -- indubitably a geographical
territory of the Philippines -- is, however, regarded in law as foreign soil.75 This legal fiction is necessary to give
The object of exemption from the VAT may either be the transaction itself or any of the parties to the meaningful effect to the policies of the special law creating the zone. 76 If respondent is located in an export
transaction.59 processing zone77 within that ecozone, sales to the export processing zone, even without being actually
exported, shall in fact be viewed as constructively exported under EO 226.78 Considered as export sales,79 such
An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed purchase transactions by respondent would indeed be subject to a zero rate.80
in and expressly exempted from the VAT under the Tax Code, without regard to the tax status -- VAT-exempt or
Tax Exemptions Broad and Express prohibited by law -- brought into the zone for manufacturing.93 In addition, they are given credits for the value of
the national internal revenue taxes imposed on domestic capital equipment also reasonably needed and
Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue exclusively used for the manufacture of their products,94 as well as for the value of such taxes imposed on
laws and regulations. domestic raw materials and supplies that are used in the manufacture of their export products and that form
part thereof.95
This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on
consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to Sixth, the exemption from local and national taxes granted under RA 722796 are ipso facto accorded to
another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly ecozones.97In case of doubt, conflicts with respect to such tax exemption privilege shall be resolved in favor of
made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos the ecozone.98
distinguere debemus. Where the law does not distinguish, we ought not to distinguish.
And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in the production
Moreover, the exemption is both express and pervasive for the following reasons: of export goods,99 and for locally produced raw materials, capital equipment and spare parts used by exporters
of non-traditional products100 -- shall also be continuously enjoyed by similar exporters within the
ecozone.101 Indeed, the latter exporters are likewise entitled to such tax exemptions and credits.
First, RA 7916 states that "no taxes, local and national, shall be imposed on business establishments operating
within the ecozone."81 Since this law does not exclude the VAT from the prohibition, it is deemed
included. Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in cases not excepted; Tax Refund as Tax Exemption
that is, a thing not being excepted must be regarded as coming within the purview of the general rule.
To be sure, statutes that grant tax exemptions are construed strictissimi juris102 against the taxpayer103 and
Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on liberally in favor of the taxing authority.104
and, therefore, indirectly imposed on the same entity -- a patent circumvention of the law. That no VAT shall be
imposed directly upon business establishments operating within the ecozone under RA 7916 also means that no Tax refunds are in the nature of such exemptions.105 Accordingly, the claimants of those refunds bear the burden
VAT may be passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. of proving the factual basis of their claims;106 and of showing, by words too plain to be mistaken, that the
When anything is prohibited directly, it is also prohibited indirectly. legislature intended to exempt them.107 In the present case, all the cited legal provisions are teeming with life
with respect to the grant of tax exemptions too vivid to pass unnoticed. In addition, respondent easily meets the
Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for real property challenge.
taxes that presently are imposed on land owned by developers. 82 This similar and repeated prohibition is an
unambiguous ratification of the law’s intent in not imposing local or national taxes on business enterprises Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The end
within the ecozone. result, however, is that it is not subject to the VAT. The non-taxability of transactions that are otherwise taxable
is merely a necessary incident to the tax exemption conferred by law upon it as an entity, not upon the
Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be subject to x x x transactions themselves.108 Nonetheless, its exemption as an entity and the non-exemption of its transactions
internal revenue laws and regulations" under PD 6683 -- the original charter of PEZA (then EPZA) that was later lead to the same result for the following considerations:
amended by RA 7916.84 No provisions in the latter law modify such exemption.
First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to execute or
Although this exemption puts the government at an initial disadvantage, the reduced tax collection ultimately administer such laws109 will have to be adopted. Their prior tax issuances have held inconsistent positions
redounds to the benefit of the national economy by enticing more business investments and creating more brought about by their probable failure to comprehend and fully appreciate the nature of the VAT as a tax on
employment opportunities.85 consumption and the application of the destination principle.110 Revenue Memorandum Circular No. (RMC) 74-
99, however, now clearly and correctly provides that any VAT-registered supplier’s sale of goods, property or
services from the customs territory to any registered enterprise operating in the ecozone -- regardless of the
Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except those prohibited
class or type of the latter’s PEZA registration -- is legally entitled to a zero rate.111
by law -- "shall not be subject to x x x internal revenue laws and regulations x x x" 86 if brought to the ecozone’s
restricted area87 for manufacturing by registered export enterprises,88 of which respondent is one. These rules
also apply to all enterprises registered with the EPZA prior to the effectivity of such rules.89 Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its very soul.

