initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary.

Subsequently, the
A. Nature and characteristic of VAT in general 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
1. CIR V. MAGSAYSAY LINES 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
THIRD DIVISION 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
COMMISSIONER OF G.R. No. 146984 respondents).[4] The bid was approved by the Committee on Privatization, and a Notice of Award
INTERNAL REVENUE dated 1 July 1988 was issued to Magsaysay Lines.
Petitioner,
Present: On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand,
QUISUMBING, and Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. Paragraph 11.02 of the
- versus - Chairperson, contract stipulated that [v]alue-added tax, if any, shall be for the account of the PURCHASER. [5] Per
CARPIO, arrangement, an irrevocable confirmed Letter of Credit previously filed as bidders bond was accepted
CARPIO MORALES, by NDC as security for the payment of VAT, if any. By this time, a formal request for a ruling on whether
TINGA, and or not the sale of the vessels was subject to VAT had already been filed with the Bureau of Internal
MAGSAYSAY LINES, INC., VELASCO, JR., JJ. Revenue (BIR) by the law firm of Sycip Salazar Hernandez & Gatmaitan, presumably in behalf of
BALIWAG NAVIGATION, INC., private respondents. Thus, the parties agreed that should no favorable ruling be received from the BIR,
FIM LIMITED OF THE MARDEN NDC was authorized to draw on the Letter of Credit upon written demand the amount needed for the
GROUP (HK) and NATIONAL payment of the VAT on the stipulated due date, 20 December 1988.[6]
DEVELOPMENT COMPANY,
Respondents. Promulgated: 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
July 28, 2006 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
x---------------------------------------------------------------------------------x movable, tangible objects which are appropriable or transferable are subject to the 10% [VAT]. [7]

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
Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT Ruling
No. 395-88 (dated 18 August 1988), which made a similar ruling on the sale of the same vessels in
response to an inquiry from the Chairman of the Senate Blue Ribbon Committee. Their motion was
denied when the BIR issued VAT Ruling Nos. 007-89 dated 24 February 1989, reiterating the earlier
VAT rulings. At this point, NDC drew on the Letter of Credit to pay for the VAT, and the amount
of P15,120,000.00 in taxes was paid on 16 March 1989.
On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed by
a Supplemental Petition for Review on 14 July 1989. They prayed for the reversal of VAT Rulings No.
395-88, 568-88 and 007-89, as well as the refund of the VAT payment made amounting
to P15,120,000.00.[8] The Commissioner of Internal Revenue (CIR) opposed the petition, first arguing
that private respondents were not the real parties in interest as they were not the transferors or sellers
as contemplated in Sections 99 and 100 of the then Tax Code. The CIR also squarely defended the
VAT rulings holding the sale of the vessels liable for VAT, especially citing Section 3 of Revenue
Regulation No. 5-87 (R.R. No. 5-87), which provided that [VAT] is imposed on any sale or transactions
deemed sale of taxable goods (including capital goods, irrespective of the date of acquisition). The CIR
argued that the sale of the vessels were among those transactions deemed sale, as enumerated in
Section 4 of R.R. No. 5-87. It seems that the CIR particularly emphasized Section 4(E)(i) of the
Regulation, which classified change of ownership of business as a circumstance that gave rise to a
transaction deemed sale.

In a Decision dated 27 April 1992, the CTA rejected the CIRs arguments and granted the petition. [9] The
CTA ruled that the sale of a vessel was an isolated transaction, not done in the ordinary course of
NDCs business, and was thus not subject to VAT, which under Section 99 of the Tax Code, was
applied only to sales in the course of trade or business. The CTA further held that the sale of the
vessels could not be deemed sale, and thus subject to VAT, as the transaction did not fall under the
enumeration of transactions deemed sale as listed either in Section 100(b) of the Tax Code, or Section
4 of R.R. No. 5-87. Finally, the CTA ruled that any case of doubt should be resolved in favor of private
respondents since Section 99 of the Tax Code which implemented VAT is not an exemption provision,
but a classification provision which warranted the resolution of doubts in favor of the taxpayer.
The CIR appealed the CTA Decision to the Court of Appeals,[10] which on 11 March 1997,
rendered a Decision reversing the CTA.[11] While the appellate court agreed that the sale was an
isolated transaction, not made in the course of NDCs regular trade or business, it nonetheless found
that the transaction fell within the classification of those deemed sale under R.R. No. 5-87, since the
sale of the vessels together with the NMC shares brought about a change of ownership in NMC. The
Court of Appeals also applied the principle governing tax exemptions that such should be strictly
construed against the taxpayer, and liberally in favor of the government. [12]
However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution
dated 5 February 2001.[13] This time, the appellate court ruled that the change of ownership of business
as contemplated in R.R. No. 5-87 must be a consequence of the retirement from or cessation of
business by the owner of the goods, as provided for in Section 100 of the Tax Code. The Court of
Appeals also agreed with the CTA that the classification of transactions deemed sale was a
classification statute, and not an exemption statute, thus warranting the resolution of any doubt in favor
of the taxpayer.[14]
To the mind of the Court, the arguments raised in the present petition have already been adequately
discussed and refuted in the rulings assailed before us. Evidently, the petition should be denied. Yet the
Court finds that Section 99 of the Tax Code is sufficient reason for upholding the refund of VAT
payments, and the subsequent disquisitions by the lower courts on the applicability of Section 100 of
the Tax Code and Section 4 of R.R. No. 5-87 are ultimately irrelevant.
A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on
consumption, even though it is assessed on many levels of transactions on the basis of a fixed
percentage.[15] It is the end user of consumer goods or services which ultimately shoulders the tax, as
the liability therefrom is passed on to the end users by the providers of these goods or services[16] who
in turn may credit their own VAT liability (or input VAT) from the VAT payments they receive from the
final consumer (or output VAT).[17] The final purchase by the end consumer represents the final link in a
production chain that itself involves several transactions and several acts of consumption. The VAT
system assures fiscal adequacy through the collection of taxes on every level of consumption, [18] yet
assuages the manufacturers or providers of goods and services by enabling them to pass on their
respective VAT liabilities to the next link of the chain until finally the end consumer shoulders the entire
tax liability.
Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct
relevance to the taxpayers role or link in the production chain. Hence, as affirmed by Section 99 of the
Tax Code and its subsequent incarnations,[19] the tax is levied only on the sale, barter or exchange of
goods or services by persons who engage in such activities, in the course of trade or business.
These transactions outside the course of trade or business may invariably contribute to the production
chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not
occur within the course of trade or business, the providers of such goods or services would hardly, if at
all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT
collections since the accumulation of output VAT arises in the first place only through the ordinary
course of trade or business.
That the sale of the vessels was not in the ordinary course of trade or business of NDC was
appreciated by both the CTA and the Court of Appeals, the latter doing so even in its first decision
which it eventually reconsidered.[20] We cite with approval the CTAs explanation on this point:
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924,
September 30, 1955 (97 Phil. 992), the term carrying on business does not mean
the performance of a single disconnected act, but means conducting, prosecuting
and continuing business by performing progressively all the acts normally incident
thereof; while doing business conveys the idea of business being done, not from
time to time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL
REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. Course of
business is what is usually done in the management of trade or business. [Idmi v.
Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10,
(1984)].
What is clear therefore, based on the aforecited jurisprudence, is that
course of business or doing business connotes regularity of activity. In the instant
case, the sale was an isolated transaction. The sale which was involuntary and
made pursuant to the declared policy of Government for privatization could no
longer be repeated or carried on with regularity. It should be emphasized that the
normal VAT-registered activity of NDC is leasing personal property.[21]
This finding is confirmed by the Revised Charter[22] of the NDC which bears no indication that
the NDC was created for the primary purpose of selling real property. [23]
The conclusion that the sale was not in the course of trade or business, which the CIR does
not dispute before this Court,[24] should have definitively settled the matter. Any sale, barter or exchange
of goods or services not in the course of trade or business is not subject to VAT.
Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now relied upon
by the CIR, is captioned Value-added tax on sale of goods, and it expressly states that [t]here shall be
levied, assessed and collected on every sale, barter or exchange of goods, a value added tax x x x.
Section 100 should be read in light of Section 99, which lays down the general rule on which persons
are liable for VAT in the first place and on what transaction if at all. It may even be noted that Section
99 is the very first provision in Title IV of the Tax Code, the Title that covers VAT in the law. Before any
portion of Section 100, or the rest of the law for that matter, may be applied in order to subject a
transaction to VAT, it must first be satisfied that the taxpayer and transaction involved is liable for VAT 2. CIR V. SEAGATE TECHNOLOGY (PHILS)
in the first place under Section 99.

THIRD DIVISION
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 thecourse of trade
or business, and thus subject to [G.R. No. 153866. February 11, 2005]
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 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE TECHNOLOGY
business, it would be irrelevant for the purpose of determining VAT liability whether the transaction may (PHILIPPINES), respondent.
be deemed sale, since it anyway is not subject to VAT.
DECISION
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 PANGANIBAN, J.:
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. Business companies registered in and operating from the Special Economic Zone in Naga, Cebu
-- like herein respondent -- are entities exempt from all internal revenue taxes and the implementing
In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this case, the rules relevant thereto, including the value-added taxes or VAT. Although export sales are not deemed
Court finds the discussions offered on this point by the CTA and the Court of Appeals (in its subsequent exempt transactions, they are nonetheless zero-rated. Hence, in the present case, the distinction
Resolution) essentially correct. Section 4 (E)(i) of R.R. No. 5-87 does classify as among the between exempt entities and exempt transactions has little significance, because the net result is that
transactions deemed sale those involving change of ownership of business. However, Section 4(E) of the taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise, has complied with all
R.R. No. 5-87, reflecting Section 100 of the Tax Code, clarifies that such change of ownership is only requisites for claiming a tax refund of or credit for the input VAT it paid on capital goods it purchased.
an attending circumstance to retirement from or cessation of business[, ] with respect to all goods on Thus, the Court of Tax Appeals and the Court of Appeals did not err in ruling that it is entitled to such
hand [as] of the date of such retirement or cessation. [25] Indeed, Section 4(E) of R.R. No. 5-87 expressly refund or credit.
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]
The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside the
WHEREFORE, the petition is DENIED. No costs. May 27, 2002 Decision[2] of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of
the Decision reads as follows:
SO ORDERED.
WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit.[3]

The Facts

The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:

As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:

1. [Respondent] is a resident foreign corporation duly registered with the Securities and
Exchange Commission to do business in the Philippines, with principal office address
 at the new Cebu Township One, Special Economic Zone, Barangay Cantao-an, Naga,
Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to
perform the duties of his office, including, among others, the duty to act and approve
claims for refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has
been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as
amended, to engage in the manufacture of recording components primarily used in
computers for export. Such registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT
Registration Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38
with supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of
this Petition for Review), was filed on 4 October 1999 with Revenue District Office No.
83, Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on [respondents]
claim for VAT refund.
The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by the
[petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way of
Petition for Review in order to toll the running of the two-year prescriptive period.
For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:
1. [Respondents] alleged claim for tax refund/credit is subject to administrative routinary
investigation/examination by [petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and
regulations, the [respondent] has the burden of proof that the taxes sought to be
refunded were erroneously or illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled
that:
A claimant has the burden of proof to establish the
factual basis of his or her claim for tax credit/refund.
4. Claims for tax refund/tax credit are construed in strictissimi juris against the taxpayer.
This is due to the fact that claims for refund/credit [partake of] the nature of an
exemption from tax. Thus, it is incumbent upon the [respondent] to prove that it is
indeed entitled to the refund/credit sought. Failure on the part of the [respondent] to
prove the same is fatal to its claim for tax credit. He who claims exemption must be
able to justify his claim by the clearest grant of organic or statutory law. An exemption
from the common burden cannot be permitted to exist upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority
(PEZA) registered Ecozone Enterprise, then its business is not subject to VAT pursuant
to Section 24 of Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax
Code, as amended. As [respondents] business is not subject to VAT, the capital goods
and services it alleged to have purchased are considered not used in VAT taxable
business. As such, [respondent] is not entitled to refund of input taxes on such capital
goods pursuant to Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of
input taxes on services pursuant to Section 4.103 of said regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of
the 1997 Tax Code on filing of a written claim for refund within two (2) years from the
date of payment of tax.
On July 19, 2001, the Tax Court rendered a decision granting the claim for refund. [4]
Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit
certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum
represented the unutilized but substantiated input VAT paid on capital goods purchased for the period
covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the fiscal incentives under
Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not of
those under both Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916.
Respondent was, therefore, considered exempt only from the payment of income tax when it opted for
the income tax holiday in lieu of the 5 percent preferential tax on gross income earned. As a VAT-
registered entity, though, it was still subject to the payment of other national internal revenue taxes, like
the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-
1 of RR 7-95 were applicable. Having paid the input VAT on the capital goods it purchased, respondent
correctly filed the administrative and judicial claims for its refund within the two-year prescriptive period.
Such payments were -- to the extent of the refundable value -- duly supported by VAT invoices or
official receipts, and were not yet offset against any output VAT liability.
Hence this Petition.[5]
Sole Issue
Petitioner submits this sole issue for our consideration:
Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount
of P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the
period April 1, 1998 to June 30, 1999.[6]
The Courts Ruling
 The Petition is unmeritorious.
Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to
a Refund of or Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a special economic zone, [7] respondent is
entitled to the fiscal incentives and benefits[8]provided for in either PD 66[9] or EO 226.[10] It shall,
moreover, enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA)
7227[11] and 7844.[12]
Preferential Tax Treatment
Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary, respondent
shall not be subject to internal revenue laws and regulations for raw materials, supplies, articles,
equipment, machineries, spare parts and wares, except those prohibited by law, brought into the zone
to be stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise
processed, manipulated, manufactured, mixed or used directly or indirectly in such activities. [13] Even
so, respondent would enjoy a net-operating loss carry over; accelerated depreciation; foreign exchange
and financial assistance; and exemption from export taxes, local taxes and licenses. [14]
Comparatively, the same exemption from internal revenue laws and regulations applies if EO
226[15] is chosen. Under this law, respondent shall further be entitled to an income tax holiday;
additional deduction for labor expense; simplification of customs procedure; unrestricted use of
consigned equipment; access to a bonded manufacturing warehouse system; privileges for foreign
nationals employed; tax credits on domestic capital equipment, as well as for taxes and duties on raw
materials; and exemption from contractors taxes, wharfage dues, taxes and duties on imported capital
equipment and spare parts, export taxes, duties, imposts and fees,[16] local taxes and licenses, and real
property taxes.[17]
A privilege available to respondent under the provision in RA 7227 on tax and duty-free
importation of raw materials, capital and equipment[18] -- is, ipso facto, also accorded to the
zone[19] under RA 7916. Furthermore, the latter law -- notwithstanding other existing laws, rules and
regulations to the contrary -- extends[20] to that zone the provision stating that no local or national taxes
shall be imposed therein.[21] No exchange control policy shall be applied; and free markets for foreign
exchange, gold, securities and future shall be allowed and maintained. [22] Banking and finance shall
also be liberalized under minimum Bangko Sentral regulation with the establishment of foreign currency
depository units of local commercial banks and offshore banking units of foreign banks.[23]
In the same vein, respondent benefits under RA 7844 from negotiable tax credits [24] for locally-
produced materials used as inputs. Aside from the other incentives possibly already granted to it by the
Board of Investments, it also enjoys preferential credit facilities[25] and exemption from PD 1853.[26]
From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax
treatment.[27] It is not subject to internal revenue laws and regulations and is even entitled to tax credits.
The VAT on capital goods is an internal revenue tax from which petitioner as an entity is exempt.
Although the transactions involving such tax are not exempt, petitioner as a VAT-registered
person,[28] however, is entitled to their credits.
Nature of the VAT and
the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied
on every importation of goods, whether or not in the course of trade or business, or imposed on each
sale, barter, exchange or lease of goods or properties or on each rendition of services in the course of
trade or business[29] as they pass along the production and distribution chain, the tax being limited only
to the value added[30] to such goods, properties or services by the seller, transferor or lessor. [31] It is an
indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties
or services.[32] As such, it should be understood not in the context of the person or entity that is
primarily, directly and legally liable for its payment, but in terms of its nature as a tax on
consumption.[33] In either case, though, the same conclusion is arrived at.
The law[34] that originally imposed the VAT in the country, as well as the subsequent amendments
of that law, has been drawn from the tax credit method.[35] Such method adopted the mechanics and
self-enforcement features of the VAT as first implemented and practiced in Europe and subsequently
adopted in New Zealand and Canada.[36] Under the present method that relies on invoices, an entity
can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its
purchases, inputs and imports.[37]
If at the end of a taxable quarter the output taxes [38] charged by a seller[39] are equal to the input
taxes[40] passed on by the suppliers, no payment is required. It is when the output taxes exceed the
input taxes that the excess has to be paid.[41] If, however, the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or quarters. [42] Should the input taxes result from
zero-rated or effectively zero-rated transactions or from the acquisition of capital goods,[43] any excess
over the output taxes shall instead be refunded[44] to the taxpayer or credited[45] against other internal
revenue taxes.[46]
Zero-Rated and Effectively
Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-
rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of services. [47] The
tax rate is set at zero.[48] When applied to the tax base, such rate obviously results in no tax chargeable
against the purchaser. The seller of such transactions charges no output tax, [49] but can claim a refund
of or a tax credit certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods [50] or supply of
services[51] to persons or entities whose exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects such transactions to a zero rate. [52] Again, as
applied to the tax base, such rate does not yield any tax chargeable against the purchaser. The seller
who charges zero output tax on such transactions can also claim a refund of or a tax credit certificate
for the VAT previously charged by suppliers.
Zero Rating and
Exemption
In terms of the VAT computation, zero rating and exemption are the same, but the extent of
relief that results from either one of them is not.
Applying the destination principle[53] to the exportation of goods, automatic zero rating[54] is
primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such
seller internationally competitive by allowing the refund or credit of input taxes that are attributable to
export sales.[55] Effective zero rating, on the contrary, is intended to benefit the purchaser who, not
being directly and legally liable for the payment of the VAT, will ultimately bear the burden of the tax
shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the burden of the
tax.[56] But in an exemption there is only partial relief,[57] because the purchaser is not allowed any tax
refund of or credit for input taxes paid.[58]
Exempt Transaction
and Exempt Party
The object of exemption from the VAT may either be the transaction itself or any of the parties to
the transaction.[59]
An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the
tax status -- VAT-exempt or not -- of the party to the transaction.[60] Indeed, such transaction is not
subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax
Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue
of which its taxable transactions become exempt from the VAT.[61] Such party is also not subject to the
VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on its registration as a
VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or
passed on by the seller to the purchaser of the goods, properties or services. [62] While the liability is
imposed on one person, the burden may be passed on to another. Therefore, if a special law merely
exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the same
party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the
purchase transaction is not exempt. Applying this principle to the case at bar, the purchase transactions
entered into by respondent are not VAT-exempt.
Special laws may certainly exempt transactions from the VAT.[63] However, the Tax Code
provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law
under which respondent was registered. The purchase transactions it entered into are, therefore, not
VAT-exempt. These are subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10
percent,[64] depending again on the application of the destination principle.[65]
If respondent enters into such sales transactions with a purchaser -- usually in a foreign country --
for use or consumption outside the Philippines, these shall be subject to 0 percent.[66] If entered into
with a purchaser for use or consumption in the Philippines, then these shall be subject to 10
percent,[67] unless the purchaser is exempt from the indirect burden of the VAT, in which case it shall
also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero.
Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero
rate,[68] because the ecozone within which it is registered is managed and operated by the PEZA as
a separate customs territory.[69] This means that in such zone is created the legal fiction of foreign
territory.[70] Under the cross-border principle[71] of the VAT system being enforced by the Bureau of
Internal Revenue (BIR),[72] no VAT shall be imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing authority. If exports of goods and services
from the Philippines to a foreign country are free of the VAT, [73] then the same rule holds for such
exports from the national territory -- except specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are
considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-
registered person in the customs territory are deemed imports from a foreign country. [74] An ecozone --
indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign
soil.[75] This legal fiction is necessary to give meaningful effect to the policies of the special law creating
the zone.[76] If respondent is located in an export processing zone[77] within that ecozone, sales to the
export processing zone, even without being actually exported, shall in fact be viewed as constructively
exported under EO 226.[78] Considered as export sales,[79] such purchase transactions by respondent
would indeed be subject to a zero rate.[80]
Tax Exemptions
Broad and Express
Applying the special laws we have earlier discussed, respondent as an entity is exempt from
internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT
as a tax on consumption, for which the direct liability is imposed on one person but the
indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly
charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the
equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law
does not distinguish, we ought not to distinguish.
Moreover, the exemption is both express and pervasive for the following reasons:
First, RA 7916 states that no taxes, local and national, shall be imposed on business
establishments operating within the ecozone.[81] Since this law does not exclude the VAT from the
prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis. An exception
confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as coming
within the purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be
passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of the law.
That no VAT shall be imposed directly upon business establishments operating within the ecozone
under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid
prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also
prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for
real property taxes that presently are imposed on land owned by developers. [82] This similar and
repeated prohibition is an unambiguous ratification of the laws intent in not imposing local or national
taxes on business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and the like shall not be
subject to x x x internal revenue laws and regulations under PD 66[83] -- the original charter of PEZA
(then EPZA) that was later amended by RA 7916. [84] No provisions in the latter law modify such
exemption.
Although this exemption puts the government at an initial disadvantage, the reduced tax
collection ultimately redounds to the benefit of the national economy by enticing more business
investments and creating more employment opportunities.[85]
Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except
those prohibited by law -- shall not be subject to x x x internal revenue laws and regulations x x x[86] if
brought to the ecozones restricted area[87] for manufacturing by registered export enterprises,[88]of which
respondent is one. These rules also apply to all enterprises registered with the EPZA prior to the
effectivity of such rules.[89]
Fifth, export processing zone enterprises registered[90] with the Board of Investments (BOI) under
EO 226 patently enjoy exemption from national internal revenue taxes on imported capital equipment
reasonably needed and exclusively used for the manufacture of their products; [91] on required supplies
and spare part for consigned equipment;[92] and on foreign and domestic merchandise, raw materials,
equipment and the like -- except those prohibited by law -- brought into the zone for manufacturing.[93] In
addition, they are given credits for the value of the national internal revenue taxes imposed on domestic
capital equipment also reasonably needed and exclusively used for the manufacture of their
products,[94] as well as for the value of such taxes imposed on domestic raw materials and supplies that
are used in the manufacture of their export products and that form part thereof. [95]
Sixth, the exemption from local and national taxes granted under RA 7227 [96] are ipso facto
accorded to ecozones.[97] In case of doubt, conflicts with respect to such tax exemption privilege shall
be resolved in favor of the ecozone.[98]
And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in
the production of export goods,[99] and for locally produced raw materials, capital equipment and spare
parts used by exporters of non-traditional products[100] -- shall also be continuously enjoyed by similar
exporters within the ecozone.[101] Indeed, the latter exporters are likewise entitled to such tax
exemptions and credits.
Tax Refund as
Tax Exemption
To be sure, statutes that grant tax exemptions are construed strictissimi juris[102] against the
taxpayer[103] and liberally in favor of the taxing authority.[104]
Tax refunds are in the nature of such exemptions.[105] Accordingly, the claimants of those refunds
bear the burden of proving the factual basis of their claims;[106] and of showing, by words too plain to be
mistaken, that the legislature intended to exempt them.[107] In the present case, all the cited legal
provisions are teeming with life with respect to the grant of tax exemptions too vivid to pass unnoticed.
In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions which are not exempt.
The end result, however, is that it is not subject to the VAT. The non-taxability of transactions that are
otherwise taxable is merely a necessary incident to the tax exemption conferred by law upon it as an
entity, not upon the transactions themselves.[108] Nonetheless, its exemption as an entity and the non-
exemption of its transactions lead to the same result for the following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to
execute or administer such laws[109] will have to be adopted. Their prior tax issuances have held
inconsistent positions brought about by their probable failure to comprehend and fully appreciate the
nature of the VAT as a tax on consumption and the application of the destination principle.[110] Revenue
Memorandum Circular No. (RMC) 74-99, however, now clearly and correctly provides that any VAT-
registered suppliers sale of goods, property or services from the customs territory to any registered
enterprise operating in the ecozone -- regardless of the class or type of the latters PEZA registration --
is legally entitled to a zero rate.[111]
Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its
very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the
establishment of export processing zones, seeks to encourage and promote foreign commerce as a
means of x x x strengthening our export trade and foreign exchange position, of hastening
industrialization, of reducing domestic unemployment, and of accelerating the development of the
country.[112]
RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the
special economic zones, the government shall actively encourage, promote, induce and accelerate a
sound and balanced industrial, economic and social development of the country x x x through the
establishment, among others, of special economic zones x x x that shall effectively attract legitimate
and productive foreign investments.[113]
Under EO 226, the State shall encourage x x x foreign investments in industry x x x which shall x
x x meet the tests of international competitiveness[,] accelerate development of less developed regions
of the country[,] and result in increased volume and value of exports for the economy.[114] Fiscal
incentives that are cost-efficient and simple to administer shall be devised and extended to significant
projects to compensate for market imperfections, to reward performance contributing to economic
development,[115] and to stimulate the establishment and assist initial operations of the enterprise.[116]
Wisely accorded to ecozones created under RA 7916[117] was the governments policy -- spelled
out earlier in RA 7227 -- of converting into alternative productive uses[118] the former military
reservations and their extensions,[119] as well as of providing them incentives[120] to enhance the benefits
that would be derived from them[121] in promoting economic and social development.[122]
Finally, under RA 7844, the State declares the need to evolve export development into a national
effort[123] in order to win international markets. By providing many export and tax incentives,[124] the State
is able to drive home the point that exporting is indeed the key to national survival and the means
through which the economic goals of increased employment and enhanced incomes can most
expeditiously be achieved.[125]
The Tax Code itself seeks to promote sustainable economic growth x x x; x x x increase
economic activity; and x x x create a robust environment for business to enable firms to compete better
in the regional as well as the global market.[126] After all, international competitiveness requires
economic and tax incentives to lower the cost of goods produced for export. State actions that affect
global competition need to be specific and selective in the pricing of particular goods or services. [127]
All these statutory policies are congruent to the constitutional mandates of providing incentives to
needed investments,[128] as well as of promoting the preferential use of domestic materials and locally
produced goods and adopting measures to help make these competitive. [129] Tax credits for domestic
inputs strengthen backward linkages. Rightly so, the rule of law and the existence of credible and
efficient public institutions are essential prerequisites for sustainable economic development.[130]
VAT Registration, Not Application
for Effective Zero Rating,
Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT law. [131]
Petitioner alleges that
respondent did register for VAT purposes with the appropriate Revenue District Office. However, it is
now too late in the day for petitioner to challenge the VAT-registered status of respondent, given the
latters prior representation before the lower courts and the mode of appeal taken by petitioner before
this Court.
The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from
internal revenue laws and regulations the equipment -- including capital goods -- that registered
enterprises will use, directly or indirectly, in manufacturing.[132] EO 226 even reiterates this privilege
among the incentives it gives to such enterprises. [133] Petitioner merely asserts that by virtue of the
PEZA registration alone of respondent, the latter is not subject to the VAT. Consequently, the capital
goods and services respondent has purchased are not considered used in the VAT business, and no
VAT refund or credit is due.[134] This is a non sequitur. By the VATs very nature as a tax on
consumption, the capital goods and services respondent has purchased are subject to the VAT,
although at zero rate. Registration does not determine taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts. Having failed to present
evidence to support its contentions against the income tax holiday privilege of respondent,[135] petitioner
is deemed to have conceded. It is a cardinal rule that issues and arguments not adequately and
seriously brought below cannot be raised for the first time on appeal. [136] This is a matter of
procedure[137] and a question of fairness.[138]Failure to assert within a reasonable time warrants a
presumption that the party entitled to assert it either has abandoned or declined to assert it. [139]
The BIR regulations additionally requiring an approved prior application for effective zero
rating[140] cannot prevail over the clear VAT nature of respondents transactions. The scope of such
regulations is not within the statutory authority x x x granted by the legislature.[141]
First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former
cannot purport to do any more than interpret the latter.[142] The courts will not countenance one that
overrides the statute it seeks to apply and implement.[143]
Other than the general registration of a taxpayer the VAT status of which is aptly determined, no
provision under our VAT law requires an additional application to be made for such taxpayers
transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not and
cannot become exempt simply because an application therefor was not made or, if made, was denied.
To allow the additional requirement is to give unfettered discretion to those officials or agents who,
without fluid consideration, are bent on denying a valid application. Moreover, the State can never be
estopped by the omissions, mistakes or errors of its officials or agents.[144]
Second, grantia argumenti that such an application is required by law, there is still the
presumption of regularity in the performance of official duty. [145] Respondents registration carries with it
the presumption that, in the absence of contradictory evidence, an application for effective zero rating
was also filed and approval thereof given. Besides, it is also presumed that the law has been
obeyed[146] by both the administrative officials and the applicant.
Third, even though such an application was not made, all the special laws we have tackled
exempt respondent not only from internal revenue laws but also from the regulations issued pursuant
thereto. Leniency in the implementation of the VAT in ecozones is an imperative, precisely to spur
economic growth in the country and attain global competitiveness as envisioned in those laws.
A VAT-registered status, as well as compliance with the invoicing requirements,[147] is sufficient
for the effective zero rating of the transactions of a taxpayer. The nature of its business and
transactions can easily be perused from, as already clearly indicated in, its VAT registration papers and
photocopied documents attached thereto. Hence, its transactions cannot be exempted by its mere
failure to apply for their effective zero rating. Otherwise, their VAT exemption would be determined, not
by their nature, but by the taxpayers negligence -- a result not at all contemplated. Administrative
convenience cannot thwart legislative mandate.
Tax Refund or
Credit in Order
Having determined that respondents purchase transactions are subject to a zero VAT rate, the
tax refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives
in EO 226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5
percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA
law,[148] for EO 226[149] also has provisions to contend with. These two regimes are in fact incompatible
and cannot be availed of simultaneously by the same entity. While EO 226 merely exempts it from
income taxes, the PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but only from the payment
of income tax for a certain number of years, depending on its registration as a pioneer or a non-pioneer
enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned in lieu of local
and national taxes imposable upon business establishments within the ecozone cannot outrightly
determine a VAT exemption. Being subject to VAT, payments erroneously collected thereon may then
be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916,
Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such provision
merely exempts respondent from taxes imposed on business. To repeat, the VAT is a tax imposed on
consumption, not on business. Although respondent as an entity is exempt, the transactions it enters
into are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may
certainly be refunded or credited.
Compliance with All Requisites
for VAT Refund or Credit
As such, respondent is exempt from all internal revenue taxes, including the VAT, and regulations
pertaining thereto. It has opted for the income tax holiday regime, instead of the 5 percent preferential
tax regime. As a matter of law and procedure, its registration status entitling it to such tax holiday can
no longer be questioned. Its sales transactions intended for export may not be exempt, but like its
purchase transactions, they are zero-rated. No prior application for the effective zero rating of its
transactions is necessary. Being VAT-registered and having satisfactorily complied with all the
requisites for claiming a tax refund of or credit for the input VAT paid on capital goods purchased,
respondent is entitled to such VAT refund or credit.

