#1

[G.R. No. 125355. March 30, 2000]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS and

COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION, respondents. Court

DECISION

PARDO, J.:

What is before the Court is a petition for review on certiorari of the decision of the Court of
Appeals,[1] reversing that of the Court of Tax Appeals,[2] which affirmed with modification the
decision of the Commissioner of Internal Revenue ruling that Commonwealth Management
and Services Corporation, is liable for value added tax for services to clients during taxable
year 1988.

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

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

On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private
respondent COMASERCO for deficiency value-added tax (VAT) amounting to P351,851.01, for
taxable year 1988, computed as follows:

"Taxable sale/receipt P1,679,155.00

10% tax due thereon 167,915.50

25% surcharge 41,978.88

20% interest per annum 125,936.63

Compromise penalty for late payment 16,000.00

TOTAL AMOUNT DUE AND COLLECTIBLE P 351,831.01"[3]

COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net
loss in its operations in the amount of P6,077.00. J lexj

On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's
finding of deficiency VAT. On August 20, 1992, the Commissioner of Internal Revenue sent a
collection letter to COMASERCO demanding payment of the deficiency VAT.

On September 29,1992, COMASERCO filed with the Court of Tax Appeals[4] a petition for
review contesting the Commissioner's assessment. COMASERCO asserted that the services it
rendered to Philamlife and its affiliates, relating to collections, consultative and other technical
assistance, including functioning as an internal auditor, were on a "no-profit, reimbursement-
of-cost-only" basis. It averred that it was not engaged id the business of providing services to
Philamlife and its affiliates. COMASERCO was established to ensure operational orderliness
and administrative efficiency of Philamlife and its affiliates, and not in the sale of services.
COMASERCO stressed that it was not profit-motivated, thus not engaged in business. In fact, it
did not generate profit but suffered a net loss in taxable year 1988. COMASERCO averred that
since it was not engaged in business, it was not liable to pay VAT.

On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of
Internal Revenue, the dispositive portion of which reads:

"WHEREFORE, the decision of the Commissioner of Internal Revenue assessing

petitioner deficiency value-added tax for the taxable year 1988 is AFFIRMED with
slight modifications. Accordingly, petitioner is ordered to pay respondent
Commissioner of Internal Revenue the amount of P335,831.01 inclusive of the
25% surcharge and interest plus 20% interest from January 24, 1992 until fully
paid pursuant to Section 248 and 249 of the Tax Code.

"The compromise penalty of P16,000.00 imposed by the respondent in her

assessment letter shall not be included in the payment as there was no
compromise agreement entered into between petitioner and respondent with
respect to the value-added tax deficiency."[5]

On July 26, 1995, respondent filed with the Court of Appeals, petition for review of the
decision of the Court of Appeals.

After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing
that of the Court of Tax Appeals, the dispositive portion of which reads: Lexj uris

"WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING

and SETTING ASIDE the questioned Decision promulgated on 22 June 1995. The
assessment for deficiency value-added tax for the taxable year 1988 inclusive of
surcharge, interest and penalty charges are ordered CANCELLED for lack of legal
and factual basis."[6]

The Court of Appeals anchored its decision on the ratiocination in another tax case involving
the same parties,[7] where it was held that COMASERCO was not liable to pay fixed and
contractor's tax for services rendered to Philamlife and its affiliates. The Court of Appeals, in
that case, reasoned that COMASERCO was not engaged in business of providing services to
Philamlife and its affiliates. In the same manner, the Court of Appeals held that COMASERCO
was not liable to pay VAT for it was not engaged in the business of selling services.

On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition for
review on certiorari assailing the decision of the Court of Appeals.

On August 7, 1996, we required respondent COMASERCO to file comment on the petition, and
on September 26, 1996, COMASERCO complied with the resolution.[8]

We give due course to the petition.

At issue in this case is whether COMASERCO was engaged in the sale of services, and thus
liable to pay VAT thereon.

Petitioner avers that to "engage in business" and to "engage in the sale of services" are two
different things. Petitioner maintains that the services rendered by COMASERCO to Philamlife
and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on the value added
by the performance of the service. It is immaterial whether profit is derived from rendering
the service. Juri smis

We agree with the Commissioner.

Section 99 of the National Internal Revenue Code of 1986, as amended by Executive Order
(E.O.) No. 273 in 1988, provides that:

"Section 99. Persons liable. - Any person who, in the course of trade or business,
sells, barters or exchanges goods, renders services, or engages in similar
transactions and any person who imports goods shall be subject to the value-
added tax (VAT) imposed in Sections 100 to 102 of this Code."[9]

COMASERCO contends that the term "in the course of trade or business" requires that the
"business" is carried on with a view to profit or livelihood. It avers that the activities of the
entity must be profit- oriented. COMASERCO submits that it is not motivated by profit, as
defined by its primary purpose in the articles of incorporation, stating that it is operating "only
on reimbursement-of-cost basis, without any profit." Private respondent argues that profit
motive is material in ascertaining who to tax for purposes of determining liability for VAT.

We disagree.

On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT),
amending among other sections, Section 99 of the Tax Code. On January 1, 1998, Republic Act
8424, the National Internal Revenue Code of 1997, took effect. The amended law provides
that:

"SEC. 105. Persons Liable. - Any person who, in the course of trade or business,
sells, barters, exchanges, leases goods or properties, renders services, and any
person who imports goods shall be subject to the value-added tax (VAT) imposed
in Sections 106 and 108 of this Code.

"The value-added tax is an indirect tax and the amount of tax may be shifted or
passed on to the buyer, transferee or lessee of the goods, properties or services.
This rule shall likewise apply to existing sale or lease of goods, properties or
services at the time of the effectivity of Republic Act No.7716.

"The phrase "in the course of trade or business" means the regular conduct or
pursuit of a commercial or an economic activity, including transactions incidental
thereto, by any person regardless of whether or not the person engaged therein
is a nonstock, nonprofit organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to members of their guests), or
government entity. Jjj uris

"The rule of regularity, to the contrary notwithstanding, services as defined in this

Code rendered in the Philippines by nonresident foreign persons shall be
considered as being rendered in the course of trade or business."

Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-
profit, organization or government entity, is liable to pay VAT on the sale of goods or services.
VAT is a tax on transactions, imposed at every stage of the distribution process on the sale,
barter, exchange of goods or property, and on the performance of services, even in the
absence of profit attributable thereto. The term "in the course of trade or business" requires
the regular conduct or pursuit of a commercial or an economic activity, regardless of whether
or not the entity is profit-oriented.

The definition of the term "in the course of trade or business" incorporated in the present law
applies to all transactions even to those made prior to its enactment. Executive Order No. 273
stated that any person who, in the course of trade or business, sells, barters or exchanges
goods and services, was already liable to pay VAT. The present law merely stresses that even a
nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of
goods and services.

Section 108 of the National Internal Revenue Code of 1997[10] defines the phrase "sale of
services" as the "performance of all kinds of services for others for a fee, remuneration or
consideration." It includes "the supply of technical advice, assistance or services rendered in
connection with technical management or administration of any scientific, industrial or
commercial undertaking or project."[11]

On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-
98[12] emphasizing that a domestic corporation that provided technical, research, management
and technical assistance to its affiliated companies and received payments on a
reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on
services rendered. In fact, even if such corporation was organized without any intention of
realizing profit, any income or profit generated by the entity in the conduct of its activities was
subject to income tax. lex

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives
payments for services rendered to its affiliates on a reimbursement-on-cost basis only,
without realizing profit, for purposes of determining liability for VAT on services rendered. As
long as the entity provides service for a fee, remuneration or consideration, then the service
rendered is subject to VAT.

At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that allow
exemptions are construed strictly against the grantee and liberally in favor of the government.
Otherwise stated, any exemption from the payment of a tax must be clearly stated in the
language of the law; it cannot be merely implied therefrom.[13] In the case of VAT, Section 109,
Republic Act 8424 clearly enumerates the transactions exempted from VAT. The services
rendered by COMASERCO do not fall within the exemptions.

Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled that
the services rendered by COMASERCO to Philamlife and its affiliates are subject to VAT. As
pointed out by the Commissioner, the performance of all kinds of services for others for a fee,
remuneration or consideration is considered as sale of services subject to VAT. As the
government agency charged with the enforcement of the law, the opinion of the
Commissioner of Internal Revenue, in the absence of any showing that it is plainly wrong, is
entitled to great weight.[14] Also, it has been the long standing policy and practice of this Court
to respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which,
by the nature of its functions, is dedicated exclusively to the study and consideration of tax
cases and has necessarily developed an expertise on the subject, unless there has been an
abuse or improvident exercise of its authority.[15]
There is no merit to respondent's contention that the Court of Appeals' decision in CA-G. R.
No. 34042, declaring the COMASERCO as not engaged in business and not liable for the
payment of fixed and percentage taxes, binds petitioner. The issue in CA-G. R. No. 34042 is
different from the present case, which involves COMASERCO's liability for VAT. As heretofore
stated, every person who sells, barters, or exchanges goods and services, in the course of
trade or business, as defined by law, is subject to VAT. Jksm

WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the Court of
Appeals in CA-G. R. SP No. 37930. The Court hereby REINSTATES the decision of the Court of
Tax Appeals in C. T. A. Case No. 4853.

No costs.

SO ORDERED.

#2

G.R. No. 146984 July 28, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN
GROUP (HK) and NATIONAL DEVELOPMENT COMPANY, respondents.

DECISION

TINGA, J.:

The issue in this present petition is whether the sale by the National Development Company
(NDC) of five (5) of its vessels to the private respondents is subject to value-added tax (VAT)
under the National Internal Revenue Code of 1986 (Tax Code) then prevailing at the time of
the sale. The Court of Tax Appeals (CTA) and the Court of Appeals commonly ruled that the
sale is not subject to VAT. We affirm, though on a more unequivocal rationale than that
utilized by the rulings under review. The fact that the sale was not in the course of the trade or
business of NDC is sufficient in itself to declare the sale as outside the coverage of VAT.

The facts are culled primarily from the ruling of the CTA.

Pursuant to a government program of privatization, NDC decided to sell to private enterprise

all of its shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The
NDC decided to sell in one lot its NMC shares and five (5) of its ships, which are 3,700 DWT
Tween-Decker, "Kloeckner" type vessels.1 The vessels were constructed for the NDC between
1981 and 1984, then initially leased to Luzon Stevedoring Company, also its wholly-owned
subsidiary. Subsequently, the vessels were transferred and leased, on a bareboat basis, to the
NMC.2

The NMC shares and the vessels were offered for public bidding. Among the stipulated terms
and conditions for the public auction was that the winning bidder was to pay "a value added
tax of 10% on the value of the vessels."3 On 3 June 1988, private respondent Magsaysay Lines,
Inc. (Magsaysay Lines) offered to buy the shares and the vessels for P168,000,000.00. The bid
was made by Magsaysay Lines, purportedly for a new company still to be formed composed of
itself, Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong
(collectively, private respondents).4 The bid was approved by the Committee on Privatization,
and a Notice of Award dated 1 July 1988 was issued to Magsaysay Lines.

On 28 September 1988, the implementing Contract of Sale was executed between NDC, on
one hand, and Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. Paragraph
11.02 of the contract stipulated that "[v]alue-added tax, if any, shall be for the account of the
PURCHASER."5 Per arrangement, an irrevocable confirmed Letter of Credit previously filed as
bidders bond was accepted by NDC as security for the payment of VAT, if any. By this time, a
formal request for a ruling on whether or not the sale of the vessels was subject to VAT had
already been filed with the Bureau of Internal Revenue (BIR) by the law firm of Sycip Salazar
Hernandez & Gatmaitan, presumably in behalf of private respondents. Thus, the parties
agreed that should no favorable ruling be received from the BIR, NDC was authorized to draw
on the Letter of Credit upon written demand the amount needed for the payment of the VAT
on the stipulated due date, 20 December 1988.6

In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated
14 December 1988 from the BIR, holding that the sale of the vessels was subject to the 10%
VAT. The ruling cited the fact that NDC was a VAT-registered enterprise, and thus its
"transactions incident to its normal VAT registered activity of leasing out personal property
including sale of its own assets that are movable, tangible objects which are appropriable or
transferable are subject to the 10% [VAT]."7

Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT
Ruling No. 395-88 (dated 18 August 1988), which made a similar ruling on the sale of the same
vessels in response to an inquiry from the Chairman of the Senate Blue Ribbon Committee.
Their motion was denied when the BIR issued VAT Ruling Nos. 007-89 dated 24 February 1989,
reiterating the earlier VAT rulings. At this point, NDC drew on the Letter of Credit to pay for
the VAT, and the amount of P15,120,000.00 in taxes was paid on 16 March 1989.

On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA,
followed by a Supplemental Petition for Review on 14 July 1989. They prayed for the reversal
of VAT Rulings No. 395-88, 568-88 and 007-89, as well as the refund of the VAT payment made
amounting to P15,120,000.00.8 The Commissioner of Internal Revenue (CIR) opposed the
petition, first arguing that private respondents were not the real parties in interest as they
were not the transferors or sellers as contemplated in Sections 99 and 100 of the then Tax
Code. The CIR also squarely defended the VAT rulings holding the sale of the vessels liable for
VAT, especially citing Section 3 of Revenue Regulation No. 5-87 (R.R. No. 5-87), which provided
that "[VAT] is imposed on any sale or transactions ‘deemed sale’ of taxable goods (including
capital goods, irrespective of the date of acquisition)." The CIR argued that the sale of the
vessels were among those transactions "deemed sale," as enumerated in Section 4 of R.R. No.
5-87. It seems that the CIR particularly emphasized Section 4(E)(i) of the Regulation, which
classified "change of ownership of business" as a circumstance that gave rise to a transaction
"deemed sale."

In a Decision dated 27 April 1992, the CTA rejected the CIR’s arguments and granted the
petition.9 The CTA ruled that the sale of a vessel was an "isolated transaction," not done in the
ordinary course of NDC’s business, and was thus not subject to VAT, which under Section 99 of
the Tax Code, was applied only to sales in the course of trade or business. The CTA further
held that the sale of the vessels could not be "deemed sale," and thus subject to VAT, as the
transaction did not fall under the enumeration of transactions deemed sale as listed either in
Section 100(b) of the Tax Code, or Section 4 of R.R. No. 5-87. Finally, the CTA ruled that any
case of doubt should be resolved in favor of private respondents since Section 99 of the Tax
Code which implemented VAT is not an exemption provision, but a classification provision
which warranted the resolution of doubts in favor of the taxpayer.

The CIR appealed the CTA Decision to the Court of Appeals,10 which on 11 March 1997,
rendered a Decision reversing the CTA.11 While the appellate court agreed that the sale was an
isolated transaction, not made in the course of NDC’s regular trade or business, it nonetheless
found that the transaction fell within the classification of those "deemed sale" under R.R. No.
5-87, since the sale of the vessels together with the NMC shares brought about a change of
ownership in NMC. The Court of Appeals also applied the principle governing tax exemptions
that such should be strictly construed against the taxpayer, and liberally in favor of the
government.12

However, the Court of Appeals reversed itself upon reconsidering the case, through a
Resolution dated 5 February 2001.13 This time, the appellate court ruled that the "change of
ownership of business" as contemplated in R.R. No. 5-87 must be a consequence of the
"retirement from or cessation of business" by the owner of the goods, as provided for in
Section 100 of the Tax Code. The Court of Appeals also agreed with the CTA that the
classification of transactions "deemed sale" was a classification statute, and not an exemption
statute, thus warranting the resolution of any doubt in favor of the taxpayer.14

To the mind of the Court, the arguments raised in the present petition have already been
adequately discussed and refuted in the rulings assailed before us. Evidently, the petition
should be denied. Yet the Court finds that Section 99 of the Tax Code is sufficient reason for
upholding the refund of VAT payments, and the subsequent disquisitions by the lower courts
on the applicability of Section 100 of the Tax Code and Section 4 of R.R. No. 5-87 are ultimately
irrelevant.