Fifth, export processing zone enterprises registered90 with the Board of Investments (BOI) under EO 226 patently In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the establishment of export
enjoy exemption from national internal revenue taxes on imported capital equipment reasonably needed and processing zones, seeks "to encourage and promote foreign commerce as a means of x x x strengthening our
exclusively used for the manufacture of their products; 91 on required supplies and spare part for consigned export trade and foreign exchange position, of hastening industrialization, of reducing domestic unemployment,
equipment;92 and on foreign and domestic merchandise, raw materials, equipment and the like -- except those and of accelerating the development of the country."112
RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the special economic considered used in the VAT business, and no VAT refund or credit is due. 134 This is a non sequitur. By the VAT’s
zones, "the government shall actively encourage, promote, induce and accelerate a sound and balanced very nature as a tax on consumption, the capital goods and services respondent has purchased are subject to the
industrial, economic and social development of the country x x x through the establishment, among others, of VAT, although at zero rate. Registration does not determine taxability under the VAT law.
special economic zones x x x that shall effectively attract legitimate and productive foreign investments."113
Moreover, the facts have already been determined by the lower courts. Having failed to present evidence to
Under EO 226, the "State shall encourage x x x foreign investments in industry x x x which shall x x x meet the support its contentions against the income tax holiday privilege of respondent,135 petitioner is deemed to have
tests of international competitiveness[,] accelerate development of less developed regions of the country[,] and conceded. It is a cardinal rule that "issues and arguments not adequately and seriously brought below cannot be
result in increased volume and value of exports for the economy." 114 Fiscal incentives that are cost-efficient and raised for the first time on appeal."136 This is a "matter of procedure"137 and a "question of fairness."138 Failure to
simple to administer shall be devised and extended to significant projects "to compensate for market assert "within a reasonable time warrants a presumption that the party entitled to assert it either has
imperfections, to reward performance contributing to economic development," 115 and "to stimulate the abandoned or declined to assert it."139
establishment and assist initial operations of the enterprise."116
The BIR regulations additionally requiring an approved prior application for effective zero rating 140 cannot prevail
Wisely accorded to ecozones created under RA 7916117 was the government’s policy -- spelled out earlier in RA over the clear VAT nature of respondent’s transactions. The scope of such regulations is not "within the statutory
7227 -- of converting into alternative productive uses118 the former military reservations and their authority x x x granted by the legislature.141
extensions,119 as well as of providing them incentives120 to enhance the benefits that would be derived from
them121 in promoting economic and social development.122 First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot purport to
do any more than interpret the latter.142 The courts will not countenance one that overrides the statute it seeks
Finally, under RA 7844, the State declares the need "to evolve export development into a national effort" 123 in to apply and implement.143
order to win international markets. By providing many export and tax incentives, 124 the State is able to drive
home the point that exporting is indeed "the key to national survival and the means through which the economic Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under
goals of increased employment and enhanced incomes can most expeditiously be achieved." 125 our VAT law requires an additional application to be made for such taxpayer’s transactions to be considered
effectively zero-rated. An effectively zero-rated transaction does not and cannot become exempt simply because
The Tax Code itself seeks to "promote sustainable economic growth x x x; x x x increase economic activity; and x an application therefor was not made or, if made, was denied. To allow the additional requirement is to give
x x create a robust environment for business to enable firms to compete better in the regional as well as the unfettered discretion to those officials or agents who, without fluid consideration, are bent on denying a valid
global market."126 After all, international competitiveness requires economic and tax incentives to lower the cost application. Moreover, the State can never be estopped by the omissions, mistakes or errors of its officials or
of goods produced for export. State actions that affect global competition need to be specific and selective in the agents.144
pricing of particular goods or services.127
Second, grantia argumenti that such an application is required by law, there is still the presumption of regularity
All these statutory policies are congruent to the constitutional mandates of providing incentives to needed in the performance of official duty.145 Respondent’s registration carries with it the presumption that, in the
investments,128 as well as of promoting the preferential use of domestic materials and locally produced goods absence of contradictory evidence, an application for effective zero rating was also filed and approval thereof
and adopting measures to help make these competitive.129 Tax credits for domestic inputs strengthen backward given. Besides, it is also presumed that the law has been obeyed146 by both the administrative officials and the
linkages. Rightly so, "the rule of law and the existence of credible and efficient public institutions are essential applicant.
prerequisites for sustainable economic development."130
Third, even though such an application was not made, all the special laws we have tackled exempt respondent
VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund not only from internal revenue laws but also from the regulations issued pursuant thereto. Leniency in the
implementation of the VAT in ecozones is an imperative, precisely to spur economic growth in the country and
Registration is an indispensable requirement under our VAT law. 131 Petitioner alleges that respondent did attain global competitiveness as envisioned in those laws.
register for VAT purposes with the appropriate Revenue District Office. However, it is now too late in the day for
petitioner to challenge the VAT-registered status of respondent, given the latter’s prior representation before A VAT-registered status, as well as compliance with the invoicing requirements,147 is sufficient for the effective
the lower courts and the mode of appeal taken by petitioner before this Court. zero rating of the transactions of a taxpayer. The nature of its business and transactions can easily be perused
from, as already clearly indicated in, its VAT registration papers and photocopied documents attached thereto.
The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from internal revenue Hence, its transactions cannot be exempted by its mere failure to apply for their effective zero rating. Otherwise,
laws and regulations the equipment -- including capital goods -- that registered enterprises will use, directly or their VAT exemption would be determined, not by their nature, but by the taxpayer’s negligence -- a result not at
indirectly, in manufacturing.132 EO 226 even reiterates this privilege among the incentives it gives to such all contemplated. Administrative convenience cannot thwart legislative mandate.
enterprises.133Petitioner merely asserts that by virtue of the PEZA registration alone of respondent, the latter is
not subject to the VAT. Consequently, the capital goods and services respondent has purchased are not Tax Refund or Credit in Order
Having determined that respondent’s purchase transactions are subject to a zero VAT rate, the tax refund or xxxxxxxxx
credit is in order.
"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment conducive
As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO 226 over for investors, the bill offers incentives such as the exemption from local and national taxes, x x x tax credits for
those in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5 percent preferential tax locally sourced inputs x x x."153
regime.
And third, no question as to either the filing of such claims within the prescriptive period or the validity of the
The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law, 148 for EO VAT returns has been raised. Even if such a question were raised, the tax exemption under all the special laws
226149 also has provisions to contend with. These two regimes are in fact incompatible and cannot be availed of cited above is broad enough to cover even the enforcement of internal revenue laws, including prescription. 154
simultaneously by the same entity. While EO 226 merely exempts it from income taxes, the PEZA law exempts it
from all taxes. Summary

Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of income tax To summarize, special laws expressly grant preferential tax treatment to business establishments registered and
for a certain number of years, depending on its registration as a pioneer or a non-pioneer enterprise. Besides, operating within an ecozone, which by law is considered as a separate customs territory. As such, respondent is
the remittance of the aforesaid 5 percent of gross income earned in lieu of local and national taxes imposable exempt from all internal revenue taxes, including the VAT, and regulations pertaining thereto. It has opted for
upon business establishments within the ecozone cannot outrightly determine a VAT exemption. Being subject the income tax holiday regime, instead of the 5 percent preferential tax regime. As a matter of law and
to VAT, payments erroneously collected thereon may then be refunded or credited. procedure, its registration status entitling it to such tax holiday can no longer be questioned. Its sales
transactions intended for export may not be exempt, but like its purchase transactions, they are zero-rated. No
Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916, Section 24 prior application for the effective zero rating of its transactions is necessary. Being VAT-registered and having
thereof does not preclude the VAT. One can, therefore, counterargue that such provision merely exempts satisfactorily complied with all the requisites for claiming a tax refund of or credit for the input VAT paid on
respondent from taxes imposed on business. To repeat, the VAT is a tax imposed on consumption, not on capital goods purchased, respondent is entitled to such VAT refund or credit.
business. Although respondent as an entity is exempt, the transactions it enters into are not necessarily so. The
VAT payments made in excess of the zero rate that is imposable may certainly be refunded or credited. WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to costs.