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to
VAT refund or credit.[150] costs.

First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from SO ORDERED.
Contex, in which this Court held that the petitioner therein was registered as a non-VAT
taxpayer.[151] Hence, for being merely VAT-exempt, the petitioner in that case cannot claim any VAT
refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly supported by VAT
invoices and have not been offset against any output taxes. Although enterprises registered with the
BOI after December 31, 1994 would no longer enjoy the tax credit incentives on domestic capital
equipment -- as provided for under Article 39(d), Title III, Book I of EO 226[152] -- starting January 1,
1996, respondent would still have the same benefit under a general and express exemption contained
in both Article 77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227, extended to the
ecozones by RA 7916.

There was a very clear intent on the part of our legislators, not only to exempt investors in
ecozones from national and local taxes, but also to grant them tax credits. This fact was revealed by the
sponsorship speeches in Congress during the second reading of House Bill No. 14295, which later
became RA 7916, as shown below:

MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local
taxes; x x x tax credit for locally-sourced inputs x x x.

xxxxxxxxx

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

And third, no question as to either the filing of such claims within the prescriptive period or the
validity of the VAT returns has been raised. Even if such a question were raised, the tax exemption
under all the special laws cited above is broad enough to cover even the enforcement of internal
revenue laws, including prescription.[154]

Summary

To summarize, special laws expressly grant preferential tax treatment to business establishments
registered and operating within an ecozone, which by law is considered as a separate customs territory.
 B. VAT AS AN INDIRECT TAX
3. CONTEX V. CIR
SECOND DIVISION
[G.R. No. 151135. July 2, 2004]
CONTEX CORPORATION, petitioner, vs. HON. COMMISSIONER OF INTERNAL
REVENUE, respondent.
DECISION
QUISUMBING, J.:
[1]
For review is the Decision dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP
No. 62823, which reversed and set aside the decision[2] dated October 13, 2000, of the Court of Tax
Appeals (CTA). The CTA had ordered the Commissioner of Internal Revenue (CIR) to refund the sum
of P683,061.90 to petitioner as erroneously paid input value-added tax (VAT) or in the alternative, to
issue a tax credit certificate for said amount. Petitioner also assails the appellate courts
Resolution,[3] dated December 19, 2001, denying the motion for reconsideration.
Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles
and garments and other hospital supplies for export. Petitioners place of business is at the Subic Bay
Freeport Zone (SBFZ). It is duly registered with the Subic Bay Metropolitan Authority (SBMA) as a
Subic Bay Freeport Enterprise, pursuant to the provisions of Republic Act No. 7227. [4] As an SBMA-
registered firm, petitioner is exempt from all local and national internal revenue taxes except for the
preferential tax provided for in Section 12 (c)[5] of Rep. Act No. 7227. Petitioner also registered with the
Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under Certificate of Registration RDO Control
No. 95-180-000133.
From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and
materials necessary in the conduct of its manufacturing business. The suppliers of these goods shifted
unto petitioner the 10% VAT on the purchased items, which led the petitioner to pay input taxes in the
amounts of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.[6]
Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant
to Rep. Act No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr.
Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied the first application letter, dated
December 29, 1998.
Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit,
this time directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4. The
second letter sought a refund or issuance of a tax credit certificate in the amount of P1,108,307.72,
representing erroneously paid input VAT for the period January 1, 1997 to November 30, 1998.
When no response was forthcoming from the BIR Regional Director, petitioner then elevated the
matter to the Court of Tax Appeals, in a petition for review docketed as CTA Case No. 5895. Petitioner
stressed that Section 112(A)[7] if read in relation to Section 106(A)(2)(a)[8] of the National Internal
Revenue Code, as amended and Section 12(b)[9] and (c) of Rep. Act No. 7227 would show that it was
not liable in any way for any value-added tax.
In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that
claims for refund are strictly construed against the taxpayer. Since petitioner failed to establish both its
right to a tax refund or tax credit and its compliance with the rules on tax refund as provided for in
Sections 204[10] and 229[11] of the Tax Code, its claim should be denied, according to the BIR.
On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:
WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY
GRANTED. Respondent is hereby ORDERED to REFUND or in the alternative to ISSUE A TAX
CREDIT CERTIFICATE in favor of Petitioner the sum of P683,061.90, representing erroneously paid
input VAT.
SO ORDERED.[12]
In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and
112(A) of the Tax Code. The tax court stressed that these provisions apply only to those entities
registered as VAT taxpayers whose sales are zero-rated. Petitioner does not fall under this category,
since it is a non-VAT taxpayer as evidenced by the Certificate of Registration RDO Control No. 95-180-
000133 issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic Bay Freeport Zone and
thus it is exempt from VAT, pursuant to Rep. Act No. 7227, said the CTA.
Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its
purchases of supplies and materials. It pointed out that under Section 12(c) of Rep. Act No. 7227 and
the Implementing Rules and Regulations of the Bases Conversion and Development Act of 1992, all
that petitioner is required to pay as a SBFZ-registered enterprise is a 5% preferential tax.
The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for
being barred by the two-year prescriptive period under Section 229 of the Tax Code. The tax court also
limited the refund only to the input VAT paid by the petitioner on the supplies and materials directly
used by the petitioner in the manufacture of its goods. It struck down all claims for input VAT paid on
maintenance, office supplies, freight charges, and all materials and supplies shipped or delivered to the
petitioners Makati and Pasay City offices.
Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of
the CTA decision by the Court of Appeals. Respondent maintained that the exemption of Contex Corp.
under Rep. Act No. 7227 was limited only to direct taxes and not to indirect taxes such as the input
component of the VAT. The Commissioner pointed out that from its very nature, the value-added tax is
a burden passed on by a VAT registered person to the end users; hence, the direct liability for the tax
lies with the suppliers and not Contex.
 Finding merit in the CIRs arguments, the appellate court decided CA-G.R. SP No. 62823 in his
favor, thus:
WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET
ASIDE. Contexs claim for refund of erroneously paid taxes is DENIED accordingly.
SO ORDERED.[13]
In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the
importation of raw materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act No.
7227 and its implementing rules covers only the VAT imposable under Section 107 of the [Tax Code],
which is a direct liability of the importer, and in no way includes the value-added tax of the seller-
exporter the burden of which was passed on to the importer as an additional costs of the goods. [14] This
was because the exemption granted by Rep. Act No. 7227 relates to the act of importation and Section
107[15] of the Tax Code specifically imposes the VAT on importations. The appellate court applied the
principle that tax exemptions are strictly construed against the taxpayer. The Court of Appeals pointed
out that under the implementing rules of Rep. Act No. 7227, the exemption of SBFZ-registered
enterprises from internal revenue taxes is qualified as pertaining only to those for which they may be
directly liable. It then stated that apparently, the legislative intent behind Rep. Act No. 7227 was to grant
exemptions only to direct taxes, which SBFZ-registered enterprise may be liable for and only in
connection with their importation of raw materials, capital, and equipment as well as the sale of their
goods and services.
Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was
denied.
Hence, the instant petition raising as issues for our resolution the following:
A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL
INTERNAL REVENUE TAXES PROVIDED IN REPUBLIC ACT
NO. 7227 COVERS THE VALUE ADDED TAX PAID BY PETITIONER, A SUBIC
BAY FREEPORT ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND
MATERIALS.
B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT
PETITIONER IS ENTITLED TO A TAX CREDIT OR REFUND OF THE VAT PAID
ON ITS PURCHASES OF SUPPLIES AND RAW MATERIALS FOR THE YEARS
1997 AND 1998.[16]
Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of
the Court of Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not apply to
petitioner as a purchaser; and (2) the entitlement of the petitioner to a tax refund on its purchases of
supplies and raw materials for 1997 and 1998.
On the first issue, petitioner argues that the appellate courts restrictive interpretation of petitioners
VAT exemption as limited to those covered by Section 107 of the Tax Code is erroneous and devoid of
legal basis. It contends that the provisions of Rep. Act No. 7227 clearly and unambiguously mandate
that no local and national taxes shall be imposed upon SBFZ-registered firms and hence, said law
should govern the case. Petitioner calls our attention to regulations issued by both the SBMA and BIR
clearly and categorically providing that the tax exemption provided for by Rep. Act No.
7227 includes exemption from the imposition of VAT on purchases of supplies and materials.
The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax
exemptions, such grant is not all-encompassingbut is limited only to those taxes for which a SBFZ-
registered business may be directly liable. Hence, SBFZ locators are not relieved from the indirect
taxes that may be shifted to them by a VAT-registered seller.
At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax
paid on the goods, properties or services bought, transferred, or leased may be shifted or passed on by
the seller, transferor, or lessor to the buyer, transferee or lessee.[17] Unlike a direct tax, such as the
income tax, which primarily taxes an individuals ability to pay based on his income or net wealth, an
indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions
involving the same. The VAT, thus, forms a substantial portion of consumer expenditures.
Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the
burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by the
seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax
burden. In adding or including the VAT due to the selling price, the seller remains the person primarily
and legally liable for the payment of the tax.What is shifted only to the intermediate buyer and ultimately
to the final purchaser is the burden of the tax.[18] Stated differently, a seller who is directly and legally
liable for payment of an indirect tax, such as the VAT on goods or services is not necessarily the person
who ultimately bears the burden of the same tax. It is the final purchaser or consumer of such goods or
services who, although not directly and legally liable for the payment thereof, ultimately bears the
burden of the tax.[19]
Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under
VAT, the transaction can have preferential treatment in the following ways:
(a) VAT Exemption. An exemption means that the sale of goods or properties and/or services and the
use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit
on VAT (input tax) previously paid.[20] This is a case wherein the VAT is removed at the exempt stage
(i.e., at the point of the sale, barter or exchange of the goods or properties).
The person making the exempt sale of goods, properties or services shall not bill any output tax to his
customers because the said transaction is not subject to VAT.On the other hand, a VAT-registered
purchaser of VAT-exempt goods/properties or services which are exempt from VAT is not entitled to
any input tax on such purchase despite the issuance of a VAT invoice or receipt. [21]
(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0% rate,
meaning the tax burden is not passed on to the purchaser. A zero-rated sale by a VAT-registered
person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the
input tax on his purchases of goods, properties or services related to such zero-rated sale shall be
available as tax credit or refund in accordance with these regulations. [22]
Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast,
exemption only removes the VAT at the exempt stage, and it will actually increase, rather than reduce
the total taxes paid by the exempt firms business or non-retail customers. It is for this reason that a
sharp distinction must be made between zero-rating and exemption in designating a value-added tax.[23]
Apropos, the petitioners claim to VAT exemption in the instant case for its purchases of supplies
and raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically
exempts them from all national and local internal revenue taxes, including VAT and Section 4 (A)(a) of
BIR Revenue Regulations No. 1-95.[24]
On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not
controverted by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate
of Registration[25] issued by the BIR. As such, it is exempt from VAT on all its sales and importations of
goods and services.
Petitioners claim, however, for exemption from VAT for its purchases of supplies and raw
materials is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities can claim
Input VAT Credit/Refund.
The point of contention here is whether or not the petitioner may claim a refund on the Input VAT
erroneously passed on to it by its suppliers.
While it is true that the petitioner should not have been liable for the VAT inadvertently passed on
to it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the
proper party to claim such VAT refund.
Section 4.100-2 of BIRs Revenue Regulations 7-95, as amended, or the Consolidated Value-
Added Tax Regulations provide:
(PEZA), or international agreements, e.g. Asian Development Bank (ADB), International
Rice Research Institute (IRRI), etc. to which the Philippines is a signatory effectively subject
such sales to zero-rate.
Since the transaction is deemed a zero-rated sale, petitioners supplier may claim an Input VAT
credit with no corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the
petitioner.
On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a
NON-VAT taxpayer and thus, is exempt from VAT.As an exempt VAT taxpayer, it is not allowed any tax
credit on VAT (input tax) previously paid. In fine, even if we are to assume that exemption from the
burden of VAT on petitioners purchases did exist, petitioner is still not entitled to any tax credit or refund
on the input tax previously paid as petitioner is an exempt VAT taxpayer.
Rather, it is the petitioners suppliers who are the proper parties to claim the tax credit and
accordingly refund the petitioner of the VAT erroneously passed on to the latter.
Accordingly, we find that the Court of Appeals did not commit any reversible error of law in
holding that petitioners VAT exemption under Rep. Act No. 7227 is limited to the VAT on which it is
directly liable as a seller and hence, it cannot claim any refund or exemption for any input VAT it paid, if
any, on its purchases of raw materials and supplies.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001,
of the Court of Appeals in CA-G.R. SP No. 62823, as well as its Resolution of December 19, 2001 are
AFFIRMED. No pronouncement as to costs.

SO ORDERED.
Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which is a taxable
transaction for VAT purposes, shall not result in any output tax.However, the input tax on his purchases
of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund
in accordance with these regulations.

The following sales by VAT-registered persons shall be subject to 0%:

(a) Export Sales

Export Sales shall mean

...

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

...

(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly
registered and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and
Clark Development Authority (CDA), R. A. No. 7916, Philippine Economic Zone Authority
 PERSONS LIABLE IN GENERAL 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
4. CIR V. CA & CMS 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
FIRST DIVISION 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
[G.R. No. 125355. March 30, 2000] 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
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS and
Philamlife and its affiliates, and not in the sale of services. COMASERCO stressed that it was not profit-
COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION, respondents. Court
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
DECISION pay VAT.

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
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.

10% tax due thereon 167,915.50 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

25% surcharge 41,978.88

"WHEREFORE, in view of the foregoing, judgment is hereby rendered
REVERSING and SETTING ASIDE the questioned Decision promulgated on 22
20% interest per annum 125,936.63
June 1995. The assessment for deficiency value-added tax for the taxable year
1988 inclusive of surcharge, interest and penalty charges are ordered
Compromise penalty for late payment 16,000.00 CANCELLED for lack of legal and factual basis."[6]

TOTAL AMOUNT DUE AND COLLECTIBLE P 351,831.01"[3] 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
COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss in services rendered to Philamlife and its affiliates. The Court of Appeals, in that case, reasoned that
its operations in the amount of P6,077.00. J lexj 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 C. MEANING OF THE PHRASE “IN THE COURSE OF TRADE OF BUSINESS”
a fee, remuneration or consideration, then the service rendered is subject to VAT.
5. CIR V. MAGASAYSAY LINES [2X]
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
ZERO RATED SALES & VAT EXEMPT TRANSACTIONS
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
C. ZERO RATED SALE OF SERVICES
transactions exempted from VAT. The services rendered by COMASERCO do not fall within the
exemptions.
6. CIR V. AMERICAN EXPRESS

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 THIRD DIVISION
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 COMMISSIONER OF G.R. No. 152609
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 INTERNAL REVENUE,
or improvident exercise of its authority.[15]
Petitioner, Present:
There is no merit to respondent's contention that the Court of Appeals' decision in CA-G. R. No. 34042,
Panganiban, J.,
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,
Chairman,
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 Sandoval-Gutierrez,
VAT. Jksm
- versus - Corona,
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. Carpio Morales, and
T. A. Case No. 4853.
Garcia, JJ
No costs.
AMERICAN EXPRESS

SO ORDERED. INTERNATIONAL, INC. Promulgated:

(PHILIPPINE BRANCH),

Respondent. June 29, 2005

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

DECISION
PANGANIBAN, J.: H 4th Qtr. January 20, 1998

A s a general rule, the value-added tax (VAT) system uses the destination principle. However, our
VAT law itself provides for a clear exception, under which the supply of service shall be zero-rated On March 23, 1999, however, [respondent] amended the aforesaid
when the following requirements are met: (1) the service is performed in the Philippines; (2) the service returns and declared the following:
falls under any of the categories provided in Section 102(b) of the Tax Code; and (3) it is paid for in
acceptable foreign currency that is accounted for in accordance with the regulations of the Bangko
Sentral ng Pilipinas. Since respondents services meet these requirements, they are zero-rated. Taxable Output Zero-rated Domestic Input
Petitioners Revenue Regulations that alter or revoke the above requirements are ultra vires and invalid. Exh Sales VAT Sales Purchases VAT
1997
The Case
I 1st qtr P59,597.20 P5,959.72 P17,513,801.11 P6,778,182.30 P677,818.23
J 67,517.20 6,751.72 17,937,361.51 9,333,242.90 933,324.29
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, assailing the 2nd qtr
February 28, 2002 Decision[2] of the Court of Appeals (CA) in CA-GR SP No. 62727. The assailed K 51,936.60 5,193.66 19,627,245.36 8,438,357.00 843,835.70
Decision disposed as follows: 3rd qtr
L 67,994.30 6,799.43 25,231,225.22 13,080,822.10 1,308,082.21
WHEREFORE, premises considered, the petition is 4th qtr
hereby DISMISSED for lack of merit. The assailed decision of the Court of Tax
Appeals (CTA) is AFFIRMED in toto.[3] Total P247,045.30 P24,704.53 P80,309,633.20 P37,630,604.30 P3,763,060.43

The Facts
Quoting the CTA, the CA narrated the undisputed facts as follows:
[Respondent] is a Philippine branch of American Express International,
Inc., a corporation duly organized and existing under and by virtue of the laws of
the State of Delaware, U.S.A., with office in the Philippines at the Ground Floor,
ACE Building, corner Rada and de la Rosa Streets, Legaspi Village, Makati City. It
is a servicing unit of American Express International, Inc. - Hongkong Branch
(Amex-HK) and is engaged primarily to facilitate the collections of Amex-HK
receivables from card members situated in the Philippines and payment to service
establishments in the Philippines.
Amex Philippines registered itself with the Bureau of Internal Revenue
(BIR), Revenue District Office No. 47 (East Makati) as a value-added tax (VAT)
taxpayer effective March 1988 and was issued VAT Registration Certificate No.
088445 bearing VAT Registration No. 32A-3-004868. For the period January 1,
1997 to December 31, 1997, [respondent] filed with the BIR its quarterly VAT
returns as follows:
On April 13, 1999, [respondent] filed with the BIR a letter-request for the
refund of its 1997 excess input taxes in the amount of P3,751,067.04, which
amount was arrived at after deducting from its total input VAT paid
of P3,763,060.43 its applied output VAT liabilities only for the third and fourth
quarters of 1997 amounting to P5,193.66 and P6,799.43, respectively.
[Respondent] cites as basis therefor, Section 110 (B) of the 1997 Tax Code, to
state:
Section 110. Tax Credits. -
xxxxxxxxx
(B) Excess Output or Input Tax. - If at the end of any
taxable quarter the output tax exceeds the input tax, the
excess shall be paid by the VAT-registered person. If the input
tax exceeds the output tax, the excess shall be carried over to
the succeeding quarter or quarters. Any input tax attributable
to the purchase of capital goods or to zero-rated sales by a
VAT-registered person may at his option be refunded or
credited against other internal revenue taxes, subject to the
provisions of Section 112.

Exhibit Period Covered Date Filed

There being no immediate action on the part of the [petitioner],
st
[respondents] petition was filed on April 15, 1999.
D 1997 1 Qtr. April 18, 1997
F 2nd Qtr. July 21, 1997 In support of its Petition for Review, the following arguments were raised
G 3rd Qtr. October 2, 1997
by [respondent]:

A. Export sales by a VAT-registered person, the
consideration for which is paid for in acceptable foreign
currency inwardly remitted to the Philippines and accounted for
in accordance with existing regulations of the Bangko Sentral
ng Pilipinas, are subject to [VAT] at zero percent (0%).
According to [respondent], being a VAT-registered entity, it is
subject to the VAT imposed under Title IV of the Tax Code, to
wit:
Section 102.(sic) Value-added
tax on sale of services.- (a) Rate and
base of tax. - There shall be levied,
assessed and collected, a value-added
tax equivalent to 10% percent of gross
receipts derived by any person engaged in
the sale of services. The phrase sale of
services means the performance of all
kinds of services for others for a fee,
remuneration or consideration, including
those performed or rendered by
construction and service contractors:
stock, real estate, commercial, customs
and immigration brokers; lessors of
personal property; lessors or distributors
of cinematographic films; persons
engaged in milling, processing,
manufacturing or repacking goods for
others; and similar services regardless of
whether o[r] not the performance thereof
calls for the exercise or use of the physical
or mental faculties: Provided That the
following services performed in the
Philippines by VAT-registered persons
shall be subject to 0%:
(1) xxx
(2) Services
other than
those
mentioned
in
the preceding
subparagraph,
the
considerati
on is paid
for in
acceptable
foreign
currency
which is
remitted
inwardly to
the Philippine
s and
accounted for
in
accordance
with the
rules and
regulations
of the BSP.
x x x.
In addition, [respondent] relied on VAT Ruling No.
080-89, dated April 3, 1989, the pertinent portion of which
reads as follows:
In Reply, please be informed
that, as a VAT registered entity whose
service is paid for in acceptable foreign
currency which is remitted inwardly to the
Philippines and accounted for in
accordance with the rules and regulations
of the Central [B]ank of the Philippines,
your service income is automatically zero
rated effective January 1, 1998. [Section
102(a)(2) of the Tax Code as
amended].[4] For this, there is no need to
file an application for zero-rate.
B. Input taxes on domestic purchases of taxable
goods and services related to zero-rated revenues are
available as tax refund in accordance with Section 106 (now
Section 112) of the [Tax Code] and Section 8(a) of [Revenue]
Regulations [(RR)] No. 5-87, to state:
Section 106. Refunds or tax
credits of input tax. -
(A) Zero-rated or effectively
Zero-rated Sales. - Any VAT-registered
person, except those covered by
paragraph (a) above, whose sales are
zero-rated or are effectively zero-rated,
may, within two (2) years after the close of
the taxable quarter when such sales were
 made, apply for the issuance of tax credit
certificate or refund of the input taxes due
or attributable to such sales, to the extent
that such input tax has not been applied
against output tax. x x x. [Section 106(a)
of the Tax Code][5]
Section 8. Zero-rating. - (a) In
general. - A zero-rated sale is a taxable
transaction for value-added tax purposes.
A sale by a VAT-registered person of
goods and/or services taxed at zero rate
shall not result in any output tax. The input
tax on his purchases of goods or services
related to such zero-rated sale shall be
available as tax credit or refundable in
accordance with Section 16 of these
Regulations. x x x. [Section 8(a), [RR] 5-
87].[6]
[Petitioner], in his Answer filed on May 6, 1999, claimed by way of
Special and Affirmative Defenses that:
7. The claim for refund is subject to investigation by
the Bureau of Internal Revenue;
8. Taxes paid and collected are presumed to have
been made in accordance with laws and regulations, hence,
not refundable. Claims for tax refund are construed strictly
against the claimant as they partake of the nature of tax
exemption from tax and it is incumbent upon the [respondent]
to prove that it is entitled thereto under the law and he who
claims exemption must be able to justify his claim by the
clearest grant of organic or statu[t]e law. An exemption from
the common burden [cannot] be permitted to exist upon vague
implications;
9. Moreover, [respondent] must prove that it has
complied with the governing rules with reference to tax
recovery or refund, which are found in Sections 204(c) and
229 of the Tax Code, as amended, which are quoted as
follows:
Section 204. Authority of the
Commissioner to Compromise, Abate and
Refund or Credit Taxes. - The
Commissioner may - x x x.
(C) Credit or refund taxes
erroneously or illegally received or
penalties imposed without authority,
refund the value of internal revenue
stamps when they are returned in good
condition by the purchaser, and, in his
discretion, redeem or change unused
stamps that have been rendered unfit for
use and refund their value upon proof of
destruction. No credit or refund of taxes or
penalties shall be allowed unless the
taxpayer files in writing with the
Commissioner a claim for credit or refund
within two (2) years after payment of the
tax or penalty: Provided, however,That a
return filed with an overpayment shall be
considered a written claim for credit or
refund.
Section 229. Recovery of tax
erroneously or illegally collected.- No
suit or proceeding shall be maintained in
any court for the recovery of any national
internal revenue tax hereafter alleged to
have been erroneously or illegally
assessed or collected, or of any penalty
claimed to have been collected without
authority, or of any sum alleged to have
been excessively or in any manner
wrongfully collected, until a claim for
refund or credit has been duly filed with
the Commissioner; but such suit or
proceeding may be maintained, whether
or not such tax, penalty or sum has been
paid under protest or duress.
In any case, no such suit or
proceeding shall be begun (sic) after the
expiration of two (2) years from the date of
payment of the tax or penalty regardless
of any supervening cause that may arise
after payment: Provided, however, That
the Commissioner may, even without
written claim therefor, refund or credit any
tax, where on the face of the return upon
which payment was made, such payment
appears clearly to have been erroneously
paid.
 From the foregoing, the [CTA], through the Presiding Judge Ernesto D.
Acosta rendered a decision[7] in favor of the herein respondent holding that its
services are subject to zero-rate pursuant to Section 108(b) of the Tax Reform Act
of 1997 and Section 4.102-2 (b)(2) of Revenue Regulations 5-96, the decretal
portion of which reads as follows:
WHEREFORE, in view of all the foregoing, this
Court finds the [petition] meritorious and in accordance with
law. Accordingly, [petitioner] is
hereby ORDERED to REFUND to [respondent] the amount
of P3,352,406.59 representing the latters excess input VAT
paid for the year 1997.[8]
Ruling of the Court of Appeals
In affirming the CTA, the CA held that respondents services fell under the first type enumerated in
Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96. More particularly, its services were not of
the same class or of the same nature as project studies, information, or engineering and architectural
designs for non-resident foreign clients; rather, they were services other than the processing,
manufacturing or repacking of goods for persons doing business outside the Philippines. The
consideration in both types of service, however, was paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas.
Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98 was unwarranted. By requiring
that respondents services be consumed abroad in order to be zero-rated, petitioner went
beyond the sphere of interpretation and into that of legislation. Even granting that it is valid, the ruling
cannot be given retroactive effect, for it will be harsh and oppressive to respondent, which has already
relied upon VAT Ruling No. 080-89 for zero rating.
Hence, this Petition.[9]
The Issue
Petitioner raises this sole issue for our consideration:
Whether or not the Court of Appeals committed reversible error in holding that
respondent is entitled to the refund of the amount of P3,352,406.59 allegedly
representing excess input VAT for the year 1997.0[10]
The Courts Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement to Tax Refund
Section 102 of the Tax Code[11] provides:
Sec. 102. Value-added tax on sale of services and use or lease of
properties. -- (a) Rate and base of tax. -- There shall be levied, assessed and
collected, a value-added tax equivalent to ten percent (10%) of gross receipts
derived from the sale or exchange of services x x x.
The phrase 'sale or exchange of services' means the performance of all
kinds of services in the Philippines for others for a fee, remuneration or
consideration, including those performed or rendered by x x x persons engaged in
milling, processing, manufacturing or repacking goods for others; x x x services of
banks, non-bank financial intermediaries and finance companies; x x x and similar
services regardless of whether or not the performance thereof calls for the exercise
or use of the physical or mental faculties. The phrase 'sale or exchange of services'
shall likewise include:
xxxxxxxxx
(3) The supply of x x x commercial knowledge or
information;
(4) The supply of any assistance that is ancillary
and subsidiary to and is furnished as a means of enabling
the application or enjoyment of x x x any such knowledge or
information as is mentioned in subparagraph (3);
xxxxxxxxx
(6) The supply of technical advice, assistance or
services rendered in connection with technical management or
administration of any x x x commercial undertaking, venture,
project or scheme;
xxxxxxxxx
"The term 'gross receipts means the total amount of money or its
equivalent representing the contract price, compensation, service fee, rental or
royalty, including the amount charged for materials supplied with the services and
deposits and advanced payments actually or constructively received during the
taxable quarter for the services performed or to be performed for another person,
excluding value-added tax.
"(b) Transactions subject to zero percent (0%) rate. -- The following
services performed in the Philippines by VAT-registered persons shall be subject to
zero percent (0%) rate[:]
 (1) Processing, manufacturing or repacking goods
for other persons doing business outside the Philippines which
goods are subsequently exported, where the services are paid
for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the
preceding subparagraph, the consideration for which is paid
for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the [BSP];
xxxxxxxxx
Zero Rating of
Other Service
The law is very clear. Under the last paragraph quoted above, services performed by VAT-registered
persons in the Philippines (other than the processing, manufacturing or repacking of goods for persons
doing business outside the Philippines), when paid in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP, are zero-rated.
Respondent is a VAT-registered person that facilitates the collection and payment of receivables
belonging to its non-resident foreign client, for which it gets paid in acceptable foreign currency inwardly
remitted and accounted for in conformity with BSP rules and regulations. Certainly, the service it
renders in the Philippines is not in the same category as processing, manufacturing or repacking of
goods and should, therefore, be zero-rated. In reply to a query of respondent, the BIR opined in VAT
Ruling No. 080-89 that the income respondent earned from its parent companys regional operating
centers (ROCs) was automatically zero-rated effective January 1, 1988.[12]
Service has been defined as the art of doing something useful for a person or company for a fee [13] or
useful labor or work rendered or to be rendered by one person to another. [14] For facilitating in the
Philippines the collection and payment of receivables belonging to its Hong Kong-based foreign client,
and getting paid for it in duly accounted acceptable foreign currency, respondent renders service falling
under the category of zero rating. Pursuant to the Tax Code, a VAT of zero percent should, therefore,
be levied upon the supply of that service.[15]
The Credit Card System
and Its Components
For sure, the ancillary business of facilitating the said collection is different from the main business of
issuing credit cards.[16]Under the credit card system, the credit card company extends credit
accommodations to its card holders for the purchase of goods and services from its member
establishments, to be reimbursed by them later on upon proper billing. Given the complexities of
present-day business transactions, the components of this system can certainly function as separate
billable services.
Under RA 8484,[17] the credit card that is issued by banks[18] in general, or by non-banks in particular,
refers to any card x x x or other credit device existing for the purpose of obtaining x x x goods x x x or
services x x x on credit;[19] and is being used usually on a revolving basis.[20] This means that the
consumer-credit arrangement that exists between the issuer and the holder of the credit card enables
the latter to procure goods or services on a continuing basis as long as the outstanding balance does
not exceed a specified limit.[21] The card holder is, therefore, given the power to obtain present control
of goods or service on a promise to pay for them in the future. [22]
Business establishments may extend credit sales through the use of the credit card facilities of a non-
bank credit card company to avoid the risk of uncollectible accounts from their customers. Under
this system, the establishments do not deposit in their bank accounts the credit card drafts [23] that arise
from the credit sales. Instead, they merely record their receivables from the credit card company and
periodically send the drafts evidencing those receivables to the latter.
The credit card company, in turn, sends checks as payment to these business establishments, but it
does not redeem the drafts at full price. The agreement between them usually provides for discounts to
be taken by the company upon its redemption of the drafts.[24] At the end of each month, it then bills its
credit card holders for their respective drafts redeemed during the previous month. If the holders fail to
pay the amounts owed, the company sustains the loss.[25]
In the present case, respondents role in the consumer credit [26]
process described above primarily consists of gathering the bills and credit card drafts of different
service establishments located in the Philippines and forwarding them to the ROCs outside the country.
Servicing the bill is not the same as billing. For the former type of service alone, respondent already
gets paid.
The parent company -- to which the ROCs and respondent belong -- takes charge not only of
redeeming the drafts from the ROCs and sending the checks to the service establishments, but also of
billing the credit card holders for their respective drafts that it has redeemed. While it usually imposes
finance charges[27] upon the holders, none may be exacted by respondent upon either the ROCs or the
card holders.
Branch and Home Office
By designation alone, respondent and the ROCs are operated as branches. This means that each of
them is a unit, an offshoot, lateral extension, or division[28] located at some distance from the home
office[29] of the parent company; carrying separate inventories; incurring their own expenses; and
generating their respective incomes. Each may conduct sales operations in any locality as an extension
of the principal office.[30]
The extent of accounting activity at any of these branches depends upon company policy, [31] but the
financial reports of the entire business enterprise -- the credit card company to which they all belong --
must always show its financial position, results of operation, and changes in its financial position as a
single unit.[32] Reciprocal accounts are reconciled or eliminated, because they lose all significance when
the branches and home office are viewed as a single entity. [33] In like manner, intra-company profits or
losses must be offset against each other for accounting purposes.
Contrary to petitioners assertion,[34] respondent can sell its services to another branch of the same
parent company.[35] In fact, the business concept of a transfer price allows goods and services to be
sold between and among intra-company units at cost or above cost.[36] A branch may be operated as a
revenue center, cost center, profit center or investment center, depending upon the policies and
accounting system of its parent company.[37] Furthermore, the latter may choose not to make any sale
itself, but merely to function as a control center, where most or all of its expenses are allocated to any
of its branches.[38]
Gratia argumenti that the sending of drafts and bills by service establishments to respondent is
equivalent to the act of sending them directly to its parent company abroad, and that the parent
companys subsequent redemption of these drafts and billings of credit card holders is also attributable
to respondent, then with greater reason should the service rendered by respondent be zero-rated under
our VAT system. The service partakes of the nature of export sales as
applied to goods,[39] especially when rendered in the Philippines by a VAT-registered person[40] that gets
paid in acceptable foreign currency accounted for in accordance with BSP rules and regulations.
VAT Requirements for
the Supply of Service
The VAT is a tax on consumption[41] expressed as a percentage of the value added to goods or
services[42] purchased by the producer or taxpayer.[43] As an indirect tax[44] on services,[45] its main object
is the transaction[46] itself or, more concretely, the performance of all kinds of services [47] conducted in
the course of trade or business in the Philippines.[48] These services must be regularly conducted in this
country; undertaken in pursuit of a commercial or an economic activity; [49] for a valuable consideration;
and not exempt under the Tax Code, other special laws, or any international agreement.[50]
Without doubt, the transactions respondent entered into with its Hong Kong-based client meet all these
requirements.
First, respondent regularly renders in the Philippines the service of facilitating the collection and
payment of receivables belonging to a foreign company that is a clearly separate and distinct entity.
Second, such service is commercial in nature; carried on over a sustained period of time; on a
significant scale; with a reasonable degree of frequency; and not at random, fortuitous or attenuated.
Third, for this service, respondent definitely receives consideration in foreign currency that is accounted
for in conformity with law.
Finally, respondent is not an entity exempt under any of our laws or international agreements.
Services Subject to
Zero VAT
As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach
of the tax.[51] Goods and services are taxed only in the country where they are consumed. Thus, exports
are zero-rated, while imports are taxed.
Confusion in zero rating arises because petitioner equates the performance of a particular type of
service with the consumption of its output abroad. In the present case, the facilitation of the collection of
receivables is different from the utilization or consumption of the outcome of such service. While
the facilitation is done in the Philippines, the consumption is not. Respondent renders assistance to its
foreign clients -- the ROCs outside the country -- by receiving the bills of service establishments located
here in the country and forwarding them to the ROCs abroad. The consumption contemplated by law,
contrary to petitioners administrative interpretation,[52] does not imply that the service be done abroad in
order to be zero-rated.
Consumption is the use of a thing in a way that thereby exhausts it. [53] Applied to services, the term
means the performance or successful completion of a contractual duty, usually resulting in the
performers release from any past or future liability x x x. [54]The services rendered by respondent are
performed or successfully completed upon its sending to its foreign client the drafts and bills it has
gathered from service establishments here. Its services, having been performed in the Philippines, are
therefore also consumed in the Philippines.
Unlike goods, services cannot be physically used in or bound for a specific place when their destination
is determined. Instead, there can only be a predetermined end of a course [55] when determining the
service location or position x x x for legal purposes.[56] Respondents facilitation service has no physical
existence, yet takes place upon rendition, and therefore upon consumption, in the Philippines. Under
the destination principle, as petitioner asserts, such service is subject to VAT at the rate of 10 percent.
Respondents Services Exempt
from the Destination Principle
However, the law clearly provides for an exception to the destination principle; that is, for a zero percent
VAT rate for services that are performed in the Philippines, paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the [BSP].[57] Thus, for the supply of
service to be zero-rated as an exception, the law merely requires that first, the service be performed in
the Philippines; second, the service fall under any of the categories in Section 102(b) of the Tax Code;
and, third, it be paid in acceptable foreign currency accounted for in accordance with BSP rules and
regulations.
Indeed, these three requirements for exemption from the destination principle are met by respondent.
Its facilitation service is performed in the Philippines. It falls under the second category found in Section
102(b) of the Tax Code, because it is a service other than processing, manufacturing or repacking of
goods as mentioned in the provision. Undisputed is the fact that such service meets the statutory
condition that it be paid in acceptable foreign currency duly accounted for in accordance with BSP
rules. Thus, it should be zero-rated.
Performance of Service versus
Product Arising from Performance
Again, contrary to petitioners stand, for the cost of respondents service to be zero-rated, it need not be tacked
in as part of the cost of goods exported.[58] The law neither imposes such requirement nor associates services
with exported goods. It simply states that the services performed by VAT-registered persons in the Philippines
-- services other than the processing, manufacturing or repacking of goods for persons doing business
outside this country -- if paid in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the BSP, are zero-rated. The service rendered by respondent is clearly different from the (1) Services in connection with
product that arises from the rendition of such service. The activity that creates the income must not be the processing, manufacturing or
confused with the main business in the course of which that income is realized.[59] repacking of goods for persons doing
business outside the Philippines, where
Tax Situs of a such goods are actually shipped out of the
Philippines to said persons or their
Zero-Rated Service assignees and the services are paid for in
acceptable foreign currency inwardly
The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated remitted and duly accounted for under the
service. Under this criterion, the place where the service is rendered determines the jurisdiction [60] to regulations of the Central Bank of the
impose the VAT.[61] Performed in the Philippines, such service is necessarily subject to its Philippines.
jurisdiction,[62] for the State necessarily has to have a substantial connection[63] to it, in order to enforce
a zero rate.[64] The place of payment is immaterial;[65] much less is the place where the output of the xxxxxxxxx
service will be further or ultimately used.
(3) Services performed in the
Statutory Construction Philippines other than those mentioned in
subparagraph (1) above which are paid for
or Interpretation Unnecessary by the person or entity to whom the
service is rendered in acceptable foreign
As mentioned at the outset, Section 102(b)(2) of the Tax Code is very clear. Therefore, no statutory currency inwardly remitted and duly
construction or interpretation is needed. Neither can conditions or limitations be introduced where none accounted for in accordance with Central
is provided for. Rewriting the law is a forbidden ground that only Congress may tread upon. Bank regulations. Where the contract
involves payment in both foreign and local
The Court may not construe a statute that is free from doubt. [66] [W]here the law speaks in clear and currency, only the service corresponding
categorical language, there is no room for interpretation. There is only room for application.[67] The to that paid in foreign currency shall enjoy
Court has no choice but to see to it that its mandate is obeyed.[68] zero-rating. The portion paid for in local
currency shall be subject to VAT at the
No Qualifications rate of 10%.