A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on
consumption, even though it is assessed on many levels of transactions on the basis of a fixed
percentage.15 It is the end user of consumer goods or services which ultimately shoulders the
tax, as the liability therefrom is passed on to the end users by the providers of these goods or
services16 who in turn may credit their own VAT liability (or input VAT) from the VAT payments
they receive from the final consumer (or output VAT).17 The final purchase by the end
consumer represents the final link in a production chain that itself involves several
transactions and several acts of consumption. The VAT system assures fiscal adequacy through
the collection of taxes on every level of consumption,18 yet assuages the manufacturers or
providers of goods and services by enabling them to pass on their respective VAT liabilities to
the next link of the chain until finally the end consumer shoulders the entire tax liability.

Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct
relevance to the taxpayer’s role or link in the production chain. Hence, as affirmed by Section
99 of the Tax Code and its subsequent incarnations,19 the tax is levied only on the sale, barter
or exchange of goods or services by persons who engage in such activities, in the course of
trade or business. These transactions outside the course of trade or business may invariably
contribute to the production chain, but they do so only as a matter of accident or incident. As
the sales of goods or services do not occur within the course of trade or business, the
providers of such goods or services would hardly, if at all, have the opportunity to
appropriately credit any VAT liability as against their own accumulated VAT collections since
the accumulation of output VAT arises in the first place only through the ordinary course of
trade or business.
That the sale of the vessels was not in the ordinary course of trade or business of NDC was
appreciated by both the CTA and the Court of Appeals, the latter doing so even in its first
decision which it eventually reconsidered.20 We cite with approval the CTA’s explanation on
this point:

In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97
Phil. 992), the term "carrying on business" does not mean the performance of a single
disconnected act, but means conducting, prosecuting and continuing business by
performing progressively all the acts normally incident thereof; while "doing business"
conveys the idea of business being done, not from time to time, but all the time. [J.
Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9
(1988)]. "Course of business" is what is usually done in the management of trade or
business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words &
Phrases, Vol. 10, (1984)].

What is clear therefore, based on the aforecited jurisprudence, is that "course of

business" or "doing business" connotes regularity of activity. In the instant case, the sale
was an isolated transaction. The sale which was involuntary and made pursuant to the
declared policy of Government for privatization could no longer be repeated or carried
on with regularity. It should be emphasized that the normal VAT-registered activity of
NDC is leasing personal property.21

This finding is confirmed by the Revised Charter22 of the NDC which bears no indication that
the NDC was created for the primary purpose of selling real property.23

The conclusion that the sale was not in the course of trade or business, which the CIR does not
dispute before this Court,24 should have definitively settled the matter. Any sale, barter or
exchange of goods or services not in the course of trade or business is not subject to VAT.

Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now
relied upon by the CIR, is captioned "Value-added tax on sale of goods," and it expressly states
that "[t]here shall be levied, assessed and collected on every sale, barter or exchange of goods,
a value added tax x x x." Section 100 should be read in light of Section 99, which lays down the
general rule on which persons are liable for VAT in the first place and on what transaction if at
all. It may even be noted that Section 99 is the very first provision in Title IV of the Tax Code,
the Title that covers VAT in the law. Before any portion of Section 100, or the rest of the law
for that matter, may be applied in order to subject a transaction to VAT, it must first be
satisfied that the taxpayer and transaction involved is liable for VAT in the first place under
Section 99.

It would have been a different matter if Section 100 purported to define the phrase "in the
course of trade or business" as expressed in Section 99. If that were so, reference to Section
100 would have been necessary as a means of ascertaining whether the sale of the vessels was
"in the course of trade or business," and thus subject to

VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate
on is not the meaning of "in the course of trade or business," but instead the identification of
the transactions which may be deemed as sale. It would become necessary to ascertain
whether under those two provisions the transaction may be deemed a sale, only if it is settled
that the transaction occurred in the course of trade or business in the first place. If the
transaction transpired outside the course of trade or business, it would be irrelevant for the
purpose of determining VAT liability whether the transaction may be deemed sale, since it
anyway is not subject to VAT.

Accordingly, the Court rules that given the undisputed finding that the transaction in question
was not made in the course of trade or business of the seller, NDC that is, the sale is not
subject to VAT pursuant to Section 99 of the Tax Code, no matter how the said sale may hew
to those transactions deemed sale as defined under Section 100.

In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this
case, the Court finds the discussions offered on this point by the CTA and the Court of Appeals
(in its subsequent Resolution) essentially correct. Section 4 (E)(i) of R.R. No. 5-87 does classify
as among the transactions deemed sale those involving "change of ownership of business."
However, Section 4(E) of R.R. No. 5-87, reflecting Section 100 of the Tax Code, clarifies that
such "change of ownership" is only an attending circumstance to "retirement from or
cessation of business[, ] with respect to all goods on hand [as] of the date of such retirement
or cessation."25 Indeed, Section 4(E) of R.R. No. 5-87 expressly characterizes the "change of
ownership of business" as only a "circumstance" that attends those transactions "deemed
sale," which are otherwise stated in the same section.26

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.

#3

G.R. No. 178697 November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SONY PHILIPPINES, INC., Respondent.

DECISION

MENDOZA, J.:

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 the CTA-First Division2 which, in turn, partially
granted the petition for review of respondent Sony Philippines, 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
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

THE FACTS:

On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA
19734) authorizing certain revenue officers to examine Sony’s books of accounts and other
accounting records regarding revenue taxes for "the period 1997 and unverified prior
years." On December 6, 1999, a preliminary assessment for 1997 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 the deficiency taxes and penalties for late remittance of internal
revenue taxes are as follows:

DEFICIENCY VALUE -ADDED TAX (VAT)

(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due P 7,958,700.00
Add: Penalties
Interest up to 3-31-2000 P 3,157,314.41
Compromise 25,000.00 3,182,314.41
Deficiency VAT Due P 11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING

TAX (EWT)
(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due P 1,416,976.90
Add: Penalties
Interest up to 3-31-2000 P 550,485.82
Compromise 25,000.00 575,485.82
Deficiency EWT Due P 1,992,462.72

DEFICIENCY OF VAT ON ROYALTY

PAYMENTS
(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 359,177.80
Interest up to 3-31-2000 87,580.34
Compromise 16,000.00 462,758.14
Penalties Due P 462,758.14

LATE REMITTANCE OF FINAL

WITHHOLDING TAX
(Assessment No. ST-LR2-97-0127-2000)
Basic Tax Due P
Add: Penalties
 Surcharge P 1,729,690.71
Interest up to 3-31-2000 508,783.07
Compromise 50,000.00 2,288,473.78
Penalties Due P 2,288,473.78

LATE REMITTANCE OF INCOME

PAYMENTS
(Assessment No. ST-LR3-97-0128-2000)
Basic Tax Due P
Add: Penalties
25 % Surcharge P 8,865.34
Interest up to 3-31-2000 58.29
Compromise 2,000.00 10,923.60
Penalties Due P 10,923.60

GRAND TOTAL P 15,895,632.655

Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2,

2000. Sony submitted relevant documents in support of its protest on the 16th of that same
month.6

On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said
supporting documents to the CIR, Sony filed a petition for review before the CTA.7

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 EWT, the CTA-First Division maintained the deficiency
EWT assessment on Sony’s motor vehicles and on 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 19734. Except for the compromise penalties, the
CTA-First Division also upheld the penalties for the late 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
petition by cancelling the deficiency VAT assessment but upheld a modified deficiency EWT
assessment as well as the penalties. Thus, the dispositive portion reads:

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 assessments for expanded withholding tax and penalties for
late remittance of internal revenue taxes are UPHELD.

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:

1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioner's Branches 8,923.63
Total P 1,269,593.90

Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section
249(C)(3) of the 1997 Tax Code.

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 deficiency VAT in the amount of ₱11,141,014.41;

B. The Honorable court committed reversible error in holding that the commission
expense in the amount of P2,894,797.00 should be subjected to 5% withholding tax
instead of the 10% tax rate;

C. The Honorable Court committed a reversible error in holding that the withholding tax
assessment with respect to the 5% withholding tax on rental deposit in the amount of
₱10,523,821.99 should be cancelled; and

D. The Honorable Court committed reversible error in holding that the remittance of
final withholding 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 petition for review with the CTA-EB raising
identical issues:

1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of
P11,141,014.41;

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;

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

4. Whether or not the remittance of final withholding tax on royalties covering the
period January to March 1998 was filed outside of time.11
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.

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:

GROUNDS FOR THE ALLOWANCE OF THE PETITION

THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR DEFICIENCY VAT
IN THE AMOUNT OF PHP11,141,014.41.

II

AS TO RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF

PHP1,992,462.72:

A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN THE
AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A WITHHOLDING TAX
OF 5% INSTEAD OF THE 10% TAX RATE.

B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH RESPECT
TO THE 5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE AMOUNT OF
PHP10,523,821.99 IS NOT PROPER.

III

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

Upon filing of Sony’s comment, the Court ordered the CIR to file its reply thereto. The CIR
subsequently filed a 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

The Court finds no merit in the petition.

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.

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 examine the books of account and other accounting records of
a taxpayer for the purpose of collecting the 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.

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional

Requirements for Tax Administration and Enforcement. –
(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 shall not prevent the
Commissioner from authorizing the examination of any taxpayer. x x x [Emphases supplied]

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.

As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said
reason, the CIR acting 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 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 1998, it should have done so by including it in the LOA or issuing another LOA.

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 pertinent portion of which reads:

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 than one taxable period, the other periods or years shall
be specifically indicated in the L/A.16 [Emphasis supplied]

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 advertising expense. As a result, Sony is not entitled to a tax credit. At
most, the CIR continues, the said advertising expense should be for the account of SIS, and not
Sony.17

The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the
CTA-EB, Sony’s deficiency VAT assessment stemmed from the CIR’s disallowance of the input
VAT credits that should have been realized from the advertising expense of the latter.18 It is
evident under Section 11019 of the 1997 Tax Code that an advertising expense duly covered by
a VAT invoice is a legitimate business expense. This is confirmed by no less than CIR’s own
witness, Revenue Officer Antonio Aluquin.20 There is also no denying that Sony incurred
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 money came from is another matter all together but will
definitely not change said fact.

The CIR further argues that Sony itself admitted that the reimbursement from SIS was income
and, thus, taxable. In support of this, the CIR cited a portion of Sony’s protest filed before it:
The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a
subsidy equivalent 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 subject to VAT on the subsidy income
as this was not derived from the sale of goods or services.22

Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject
to income tax, the Court agrees. However, the Court does not agree that the same subsidy
should be subject to the 10% VAT. To begin with, the said subsidy termed by the CIR as
reimbursement was not even exclusively earmarked for Sony’s 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."

Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:

SEC. 106. Value-added Tax on Sale of Goods or Properties. –

(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale, barter
or exchange of goods or properties, 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 transferor.

Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be
levied. Certainly, 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 not in payment for goods or properties sold, bartered or
exchanged by Sony.

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, however, is not applicable to the present case. In that case,
COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the former
reimbursement-on-cost which means that it was paid the cost or expense that it incurred
although without profit. This is not true in the present case. Sony did not render any service to
SIS at all. The services rendered by the advertising companies, paid for by Sony using SIS dole-
out, were for Sony and not SIS. SIS just gave assistance to Sony in the amount equivalent to
the latter’s advertising expense but never received any goods, properties or service from Sony.

Regarding the deficiency EWT assessment, more particularly Sony’s commission expense, the
CIR insists that said deficiency EWT assessment is subject to the ten percent (10%) rate instead
of the five percent (5%) citing Revenue Regulation No. 2-98 dated April 17, 1998.24 The said
revenue regulation provides that the 10% rate is applied when the recipient of the commission
income is a natural person. According to the CIR, Sony’s schedule of Selling, General and
Administrative expenses shows the commission expense as "commission/dealer salesman
incentive," emphasizing the word salesman.

On the other hand, the application of the five percent (5%) rate by the CTA-First Division is
based on Section 1(g) of Revenue Regulations No. 6-85 which provides:

(g) Amounts paid to certain Brokers and Agents. – On gross payments to customs, insurance,
real estate and commercial brokers and agents of professional entertainers – five per centum
(5%).25
In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First
Division, held:

x x x, commission expense is indeed subject to 10% withholding tax but payments made to
broker is subject to 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 captioned as "commission/dealer
salesman incentive" the same does not justify the automatic imposition of flat 10% rate. As
itemized by petitioner, such expense is composed of "Commission Expense" in the amount of
P10,200.00 and ‘Broker Dealer’ of P2,894,797.00.26

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 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, 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%.

The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the
deficiency EWT 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 LOA specifying the coverage, the CIR’s
deficiency EWT assessment from January to March 1998, is not valid and must be disallowed.

Finally, the Court now proceeds to the third ground relied upon by the CIR.

The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on
royalties (i) as of December 1997; and (ii) for the period from January to March 1998. Again,
the Court agrees with the CTA-First Division when it upheld the CIR with respect to the
royalties for December 1997 but cancelled that from January to March 1998.

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 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 Sony and Sony-Japan, particularly in the
payment of royalties.

The above revenue regulations provide the manner of withholding remittance as well as the
payment of final tax on royalty. Based on the same, Sony is required to deduct and withhold
final taxes on royalty payments when 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?

Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty
payments were agreed upon:

(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 MODELS sold, leased or otherwise disposed of by the
LICENSEE during such respective semi-annual period and amount of royalty due pursuant this
ARTICLE X therefore, and the LICENSEE shall pay the royalty hereunder to the LICENSOR
concurrently with the furnishing of the above statement.30

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 December 1997 as well as by the end of June 1998.
Given this, the FWTs should have been paid or remitted by Sony to the CIR on January 10,
1998 and July 10, 1998. Thus, it was correct for the CTA-First Division and the CTA-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 royalty may be payable until August 1998 pursuant to the MLA, the FWT
for said royalty had to be paid on or 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.

In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.

WHEREFORE, the petition is DENIED.

SO ORDERED.

#4

G.R. No. 193301 March 11, 2013

MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 194637

MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CARPIO, J.:

G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on 10 March
2010 as well as the Resolution3 promulgated on 28 July 2010 by the Court of Tax Appeals En
Banc (CTA En Banc) in CTA EB No. 513. The CTA En Banc affirmed the 22 September 2008
Decision4 as well as the 26 June 2009 Amended Decision5 of the First Division of the Court of
Tax Appeals (CTA First Division) in CTA Case Nos. 7227, 7287, and 7317. The CTA First Division
denied Mindanao II Geothermal Partnership’s (Mindanao II) claims for refund or tax credit for
the first and second quarters of taxable year 2003 for being filed out of time (CTA Case Nos.
7227 and 7287). The CTA First Division, however, ordered the
Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II unutilized input
value-added tax (VAT) for the third and fourth quarters of taxable year 2003 (CTA Case No.
7317).