Compliance with All Requisites for VAT Refund or Credit SO ORDERED.

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT refund or G.R. No. 147295 February 16, 2007
credit.150
THE COMMISIONER OF INTERNAL REVENUE, Petitioner,
First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex, in which vs.
this Court held that the petitioner therein was registered as a non-VAT taxpayer.151 Hence, for being merely VAT- ACESITE (PHILIPPINES) HOTEL CORPORATION, Respondent.
exempt, the petitioner in that case cannot claim any VAT refund or credit.
DECISION
Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and have not
been offset against any output taxes. Although enterprises registered with the BOI after December 31, 1994
VELASCO, JR., J.:
would no longer enjoy the tax credit incentives on domestic capital equipment -- as provided for under Article
39(d), Title III, Book I of EO 226152 -- starting January 1, 1996, respondent would still have the same benefit under
a general and express exemption contained in both Article 77(1), Book VI of EO 226; and Section 12, paragraph 2 The Case
(c) of RA 7227, extended to the ecozones by RA 7916.
Before us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, assailing the November 17,
There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones from 2000 Decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 56816, which affirmed the January 3, 2000
national and local taxes, but also to grant them tax credits. This fact was revealed by the sponsorship speeches in Decision3 of the Court of Tax Appeals (CTA) in CTA Case No. 5645 entitled Acesite (Philippines) Hotel Corporation
Congress during the second reading of House Bill No. 14295, which later became RA 7916, as shown below: v. The Commissioner of Internal Revenue for Refund of VAT Payments.

"MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local taxes; x x x The Facts
tax credit for locally-sourced inputs x x x."
The facts as found by the appellate court are undisputed, thus: Upon appeal by petitioner, the CA affirmed in toto the decision of the CTA holding that PAGCOR was not only
exempt from direct taxes but was also exempt from indirect taxes like the VAT and consequently, the
Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel along United Nations Avenue in transactions between respondent Acesite and PAGCOR were "effectively zero-rated" because they involved the
Manila. It leases 6,768.53 square meters of the hotel’s premises to the Philippine Amusement and Gaming rendition of services to an entity exempt from indirect taxes. Thus, the CA affirmed the CTA’s determination by
Corporation [hereafter, PAGCOR] for casino operations. It also caters food and beverages to PAGCOR’s casino ruling that respondent Acesite was entitled to a refund of PhP 30,054,148.64 from petitioner.
patrons through the hotel’s restaurant outlets. For the period January (sic) 96 to April 1997, Acesite incurred VAT
amounting to P30,152,892.02 from its rental income and sale of food and beverages to PAGCOR during said The Issues
period. Acesite tried to shift the said taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR but
the latter refused to pay the taxes on account of its tax exempt status.1awphi1.net Hence, we have the instant petition with the following issues: (1) whether PAGCOR’s tax exemption privilege
includes the indirect tax of VAT to entitle Acesite to zero percent (0%) VAT rate; and (2) whether the zero
Thus, PAGCOR paid the amount due to Acesite minus the P30,152,892.02 VAT while the latter paid the VAT to percent (0%) VAT rate under then Section 102 (b)(3) of the Tax Code (now Section 108 (B)(3) of the Tax Code of
the Commissioner of Internal Revenue [hereafter, CIR] as it feared the legal consequences of non-payment of the 1997) legally applies to Acesite.
tax. However, Acesite belatedly arrived at the conclusion that its transaction with PAGCOR was subject to zero
rate as it was rendered to a tax-exempt entity. On 21 May 1998, Acesite filed an administrative claim for refund The petition is devoid of merit.
with the CIR but the latter failed to resolve the same. Thus on 29 May 1998, Acesite filed a petition with the
Court of Tax Appeals [hereafter, CTA] which was decided in this wise:
In resolving the first issue on whether PAGCOR’s tax exemption privilege includes the indirect tax of VAT to
entitle Acesite to zero percent (0%) VAT rate, we answer in the affirmative. We will however discuss both issues
As earlier stated, Petitioner is subject to zero percent tax pursuant to Section 102 (b)(3) [now 106(A)(C)] insofar together.
as its gross income from rentals and sales to PAGCOR, a tax exempt entity by virtue of a special law. Accordingly,
the amounts of P21,413,026.78 and P8,739,865.24, representing the 10% EVAT on its sales of food and services
PAGCOR is exempt from payment of indirect taxes
and gross rentals, respectively from PAGCOR shall, as a matter of course, be refunded to the petitioner for
having been inadvertently remitted to the respondent.
It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the payment
of taxes. Section 13 of P.D. 1869 pertinently provides:
Thus, taking into consideration the prescribed portion of Petitioner’s claim for refund of P98,743.40, and
considering further the principle of ‘solutio indebiti’ which requires the return of what has been delivered
through mistake, Respondent must refund to the Petitioner the amount of P30,054,148.64 computed as follows: Sec. 13. Exemptions. –

xxxx
Total amount per claim 30,152,892.02

Less Prescribed amount (Exhs A, X, & X-20) (2) Income and other taxes. – (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as
fees, charges or levies of whatever nature, whether National or Local, shall be assessed and collected under
January 1996 P 2,199.94 this Franchise from the Corporation; nor shall any form of tax or charge attach in any way to the earnings of
the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or earnings derived by the
February 1996 26,205.04 Corporation from its operation under this Franchise. Such tax shall be due and payable quarterly to the National
Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or
March 1996 70,338.42 98,743.40 description, levied, established or collected by any municipal, provincial, or national government authority.