Under RR 5-87

In implementing the VAT provisions of the Tax Code, RR 5-87 provides for the zero rating of services
other than the processing, manufacturing or repacking of goods -- in general and without qualifications -
- when paid for by the person to whom such services are rendered in acceptable foreign currency
inwardly remitted and duly accounted for in accordance with the BSP (then Central Bank) regulations.
Section 8 of RR 5-87 states:
SECTION 8. Zero-rating. -- (a) In general. -- A zero-rated sale is a
taxable transaction for value-added tax purposes. A sale by a VAT-registered
person of goods and/or services taxed at zero rate shall not result in any output
tax. The input tax on his purchases of goods or services related to such zero-rated
sale shall be available as tax credit or refundable in accordance with Section 16 of
these Regulations.
xxxxxxxxx
(c) Zero-rated sales of services. -- The following services
rendered by VAT-registered persons are zero-rated:
RR 7-95
Broad Enough
RR 7-95, otherwise known as the Consolidated VAT Regulations,[69] reiterates the above-quoted provision and
further presents as examples only the services performed in the Philippines by VAT-registered hotels and other
service establishments. Again, the condition remains that these services must be paid in acceptable
foreign currency inwardly remitted and accounted for in accordance with the rules and regulations of the
BSP. The term other service establishments is obviously broad enough to cover respondents facilitation
service. Section 4.102-2 of RR 7-95 provides thus:
SECTION 4.102-2. Zero-Rating. -- (a) In general. -- A zero-rated sale by
a VAT registered person, which is a taxable transaction for VAT purposes, shall not
result in any output tax. However, the input tax on his purchases of goods,
properties or services related to such zero-rated sale shall be available as tax
credit or refund in accordance with these regulations.
(b) Transaction subject to zero-rate. -- The following services performed
in the Philippines by VAT-registered persons shall be subject to 0%:
 (1) Processing, manufacturing or repacking goods
for other persons doing business outside the Philippines which
goods are subsequently exported, where the services are paid
for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP;
(2) Services other than those mentioned in the
preceding subparagraph, e.g. those rendered by hotels and
other service establishments, the consideration for which is
paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP;
xxxxxxxx
Meaning of as well as
in RR 5-96
Section 4.102-2(b)(2) of RR 7-95 was subsequently amended by RR 5-96 to read as follows:
Section 4.102-2(b)(2) -- Services other than processing, manufacturing
or repacking for other persons doing business outside the Philippines for goods
which are subsequently exported, as well as services by a resident to a non-
resident foreign client such as project studies, information services, engineering
and architectural designs and other similar services, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the BSP."
Aside from the already scopious coverage of services in Section 4.102-2(b)(2) of RR 7-95, the
amendment introduced by RR 5-96 further enumerates specific services entitled to zero rating.
Although superfluous, these sample services are meant to be merely illustrative. In this provision, the
use of the term as well as is not restrictive. As a prepositional phrase with an adverbial relation to some
other word, it simply means in addition to, besides, also or too. [70]
Neither the law nor any of the implementing revenue regulations aforequoted categorically defines or
limits the services that may be sold or exchanged for a fee, remuneration or consideration. Rather, both
merely enumerate the items of service that fall under the term sale or exchange of services. [71]
Ejusdem Generis
Inapplicable
The canon of statutory construction known as ejusdem generis or of the same kind or specie does not
apply to Section 4.102-2(b)(2) of RR 7-95 as amended by RR 5-96.
First, although the regulatory provision contains an enumeration of particular or specific words, followed
by the general phrase and other similar services, such words do not constitute a readily discernible
class and are patently not of the same kind.[72]Project studies involve investments or marketing;
information services focus on data technology; engineering and architectural designs require creativity.
Aside from calling for the exercise or use of mental faculties or perhaps producing written technical
outputs, no common denominator to the exclusion of all others characterizes these three services.
Nothing sets them apart from other and similar general services that may involve advertising,
computers, consultancy, health care, management, messengerial work -- to name only a few.
Second, there is the regulatory intent to give the general phrase and other similar services a broader
meaning.[73] Clearly, the preceding phrase as well as is not meant to limit the effect of and other similar
services.
Third, and most important, the statutory provision upon which this regulation is based is by itself not
restrictive. The scope of the word services in Section 102(b)(2) of the Tax Code is broad; it is not
susceptible of narrow interpretation.[74]
VAT Ruling
Nos. 040-98 and 080-89
VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the administrative
level,[75] rendered by the BIR commissioner upon request of a taxpayer to clarify certain provisions of
the VAT law. As correctly held by the CA, when this ruling states that the service must be destined for
consumption outside of the Philippines[76] in order to qualify for zero rating, it contravenes both the law
and the regulations issued pursuant to it.[77] This portion of VAT Ruling No. 040-98 is clearly ultra
vires and invalid.[78]
Although [i]t is widely accepted that the interpretation placed upon a statute by the executive officers,
whose duty is to enforce it, is entitled to great respect by the courts, [79] this interpretation is not
conclusive and will have to be ignored if judicially found to be erroneous [80] and clearly absurd x x x or
improper.[81] An administrative issuance that overrides the law it merely seeks to interpret, instead of
remaining consistent and in harmony with it, will not be countenanced by this Court. [82]
In the present case, respondent has relied upon VAT Ruling No. 080-89, which clearly recognizes its
zero rating. Changing this status will certainly deprive respondent of a refund of the substantial amount
of excess input taxes to which it is entitled.
Again, assuming arguendo that VAT Ruling No. 040-98 revoked VAT Ruling No. 080-89, such
revocation could not be given
retroactive effect if the application of the latter ruling would only be prejudicial to respondent.[83] Section
246 of the Tax Code categorically declares that [a]ny revocation x x x of x x x any of the rulings x x x
promulgated by the Commissioner shall not be given retroactive application if the revocation x x x will
be prejudicial to the taxpayers.[84]
It is also basic in law that no x x x rule x x x shall be given retrospective effect[85] unless explicitly
stated.[86] No indication of such retroactive application to respondent does the Court find in VAT Ruling
No. 040-98. Neither do the exceptions enumerated in Section 246[87] of the Tax Code apply.
Though vested with the power to interpret the provisions of the Tax Code [88] and not bound by
predecessors acts or rulings, the BIR commissioner may render a different construction to a
statute[89] only if the new interpretation is in congruence with the law. Otherwise, no amount of
interpretation can ever revoke, repeal or modify what the law says.

Consumed Abroad
Not Required by Legislature
Interpellations on the subject in the halls of the Senate also reveal a clear intent on the part of the
legislators not to impose the condition of being consumed abroad in order for services performed in the
Philippines by a VAT-registered person to be zero-rated. We quote the relevant portions of the
proceedings:
Senator Maceda: Going back to Section 102 just for the moment. Will the
Gentleman kindly explain to me - I am referring to the lower part of the first
paragraph with the Provided. Section 102. Provided that the following services
performed in the Philippines by VAT registered persons shall be subject to zero
percent. There are three here. What is the difference between the three here which
is subject to zero percent and Section 103 which is exempt transactions, to being
with?
Senator Herrera: Mr. President, in the case of processing and manufacturing or
repacking goods for persons doing business outside the Philippines which are
subsequently exported, and where the services are paid for in acceptable foreign
currencies inwardly remitted, this is considered as subject to 0%. But if these
conditions are not complied with, they are subject to the VAT.
In the case of No. 2, again, as the Gentleman pointed out, these three are zero-
rated and the other one that he indicated are exempted from the very beginning.
These three enumerations under Section 102 are zero-rated provided that these
conditions indicated in these three paragraphs are also complied with. If they are
not complied with, then they are not entitled to the zero ratings. Just like in the
export of minerals, if these are not exported, then they cannot qualify under this
provision of zero rating.
Senator Maceda: Mr. President, just one small item so we can leave this. Under
the proviso, it is required that the following services be performed in the
Philippines.
Under No. 2, services other than those mentioned above includes, let us say,
manufacturing computers and computer chips or repacking goods for persons
doing business outside the Philippines. Meaning to say, we ship the goods to them
in Chicago or Washington and they send the payment inwardly to the Philippines in
foreign currency, and that is, of course, zero-rated.
Now, when we say services other than those mentioned in the preceding
subsection[,] may I have some examples of these?
Senator Herrera: Which portion is the Gentleman referring to?
Senator Maceda: I am referring to the second paragraph, in the same Section 102.
The first paragraph is when one manufactures or packages something here and he
sends it abroad and they pay him, that is covered. That is clear to me. The second
paragraph says Services other than those mentioned in the preceding
subparagraph, the consideration of which is paid for in acceptable foreign currency
One example I could immediately think of -- I do not know why this comes to my
mind tonight -- is for tourism or escort services. For example, the services of the
tour operator or tour escort -- just a good name for all kinds of activities -- is made
here at the Midtown Ramada Hotel or at the Philippine Plaza, but the payment is
made from outside and remitted into the country.
Senator Herrera: What is important here is that these services are paid in
acceptable foreign currency remitted inwardly to the Philippines.
Senator Maceda: Yes, Mr. President. Like those Japanese tours which include
$50 for the services of a woman or a tourist guide, it is zero-rated when it is
remitted here.
Senator Herrera: I guess it can be interpreted that way, although this tourist guide
should also be considered as among the professionals. If they earn more
than P200,000, they should be covered.
xxxxxxxxx
 Senator Maceda: So, the services by Filipino citizens outside the Philippines are court like the CTA which, by the nature of its functions, is dedicated exclusively to the study and
subject to VAT, and I am talking of all services. Do big contractual engineers in consideration of tax cases and has necessarily developed an expertise on the subject.[93]
Saudi Arabia pay VAT?

Senator Herrera: This provision applies to a VAT-registered person. When he
performs services in the Philippines, that is zero-rated.
Furthermore, under a zero-rating scheme, the sale or exchange of a particular service is completely
freed from the VAT, because the seller is entitled to recover, by way of a refund or as an input tax
credit, the tax that is included in the cost of purchases attributable to the sale or exchange. [94] [T]he tax
paid or withheld is not deducted from the tax base.[95] Having been applied for within the reglementary
period,[96] respondents refund is in order.

Senator Maceda: That is right."[90] WHEREFORE, the Petition is hereby DENIED, and the assailed Decision AFFIRMED. No
pronouncement as to costs.

SO ORDERED.

Legislative Approval

By Reenactment

Finally, upon the enactment of RA 8424, which substantially carries over the particular provisions on
zero rating of services under Section 102(b) of the Tax Code, the principle of legislative approval of
administrative interpretation by reenactment clearly obtains. This principle means that the reenactment
of a statute substantially unchanged is persuasive indication of the adoption by Congress of a prior
executive construction.[91]

The legislature is presumed to have reenacted the law with full knowledge of the contents of the
revenue regulations then in force regarding the VAT, and to have approved or confirmed them because
they would carry out the legislative purpose. The particular provisions of the regulations we have
mentioned earlier are, therefore, re-enforced. When a statute is susceptible of the meaning placed upon
it by a ruling of the government agency charged with its enforcement and the [l]egislature thereafter
[reenacts] the provisions [without] substantial change, such action is to some extent confirmatory that
the ruling carries out the legislative purpose.[92]

In sum, having resolved that transactions of respondent are zero-rated, the Court upholds the formers
entitlement to the refund as determined by the appellate court. Moreover, there is no conflict between
the decisions of the CTA and CA. This Court respects the findings and conclusions of a specialized
 7. CIR V. BURMEISTER AND WAIN entered into a contract with the National Power Corporation (NAPOCOR) for the
operation and maintenance of [NAPOCORs] two power barges. The Consortium
SECOND DIVISION appointed BWSC-Denmark as its coordination manager.

BWSC-Denmark established [respondent] which subcontracted the actual

COMMISSIONER OF G.R. No. 153205 operation and maintenance of NAPOCORs two power barges as well as the
INTERNAL REVENUE, performance of other duties and acts which necessarily have to be done in
Petitioner, Present: the Philippines.

QUISUMBING, J. NAPOCOR paid capacity and energy fees to the Consortium in a mixture of
- versus - Chairperson, currencies (Mark, Yen, and Peso). The freely convertible non-Peso component is
CARPIO, deposited directly to the Consortiums bank accounts in Denmark and Japan, while
CARPIO MORALES, the Peso-denominated component is deposited in a separate and special
TINGA, and designated bank account in the Philippines. On the other hand, the Consortium
BURMEISTER AND WAIN VELASCO, JR., JJ. pays [respondent] in foreign currency inwardly remitted to the Philippines through
SCANDINAVIAN CONTRACTOR the banking system.
MINDANAO, INC., Promulgated:
Respondent. In order to ascertain the tax implications of the above transactions, [respondent]
January 22, 2007 sought a ruling from the BIR which responded with BIR Ruling No. 023-95 dated
February 14, 1995, declaring therein that if [respondent] chooses to register as a
x----------------------------------------------------------------------------------------x VAT person and the consideration for its services is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT at
DECISION zero-rate.

CARPIO, J.: [Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the
Certificate of Registration bearing RDO Control No. 95-113-007556 was issued in
favor of [respondent] by the Revenue District Office No. 113 of Davao City.
The Case
For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax
Returns reflecting, among others, a total zero-rated sales of P147,317,189.62 with
This petition for review[1] seeks to set aside the 16 April 2002 Decision[2] of the Court of Appeals in CA- VAT input taxes of P3,361,174.14, detailed as follows:
G.R. SP No. 66341 affirming the 8 August 2001 Decision[3] of the Court of Tax Appeals (CTA). The CTA Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax
ordered the Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate ----------------------------------------------------------------------------------
for P6,994,659.67 in favor of Burmeister and Wain Scandinavian Contractor Mindanao, Inc. 1st E 04-18-96 P 33,019,651.07 P608,953.48
(respondent). 2nd F 07-16-96 37,108,863.33 756,802.66
3rd G 10-14-96 34,196,372.35 930,279.14
4th H 01-20-97 42,992,302.87 1,065,138.86
The Antecedents Totals P147,317,189.62 P3,361,174.14

The CTA summarized the facts, which the Court of Appeals adopted, as follows: On December 29, 1997, [respondent] availed of the Voluntary Assessment
Program (VAP) of the BIR. It allegedly misinterpreted Revenue Regulations No. 5-
[Respondent] is a domestic corporation duly organized and existing under and by 96 dated February 20, 1996 to be applicable to its case. Revenue Regulations No.
virtue of the laws of the Philippines with principal address located 5-96 provides in part thus:
at Daruma Building, Jose P. Laurel Avenue, Lanang, Davao City.
SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue
It is represented that a foreign consortium Regulations No. 7-95 are hereby amended to read as follows:
composed of Burmeister and Wain Scandinavian Contractor A/S (BWSC-
Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd.
 Section 4.102-2(b)(2) Services other than processing,
manufacturing or repacking for other persons doing business
outside the Philippines for goods which are subsequently
exported, as well as services by a resident to a non-resident
foreign client such as project studies, information services,
engineering and architectural designs and other similar
services, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the
rules and regulations of the BSP.
x x x x x x x x x x.
In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its
sale of services to the Consortium to the 10% VAT in the total amount
of P103,558,338.11 representing April to December 1996 sales since said
Revenue Regulations No. 5-96 became effective only on April 1996. The sum
of P43,893,951.07, representing January to March 1996 sales was subjected to
zero rate. Consequently, [respondent] filed its 1996 amended VAT return
consolidating therein the VAT output and input taxes for the four calendar quarters
of 1996. It paid the amount of P6,994,659.67through BIRs collecting
agent, PCIBank, as its output tax liability for the year 1996, computed as follows:
Amount subject to 10% VAT P103,558,338.11
Multiply by 10%
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67
On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from
the VAT Review Committee which reconfirmed BIR Ruling No. 023-95 insofar as it
held that the services being rendered by BWSCMI is subject to VAT at zero
percent (0%).
On the strength of the aforementioned rulings, [respondent] on April
22,1999, filed a claim for the issuance of a tax credit certificate with Revenue
District No. 113 of the BIR. [Respondent] believed that it erroneously paid the
output VAT for 1996 due to its availment of the Voluntary Assessment Program
(VAP) of the BIR.[4]
On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the running of
the two-year prescriptive period under the Tax Code.
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate
for P6,994,659.67 in favor of respondent. The CTAsruling stated:
[Respondents] sale of services to the Consortium [was] paid for in acceptable
foreign currency inwardly remitted to the Philippines and accounted for in
accordance with the rules and regulations of Bangko Sentral ng Pilipinas. These
were established by various BPI Credit Memos showing remittances in
Danish Kroner (DKK) and US dollars (US$) as payments for the specific invoices
billed by [respondent] to the consortium. These remittances were further certified
by the Branch Manager x x x of BPI-Davao Lanang Branch to represent payments
for sub-contract fees that came from Den Danske Aktieselskab Bank-Denmark for
the account of [respondent]. Clearly, [respondents] sale of services to the
Consortium is subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code.
xxxx
The zero-rating of [respondents] sale of services to the Consortium was even
confirmed by the [petitioner] in BIR Ruling No. 023-95 dated February 15, 1995,
and later by VAT Ruling No. 003-99 dated January 7,1999, x x x.
Since it is apparent that the payments for the services rendered by [respondent]
were indeed subject to VAT at zero percent, it follows that it mistakenly availed
of the Voluntary Assessment Program by paying output tax for its sale of
services. x x x
x x x Considering the principle of solutio indebiti which requires the return of what
has been delivered by mistake, the [petitioner] is obligated to issue the tax credit
certificate prayed for by [respondent]. x x x[5]
Petitioner filed a petition for review with the Court of Appeals, which dismissed the petition for lack of
merit and affirmed the CTA decision.[6]
Hence, this petition.
The Court of Appeals Ruling
In affirming the CTA, the Court of Appeals rejected petitioners view that since respondents
services are not destined for consumption abroad, they are not of the same nature as project studies,
information services, engineering and architectural designs, and other similar services mentioned in
Section 4.102-2(b)(2) of Revenue Regulations No. 5-96[7] as subject to 0% VAT. Thus, according to
petitioner, respondents services cannot legally qualify for 0% VAT but are subject to the regular 10%
VAT.[8]
The Court of Appeals found untenable petitioners contention that under VAT Ruling No. 040-98,
respondents services should be destined for consumption abroad to enjoy zero-rating. Contrary to
petitioners interpretation, there are two kinds of transactions or services subject to zero percent VAT Section 102(b) of the Tax Code,[19] the applicable provision in 1996 when respondent rendered the
under VAT Ruling No. 040-98. These are (a) services other than repacking goods for other persons services and paid the VAT in question, enumerates which services are zero-rated, thus:
doing business outside the Philippines which goods are subsequently exported; and (b) services by a
resident to a non-resident foreign client, such as project studies, information services, engineering and (b) Transactions subject to zero-rate. ― The following services performed in
architectural designs and other similar services, the consideration for which is paid for in acceptable the Philippines by VAT-registered persons shall be subject to 0%:
foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP).[9]
(1) Processing, manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported,
The Court of Appeals stated that only the first classification is required by the provision to be consumed
where the services are paid for in acceptable foreign currency and accounted
abroad in order to be taxed at zero rate. In x x x the absence of such express or implied stipulation in
for in accordance with the rules and regulations of
the statute, the second classification need not be consumed abroad.[10]
the Bangko Sentral ng Pilipinas (BSP);
The Court of Appeals further held that assuming petitioners interpretation of Section 4.102-2(b)(2) of
(2) Services other than those mentioned in the preceding sub-paragraph,
Revenue Regulations No. 5-96 is correct, such administrative provision is void being an amendment to
the consideration for which is paid for in acceptable foreign currency and
the Tax Code. Petitioner went beyond merely providing the implementing details by adding another
accounted for in accordance with the rules and regulations of
requirement to zero-rating. This is indicated by the additional phrase as well as services by a resident to
the Bangko Sentral ng Pilipinas (BSP);
a non-resident foreign client, such as project studies, information services and engineering and
architectural designs and other similar services. In effect, this phrase adds not just one but two
(3) Services rendered to persons or entities whose exemption under special
requisites: (a) services must be rendered by a resident to a non-resident; and (b) these must be in the
laws or international agreements to which the Philippines is a signatory
nature of project studies, information services, etc.[11]
effectively subjects the supply of such services to zero rate;
The Court of Appeals explained that under Section 108(b)(2) of the Tax Code,[12] for services which
(4) Services rendered to vessels engaged exclusively in international shipping;
were performed in the Philippines to enjoy zero-rating, these must comply only with two requisites, to
and
wit: (1) payment in acceptable foreign currency and (2) accounted for in accordance with the rules of
the BSP. Section 108(b)(2) of the Tax Code does not provide that services must be destined for
(5) Services performed by subcontractors and/or contractors in processing,
consumption abroad in order to be VAT zero-rated.[13]
converting, or manufacturing goods for an enterprise whose export sales
exceed seventy percent (70%) of total annual production. (Emphasis supplied)
The Court of Appeals disagreed with petitioners argument that our VAT law generally follows the
destination principle (i.e., exports exempt, imports taxable).[14] The Court of Appeals stated that if
indeed the destination principle underlies and is the basis of the VAT laws, then petitioners proper
remedy would be to recommend an amendment of Section 108(b)(2) to Congress. Without such
amendment, however, petitioner should apply the terms of the basic law. Petitioner could not resort to
administrative legislation, as what [he] had done in this case.[15] In insisting that its services should be zero-rated, respondent claims that it complied with the
requirements of the Tax Code for zero rating under the second paragraph of Section
The Issue 102(b). Respondent asserts that (1) the payment of its service fees was in acceptable foreign currency,
(2) there was inward remittance of the foreign currency into the Philippines, and (3) accounting of such
The lone issue for resolution is whether respondent is entitled to the refund of P6,994,659.67 as remittance was in accordance with BSP rules. Moreover, respondent contends that
erroneously paid output VAT for the year 1996.[16] its services which constitute the actual operation and management of two (2) power barges in
Mindanao are not even remotely similar to project studies, information services and engineering and
architectural designs under Section 4.102-2(b)(2) of Revenue Regulations No. 5-96. As such,
The Ruling of the Court respondents services need not be destined to be consumed abroad in order to be VAT zero-rated.