G.R. No. 194637 is a petition for review6 assailing the Decision7 promulgated on 31 May 2010
as well as the Amended Decision8 promulgated on 24 November 2010 by the CTA En Banc in
CTA EB Nos. 476 and 483. In its Amended Decision, the CTA En Banc reversed its 31 May 2010
Decision and granted the CIR’s petition for review in CTA Case No. 476. The CTA En Banc
denied Mindanao I Geothermal Partnership’s (Mindanao I) claims for refund or tax credit for
the first (CTA Case No. 7228), second (CTA Case No. 7286), third, and fourth quarters (CTA
Case No. 7318) of 2003.

Both Mindanao I and II are partnerships registered with the Securities and Exchange
Commission, value added taxpayers registered with the Bureau of Internal Revenue (BIR), and
Block Power Production Facilities accredited by the Department of Energy. Republic Act No.
9136, or the Electric Power Industry Reform Act of 2000 (EPIRA), effectively amended Republic
Act No. 8424, or the Tax Reform Act of 1997 (1997 Tax Code),9 when it decreed that sales of
power by generation companies shall be subjected to a zero rate of VAT.10 Pursuant to EPIRA,
Mindanao I and II filed with the CIR claims for refund or tax credit of accumulated unutilized
and/or excess input taxes due to VAT zero-rated sales in 2003. Mindanao I and II filed their
claims in 2005.

G.R. No. 193301

Mindanao II v. CIR

The Facts

G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227, 7287, and 7317,
which were consolidated as CTA EB No. 513. CTA Case Nos. 7227, 7287, and 7317 claim a tax
refund or credit of Mindanao II’s alleged excess or unutilized input taxes due to VAT zero-rated
sales. In CTA Case No. 7227, Mindanao II claims a tax refund or credit of ₱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 tax
refund or credit of ₱3,521,129.50 for the third and fourth quarters of 2003.

The CTA First Division’s narration of the pertinent facts is as follows:

xxxx

On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-Transfer (BOT)
contract with the Philippine National Oil Corporation – Energy Development Company (PNOC-
EDC) for finance, engineering, supply, installation, testing, commissioning, operation, and
maintenance of a 48.25 megawatt geothermal power plant, provided that PNOC-EDC shall
supply and deliver steam to Mindanao II at no cost. In turn, Mindanao II shall convert the
steam into electric capacity and energy for PNOC-EDC and shall deliver the same to the
National Power Corporation (NPC) for and in behalf of PNOC-EDC. Mindanao II alleges that its
sale of generated power and delivery of electric capacity and energy of Mindanao II to NPC for
and in behalf of PNOC-EDC is its only revenue-generating activity which is in the ambit of VAT
zero-rated sales under the EPIRA Law, x x x.

xxxx
Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable to sales of
generated power by generation companies from ten (10%) percent to zero (0%) percent.

In the course of its operation, Mindanao II makes domestic purchases of goods and services
and accumulates therefrom creditable input taxes. Pursuant to the provisions of the National
Internal Revenue Code (NIRC), Mindanao II alleges that it can use its accumulated input tax
credits to offset its output tax liability. Considering, however that its only revenue-generating
activity is VAT zero-rated under RA No. 9136, Mindanao II’s input tax credits remain unutilized.

Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II adopted the VAT zero-
rating of the EPIRA in computing for its VAT payable when it filed its Quarterly VAT Returns on
the following dates:

CTA Case No. Period Covered Date of Filing

(2003)
Original Amended
Return Return
7227 1st Quarter April 23, 2003 July 3, 2002
(sic),
April 1, 2004 &
October 22,
2004
7287 2nd Quarter July 22, 2003 April 1, 2004
7317 3rd Quarter Oct. 27, 2003 April 1, 2004
7317 4th Quarter Jan. 26, 2004 April 1, 2204

Considering that it has accumulated unutilized creditable input taxes from its only income-
generating activity, Mindanao II filed an application for refund and/or issuance of tax credit
certificate with the BIR’s Revenue District Office at Kidapawan City on April 13, 2005 for the
four quarters of 2003.

To date (September 22, 2008), the application for refund by Mindanao II remains unacted
upon by the CIR. Hence, these three petitions filed on April 22, 2005 covering the 1st quarter
of 2003; July 7, 2005 for the 2nd quarter of 2003; and September 9, 2005 for the 3rd and 4th
quarters of 2003. At the instance of Mindanao II, these petitions were consolidated on March
15, 2006 as they involve the same parties and the same subject matter. The only difference
lies with the taxable periods involved in each petition.11

The Court of Tax Appeals’ Ruling: Division

In its 22 September 2008 Decision,12 the CTA First Division found that Mindanao II satisfied the
twin requirements for VAT zero rating under EPIRA: (1) it is a generation company, and (2) it
derived sales from power generation. The CTA First Division also stated that Mindanao II
complied with five requirements to be entitled to a refund:

1. There must be zero-rated or effectively zero-rated sales;

2. That input taxes were incurred or paid;

 3. That such input VAT payments are directly attributable to zero-rated sales or
effectively zero-rated sales;

4. That the input VAT payments were not applied against any output VAT liability; and

5. That the claim for refund was filed within the two-year prescriptive period.13

With respect to the fifth requirement, the CTA First Division tabulated the dates of filing of
Mindanao II’s return 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 prescriptive
period for filing a VAT refund claim should not be counted from the close of the quarter but
from the date of the filing of the VAT return. As ruled in Atlas, VAT liability or entitlement to a
refund can only be determined upon the filing of the quarterly VAT return.

CTA Period Date Filing

Case Covered
Original Amended Administrative Judicial
No. (2003)
Return Return Return Claim
7227 1st 23 April 1 April 13 April 2005 22 April
Quarter 2003 2004 2005
7287 2nd 22 July 1 April 13 April 2005 7 July
Quarter 2003 2004 2005
7317 3rd 25 Oct. 1 April 13 April 2005 9 Sept.
Quarter 2003 2004 2005
7317 4th 26 Jan. 1 April 13 April 2005 9 Sept.
Quarter 2004 2004 200515

Thus, counting from 23 April 2003, 22 July 2003, 25 October 2003, and 26 January 2004, when
Mindanao II filed its VAT returns, its administrative claim filed on 13 April 2005 and judicial
claims filed on 22 April 2005, 7 July 2005, and 9 September 2005 were timely filed in
accordance with Atlas.

The CTA First Division found that Mindanao II is entitled to a refund in the modified amount of
₱7,703,957.79, after disallowing ₱522,059.91 from input VAT16 and deducting ₱18,181.82
from Mindanao II’s sale of a fully depreciated ₱200,000.00 Nissan Patrol. The input taxes
amounting to ₱522,059.91 were disallowed for failure to meet invoicing requirements, while
the input VAT on the sale of the Nissan Patrol was reduced by ₱18,181.82 because the output
VAT for the sale was not included in the VAT declarations.

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 REFUND or to ISSUE A TAX CREDIT CERTIFICATE in the modified amount of
SEVEN MILLION SEVEN HUNDRED THREE THOUSAND NINE HUNDRED FIFTY SEVEN AND 79/100
PESOS (₱7,703,957.79) representing its unutilized input VAT for the four (4) quarters of the
taxable year 2003.

SO ORDERED.17
Mindanao II filed a motion for partial reconsideration.18 It stated that the sale of the fully
depreciated Nissan Patrol is a one-time transaction and is not incidental to its VAT zero-rated
operations. Moreover, the disallowed input taxes substantially complied with the
requirements for refund or tax credit.

The CIR also filed a motion for partial reconsideration. It argued that the judicial claims for the
first and second quarters of 2003 were filed beyond the period allowed by law, as stated in
Section 112(A) of the 1997 Tax Code. The CIR further stated that Section 229 is a general
provision, and governs cases not covered by Section 112(A). The CIR countered the CTA First
Division’s 22 September 2008 decision by citing this Court’s ruling in Commisioner of Internal
Revenue v. Mirant Pagbilao Corporation (Mirant),19 which stated that unutilized input VAT
payments must be claimed within two years reckoned from the close of the taxable quarter
when the relevant sales were made regardless of whether said tax was paid.

The CTA First Division denied Mindanao II’s motion for partial reconsideration, found the CIR’s
motion for partial reconsideration partly meritorious, and rendered an Amended Decision20 on
26 June 2009. The CTA First Division stated that the claim for refund or credit with the BIR and
the subsequent appeal to the CTA must be filed within the two-year period prescribed under
Section 229. The two-year prescriptive period in Section 229 was denominated as a mandatory
statute of limitations. Therefore, Mindanao II’s claims for refund for the first and second
quarters of 2003 had already prescribed.

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.

The CTA First Division modified its 22 September 2008 Decision to read as follows:

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is
hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE to Mindanao II
Geothermal Partnership in the modified amount of TWO MILLION NINE HUNDRED EIGHTY
THOUSAND EIGHT HUNDRED EIGHTY SEVEN AND 77/100 PESOS (₱2,980,887.77) representing
its unutilized input VAT for the third and fourth quarters of the taxable year 2003.

SO ORDERED.21

Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513, before the CTA En Banc.

The Court of Tax Appeals’ Ruling: En Banc

On 10 March 2010, the CTA En Banc rendered its Decision23 in CTA EB No. 513 and denied
Mindanao II’s petition. The CTA En Banc ruled that (1) Section 112(A) clearly provides that the
reckoning of the two-year prescriptive period for filing the application for refund or credit of
input VAT attributable to zero-rated sales or effectively zero-rated sales shall be counted from
the close of the taxable quarter when the sales were made; (2) the Atlas and Mirant cases
applied different tax codes: Atlas applied the 1977 Tax Code while Mirant applied the 1997 Tax
Code; (3) the sale of the fully-depreciated Nissan Patrol is incidental to Mindanao II’s VAT zero-
rated transactions pursuant to Section 105; (4) Mindanao II failed to comply with the
substantiation requirements provided under Section 113(A) in relation to Section 237 of the
1997 Tax Code as implemented by Section 4.104-1, 4.104-5, and 4.108-1 of Revenue
Regulation No. 7-95; and (5) the doctrine of strictissimi juris on tax exemptions cannot be
relaxed in the present case.

The dispositive portion of the CTA En Banc’s 10 March 2010 Decision reads:

WHEREFORE, on the basis of the foregoing considerations, the Petition for Review en banc is
DISMISSED for lack of merit. Accordingly, the Decision dated September 22, 2008 and the
Amended Decision dated June 26, 2009 issued by the First Division are AFFIRMED.

SO ORDERED.24

The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack of merit Mindanao II’s
Motion for Reconsideration.26 The CTA En Banc highlighted the following bases of their
previous ruling:

1. The Supreme Court has long decided that the claim for refund of unutilized input VAT
must be filed within two (2) years after the close of the taxable quarter when such sales
were made.

2. The Supreme Court is the ultimate arbiter whose decisions all other courts should
take bearings.

3. The words of the law are clear, plain, and free from ambiguity; hence, it must be
given its literal meaning and applied without any interpretation.27

G.R. No. 194637

Mindanao I v. CIR

The Facts

G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case Nos. 476 and 483.
Both CTA EB cases consolidate three cases from the CTA Second Division: CTA Case Nos. 7228,
7286, and 7318. CTA Case Nos. 7228, 7286, and 7318 claim a tax refund or credit of Mindanao
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
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 I is similarly situated as Mindanao II. The CTA Second Division’s narration of the
pertinent facts is as follows:

xxxx

In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer (BOT) with

the Philippine National Oil Corporation – Energy Development Corporation (PNOC-EDC) for the
finance, design, construction, testing, commissioning, operation, maintenance and repair of a
47-megawatt geothermal power plant. Under the said BOT contract, PNOC-EDC shall supply
and deliver steam to Mindanao I at no cost. In turn, Mindanao I will convert the steam into
electric capacity and energy for PNOC-EDC and shall subsequently supply and deliver the same
to the National Power Corporation (NPC), for and in behalf of PNOC-EDC.
Mindanao 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 Certificate of Accreditation No. 95-037 was issued.

On June 26, 2001, Republic Act (R.A.) No. 9136 took effect, and the relevant provisions of the
National Internal Revenue Code (NIRC) of 1997 were deemed modified. R.A. No. 9136, also
known as the "Electric Power Industry Reform Act of 2001 (EPIRA), was enacted by Congress to
ordain reforms in the electric power industry, highlighting, among others, the importance of
ensuring the reliability, security and affordability of the supply of electric power to end users.
Under the provisions of this Republic Act and its implementing rules and regulations, the
delivery and supply of electric energy by generation companies became VAT zero-rated, which
previously were subject to ten percent (10%) VAT.

xxxx

The amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated
power by generation companies from ten (10%) percent to zero percent (0%). Thus, Mindanao
I adopted the VAT zero-rating of the EPIRA in computing for its VAT payable when it filed its
VAT Returns, on the belief that its sales qualify for VAT zero-rating.

Mindanao I reported its unutilized or excess creditable input taxes in its Quarterly VAT Returns
for the first, second, third, and fourth quarters of taxable year 2003, which were subsequently
amended and filed with the BIR.

On April 4, 2005, Mindanao I filed with the BIR separate administrative claims for the issuance
of tax credit certificate on its alleged unutilized or excess input taxes for taxable year 2003, in
the accumulated amount of ₱14,185, 294.80.

Alleging inaction on the part of CIR, Mindanao I elevated its claims before this Court on April
22, 2005, July 7, 2005, and September 9, 2005 docketed as CTA Case Nos. 7228, 7286, and
7318, respectively. However, on October 10, 2005, Mindanao I received a copy of the letter
dated September 30, 2003 (sic) of the BIR denying its application for tax credit/refund.28

The Court of Tax Appeals’ Ruling: Division

On 24 October 2008, the CTA Second Division rendered its 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 of substantiated excess input VAT because a portion
was not reported in its quarterly VAT returns; (2) out of the ₱14,185,294.80 excess input VAT
applied for refund, only ₱11,657,447.14 can be considered substantiated excess input VAT due
to disallowances by the Independent Certified Public Accountant, adjustment on the
disallowances per the CTA Second Division’s further verification, and additional disallowances
per the CTA Second Division’s further verification;

(3) Mindanao I’s accumulated excess input VAT for the second quarter of 2003 that was
carried over to the third quarter of 2003 is net of the claimed input VAT for the first quarter of
2003, and the same procedure was done for the second, third, and fourth quarters of 2003;
and (4) Mindanao I’s administrative claims were filed within the two-year prescriptive period
reckoned from the respective dates of filing of the quarterly VAT returns.

The dispositive portion of the CTA Second Division’s 24 October 2008 Decision reads:
WHEREFORE, premises considered, the consolidated Petitions for Review are hereby
PARTIALLY GRANTED. Accordingly, the CIR is hereby ORDERED TO ISSUE A TAX CREDIT
CERTIFICATE in favor of Mindanao I in the reduced amount of TEN MILLION FIVE HUNDRED
TWENTY THREE THOUSAND ONE HUNDRED SEVENTY SEVEN PESOS AND 53/100
(₱10,523,177.53) representing Mindanao I’s unutilized input VAT for the four quarters of the
taxable year 2003.