P30,054,148.64 xxxx
vvvvvvvvvvvvvv
WHEREFORE, in view of all the foregoing, the instant Petition for Review is partially GRANTED. The Respondent is (b) Others: The exemptions herein granted for earnings derived from the operations conducted under the
hereby ORDERED to REFUND to the petitioner the amount of THIRTY MILLION FIFTY FOUR THOUSAND ONE franchise specifically from the payment of any tax, income or otherwise, as well as any form of charges, fees
or levies, shall inure to the benefit of and extend to corporation(s), association(s), agency(ies), or individual(s)
HUNDRED FORTY EIGHT PESOS AND SIXTY FOUR CENTAVOS (P30,054,148.64) immediately.
with whom the Corporation or operator has any contractual relationship in connection with the operations of
the casino(s) authorized to be conducted under this Franchise and to those receiving compensation or other
SO ORDERED.4 remuneration from the Corporation or operator as a result of essential facilities furnished and/or technical
services rendered to the Corporation or operator. (Emphasis supplied.)
The Ruling of the Court of Appeals
Petitioner contends that the above tax exemption refers only to PAGCOR’s direct tax liability and not to indirect (b) Transactions subject to zero percent (0%) rated.—
taxes, like the VAT.
xxxx
We disagree.
(3) Services rendered to persons or entities whose exemption under special laws or international agreements
A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no distinction on to which the Philippines is a signatory effectively subjects the supply of such services to zero (0%) rate (emphasis
whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is also exempt from indirect supplied).
taxes, like VAT, as follows:
The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such
Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers to exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated from the 1987
PAGCOR. Although the law does not specifically mention PAGCOR’s exemption from indirect taxes, PAGCOR is case of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc.,5 where the absolute tax exemption of
undoubtedly exempt from such taxes because the law exempts from taxes persons or entities contracting with the World Health Organization (WHO) upon an international agreement was upheld. We held in said case that
PAGCOR in casino operations. Although, differently worded, the provision clearly exempts PAGCOR from the exemption of contractee WHO should be implemented to mean that the entity or person exempt is the
indirect taxes. In fact, it goes one step further by granting tax exempt status to persons dealing with PAGCOR contractor itself who constructed the building owned by contractee WHO, and such does not violate the rule
in casino operations. The unmistakable conclusion is that PAGCOR is not liable for the P30,152,892.02 VAT and that tax exemptions are personal because the manifest intention of the agreement is to exempt the contractor
neither is Acesite as the latter is effectively subject to zero percent rate under Sec. 108 B (3). R.A. 8424. so that no contractor’s tax may be shifted to the contractee WHO. Thus, the proviso in P.D. 1869, extending the
(Emphasis supplied.) exemption to entities or individuals dealing with PAGCOR in casino operations, is clearly to proscribe any indirect
tax, like VAT, that may be shifted to PAGCOR.
Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly
granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case, Acesite paid VAT by mistake
can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services subject to VAT.
Thus, by extending the tax exemption to entities or individuals dealing with PAGCOR in casino operations, it is Considering the foregoing discussion, there are undoubtedly erroneous payments of the VAT pertaining to the
exempting PAGCOR from being liable to indirect taxes. effectively zero-rate transactions between Acesite and PAGCOR. Verily, Acesite has clearly shown that it paid the
subject taxes under a mistake of fact, that is, when it was not aware that the transactions it had with PAGCOR
The manner of charging VAT does not make PAGCOR liable to said tax were zero-rated at the time it made the payments. In UST Cooperative Store v. City of Manila,6 we explained that
"there is erroneous payment of taxes when a taxpayer pays under a mistake of fact, as for the instance in a case
It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or leased, in where he is not aware of an existing exemption in his favor at the time the payment was made."7 Such payment
which case it is computed as 1/11 of such value, or charged as an additional 10% to the value. Verily, the seller or is held to be not voluntary and, therefore, can be recovered or refunded.8
lessor has the option to follow either way in charging its clients and customer. In the instant case, Acesite
followed the latter method, that is, charging an additional 10% of the gross sales and rentals. Be that as it may, Moreover, it must be noted that aside from not raising the issue of Acesite’s compliance with pertinent Revenue
the use of either method, and in particular, the first method, does not denigrate the fact that PAGCOR is exempt Regulations on exemptions during the proceedings in the CTA, it cannot be gainsaid that Acesite should have
from an indirect tax, like VAT. done so as it paid the VAT under a mistake of fact. Hence, petitioner’s argument on this point is utterly tenuous.

VAT exemption extends to Acesite Solutio indebiti applies to the Government

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable for the Tax refunds are based on the principle of quasi-contract or solutio indebiti and the pertinent laws governing this
payment of it as it is exempt in this particular transaction by operation of law to pay the indirect tax. Such principle are found in Arts. 2142 and 2154 of the Civil Code, which provide, thus:
exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of
R.A. 8424), which provides: Art. 2142. Certain lawful, voluntary, and unilateral acts give rise to the juridical relation of quasi-contract to the
end that no one shall be unjustly enriched or benefited at the expense of another.
Section 102. Value-added tax on sale of services – (a) Rate and base of tax – There shall be levied, assessed and
collected, a value-added tax equivalent to 10% of gross receipts derived by any person engaged in the sale of Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered through
services x x x; Provided, that the following services performed in the Philippines by VAT-registered persons shall mistake, the obligation to return it arises.
be subject to 0%.
When money is paid to another under the influence of a mistake of fact, that is to say, on the mistaken
xxxx supposition of the existence of a specific fact, where it would not have been known that the fact was otherwise,
it may be recovered. The ground upon which the right of recovery rests is that money paid through the Constitution. Petitioner further seeks to prohibit the implementation of Bureau of Internal Revenue (BIR)
misapprehension of facts belongs in equity and in good conscience to the person who paid it. 9 Revenue Regulations No. 16-2005 for being contrary to law.