We deny the petition. Respondent is mistaken.

At the outset, the Court declares that the denial of the instant petition is not on the ground that
respondents services are subject to 0% VAT.Rather, it is based on the non-retroactivity of the
prejudicial revocation of BIR Ruling No. 023-95[17] and VAT Ruling No. 003-99,[18]which held that
respondents services are subject to 0% VAT and which respondent invoked in applying for refund of the
output VAT.
The Tax Code not only requires that the services be other than processing, manufacturing or
repacking of goods and that payment for such services be in acceptable foreign currency accounted for
in accordance with BSP rules. Another essential condition for qualification to zero-rating under Section
102(b)(2) is that the recipient of such services is doing business outside the Philippines. While
this requirement is not expressly stated in the second paragraph of Section 102(b), this is clearly
provided in the first paragraph of Section 102(b) where the listed services must be for other persons
doing business outside the Philippines. The phrase for other persons doing business outside the
Philippines not only refers to the services enumerated in the first paragraph of Section 102(b), but also
pertains to the general term services appearing in the second paragraph of Section 102(b). In short,
services other than processing, manufacturing, or repacking of goods must likewise be performed for
persons doing business outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of
the other services are both doing business in the Philippines, the payment of foreign currency is
irrelevant. Otherwise, those subject to the regular VAT under Section 102(a) can avoid paying the VAT
by simply stipulating payment in foreign currency inwardly remitted by the recipient of services. To
interpret Section 102(b)(2) to apply to a payer-recipient of services doing business in the Philippines is
to make the payment of the regular VAT under Section 102(a) dependent on the generosity of the
taxpayer. The provider of services can choose to pay the regular VAT or avoid it by stipulating payment
in foreign currency inwardly remitted by the payer-recipient. Such interpretation removes Section 102(a)
as a tax measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory
exaction, not a voluntary contribution.
When Section 102(b)(2) stipulates payment in acceptable foreign currency under BSP rules,
the law clearly envisions the payer-recipient of services to be doing business outside the
Philippines. Only those not doing business in the Philippines can be required under BSP rules [20] to pay
in acceptable foreign currency for their purchase of goods or services from the Philippines. In a
domestic transaction, where the provider and recipient of services are both doing business in the
Philippines, the BSP cannot require any party to make payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the
payer-recipient of services is doing business outside the Philippines. Under BSP rules,[21] the proceeds
of export sales must be reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the
provider of services under Section 102(b) (1) and (2) to account for the foreign currency proceeds to the
BSP. The same rationale does not apply if the provider and recipient of the services are both doing
business in the Philippines since their transaction is not in the nature of an export sale even if payment
is denominated in foreign currency.
Further, when the provider and recipient of services are both doing business in the
Philippines, their transaction falls squarely under Section 102(a) governing domestic sale or exchange
of services. Indeed, this is a purely local sale or exchange of services subject to the regular VAT,
unless of course the transaction falls under the other provisions of Section 102(b).
Thus, when Section 102(b)(2) speaks of [s]ervices other than those mentioned in the
preceding subparagraph, the legislative intent is that only the services are different between
subparagraphs 1 and 2. The requirements for zero-rating, including the essential condition that the
recipient of services is doing business outside the Philippines, remain the same under both
subparagraphs.
Significantly, the amended Section 108(b)[22] [previously Section 102(b)] of the present Tax Code
clarifies this legislative intent. Expressly included among the transactions subject to 0% VAT
are [s]ervices other than those mentioned in the [first] paragraph [of Section 108(b)] rendered to
a person engaged in business conducted outside the Philippines or to a nonresident person not
engaged in business who is outside the Philippines when the services are performed, the
consideration for which is paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the BSP.
In this case, the payer-recipient of respondents services is the Consortium which is a joint-venture
doing business in the Philippines. While the Consortiums principal members are non-resident foreign
corporations, the Consortium itself is doing business in the Philippines. This is shown clearly in
BIR Ruling No. 023-95 which states that the contract between the Consortium and NAPOCOR is for
a 15-year term, thus:
This refers to your letter dated January 14, 1994 requesting for a clarification of the
tax implications of a contract between a consortium composed
of Burmeister & Wain Scandinavian Contractor A/S (BWSC), Mitsui Engineering &
Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. (MITSUI), all referred to hereinafter
as the Consortium, and the National Power Corporation (NAPOCOR) for the
operation and maintenance of two 100-Megawatt power barges (Power
Barges) acquired by NAPOCOR for a 15-year term.[23] (Emphasis supplied)
Considering this length of time, the Consortiums operation and maintenance of NAPOCORs power
barges cannot be classified as a single or isolated transaction. The Consortium does not fall under
Section 102(b)(2) which requires that the recipient of the services must be a person doing business
outside the Philippines. Therefore, respondents services to the Consortium, not being supplied to a
person doing business outside the Philippines, cannot legally qualify for 0% VAT.
Respondent, as subcontractor of the Consortium, operates and maintains NAPOCORs power barges in
the Philippines. NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign
currency outwardly remitted. In turn, the Consortium pays respondent also in foreign currency inwardly
remitted and accounted for in accordance with BSP rules. This payment scheme does not entitle
respondent to 0% VAT. As the Court held in Commissioner of Internal Revenue v. American Express
International, Inc. (Philippine Branch),[24] the place of payment is immaterial, much less is the place
where the output of the service is ultimately used. An essential condition for entitlement to 0% VAT
under Section 102(b)(1) and (2) is that the recipient of the services is a person doing business outside
the Philippines. In this case, the recipient of the services is the Consortium, which is doing
business not outside, but within the Philippines because it has a 15-year contract to operate and
maintain NAPOCORs two 100-megawatt power barges in Mindanao.
The Court recognizes the rule that the VAT system generally follows the destination principle
(exports are zero-rated whereas imports are taxed). However, as the Court stated in American
Express, there is an exception to this rule.[25] This exception refers to the 0% VAT on services
enumerated in Section 102 and performed in the Philippines. For services covered by Section 102(b)(1)
and (2), the recipient of the services must be a person doing business outside the Philippines. Thus, to
be exempt from the destination principle under Section 102(b)(1) and (2), the services must be (a)
performed in the Philippines; (b) for a person doing business outside the Philippines; and (c) paid in
acceptable foreign currency accounted for in accordance with BSP rules.
Respondents reliance on the ruling in American Express[26] is misplaced. That case involved a recipient
of services, specifically American Express International, Inc. (Hongkong Branch), doing business
outside the Philippines. There, the Court stated:
Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-
registered person that facilitates the collection and payment of receivables
 belonging to its non-resident foreign client [American Express International, Inc.
(Hongkong Branch)], for which it gets paid in acceptable foreign currency inwardly
remitted and accounted for in accordance with BSP rules and regulations.
x x x x[27] (Emphasis supplied)
In contrast, this case involves a recipient of services the Consortium which is doing business in the
Philippines. Hence, American Express services were subject to 0% VAT, while respondents services
should be subject to 10% VAT.
Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling No. 003-
99,[28] which reconfirmed BIR RulingNo. 023-95[29] insofar as it held that the services being rendered by
BWSCMI is subject to VAT at zero percent (0%). Respondents reliance on these BIR rulings binds
petitioner.
Petitioners filing of his Answer before the CTA challenging respondents claim for refund effectively
serves as a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However, such
revocation cannot be given retroactive effect since it will prejudice respondent. Changing respondents
status will deprive respondent of a refund of a substantial amount representing excess output
tax.[30] Section 246 of the Tax Code provides that any revocation of a ruling by the Commissioner of
Internal Revenue shall not be given retroactive application if the revocation will prejudice the
taxpayer. Further, there is no showing of the existence of any of the exceptions enumerated in Section
246 of the Tax Code for the retroactive application of such revocation.
However, upon the filing of petitioners Answer dated 2 March 2000 before the CTA contesting
respondents claim for refund, respondents services shall be subject to the regular 10% VAT.[31] Such
filing is deemed a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition.
SO ORDERED.
D. AUTOMATIC ZERO RATE V. EFFECTIVELY ZERO RATE
8. CIR V. SEAGATE TECHNOLOGY (PHILS) [2X]
9. CIR V. TOSHIBA INFORMATION EQUIPMENT
SECOND DIVISION
[G.R. No. 150154. August 9, 2005]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOSHIBA INFORMATION EQUIPMENT
(PHILS.), INC., respondent.
DECISION
CHICO-NAZARIO, J.:
In this Petition for Review under Rule 45 of the Rules of Court, petitioner Commissioner of
Internal Revenue (CIR) prays for the reversal of the decision of the Court of Appeals in CA-G.R. SP No.
59106,[1] affirming the order of the Court of Tax Appeals (CTA) in CTA Case No. 5593, [2] which ordered
said petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba
Information Equipment (Phils.), Inc. (Toshiba), in the amount of P16,188,045.44, representing unutilized
input value-added tax (VAT) payments for the first and second quarters of 1996.
There is hardly any dispute as to the facts giving rise to the present Petition.
Respondent Toshiba was organized and established as a domestic corporation, duly-registered
with the Securities and Exchange Commission on 07 July 1995,[3] with the primary purpose of engaging
in the business of manufacturing and exporting of electrical and mechanical machinery, equipment,
systems, accessories, parts, components, materials and goods of all kinds, including, without limitation,
to those relating to office automation and information technology, and all types of computer hardware
and software, such as HDD, CD-ROM and personal computer printed circuit boards.[4]
On 27 September 1995, respondent Toshiba also registered with the Philippine Economic Zone
Authority (PEZA) as an ECOZONE Export Enterprise, with principal office in Laguna Technopark, Bian,
Laguna.[5] Finally, on 29 December 1995, it registered with the Bureau of Internal Revenue (BIR) as a
VAT taxpayer and a withholding agent.[6]
Respondent Toshiba filed its VAT returns for the first and second quarters of taxable year 1996,
reporting input VAT in the amount of P13,118,542.00[7] and P5,128,761.94,[8] respectively, or a total
of P18,247,303.94. It alleged that the said input VAT was from its purchases of capital goods and
services which remained unutilized since it had not yet engaged in any business activity or transaction
for which it may be liable for any output VAT. [9] Consequently, on 27 March 1998, respondent Toshiba
filed with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of
Finance (DOF) applications for tax credit/refund of its unutilized input VAT for 01 January to 31 March
1996 in the amount of P14,176,601.28,[10] and for 01 April to 30 June 1996 in the amount
of P5,161,820.79,[11] for a total of P19,338,422.07. To toll the running of the two-year prescriptive period
for judicially claiming a tax credit/refund, respondent Toshiba, on 31 March 1998, filed with the CTA a
Petition for Review. It would subsequently file an Amended Petition for Review on 10 November 1998
so as to conform to the evidence presented before the CTA during the hearings.
In his Answer to the Amended Petition for Review before the CTA, petitioner CIR raised several
Special and Affirmative Defenses, to wit
5. Assuming without admitting that petitioner filed a claim for refund/tax credit, the same is
subject to investigation by the Bureau of Internal Revenue.
6. Taxes are presumed to have been collected in accordance with law. Hence, petitioner must
prove that the taxes sought to be refunded were erroneously or illegally collected.
7. Petitioner must prove the allegations supporting its entitlement to a refund.
8. Petitioner must show that it has complied with the provisions of Sections 204(c) and 229 of
the 1997 Tax Code on the filing of a written claim for refund within two (2) years from the
date of payment of the tax.
9. Claims for refund of taxes are construed strictly against claimants, the same being in the
nature of an exemption from taxation.[12]
After evaluating the evidence submitted by respondent Toshiba, [13] the CTA, in its Decision dated
10 March 2000, ordered petitioner CIR to refund, or in the alternative, to issue a tax credit certificate to
respondent Toshiba in the amount of P16,188,045.44.[14]
In a Resolution, dated 24 May 2000, the CTA denied petitioner CIRs Motion for Reconsideration
for lack of merit.[15]
The Court of Appeals, in its Decision dated 27 September 2001, dismissed petitioner CIRs
Petition for Review and affirmed the CTA Decision dated 10 March 2000.
Comes now petitioner CIR before this Court assailing the above-mentioned Decision of the Court
of Appeals based on the following grounds
1. The Court of Appeals erred in holding that petitioners failure to raise in the Tax Court the
arguments relied upon by him in the petition, is fatal to his cause.
2. The Court of Appeals erred in not holding that respondent being registered with the Philippine
Economic Zone Authority (PEZA) as an Ecozone Export Enterprise, its business is not
subject to VAT pursuant to Section 24 of Republic Act No. 7916 in relation to Section 103
(now 109) of the Tax Code.
3. The Court of Appeals erred in not holding that since respondents business is not subject to
VAT, the capital goods and services it purchased are considered not used in VAT taxable
business, and, therefore, it is not entitled to refund of input taxes on such capital goods
pursuant to Section 4.106-1 of Revenue Regulations No. 7-95 and of input taxes on
services pursuant to Section 4.103-1 of said Regulations.
4. The Court of Appeals erred in holding that respondent is entitled to a refund or tax credit of
input taxes it paid on zero-rated transactions.[16]
Ultimately, however, the issue still to be resolved herein shall be whether respondent Toshiba is
entitled to the tax credit/refund of its input VAT on its purchases of capital goods and services, to which
this Court answers in the affirmative.
I
An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by persons
from the Customs Territory to ECOZONE enterprises shall be subject to VAT at zero percent (0%).
Respondent Toshiba bases its claim for tax credit/refund on Section 106(b) of the Tax Code of
1977, as amended, which reads:
SEC. 106. Refunds or tax credits of creditable input tax.
(b) Capital goods. A VAT-registered person may apply for the issuance of a tax credit certificate or
refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input
taxes have not been applied against output taxes. The application may be made only within two (2)
years after the close of the taxable quarter when the importation or purchase was made. [17]
Petitioner CIR, on the other hand, opposes such claim on account of Section 4.106-1(b) of
Revenue Regulations (RR) No. 7-95, otherwise known as the VAT Regulations, as amended, which
provides as follows
Sec. 4.106-1. Refunds or tax credits of input tax.
...
(b) Capital Goods. -- Only a VAT-registered person may apply for issuance of a tax credit certificate or
refund of input taxes paid on capital goods imported or locally purchased. The refund shall be allowed
to the extent that such input taxes have not been applied against output taxes. The application should
be made within two (2) years after the close of the taxable quarter when the importation or purchase
was made.
Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are
used in VAT taxable business. If it is also used in exempt operations, the input tax refundable shall only
be the ratable portion corresponding to the taxable operations.
Capital goods or properties refer to goods or properties with estimated useful life greater than one year
and which are treated as depreciable assets under Section 29(f), used directly or indirectly in the
production or sale of taxable goods or services. (Underscoring ours.)
Petitioner CIR argues that although respondent Toshiba may be a VAT-registered taxpayer, it is
not engaged in a VAT-taxable business. According to petitioner CIR, respondent Toshiba is actually
VAT-exempt, invoking the following provision of the Tax Code of 1977, as amended
SEC. 103. Exempt transactions. The following shall be exempt from value-added tax.
(q) Transactions which are exempt under special laws, except those granted under Presidential Decree
No. 66, 529, 972, 1491, and 1590, and non-electric cooperatives under Republic Act No. 6938, or
international agreements to which the Philippines is a signatory.[18]
Since respondent Toshiba is a PEZA-registered enterprise, it is subject to the five percent (5%)
preferential tax rate imposed under Chapter III, Section 24 of Republic Act No. 7916, otherwise known
as The Special Economic Zone Act of 1995, as amended. According to the said section, [e]xcept for
real property taxes on land owned by developers, no taxes, local and national, shall be imposed on
business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross
income earned by all business enterprises within the ECOZONE shall be paid The five percent (5%)
preferential tax rate imposed on the gross income of a PEZA-registered enterprise shall be in lieu of all
national taxes, including VAT. Thus, petitioner CIR contends that respondent Toshiba is VAT-exempt
by virtue of a special law, Rep. Act No. 7916, as amended.
It would seem that petitioner CIR failed to differentiate between VAT-exempt transactions from
VAT-exempt entities. In the case of Commissioner of Internal Revenue v. Seagate Technology
(Philippines),[19] this Court already made such distinction
An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the
tax status VAT-exempt or not of the party to the transaction
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code,
a special law or an international agreement to which the Philippines is a signatory, and by virtue of
which its taxable transactions become exempt from VAT
Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to
VAT-exempt transactions. These are transactions exempted from VAT by special laws or international
agreements to which the Philippines is a signatory. Since such transactions are not subject to VAT, the
sellers cannot pass on any output VAT to the purchasers of goods, properties, or services, and they
may not claim tax credit/refund of the input VAT they had paid thereon.
Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of respondent
Toshiba because although the said section recognizes that transactions covered by special laws may
be exempt from VAT, the very same section provides that those falling under Presidential Decree No.
66 are not. Presidential Decree No. 66, creating the Export Processing Zone Authority (EPZA), is the
precursor of Rep. Act No. 7916, as amended,[20] under which the EPZA evolved into the PEZA.
Consequently, the exception of Presidential Decree No. 66 from Section 103(q) of the Tax Code of
1977, as amended, extends likewise to Rep. Act No. 7916, as amended.
This Court agrees, however, that PEZA-registered enterprises, which would necessarily be
located within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916,
as amended, which imposes the five percent (5%) preferential tax rate on gross income of PEZA-
registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which
establishes the fiction that ECOZONES are foreign territory.
It is important to note herein that respondent Toshiba is located within an ECOZONE. An
ECOZONE or a Special Economic Zone has been described as
. . . [S]elected areas with highly developed or which have the potential to be developed into agro-
industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose
metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any
or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade zones and
tourist/recreational centers.[21]
The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be
referred to as the Customs Territory.[22]
Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate
the ECOZONES as a separate customs territory; [23] thus, creating the fiction that the ECOZONE is a
foreign territory.[24] As a result, sales made by a supplier in the Customs Territory to a purchaser in the
ECOZONE shall be treated as an exportation from the Customs Territory. Conversely, sales made by a
supplier from the ECOZONE to a purchaser in the Customs Territory shall be considered as an
importation into the Customs Territory.
Given the preceding discussion, what would be the VAT implication of sales made by a supplier
from the Customs Territory to an ECOZONE enterprise?
The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT
shall be imposed to form part of the cost of goods destined for consumption outside of the territorial
border of the taxing authority. Hence, actual export of goods and services from the Philippines to a
foreign country must be free of VAT; while, those destined for use or consumption within the Philippines
shall be imposed with ten percent (10%) VAT.[25]
Applying said doctrine to the sale of goods, properties, and services to and from the
ECOZONES,[26] the BIR issued Revenue Memorandum Circular (RMC) No. 74-99, on 15 October 1999.
Of particular interest to the present Petition is Section 3 thereof, which reads
SECTION 3. Tax Treatment Of Sales Made By a VAT Registered Supplier from The Customs
Territory, To a PEZA Registered Enterprise.
(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of
all taxes, except real property tax, pursuant to R.A. No. 7916, as amended:
(a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence, considered
subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No.
7916, in relation to ART. 77(2) of the Omnibus Investments Code.
(b) Sale of service. This shall be treated subject to zero percent (0%) VAT under the cross border
doctrine of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.
(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime,
hence, subject to taxes under the NIRC, e.g., Service Establishments which are subject to taxes under
the NIRC rather than the 5% special tax regime:
(a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence, considered
subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916
in relation to ART. 77(2) of the Omnibus Investments Code.
(b) Sale of Service. This shall be treated subject to zero percent (0%) VAT under the cross border
doctrine of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.
(3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier from
the Customs Territory to any registered enterprise operating in the ecozone, regardless of the class or
type of the latters PEZA registration, is actually qualified and thus legally entitled to the zero percent
(0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT registered
supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec.
106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus Investments Code, while all sales of
services to the said enterprises, made by VAT registered suppliers from the Customs Territory, shall be
treated effectively subject to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the
provisions of R.A. No. 7916 and the Cross Border Doctrine of the VAT system.
This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to
the benefit of the zero percent (0%) VAT for sales made to the aforementioned ECOZONE enterprises
and shall serve as sufficient compliance to the requirement for prior approval of zero-rating imposed by
Revenue Regulations No. 7-95 effective as of the date of the issuance of this Circular.
Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a VAT-
exempt entity. The VAT treatment of sales to it, however, varies depending on whether the supplier
from the Customs Territory is VAT-registered or not.
Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory
to an ECOZONE enterprise shall be treated as export sales. If such sales are made by a VAT-
registered supplier, they shall be subject to VAT at zero percent (0%). In zero-rated transactions, the
VAT-registered supplier shall not pass on any output VAT to the ECOZONE enterprise, and at the
same time, shall be entitled to claim tax credit/refund of its input VAT attributable to such sales. Zero-
rating of export sales primarily intends to benefit the exporter (i.e., the supplier from the Customs
Territory), who is directly and legally liable for the VAT, making it internationally competitive by allowing
it to credit/refund the input VAT attributable to its export sales.
Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would
only be exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT.
Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a VAT-
exempt entity that could not have engaged in a VAT-taxable business, this Court still believes, given the
particular circumstances of the present case, that it is entitled to a credit/refund of its input VAT.
II
Prior to RMC No. 74-99, however, PEZA-registered enterprises availing of the income tax holiday under
Executive Order No. 226, as amended, were deemed subject to VAT.
In his Petition, petitioner CIR opposed the grant of tax credit/refund to respondent Toshiba,
reasoning thus
In the first place, respondent could not have paid input taxes on its purchases of goods and services
from VAT-registered suppliers because such purchases being zero-rated, that is, no output tax was
paid by the suppliers, no input tax was shifted or passed on to respondent. The VAT is an indirect tax
and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services (Section 105, 1997 Tax Code).
Secondly, Section 4.100-2 of Revenue Regulations No. 7-95 provides:
SEC. 4.100-2. Zero-rated sales. A zero-rated sale by a VAT-registered person, which is a taxable
transaction for VAT purposes, shall not result in any output tax. However, the input tax on his
purchases of goods, properties or services related to such zero-rated sale shall be available as tax
credit or refund in accordance with these regulations.
From the foregoing, the VAT-registered person who can avail as tax credit or refund of the input tax on
his purchases of goods, services or properties is the seller whose sale is zero-rated. Applying the
foregoing provision to the case at bench, the VAT-registered supplier, whose sale of goods and
services to respondent is zero-rated, can avail as tax credit or refund the input taxes on its (supplier)
own purchases of goods and services related to its zero-rated sale of goods and services to
respondent. On the other hand, respondent, as the buyer in such zero-rated sale of goods and
services, could not have paid input taxes for which it can claim as tax credit or refund. [27]
Before anything else, this Court wishes to point out that petitioner CIR is working on the
erroneous premise that respondent Toshiba is claiming tax credit or refund of input VAT based on
Section 4.100-2,[28] in relation to Section 4.106-1(a),[29] of RR No. 7-95, as amended, which allows the
tax credit/refund of input VAT on zero-rated sales of goods, properties or services. Instead, respondent
Toshiba is basing its claim for tax credit or refund on Sec. 4.106-1(b) of the same regulations, which
allows a VAT-registered person to apply for tax credit/refund of the input VAT on its capital goods.
While in the former, the seller of the goods, properties or services is the one entitled to the tax
credit/refund; in the latter, it is the purchaser of the capital goods.
Nevertheless, regardless of his mistake as to the basis for respondent Toshibas application for
tax credit/refund, petitioner CIR validly raised the question of whether any output VAT was actually
passed on to respondent Toshiba which it could claim as input VAT subject to credit/refund. If the VAT-
registered supplier from the Customs Territory did not charge any output VAT to respondent Toshiba
believing that it is exempt from VAT or it is subject to zero-rated VAT, then respondent Toshiba did not
pay any input VAT on its purchase of capital goods and it could not claim any tax credit/refund thereof.
The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-
registered enterprise shall be considered an export sale and subject to zero percent (0%) VAT was
clearly established only on 15 October 1999, upon the issuance of RMC No. 74-99. Prior to the said
date, however, whether or not a PEZA-registered enterprise was VAT-exempt depended on the type of
fiscal incentives availed of by the said enterprise. This old rule on VAT-exemption or liability of PEZA-
registered enterprises, followed by the BIR, also recognized and affirmed by the CTA, the Court of
Appeals, and even this Court,[30] cannot be lightly disregarded considering the great number of PEZA-
registered enterprises which did rely on it to determine its tax liabilities, as well as, its privileges.
According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-
registered enterprise the option to choose between two sets of fiscal incentives: (a) The five percent
(5%) preferential tax rate on its gross income under Rep. Act No. 7916, as amended; and (b) the
income tax holiday provided under Executive Order No. 226, otherwise known as the Omnibus
Investment Code of 1987, as amended.[31]
The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, as
amended, is in lieu of all taxes. Except for real property taxes, no other national or local tax may be
imposed on a PEZA-registered enterprise availing of this particular fiscal incentive, not even an indirect
tax like VAT.
Alternatively, Book VI of Exec. Order No. 226, as amended, grants income tax holiday to
registered pioneer and non-pioneer enterprises for six-year and four-year periods,
respectively.[32] Those availing of this incentive are exempt only from income tax, but shall be subject to
all other taxes, including the ten percent (10%) VAT.
This old rule clearly did not take into consideration the Cross Border Doctrine essential to the
VAT system or the fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal
incentives of the PEZA-registered enterprise. Again, for emphasis, the old VAT rule for PEZA-registered
enterprises was based on their choice of fiscal incentives: (1) If the PEZA-registered enterprise chose
the five percent (5%) preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act
No. 7916, as amended, then it would be VAT-exempt; (2) If the PEZA-registered enterprise availed of
the income tax holiday under Exec. Order No. 226, as amended, it shall be subject to VAT at ten
percent (10%). Such distinction was abolished by RMC No. 74-99, which categorically declared that all
sales of goods, properties, and services made by a VAT-registered supplier from the Customs Territory
to an ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latters
type or class of PEZA registration; and, thus, affirming the nature of a PEZA-registered or an
ECOZONE enterprise as a VAT-exempt entity.
The sale of capital goods by suppliers from the Customs Territory to respondent Toshiba in the
present Petition took place during the first and second quarters of 1996, way before the issuance of
RMC No. 74-99, and when the old rule was accepted and implemented by no less than the BIR itself.
Since respondent Toshiba opted to avail itself of the income tax holiday under Exec. Order No. 226, as
amended, then it was deemed subject to the ten percent (10%) VAT. It was very likely therefore that
suppliers from the Customs Territory had passed on output VAT to respondent Toshiba, and the latter,
thus, incurred input VAT. It bears emphasis that the CTA, with the help of SGV & Co., the independent
accountant it commissioned to make a report, already thoroughly reviewed the evidence submitted by
respondent Toshiba consisting of receipts, invoices, and vouchers, from its suppliers from the Customs
Territory. Accordingly, this Court gives due respect to and adopts herein the CTAs findings that the
suppliers of capital goods from the Customs Territory did pass on output VAT to respondent Toshiba
and the amount of input VAT which respondent Toshiba could claim as credit/refund.
Moreover, in another circular, Revenue Memorandum Circular (RMC) No. 42-2003, issued on 15
July 2003, the BIR answered the following question
Q-5: Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by PEZA-registered
firms automatically qualify as zero-rated without seeking prior approval from the
BIR effective October 1999.
1) Will the OSS-DOF Center still accept applications from PEZA-registered
claimants who were allegedly billed VAT by their suppliers before and during
the effectivity of the RMC by issuing VAT invoices/receipts?
A-5(1): If the PEZA-registered enterprise is paying the 5% preferential tax in lieu of all other
taxes, the said PEZA-registered taxpayer cannot claim TCC or refund for the VAT
paid on purchases. However, if the taxpayer is availing of the income tax holiday, it
can claim VAT credit provided:
a. The taxpayer-claimant is VAT-registered;
b. Purchases are evidenced by VAT invoices or receipts, whichever is applicable,
with shifted VAT to the purchaser prior to the implementation of RMC No. 74-
99; and
c. The supplier issues a sworn statement under penalties of perjury that it shifted
the VAT and declared the sales to the PEZA-registered purchaser as taxable
sales in its VAT returns.
For invoices/receipts issued upon the effectivity of RMC No. 74-99, the claims for
input VAT by PEZA-registered companies, regardless of the type or class of PEZA
registration, should be denied.
Under RMC No. 42-2003, the DOF would still accept applications for tax credit/refund filed by
PEZA-registered enterprises, availing of the income tax holiday, for input VAT on their purchases made
prior to RMC No. 74-99. Acceptance of applications essentially implies processing and possible
approval thereof depending on whether the given conditions are met. Respondent Toshibas claim for
tax credit/refund arose from the very same circumstances recognized by Q-5(1) and A-5(1) of RMC No.
42-2003. It therefore seems irrational and unreasonable for petitioner CIR to oppose respondent
Toshibas application for tax credit/refund of its input VAT, when such claim had already been
determined and approved by the CTA after due hearing, and even affirmed by the Court of Appeals;
while it could accept, process, and even approve applications filed by other similarly-situated PEZA-
registered enterprises at the administrative level.
III
 Findings of fact by the CTA are respected and adopted by this Court.

E. DESTINATION PRINCIPLE AND CROSS BORDER DOCTRINE

Finally, petitioner CIR, in a last desperate attempt to block respondent Toshibas claim for tax
credit/refund, challenges the allegation of said respondent that it availed of the income tax holiday
under Exec. Order No. 226, as amended, rather than the five percent (5%) preferential tax rate under 10. CIR V. AMERICAN EXPRESS [2X]
Rep. Act No. 7916, as amended. Undoubtedly, this is a factual matter that should have been raised and
threshed out in the lower courts. Giving it credence would belie petitioner CIRs assertion that it is 11. CIR V. TOSHIBA INFORMATION EQUIPMENT [2X]
raising only issues of law in its Petition that may be resolved without need for reception of additional
evidences. Once more, this Court respects and adopts the finding of the CTA, affirmed by the Court of
Appeals, that respondent Toshiba had indeed availed of the income tax holiday under Exec. Order No. F. ZERO RATED SALES V. EXEMPT-SALES
226, as amended.

WHEREFORE, based on the foregoing, this Court AFFIRMS the decision of the Court of Appeals 12. CIR V. CEBU TOYO CORP
in CA-G.R. SP. No. 59106, and the order of the CTA in CTA Case No. 5593, ordering said petitioner
CIR to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba, in the amount
of P16,188,045.44, representing unutilized input VAT for the first and second quarters of 1996. FIRST DIVISION

SO ORDERED.

[G.R. No. 149073. February 16, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CEBU TOYO

CORPORATION, respondent.