SO ORDERED.30

Mindanao I filed a motion for partial reconsideration with motion for Clarification31 on 11
November 2008. It 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 creditable taxes in Section 112(A)
applies only when the creditable input taxes due cannot be directly and entirely attributed to
any of the zero-rated or effectively zero-rated sales. Mindanao I claims that its unreported
collection is directly attributable to its VAT zero-rated sales. The CTA Second Division denied
Mindanao I’s motion and maintained the proportionate allocation because there was a portion
of the gross receipts that was undeclared in Mindanao I’s gross receipts.

The CIR also filed a motion for partial reconsideration32 on 11 November 2008. It claimed that
Mindanao I failed to exhaust administrative remedies before it filed its petition for review. The
CTA Second Division denied the CIR’s motion, and cited Atlas33 as the basis for ruling that it is
more practical and reasonable to count the two-year prescriptive period for filing a claim for
refund or credit of input VAT on zero-rated sales from the date of filing of the return and
payment of the tax due.

The dispositive portion of the CTA Second Division’s 10 March 2009 Resolution reads:

WHEREFORE, premises considered, the CIR’s Motion for Partial Reconsideration and Mindanao
I’s Motion for Partial Reconsideration with Motion for Clarification are hereby DENIED for lack
of merit.

SO ORDERED.34

The Ruling of the Court of Tax Appeals: En Banc

On 31 May 2010, the CTA En Banc rendered its Decision35 in CTA EB Case Nos. 476 and 483 and
denied the petitions filed by the CIR and Mindanao I. The CTA En Banc found no new matters
which have not yet been considered and passed upon by the CTA Second Division in its
assailed decision and resolution.

The dispositive portion of the CTA En Banc’s 31 May 2010 Decision reads:

WHEREFORE, premises considered, the Petitions for Review are hereby DISMISSED for lack of
merit. Accordingly, the October 24, 2008 Decision and March 10, 2009 Resolution of the CTA
Former Second Division in CTA Case Nos. 7228, 7286, and 7318, entitled "Mindanao I
Geothermal Partnership vs. Commissioner of Internal Revenue" are hereby AFFIRMED in toto.

SO ORDERED.36

Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En 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 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 before the CTA En
Banc can act on Mindanao I’s claim. The CTA En Banc reconsidered its 31 May 2010 Decision in
light of this Court’s ruling in Commissioner of Internal Revenue v. Aichi Forging Company of
Asia, Inc. (Aichi).38

The pertinent portions of the CTA En Banc’s 24 November 2010 Amended Decision read:

C.T.A. Case No. 7228:

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for
the First Quarter of 2003. Pursuant to Section 112(A) of the NIRC of 1997, as amended,
Mindanao I has two years from March 31, 2003 or until March 31, 2005 within which to
file its administrative claim for refund;

(2) On April 4, 2005, Mindanao I applied for an administrative claim for refund of
unutilized input VAT for the first quarter of taxable year 2003 with the BIR, which is
beyond the two-year prescriptive period mentioned above.

C.T.A. Case No. 7286:

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for
the second quarter of 2003. Pursuant to

Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from June
30, 2003, within which to file its administrative claim for refund for the second quarter
of 2003, or until June 30, 2005;

(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized
input VAT for the second quarter of taxable year 2003 with the BIR, which is within the
two-year prescriptive period, provided under Section 112 (A) of the NIRC of 1997, as
amended;

(3) The CIR has 120 days from April 4, 2005 (presumably the date Mindanao I submitted
the supporting documents together with the application for refund) or until August 2,
2005, to decide the administrative claim for refund;

(4) Within 30 days from the lapse of the 120-day period or from August 3, 2005 to
September 1, 2005, Mindanao I should have elevated its claim for refund to the CTA in
Division;

(5) However, on July 7, 2005, Mindanao I filed its Petition for Review with this Court,
docketed as CTA Case No. 7286, even before the 120-day period for the CIR to decide
the claim for refund had lapsed on August 2, 2005. The Petition for Review was,
therefore, prematurely filed and there was failure to exhaust administrative remedies;

xxxx

C.T.A. Case No. 7318:

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for
the third and fourth quarters of 2003. Pursuant to Section 112(A) of the NIRC of 1997, as
 amended, Mindanao I therefore, has two years from September 30, 2003 and December
31, 2003, or until September 30, 2005 and December 31, 2005, respectively, within
which to file its administrative claim for the third and fourth quarters of 2003;

(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized
input VAT for the third and fourth quarters of taxable year 2003 with the BIR, which is
well within the two-year prescriptive period, provided under Section 112(A) of the NIRC
of 1997, as amended;

(3) From April 4, 2005, which is also presumably the date Mindanao I submitted
supporting documents, together with the aforesaid application for refund, the CIR has
120 days or until August 2, 2005, to decide the claim;

(4) Within thirty (30) days from the lapse of the 120-day period or from August 3, 2005
until September 1, 2005 Mindanao I should have elevated its claim for refund to the
CTA;

(5) However, Mindanao I filed its Petition for Review with the CTA in Division only on
September 9, 2005, which is 8 days beyond the 30-day period to appeal to the CTA.

Evidently, the Petition for Review was filed way beyond the 30-day prescribed period. Thus,
the Petition for Review should have been dismissed for being filed late.

In recapitulation:

(1) C.T.A. Case No. 7228

Claim for the first quarter of 2003 had already prescribed for having been filed beyond
the two-year prescriptive period;

(2) C.T.A. Case No. 7286

Claim for the second quarter of 2003 should be dismissed for Mindanao I’s failure to
comply with a condition precedent when it failed to exhaust administrative remedies by
filing its Petition for Review even before the lapse of the 120-day period for the CIR to
decide the administrative claim;

(3) C.T.A. Case No. 7318

Petition for Review was filed beyond the 30-day prescribed period to appeal to the CTA.

xxxx

IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenue’s Motion for

Reconsideration is hereby GRANTED; Mindanao I’s Motion for Partial Reconsideration is
hereby DENIED for lack of merit.

The May 31, 2010 Decision of this Court En Banc is hereby REVERSED.

Accordingly, the Petition for Review of the Commissioner of Internal Revenue in CTA EB No.
476 is hereby GRANTED and the entire claim of Mindanao I Geothermal Partnership for the
first, second, third and fourth quarters of 2003 is hereby DENIED.
SO ORDERED.39

The Issues

G.R. No. 193301

Mindanao II v. CIR
Mindanao II raised the following grounds in its Petition for Review:

I. The Honorable Court of Tax Appeals erred in holding that the claim of Mindanao II for
the 1st and 2nd quarters of year 2003 has already prescribed pursuant to the Mirant
case.

A. The Atlas case and Mirant case have conflicting interpretations of the law as to
the reckoning date of the two year prescriptive period for filing claims for VAT
refund.

B. The Atlas case was not and cannot be superseded by the Mirant case in light of
Section 4(3), Article VIII of the 1987 Constitution.

C. The ruling of the Mirant case, which uses the close of the taxable quarter when
the sales were made as the reckoning date in counting the two-year prescriptive
period cannot be applied retroactively in the case of Mindanao II.

II. The Honorable Court of Tax Appeals erred in interpreting Section 105 of the 1997 Tax
Code, as amended in that the sale of the fully depreciated Nissan Patrol is a one-time
transaction and is not incidental to the VAT zero-rated operation of Mindanao II.

III. The Honorable Court of Tax Appeals erred in denying the amount disallowed by the
Independent Certified Public Accountant as Mindanao II substantially complied with the
requisites of the 1997 Tax Code, as amended, for refund/tax credit.

A. The amount of ₱2,090.16 was brought about by the timing difference in the
recording of the foreign currency deposit transaction.

B. The amount of ₱2,752.00 arose from the out-of-pocket expenses reimbursed to

SGV & Company which is substantially suppoerted [sic] by an official receipt.

C. The amount of ₱487,355.93 was unapplied and/or was not included in

Mindanao II’s claim for refund or tax credit for the year 2004 subject matter of
CTA Case No. 7507.

IV. The doctrine of strictissimi juris on tax exemptions should be relaxed in the present
case.40

G.R. No. 194637

Mindanao I v. CIR

Mindanao I raised the following grounds in its Petition for Review:

I. The administrative claim and judicial claim in CTA Case No. 7228 were timely filed
pursuant to the case of Atlas Consolidated Mining and Development Corporation vs.
Commissioner of Internal Revenue, which was then the controlling ruling at the time of
filing.
 A. The recent ruling in the Commissioner of Internal Revenue vs. Mirant Pagbilao
Corporation, which uses the end of the taxable quarter when the sales were made
as the reckoning date in counting the two-year prescriptive period, cannot be
applied retroactively in the case of Mindanao I.

B. The Atlas case promulgated by the Third Division of this Honorable Court on
June 8, 2007 was not and cannot be superseded by the Mirant Pagbilao case
promulgated by the Second Division of this Honorable Court on September 12,
2008 in light of the explicit provision of Section 4(3), Article VIII of the 1987
Constitution.

II. Likewise, the recent ruling of this Honorable Court in Commissioner of Internal
Revenue vs. Aichi Forging Company of Asia, Inc., cannot be applied retroactively to
Mindanao I in the present case.41

In a Resolution dated 14 December 2011,42 this Court resolved to consolidate G.R. Nos. 193301
and 194637 to avoid conflicting rulings in related cases.

The Court’s Ruling

Determination of Prescriptive Period

G.R. Nos. 193301 and 194637 both raise the question of the determination of the prescriptive
period, or the interpretation of Section 112 of the 1997 Tax Code, in light of our rulings in Atlas
and Mirant.

Mindanao II’s unutilized input VAT tax credit for the first and second quarters of 2003, in the
amounts of ₱3,160,984.69 and ₱1,562,085.33, respectively, are covered by G.R. No. 193301,
while Mindanao I’s unutilized 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.

Section 112 of the 1997 Tax Code

The pertinent sections of the 1997 Tax Code, the law applicable at the time of Mindanao II’s
and Mindanao I’s administrative and judicial claims, provide:

SEC. 112. Refunds or Tax Credits of Input Tax. -(A) Zero-rated or Effectively Zero-rated Sales. -
Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within
two (2) years after the close of the taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to
such sales, except transitional input tax, to the extent that such input tax has not been applied
against output tax: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency
exchange proceeds thereof had been duly accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the
taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt
sale of goods or properties or services, and the amount of creditable input tax due or paid
cannot be directly and entirely attributed to any one of the transactions, it shall be allocated
proportionately on the basis of the volume of sales.

xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases,
the Commissioner shall grant a refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of submission of complete
documents in support of the application filed in accordance with Subsections (A) and (B)
hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the
part of the Commissioner to act on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals.

x x x x 43 (Underscoring supplied)

The relevant dates for G.R. No. 193301 (Mindanao II) are:

CTA Period Close of Last day Actual date of Last day Actual
Case covered by quarter for filing filing for Date
No. VAT Sales in when sales application application for filing case of filing
2003 and were of tax tax refund/ with CTA45 case
amount made refund/tax credit with the with CTA
credit CIR (judicial
certificate (administrative claim)
with the claim)44
CIR
7227 1st Quarter, 31 March 31 March 13 April 2005 12 22 April
₱3,160,984.69 2003 2005 September 2005
2005
7287 2nd Quarter, 30 June 30 June 13 April 2005 12 7 July
₱1,562,085.33 2003 2005 September 2005
2005
7317 3rd and 4th 30 30 13 April 2005 12 9
Quarters, September September September September
₱3,521,129.50 2003 2005 2005 2005
31 2 January
December 2006
2003 (31
December
2005 being
a
Saturday)

The relevant dates for G.R. No. 194637 (Minadanao I) are:

CTA Period Close of Last day Actual date of Last day Actual
Case covered by quarter for filing filing for Date
No. VAT Sales in when sales application application for filing case of filing
2003 and were of tax tax refund/ with CTA47 case
amount made refund/tax credit with the with CTA
 credit CIR (judicial
certificate (administrative claim)
with the claim)46
CIR
7227 1st Quarter, 31 March 31 March 4 April 2005 1 22 April
₱3,893,566.14 2003 2005 September 2005
2005
7287 2nd Quarter, 30 June 30 June 4 April 2005 1 7 July
₱2,351,000.83 2003 2005 September 2005
2005
7317 3rd 30 30 4 April 2005 1 9
and 4th September September September September
Quarters, 2003 2005 2005 2005
₱7,940,727.83
31 2 January
December 2006
2003 (31
December
2005 being
a
Saturday)

When Mindanao II and Mindanao I filed their respective administrative and judicial claims in
2005, neither Atlas nor Mirant has been promulgated. Atlas was promulgated on 8 June 2007,
while Mirant was promulgated on 12 September 2008. It is therefore misleading to state that
Atlas was the controlling doctrine at the time of filing of the claims. The 1997 Tax Code, which
took effect on 1 January 1998, was the applicable law at the time of filing of the claims in
issue. As this Court explained in the recent consolidated cases of Commissioner of Internal
Revenue v. San Roque Power Corporation, Taganito Mining Corporation v. Commissioner of
Internal Revenue, and Philex Mining Corporation v. Commissioner of Internal Revenue (San
Roque):48

Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly given
by law to the Commissioner to decide whether to grant or deny San Roque’s application for
tax refund or credit. It is indisputable that compliance with the 120-day waiting period is
mandatory and jurisdictional. The waiting period, originally fixed at 60 days only, was part of
the provisions of the first VAT law, Executive Order No. 273, which took effect on 1 January
1988. The waiting period was extended to 120 days effective 1 January 1998 under RA 8424 or
the Tax Reform Act of 1997. Thus, the waiting period has been in our statute books for more
than fifteen (15) years before San Roque filed its judicial claim.

Failure to comply with the 120-day waiting period violates a mandatory provision of law. It
violates the doctrine of exhaustion of administrative remedies and renders the petition
premature and thus without a cause of action, with the effect that the CTA does not acquire
jurisdiction over the taxpayer’s petition. Philippine jurisprudence is replete with cases
upholding and reiterating these doctrinal principles.

The charter of the CTA expressly provides that its jurisdiction is to review on appeal "decisions
of the Commissioner of Internal Revenue in cases involving x x x refunds of internal revenue
taxes." When a taxpayer prematurely files a judicial claim for tax refund or credit with the CTA
without waiting for the decision of the Commissioner, there is no "decision" of the
Commissioner to review and thus the CTA as a court of special jurisdiction has no jurisdiction
over the appeal. The charter of the CTA also expressly provides that if the Commissioner fails
to decide within "a specific period" required by law, such "inaction shall be deemed a denial"
of the application for tax refund or credit. It is the 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 Commissioner, the CTA has no jurisdiction over a
petition for review.

San Roque’s failure to comply with the 120-day mandatory period renders its petition for
review with the CTA void. Article 5 of the Civil Code provides, "Acts executed against
provisions of mandatory or prohibitory laws shall be void, except when the law itself
authorizes their validity." San Roque’s void petition for review cannot be legitimized by the
CTA or this Court because Article 5 of the Civil Code states that such void petition cannot be
legitimized "except when the law itself authorizes its validity." There is no law authorizing the
petition’s validity.