The Government comes within the scope of solutio indebiti principle as elucidated in Commissioner of Internal The undisputed facts follow.
Revenue v. Fireman’s Fund Insurance Company, where we held that: "Enshrined in the basic legal principles is the
time-honored doctrine that no person shall unjustly enrich himself at the expense of another. It goes without PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A2 on January 1, 1977. Simultaneous to its
saying that the Government is not exempted from the application of this doctrine." 10 creation, P.D. No. 1067-B3 (supplementing P.D. No. 1067-A) was issued exempting PAGCOR from the payment of
any type of tax, except a franchise tax of five percent (5%) of the gross revenue. 4 Thereafter, on June 2, 1978,
Action for refund strictly construed; Acesite discharged the burden of proof P.D. No. 1399 was issued expanding the scope of PAGCOR's exemption.5

Since an action for a tax refund partakes of the nature of an exemption, which cannot be allowed unless granted To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 18696 was issued. Section 13
in the most explicit and categorical language, it is strictly construed against the claimant who must discharge thereof reads as follows:
such burden convincingly.11 In the instant case, respondent Acesite had discharged this burden as found by the
CTA and the CA. Indeed, the records show that Acesite proved its actual VAT payments subject to refund, as Sec. 13. Exemptions. — x x x
attested to by an independent Certified Public Accountant who was duly commissioned by the CTA. On the other
hand, petitioner never disputed nor contested respondent’s testimonial and documentary evidence. In fact,
(1) Customs Duties, taxes and other imposts on importations. - All importations of equipment, vehicles,
petitioner never presented any evidence on its behalf.
automobiles, boats, ships, barges, aircraft and such other gambling paraphernalia, including
accessories or related facilities, for the sole and exclusive use of the casinos, the proper and efficient
One final word. The BIR must release the refund to respondent without any unreasonable delay. Indeed, fair management and administration thereof and such other clubs, recreation or amusement places to be
dealing is expected by our taxpayers from the BIR and this duty demands that the BIR should refund without any established under and by virtue of this Franchise shall be exempt from the payment of duties, taxes
unreasonable delay what it has erroneously collected.12 and other imposts, including all kinds of fees, levies, or charges of any kind or nature.

WHEREFORE, the petition is DENIED for lack of merit and the November 17, 2000 Decision of the CA is hereby Vessels and/or accessory ferry boats imported or to be imported by any corporation having existing
AFFIRMED. No costs. contractual arrangements with the Corporation, for the sole and exclusive use of the casino or to be
used to service the operations and requirements of the casino, shall likewise be totally exempt from
SO ORDERED. the payment of all customs duties, taxes and other imposts, including all kinds of fees, levies,
assessments or charges of any kind or nature, whether National or Local.
G.R. No. 172087 March 15, 2011
(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise, as
PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner, well as fees, charges, or levies of whatever nature, whether National or Local, shall be assessed and
vs. collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any
THE BUREAU OF INTERNAL REVENUE (BIR), represented herein by HON. JOSE MARIO BUÑAG, in his official way to the earnings of the Corporation, except a Franchise Tax of five percent (5%)of the gross revenue
capacity as COMMISSIONER OF INTERNAL REVENUE, Public Respondent, or earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due
JOHN DOE and JANE DOE, who are persons acting for, in behalf, or under the authority of Respondent.Public and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees
and Private Respondents. or assessments of any kind, nature or description, levied, established, or collected by any municipal,
provincial or national government authority.
DECISION
(b) Others: The exemption herein granted for earnings derived from the operations
conducted under the franchise, specifically from the payment of any tax, income or
PERALTA, J.:
otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and
extend to corporation(s), association(s), agency(ies), or individual(s) with whom the
For resolution of this Court is the Petition for Certiorari and Prohibition1 with prayer for the issuance of a Corporation or operator has any contractual relationship in connection with the operations
Temporary Restraining Order and/or Preliminary Injunction, dated April 17, 2006, of petitioner Philippine of the casino(s) authorized to be conducted under this Franchise and to those receiving
Amusement and Gaming Corporation (PAGCOR), seeking the declaration of nullity of Section 1 of Republic Act compensation or other remuneration from the Corporation as a result of essential facilities
(R.A.) No. 9337 insofar as it amends Section 27 (c) of the National Internal Revenue Code of 1997, by excluding furnished and/or technical services rendered to the Corporation or operator.
petitioner from exemption from corporate income tax for being repugnant to Sections 1 and 10 of Article III of
The fee or remuneration of foreign entertainers contracted by the Corporation or operator in Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are imposed by this Section
pursuance of this provision shall be free of any tax. upon corporations or associations engaged in similar business, industry, or activity.

(3) Dividend Income. − Notwithstanding any provision of law to the contrary, in the event the Different groups came to this Court via petitions for certiorari and prohibition11 assailing the validity and
Corporation should declare a cash dividend income corresponding to the participation of the private constitutionality of R.A. No. 9337, in particular:
sector shall, as an incentive to the beneficiaries, be subject only to a final flat income rate of ten
percent (10%) of the regular income tax rates. The dividend income shall not in such case be 1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and properties; Section 5,
considered as part of the beneficiaries' taxable income; provided, however, that such dividend income which imposes a 10% VAT on importation of goods; and Section 6, which imposes a 10% VAT on sale of
shall be totally exempted from income or other form of taxes if invested within six (6) months from the services and use or lease of properties, all contain a uniform proviso authorizing the President, upon
date the dividend income is received in the following: the recommendation of the Secretary of Finance, to raise the VAT rate to 12%. The said provisions
were alleged to be violative of Section 28 (2), Article VI of the Constitution, which section vests in
(a) operation of the casino(s) or investments in any affiliate activity that will ultimately Congress the exclusive authority to fix the rate of taxes, and of Section 1, Article III of the Constitution
redound to the benefit of the Corporation; or any other corporation with whom the on due process, as well as of Section 26 (2), Article VI of the Constitution, which section provides for
Corporation has any existing arrangements in connection with or related to the operations of the "no amendment rule" upon the last reading of a bill;
the casino(s);
2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the Constitution, or the
(b) Government bonds, securities, treasury notes, or government debentures; or guarantee of equal protection of the laws, and Section 28 (1), Article VI of the Constitution; and

(c) BOI-registered or export-oriented corporation(s).7 3) other technical aspects of the passage of the law, questioning the manner it was passed.

PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later restored by Letter of On September 1, 2005, the Court dismissed all the petitions and upheld the constitutionality of R.A. No. 9337. 12
Instruction No. 1430, which was issued in September 1984.
On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-2005,13 specifically identifying
On January 1, 1998, R.A. No. 8424,8 otherwise known as the National Internal Revenue Code of 1997, took effect. PAGCOR as one of the franchisees subject to 10% VAT imposed under Section 108 of the National Internal
Section 27 (c) of R.A. No. 8424 provides that government-owned and controlled corporations (GOCCs) shall pay Revenue Code of 1997, as amended by R.A. No. 9337. The said revenue regulation, in part, reads:
corporate income tax, except petitioner PAGCOR, the Government Service and Insurance Corporation, the Social
Security System, the Philippine Health Insurance Corporation, and the Philippine Charity Sweepstakes Office, Sec. 4. 108-3. Definitions and Specific Rules on Selected Services. —
thus:
xxxx
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing
special general laws to the contrary notwithstanding, all corporations, agencies or instrumentalities owned and
(h) x x x
controlled by the Government, except the Government Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes
Office (PCSO), and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code, regardless of how
their taxable income as are imposed by this Section upon corporations or associations engaged in similar their franchisees may have been granted, shall be subject to the 10% VAT imposed under Sec.108 of the Tax
business, industry, or activity.9 Code. This includes, among others, the Philippine Amusement and Gaming Corporation (PAGCOR), and its
licensees or franchisees.
With the enactment of R.A. No. 933710 on May 24, 2005, certain sections of the National Internal Revenue Code
of 1997 were amended. The particular amendment that is at issue in this case is Section 1 of R.A. No. 9337, Hence, the present petition for certiorari.
which amended Section 27 (c) of the National Internal Revenue Code of 1997 by excluding PAGCOR from the
enumeration of GOCCs that are exempt from payment of corporate income tax, thus: PAGCOR raises the following issues:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing I


special general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned and
controlled by the Government, except the Government Service and Insurance Corporation (GSIS), the Social WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO THE EQUAL
Security System (SSS), the Philippine Health Insurance Corporation (PHIC), and the Philippine Charity PROTECTION [CLAUSE] EMBODIED IN SECTION 1, ARTICLE III OF THE 1987 CONSTITUTION.
II Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue Code of 1977,
petitioner is no longer exempt from corporate income tax as it has been effectively omitted from the list of
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO THE NON- GOCCs that are exempt from it. Petitioner argues that such omission is unconstitutional, as it is violative of its
IMPAIRMENT [CLAUSE] EMBODIED IN SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION. right to equal protection of the laws under Section 1, Article III of the Constitution:

III Sec. 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person
be denied the equal protection of the laws.
WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS NULL AND VOID AB INITIO FOR BEING
BEYOND THE SCOPE OF THE BASIC LAW, RA 8424, SECTION 108, INSOFAR AS THE SAID REGULATION IMPOSED In City of Manila v. Laguio, Jr.,17 this Court expounded the meaning and scope of equal protection, thus:
VAT ON THE SERVICES OF THE PETITIONER AS WELL AS PETITIONER’S LICENSEES OR FRANCHISEES WHEN THE
BASIC LAW, AS INTERPRETED BY APPLICABLE JURISPRUDENCE, DOES NOT IMPOSE VAT ON PETITIONER OR ON Equal protection requires that all persons or things similarly situated should be treated alike, both as to rights
PETITIONER’S LICENSEES OR FRANCHISEES.14 conferred and responsibilities imposed. Similar subjects, in other words, should not be treated differently, so as
to give undue favor to some and unjustly discriminate against others. The guarantee means that no person or
The BIR, in its Comment15 dated December 29, 2006, counters: class of persons shall be denied the same protection of laws which is enjoyed by other persons or other classes in
like circumstances. The "equal protection of the laws is a pledge of the protection of equal laws." It limits
governmental discrimination. The equal protection clause extends to artificial persons but only insofar as their
I
property is concerned.

SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869 ARE BOTH VALID AND CONSTITUTIONAL
xxxx
PROVISIONS OF LAWS THAT SHOULD BE HARMONIOUSLY CONSTRUED TOGETHER SO AS TO GIVE EFFECT TO ALL
OF THEIR PROVISIONS WHENEVER POSSIBLE.
Legislative bodies are allowed to classify the subjects of legislation. If the classification is reasonable, the law may
operate only on some and not all of the people without violating the equal protection clause. The classification
II
must, as an indispensable requisite, not be arbitrary. To be valid, it must conform to the following requirements:

SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1 AND SECTION 10, ARTICLE III OF THE 1987
1) It must be based on substantial distinctions.
CONSTITUTION.

2) It must be germane to the purposes of the law.


III

3) It must not be limited to existing conditions only.