DECISION

QUISUMBING, J.:

In its Decision[1] dated July 6, 2001, the Court of Appeals, in CA-G.R. SP No. 60304, affirmed
the Resolutions dated May 31, 2000[2] and August 2, 2000,[3] of the Court of Tax Appeals (CTA)
ordering the Commissioner of Internal Revenue (CIR) to allow a partial refund or, alternatively, to issue
a tax credit certificate in favor of Cebu Toyo Corporation in the sum of P2,158,714.46, representing the
unutilized input value-added tax (VAT) payments.

The facts, as culled from the records, are as follows:

Respondent Cebu Toyo Corporation is a domestic corporation engaged in the manufacture of

lenses and various optical components used in television sets, cameras, compact discs and other
similar devices. Its principal office is located at the Mactan Export Processing Zone (MEPZ) in Lapu-
Lapu City, Cebu. It is a subsidiary of Toyo Lens Corporation, a non-resident corporation organized
under the laws of Japan. Respondent is a zone export enterprise registered with the Philippine
Economic Zone Authority (PEZA), pursuant to the provisions of Presidential Decree No. 66. [4] It is also
registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer.[5]

As an export enterprise, respondent sells 80% of its products to its mother corporation, the
Japan-based Toyo Lens Corporation, pursuant to an Agreement of Offsetting. The rest are sold to
various enterprises doing business in the MEPZ. Inasmuch as both sales are considered export sales WHEREFORE, finding the petition for review partially meritorious, respondent is hereby ORDERED to
subject to Value-Added Tax (VAT) at 0% rate under Section 106(A)(2)(a)[6] of the National Internal REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of Petitioner in the
Revenue Code, as amended, respondent filed its quarterly VAT returns from April 1, 1996 to December amount of P2,158,714.46 representing unutilized input tax payments.
31, 1997 showing a total input VAT of P4,462,412.63.

On March 30, 1998, respondent filed with the Tax and Revenue Group of the One-Stop Inter- SO ORDERED.[9]
Agency Tax Credit and Duty Drawback Center of the Department of Finance, an application for tax
credit/refund of VAT paid for the period April 1, 1996 to December 31, 1997 amounting In granting partial reconsideration, the tax court found that there was no need for BSP approval of
to P4,439,827.21 representing excess VAT input payments. the Agreement of Offsetting since the same may be categorized as an inter-company open account
offset arrangement. Hence, the respondent need not present proof of foreign currency exchange
Respondent, however, did not bother to wait for the Resolution of its claim by the CIR. Instead, proceeds from its sales to MEPZ enterprises pursuant to Section 106(A)(2)(a)[10] of the Tax Code.
on June 26, 1998, it filed a Petition for Review with the CTA to toll the running of the two-year However, the CTA stressed that respondent must still prove that there was an actual offsetting of
prescriptive period pursuant to Section 230[7] of the Tax Code. accounts to prove that constructive foreign currency exchange proceeds were inwardly remitted as
required under Section 106(A)(2)(a).
Before the CTA, the respondent posits that as a VAT-registered exporter of goods, it is subject to
VAT at the rate of 0% on its export sales that do not result in any output tax. Hence, the unutilized VAT The CTA found that only the amount of Y274,043,858.00 covering respondents sales to Toyo
input taxes on its purchases of goods and services related to such zero-rated activities are available as Lens Corporation and purchases from said mother company for the period August 7, 1996 to August
tax credits or refunds. 26, 1997 were actually offset against respondents related accounts receivable and accounts payable as
shown by the Agreement for Offsetting dated August 30, 1997. Resort to the respondents Accounts
The petitioners position is that respondent was not entitled to a refund or tax credit since: (1) it
Receivable and Accounts Payable subsidiary ledgers corroborated the amount. The tax court also
failed to show that the tax was erroneously or illegally collected; (2) the taxes paid and collected are
found that out of the total export sales for the period April 1, 1996 to December 31, 1997 amounting
presumed to have been made in accordance with law; and (3) claims for refund are strictly construed
to Y700,654,606.15, respondents sales to MEPZ enterprises amounted only to Y136,473,908.05 of said
against the claimant as these partake of the nature of tax exemption.
total. Thus, allocating the input taxes supported by receipts to the export sales, the CTA determined
Initially, the CTA denied the petition for insufficiency of evidence. [8] The tax court sustained that the refund/credit amounted to only P2,158,714.46,[11] computed as follows:
respondents argument that it was a VAT-registered entity. It also found that the petition was timely, as it
was filed within the prescription period. The CTA also ruled that the respondents sales to Toyo Lens Total Input Taxes Claimed by respondent P4,439,827.2
Corporation and to certain establishments in the Mactan Export Processing Zone were export sales Less: Exceptions made by SGV
subject to VAT at 0% rate. It found that the input VAT covered by respondents claim was not applied a.) 1996 P651,256.17
against any output VAT. However, the tax court decreed that the petition should nonetheless be denied b.) 1997 104,129.13 755,385.30
because of the respondents failure to present documentary evidence to show that there were foreign Validly Supported Input Taxes P3,684,441.9
currency exchange proceeds from its export sales. The CTA also observed that respondent failed to Allocation:
submit the approval by Bangko Sentral ng Pilipinas (BSP) of its Agreement of Offsetting with Toyo Lens Verified Zero-Rated Sales
Corporation and the certification of constructive inward remittance. a.) Toyo Lens Corporation Y274,043,858.00
Undaunted, respondent filed on February 21, 2000, a Motion for Reconsideration arguing that: b.) MEPZ Enterprises 136,473,908.05 Y410,517,766
(1) proof of its inward remittance was not required by law; (2) BSP and BIR regulations do not require Divided by Total Zero-Rated Sales Y700,654,606
BSP approval on its Agreement of Offsetting nor do they require certification on the amount Quotient 0.5859
constructively remitted; (3) it was not legally required to prove foreign currency payments on the Multiply by Allowable Input Tax P3,684,441.9
remaining sales to MEPZ enterprises; and (4) it had complied with the substantiation requirements Amount Refundable P2,158,714.[52
under Section 106(A)(2)(a) of the Tax Code. Hence, it was entitled to a refund of unutilized VAT input
tax. On June 21, 2000, petitioner Commissioner filed a Motion for Reconsideration arguing that
respondent was not entitled to a refund because as a PEZA-registered enterprise, it was not subject to
On May 31, 2000, the tax court partly granted the motion for reconsideration in a Resolution, to VAT pursuant to Section 24[13] of Republic Act No. 7916,[14] as amended by Rep. Act No. 8748.[15]Thus,
wit: since respondent was not subject to VAT, the Commissioner contended that the capital goods it
purchased must be deemed not used in VAT taxable business and therefore it was not entitled to
WHEREFORE, finding the motion of petitioner to be meritorious, the same is hereby partially granted. refund of input taxes on such capital goods pursuant to Section 4.106-1 of Revenue Regulations No. 7-
Accordingly, the Court hereby MODIFIES its decision in the above-entitled case, the dispositive portion 95.[16]
of which shall now read as follows:
Petitioner filed a Motion for Reconsideration on June 21, 2000 based on the following theories:
(1) that respondent being registered with the PEZA as an ecozone enterprise is not subject to VAT
pursuant to Sec. 24 of Rep. Act No. 7916; and (2) since respondents business is not subject to VAT,
the capital goods it purchased are considered not used in a VAT taxable business and therefore is not
entitled to a refund of input taxes.[17]
The respondent opposed the Commissioners Motion for Reconsideration and prayed that the
CTA resolution be modified so as to grant it the entire amount of tax refund or credit it was seeking.
On August 2, 2000, the Court of Tax Appeals denied the petitioners motion for reconsideration. It
held that the grounds relied upon were only raised for the first time and that Section 24 of Rep. Act No.
7916 was not applicable since respondent has availed of the income tax holiday incentive under
Executive Order No. 226 or the Omnibus Investment Code of 1987 pursuant to Section 23[18] of Rep.
Act No. 7916. The tax court pointed out that E.O. No. 226 granted PEZA-registered enterprises an
exemption from payment of income taxes for 4 or 6 years depending on whether the registration was as
a pioneer or as a non-pioneer enterprise, but subject to other national taxes including VAT.
The petitioner then filed a Petition for Review with the Court of Appeals (CA), docketed as CA-
G.R. SP No. 60304, praying for the reversal of the CTA Resolutions dated May 31, 2000 and August 2,
2000, and reiterating its claim that respondent is not entitled to a refund of input taxes since it is VAT-
exempt.
On July 6, 2001, the appellate court decided CA-G.R. SP No. 60304 in respondents favor, thus:
WHEREFORE, finding no merit in the petition, this Court DISMISSES it and AFFIRMS the Resolutions
dated May 31, 2000 and August 2, 2000 . . . of the Court of Tax Appeals.
SO ORDERED.[19]
The Court of Appeals found no reason to set aside the conclusions of the Court of Tax Appeals.
The appellate court held as untenable herein petitioners argument that respondent is not entitled to a
refund because it is VAT-exempt since the evidence showed that it is a VAT-registered enterprise
subject to VAT at the rate of 0%. It agreed with the ruling of the tax court that respondent had two
options under Section 23 of Rep. Act No. 7916, namely: (1) to avail of an income tax holiday under E.O.
No. 226 and be subject to VAT at the rate of 0%; or (2) to avail of the 5% preferential tax under P.D.
No. 66 and enjoy VAT exemption. Since respondent availed of the incentives under E.O. No. 226, then
the 0% VAT rate would be applicable to it and any unutilized input VAT should be refunded to
respondent upon proper application with and substantiation by the BIR.
Hence, the instant petition for review now before us, with herein petitioner alleging that:
I. RESPONDENT BEING REGISTERED WITH THE PHILIPPINE ECONOMIC ZONE
AUTHORITY (PEZA) AS AN ECOZONE EXPORT ENTERPRISE, ITS BUSINESS IS
NOT SUBJECT TO VAT PURSUANT TO SECTION 24 OF REPUBLIC ACT NO. 7916
IN RELATION TO SECTION 103 OF THE TAX CODE, AS AMENDED BY RA NO.
7716.
II. SINCE RESPONDENTS BUSINESS IS NOT SUBJECT TO VAT, IT IS NOT ENTITLED
TO REFUND OF INPUT TAXES PURSUANT TO SECTION 4.103-1 OF REVENUE
REGULATIONS NO. 7-95.[20]
In our view, the main issue for our resolution is whether the Court of Appeals erred in affirming
the Court of Tax Appeals resolution granting a refund in the amount of P2,158,714.46 representing
unutilized input VAT on goods and services for the period April 1, 1996 to December 31, 1997.
Both the Commissioner of Internal Revenue and the Office of the Solicitor General argue that
respondent Cebu Toyo Corporation, as a PEZA-registered enterprise, is exempt from national and local
taxes, including VAT, under Section 24 of Rep. Act No. 7916 and Section 109 [21] of the NIRC. Thus,
they contend that respondent Cebu Toyo Corporation is not entitled to any refund or credit on input
taxes it previously paid as provided under Section 4.103-1[22] of Revenue Regulations No. 7-95,
notwithstanding its registration as a VAT taxpayer. For petitioner claims that said registration was
erroneous and did not confer upon the respondent any right to claim recognition of the input tax credit.
The respondent counters that it availed of the income tax holiday under E.O. No. 226 for four
years from August 7, 1995 making it exempt from income tax but not from other taxes such as VAT.
Hence, according to respondent, its export sales are not exempt from VAT, contrary to petitioners
claim, but its export sales is subject to 0% VAT. Moreover, it argues that it was able to establish through
a report certified by an independent Certified Public Accountant that the input taxes it incurred from
April 1, 1996 to December 31, 1997 were directly attributable to its export sales. Since it did not have
any output tax against which said input taxes may be offset, it had the option to file a claim for
refund/tax credit of its unutilized input taxes.
Considering the submission of the parties and the evidence on record, we find the petition bereft
of merit.
Petitioners contention that respondent is not entitled to refund for being exempt from VAT is
untenable. This argument turns a blind eye to the fiscal incentives granted to PEZA-registered
enterprises under Section 23 of Rep. Act No. 7916. Note that under said statute, the respondent had
two options with respect to its tax burden. It could avail of an income tax holiday pursuant to provisions
of E.O. No. 226, thus exempt it from income taxes for a number of years but not from other internal
revenue taxes such as VAT; or it could avail of the tax exemptions on all taxes, including VAT under
P.D. No. 66 and pay only the preferential tax rate of 5% under Rep. Act No. 7916. Both the Court of
Appeals and the Court of Tax Appeals found that respondent availed of the income tax holiday for four
(4) years starting from August 7, 1995, as clearly reflected in its 1996 and 1997 Annual Corporate
Income Tax Returns, where respondent specified that it was availing of the tax relief under E.O. No.
226. Hence, respondent is not exempt from VAT and it correctly registered itself as a VAT taxpayer. In
fine, it is engaged in taxable rather than exempt transactions.
Taxable transactions are those transactions which are subject to value-added tax either at the
rate of ten percent (10%) or zero percent (0%). In taxable transactions, the seller shall be entitled to tax
credit for the value-added tax paid on purchases and leases of goods, properties or services. [23]
An exemption means that the sale of goods, properties or services and the use or lease of
properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input
tax) previously paid. The person making the exempt sale of goods, properties or services shall not bill
any output tax to his customers because the said transaction is not subject to VAT. Thus, a VAT-
registered purchaser of goods, properties or services that are VAT-exempt, is not entitled to any input
tax on such purchases despite the issuance of a VAT invoice or receipt.[24]
Now, having determined that respondent is engaged in taxable transactions subject to VAT, let us
then proceed to determine whether it is subject to 10% or zero (0%) rate of VAT. To begin with, it must
be recalled that generally, sale of goods and supply of services performed in the Philippines are taxable
at the rate of 10%. However, export sales, or sales outside the Philippines, shall be subject to value- H. EXEMPT PERSONS V. EXEMPT TRANSACTIONS
added tax at 0% if made by a VAT-registered person.[25] Under the value-added tax system, a zero-
rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result
in any output tax. However, the input tax on his purchase of goods, properties or services related to 13. CIR V. SEAGATE TECHNOLOGY (PHILS) [3X]
such zero-rated sale shall be available as tax credit or refund.[26]

In principle, the purpose of applying a zero percent (0%) rate on a taxable transaction is to TRANSITIONAL AND PRESUMPTIVE INPUT TAXES
exempt the transaction completely from VAT previously collected on inputs. It is thus the only true way
to ensure that goods are provided free of VAT. While the zero rating and the exemption are
computationally the same, they actually differ in several aspects, to wit: 14. FORT BONIFACIO DEVELOPMENT V. CIR

(a) A zero-rated sale is a taxable transaction but does not result in an output tax while an exempted
transaction is not subject to the output tax; EN BANC

(b) The input VAT on the purchases of a VAT-registered person with zero-rated sales may be allowed
as tax credits or refunded while the seller in an exempt transaction is not entitled to any input tax on his
purchases despite the issuance of a VAT invoice or receipt. FORT BONIFACIO DEVELOPMENT G.R. No. 158885

(c) Persons engaged in transactions which are zero-rated, being subject to VAT, are required to register CORPORATION,
while registration is optional for VAT-exempt persons.
Petitioner, Present:
In this case, it is undisputed that respondent is engaged in the export business and is registered
PUNO, C.J.,
as a VAT taxpayer per Certificate of Registration of the BIR.[27] Further, the records show that the
respondent is subject to VAT as it availed of the income tax holiday under E.O. No. 226. Perforce,
QUISUMBING,
respondent is subject to VAT at 0% rate and is entitled to a refund or credit of the unutilized input taxes,
which the Court of Tax Appeals computed at P2,158,714.46, but which we findafter
YNARES-SANTIAGO,
recomputationshould be P2,158,714.52.

The Supreme Court will not set aside lightly the conclusions reached by the Court of Tax Appeals CARPIO,
which, by the very nature of its functions, is dedicated exclusively to the resolution of tax problems and
has accordingly developed an expertise on the subject, unless there has been an abuse or improvident AUSTRIA-MARTINEZ,
exercise of authority.[28] In this case, we find no cogent reason to deviate from this well-entrenched
CORONA,
principle. Thus, we are persuaded that indeed the Court of Appeals committed no reversible error in
affirming the assailed ruling of the Court of Tax Appeals.
- versus - CARPIO MORALES,
WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision dated July 6, 2001
of the Court of Appeals, in CA-G.R. SP No. 60304 is AFFIRMED with very slight modification. Petitioner TINGA,
is hereby ORDERED to REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in
favor of respondent in the amount of P2,158,714.52 representing unutilized input tax payments. No CHICO-NAZARIO,
pronouncement as to costs.
VELASCO, JR.,
SO ORDERED.
NACHURA,

LEONARDO DE CASTRO,

BRION, and

COMMISSIONER OF INTERNAL PERALTA, JJ.

REVENUE, REGIONAL DIRECTOR,

REVENUE REGION NO. 8, and

CHIEF, ASSESSMENT DIVISION, Promulgated:

SEC. 105. Transitional input tax credits. A person who becomes liable to
REVENUE REGION NO. 8, BIR, value-added tax or any person who elects to be a VAT-registered person shall,
Respondents. April 2, 2009 subject to the filing of an inventory as prescribed by regulations, be allowed input tax
on his beginning inventory of goods, materials and supplies equivalent to 8% of the
value of such inventory or the actual value-added tax paid on such goods, materials
x--------------------------------------------------------------------------- x and supplies, whichever is higher, which shall be creditable against the output tax.[2]

There are other measures contained in E.O. No. 273 which were similarly intended to ease
the shift to the VAT system. These measures also took the form of transitional input taxes which can be
FORT BONIFACIO DEVELOPMENT G.R. No. 170680 credited against output tax,[3] and are found in Section 25 of E.O. No. 273, the section entitled
Transitory Provisions. Said transitory provisions, which were never incorporated in the Old NIRC, read:
CORPORATION,
Sec. 25. Transitory provisions. (a) All VAT-registered persons shall be
Petitioner, allowed transitional input taxes which can be credited against output tax in the same
manner as provided in Sections 104 of the National Internal Revenue Code as
- versus - follows:
1) The balance of the deferred sales tax credit account as of December
COMMISSIONER OF INTERNAL REVENUE
31, 1987 which are accounted for in accordance with regulations prescribed
therefor;
and REVENUE DISTRICT OFFICER,
2) A presumptive input tax equivalent to 8% of the value of the inventory
REVENUE DISTRICT NO. 44, TAGUIG as of December 31, 1987 of materials and supplies which are not for sale, the
tax on which was not taken up or claimed as deferred sales tax credit; and
and PATEROS, BUREAU OF INTERNAL
3) A presumptive input tax equivalent to 8% of the value of the inventory
REVENUE, as of December 31, 1987 as goods for sale, the tax on which was not taken up
or claimed as deferred sales tax credit.
Respondents. Tax credit prescribed in paragraphs (2) and (3) above shall be allowed only to
a VAT-registered person who files an inventory of the goods referred to in said
paragraphs as provided in regulations.