It is hornbook doctrine that a person committing a void act contrary to a mandatory provision
of law cannot claim or acquire any right from his void act. A right cannot spring in favor of a
person from his own void or illegal act. This doctrine is repeated in Article 2254 of the Civil
Code, which states, "No vested or acquired right can arise from acts or omissions which are
against the law or which infringe upon the rights of others." For violating a mandatory
provision of law in filing its petition with the CTA, San Roque cannot claim any right arising
from such void petition. Thus, San Roque’s petition with the CTA is a mere scrap of paper.

This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of the
120-day period just because the Commissioner merely asserts that the case was prematurely
filed with the CTA and does not question the entitlement of San Roque to the refund. The
mere fact that a taxpayer has undisputed excess input VAT, or that the tax was admittedly
illegally, erroneously or excessively collected from him, does not entitle him as a matter of
right to a tax refund or credit. Strict compliance with the mandatory and jurisdictional
conditions prescribed by law to claim such tax refund or credit is essential and necessary for
such claim to prosper. Well-settled is the rule that tax refunds or credits, just like tax
exemptions, are strictly construed against the taxpayer.

The burden is on the taxpayer to show that he has strictly complied with the conditions for the
grant of the tax refund or credit.

This Court cannot disregard mandatory and jurisdictional conditions mandated by law simply
because the Commissioner chose not to contest the numerical correctness of the claim for tax
refund or credit of the taxpayer. Non-compliance with mandatory periods, non-observance of
prescriptive periods, and non-adherence to exhaustion of administrative remedies bar a
taxpayer’s claim for tax refund or credit, whether or not the Commissioner questions the
numerical correctness of the claim of the taxpayer. This Court should not establish the
precedent that non-compliance with mandatory and jurisdictional conditions can be excused if
the claim is otherwise meritorious, particularly in claims for tax refunds or credit. Such
precedent will render meaningless compliance with mandatory and jurisdictional
requirements, for then every tax refund case will have to be decided on the numerical
correctness of the amounts claimed, regardless of non-compliance with mandatory and
jurisdictional conditions.
San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine
because San Roque filed its petition for review with the CTA more than four years before Atlas
was promulgated. The Atlas doctrine did not exist at the time San Roque failed to comply with
the 120-day period. Thus, San Roque cannot invoke the Atlas doctrine as an excuse for its
failure to wait for the 120-day period to lapse. In any event, the Atlas doctrine merely stated
that the two-year prescriptive period should be counted from the date of payment of the
output VAT, not from the close of the taxable quarter when the sales involving the input VAT
were made. The Atlas doctrine does not interpret, expressly or impliedly, the 120+30 day
periods.49 (Emphases in the original; citations omitted)

Prescriptive Period for

the Filing of Administrative Claims

In determining whether the administrative claims of Mindanao I and Mindanao II for 2003
have prescribed, we see no need to rely on either Atlas or Mirant. Section 112(A) of the 1997
Tax Code is clear: "Any VAT-registered person, whose sales are zero-rated or effectively zero-
rated may, within two (2) years after the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or
paid attributable to such sales x x x."

We rule on Mindanao I and II’s administrative claims for the first, second, third, and fourth
quarters of 2003 as follows:

(1) The last day for filing an application for tax refund or credit with the CIR for the first
quarter of 2003 was on 31 March 2005. Mindanao II filed its administrative claim before
the CIR on 13 April 2005, while Mindanao I filed its administrative claim before the CIR
on 4 April 2005. Both claims have prescribed, pursuant to Section 112(A) of the 1997 Tax
Code.

(2) The last day for filing an application for tax refund or credit with the CIR for the
second quarter of 2003 was on 30 June 2005. Mindanao II filed its administrative claim
before the CIR on 13 April 2005, while Mindanao I filed its administrative claim before
the CIR on 4 April 2005. Both claims were filed on time, pursuant to Section 112(A) of
the 1997 Tax Code.

(3) The last day for filing an application for tax refund or credit with the CIR for the third
quarter of 2003 was on 30 September 2005. Mindanao II filed its administrative claim
before the CIR on 13 April 2005, while Mindanao I filed its administrative claim before
the CIR on 4 April 2005. Both claims were filed on time, pursuant to Section 112(A) of
the 1997 Tax Code.

(4) The last day for filing an application for tax refund or credit with the CIR for the
fourth quarter of 2003 was on 2 January 2006. Mindanao II filed its administrative claim
before the CIR on 13 April 2005, while Mindanao I filed its administrative claim before
the CIR on 4 April 2005. Both claims were filed on time, pursuant to Section 112(A) of
the 1997 Tax Code.

Prescriptive Period for

the Filing of Judicial Claims

In determining whether the claims for the second, third and fourth quarters of 2003 have been
properly appealed, we still see no need to refer to either Atlas or Mirant, or even to Section
229 of the 1997 Tax Code. The second paragraph of Section 112(C) of the 1997 Tax Code is
clear: "In case of full or partial denial of the claim for tax refund or tax credit, or the failure on
the part of the Commissioner to act on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals."

The mandatory and jurisdictional nature of the 120+30 day periods was explained in San
Roque:

At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory
periods were already in the law. Section 112(C) expressly grants the Commissioner 120 days
within which to decide the 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 complete documents."
Following the verba legis doctrine, this law must be applied exactly as worded since it is clear,
plain, and unequivocal. The taxpayer cannot simply file a petition with the CTA without waiting
for the Commissioner’s decision within the 120-day mandatory and jurisdictional period. The
CTA will have no jurisdiction because there will be no "decision" or "deemed a denial" decision
of the Commissioner for the CTA to review. In San Roque’s case, it filed its petition with the
CTA a mere 13 days after it filed its administrative claim with the Commissioner. Indisputably,
San Roque knowingly violated the mandatory 120-day period, and it cannot blame anyone but
itself.

Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the
decision or inaction of the Commissioner, thus:

x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one hundred twenty day-period, appeal the
decision or the unacted claim with the Court of Tax Appeals. (Emphasis supplied)

This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this
law should be applied exactly as worded since it is clear, plain, and unequivocal. As this law
states, the taxpayer may, if he wishes, appeal the decision of the Commissioner to the CTA
within 30 days from receipt of the Commissioner’s 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.

xxxx

There are three compelling reasons why the 30-day period need not necessarily fall within the
two-year prescriptive period, as long as the administrative claim is filed within the two-year
prescriptive period.

First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "may, within
two (2) years after the close of the taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of the creditable input tax due or paid to such
sales." In short, the law states that the taxpayer may apply with the Commissioner for a refund
or credit "within two (2) years," which means at anytime within two years. Thus, the
application for refund or credit may be filed by the taxpayer with the Commissioner on the last
day of the two-year prescriptive period and it will still strictly comply with the law. The two-
year prescriptive period is a grace period in favor of the taxpayer and he can avail of the full
period before his right to apply for a tax refund or credit is barred by prescription.

Second, Section 112(C) provides that the Commissioner shall decide the application for refund
or credit "within one hundred twenty (120) days from the date of submission of complete
documents in support of the application filed in accordance with Subsection (A)." The
reference in Section 112(C) of the submission of documents "in support of the application filed
in accordance with Subsection A" means that the application in Section 112(A) is the
administrative claim that the Commissioner must decide within the 120-day period. In short,
the two-year prescriptive period in Section 112(A) refers to the period within which the
taxpayer can file an administrative claim for tax refund or credit. Stated otherwise, the two-
year prescriptive period does not refer to the filing of the judicial claim with the CTA but to the
filing of the administrative claim with the Commissioner. As held in Aichi, the "phrase ‘within
two years x x x apply for the issuance of a tax credit or refund’ refers to applications for
refund/credit with the CIR and not to appeals made to the CTA."

Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive
period (equivalent to 730 days), then the taxpayer must file his administrative claim for refund
or credit within the first 610 days of the two-year prescriptive period. Otherwise, the filing of
the administrative claim beyond the first 610 days will result in the appeal to the CTA being
filed beyond the two-year prescriptive period. Thus, if the taxpayer files his administrative
claim on the 611th day, the Commissioner, with his 120-day period, will have until the 731st
day to decide the claim. If the Commissioner decides only on the 731st day, or does not decide
at all, the taxpayer can no longer file his judicial claim with the CTA because the two-year
prescriptive period (equivalent to 730 days) has lapsed. The 30-day period granted by law to
the taxpayer to file an appeal before the CTA becomes utterly useless, even if the taxpayer
complied with the law by filing his administrative claim within the two-year prescriptive
period.

The theory that the 30-day period must fall within the two-year prescriptive period adds a
condition that is not found in the law. It results in truncating 120 days from the 730 days that
the law grants the taxpayer for filing his administrative claim with the Commissioner. This
Court cannot interpret a law to defeat, wholly or even partly, a remedy that the law expressly
grants in clear, plain, and unequivocal language.

Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal
language. The taxpayer can file his administrative claim for refund or credit at anytime within
the two-year prescriptive period. If he files his claim on the last day of the two-year
prescriptive

period, his claim is still filed on time. The Commissioner will have 120 days from such filing to
decide the claim. If the Commissioner decides the claim on the 120th day, or does not decide
it on that day, the taxpayer still has 30 days to file his judicial claim with the CTA. This is not
only the plain meaning but also the only logical interpretation of Section 112(A) and
(C).50 (Emphases in the original; citations omitted)

In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No. DA-489-03 from
the time of its issuance on 10 December 2003 up to its reversal in Aichi on 6 October 2010,
where this Court held that the 120+30 day periods are mandatory and jurisdictional."51 We
shall discuss later the effect of San Roque’s recognition of BIR Ruling No. DA-489-03 on claims
filed between 10 December 2003 and 6 October 2010. Mindanao I and II filed their claims
within this period.

We rule on Mindanao I and II’s judicial claims for the second, third, and fourth quarters of
2003 as follows:

G.R. No. 193301

Mindanao II v. CIR

Mindanao II filed its administrative claims for the second, third, and fourth quarters of 2003 on
13 April 2005. Counting 120 days after filing of the administrative claim with the CIR (11
August 2005) and 30 days after the 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 2005, which is the
expiration of the 120-day period for the Commissioner to act on the claim.

(1) Mindanao II filed its judicial claim for the second quarter of 2003 before the CTA on 7
July 2005, before the expiration of the 120-day period. Pursuant to Section 112(C) of the
1997 Tax Code, Mindanao II’s judicial claim for the second quarter of 2003 was
prematurely filed.

However, pursuant to San Roque’s recognition of the effect of BIR Ruling No. DA-489-03,
we rule that Mindanao II’s judicial claim for the second quarter of 2003 qualifies under
the exception to the strict application of the 120+30 day periods.

(2) Mindanao II filed its judicial claim for the third quarter of 2003 before the CTA on 9
September 2005. Mindanao 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.

(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before the CTA on 9
September 2005. Mindanao II’s judicial claim for the fourth quarter of 2003 was thus
filed on time, pursuant to Section 112(C) of the 1997 Tax Code.

G.R. No. 194637

Mindanao I v. CIR

Mindanao I filed its administrative claims for the second, third, and fourth quarters of 2003 on
4 April 2005. Counting 120 days after filing of the administrative claim with the CIR (2 August
2005) and 30 days after the CIR’s denial by inaction,52 the last day for filing a judicial claim with
the CTA for the second, third, and fourth quarters of 2003 was on 1 September 2005.
However, the judicial claim cannot be filed earlier than 2 August 2005, which is the expiration
of the 120-day period for the Commissioner to act on the claim.

(1) Mindanao I filed its judicial claim for the second quarter of 2003 before the CTA on 7
July 2005, before the expiration of the 120-day period. Pursuant to Section 112(C) of the
1997 Tax Code, Mindanao I’s judicial claim for the second quarter of 2003 was
prematurely filed. However, pursuant to San Roque’s recognition of the effect of BIR
Ruling No. DA-489-03, we rule that Mindanao I’s judicial claim for the second quarter of
2003 qualifies under the exception to the strict application of the 120+30 day periods.
 (2) Mindanao I filed its judicial claim for the third quarter of 2003 before the CTA on 9
September 2005. Mindanao I’s judicial claim for the third quarter of 2003 was thus filed
after the prescriptive period, pursuant to Section 112(C) of the 1997 Tax Code.

(3) Mindanao I filed its judicial claim for the fourth quarter of 2003 before the CTA on 9
September 2005. Mindanao 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.

San Roque: Recognition of BIR Ruling No. DA-489-03

In the consolidated cases of San Roque, the Court En Banc53 examined and ruled on the
different claims for tax refund or credit of three different companies. In San Roque, we
reiterated that "following the verba legis doctrine, Section 112(C) must be applied exactly as
worded since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition with
the CTA without waiting for the Commissioner’s decision within the 120-day mandatory and
jurisdictional period. The CTA will have no jurisdiction because there will be no ‘decision’ or
‘deemed a denial decision’ of the Commissioner for the CTA to review."

Notwithstanding a strict construction of any claim for tax exemption or refund, the Court in
San Roque recognized that BIR Ruling No. DA-489-03 constitutes equitable estoppel54 in favor
of taxpayers. BIR Ruling No. DA-489-03 expressly states that the "taxpayer-claimant need not
wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way
of Petition for Review." This Court discussed BIR Ruling No. DA-489-03 and its effect on
taxpayers, thus:

Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner,

particularly on a difficult question of law. The abandonment of the Atlas doctrine by Mirant
and Aichi is proof that the reckoning of the prescriptive periods for input VAT tax refund or
credit is a difficult question of law. The abandonment of the Atlas doctrine did not result in
Atlas, or other taxpayers similarly situated, being made to return the tax refund or credit they
received or could have received under Atlas prior to its abandonment. This Court is applying
Mirant and Aichi prospectively. Absent fraud, bad faith or misrepresentation, the reversal by
this Court of a general interpretative rule issued by the Commissioner, like the reversal of a
specific BIR ruling under Section 246, should also apply prospectively. x x x.

xxxx

Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule
applicable to all taxpayers or a specific ruling applicable only to a particular taxpayer.

BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query
made, not by a particular taxpayer, but by a government agency tasked with processing tax
refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center
of the Department of Finance. This government agency is also the addressee, or the entity
responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency mentions in its
query to the Commissioner the administrative claim of Lazi Bay Resources Development, Inc.,
the agency was in fact asking the Commissioner what to do in cases like the tax claim of Lazi
Bay Resources Development, Inc., where the taxpayer did not wait for the lapse of the 120-day
period.

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely
on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its
reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day
periods are mandatory and jurisdictional.

xxxx

Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the issuance
of BIR Ruling No. DA-489-03 on 10 December 2003. Truly, Taganito can claim that in filing its
judicial claim prematurely without waiting for the 120-day period to expire, it was misled by
BIR Ruling No. DA-489-03. Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-03,
which shields the filing of its judicial claim from the vice of prematurity. (Emphasis in the
original)

Summary of Administrative and Judicial Claims

G.R. No. 193301

Mindanao II v. CIR

Administrative Judicial Claim Action on Claim

Claim
1st Quarter, 2003 Filed late -- Deny, pursuant to
Section 112(A) of the
1997 Tax Code
2nd Quarter, Filed on time Prematurely Grant, pursuant to
2003 filed BIR Ruling No. DA-489-
03
3rd Quarter, Filed on time Filed on time Grant, pursuant to
2003 Section 112(C) of the
1997 Tax Code
4th Quarter, Filed on time Filed on time Grant, pursuant to
2003 Section 112(C) of the
1997 Tax Code

G.R. No. 194637

Mindanao I v. CIR

Administrative Judicial Claim Action on Claim

Claim
1st Quarter, 2003 Filed late -- Deny, pursuant to
Section 112(A) of the
1997 Tax Code
2nd Quarter, Filed on time Prematurely Grant, pursuant to
2003 filed BIR Ruling No. DA-489-
03
3rd Quarter, Filed on time Filed late Grant, pursuant to
2003 Section 112(C) of the
1997 Tax Code
 4th Quarter, Filed on time Filed late Grant, pursuant to
2003 Section 112(C) of the
1997 Tax Code

Summary of Rules on Prescriptive Periods Involving VAT

We summarize the rules on the determination of the prescriptive period for filing a tax refund
or credit of unutilized input VAT as provided in Section 112 of the 1997 Tax Code, as follows:

(1) An administrative claim must be filed with the CIR within two years after the close of
the taxable quarter when the zero-rated or effectively zero-rated sales were made.