BIR REVENUE REGULATIONS ARE PRESUMED VALID AND CONSTITUTIONAL UNTIL STRICKEN DOWN BY LAWFUL
AUTHORITIES.
4) It must apply equally to all members of the class.18
The Office of the Solicitor General (OSG), by way of Manifestation In Lieu of Comment,16 concurred with the
arguments of the petitioner. It added that although the State is free to select the subjects of taxation and that It is not contested that before the enactment of R.A. No. 9337, petitioner was one of the five GOCCs exempted
the inequity resulting from singling out a particular class for taxation or exemption is not an infringement of the from payment of corporate income tax as shown in R.A. No. 8424, Section 27 (c) of which, reads:
constitutional limitation, a tax law must operate with the same force and effect to all persons, firms and
corporations placed in a similar situation. Furthermore, according to the OSG, public respondent BIR exceeded (c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing
its statutory authority when it enacted RR No. 16-2005, because the latter's provisions are contrary to the special or general laws to the contrary notwithstanding, all corporations, agencies or instrumentalities owned
mandates of P.D. No. 1869 in relation to R.A. No. 9337. and controlled by the Government, except the Government Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes
The main issue is whether or not PAGCOR is still exempt from corporate income tax and VAT with the enactment Office (PCSO), and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon
of R.A. No. 9337. their taxable income as are imposed by this Section upon corporations or associations engaged in similar
business, industry, or activity.19
After a careful study of the positions presented by the parties, this Court finds the petition partly meritorious.
A perusal of the legislative records of the Bicameral Conference Meeting of the Committee on Ways on Means
dated October 27, 1997 would show that the exemption of PAGCOR from the payment of corporate income tax
was due to the acquiescence of the Committee on Ways on Means to the request of PAGCOR that it be exempt CHAIRMAN ENRILE. It does, it does, because this is taken and spent by government, somebody receives it in the
from such tax.20 The records of the Bicameral Conference Meeting reveal: form of wages and supplies and other services and other goods. They are not being taken from the public and
stored in a vault.
HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a tax on lotto winnings.
CHAIRMAN JAVIER. That 7.7 loss because of tax exemption. That will be extra income for the taxpayers.
CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.
HON. ROXAS. Precisely, so they will be spending it.21
HON. R. DIAZ. Tinanggal na ba natin yon?
The discussion above bears out that under R.A. No. 8424, the exemption of PAGCOR from paying corporate
CHAIRMAN ENRILE. Oo. income tax was not based on a classification showing substantial distinctions which make for real differences,
but to reiterate, the exemption was granted upon the request of PAGCOR that it be exempt from the payment of
corporate income tax.
HON. R. DIAZ. Because I was wondering whether we covered the tax on --- Whether on a universal basis, we
included a tax on cockfighting winnings.
With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424, PAGCOR has been excluded from the
enumeration of GOCCs that are exempt from paying corporate income tax. The records of the Bicameral
CHAIRMAN ENRILE. No, we removed the ---
Conference Meeting dated April 18, 2005, of the Committee on the Disagreeing Provisions of Senate Bill No.
1950 and House Bill No. 3555, show that it is the legislative intent that PAGCOR be subject to the payment of
HON. R. DIAZ. I . . . (inaudible) natin yong lotto? corporate income tax, thus:

CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request. THE CHAIRMAN (SEN. RECTO). Yes, Osmeña, the proponent of the amendment.

CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission. SEN. OSMEÑA. Yeah. Mr. Chairman, one of the reasons why we're even considering this VAT bill is we want to
show the world who our creditors, that we are increasing official revenues that go to the national budget.
CHAIRMAN ENRILE. Philippine Insurance --- Health, health ba. Yon ang request ng Chairman, I will accept. Unfortunately today, Pagcor is unofficial.
(laughter) Pag-Pag-ibig yon, maliliit na sa tao yon.
Now, in 2003, I took a quick look this morning, Pagcor had a net income of 9.7 billion after paying some small
HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers if we factored in an amount that would reflect the taxes that they are subjected to. Of the 9.7 billion, they claim they remitted to national government seven
VAT and other sales taxes--- billion. Pagkatapos, there are other specific remittances like to the Philippine Sports Commission, etc., as
mandated by various laws, and then about 400 million to the President's Social Fund. But all in all, their net profit
CHAIRMAN ENRILE. No, we’re talking of this measure only. We will not --- (discontinued) today should be about 12 billion. That's why I am questioning this two billion. Because while essentially they
claim that the money goes to government, and I will accept that just for the sake of argument. It does not pass
through the appropriation process. And I think that at least if we can capture 35 percent or 32 percent through
HON. ROXAS. No, no, no, no, from the --- arising from the exemption. Assuming that when we release the money the budgetary process, first, it is reflected in our official income of government which is applied to the national
into the hands of the public, they will not use that to --- for wallpaper. They will spend that eh, Mr. Chairman. So budget, and secondly, it goes through what is constitutionally mandated as Congress appropriating and
when they spend that--- defining where the money is spent and not through a board of directors that has absolutely no accountability.

CHAIRMAN ENRILE. There’s a VAT. REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman, follow up lang.

HON. ROXAS. There will be a VAT and there will be other sales taxes no. Is there a quantification? Is there an There is wisdom in the comments of my good friend from Cebu, Senator Osmeña.
approximation?
SEN. OSMEÑA. And Negros.
CHAIRMAN JAVIER. Not anything.
REP. PUENTEBELLA. And Negros at the same time ay Kasimanwa. But I would not want to put my friends from
HON. ROXAS. So, in effect, we have sterilized that entire seven billion. In effect, it is not circulating in the the Department of Finance in a difficult position, but may we know your comments on this knowing that as
economy which is unrealistic. Senator Osmeña just mentioned, he said, "I accept that that a lot of it is going to spending for basic services,"
you know, going to most, I think, supposedly a lot or most of it should go to government spending, social services THE CHAIRMAN (REP. LAPUS). Congressman Nograles.
and the like. What is your comment on this? This is going to affect a lot of services on the government side.
REP. NOGRALES. Just a point of inquiry from the Chair. What exactly are the functions of Pagcor that are
THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair. VATable? What will we VAT in Pagcor?

SEN. OSMEÑA. It goes from pocket to the other, Monico. THE CHAIRMAN (REP. LAPUS). This is on own income tax. This is Pagcor income tax.