x---------------------------------------------------------------------------x
DECISION
TINGA, J.:
The value-added tax (VAT) system was first introduced in the Philippines on 1 January 1988, with the
tax imposable on any person who, in the course of trade or business, sells, barters or exchanges
goods, renders services, or engages in similar transactions and any person who imports goods. [1] The
first VAT law is found in Executive Order No. 273 (E.O. 273), which amended several provisions of the
then National Internal Revenue Code of 1986 (Old NIRC). E.O. No. 273 likewise accommodated the
potential burdens of the shift to the VAT system by allowing newly liable VAT-registered persons to
avail of a transitional input tax credit, as provided for in Section 105 of the old NIRC, as amended by
E.O. No. 273. Said Section 105 is quoted, thus:
(b) Any unused tax credit certificate issued prior to January 1, 1988 for excess
tax credits which are applicable against advance sales tax shall be surrendered to,
and replaced by the Commissioner with new tax credit certificates which can be
used in payment for value-added tax liabilities.
(c) Any person already engaged in business whose gross sales or receipts for
a 12-month period from September 1, 1986 to August 1, 1987, exceed the amount
of P200,000.00, or any person who has been in business for less than 12 months as
of August 1, 1987 but expects his gross sales or receipts to exceed P200,000 on or
before December 31, 1987, shall apply for registration on or before October 29,
1987.[4]
 On 1 January 1996, Republic Act (Rep. Act) No. 7716 took effect.[5] It amended provisions of
the Old NIRC principally by restructuring the VAT system. It was under Rep. Act No. 7716 that VAT was
imposed for the first time on the sale of real properties. This was accomplished by amending Section
100 of the NIRC to include real properties among the goods or properties, the sale, barter or exchange
of which is made subject to VAT. The relevant portions of Section 100, as amended by Rep. Act No.
7716, thus read:
Sec. 100. Value-added-tax on sale of goods or properties.
(a) Rate and base of tax. There shall be levied, assessed and collected
on every sale, barter or exchange of goods or properties, a value-added tax
equivalent to 10% of the gross selling price or gross value in money of the goods,
or properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor.
(1) The term 'goods or properties' shall mean all tangible and intangible
objects which are capable of pecuniary estimation and shall include:
(A) Real properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business; xxx[6]
The provisions of Section 105 of the NIRC, on the transitional input tax credit, had remained
intact despite the enactment of Rep. Act No. 7716. Said provisions would however be amended
following the passage of the new National Internal Revenue Code of 1997 (New NIRC), also officially
known as Rep Act No. 8424. The section on the transitional input tax credit was renumbered from
Section 105 of the Old NIRC to Section 111(A) of the New NIRC. The new amendments on the
transitional input tax credit are relatively minor, hardly material to the case at bar. They are highlighted
below for easy reference:
Section 111. Transitional/Presumptive Input Tax Credits. -
(A) Transitional Input Tax Credits. - A person who becomes liable to
value-added tax or any person who elects to be a VAT-registered person shall,
subject to the filing of an inventory according to rules and regulations prescribed
by the Secretary of finance, upon recommendation of the Commissioner, be
allowed input tax on his beginning inventory of goods, materials and supplies
equivalent for eight percent (8%) of the value of such inventory or the actual value-
added tax paid on such goods, materials and supplies, whichever is higher, which
shall be creditable against the output tax.[7] (Emphasis supplied).
Rep. Act No. 8424 also made part of the NIRC, for the first time, the concept of presumptive input tax
credits, with Section 111(b) of the New NIRC providing as follows:
(B) Presumptive Input Tax Credits. -
(1) Persons or firms engaged in the processing of sardines, mackerel and
milk, and in manufacturing refined sugar and cooking oil, shall be allowed
a presumptive input tax, creditable against the output tax, equivalent to
one and one-half percent (1 1/2%) of the gross value in money of their
purchases of primary agricultural products which are used as inputs to
their production.
As used in this Subsection, the term 'processing' shall mean
pasteurization, canning and activities which through physical or chemical
process alter the exterior texture or form or inner substance of a product
in such manner as to prepare it for special use to which it could not have
been put in its original form or condition.
(2) Public works contractors shall be allowed a presumptive input tax
equivalent to one and one-half percent (1 1/2%) of the contract price with
respect to government contracts only in lieu of actual input taxes
therefrom.[8]
What we have explained above are the statutory antecedents that underlie the present petitions for
review. We now turn to the factual antecedents.
Petitioner Fort Bonifacio Development Corporation (FBDC) is engaged in the development and sale of
real property. On 8 February 1995, FBDC acquired by way of sale from the national government, a vast
tract of land that formerly formed part of the Fort Bonifacio military reservation, located in what is now
the Fort Bonifacio Global City (Global City) in Taguig City.[9] Since the sale was consummated prior to
the enactment of Rep. Act No. 7716, no VAT was paid thereon. FBDC then proceeded to develop the
tract of land, and from October, 1966 onwards it has been selling lots located in the Global City to
interested buyers.[10]
Following the effectivity of Rep. Act No. 7716, real estate transactions such as those regularly
engaged in by FBDC have since been made subject to VAT. As the vendor, FBDC from thereon has
become obliged to remit to the Bureau of Internal Revenue (BIR) output VAT payments it received from
the sale of its properties to the Bureau of Internal Revenue (BIR). FBDC likewise invoked its right to
avail of the transitional input tax credit and accordingly submitted an inventory list of real properties it
owned, with a total book value of P71,227,503,200.00.[11]
On 14 October 1996, FBDC executed in favor of Metro Pacific Corporation two (2) contracts
to sell, separately conveying two (2) parcels of land within the Global City in consideration of the
purchase prices at P1,526,298,949.00 and P785,009,018.00, both payable in installments.[12] For the
fourth quarter of 1996, FBDC earned a total of P3,498,888,713.60 from the sale of its lots, on which the
output VAT payable to the BIR was P318,080,792.14. In the context of remitting its output VAT
payments to the BIR, FBDC paid a total of P269,340,469.45 and utilized (a) P28,413,783.00
representing a portion of its then total transitional/presumptive input tax credit of P5,698,200,256.00,
which petitioner allocated for the two (2) lots sold to Metro Pacific; and (b) its regular input tax credit
of P20,326,539.69 on the purchase of goods and services.[13]
Between July and October 1997, FBDC sent two (2) letters to the BIR requesting appropriate
action on whether its use of its presumptive input VAT on its land inventory, to the extent
of P28,413,783.00 in partial payment of its output VAT for the fourth quarter of 1996, was in order. After
investigating the matter, the BIR recommended that the claimed presumptive input tax credit be
disallowed.[14]Consequently, the BIR issued to FBDC a Pre-Assessment Notice (PAN) dated 23
December 1997 for deficiency VAT for the 4th quarter of 1996. This was followed by a letter of
respondent Commissioner of Internal Revenue (CIR),[15] addressed to and received by FBDC on 5
March 1998, disallowing the presumptive input tax credit arising from the land inventory on the basis of
Revenue Regulation 7-95 (RR 7-95) and Revenue Memorandum Circular 3-96 (RMC 3-96). Section
4.105-1 of RR 7-95 provided the basis in main for the CIRs opinion, the section reading, thus:
Sec. 4.105-1. Transitional input tax on beginning inventories. Taxpayers
who became VAT-registered persons upon effectivity of RA No. 7716 who have
exceeded the minimum turnover of P500,000.00 or who voluntarily register even if
their turnover does not exceed P500,000.00 shall be entitled to a presumptive input
tax on the inventory on hand as of December 31, 1995 on the following: (a) goods
purchased for resale in their present condition; (b) materials purchased for further
processing, but which have not yet undergone processing; (c) goods which have
been manufactured by the taxpayer; (d) goods in process and supplies, all of which
are for sale or for use in the course of the taxpayers trade or business as a VAT-
registered person.
However, in the case of real estate dealers, the basis of the presumptive
input tax shall be the improvements, such as buildings, roads, drainage systems,
and other similar structures, constructed on or after the effectivity of EO 273
(January 1, 1988).
The transitional input tax shall be 8% of the value of the inventory or
actual VAT paid, whichever is higher, which amount may be allowed as tax credit
against the output tax of the VAT-registered person.
The CIR likewise cited from the Transitory Provisions of RR 7-95, particularly the following:
(a) Presumptive Input Tax Credits -
xxx
(iii) For real estate dealers, the presumptive input tax of 8% of the book
value of improvements on or after January 1, 1988 (the effectivity of E.O. 273)
shall be allowed.
For purposes of sub-paragraphs (i), (ii) and (iii) above, an inventory as
of December 31, 1995 of such goods or properties and improvements showing the
quantity, description and amount filed with the RDO not later than Janaury 31,
1996.
xxx
Consequently, FBDC received an Assessment Notice in the amount of P45,188,708.08,
representing deficiency VAT for the 4th quarter of 1996, including surcharge, interest and penalty. After
respondent Regional Director denied FBDCs motion for reconsideration/protest, FBDC filed a petition
for review with the Court of Tax Appeals (CTA), docketed as C.T.A. Case No. 5665.[16] On 11 August
2000, the CTA rendered a decision affirming the assessment made by the respondents. [17] FBDC
assailed the CTA decision through a petition for review filed with the Court of Appeals, docketed as CA-
G.R. SP No. 60477. On 15 November 2002, the Court of Appeals rendered a decision affirming the
CTA decision, but removing the surcharge, interests and penalties, thus reducing the amount due
to P28,413,783.00.[18] From said decision, FBDC filed a petition for review with this Court, the first of the
two petitions now before us, seeking the reversal of the CTA decision dated 11 August 2000 and a
pronouncement that FBDC is entitled to the transitional/presumptive input tax credit of P28,413,783.00.
This petition has been docketed as G.R. No. 158885.
The second petition, which is docketed as G.R. No. 170680, involves the same parties and
legal issues, but concerns the claim of FBDC that it is entitled to claim a similar transitional/presumptive
input tax credit, this time for the third quarter of 1997. A brief recital of the anteceding facts underlying
this second claim is in order.
For the third quarter of 1997, FBDC derived the total amount of P3,591,726,328.11 from its
sales and lease of lots, on which the output VAT payable to the BIR
was P359,172,632.81.[19] Accordingly, FBDC made cash payments totaling P347,741,695.74 and
utilized its regular input tax credit of P19,743,565.73 on purchases of goods and services.[20] On 11 May
1999, FBDC filed with the BIR a claim for refund of the amount of P347,741,695.74 which it had paid as
VAT for the third quarter of 1997.[21] No action was taken on the refund claim, leading FBDC to file a
petition for review with the CTA, docketed as CTA Case No. 5926. Utilizing the same valuation[22] of 8%
of the total book value of its beginning inventory of real properties (or P71,227,503,200.00) FBDC
argued that its input tax credit was more than enough to offset the VAT paid by it for the third quarter of
1997.[23]
On 17 October 2000, the CTA promulgated its decision[24] in CTA Case No. 5926, denying
the claim for refund. FBDC then filed a petition for review with the Court of Appeals, docketed as CA-
G.R. SP No. 61517. On 3 October 2003, the Court of Appeals rendered a decision[25] affirming the
judgment of the CTA. As a result, FBDC filed its second petition, docketed as G.R. No. 170680.
II.
The two petitions were duly consolidated[26] and called for oral argument on 18 April 2006.
During the oral arguments, the parties were directed to discuss the following issues:
1. In determining the 10% value-added tax in Section 100 of the
[Old NIRC] on the sale of real properties by real estate dealers, is the
8% transitional input tax credit in Section 105 applied only to the
improvements on the real property or is it applied on the value of the
entire real property?
2. Are Section 4.105.1 and paragraph (a)(III) of the Transitory
Provisions of Revenue Regulations No. 7-95 valid in limiting the 8%
transitional input tax to the improvements on the real property?
While the two issues are linked, the main issue is evidently whether Section 105 of the Old
NIRC may be interpreted in such a way as to restrict its application in the case of real estate dealers
only to the improvements on the real property belonging to their beginning inventory, and not the entire
real property itself. There would be no controversy before us if the Old NIRC had itself supplied that
limitation, yet the law is tellingly silent in that regard. RR 7-95, which imposes such restrictions on real
estate dealers, is discordant with the Old NIRC, so it is alleged.
 III.
On its face, there is nothing in Section 105 of the Old NIRC that prohibits the inclusion of real
properties, together with the improvements thereon, in the beginning inventory of goods, materials and
supplies, based on which inventory the transitional input tax credit is computed. It can be conceded that
when it was drafted Section 105 could not have possibly contemplated concerns specific to real
properties, as real estate transactions were not originally subject to VAT. At the same time, when
transactions on real properties were finally made subject to VAT beginning with Rep. Act No. 7716, no
corresponding amendment was adopted as regards Section 105 to provide for a differentiated
treatment in the application of the transitional input tax credit with respect to real properties or real
estate dealers.
It was Section 100 of the Old NIRC, as amended by Rep. Act No. 7716, which made real estate
transactions subject to VAT for the first time. Prior to the amendment, Section 100 had imposed the
VAT on every sale, barter or exchange of goods, without however specifying the kind of properties that
fall within or under the generic class goods subject to the tax.
Rep. Act No. 7716, which significantly is also known as the Expanded Value-Added
Tax (EVAT) law, expanded the coverage of the VAT by amending Section 100 of the Old NIRC in
several respects, some of which we will enumerate. First, it made every sale, barter or exchange of
goods or properties subject to VAT.[27] Second, it generally defined goods or properties as all tangible
and intangible objects which are capable of pecuniary estimation.[28] Third, it included a non-exclusive
enumeration of various objects that fall under the class goods or properties subject to VAT, including
[r]eal properties held primarily for sale to customers or held for lease in the ordinary course of trade or
business.[29]
From these amendments to Section 100, is there any differentiated VAT treatment on real
properties or real estate dealers that would justify the suggested limitations on the application of the
transitional input tax on them? We see none.
Rep. Act No. 7716 clarifies that it is the real properties held primarily for sale to customers or
held for lease in the ordinary course of trade or business that are subject to the VAT, and not when the
real estate transactions are engaged in by persons who do not sell or lease properties in the ordinary
course of trade or business. It is clear that those regularly engaged in the real estate business are
accorded the same treatment as the merchants of other goods or properties available in the market. In
the same way that a milliner considers hats as his goods and a rancher considers cattle as his goods, a
real estate dealer holds real property, whether or not it contains improvements, as his goods.
Had Section 100 itself supplied any differentiation between the treatment of real properties or
real estate dealers and the treatment of the transactions involving other commercial goods, then such
differing treatment would have constituted the statutory basis for the CIR to engage in such
differentiation which said respondent did seek to accomplish in this case through Section 4.105-1 of RR
7-95. Yet the amendments introduced by Rep. Act No. 7716 to Section 100, coupled with the fact that
the said law left Section 105 intact, reveal the lack of any legislative intention to make persons or
entities in the real estate business subject to a VAT treatment different from those engaged in the sale
of other goods or properties or in any other commercial trade or business.
If the plain text of Rep. Act No. 7716 fails to supply any apparent justification for limiting the
beginning inventory of real estate dealers only to the improvements on their properties, how then were
the CIR and the courts a quo able to justify such a view?
IV.
The fact alone that the denial of FBDCs claims is in accord with Section 4.105-1 of RR 7-95
does not, of course, put this inquiry to rest. If Section 4.105-1 is itself incongruent to Rep. Act No. 7716,
the incongruence cannot by itself justify the denial of the claims. We need to inquire into the rationale
behind Section 4.105-1, as well as the question whether the interpretation of the law embodied therein
is validated by the law itself.
The CTA, in its rulings, proceeded from a thesis which is not readily apparent from the texts
of the laws we have cited. The transitional input tax credit is conditioned on the prior payment of sales
taxes or the VAT, so the CTA observed. The introduction of the VAT through E.O. No. 273 and its
subsequent expansion through Rep. Act No. 7716 subjected various persons to the tax for the very first
time, leaving them unable to claim the input tax credit based on their purchases before they became
subject to the VAT. Hence, the transitional input tax credit was designed to alleviate that relatively
iniquitous loss. Given that rationale, according to the CTA, it would be improper to allow FBDC, which
had acquired its properties through a tax-free purchase, to claim the transitional input tax credit. The
CTA added that Section 105.4.1 of RR 7-95 is consonant with its perceived rationale behind the
transitional input tax credit since the materials used for the construction of improvements would have
most likely involved the payment of VAT on their purchase.
Concededly, this theory of the CTA has some sense, extravagantly extrapolated as it is
though from the seeming silence on the part of the provisions of the law. Yet ultimately, the theory is
woefully limited in perspective.
It is correct, as pointed out by the CTA, that upon the shift from sales taxes to VAT in 1987
newly-VAT registered people would have been prejudiced by the inability to credit against the output
VAT their payments by way of sales tax on their existing stocks in trade. Yet that inequity was precisely
addressed by a transitory provision in E.O. No. 273 found in Section 25 thereof. The
provision authorized VAT-registered persons to invoke a presumptive input tax equivalent to 8% of the
value of the inventory as of December 31, 1987 of materials and supplies which are not for sale, the tax
on which was not taken up or claimed as deferred sales tax credit, and a similar presumptive input tax
equivalent to 8% of the value of the inventory as of December 31, 1987 of goods for sale, the tax on
which was not taken up or claimed as deferred sales tax credit.[30]
Section 25 of E.O. No. 273 perfectly remedies the problem assumed by the CTA as the basis
for the introduction of transitional input tax credit in 1987. If the core purpose of the tax credit is only, as
hinted by the CTA, to allow for some mode of accreditation of previously-paid sales taxes, then Section
25 alone would have sufficed. Yet E.O. No. 273 amended the Old NIRC itself by providing for the
transitional input tax credit under Section 105, thereby assuring that the tax credit would endure long
after the last goods made subject to sales tax have been consumed.
If indeed the transitional input tax credit is integrally related to previously paid sales taxes, the
purported causal link between those two would have been nonetheless extinguished long ago. Yet
Congress has reenacted the transitional input tax credit several times; that fact simply belies the
absence of any relationship between such tax credit and the long-abolished sales taxes. Obviously
then, the purpose behind the transitional input tax credit is not confined to the transition from sales tax
to VAT.
There is hardly any constricted definition of "transitional" that will limit its possible meaning to
the shift from the sales tax regime to the VAT regime. Indeed, it could also allude to the transition one
undergoes from not being a VAT-registered person to becoming a VAT-registered person. Such
transition does not take place merely by operation of law, E.O. No. 273 or Rep. Act No. 7716 in
particular. It could also occur when one decides to start a business. Section 105 states that the
transitional input tax credits become available either to (1) a person who becomes liable to VAT; or (2)
any person who elects to be VAT-registered. The clear language of the law entitles new trades or
businesses to avail of the tax credit once they become VAT-registered. The transitional input tax credit,
whether under the Old NIRC or the New NIRC, may be claimed by a newly-VAT registered person such
as when a business as it commences operations. If we view the matter from the perspective of a
starting entrepreneur, greater clarity emerges on the continued utility of the transitional input tax credit.
Following the theory of the CTA, the new enterprise should be able to claim the transitional
input tax credit because it has presumably paid taxes, VAT in particular, in the purchase of the goods,
materials and supplies in its beginning inventory. Consequently, as the CTA held below, if the new
enterprise has not paid VAT in its purchases of such goods, materials and supplies, then it should not
be able to claim the tax credit. However, it is not always true that the acquisition of such goods,
materials and supplies entail the payment of taxes on the part of the new business. In fact, this could
occur as a matter of course by virtue of the operation of various provisions of the NIRC, and not only on
account of a specially legislated exemption.
Let us cite a few examples drawn from the New NIRC. If the goods or properties are not
acquired from a person in the course of trade or business, the transaction would not be subject to VAT
under Section 105.[31] The sale would be subject to capital gains taxes under Section 24(D), [32] but since
capital gains is a tax on passive income it is the seller, not the buyer, who generally would shoulder the
tax.
If the goods or properties are acquired through donation, the acquisition would not be subject to VAT
but to donors tax under Section 98 instead.[33] It is the donor who would be liable to pay the donors
tax,[34] and the donation would be exempt if the donors total net gifts during the calendar year does not
exceed P100,000.00.[35]
If the goods or properties are acquired through testate or intestate succession, the transfer would not
be subject to VAT but liable instead for estate tax under Title III of the New NIRC. [36] If the net estate
does not exceed P200,000.00, no estate tax would be assessed.[37]
The interpretation proffered by the CTA would exclude goods and properties which are
acquired through sale not in the ordinary course of trade or business, donation or through succession,
from the beginning inventory on which the transitional input tax credit is based. This prospect all but
highlights the ultimate absurdity of the respondents' position. Again, nothing in the Old NIRC (or even
the New NIRC) speaks of such a possibility or qualifies the previous payment of VAT or any other taxes
on the goods, materials and supplies as a pre-requisite for inclusion in the beginning inventory.
It is apparent that the transitional input tax credit operates to benefit newly VAT-registered
persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of
goods, materials and supplies. During that period of transition from non-VAT to VAT status, the
transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very
beginning, the VAT-registered taxpayer is obliged to remit a significant portion of the income it derived
from its sales as output VAT. The transitional input tax credit mitigates this initial diminution of the
taxpayers income by affording the opportunity to offset the losses incurred through the remittance of the
output VAT at a stage when the person is yet unable to credit input VAT payments.
There is another point that weighs against the CTAs interpretation. Under Section 105 of the
Old NIRC, the rate of the transitional input tax credit is 8% of the value of such inventory or the actual
value-added tax paid on such goods, materials and supplies, whichever is higher.[38] If indeed the
transitional input tax credit is premised on the previous payment of VAT, then it does not make sense to
afford the taxpayer the benefit of such credit based on 8% of the value of such inventory should the
same prove higher than the actual VAT paid. This intent that the CTA alluded to could have been
implemented with ease had the legislature shared such intent by providing the actual VAT paid as the
sole basis for the rate of the transitional input tax credit.
The CTA harped on the circumstance that FBDC was excused from paying any tax on the
purchase of its properties from the national government, even claiming that to allow the transitional
input tax credit is "tantamount to giving an undeserved bonus to real estate dealers similarly situated as
[FBDC] which the Government cannot afford to provide." Yet the tax laws in question, and all tax laws
in general, are designed to enforce uniform tax treatment to persons or classes of persons who share
minimum legislated standards. The common standard for the application of the transitional input tax
credit, as enacted by E.O. No. 273 and all subsequent tax laws which reinforced or reintegrated the tax
credit, is simply that the taxpayer in question has become liable to VAT or has elected to be a VAT-
registered person. E.O. No. 273 and the subsequent tax laws are all decidedly neutral and
accommodating in ascertaining who should be entitled to the tax credit, and it behooves the CIR and
the CTA to adopt a similarly judicious perspective.
IV.
Given the fatal flaws in the theory offered by the CTA as supposedly underlying the
transitional input tax credit, is there any other basis to justify the limitations imposed by the CIR through
RR 7-95? We discern nothing more. As seen in our discussion, there is no logic that coheres with either
E.O. No. 273 or Rep. Act No. 7716 which supports the restriction imposed on real estate brokers and
their ability to claim the transitional input tax credit based on the value of their real properties. In
addition, the very idea of excluding the real properties itself from the beginning inventory simply runs
counter to what the transitional input tax credit seeks to accomplish for persons engaged in the sale of
goods, whether or not such goods take the form of real properties or more mundane commodities.
Under Section 105, the beginning inventory of goods forms part of the valuation of the
transitional input tax credit. Goods, as commonly understood in the business sense, refers to the
product which the VAT-registered person offers for sale to the public. With respect to real estate
dealers, it is the real properties themselves which constitute their goods. Such real properties are the
operating assets of the real estate dealer.
 Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of goods or properties such
real properties held primarily for sale to customers or held for lease in the ordinary course of trade or
business. Said definition was taken from the very statutory language of Section 100 of the Old
NIRC. By limiting the definition of goods to improvements in Section 4.105-1, the BIR not only
contravened the definition of goods as provided in the Old NIRC, but also the definition which the same
revenue regulation itself has provided.
The Court of Tax Appeals claimed that under Section 105 of the Old NIRC the basis for the
inventory of goods, materials and supplies upon which the transitional input VAT would be based shall
be left to regulation by the appropriate administrative authority. This is based on the phrase filing of an
inventory as prescribed by regulations found in Section 105. Nonetheless, Section 105 does include the
particular properties to be included in the inventory, namely goods, materials and supplies. It is
questionable whether the CIR has the power to actually redefine the concept of goods, as she did when
she excluded real properties from the class of goods which real estate companies in the business of
selling real properties may include in their inventory. The authority to prescribe regulations can pertain
to more technical matters, such as how to appraise the value of the inventory or what papers need to
be filed to properly itemize the contents of such inventory. But such authority cannot go as far as to
amend Section 105 itself, which the Commissioner had unfortunately accomplished in this case.
It is of course axiomatic that a rule or regulation must bear upon, and be consistent with, the
provisions of the enabling statute if such rule or regulation is to be valid. [39] In case of conflict between a
statute and an administrative order, the former must prevail.[40] Indeed, the CIR has no power to limit
the meaning and coverage of the term goods in Section 105 of the Old NIRC absent statutory authority
or basis to make and justify such limitation. A contrary conclusion would mean the CIR could very well
moot the law or arrogate legislative authority unto himself by retaining sole discretion to provide the
definition and scope of the term goods.
V.
At this juncture, we turn to some of the points raised in the dissent of the esteemed Justice Antonio T.
Carpio.
The dissent adopts the CTAs thesis that the transitional input tax credit applies only when taxes were
previously paid on the properties in the beginning inventory. Had the dissenting view won, it would have
introduced a new requisite to the application of the transitional input tax credit and required the taxpayer
to supply proof that it had previously paid taxes on the acquisition of goods, materials and supplies
comprising its beginning inventory. We have sufficiently rebutted this thesis, but the dissent adds a twist
to the argument by using the term presumptive input tax credit to imply that the transitional input tax
credit involves a presumption that there was a previous payment of taxes.
Let us clarify the distinction between the presumptive input tax credit and the transitional input tax
credit. As with the transitional input tax credit, the presumptive input tax credit is creditable against the
output VAT. It necessarily has come into existence in our tax structure only after the introduction of the
VAT. As quoted earlier,[41] E.O. No. 273 provided for a presumptive input tax credit as one of the
transitory measures in the shift from sales taxes to VAT, but such presumptive input tax credit was
never integrated in the NIRC itself. It was only in 1997, or eleven years after the VAT was first
introduced, that the presumptive input tax credit was first incorporated in the NIRC, more particularly in
Section 111(B) of the New NIRC. As borne out by the text of the provision, [42] it is plain that the
presumptive input tax credit is highly limited in application as it may be claimed only by persons or firms
engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and
cooking oil;[43] and public works contractors.[44]
Clearly, for more than a decade now, the term presumptive input tax credit has contemplated a
particularly idiosyncratic tax credit far divorced from its original usage in the transitory provisions of E.O.
No. 273. There is utterly no sense then in latching on to the term as having any significant meaning for
the purpose of the cases at bar.
The dissent, in arguing for the effectivity of Section 4.105-1 of RR 7-95, ratiocinates in this
manner: (1) Section 4.105-1 finds basis in Section 105 of the Old NIRC, which provides that the input
tax is allowed on the beginning inventory of goods, materials and supplies; (2) input taxes must have
been paid on such goods, materials and supplies; (3) unlike real property itself, the improvements
thereon were already subject to VAT even prior to the passage of Rep. Act No. 7716; (4) since no VAT
was paid on the real property prior to the passage of Rep. Act No. 7716, it could not form part of the
beginning inventory of goods, materials and supplies.
This chain of premises have already been debunked. It is apparent that the dissent believes
that only those goods, materials and supplies on which input VAT was paid could form the basis of
valuation of the input tax credit. Thus, if the VAT-registered person acquired all the goods, materials
and supplies of the beginning inventory through a sale not in the ordinary course of trade or business,
or through succession or donation, said person would be unable to receive a transitional input tax
credit. Yet even RR 7-95, which imposes the restriction only on real estate dealers permits such other
persons who obtained their beginning inventory through tax-free means to claim the transitional input
tax credit. The dissent thus betrays a view that is even more radical and more misaligned with the
language of the law than that expressed by the CIR.
VI.
A final observation. Section 4.105.1 of RR No. 7-95, insofar as it disallows real estate dealers
from including the value of their real properties in the beginning inventory of goods, materials and
supplies, has in fact already been repealed. The offending provisions were deleted with the enactment
of Revenue Regulation No. 6-97 (RR 6-97) dated 2 January 1997, which amended RR 7-95.[45] The
repeal of the basis for the present assessments by RR 6-97 only highlights the continuing absurdity of
the position of the BIR towards FBDC.
FBDC points out that while the transactions involved in G.R. No. 158885 took place during
the effectivity of RR 7-95, the transactions involved in G.R. No. 170680 in fact took place after RR No.
6-97 had taken effect. Indeed, the assessments subject of G.R. No. 170680 were for the third quarter of
1997, or several months after the effectivity of RR 6-97. That fact provides additional reason to sustain
FBDCs claim for refund of its 1997 Third Quarter VAT payments. Nevertheless, since the assailed
restrictions implemented by RR 7-95 were not sanctioned by law in the first place there is no longer
need to dwell on such fact.
WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court of Tax Appeals and
the Court of Appeals are REVERSED and SET ASIDE. Respondents are hereby (1) restrained from
collecting from petitioner the amount of P28,413,783.00 representing the transitional input tax credit
due it for the fourth quarter of 1996; and (2) directed to refund to petitioner the amount
of P347,741,695.74 paid as output VAT for the third quarter of 1997 in light of the persisting transitional
input tax credit available to petitioner for the said quarter, or to issue a tax credit corresponding to such VAT CLAIM FOR REFUND
amount. No pronouncement as to costs.

SO ORDERED. 15. CONTEX V. CIR [2X]

16. ATLAS CONSOLIDATED MINING V. CIR

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. Nos. 141104 & 148763 June 8, 2007

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

CHICO-NAZARIO, J.:

Before this Court are the consolidated cases involving the unsuccessful claims of herein petitioner Atlas
Consolidated Mining and Development Corporation (petitioner corporation) for the refund/credit of the
input Value Added Tax (VAT) on its purchases of capital goods and on its zero-rated sales in the
taxable quarters of the years 1990 and 1992, the denial of which by the Court of Tax Appeals (CTA),
was affirmed by the Court of Appeals.

Petitioner corporation is engaged in the business of mining, production, and sale of various mineral
products, such as gold, pyrite, and copper concentrates. It is a VAT-registered taxpayer. It was initially
issued VAT Registration No. 32-A-6-002224, dated 1 January 1988, but it had to register anew with the
appropriate revenue district office (RDO) of the Bureau of Internal Revenue (BIR) when it moved its
principal place of business, and it was re-issued VAT Registration No. 32-0-004622, dated 15 August
1990.1

G.R. No. 141104

Petitioner corporation filed with the BIR its VAT Return for the first quarter of 1992. 2 It alleged that it
likewise filed with the BIR the corresponding application for the refund/credit of its input VAT on its
purchases of capital goods and on its zero-rated sales in the amount of P26,030,460.00.3 When its
application for refund/credit remained unresolved by the BIR, petitioner corporation filed on 20 April
1994 its Petition for Review with the CTA, docketed as CTA Case No. 5102. Asserting that it was a
"zero-rated VAT person," it prayed that the CTA order herein respondent Commissioner of Internal
Revenue (respondent Commissioner) to refund/credit petitioner corporation with the amount
of P26,030,460.00, representing the input VAT it had paid for the first quarter of 1992. The respondent
Commissioner opposed and sought the dismissal of the petition for review of petitioner corporation for
failure to state a cause of action. After due trial, the CTA promulgated its Decision 4 on 24 November
1997 with the following disposition –
WHEREFORE, in view of the foregoing, the instant claim for refund is hereby DENIED on the
ground of prescription, insufficiency of evidence and failure to comply with Section 230 of the
Tax Code, as amended. Accordingly, the petition at bar is hereby DISMISSED for lack of
merit.
The CTA denied the motion for reconsideration of petitioner corporation in a Resolution 5 dated 15 April
1998.
G.R. No. 148763
G.R. No. 148763 involves almost the same set of facts as in G.R. No. 141104 presented above, except
that it relates to the claims of petitioner corporation for refund/credit of input VAT on its purchases of
capital goods and on its zero-rated sales made in the last three taxable quarters of 1990.
Petitioner corporation filed with the BIR its VAT Returns for the second, third, and fourth quarters of
1990, on 20 July 1990, 18 October 1990, and 20 January 1991, respectively. It submitted separate
applications to the BIR for the refund/credit of the input VAT paid on its purchases of capital goods and
on its zero-rated sales, the details of which are presented as follows –
Date of Application Period Covered Amount Applied For

When the case was elevated to the Court of Appeals as CA-G.R. SP No. 47607, the appellate court, in 21 August 1990 2nd Quarter, 1990 P 54,014,722.04
its Decision,6 dated 6 July 1999, dismissed the appeal of petitioner corporation, finding no reversible
error in the CTA Decision, dated 24 November 1997. The subsequent motion for reconsideration of 21 November 1990 3rd Quarter, 1990 75,304,774.77
petitioner corporation was also denied by the Court of Appeals in its Resolution, 7 dated 14 December
1999. 19 February 1991 4th Quarter, 1990 43,829,766.10

Thus, petitioner corporation comes before this Court, via a Petition for Review on Certiorari under Rule When the BIR failed to act on its applications for refund/credit, petitioner corporation filed with the CTA
45 of the Revised Rules of Court, assigning the following errors committed by the Court of Appeals – the following petitions for review –

I
Date Filed Period Covered CTA Case No.

THE COURT OF APPEALS ERRED IN AFFIRMING THE REQUIREMENT OF REVENUE 20 July 1992 2nd Quarter, 1990 4831
REGULATIONS NO. 2-88 THAT AT LEAST 70% OF THE SALES OF THE [BOARD OF
INVESTMENTS (BOI)]-REGISTERED FIRM MUST CONSIST OF EXPORTS FOR ZERO- 9 October 1992 3rd Quarter, 1990 4859
RATING TO APPLY.
14 January 1993 4th Quarter, 1990 4944

II
THE COURT OF APPEALS ERRED IN AFFIRMING THAT PETITIONER FAILED TO
SUBMIT SUFFICIENT EVIDENCE SINCE FAILURE TO SUBMIT PHOTOCOPIES OF VAT
INVOICES AND RECEIPTS IS NOT A FATAL DEFECT.
III
THE COURT OF APPEALS ERRED IN RULING THAT THE JUDICIAL CLAIM WAS FILED
BEYOND THE PRESCRIPTIVE PERIOD SINCE THE JUDICIAL CLAIM WAS FILED
WITHIN TWO (2) YEARS FROM THE FILING OF THE VAT RETURN.
IV
THE COURT OF APPEALS ERRED IN NOT ORDERING CTA TO ALLOW THE RE-
OPENING OF THE CASE FOR PETITIONER TO PRESENT ADDITIONAL EVIDENCE.8
which were eventually consolidated. The respondent Commissioner contested the foregoing Petitions
and prayed for the dismissal thereof. The CTA ruled in favor of respondent Commissioner and in its
Decision,9 dated 30 October 1997, dismissed the Petitions mainly on the ground that the prescriptive
periods for filing the same had expired. In a Resolution, 10 dated 15 January 1998, the CTA denied the
motion for reconsideration of petitioner corporation since the latter presented no new matter not already
discussed in the court's prior Decision. In the same Resolution, the CTA also denied the alternative
prayer of petitioner corporation for a new trial since it did not fall under any of the grounds cited under
Section 1, Rule 37 of the Revised Rules of Court, and it was not supported by affidavits of merits
required by Section 2 of the same Rule.
Petitioner corporation appealed its case to the Court of Appeals, where it was docketed as CA-G.R. SP
No. 46718. On 15 September 2000, the Court of Appeals rendered its Decision, 11 finding that although
petitioner corporation timely filed its Petitions for Review with the CTA, it still failed to substantiate its
claims for the refund/credit of its input VAT for the last three quarters of 1990. In its Resolution, 12 dated
27 June 2001, the appellate court denied the motion for reconsideration of petitioner corporation,
finding no cogent reason to reverse its previous Decision.
Aggrieved, petitioner corporation filed with this Court another Petition for Review on Certiorari under
Rule 45 of the Revised Rules of Court, docketed as G.R. No. 148763, raising the following issues –
A.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER'S CLAIM IS BARRED UNDER REVENUE REGULATIONS NOS. 2-88 AND 3-
88 I.E., FOR FAILURE TO PTOVE [sic] THE 70% THRESHOLD FOR ZERO-RATING TO
APPLY AND FOR FAILURE TO ESTABLISH THE FACTUAL BASIS FOR THE INSTANT
CLAIM.
B.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN FINDING THAT THERE IS NO
BASIS TO GRANT PETITIONER'S MOTION FOR NEW TRIAL.
There being similarity of parties, subject matter, and issues, G.R. Nos. 141104 and 148763 were
consolidated pursuant to a Resolution, dated 4 September 2006, issued by this Court. The ruling of this
Court in these cases hinges on how it will resolve the following key issues: (1) prescription of the claims
of petitioner corporation for input VAT refund/credit; (2) validity and applicability of Revenue
Regulations No. 2-88 imposing upon petitioner corporation, as a requirement for the VAT zero-rating of
its sales, the burden of proving that the buyer companies were not just BOI-registered but also
exporting 70% of their total annual production; (3) sufficiency of evidence presented by petitioner
corporation to establish that it is indeed entitled to input VAT refund/credit; and (4) legal ground for
granting the motion of petitioner corporation for re-opening of its cases or holding of new trial before the
CTA so it could be given the opportunity to present the required evidence.
Prescription
The prescriptive period for filing an application for tax refund/credit of input VAT on zero-rated sales
made in 1990 and 1992 was governed by Section 106(b) and (c) of the Tax Code of 1977, as amended,
which provided that –
SEC. 106. Refunds or tax credits of input tax. – x x x.
(b) Zero-rated or effectively zero-rated sales. – Any person, except those covered by
paragraph (a) above, whose sales are zero-rated may, within two years after the close of the
quarter when such sales were made, apply for the issuance of a tax credit certificate or
refund of the input taxes attributable to such sales to the extent that such input tax has not
been applied against output tax.
xxxx
(e) Period within which refund of input taxes may be made by the Commissioner. – The
Commissioner shall refund input taxes within 60 days from the date the application for refund
was filed with him or his duly authorized representative. No refund of input taxes shall be
allowed unless the VAT-registered person files an application for refund within the period
prescribed in paragraphs (a), (b) and (c) as the case may be.
By a plain reading of the foregoing provision, the two-year prescriptive period for filing the application
for refund/credit of input VAT on zero-rated sales shall be determined from the close of the quarter
when such sales were made.
Petitioner contends, however, that the said two-year prescriptive period should be counted, not from the
close of the quarter when the zero-rated sales were made, but from the date of filing of the quarterly
VAT return and payment of the tax due 20 days thereafter, in accordance with Section 110(b) of the
Tax Code of 1977, as amended, quoted as follows –
SEC. 110. Return and payment of value-added tax. – x x x.
(b) Time for filing of return and payment of tax. – The return shall be filed and the tax paid
within 20 days following the end of each quarter specifically prescribed for a VAT-registered
person under regulations to be promulgated by the Secretary of Finance: Provided,
however, That any person whose registration is cancelled in accordance with paragraph (e)
of Section 107 shall file a return within 20 days from the cancellation of such registration.
It is already well-settled that the two-year prescriptive period for instituting a suit or proceeding for
recovery of corporate income tax erroneously or illegally paid under Section 230 13 of the Tax Code of
1977, as amended, was to be counted from the filing of the final adjustment return. This Court already
set out in ACCRA Investments Corporation v. Court of Appeals,14 the rationale for such a rule, thus –
Clearly, there is the need to file a return first before a claim for refund can prosper inasmuch
as the respondent Commissioner by his own rules and regulations mandates that the
corporate taxpayer opting to ask for a refund must show in its final adjustment return the
income it received from all sources and the amount of withholding taxes remitted by its
withholding agents to the Bureau of Internal Revenue. The petitioner corporation filed its final
adjustment return for its 1981 taxable year on April 15, 1982. In our Resolution dated April
10, 1989 in the case of Commissioner of Internal Revenue v. Asia Australia Express,
Ltd. (G.R. No. 85956), we ruled that the two-year prescriptive period within which to claim a
refund commences to run, at the earliest, on the date of the filing of the adjusted final tax
return. Hence, the petitioner corporation had until April 15, 1984 within which to file its claim
for refund.
Considering that ACCRAIN filed its claim for refund as early as December 29, 1983 with the
respondent Commissioner who failed to take any action thereon and considering further that
the non-resolution of its claim for refund with the said Commissioner prompted ACCRAIN to
reiterate its claim before the Court of Tax Appeals through a petition for review on April 13,
1984, the respondent appellate court manifestly committed a reversible error in affirming the
holding of the tax court that ACCRAIN's claim for refund was barred by prescription.
It bears emphasis at this point that the rationale in computing the two-year prescriptive period
with respect to the petitioner corporation's claim for refund from the time it filed its final
adjustment return is the fact that it was only then that ACCRAIN could ascertain whether it
 made profits or incurred losses in its business operations. The "date of payment", therefore,
in ACCRAIN's case was when its tax liability, if any, fell due upon its filing of its final
adjustment return on April 15, 1982.
In another case, Commissioner of Internal Revenue v. TMX Sales, Inc.,15 this Court further expounded
on the same matter –
A re-examination of the aforesaid minute resolution of the Court in the Pacific Procon case is
warranted under the circumstances to lay down a categorical pronouncement on the question
as to when the two-year prescriptive period in cases of quarterly corporate income tax
commences to run. A full-blown decision in this regard is rendered more imperative in the
light of the reversal by the Court of Tax Appeals in the instant case of its previous ruling in
the Pacific Procon case.
Section 292 (now Section 230) of the National Internal Revenue Code should be interpreted
in relation to the other provisions of the Tax Code in order to give effect the legislative intent
and to avoid an application of the law which may lead to inconvenience and absurdity. In the
case of People vs. Rivera (59 Phil. 236 [1933]), this Court stated that statutes should receive
a sensible construction, such as will give effect to the legislative intention and so as to avoid
an unjust or an absurd conclusion. INTERPRETATIO TALIS IN AMBIGUIS SEMPER
FRIENDA EST, UT EVITATUR INCONVENIENS ET ABSURDUM. Where there is ambiguity,
such interpretation as will avoid inconvenience and absurdity is to be adopted. Furthermore,
courts must give effect to the general legislative intent that can be discovered from or is
unraveled by the four corners of the statute, and in order to discover said intent, the whole
statute, and not only a particular provision thereof, should be considered. (Manila Lodge No.
761, et al. vs. Court of Appeals, et al. 73 SCRA 162 [1976) Every section, provision or clause
of the statute must be expounded by reference to each other in order to arrive at the effect
contemplated by the legislature. The intention of the legislator must be ascertained from the
whole text of the law and every part of the act is to be taken into view. (Chartered Bank vs.
Imperial, 48 Phil. 931 [1921]; Lopez vs. El Hoger Filipino, 47 Phil. 249, cited in Aboitiz
Shipping Corporation vs. City of Cebu, 13 SCRA 449 [1965]).
Thus, in resolving the instant case, it is necessary that we consider not only Section 292 (now
Section 230) of the National Internal Revenue Code but also the other provisions of the Tax
Code, particularly Sections 84, 85 (now both incorporated as Section 68), Section 86 (now
Section 70) and Section 87 (now Section 69) on Quarterly Corporate Income Tax Payment
and Section 321 (now Section 232) on keeping of books of accounts. All these provisions of
the Tax Code should be harmonized with each other.
xxxx
Therefore, the filing of a quarterly income tax returns required in Section 85 (now Section 68)
and implemented per BIR Form 1702-Q and payment of quarterly income tax should only be
considered mere installments of the annual tax due. These quarterly tax payments which are
computed based on the cumulative figures of gross receipts and deductions in order to arrive
at a net taxable income, should be treated as advances or portions of the annual income tax
due, to be adjusted at the end of the calendar or fiscal year. This is reinforced by Section 87
(now Section 69) which provides for the filing of adjustment returns and final payment of
income tax. Consequently, the two-year prescriptive period provided in Section 292 (now
Section 230) of the Tax Code should be computed from the time of filing the Adjustment
Return or Annual Income Tax Return and final payment of income tax.
In the case of Collector of Internal Revenue vs. Antonio Prieto (2 SCRA 1007 [1961]), this
Court held that when a tax is paid in installments, the prescriptive period of two years
provided in Section 306 (Section 292) of the National Internal Revenue Code should be
counted from the date of the final payment. This ruling is reiterated in Commissioner of
Internal Revenue vs. Carlos Palanca (18 SCRA 496 [1966]), wherein this Court stated that
where the tax account was paid on installment, the computation of the two-year prescriptive
period under Section 306 (Section 292) of the Tax Code, should be from the date of the last
installment.
In the instant case, TMX Sales, Inc. filed a suit for a refund on March 14, 1984. Since the
two-year prescriptive period should be counted from the filing of the Adjustment Return on
April 15,1982, TMX Sales, Inc. is not yet barred by prescription.
The very same reasons set forth in the afore-cited cases concerning the two-year prescriptive period for
claims for refund of illegally or erroneously collected income tax may also apply to the Petitions at bar
involving the same prescriptive period for claims for refund/credit of input VAT on zero-rated sales.
It is true that unlike corporate income tax, which is reported and paid on installment every quarter, but is
eventually subjected to a final adjustment at the end of the taxable year, VAT is computed and paid on
a purely quarterly basis without need for a final adjustment at the end of the taxable year. However, it is
also equally true that until and unless the VAT-registered taxpayer prepares and submits to the BIR its
quarterly VAT return, there is no way of knowing with certainty just how much input VAT 16 the taxpayer
may apply against its output VAT;17 how much output VAT it is due to pay for the quarter or how much
excess input VAT it may carry-over to the following quarter; or how much of its input VAT it may claim
as refund/credit. It should be recalled that not only may a VAT-registered taxpayer directly apply against
his output VAT due the input VAT it had paid on its importation or local purchases of goods and
services during the quarter; the taxpayer is also given the option to either (1) carry over any excess
input VAT to the succeeding quarters for application against its future output VAT liabilities, or (2) file an
application for refund or issuance of a tax credit certificate covering the amount of such input
VAT.18 Hence, even in the absence of a final adjustment return, the determination of any output VAT
payable necessarily requires that the VAT-registered taxpayer make adjustments in its VAT return
every quarter, taking into consideration the input VAT which are creditable for the present quarter or
had been carried over from the previous quarters.
Moreover, when claiming refund/credit, the VAT-registered taxpayer must be able to establish that it
does have refundable or creditable input VAT, and the same has not been applied against its output
VAT liabilities – information which are supposed to be reflected in the taxpayer's VAT returns. Thus, an
application for refund/credit must be accompanied by copies of the taxpayer's VAT return/s for the
taxable quarter/s concerned.
Lastly, although the taxpayer's refundable or creditable input VAT may not be considered as illegally or
erroneously collected, its refund/credit is a privilege extended to qualified and registered taxpayers by
the very VAT system adopted by the Legislature. Such input VAT, the same as any illegally or A review of the records reveal that the original of the aforecited application was lost during
erroneously collected national internal revenue tax, consists of monetary amounts which are currently in the time petitioner transferred its office (TSN, p. 6, Hearing of December 9, 1994). Attempt
the hands of the government but must rightfully be returned to the taxpayer. Therefore, whether was made to prove that petitioner exerted efforts to recover the original copy, but to no avail.
claiming refund/credit of illegally or erroneously collected national internal revenue tax, or input VAT, Despite this, however, We observe that petitioner completely failed to establish the missing
the taxpayer must be given equal opportunity for filing and pursuing its claim. dates and signatures abovementioned. On this score, said application has no probative value
in demonstrating the fact of its filing within two years after the [filing of the VAT return for the
For the foregoing reasons, it is more practical and reasonable to count the two-year prescriptive period quarter] when petitioner's sales of goods were made as prescribed under Section 106(b) of
for filing a claim for refund/credit of input VAT on zero-rated sales from the date of filing of the return the Tax Code. We believe thus that petitioner failed to file an application for refund in due
and payment of the tax due which, according to the law then existing, should be made within 20 days form and within the legal period set by law at the administrative level. Hence, the case at bar
from the end of each quarter. Having established thus, the relevant dates in the instant cases are has failed to satisfy the requirement on the prior filing of an application for refund with the
summarized and reproduced below – respondent before the commencement of a judicial claim for refund, as prescribed under
Section 230 of the Tax Code. This fact constitutes another one of the many reasons for not
granting petitioner's judicial claim.
Period Covered Date of Date of Date of Filing (Case
Filing (Return w/ Filing (Application w/ w/ CTA) As pointed out by the CTA, in serious doubt is not only the fact of whether petitioner corporation timely
BIR) BIR) filed its administrative claim for refund of its input VAT for the first quarter of 1992, but also whether
petitioner corporation actually filed such administrative claim in the first place. For failing to prove that it
2nd Quarter, 1990 20 July 1990 21 August 1990 20 July 1992
had earlier filed with the BIR an application for refund/credit of its input VAT for the first quarter of 1992,
3rd Quarter, 1990 18 October 1990 21 November 1990 9 October 1992 within the period prescribed by law, then the case instituted by petitioner corporation with the CTA for
the refund/credit of the very same tax cannot prosper.
4th Quarter, 1990 20 January 1991 19 February 1991 14 January 1993
Revenue Regulations No. 2-88 and the 70% export requirement
1st Quarter, 1992 20 April 1992 -- 20 April 1994