(2) The CIR has 120 days from the date of submission of complete documents in support
of the administrative claim within which to decide whether to grant a refund or issue a
tax credit certificate. The 120-day period may extend beyond the two-year period from
the filing of the administrative claim if the claim is filed in the later part of the two-year
period. If the 120-day period expires without any decision from the CIR, then the
administrative claim may be considered to be denied by inaction.

(3) A judicial claim must be filed with the CTA within 30 days from the receipt of the
CIR’s decision denying the administrative claim or from the expiration of the 120-day
period without any action from the CIR.

(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October
2010, as an exception to the mandatory and jurisdictional 120+30 day periods.

"Incidental" Transaction

Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental
transaction in the course of its business; hence, it is an isolated transaction that should not
have been subject to 10% VAT.

Section 105 of the 1997 Tax Code does not support Mindanao II’s position:

SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters,
exchanges, leases goods or properties, renders services, and any person who imports goods
shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to
the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise
apply to existing contracts of sale or lease of goods, properties or services at the time of the
effectivity of Republic Act No. 7716.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a nonstock, nonprofit private
organization (irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this Code
rendered in the Philippines by nonresident foreign persons shall be considered as being
rendered in the course of trade or business. (Emphasis supplied)

Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc.

(Magsaysay)55 and Imperial v. Collector of Internal Revenue (Imperial)56 to justify its position.
Magsaysay, decided under the NIRC of 1986, involved the sale of vessels of the National
Development Company (NDC) to Magsaysay Lines, Inc. We ruled that the sale of vessels was
not in the course of 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 the definition of "carrying on business." Imperial, however, is an unreported
case that merely stated that "‘to engage’ is to embark in a business or to employ oneself
therein."57

Mindanao 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 "transactions incidental thereto."

Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC into electricity and
to deliver the electricity to NPC. In the course of its business, Mindanao II bought and
eventually sold a Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao II’s
property, plant, and equipment. Therefore, the sale of the Nissan Patrol is an incidental
transaction made in the course of Mindanao II’s business which should be liable for VAT.

Substantiation Requirements

Mindanao II claims that the CTA’s disallowance of a total amount of ₱492,198.09 is improper
as it has substantially complied with the substantiation requirements of Section 113(A)58 in
relation to Section 23759 of the 1997 Tax Code, as implemented by Section 4.104-1, 4.104-5
and 4.108-1 of Revenue Regulation No. 7-95.60

We are constrained to state that Mindanao II’s compliance with the substantiation
requirements is a finding of fact. The CTA En Banc evaluated the records of the case and found
that the transactions in question are purchases for services and that Mindanao II failed to
comply with the substantiation requirements. We affirm the CTA En Banc’s finding of fact,
which in turn affirmed the finding of the CTA First Division. We see no reason to overturn their
findings.

WHEREFORE, we PARTIALLY GRANT the petitions. The Decision of the Court of Tax Appeals En
Bane in CT A EB No. 513 promulgated on 10 March 2010, as well as the Resolution
promulgated on 28 July 2010, and the Decision of the Court of Tax Appeals En Bane in CTA EB
Nos. 476 and 483 promulgated on 31 May 2010, as well as the Amended Decision
promulgated on 24 November 2010, are AFFIRMED with MODIFICATION.

For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for the first quarter of
2003 is DENIED while its claims for the second, third, and fourth quarters of 2003 are
GRANTED. For G.R. No. 19463 7, the claims of Mindanao I Geothermal Partnership for the first,
third, and fourth quarters of 2003 are DENIED while its claim for the second quarter of 2003 is
GRANTED.

SO ORDERED.
#7

G.R. No. 183505 February 26, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SM PRIME HOLDINGS, INC. and FIRST ASIA REALTY DEVELOPMENT
CORPORATION, Respondents.

DECISION

DEL CASTILLO, J.:

When the intent of the law is not apparent as worded, or when the application of the law
would lead to absurdity or injustice, legislative history is all important. In such cases, courts
may take judicial notice of the origin and history of the law,1 the deliberations during the
enactment,2 as well as prior laws on the same subject matter3 to ascertain the true intent or
spirit of the law.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to
Republic Act (RA) No. 9282,4 seeks to set aside the April 30, 2008 Decision5 and the June 24,
2008 Resolution6 of the Court of Tax Appeals (CTA).

Factual Antecedents

Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development
Corporation (First Asia) are domestic corporations duly organized and existing under the laws
of the Republic of the Philippines. Both are engaged in the business of operating cinema
houses, among others.7

CTA Case No. 7079

On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a Preliminary
Assessment Notice (PAN) for value added tax (VAT) deficiency on cinema ticket sales in the
amount of ₱119,276,047.40 for taxable year 2000.8 In response, SM Prime filed a letter-
protest dated December 15, 2003.9

On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the alleged VAT
deficiency, which the latter protested in a letter dated January 14, 2004.10

On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay the
VAT deficiency for taxable year 2000 in the amount of ₱124,035,874.12.11

On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA
Case No. 7079.12

CTA Case No. 7085

On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on
cinema ticket sales for taxable year 1999 in the total amount of ₱35,823,680.93.13 First Asia
protested the PAN in a letter dated July 9, 2002.14

Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency which
was protested by First Asia in a letter dated December 12, 2002.15

On September 6, 2004, the BIR rendered a Decision denying the protest and ordering First Asia
to pay the amount of ₱35,823,680.93 for VAT deficiency for taxable year 1999.16

Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA,
docketed as CTA Case No. 7085.17

CTA Case No. 7111

On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema ticket sales for
taxable year 2000 in the amount of ₱35,840,895.78. First Asia protested the PAN through a
letter dated April 22, 2004.18

Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency.19 First Asia
protested the same in a letter dated July 9, 2004.20

On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT
deficiency in the amount of ₱35,840,895.78 for taxable year 2000.21

This prompted First Asia to file a Petition for Review before the CTA on December 16, 2004.
The case was docketed as CTA Case No. 7111.22

CTA Case No. 7272

Re: Assessment Notice No. 008-02

A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total amount
of ₱32,802,912.21 was issued against First Asia by the BIR. In response, First Asia filed a
protest-letter dated November 11, 2004. The BIR then sent a Formal Letter of Demand, which
was protested by First Asia on December 14, 2004.23

Re: Assessment Notice No. 003-03

A PAN for VAT deficiency on cinema ticket sales in the total amount of ₱28,196,376.46 for the
taxable year 2003 was issued by the BIR against First Asia. In a letter dated September 23,
2004, First Asia protested the PAN. A Formal Letter of Demand was thereafter issued by the
BIR to First Asia, which the latter protested through a letter dated November 11, 2004. 24

On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia to pay
the amounts of ₱33,610,202.91 and ₱28,590,826.50 for VAT deficiency for taxable years 2002
and 2003, respectively.25

Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as CTA
Case No. 7272.26

Consolidated Petitions
The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions filed by SM
Prime and First Asia.27

On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085, 7111 and 7272
with CTA Case No. 7079 on the grounds that the issues raised therein are identical and that SM
Prime is a majority shareholder of First Asia. The motion was granted.28

Upon submission of the parties’ respective memoranda, the consolidated cases were
submitted for decision on the sole issue of whether gross receipts derived from admission
tickets by cinema/theater operators or proprietors are subject to VAT.29

Ruling of the CTA First Division

On September 22, 2006, the First Division of the CTA rendered a Decision granting the Petition
for Review. Resorting to the language used and the legislative history of the law, it ruled that
the activity of showing cinematographic films is not a service covered by VAT under the
National Internal Revenue Code (NIRC) of 1997, as amended, but an activity subject to
amusement tax under RA 7160, otherwise known as the Local Government Code (LGC) of
1991. Citing House Joint Resolution No. 13, entitled "Joint Resolution Expressing the True
Intent of Congress with Respect to the Prevailing Tax Regime in the Theater and Local Film
Industry Consistent with the State’s Policy to Have a Viable, Sustainable and Competitive
Theater and Film Industry as One of its Partners in National Development,"30 the CTA First
Division held that the House of Representatives resolved that there should only be one
business tax applicable to theaters and movie houses, which is the 30% amusement tax
imposed by cities and provinces under the LGC of 1991. Further, it held that consistent with
the State’s policy to have a viable, sustainable and competitive theater and film industry, the
national government should be precluded from imposing its own business tax in addition to
that already imposed and collected by local government units. The CTA First Division likewise
found that Revenue Memorandum Circular (RMC) No. 28-2001, which imposes VAT on gross
receipts from admission to cinema houses, cannot be given force and effect because it failed
to comply with the procedural due process for tax issuances under RMC No. 20-86.31 Thus, it
disposed of the case as follows:

IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions for Review.
Respondent’s Decisions denying petitioners’ protests against deficiency value-added taxes are
hereby REVERSED. Accordingly, Assessment Notices Nos. VT-00-000098, VT-99-000057, VT-00-
000122, 003-03 and 008-02 are ORDERED cancelled and set aside.

SO ORDERED.32

Aggrieved, the CIR moved for reconsideration which was denied by the First Division in its
Resolution dated December 14, 2006.33

Ruling of the CTA En Banc

Thus, the CIR appealed to the CTA En Banc.34 The case was docketed as CTA EB No. 244.35 The
CTA En Banc however denied36 the Petition for Review and dismissed37 as well petitioner’s
Motion for Reconsideration.

The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive
enumeration of what services are intended to be subject to VAT. And since the showing or
exhibition of motion pictures, films or movies by cinema operators or proprietors is not among
the enumerated activities contemplated in the phrase "sale or exchange of services," then
gross receipts derived by cinema/ theater operators or proprietors from admission tickets in
showing motion pictures, film or movie are not subject to VAT. It reiterated that the exhibition
or showing of motion pictures, films, or movies is instead subject to amusement tax under the
LGC of 1991. As regards the validity of RMC No. 28-2001, the CTA En Banc agreed with its First
Division that the same cannot be given force and effect for failure to comply with RMC No. 20-
86.

Issue

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

(1) In not finding/holding that the gross receipts derived by operators/proprietors of cinema
houses from admission tickets [are] subject to the 10% VAT because:

(a) THE EXHIBITION OF MOVIES BY CINEMA OPERATORS/PROPRIETORS TO THE PAYING

PUBLIC IS A SALE OF SERVICE;

(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE EXPRESSLY SUBJECT TO VAT
UNDER SECTION 108 OF THE NIRC OF 1997;

(c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF LAW AND THE
APPLICATION OF RULES OF STATUTORY CONSTRUCTION AND EXTRINSIC AIDS IS
UNWARRANTED;

(d) GRANTING WITHOUT CONCEDING THAT RULES OF CONSTRUCTION ARE APPLICABLE

HEREIN, STILL THE HONORABLE COURT ERRONEOUSLY APPLIED THE SAME AND
PROMULGATED DANGEROUS PRECEDENTS;

(e) THERE IS NO VALID, EXISTING PROVISION OF LAW EXEMPTING RESPONDENTS’

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

(f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER ISSUES TO BE TRIED BY
THE HONORABLE COURT; and

(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION OF SECTION 108 OF THE
NIRC.

(2) In ruling that the enumeration in Section 108 of the NIRC of 1997 is exhaustive in coverage;

(3) In misconstruing the NIRC of 1997 to conclude that the showing of motion pictures is
merely subject to the amusement tax imposed by the Local Government Code; and

(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.38

Simply put, the issue in this case is whether the gross receipts derived by operators or
proprietors of cinema/theater houses from admission tickets are subject to VAT.

Petitioner’s Arguments

Petitioner argues that the enumeration of services subject to VAT in Section 108 of the NIRC is
not exhaustive because it covers all sales of services unless exempted by law. He claims that
the CTA erred in applying the rules on statutory construction and in using extrinsic aids in
interpreting Section 108 because the provision is clear and unambiguous. Thus, he maintains
that the exhibition of movies by cinema operators or proprietors to the paying public, being a
sale of service, is subject to VAT.

Respondents’ Arguments

Respondents, on the other hand, argue that a plain reading of Section 108 of the NIRC of 1997
shows that the gross receipts of proprietors or operators of cinemas/theaters derived from
public admission are not among the services subject to VAT. Respondents insist that gross
receipts from cinema/theater admission tickets were never intended to be subject to any tax
imposed by the national government. According to them, the absence of gross receipts from
cinema/theater admission tickets from the list of services which are subject to the national
amusement tax under Section 125 of the NIRC of 1997 reinforces this legislative intent.
Respondents also highlight the fact that RMC No. 28-2001 on which the deficiency
assessments were based is an unpublished administrative ruling.

Our Ruling

The petition is bereft of merit.

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

Section 108 of the NIRC of the 1997 reads:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. —

(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of
services, including the use or lease of properties.

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

(1) The lease or the use of or the right or privilege to use any copyright, patent, design or
model, plan, secret formula or process, goodwill, trademark, trade brand or other like
property or right;
xxxx

(7) The lease of motion picture films, films, tapes and discs; and

(8) The lease or the use of or the right to use radio, television, satellite transmission and cable
television time.

x x x x (Emphasis supplied)

A cursory reading of the foregoing provision clearly shows that the enumeration of the "sale or
exchange of services" subject to VAT is not exhaustive. The words, "including," "similar
services," and "shall likewise include," indicate that the enumeration is by way of example
only.39

Among those included in the enumeration is the "lease of motion picture films, films, tapes
and discs." This, however, is not the same as the showing or exhibition of motion pictures or
films. As pointed out by the CTA En Banc:

"Exhibition" in Black’s Law Dictionary is defined as "To show or display. x x x To produce

anything in public so that it may be taken into possession" (6th ed., p. 573). While the word
"lease" is defined as "a contract by which one owning such property grants to another the
right to possess, use and enjoy it on specified period of time in exchange for periodic payment
of a stipulated price, referred to as rent (Black’s Law Dictionary, 6th ed., p. 889). x x x40

Since the activity of showing motion pictures, films or movies by cinema/ theater operators or
proprietors is not included in the enumeration, it is incumbent upon the court to the
determine whether such activity falls under the phrase "similar services." The intent of the
legislature must therefore be ascertained.