REP. PUENTEBELLA. I know that. But I wanted to ask them, Mr. Senator, because you may have your own pre- REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa kanya. Sale of what?
judgment on this and I don't blame you. I don't blame you. And I know you have your own research. But will this
not affect a lot, the disbursements on social services and other? xxxx

REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to that question also. Wouldn't it be easier for you to REP. VILLAFUERTE. Mr. Chairman, my question is, what are we VATing Pagcor with, is it the . . .
explain to, say, foreign creditors, how do you explain to them that if there is a fiscal gap some of our richest
corporations has [been] spared [from] taxation by the government which is one rich source of revenues. Now,
REP. NOGRALES. Mr. Chairman, this is a secret agreement or the way they craft their contract, which basis?
why do you save, why do you spare certain government corporations on that, like Pagcor? So, would it be easier
for you to make an argument if everything was exposed to taxation?
THE CHAIRMAN (SEN. RECTO). Congressman Nograles, the Senate version does not discuss a VAT on Pagcor but
it just takes away their exemption from non-payment of income tax.22
REP. TEVES. Mr. Chair, please.

Taxation is the rule and exemption is the exception.23 The burden of proof rests upon the party claiming
THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to respond to those before we call Congressman Teves?
exemption to prove that it is, in fact, covered by the exemption so claimed.24 As a rule, tax exemptions are
construed strongly against the claimant.25 Exemptions must be shown to exist clearly and categorically, and
MR. PURISIMA. Thank you, Mr. Chair. supported by clear legal provision.26

Yes, from definitely improving the collection, it will help us because it will then enter as an official revenue In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate income tax, considering
although when dividends declare it also goes in as other income. (sic) that Section 1 of R.A. No. 9337 amended Section 27 (c) of the National Internal Revenue Code of 1997 by
omitting PAGCOR from the exemption. The legislative intent, as shown by the discussions in the Bicameral
xxxx Conference Meeting, is to require PAGCOR to pay corporate income tax; hence, the omission or removal of
PAGCOR from exemption from the payment of corporate income tax. It is a basic precept of statutory
REP. TEVES. Mr. Chairman. construction that the express mention of one person, thing, act, or consequence excludes all others as expressed
in the familiar maxim expressio unius est exclusio alterius.27 Thus, the express mention of the GOCCs exempted
from payment of corporate income tax excludes all others. Not being excepted, petitioner PAGCOR must be
xxxx
regarded as coming within the purview of the general rule that GOCCs shall pay corporate income tax, expressed
in the maxim: exceptio firmat regulam in casibus non exceptis.28
THE CHAIRMAN (REP. LAPUS). Congressman Teves.
PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records of the
REP. TEVES. Yeah. Pagcor is controlled under Section 27, that is on income tax. Now, we are talking here on Bicameral Conference Meeting dated October 27, 1997, of the Committee on Ways and Means, show that
value-added tax. Do you mean to say we are going to amend it from income tax to value-added tax, as far as PAGCOR’s exemption from payment of corporate income tax, as provided in Section 27 (c) of R.A. No. 8424, or
Pagcor is concerned? the National Internal Revenue Code of 1997, was not made pursuant to a valid classification based on substantial
distinctions and the other requirements of a reasonable classification by legislative bodies, so that the law may
THE CHAIRMAN (SEN. RECTO). No. We are just amending that section with regard to the exemption from operate only on some, and not all, without violating the equal protection clause. The legislative records show
income tax of Pagcor. that the basis of the grant of exemption to PAGCOR from corporate income tax was PAGCOR’s own request to be
exempted.
xxxx
Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for violating the non-
REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr. Chairman. impairment clause of the Constitution. Petitioner avers that laws form part of, and is read into, the contract even
without the parties expressly saying so. Petitioner states that the private parties/investors transacting with it
considered the tax exemptions, which inure to their benefit, as the main consideration and inducement for their Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10% VAT is invalid
decision to transact/invest with it. Petitioner argues that the withdrawal of its exemption from corporate income for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that petitioner can be subjected to
tax by R.A. No. 9337 has the effect of changing the main consideration and inducement for the transactions of VAT. R.A. No. 9337 is clear only as to the removal of petitioner's exemption from the payment of corporate
private parties with it; thus, the amendatory provision is violative of the non-impairment clause of the income tax, which was already addressed above by this Court.
Constitution.
As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant to Section 7 (k) thereof,
Petitioner’s contention lacks merit. which reads:

The non-impairment clause is contained in Section 10, Article III of the Constitution, which provides that no law Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows:
impairing the obligation of contracts shall be passed. The non-impairment clause is limited in application to laws
that derogate from prior acts or contracts by enlarging, abridging or in any manner changing the intention of the Section 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the following
parties.29 There is impairment if a subsequent law changes the terms of a contract between the parties, imposes transactions shall be exempt from the value-added tax:
new conditions, dispenses with those agreed upon or withdraws remedies for the enforcement of the rights of
the parties.30
xxxx

As regards franchises, Section 11, Article XII of the Constitution 31 provides that no franchise or right shall be
(k) Transactions which are exempt under international agreements to which the Philippines is a signatory
granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress
or under special laws, except Presidential Decree No. 529.37
when the common good so requires.32

Petitioner is exempt from the payment of VAT, because PAGCOR’s charter, P.D. No. 1869, is a special law that
In Manila Electric Company v. Province of Laguna,33 the Court held that a franchise partakes the nature of a
grants petitioner exemption from taxes.
grant, which is beyond the purview of the non-impairment clause of the Constitution.34 The pertinent portion of
the case states:
Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which retained
Section 108 (B) (3) of R.A. No. 8424, thus:
While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as being in
the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions,
nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions, in the real sense of [R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is hereby further amended to
the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to read as follows:
by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully
entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. —
of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked
without impairing the obligations of contracts. These contractual tax exemptions, however, are not to be (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten
confused with tax exemptions granted under franchises. A franchise partakes the nature of a grant which is percent (10%) of gross receipts derived from th