The legislature never intended operators

or proprietors of cinema/theater houses to be covered by VAT

Under the NIRC of 1939,41 the national government imposed amusement tax on proprietors,
lessees, or operators of theaters, cinematographs, concert halls, circuses, boxing exhibitions,
and other places of amusement, including cockpits, race tracks, and cabaret.42 In the case of
theaters or cinematographs, the taxes were first deducted, withheld, and paid by the
proprietors, lessees, or operators of such theaters or cinematographs before the gross receipts
were divided between the proprietors, lessees, or operators of the theaters or
cinematographs and the distributors of the cinematographic films. Section 1143 of the Local
Tax Code,44 however, amended this provision by transferring the power to impose amusement
tax45 on admission from theaters, cinematographs, concert halls, circuses and other places of
amusements exclusively to the local government. Thus, when the NIRC of 197746 was enacted,
the national government imposed amusement tax only on proprietors, lessees or operators of
cabarets, day and night clubs, Jai-Alai and race tracks.47

On January 1, 1988, the VAT Law48 was promulgated. It amended certain provisions of the
NIRC of 1977 by imposing a multi-stage VAT to replace the tax on original and subsequent
sales tax and percentage tax on certain services. It imposed VAT on sales of services under
Section 102 thereof, which provides:
SECTION 102. Value-added tax on sale of services. — (a) Rate and base of tax. — There shall be
levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts
derived by any person engaged in the sale of services. The phrase "sale of services" means the
performance of all kinds of services for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service contractors; stock, real
estate, commercial, customs and immigration brokers; lessors of personal property; lessors or
distributors of cinematographic films; persons engaged in milling, processing, manufacturing
or repacking goods for others; and similar services regardless of whether or not the
performance thereof calls for the exercise or use of the physical or mental faculties: Provided
That the following services performed in the Philippines by VAT-registered persons shall be
subject to 0%:

(1) Processing manufacturing or repacking goods for other persons doing business
outside the Philippines which goods are subsequently exported, x x x

xxxx

"Gross receipts" means the total amount of money or its equivalent representing
the contract price, compensation or service fee, including the amount charged for
materials supplied with the services and deposits or advance payments actually or
constructively received during the taxable quarter for the service performed or to
be performed for another person, excluding value-added tax.

(b) Determination of the tax. — (1) Tax billed as a separate item in the invoice. —
If the tax is billed as a separate item in the invoice, the tax shall be based on the
gross receipts, excluding the tax.

(2) Tax not billed separately or is billed erroneously in the invoice. — If the tax is not
billed separately or is billed erroneously in the invoice, the tax shall be determined by
multiplying the gross receipts (including the amount intended to cover the tax or the tax
billed erroneously) by 1/11. (Emphasis supplied)

Persons subject to amusement tax under the NIRC of 1977, as amended, however, were
exempted from the coverage of VAT.49

On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-88, which
clarified that the power to impose amusement tax on gross receipts derived from admission
tickets was exclusive with the local government units and that only the gross receipts of
amusement places derived from sources other than from admission tickets were subject to
amusement tax under the NIRC of 1977, as amended. Pertinent portions of RMC 8-88 read:

Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy amusement tax on
gross receipts arising from admission to places of amusement has been transferred to the local
governments to the exclusion of the national government.

xxxx

Since the promulgation of the Local Tax Code which took effect on June 28, 1973 none of the
amendatory laws which amended the National Internal Revenue Code, including the value
added tax law under Executive Order No. 273, has amended the provisions of Section 11 of the
Local Tax Code. Accordingly, the sole jurisdiction for collection of amusement tax on admission
receipts in places of amusement rests exclusively on the local government, to the exclusion of
the national government. Since the Bureau of Internal Revenue is an agency of the national
government, then it follows that it has no legal mandate to levy amusement tax on admission
receipts in the said places of amusement.

Considering the foregoing legal background, the provisions under Section 123 of the National
Internal Revenue Code as renumbered by Executive Order No. 273 (Sec. 228, old NIRC)
pertaining to amusement taxes on places of amusement shall be implemented in accordance
with BIR RULING, dated December 4, 1973 and BIR RULING NO. 231-86 dated November 5,
1986 to wit:

"x x x Accordingly, only the gross receipts of the amusement places derived from sources
other than from admission tickets shall be subject to x x x amusement tax prescribed under
Section 228 of the Tax Code, as amended (now Section 123, NIRC, as amended by E.O.
273). The tax on gross receipts derived from admission tickets shall be levied and collected
by the city government pursuant to Section 23 of Presidential Decree No. 231, as amended x
x x" or by the provincial government, pursuant to Section 11 of P.D. 231, otherwise known
as the Local Tax Code. (Emphasis supplied)

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

In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its
administration. Three years later, RA 7716 was amended by RA 8241. Shortly thereafter, the
NIRC of 199751 was signed into law. Several amendments52 were made to expand the coverage
of VAT. However, none pertain to cinema/theater operators or proprietors. At present, only
lessors or distributors of cinematographic films are subject to VAT. While persons subject to
amusement tax53 under the NIRC of 1997 are exempt from the coverage of VAT.54

Based on the foregoing, the following facts can be established:

(1) Historically, the activity of showing motion pictures, films or movies by

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

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

(3) When the Local Tax Code was enacted, amusement tax on admission tickets from
theaters, cinematographs, concert halls, circuses and other places of amusements were
transferred to the local government.
 (4) Under the NIRC of 1977, the national government imposed amusement tax only on
proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race
tracks.

(5) The VAT law was enacted to replace the tax on original and subsequent sales tax and
percentage tax on certain services.

(6) When the VAT law was implemented, it exempted persons subject to amusement tax
under the NIRC from the coverage of VAT.1auuphil

(7) When the Local Tax Code was repealed by the LGC of 1991, the local government
continued to impose amusement tax on admission tickets from theaters,
cinematographs, concert halls, circuses and other places of amusements.

(8) Amendments to the VAT law have been consistent in exempting persons subject to
amusement tax under the NIRC from the coverage of VAT.

(9) Only lessors or distributors of cinematographic films are included in the coverage of
VAT.

These reveal the legislative intent not to impose VAT on persons already covered by the
amusement tax. This holds true even in the case of cinema/theater operators taxed under the
LGC of 1991 precisely because the VAT law was intended to replace the percentage tax on
certain services. The mere fact that they are taxed by the local government unit and not by the
national government is immaterial. The Local Tax Code, in transferring the power to tax gross
receipts derived by cinema/theater operators or proprietor from admission tickets to the local
government, did not intend to treat cinema/theater houses as a separate class. No distinction
must, therefore, be made between the places of amusement taxed by the national
government and those taxed by the local government.

To hold otherwise would impose an unreasonable burden on cinema/theater houses

operators or proprietors, who would be paying an additional 10%55 VAT on top of the 30%
amusement tax imposed by Section 140 of the LGC of 1991, or a total of 40% tax. Such
imposition would result in injustice, as persons taxed under the NIRC of 1997 would be in a
better position than those taxed under the LGC of 1991. We need not belabor that a literal
application of a law must be rejected if it will operate unjustly or lead to absurd results.56 Thus,
we are convinced that the legislature never intended to include cinema/theater operators or
proprietors in the coverage of VAT.

On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals,57 to wit:

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

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of
VAT

Petitioner, in issuing the assessment notices for deficiency VAT against respondents,
ratiocinated that:
Basically, it was acknowledged that a cinema/theater operator was then subject to
amusement tax under Section 260 of Commonwealth Act No. 466, otherwise known as the
National Internal Revenue Code of 1939, computed on the amount paid for admission. With
the enactment of the Local Tax Code under Presidential Decree (PD) No. 231, dated June 28,
1973, the power of imposing taxes on gross receipts from admission of persons to
cinema/theater and other places of amusement had, thereafter, been transferred to the
provincial government, to the exclusion of the national or municipal government (Sections 11
& 13, Local Tax Code). However, the said provision containing the exclusive power of the
provincial government to impose amusement tax, had also been repealed and/or deleted by
Republic Act (RA) No. 7160, otherwise known as the Local Government Code of 1991, enacted
into law on October 10, 1991. Accordingly, the enactment of RA No. 7160, thus, eliminating
the statutory prohibition on the national government to impose business tax on gross receipts
from admission of persons to places of amusement, led the way to the valid imposition of the
VAT pursuant to Section 102 (now Section 108) of the old Tax Code, as amended by the
Expanded VAT Law (RA No. 7716) and which was implemented beginning January 1,
1996.58(Emphasis supplied)

We disagree.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of
VAT on the gross receipts of cinema/theater operators or proprietors derived from admission
tickets. The removal of the prohibition under the Local Tax Code did not grant nor restore to
the national government the power to impose amusement tax on cinema/theater operators or
proprietors. Neither did it expand the coverage of VAT. Since the imposition of a tax is a
burden on the taxpayer, it cannot be presumed nor can it be extended by implication. A law
will not be construed as imposing a tax unless it does so clearly, expressly, and
unambiguously.59 As it is, the power to impose amusement tax on cinema/theater operators
or proprietors remains with the local government.

Revenue Memorandum Circular No. 28-2001 is invalid

Considering that there is no provision of law imposing VAT on the gross receipts of
cinema/theater operators or proprietors derived from admission tickets, RMC No. 28-2001
which imposes VAT on the gross receipts from admission to cinema houses must be struck
down. We cannot overemphasize that RMCs must not override, supplant, or modify the law,
but must remain consistent and in harmony with, the law they seek to apply and implement.60

In view of the foregoing, there is no need to discuss whether RMC No. 28-2001 complied with
the procedural due process for tax issuances as prescribed under RMC No. 20-86.

Rule on tax exemption does not apply

Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to
an exemption from the coverage of VAT. The rule that tax exemptions should be construed
strictly against the taxpayer presupposes that the taxpayer is clearly subject to the tax being
levied against him.61 The reason is obvious: it is both illogical and impractical to determine
who are exempted without first determining who are covered by the provision.62 Thus, unless
a statute imposes a tax clearly, expressly and unambiguously, what applies is the equally well-
settled rule that the imposition of a tax cannot be presumed.63 In fact, in case of doubt, tax
laws must be construed strictly against the government and in favor of the taxpayer.64
WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the Court
of Tax Appeals En Banc holding that gross receipts derived by respondents from admission
tickets in showing motion pictures, films or movies are not subject to value-added tax under
Section 108 of the National Internal Revenue Code of 1997, as amended, and its June 24, 2008
Resolution denying the motion for reconsideration are AFFIRMED.

SO ORDERED.

#7

G.R. No. 193007 July 19, 2011

RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, Respondents.

DECISION

ABAD, J.:

May toll fees collected by tollway operators be subjected to value- added tax?

The Facts and the Case

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for
declaratory relief1 assailing the validity of the impending imposition of value-added tax (VAT)
by the Bureau of Internal Revenue (BIR) on the collections of tollway operators.

Petitioners claim that, since the VAT would result in increased toll fees, they have an interest
as regular users of tollways in stopping the BIR action. Additionally, Diaz claims that he
sponsored the approval of Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and
Republic Act 8424 (the 1997 National Internal Revenue Code or the NIRC) at the House of
Representatives. Timbol, on the other hand, claims that she served as Assistant Secretary of
the Department of Trade and Industry and consultant of the Toll Regulatory Board (TRB) in the
past administration.

Petitioners allege that the BIR attempted during the administration of President Gloria
Macapagal-Arroyo to impose VAT on toll fees. The imposition was deferred, however, in view
of the consistent opposition of Diaz and other sectors to such move. But, upon President
Benigno C. Aquino III’s assumption of office in 2010, the BIR revived the idea and would
impose the challenged tax on toll fees beginning August 16, 2010 unless judicially enjoined.

Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include
toll fees within the meaning of "sale of services" that are subject to VAT; that a toll fee is a
"user’s tax," not a sale of services; that to impose VAT on toll fees would amount to a tax on
public service; and that, since VAT was never factored into the formula for computing toll fees,
its imposition would violate the non-impairment clause of the constitution.

On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the
implementation of the VAT. The Court required the government, represented by respondents
Cesar V. Purisima, Secretary of the Department of Finance, and Kim S. Jacinto-Henares,
Commissioner of Internal Revenue, to comment on the petition within 10 days from
notice.2 Later, the Court issued another resolution treating the petition as one for prohibition.3

On August 23, 2010 the Office of the Solicitor General filed the government’s comment.4 The
government avers that the NIRC imposes VAT on all kinds of services of franchise grantees,
including tollway operations, except where the law provides otherwise; that the Court should
seek the meaning and intent of the law from the words used in the statute; and that the
imposition of VAT on tollway operations has been the subject as early as 2003 of several BIR
rulings and circulars.5

The government also argues that petitioners have no right to invoke the non-impairment of
contracts clause since they clearly have no personal interest in existing toll operating
agreements (TOAs) between the government and tollway operators. At any rate, the non-
impairment clause cannot limit the State’s sovereign taxing power which is generally read into
contracts.

Finally, the government contends that the non-inclusion of VAT in the parametric formula for
computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot be
claimed that the rights of tollway operators to a reasonable rate of return will be impaired by
the VAT since this is imposed on top of the toll rate. Further, the imposition of VAT on toll fees
would have very minimal effect on motorists using the tollways.

In their reply6 to the government’s comment, petitioners point out that tollway operators
cannot be regarded as franchise grantees under the NIRC since they do not hold legislative
franchises. Further, the BIR intends to collect the VAT by rounding off the toll rate and putting
any excess collection in an escrow account. But this would be illegal since only the Congress
can modify VAT rates and authorize its disbursement. Finally, BIR Revenue Memorandum
Circular 63-2010 (BIR RMC 63-2010), which directs toll companies to record an accumulated
input VAT of zero balance in their books as of August 16, 2010, contravenes Section 111 of the
NIRC which grants entities that first become liable to VAT a transitional input tax credit of 2%
on beginning inventory. For this reason, the VAT on toll fees cannot be implemented.

The Issues Presented

The case presents two procedural issues:

1. Whether or not the Court may treat the petition for declaratory relief as one for
prohibition; and

2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.

The case also presents two substantive issues:

1. Whether or not the government is unlawfully expanding VAT coverage by including

tollway operators and tollway operations in the terms "franchise grantees" and "sale of
services" under Section 108 of the Code; and

2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax
and not a tax on services; b) will impair the tollway operators’ right to a reasonable
return of investment under their TOAs; and c) is not administratively feasible and cannot
be implemented.
 The Court’s Rulings

A. On the Procedural Issues:

On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition
rather than one for declaratory relief, the characterization that petitioners Diaz and Timbol
gave their action. The government has sought reconsideration of the Court’s
resolution,7 however, arguing that petitioners’ allegations clearly made out a case for
declaratory relief, an action over which the Court has no original jurisdiction. The government
adds, moreover, that the petition does not meet the requirements of Rule 65 for actions for
prohibition since the BIR did not exercise judicial, quasi-judicial, or ministerial functions when
it sought to impose VAT on toll fees. Besides, petitioners Diaz and Timbol has a plain, speedy,
and adequate remedy in the ordinary course of law against the BIR action in the form of an
appeal to the Secretary of Finance.

But there are precedents for treating a petition for declaratory relief as one for prohibition if
the case has far-reaching implications and raises questions that need to be resolved for the
public good.8 The Court has also held that a petition for prohibition is a proper remedy to
prohibit or nullify acts of executive officials that amount to usurpation of legislative authority.9

Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would
impact, not only on the more than half a million motorists who use the tollways everyday, but
more so on the government’s effort to raise revenue for funding various projects and for
reducing budgetary deficits.

To dismiss the petition and resolve the issues later, after the challenged VAT has been
imposed, could cause more mischief both to the tax-paying public and the government. A
belated declaration of nullity of the BIR action would make any attempt to refund to the
motorists what they paid an administrative nightmare with no solution. Consequently, it is not
only the right, but the duty of the Court to take cognizance of and resolve the issues that the
petition raises.

Although the petition does not strictly comply with the requirements of Rule 65, the Court has
ample power to waive such technical requirements when the legal questions to be resolved
are of great importance to the public. The same may be said of the requirement of locus standi
which is a mere procedural requisite.10

B. On the Substantive Issues:

One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied,
assessed, and collected, according to Section 108, on the gross receipts derived from the sale
or exchange of services as well as from the use or lease of properties. The third paragraph of
Section 108 defines "sale or exchange of services" as follows:

The phrase ‘sale or exchange of services’ means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real; warehousing services;
lessors or distributors of cinematographic films; persons engaged in milling, processing,
manufacturing or repacking goods for others; proprietors, operators or keepers of hotels,
motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in
securities; lending investors; transportation contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes for hire and other domestic common
carriers by land relative to their transport of goods or cargoes; common carriers by air and sea
relative to their transport of passengers, goods or cargoes from one place in the Philippines to
another place in the Philippines; sales of electricity by generation companies, transmission,
and distribution companies; services of franchise grantees of electric utilities, telephone and
telegraph, radio and television broadcasting and all other franchise grantees except those
under Section 119 of this Code and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding companies; and similar services
regardless of whether or not the performance thereof calls for the exercise or use of the
physical or mental faculties. (Underscoring supplied)

It is plain from the above that the law imposes VAT on "all kinds of services" rendered in the
Philippines for a fee, including those specified in the list. The enumeration of affected services
is not exclusive.11 By qualifying "services" with the words "all kinds," Congress has given the
term "services" an all-encompassing meaning. The listing of specific services are intended to
illustrate how pervasive and broad is the VAT’s reach rather than establish concrete limits to
its application. Thus, every activity that can be imagined as a form of "service" rendered for a
fee should be deemed included unless some provision of law especially excludes it.

Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the
Toll Operation Decree establishes the legal basis for the services that tollway operators
render. Essentially, tollway operators construct, maintain, and operate expressways, also
called tollways, at the operators’ expense. Tollways serve as alternatives to regular public
highways that meander through populated areas and branch out to local roads. Traffic in the
regular public highways is for this reason slow-moving. In consideration for constructing
tollways at their expense, the operators are allowed to collect government-approved fees
from motorists using the tollways until such operators could fully recover their expenses and
earn reasonable returns from their investments.

When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s use
of the tollway facilities over which the operator enjoys private proprietary rights12 that its
contract and the law recognize. In this sense, the tollway operator is no different from the
following service providers under Section 108 who allow others to use their properties or
facilities for a fee:

1. Lessors of property, whether personal or real;

2. Warehousing service operators;

3. Lessors or distributors of cinematographic films;

4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns,

resorts;

5. Lending investors (for use of money);

6. Transportation contractors on their transport of goods or cargoes, including persons

who transport goods or cargoes for hire and other domestic common carriers by land
relative to their transport of goods or cargoes; and
 7. Common carriers by air and sea relative to their transport of passengers, goods or
cargoes from one place in the Philippines to another place in the Philippines.

It does not help petitioners’ cause that Section 108 subjects to VAT "all kinds of services"
rendered for a fee "regardless of whether or not the performance thereof calls for the exercise
or use of the physical or mental faculties." This means that "services" to be subject to VAT
need not fall under the traditional concept of services, the personal or professional kinds that
require the use of human knowledge and skills.

And not only do tollway operators come under the broad term "all kinds of services," they also
come under the specific class described in Section 108 as "all other franchise grantees" who
are subject to VAT, "except those under Section 119 of this Code."

Tollway operators are franchise grantees and they do not belong to exceptions (the low-
income radio and/or television broadcasting companies with gross annual incomes of less than
₱10 million and gas and water utilities) that Section 11913 spares from the payment of VAT.
The word "franchise" broadly covers government grants of a special right to do an act or series
of acts of public concern.14

Petitioners of course contend that tollway operators cannot be considered "franchise

grantees" under Section 108 since they do not hold legislative franchises. But nothing in
Section 108 indicates that the "franchise grantees" it speaks of are those who hold legislative
franchises. Petitioners give no reason, and the Court cannot surmise any, for making a
distinction between franchises granted by Congress and franchises granted by some other
government agency. The latter, properly constituted, may grant franchises. Indeed, franchises
conferred or granted by local authorities, as agents of the state, constitute as much a
legislative franchise as though the grant had been made by Congress itself.15 The term
"franchise" has been broadly construed as referring, not only to authorizations that Congress
directly issues in the form of a special law, but also to those granted by administrative
agencies to which the power to grant franchises has been delegated by Congress.16

Tollway operators are, owing to the nature and object of their business, "franchise grantees."
The construction, operation, and maintenance of toll facilities on public improvements are
activities of public consequence that necessarily require a special grant of authority from the
state. Indeed, Congress granted special franchise for the operation of tollways to the
Philippine National Construction Company, the former tollway concessionaire for the North
and South Luzon Expressways. Apart from Congress, tollway franchises may also be granted by
the TRB, pursuant to the exercise of its delegated powers under P.D. 1112.17 The franchise in
this case is evidenced by a "Toll Operation Certificate."18

Petitioners contend that the public nature of the services rendered by tollway operators
excludes such services from the term "sale of services" under Section 108 of the Code. But,
again, nothing in Section 108 supports this contention. The reverse is true. In specifically
including by way of example electric utilities, telephone, telegraph, and broadcasting
companies in its list of VAT-covered businesses, Section 108 opens other companies rendering
public service for a fee to the imposition of VAT. Businesses of a public nature such as public
utilities and the collection of tolls or charges for its use or service is a franchise.19

Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the
course of congressional deliberations of the would-be law. As the Court said in South African
Airways v. Commissioner of Internal Revenue,20 "statements made by individual members of
Congress in the consideration of a bill do not necessarily reflect the sense of that body and
are, consequently, not controlling in the interpretation of law." The congressional will is
ultimately determined by the language of the law that the lawmakers voted on. Consequently,
the meaning and intention of the law must first be sought "in the words of the statute itself,
read and considered in their natural, ordinary, commonly accepted and most obvious
significations, according to good and approved usage and without resorting to forced or subtle
construction."

Two. Petitioners argue that a toll fee is a "user’s tax" and to impose VAT on toll fees is
tantamount to taxing a tax.21Actually, petitioners base this argument on the following
discussion in Manila International Airport Authority (MIAA) v. Court of Appeals:22

No one can dispute that properties of public dominion mentioned in Article 420 of the Civil
Code, like "roads, canals, rivers, torrents, ports and bridges constructed by the State," are
owned by the State. The term "ports" includes seaports and airports. The MIAA Airport Lands
and Buildings constitute a "port" constructed by the State. Under Article 420 of the Civil Code,
the MIAA Airport Lands and Buildings are properties of public dominion and thus owned by
the State or the Republic of the Philippines.

x x x The operation by the government of a tollway does not change the character of the road
as one for public use. Someone must pay for the maintenance of the road, either the public
indirectly through the taxes they pay the government, or only those among the public who
actually use the road through the toll fees they pay upon using the road. The tollway system is
even a more efficient and equitable manner of taxing the public for the maintenance of public
roads.

The charging of fees to the public does not determine the character of the property whether it
is for public dominion or not. Article 420 of the Civil Code defines property of public dominion
as "one intended for public use." Even if the government collects toll fees, the road is still
"intended for public use" if anyone can use the road under the same terms and conditions as
the rest of the public. The charging of fees, the limitation on the kind of vehicles that can use
the road, the speed restrictions and other conditions for the use of the road do not affect the
public character of the road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that maintains the operations of MIAA. The
collection of such fees does not change the character of MIAA as an airport for public use.
Such fees are often termed user’s tax. This means taxing those among the public who actually
use a public facility instead of taxing all the public including those who never use the particular
public facility. A user’s tax is more equitable – a principle of taxation mandated in the 1987
Constitution."23(Underscoring supplied)

Petitioners assume that what the Court said above, equating terminal fees to a "user’s tax"
must also pertain to tollway fees. But the main issue in the MIAA case was whether or not
Parañaque City could sell airport lands and buildings under MIAA administration at public
auction to satisfy unpaid real estate taxes. Since local governments have no power to tax the
national government, the Court held that the City could not proceed with the auction sale.
MIAA forms part of the national government although not integrated in the department
framework."24 Thus, its airport lands and buildings are properties of public dominion beyond
the commerce of man under Article 420(1)25 of the Civil Code and could not be sold at public
auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to
establish a rule that tollway fees are user’s tax, but to make the point that airport lands and
buildings are properties of public dominion and that the collection of terminal fees for their
use does not make them private properties. Tollway fees are not taxes. Indeed, they are not
assessed and collected by the BIR and do not go to the general coffers of the government.

It would of course be another matter if Congress enacts a law imposing a user’s tax, collectible
from motorists, for the construction and maintenance of certain roadways. The tax in such a
case goes directly to the government for the replenishment of resources it spends for the
roadways. This is not the case here. What the government seeks to tax here are fees collected
from tollways that are constructed, maintained, and operated by private tollway operators at
their own expense under the build, operate, and transfer scheme that the government has
adopted for expressways.26 Except for a fraction given to the government, the toll fees
essentially end up as earnings of the tollway operators.

In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any
sense. A tax is imposed under the taxing power of the government principally for the purpose
of raising revenues to fund public expenditures.27 Toll fees, on the other hand, are collected by
private tollway operators as reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well as to assure them a
reasonable margin of income. Although toll fees are charged for the use of public facilities,
therefore, they are not government exactions that can be properly treated as a tax. Taxes may
be imposed only by the government under its sovereign authority, toll fees may be demanded
by either the government or private individuals or entities, as an attribute of ownership.28

Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of
VAT as an indirect tax. In indirect taxation, a distinction is made between the liability for the
tax and burden of the tax. The seller who is liable for the VAT may shift or pass on the amount
of VAT it paid on goods, properties or services to the buyer. In such a case, what is transferred
is not the seller’s liability but merely the burden of the VAT.29

Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears
its burden since the amount of VAT paid by the former is added to the selling price. Once
shifted, the VAT ceases to be a tax30 and simply becomes part of the cost that the buyer must
pay in order to purchase the good, property or service.

Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the
tollway operator. Under Section 105 of the Code, 31 VAT is imposed on any person who, in the
course of trade or business, sells or renders services for a fee. In other words, the seller of
services, who in this case is the tollway operator, is the person liable for VAT. The latter merely
shifts the burden of VAT to the tollway user as part of the toll fees.

For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were
deemed as a "user’s tax." VAT is assessed against the tollway operator’s gross receipts and not
necessarily on the toll fees. Although the tollway operator may shift the VAT burden to the
tollway user, it will not make the latter directly liable for the VAT. The shifted VAT burden
simply becomes part of the toll fees that one has to pay in order to use the tollways.32

Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause
on behalf of private investors in the tollway projects. She will neither be prejudiced by nor be
affected by the alleged diminution in return of investments that may result from the VAT
imposition. She has no interest at all in the profits to be earned under the TOAs. The interest
in and right to recover investments solely belongs to the private tollway investors.

Besides, her allegation that the private investors’ rate of recovery will be adversely affected by
imposing VAT on tollway operations is purely speculative. Equally presumptuous is her
assertion that a stipulation in the TOAs known as the Material Adverse Grantor Action will be
activated if VAT is thus imposed. The Court cannot rule on matters that are manifestly
conjectural. Neither can it prohibit the State from exercising its sovereign taxing power based
on uncertain, prophetic grounds.

Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT
make the VAT on tollway operations impractical and incapable of implementation. They cite
the fact that, in order to claim input VAT, the name, address and tax identification number of
the tollway user must be indicated in the VAT receipt or invoice. The manner by which the BIR
intends to implement the VAT – by rounding off the toll rate and putting any excess collection
in an escrow account – is also illegal, while the alternative of giving "change" to thousands of
motorists in order to meet the exact toll rate would be a logistical nightmare. Thus, according
to them, the VAT on tollway operations is not administratively feasible.33

Administrative feasibility is one of the canons of a sound tax system. It simply means that the
tax system should be capable of being effectively administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax
imposition invalid "except to the extent that specific constitutional or statutory limitations are
impaired."34 Thus, even if the imposition of VAT on tollway operations may seem burdensome
to implement, it is not necessarily invalid unless some aspect of it is shown to violate any law
or the Constitution.

Here, it remains to be seen how the taxing authority will actually implement the VAT on
tollway operations. Any declaration by the Court that the manner of its implementation is
illegal or unconstitutional would be premature. Although the transcript of the August 12, 2010
Senate hearing provides some clue as to how the BIR intends to go about it,35 the facts
pertaining to the matter are not sufficiently established for the Court to pass judgment on.
Besides, any concern about how the VAT on tollway operations will be enforced must first be
addressed to the BIR on whom the task of implementing tax laws primarily and exclusively
rests. The Court cannot preempt the BIR’s discretion on the matter, absent any clear violation
of law or the Constitution.

For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which
directs toll companies to record an accumulated input VAT of zero balance in their books as of
August 16, 2010, the date when the VAT imposition was supposed to take effect. The issuance
allegedly violates Section 111(A)36 of the Code which grants first time VAT payers a transitional
input VAT of 2% on beginning inventory.

In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of
negotiations with tollway operators who have been assessed VAT as early as 2005, but failed
to charge VAT-inclusive toll fees which by now can no longer be collected. The tollway
operators agreed to waive the 2% transitional input VAT, in exchange for cancellation of their
past due VAT liabilities. Notably, the right to claim the 2% transitional input VAT belongs to the
tollway operators who have not questioned the circular’s validity. They are thus the ones who
have a right to challenge the circular in a direct and proper action brought for the purpose.
 Conclusion

In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand
the VAT law’s coverage when she sought to impose VAT on tollway operations. Section 108(A)
of the Code clearly states that services of all other franchise grantees are subject to VAT,
except as may be provided under Section 119 of the Code. Tollway operators are not among
the franchise grantees subject to franchise tax under the latter provision. Neither are their
services among the VAT-exempt transactions under Section 109 of the Code.

If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly
allege, then it would have been well for the law to clearly say so. Tax exemptions must be
justified by clear statutory grant and based on language in the law too plain to be
mistaken.37 But as the law is written, no such exemption obtains for tollway operators. The
Court is thus duty-bound to simply apply the law as it is found.1avvphi1

Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive
prerogative of Congress. The Court’s role is to merely uphold this legislative policy, as reflected
first and foremost in the language of the tax statute. Thus, any unwarranted burden that may
be perceived to result from enforcing such policy must be properly referred to Congress. The
Court has no discretion on the matter but simply applies the law.

The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the
Expanded Value-Added Tax law was passed. It is only now, however, that the executive has
earnestly pursued the VAT imposition against tollway operators. The executive exercises
exclusive discretion in matters pertaining to the implementation and execution of tax laws.
Consequently, the executive is more properly suited to deal with the immediate and practical
consequences of the VAT imposition.

WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of

Internal Revenue’s motion for reconsideration of its August 24, 2010 resolution, DISMISSES the
petitioners Renato V. Diaz and Aurora Ma. F. Timbol’s petition for lack of merit, and SETS
ASIDE the Court’s temporary restraining order dated August 13, 2010.

SO ORDERED.