The above table readily shows that the administrative and judicial claims of petitioner corporation for
refund of its input VAT on its zero-rated sales for the last three quarters of 1990 were all filed within the
prescriptive period.
However, the same cannot be said for the claim of petitioner corporation for refund of its input VAT on
its zero-rated sales for the first quarter of 1992. Even though it may seem that petitioner corporation
filed in time its judicial claim with the CTA, there is no showing that it had previously filed an
administrative claim with the BIR. Section 106(e) of the Tax Code of 1977, as amended, explicitly
provided that no refund of input VAT shall be allowed unless the VAT-registered taxpayer filed an
application for refund with respondent Commissioner within the two-year prescriptive period. The
application of petitioner corporation for refund/credit of its input VAT for the first quarter of 1992 was not
only unsigned by its supposed authorized representative, Ma. Paz R. Semilla, Manager-Finance and
Treasury, but it was not dated, stamped, and initialed by the BIR official who purportedly received the
same. The CTA, in its Decision,19 dated 24 November 1997, in CTA Case No. 5102, made the following
observations –
This Court, likewise, rejects any probative value of the Application for Tax Credit/Refund of
VAT Paid (BIR Form No. 2552) [Exhibit "B'] formally offered in evidence by the petitioner on
account of the fact that it does not bear the BIR stamp showing the date when such
application was filed together with the signature or initial of the receiving officer of
respondent's Bureau. Worse still, it does not show the date of application and the signature of
a certain Ma. Paz R. Semilla indicated in the form who appears to be petitioner's authorized
filer.
Under Section 100(a) of the Tax Code of 1977, as amended, a 10% VAT was imposed on the gross
selling price or gross value in money of goods sold, bartered or exchanged. Yet, the same provision
subjected the following sales made by VAT-registered persons to 0% VAT –
(1) Export sales; and
(2) Sales to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such sales to zero-
rate.
"Export Sales" means the sale and shipment or exportation of goods from the Philippines to a
foreign country, irrespective of any shipping arrangement that may be agreed upon which
may influence or determine the transfer of ownership of the goods so exported, or foreign
currency denominated sales. "Foreign currency denominated sales", means sales to
nonresidents of goods assembled or manufactured in the Philippines, for delivery to residents
in the Philippines and paid for in convertible foreign currency remitted through the banking
system in the Philippines.
These are termed zero-rated sales. A zero-rated sale is still considered a taxable transaction for VAT
purposes, although the VAT rate applied is 0%. A sale by a VAT-registered taxpayer of goods and/or
services taxed at 0% shall not result in any output VAT, while the input VAT on its purchases of goods
or services related to such zero-rated sale shall be available as tax credit or refund.20
Petitioner corporation questions the validity of Revenue Regulations No. 2-88 averring that the said
regulations imposed additional requirements, not found in the law itself, for the zero-rating of its sales to
Philippine Smelting and Refining Corporation (PASAR) and Philippine Phosphate, Inc. (PHILPHOS),
both of which are registered not only with the BOI, but also with the then Export Processing Zone
Authority (EPZA).21
The contentious provisions of Revenue Regulations No. 2-88 read –
SEC. 2. Zero-rating. – (a) Sales of raw materials to BOI-registered exporters. – Sales of raw
materials to export-oriented BOI-registered enterprises whose export sales, under rules and
regulations of the Board of Investments, exceed seventy percent (70%) of total annual
production, shall be subject to zero-rate under the following conditions:
"(1) The seller shall file an application with the BIR, ATTN.: Division, applying for
zero-rating for each and every separate buyer, in accordance with Section 8(d) of
Revenue Regulations No. 5-87. The application should be accompanied with a
favorable recommendation from the Board of Investments."
"(2) The raw materials sold are to be used exclusively by the buyer in the
manufacture, processing or repacking of his own registered export product;
"(3) The words "Zero-Rated Sales" shall be prominently indicated in the sales
invoice. The exporter (buyer) can no longer claim from the Bureau of Internal
Revenue or any other government office tax credits on their zero-rated purchases;
(b) Sales of raw materials to foreign buyer. – Sales of raw materials to a nonresident foreign
buyer for delivery to a resident local export-oriented BOI-registered enterprise to be used in
manufacturing, processing or repacking of the said buyer's goods and paid for in foreign
currency, inwardly remitted in accordance with Central Bank rules and regulations shall be
subject to zero-rate.
It is the position of the respondent Commissioner, affirmed by the CTA and the Court of Appeals, that
Section 2 of Revenue Regulations No. 2-88 should be applied in the cases at bar; and to be entitled to
the zero-rating of its sales to PASAR and PHILPHOS, petitioner corporation, as a VAT-registered seller,
must be able to prove not only that PASAR and PHILPHOS are BOI-registered corporations, but also
that more than 70% of the total annual production of these corporations are actually exported. Revenue
Regulations No. 2-88 merely echoed the requirement imposed by the BOI on export-oriented
corporations registered with it.
While this Court is not prepared to strike down the validity of Revenue Regulations No. 2-88, it finds
that its application must be limited and placed in the proper context. Note that Section 2 of Revenue
Regulations No. 2-88 referred only to the zero-rated sales of raw materials to export-oriented BOI-
registered enterprises whose export sales, under BOI rules and regulations, should exceed seventy
percent (70%) of their total annual production.
Section 2 of Revenue Regulations No. 2-88, should not have been applied to the zero-rating of the
sales made by petitioner corporation to PASAR and PHILPHOS. At the onset, it must be emphasized
that PASAR and PHILPHOS, in addition to being registered with the BOI, were also registered with the
EPZA and located within an export-processing zone. Petitioner corporation does not claim that its sales
to PASAR and PHILPHOS are zero-rated on the basis that said sales were made to export-oriented
BOI-registered corporations, but rather, on the basis that the sales were made to EPZA-registered
enterprises operating within export processing zones. Although sales to export-oriented BOI-registered
enterprises and sales to EPZA-registered enterprises located within export processing zones were both
deemed export sales, which, under Section 100(a) of the Tax Code of 1977, as amended, shall be
subject to 0% VAT distinction must be made between these two types of sales because each may have
different substantiation requirements.
The Tax Code of 1977, as amended, gave a limited definition of export sales, to wit: "The sale and
shipment or exportation of goods from the Philippines to a foreign country, irrespective of any shipping
arrangement that may be agreed upon which may influence or determine the transfer of ownership of
the goods so exported, or foreign currency denominated sales." Executive Order No. 226, otherwise
known as the Omnibus Investments Code of 1987 - which, in the years concerned (i.e., 1990 and
1992), governed enterprises registered with both the BOI and EPZA, provided a more comprehensive
definition of export sales, as quoted below:
"ART. 23. "Export sales" shall mean the Philippine port F.O.B. value, determined from
invoices, bills of lading, inward letters of credit, landing certificates, and other commercial
documents, of export products exported directly by a registered export producer or the net
selling price of export product sold by a registered export producer or to an export trader that
subsequently exports the same: Provided, That sales of export products to another producer
or to an export trader shall only be deemed export sales when actually exported by the latter,
as evidenced by landing certificates of similar commercial documents: Provided, further,
That without actual exportation the following shall be considered constructively exported for
purposes of this provision: (1) sales to bonded manufacturing warehouses of export-oriented
manufacturers; (2) sales to export processing zones; (3) sales to registered export traders
operating bonded trading warehouses supplying raw materials used in the manufacture of
export products under guidelines to be set by the Board in consultation with the Bureau of
Internal Revenue and the Bureau of Customs; (4) sales to foreign military bases, diplomatic
missions and other agencies and/or instrumentalities granted tax immunities, of locally
manufactured, assembled or repacked products whether paid for in foreign currency or not:
Provided, further, That export sales of registered export trader may include commission
income; and Provided, finally, That exportation of goods on consignment shall not be deemed
export sales until the export products consigned are in fact sold by the consignee.
Sales of locally manufactured or assembled goods for household and personal use to
Filipinos abroad and other non-residents of the Philippines as well as returning Overseas
Filipinos under the Internal Export Program of the government and paid for in convertible
foreign currency inwardly remitted through the Philippine banking systems shall also be
considered export sales. (Underscoring ours.)
The afore-cited provision of the Omnibus Investments Code of 1987 recognizes as export sales the
sales of export products to another producer or to an export trader, provided that the export products
are actually exported. For purposes of VAT zero-rating, such producer or export trader must be
registered with the BOI and is required to actually export more than 70% of its annual production.
Without actual exportation, Article 23 of the Omnibus Investments Code of 1987 also considers
constructive exportation as export sales. Among other types of constructive exportation specifically
identified by the said provision are sales to export processing zones. Sales to export processing zones
are subjected to special tax treatment. Article 77 of the same Code establishes the tax treatment of
goods or merchandise brought into the export processing zones. Of particular relevance herein is
paragraph 2, which provides that "Merchandise purchased by a registered zone enterprise from the
customs territory and subsequently brought into the zone, shall be considered as export sales and the
exporter thereof shall be entitled to the benefits allowed by law for such transaction."
Such tax treatment of goods brought into the export processing zones are only consistent with the
Destination Principle and Cross Border Doctrine to which the Philippine VAT system adheres.
According to the Destination Principle,22 goods and services are taxed only in the country where these
are consumed. In connection with the said principle, the Cross Border Doctrine 23 mandates that no VAT
shall be imposed to form part of the cost of the goods destined for consumption outside the territorial
border of the taxing authority. Hence, actual export of goods and services from the Philippines to a
foreign country must be free of VAT, while those destined for use or consumption within the Philippines
shall be imposed with 10% VAT.24 Export processing zones25 are to be managed as a separate
customs territory from the rest of the Philippines and, thus, for tax purposes, are effectively considered
as foreign territory. For this reason, sales by persons from the Philippine customs territory to those
inside the export processing zones are already taxed as exports.
Plainly, sales to enterprises operating within the export processing zones are export sales, which, under
the Tax Code of 1977, as amended, were subject to 0% VAT. It is on this ground that petitioner
corporation is claiming refund/credit of the input VAT on its zero-rated sales to PASAR and PHILPHOS.
The distinction made by this Court in the preceding paragraphs between the zero-rated sales to export-
oriented BOI-registered enterprises and zero-rated sales to EPZA-registered enterprises operating
within export processing zones is actually supported by subsequent development in tax laws and
regulations. In Revenue Regulations No. 7-95, the Consolidated VAT Regulations, as amended,26 the
BIR defined with more precision what are zero-rated export sales –
(1) The sale and actual shipment of goods from the Philippines to a foreign country,
irrespective of any shipping arrangement that may be agreed upon which may influence or
determine the transfer of ownership of the goods so exported paid for in acceptable foreign
currency or its equivalent in goods or services, and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) The sale of raw materials or packaging materials to a non-resident buyer for delivery to a
resident local export-oriented enterprise to be used in manufacturing, processing, packing or
repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(3) The sale of raw materials or packaging materials to an export-oriented enterprise whose
export sales exceed seventy percent (70%) of total annual production;
Any enterprise whose export sales exceed 70% of the total annual production of the
preceding taxable year shall be considered an export-oriented enterprise upon accreditation
as such under the provisions of the Export Development Act (R.A. 7844) and its
implementing rules and regulations;
(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and
(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226,
otherwise known as the Omnibus Investments Code of 1987, and other special laws, e.g.
Republic Act No. 7227, otherwise known as the Bases Conversion and Development Act of
1992.
The Tax Code of 1997, as amended,27 later adopted the foregoing definition of export sales, which are
subject to 0% VAT.
This Court then reiterates its conclusion that Section 2 of Revenue Regulations No. 2-88, which applied
to zero-rated export sales to export-oriented BOI-registered enterprises, should not be applied to the
applications for refund/credit of input VAT filed by petitioner corporation since it based its applications
on the zero-rating of export sales to enterprises registered with the EPZA and located within export
processing zones.
Sufficiency of evidence
There can be no dispute that the taxpayer-claimant has the burden of proving the legal and factual
bases of its claim for tax credit or refund, but once it has submitted all the required documents, it is the
function of the BIR to assess these documents with purposeful dispatch. 28 It therefore falls upon herein
petitioner corporation to first establish that its sales qualify for VAT zero-rating under the existing laws
(legal basis), and then to present sufficient evidence that said sales were actually made and resulted in
refundable or creditable input VAT in the amount being claimed (factual basis).
It would initially appear that the applications for refund/credit filed by petitioner corporation cover only
input VAT on its purportedly zero-rated sales to PASAR and PHILPHOS; however, a more thorough
perusal of its applications, VAT returns, pleadings, and other records of these cases would reveal that it
is also claiming refund/credit of its input VAT on purchases of capital goods and sales of gold to the
Central Bank of the Philippines (CBP).
This Court finds that the claims for refund/credit of input VAT of petitioner corporation have sufficient
legal bases.
As has been extensively discussed herein, Section 106(b)(2), in relation to Section 100(a)(2) of the Tax
Code of 1977, as amended, allowed the refund/credit of input VAT on export sales to enterprises
operating within export processing zones and registered with the EPZA, since such export sales were
deemed to be effectively zero-rated sales.29 The fact that PASAR and PHILPHOS, to whom petitioner
corporation sold its products, were operating inside an export processing zone and duly registered with
EPZA, was never raised as an issue herein. Moreover, the same fact was already judicially recognized
in the case Atlas Consolidated Mining & Development Corporation v. Commissioner of Internal
Revenue.30 Section 106(c) of the same Code likewise permitted a VAT-registered taxpayer to apply for
refund/credit of the input VAT paid on capital goods imported or locally purchased to the extent that
such input VAT has not been applied against its output VAT. Meanwhile, the effective zero-rating of
sales of gold to the CBP from 1989 to 199131 was already affirmed by this Court in Commissioner of
Internal Revenue v. Benguet Corporation,32 wherein it ruled that –
At the time when the subject transactions were consummated, the prevailing BIR regulations
relied upon by respondent ordained that gold sales to the Central Bank were zero-rated. The
BIR interpreted Sec. 100 of the NIRC in relation to Sec. 2 of E.O. No. 581 s. 1980 which
prescribed that gold sold to the Central Bank shall be considered export and therefore shall
be subject to the export and premium duties. In coming out with this interpretation, the BIR
also considered Sec. 169 of Central Bank Circular No. 960 which states that all sales of gold
to the Central Bank are considered constructive exports. x x x.
This Court now comes to the question of whether petitioner corporation has sufficiently established the
factual bases for its applications for refund/credit of input VAT. It is in this regard that petitioner
corporation has failed, both in the administrative and judicial level.
Applications for refund/credit of input VAT with the BIR must comply with the appropriate revenue
regulations. As this Court has already ruled, Revenue Regulations No. 2-88 is not relevant to the
applications for refund/credit of input VAT filed by petitioner corporation; nonetheless, the said
applications must have been in accordance with Revenue Regulations No. 3-88, amending Section 16
of Revenue Regulations No. 5-87, which provided as follows –
SECTION 16. Refunds or tax credits of input tax. –
xxxx
(c) Claims for tax credits/refunds. – Application for Tax Credit/Refund of Value-Added Tax
Paid (BIR Form No. 2552) shall be filed with the Revenue District Office of the city or
municipality where the principal place of business of the applicant is located or directly with
the Commissioner, Attention: VAT Division.
A photocopy of the purchase invoice or receipt evidencing the value added tax paid shall be
submitted together with the application. The original copy of the said invoice/receipt,
however, shall be presented for cancellation prior to the issuance of the Tax Credit Certificate
or refund. In addition, the following documents shall be attached whenever applicable:
xxxx
"3. Effectively zero-rated sale of goods and services.
"i) photo copy of approved application for zero-rate if filing for the first
time.
"ii) sales invoice or receipt showing name of the person or entity to whom
the sale of goods or services were delivered, date of delivery, amount of
consideration, and description of goods or services delivered.
"iii) evidence of actual receipt of goods or services.
"4. Purchase of capital goods.
"i) original copy of invoice or receipt showing the date of purchase,
purchase price, amount of value-added tax paid and description of the
capital equipment locally purchased.
"ii) with respect to capital equipment imported, the photo copy of import
entry document for internal revenue tax purposes and the confirmation
receipt issued by the Bureau of Customs for the payment of the value-
added tax.
"5. In applicable cases,
where the applicant's zero-rated transactions are regulated by certain government agencies,
a statement therefrom showing the amount and description of sale of goods and services,
name of persons or entities (except in case of exports) to whom the goods or services were
sold, and date of transaction shall also be submitted.
In all cases, the amount of refund or tax credit that may be granted shall be limited to the
amount of the value-added tax (VAT) paid directly and entirely attributable to the zero-rated
transaction during the period covered by the application for credit or refund.
Where the applicant is engaged in zero-rated and other taxable and exempt sales of goods
and services, and the VAT paid (inputs) on purchases of goods and services cannot be
directly attributed to any of the aforementioned transactions, the following formula shall be
used to determine the creditable or refundable input tax for zero-rated sale:
Amount of Zero-rated Sale
Total Sales
X
Total Amount of Input Taxes
=
Amount Creditable/Refundable
In case the application for refund/credit of input VAT was denied or remained unacted upon by the BIR,
and before the lapse of the two-year prescriptive period, the taxpayer-applicant may already file a
Petition for Review before the CTA. If the taxpayer's claim is supported by voluminous documents, such
as receipts, invoices, vouchers or long accounts, their presentation before the CTA shall be governed
by CTA Circular No. 1-95, as amended, reproduced in full below –
In the interest of speedy administration of justice, the Court hereby promulgates the following
rules governing the presentation of voluminous documents and/or long accounts, such as
receipts, invoices and vouchers, as evidence to establish certain facts pursuant to Section
3(c), Rule 130 of the Rules of Court and the doctrine enunciated in Compania Maritima vs.
Allied Free Workers Union (77 SCRA 24), as well as Section 8 of Republic Act No. 1125:
1. The party who desires to introduce as evidence such voluminous documents must, after
motion and approval by the Court, present:
(a) a Summary containing, among others, a chronological listing of the numbers,
dates and amounts covered by the invoices or receipts and the amount/s of tax
paid; and (b) a Certification of an independent Certified Public Accountant attesting
to the correctness of the contents of the summary after making an examination,
evaluation and audit of the voluminous receipts and invoices. The name of the
accountant or partner of the firm in charge must be stated in the motion so that
he/she can be commissioned by the Court to conduct the audit and, thereafter,
testify in Court relative to such summary and certification pursuant to Rule 32 of the
Rules of Court.
2. The method of individual presentation of each and every receipt, invoice or account for
marking, identification and comparison with the originals thereof need not be done before the
Court or Clerk of Court anymore after the introduction of the summary and CPA certification.
It is enough that the receipts, invoices, vouchers or other documents covering the said
accounts or payments to be introduced in evidence must be pre-marked by the party
concerned and submitted to the Court in order to be made accessible to the adverse party
who desires to check and verify the correctness of the summary and CPA certification.
Likewise, the originals of the voluminous receipts, invoices or accounts must be ready for
verification and comparison in case doubt on the authenticity thereof is raised during the
hearing or resolution of the formal offer of evidence.
Since CTA Cases No. 4831, 4859, 4944,33 and 5102,34 were still pending before the CTA when the said
Circular was issued, then petitioner corporation must have complied therewith during the course of the
trial of the said cases.
In Commissioner of Internal Revenue v. Manila Mining Corporation,35 this Court denied the claim of
therein respondent, Manila Mining Corporation, for refund of the input VAT on its supposed zero-rated
sales of gold to the CBP because it was unable to substantiate its claim. In the same case, this Court
emphasized the importance of complying with the substantiation requirements for claiming refund/credit
of input VAT on zero-rated sales, to wit –
For a judicial claim for refund to prosper, however, respondent must not only prove that it is a
VAT registered entity and that it filed its claims within the prescriptive period. It
must substantiate the input VAT paid by purchase invoices or official receipts.
This respondent failed to do.
Revenue Regulations No. 3-88 amending Revenue Regulations No. 5-87 provides the
requirements in claiming tax credits/refunds.
xxxx
Under Section 8 of RA1125, the CTA is described as a court of record. As cases filed before
it are litigated de novo, party litigants should prove every minute aspect of their cases. No
evidentiary value can be given the purchase invoices or receipts submitted to the BIR as the
rules on documentary evidence require that these documents must be formally offered before
the CTA.
This Court thus notes with approval the following findings of the CTA:
x x x [S]ale of gold to the Central Bank should not be subject to the 10% VAT-
output tax but this does not ipso fact mean that [the seller] is entitled to the amount
of refund sought as it is required by law to present evidence showing the input
taxes it paid during the year in question. What is being claimed in the instant
petition is the refund of the input taxes paid by the herein petitioner on its purchase
of goods and services. Hence, it is necessary for the Petitioner to show proof that it
had indeed paid the input taxes during the year 1991. In the case at bar, Petitioner
failed to discharge this duty. It did not adduce in evidence the sales invoice,
receipts or other documents showing the input value added tax on the purchase of
goods and services.
xxx
Section 8 of Republic Act 1125 (An Act Creating the Court of Tax Appeals) provides
categorically that the Court of Tax Appeals shall be a court of record and as such it is
required to conduct a formal trial (trial de novo) where the parties must present their
evidence accordingly if they desire the Court to take such evidence into
consideration. (Emphasis and italics supplied)
A "sales or commercial invoice" is a written account of goods sold or services rendered
indicating the prices charged therefor or a list by whatever name it is known which is used in
the ordinary course of business evidencing sale and transfer or agreement to sell or transfer
goods and services.
A "receipt" on the other hand is a written acknowledgment of the fact of payment in money or
other settlement between seller and buyer of goods, debtor or creditor, or person rendering
services and client or customer.
 These sales invoices or receipts issued by the supplier are necessary to substantiate the
actual amount or quantity of goods sold and their selling price, and taken collectively are the
best means to prove the input VAT payments.36
Although the foregoing decision focused only on the proof required for the applicant for refund/credit to
establish the input VAT payments it had made on its purchases from suppliers, Revenue Regulations
No. 3-88 also required it to present evidence proving actual zero-rated VAT sales to qualified buyers,
such as (1) photocopy of the approved application for zero-rate if filing for the first time; (2) sales
invoice or receipt showing the name of the person or entity to whom the goods or services were
delivered, date of delivery, amount of consideration, and description of goods or services delivered; and
(3) the evidence of actual receipt of goods or services.
Also worth noting in the same decision is the weight given by this Court to the certification by the
independent certified public accountant (CPA), thus –
Respondent contends, however, that the certification of the independent CPA attesting to the
correctness of the contents of the summary of suppliers' invoices or receipts which were
examined, evaluated and audited by said CPA in accordance with CTA Circular No. 1-95 as
amended by CTA Circular No. 10-97 should substantiate its claims.
There is nothing, however, in CTA Circular No. 1-95, as amended by CTA Circular No. 10-97,
which either expressly or impliedly suggests that summaries and schedules of input VAT
payments, even if certified by an independent CPA, suffice as evidence of input VAT
payments.
xxxx
The circular, in the interest of speedy administration of justice, was promulgated to avoid the
time-consuming procedure of presenting, identifying and marking of documents before the
Court. It does not relieve respondent of its imperative task of pre-marking photocopies of
sales receipts and invoices and submitting the same to the court after the independent CPA
shall have examined and compared them with the originals. Without presenting these pre-
marked documents as evidence – from which the summary and schedules were based, the
court cannot verify the authenticity and veracity of the independent auditor's conclusions.
There is, moreover, a need to subject these invoices or receipts to examination by the CTA in
order to confirm whether they are VAT invoices. Under Section 21 of Revenue Regulation,
No. 5-87, all purchases covered by invoices other than a VAT invoice shall not be entitled to
a refund of input VAT.
xxxx
While the CTA is not governed strictly by technical rules of evidence, as rules of procedure
are not ends in themselves but are primarily intended as tools in the administration of justice,
the presentation of the purchase receipts and/or invoices is not mere procedural technicality
which may be disregarded considering that it is the only means by which the CTA may
ascertain and verify the truth of the respondent's claims.
The records further show that respondent miserably failed to substantiate its claims for input
VAT refund for the first semester of 1991. Except for the summary and schedules of input
VAT payments prepared by respondent itself, no other evidence was adduced in support of
its claim.
As for respondent's claim for input VAT refund for the second semester of 1991, it employed
the services of Joaquin Cunanan & Co. on account of which it (Joaquin Cunanan & Co.)
executed a certification that:
We have examined the information shown below concerning the input tax
payments made by the Makati Office of Manila Mining Corporation for the period
from July 1 to December 31, 1991. Our examination included inspection of the
pertinent suppliers' invoices and official receipts and such other auditing
procedures as we considered necessary in the circumstances. x x x
As the certification merely stated that it used "auditing procedures considered necessary" and
not auditing procedures which are in accordance with generally accepted auditing principles
and standards, and that the examination was made on "input tax payments by the Manila
Mining Corporation," without specifying that the said input tax payments are attributable to
the sales of gold to the Central Bank, this Court cannot rely thereon and regard it as sufficient
proof of the respondent's input VAT payments for the second semester. 37
As for the Petition in G.R. No. 141104, involving the input VAT of petitioner corporation on its zero-rated
sales in the first quarter of 1992, this Court already found that the petitioner corporation failed to comply
with Section 106(b) of the Tax Code of 1977, as amended, imposing the two-year prescriptive period for
the filing of the application for refund/credit thereof. This bars the grant of the application for
refund/credit, whether administratively or judicially, by express mandate of Section 106(e) of the same
Code.
Granting arguendo that the application of petitioner corporation for the refund/credit of the input VAT on
its zero-rated sales in the first quarter of 1992 was actually and timely filed, petitioner corporation still
failed to present together with its application the required supporting documents, whether before the
BIR or the CTA. As the Court of Appeals ruled –
In actions involving claims for refund of taxes assessed and collected, the burden of proof
rests on the taxpayer. As clearly discussed in the CTA's decision, petitioner failed to
substantiate its claim for tax refunds. Thus:
"We note, however, that in the cases at bar, petitioner has relied totally on
Revenue Regulations No. 2-88 in determining compliance with the documentary
requirements for a successful refund or issuance of tax credit. Unmentioned is the
applicable and specific amendment later introduced by Revenue Regulations No.
3-88 dated April 7, 1988 (issued barely after two months from the promulgation of
Revenue Regulations No. 2-88 on February 15, 1988), which amended Section 16
of Revenue Regulations No. 5-87 on refunds or tax credits of input tax. x x x.
xxxx
"A thorough examination of the evidence submitted by the petitioner before this
court reveals outright the failure to satisfy documentary requirements laid down
under the above-cited regulations. Specifically, petitioner was not able to present
the following documents, to wit:
"a) sales invoices or receipts;
"b) purchase invoices or receipts;
"c) evidence of actual receipt of goods;
"d) BOI statement showing the amount and description of sale of goods,
etc.
"e) original or attested copies of invoice or receipt on capital equipment
locally purchased; and
"f) photocopy of import entry document and confirmation receipt on
imported capital equipment.
"There is the need to examine the sales invoices or receipts in order to ascertain
the actual amount or quantity of goods sold and their selling price. Without them,
this Court cannot verify the correctness of petitioner's claim inasmuch as the
regulations require that the input taxes being sought for refund should be limited to
the portion that is directly and entirely attributable to the particular zero-rated
transaction. In this instance, the best evidence of such transaction are the said
sales invoices or receipts.
"Also, even if sales invoices are produced, there is the further need to submit
evidence that such goods were actually received by the buyer, in this case, by
CBP, Philp[h]os and PASAR.
xxxx
"Lastly, this Court cannot determine whether there were actual local and imported
purchase of capital goods as well as domestic purchase of non-capital goods
without the required purchase invoice or receipt, as the case may be, and
confirmation receipts.
"There is, thus, the imperative need to submit before this Court the original or
attested photocopies of petitioner's invoices or receipts, confirmation receipts and
import entry documents in order that a full ascertainment of the claimed amount
may be achieved.
"Petitioner should have taken the foresight to introduce in evidence all of the
missing documentsabovementioned. Cases filed before this Court are litigated de
novo. This means that party litigants should endeavor to prove at the first instance
every minute aspect of their cases strictly in accordance with the Rules of Court,
most especially on documentary evidence." (pp. 37-42, Rollo)
Tax refunds are in the nature of tax exemptions. It is regarded as in derogation of the
sovereign authority, and should be construed in strictissimi juris against the person or entity
claiming the exemption. The taxpayer who claims for exemption must justify his claim by the
clearest grant of organic or statute law and should not be permitted to stand on vague
implications (Asiatic Petroleum Co. v. Llanes, 49 Phil. 466; Northern Phil. Tobacco Corp. v.
Mun. of Agoo, La Union, 31 SCRA 304; Reagan v. Commissioner, 30 SCRA 968; Asturias
Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co.,
Inc. v. Commissioner of Customs, 44 SCRA 122).
There is no cogent reason to fault the CTA's conclusion that the SGV's certificate is "self-
destructive", as it finds comfort in the very SGV's stand, as follows:
"It is our understanding that the above procedure are sufficient for the purpose of
the Company. We make no presentation regarding the sufficiency of these
procedures for such purpose. We did not compare the total of the input tax claimed
each quarter against the pertinent VAT returns and books of accounts. The above
procedures do not constitute an audit made in accordance with generally accepted
auditing standards. Accordingly, we do not express an opinion on the company's
claim for input VAT refund or credit. Had we performed additional procedures, or
had we made an audit in accordance with generally accepted auditing standards,
other matters might have come to our attention that we would have accordingly
reported on."
The SGV's "disclaimer of opinion" carries much weight as it is petitioner's independent
auditor. Indeed, SGV expressed that it "did not compare the total of the input tax claimed
each quarter against the VAT returns and books of accounts."38
Moving on to the Petition in G.R. No. 148763, concerning the input VAT of petitioner corporation on its
zero-rated sales in the second, third, and fourth quarters of 1990, the appellate court likewise found that
petitioner corporation failed to sufficiently establish its claims. Already disregarding the declarations
made by the Court of Appeals on its erroneous application of Revenue Regulations No. 2-88, quoted
hereunder is the rest of the findings of the appellate court after evaluating the evidence submitted in
accordance with the requirements under Revenue Regulations No. 3-88 –
The Secretary of Finance validly adopted Revenue Regulations [No.] x x x 3-98 pursuant to
Sec. 245 of the National Internal Revenue Code, which recognized his power to "promulgate
 all needful rules and regulations for the effective enforcement of the provisions of this Code."
Thus, it is incumbent upon a taxpayer intending to file a claim for refund of input VATs or the
issuance of a tax credit certificate with the BIR x x x to prove sales to such buyers as required
by Revenue Regulations No. 3-98. Logically, the same evidence should be presented in
support of an action to recover taxes which have been paid.
x x x Neither has [herein petitioner corporation] presented sales invoices or receipts showing
sales of gold, copper concentrates, and pyrite to the CBP, [PASAR], and [PHILPHOS],
respectively, and the dates and amounts of the same, nor any evidence of actual receipt by
the said buyers of the mineral products. It merely presented receipts of purchases from
suppliers on which input VATs were allegedly paid. Thus, the Court of Tax Appeals correctly
denied the claims for refund of input VATs or the issuance of tax credit certificates of
petitioner [corporation]. Significantly, in the resolution, dated 7 June 2000, this Court directed
the parties to file memoranda discussing, among others, the submission of proof for "its
[petitioner's] sales of gold, copper concentrates, and pyrite to buyers." Nevertheless, the
parties, including the petitioner, failed to address this issue, thereby necessitating the
affirmance of the ruling of the Court of Tax Appeals on this point.39
This Court is, therefore, bound by the foregoing facts, as found by the appellate court, for well-settled is
the general rule that the jurisdiction of this Court in cases brought before it from the Court of Appeals,
by way of a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court, is limited to
reviewing or revising errors of law; findings of fact of the latter are conclusive. 40 This Court is not a trier
of facts. It is not its function to review, examine and evaluate or weigh the probative value of the
evidence presented.41
The distinction between a question of law and a question of fact is clear-cut. It has been held that
"[t]here is a question of law in a given case when the doubt or difference arises as to what the law is on
a certain state of facts; there is a question of fact when the doubt or difference arises as to the truth or
falsehood of alleged facts."42
Whether petitioner corporation actually made zero-rated sales; whether it paid input VAT on these sales
in the amount it had declared in its returns; whether all the input VAT subject of its applications for
refund/credit can be attributed to its zero-rated sales; and whether it had not previously applied the
input VAT against its output VAT liabilities, are all questions of fact which could only be answered after
reviewing, examining, evaluating, or weighing the probative value of the evidence it presented, and
which this Court does not have the jurisdiction to do in the present Petitions for Review
on Certiorari under Rule 45 of the revised Rules of Court.
Granting that there are exceptions to the general rule, when this Court looked into questions of fact
under particular circumstances,43 none of these exist in the instant cases. The Court of Appeals, in both
cases, found a dearth of evidence to support the claims for refund/credit of the input VAT of petitioner
corporation, and the records bear out this finding. Petitioner corporation itself cannot dispute its non-
compliance with the requirements set forth in Revenue Regulations No. 3-88 and CTA Circular No. 1-
95, as amended. It concentrated its arguments on its assertion that the substantiation requirements
under Revenue Regulations No. 2-88 should not have applied to it, while being conspicuously silent on
the evidentiary requirements mandated by other relevant regulations.
Re-opening of cases/holding of new trial before the CTA
This Court now faces the final issue of whether the prayer of petitioner corporation for the re-opening of
its cases or holding of new trial before the CTA for the reception of additional evidence, may be
granted. Petitioner corporation prays that the Court exercise its discretion on the matter in its favor,
consistent with the policy that rules of procedure be liberally construed in pursuance of substantive
justice.
This Court, however, cannot grant the prayer of petitioner corporation.
An aggrieved party may file a motion for new trial or reconsideration of a judgment already rendered in
accordance with Section 1, Rule 37 of the revised Rules of Court, which provides –
SECTION 1. Grounds of and period for filing motion for new trial or reconsideration. – Within
the period for taking an appeal, the aggrieved party may move the trial court to set aside the
judgment or final order and grant a new trial for one or more of the following causes
materially affecting the substantial rights of said party:
(a) Fraud, accident, mistake or excusable negligence which ordinary prudence could not
have guarded against and by reason of which such aggrieved party has probably been
impaired in his rights; or
(b) Newly discovered evidence, which he could not, with reasonable diligence, have
discovered and produced at the trial, and which if presented would probably alter the result.
Within the same period, the aggrieved party may also move fore reconsideration upon the
grounds that the damages awarded are excessive, that the evidence is insufficient to justify
the decision or final order, or that the decision or final order is contrary to law.
In G.R. No. 148763, petitioner corporation attempts to justify its motion for the re-opening of its cases
and/or holding of new trial before the CTA by contending that the "[f]ailure of its counsel to adduce the
necessary evidence should be construed as excusable negligence or mistake which should constitute
basis for such re-opening of trial as for a new trial, as counsel was of the belief that such evidence was
rendered unnecessary by the presentation of unrebutted evidence indicating that respondent
[Commissioner] has acknowledged the sale of [sic] PASAR and [PHILPHOS] to be zero-rated." 44 The
CTA denied such motion on the ground that it was not accompanied by an affidavit of merit as required
by Section 2, Rule 37 of the revised Rules of Court. The Court of Appeals affirmed the denial of the
motion, but apart from this technical defect, it also found that there was no justification to grant the
same.
On the matter of the denial of the motion of the petitioner corporation for the re-opening of its cases
and/or holding of new trial based on the technicality that said motion was unaccompanied by an
affidavit of merit, this Court rules in favor of the petitioner corporation. The facts which should otherwise
be set forth in a separate affidavit of merit may, with equal effect, be alleged and incorporated in the
motion itself; and this will be deemed a substantial compliance with the formal requirements of the law,
provided, of course, that the movant, or other individual with personal knowledge of the facts, take oath
as to the truth thereof, in effect converting the entire motion for new trial into an affidavit. 45 The motion
of petitioner corporation was prepared and verified by its counsel, and since the ground for the motion
was premised on said counsel's excusable negligence or mistake, then the obvious conclusion is that
he had personal knowledge of the facts relating to such negligence or mistake. Hence, it can be said
that the motion of petitioner corporation for the re-opening of its cases and/or holding of new trial was in
substantial compliance with the formal requirements of the revised Rules of Court.
Even so, this Court finds no sufficient ground for granting the motion of petitioner corporation for the re-
opening of its cases and/or holding of new trial.
In G.R. No. 141104, petitioner corporation invokes the Resolution,46 dated 20 July 1998, by the CTA in
another case, CTA Case No. 5296, involving the claim of petitioner corporation for refund/credit of input
VAT for the third quarter of 1993. The said Resolution allowed the re-opening of CTA Case No. 5296,
earlier dismissed by the CTA, to give the petitioner corporation the opportunity to present the missing
export documents.
The rule that the grant or denial of motions for new trial rests on the discretion of the trial court, 47 may
likewise be extended to the CTA. When the denial of the motion rests upon the discretion of a lower
court, this Court will not interfere with its exercise, unless there is proof of grave abuse thereof. 48
That the CTA granted the motion for re-opening of one case for the presentation of additional evidence
and, yet, deny a similar motion in another case filed by the same party, does not necessarily
demonstrate grave abuse of discretion or arbitrariness on the part of the CTA. Although the cases
involve identical parties, the causes of action and the evidence to support the same can very well be
different. As can be gleaned from the Resolution, dated 20 July 1998, in CTA Case No. 5296, petitioner
corporation was claiming refund/credit of the input VAT on its zero-rated sales, consisting of actual
export sales, to Mitsubishi Metal Corporation in Tokyo, Japan. The CTA took into account the
presentation by petitioner corporation of inward remittances of its export sales for the quarter involved,
its Supply Contract with Mitsubishi Metal Corporation, its 1993 Annual Report showing its sales to the
said foreign corporation, and its application for refund. In contrast, the present Petitions involve the
claims of petitioner corporation for refund/credit of the input VAT on its purchases of capital goods and
on its effectively zero-rated sales to CBP and EPZA-registered enterprises PASAR and PHILPHOS for
the second, third, and fourth quarters of 1990 and first quarter of 1992. There being a difference as to
the bases of the claims of petitioner corporation for refund/credit of input VAT in CTA Case No. 5926
and in the Petitions at bar, then, there are resulting variances as to the evidence required to support
them.
Moreover, the very same Resolution, dated 20 July 1998, in CTA Case No. 5296, invoked by petitioner
corporation, emphasizes that the decision of the CTA to allow petitioner corporation to present evidence
"is applicable pro hac vice or in this occasion only as it is the finding of [the CTA] that petitioner
[corporation] has established a few of the aforementioned material points regarding the possible
existence of the export documents together with the prior and succeeding returns for the quarters
involved, x x x" [Emphasis supplied.] Therefore, the CTA, in the present cases, cannot be bound by its
ruling in CTA Case No. 5296, when these cases do not involve the exact same circumstances that
compelled it to grant the motion of petitioner corporation for re-opening of CTA Case No. 5296.
Finally, assuming for the sake of argument that the non-presentation of the required documents was
due to the fault of the counsel of petitioner corporation, this Court finds that it does not constitute
excusable negligence or mistake which would warrant the re-opening of the cases and/or holding of
new trial.
Under Section 1, Rule 37 of the Revised Rules of Court, the "negligence" must be excusable and
generally imputable to the party because if it is imputable to the counsel, it is binding on the client. To
follow a contrary rule and allow a party to disown his counsel's conduct would render proceedings
indefinite, tentative, and subject to re-opening by the mere subterfuge of replacing the counsel. What
the aggrieved litigant should do is seek administrative sanctions against the erring counsel and not ask
for the reversal of the court's ruling.49
As elucidated by this Court in another case,50 the general rule is that the client is bound by the action of
his counsel in the conduct of his case and he cannot therefore complain that the result of the litigation
might have been otherwise had his counsel proceeded differently. It has been held time and again that
blunders and mistakes made in the conduct of the proceedings in the trial court as a result of the
ignorance, inexperience or incompetence of counsel do not qualify as a ground for new trial. If such
were to be admitted as valid reasons for re-opening cases, there would never be an end to litigation so
long as a new counsel could be employed to allege and show that the prior counsel had not been
sufficiently diligent, experienced or learned.
Moreover, negligence, to be "excusable," must be one which ordinary diligence and prudence could not
have guarded against.51 Revenue Regulations No. 3-88, which was issued on 15 February 1988, had
been in effect more than two years prior to the filing by petitioner corporation of its earliest application
for refund/credit of input VAT involved herein on 21 August 1990. CTA Circular No. 1-95 was issued
only on 25 January 1995, after petitioner corporation had filed its Petitions before the CTA, but still
during the pendency of the cases of petitioner corporation before the tax court. The counsel of
petitioner corporation does not allege ignorance of the foregoing administrative regulation and tax court
circular, only that he no longer deemed it necessary to present the documents required therein because
of the presentation of alleged unrebutted evidence of the zero-rated sales of petitioner corporation. It
was a judgment call made by the counsel as to which evidence to present in support of his client's
cause, later proved to be unwise, but not necessarily negligent.
Neither is there any merit in the contention of petitioner corporation that the non-presentation of the
required documentary evidence was due to the excusable mistake of its counsel, a ground under
Section 1, Rule 37 of the revised Rules of Court for the grant of a new trial. "Mistake," as it is referred to
in the said rule, must be a mistake of fact, not of law, which relates to the case. 52 In the present case,
the supposed mistake made by the counsel of petitioner corporation is one of law, for it was grounded
on his interpretation and evaluation that Revenue Regulations No. 3-88 and CTA Circular No. 1-95, as
amended, did not apply to his client's cases and that there was no need to comply with the
documentary requirements set forth therein. And although the counsel of petitioner corporation
advocated an erroneous legal position, the effects thereof, which did not amount to a deprivation of his
client's right to be heard, must bind petitioner corporation. The question is not whether petitioner
corporation succeeded in establishing its interests, but whether it had the opportunity to present its
side.53
Besides, litigation is a not a "trial and error" proceeding. A party who moves for a new trial on the 17. CIR V. MIRANT PAGBILAO CORP.
ground of mistake must show that ordinary prudence could not have guarded against it. A new trial is
not a refuge for the obstinate.54Ordinary prudence in these cases would have dictated the presentation
of all available evidence that would have supported the claims for refund/credit of input VAT of Republic of the Philippines
petitioner corporation. Without sound legal basis, counsel for petitioner corporation concluded that SUPREME COURT
Revenue Regulations No. 3-88, and later on, CTA Circular No. 1-95, as amended, did not apply to its Manila
client's claims. The obstinacy of petitioner corporation and its counsel is demonstrated in their failure,
nay, refusal, to comply with the appropriate administrative regulations and tax court circular in pursuing SECOND DIVISION
the claims for refund/credit, now subject of G.R. Nos. 141104 and 148763, even though these were
separately instituted in a span of more than two years. It is also evident in the failure of petitioner COMMISSIONER OF INTERNAL REVENUE, G.R. No. 172129
corporation to address the issue and to present additional evidence despite being given the opportunity Petitioner,
to do so by the Court of Appeals. As pointed out by the appellate court, in its Decision, dated 15 Present:
September 2000, in CA-G.R. SP No. 46718 – - versus -
QUISUMBING, J., Chairperson,
CARPIO MORALES,
x x x Significantly, in the resolution, dated 7 June 2000, this Court directed the parties to file
MIRANT PAGBILAO CORPORATION (Formerly TINGA,
memoranda discussing, among others, the submission of proof for "its [petitioner's] sales of
SOUTHERN ENERGY QUEZON, INC.), VELASCO, JR., and
gold, copper concentrates, and pyrite to buyers." Nevertheless, the parties, including the
petitioner, failed to address this issue, thereby necessitating the affirmance of the ruling of the Respondent. BRION, JJ.
Court of Tax Appeals on this point.55
Promulgated:

Summary September 12, 2008

Hence, although this Court agreed with the petitioner corporation that the two-year prescriptive period
for the filing of claims for refund/credit of input VAT must be counted from the date of filing of the
quarterly VAT return, and that sales to EPZA-registered enterprises operating within economic
processing zones were effectively zero-rated and were not covered by Revenue Regulations No. 2-88,
it still denies the claims of petitioner corporation for refund of its input VAT on its purchases of capital
goods and effectively zero-rated sales during the second, third, and fourth quarters of 1990 and the first
quarter of 1992, for not being established and substantiated by appropriate and sufficient evidence.
x-----------------------------------------------------------------------------------------x
Petitioner corporation is also not entitled to the re-opening of its cases and/or holding of new trial since
the non-presentation of the required documentary evidence before the BIR and the CTA by its counsel
DECISION
does not constitute excusable negligence or mistake as contemplated in Section 1, Rule 37 of the
VELASCO, JR., J.:
revised Rules of Court.

WHEREFORE, premises considered, the instant Petitions for Review are hereby DENIED, and the
Decisions, dated 6 July 1999 and 15 September 2000, of the Court of Appeals in CA-G.R. SP Nos.
47607 and 46718, respectively, are hereby AFFIRMED. Costs against petitioner.
Ynares-Santiago, Chairperson, Austria-Martinez, Nachura, JJ., concur.
Before us is a Petition for Review on Certiorari under Rule 45 assailing and seeking to set
aside the Decision[1] dated December 22, 2005 of the Court of Appeals (CA) in CA-G.R. SP No. 78280
which modified the March 18, 2003 Decision[2] of the Court of Tax Appeals (CTA) in CTA Case No.
6133 entitled Mirant Pagbilao Corporation (Formerly Southern Energy Quezon, Inc.) v. Commissioner
of Internal Revenue and ordered the Bureau of Internal Revenue (BIR) to refund or issue a tax credit
certificate (TCC) in favor of respondent Mirant Pagbilao Corporation (MPC) in the amount representing
its unutilized input value added tax (VAT) for the second quarter of 1998. Also assailed is the CAs
Resolution[3] of March 31, 2006 denying petitioners motion for reconsideration.

The Facts

MPC, formerly Southern Energy Quezon, Inc., and also formerly known as Hopewell (Phil.)
Corporation, is a domestic firm engaged in the generation of power which it sells to the National Power
Corporation (NPC). For the construction of the electrical and mechanical equipment portion of its
Pagbilao, Quezon plant, which appears to have been undertaken from 1993 to 1996, MPC secured the
services of Mitsubishi Corporation (Mitsubishi) of Japan. 3. Whether the unutilized creditable input VAT for said quarter, if any,
was applied against any of the VAT output tax of MPC in the subsequent quarter.
Under Section 13[4] of Republic Act No. (RA) 6395, the NPCs revised charter, NPC is exempt
from all taxes. In Maceda v. Macaraig,[5] the Court construed the exemption as covering both direct and
indirect taxes. To provide support to the CTA in verifying and analyzing documents and figures and entries
contained therein, the Sycip Gorres & Velayo (SGV), an independent auditing firm, was commissioned.
In the light of the NPCs tax exempt status, MPC, on the belief that its sale of power
generation services to NPC is, pursuant to Sec. 108(B)(3) of the Tax Code, [6] zero-rated for VAT The Ruling of the CTA
purposes, filed on December 1, 1997 with Revenue District Office (RDO) No. 60 in Lucena City an
Application for Effective Zero Rating. The application covered the construction and operation of its On the basis of its affirmative resolution of the first issue, the CTA, by its Decision
Pagbilao power station under a Build, Operate, and Transfer scheme. dated March 18, 2003, granted MPCs claim for input VAT refund or credit, but only for the amount of
PhP 10,766,939.48. The fallo of the CTAs decision reads:
Not getting any response from the BIR district office, MPC refiled its application in the form of
a request for ruling with the VAT Review Committee at the BIR national office on January 28, In view of all the foregoing, the instant petition is PARTIALLY
1999. On May 13, 1999, the Commissioner of Internal Revenue issued VAT Ruling No. 052-99, stating GRANTED. Accordingly, respondent is hereby ORDERED to REFUND or in the
that the supply of electricity by Hopewell Phil. to the NPC, shall be subject to the zero percent (0%) alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner its
VAT, pursuant to Section 108 (B) (3) of the National Internal Revenue Code of 1997. unutilized input VAT payments directly attributable to its effectively zero-rated sales
for the second quarter of 1998 in the reduced amount of P10,766,939.48,
It must be noted at this juncture that consistent with its belief to be zero-rated, MPC opted not computed as follows:
to pay the VAT component of the progress billings from Mitsubishi for the period covering April 1993 to
September 1996for the E & M Equipment Erection Portion of MPCs contract with Mitsubishi. This Claimed Input VAT P148,003,047.62
prompted Mitsubishi to advance the VAT component as this serves as its output VAT which is essential
for the determination of its VAT payment. Apparently, it was only on April 14, 1998 that MPC paid Less: Disallowances
Mitsubishi the VAT component for the progress billings from April 1993 to September 1996, and for
which Mitsubishi issued Official Receipt (OR) No. 0189 in the aggregate amount of PhP 135,993,570. a.) As summarized by SGV & Co. in its initial report (Exh. P)
I. Input Taxes on Purchases of Services:
On August 25, 1998, MPC, while awaiting approval of its application aforestated, filed its 1. Supported by documents
quarterly VAT return for the second quarter of 1998 where it reflected an input VAT of PhP other than VAT Ors P 10,629.46
148,003,047.62, which included PhP 135,993,570 supported by OR No. 0189. Pursuant to the 2. Supported by photocopied VAT OR 879.09
procedure prescribed in Revenue Regulations No. 7-95, MPC filed on December 20, 1999 an II. Input Taxes on Purchases of Goods:
administrative claim for refund of unutilized input VAT in the amount of PhP 148,003,047.62. 1. Supported by documents other than
VAT invoices 165,795.70
Since the BIR Commissioner failed to act on its claim for refund and obviously to forestall the 2. Supported by Invoices with TIN only 1,781.82
running of the two-year prescriptive period under Sec. 229 of the National Internal Revenue Code 3. Supported by photocopied VAT
(NIRC), MPC went to the CTA via a petition for review, docketed as CTA Case No. 6133. invoices 3,153.62
III. Input Taxes on Importation of Goods:
Answering the petition, the BIR Commissioner, citing Kumagai-Gumi Co. Ltd. v. 1. Supported by photocopied documents
CIR,[7] asserted that MPCs claim for refund cannot be granted for this main reason: MPCs sale of [IEDs and/or Bureau of Customs
electricity to NPC is not zero-rated for its failure to secure an approved application for zero-rating. (BOC) Ors] 716,250.00
2. Supported by brokers computations 91,601.00 990,090.69
Before the CTA, among the issues stipulated by the parties for resolution were, in gist, the
following: b.) Input taxes without supporting documents as
summarized in Annex A of SGV & Co.s
1. Whether or not [MPC] has unapplied or unutilized creditable input VAT supplementary report (CTA records, page 134) 252,447.45
for the 2nd quarter of 1998 attributable to zero-rated sales to NPC which are proper
subject for refund pursuant to relevant provisions of the NIRC; c.) Claimed input taxes on purchases of services from
2. Whether the creditable input VAT of MPC for said period, if any, is Mitsubishi Corp. for being substantiated by dubious OR 135,996,570.00[8]
substantiated by documents; and
 Refundable Input P10,766,939.48
SO ORDERED.[9]
Explaining the disallowance of over PhP 137 million claimed input VAT, the CTA stated that
most of MPCs purchases upon which it anchored its claims for refund or tax credit have not been amply
substantiated by pertinent documents, such as but not limited to VAT ORs, invoices, and other
supporting documents. Wrote the CTA:
We agree with the above SGV findings that out of the remaining taxes of
P136,246,017.45, the amount of P252,477.45 was not supported by any document
and should therefore be outrightly disallowed.
As to the claimed input tax of P135,993,570.00 (P136,246,017.45 less
P252,477.45 ) on purchases of services from Mitsubishi Corporation, Japan, the
same is found to be of doubtful veracity. While it is true that said amount is
substantiated by a VAT official receipt with Serial No. 0189dated April 14, 1998 x x
x, it must be observed, however, that said VAT allegedly paid pertains to the
services which were rendered for the period 1993 to 1996. x x x
The Ruling of the CA
Aggrieved, MPC appealed the CTAs Decision to the CA via a petition for review under Rule
43, docketed as CA-G.R. SP No. 78280.On December 22, 2005, the CA rendered its assailed decision
modifying that of the CTA decision by granting most of MPCs claims for tax refund or credit. And in a
Resolution of March 31, 2006, the CA denied the BIR Commissioners motion for reconsideration. The
decretal portion of the CA decision reads:
WHEREFORE, premises considered, the instant petition is
GRANTED. The assailed Decision of the Court of Tax Appeals dated March 18,
2003 is hereby MODIFIED. Accordingly, respondent Commissioner of Internal
Revenue is ordered to refund or issue a tax credit certificate in favor of petitioner
Mirant Pagbilao Corporation its unutilized input VAT payments directly attributable
to its effectively zero-rated sales for the second quarter of 1998 in the total amount
of P146,760,509.48.
SO ORDERED.[10]
The CA agreed with the CTA on MPCs entitlement to (1) a zero-rating for VAT purposes for
its sales and services to tax-exempt NPC; and (2) a refund or tax credit for its unutilized input VAT for
the second quarter of 1998. Their disagreement, however, centered on the issue of proper
documentation, particularly the evidentiary value of OR No. 0189.
The CA upheld the disallowance of PhP 1,242,538.14 representing zero-rated input VAT
claims supported only by photocopies of VAT OR/Invoice, documents other than VAT Invoice/OR, and
mere brokers computations. But the CA allowed MPCs refund claim of PhP 135,993,570 representing
input VAT payments for purchases of goods and/or services from Mitsubishi supported by OR No.
0189. The appellate court ratiocinated that the CTA erred in disallowing said claim since the OR from
Mitsubishi was the best evidence for the payment of input VAT by MPC to Mitsubishi as required under
Sec. 110(A)(1)(b) of the NIRC. The CA ruled that the legal requirement of a VAT Invoice/OR to
substantiate creditable input VAT was complied with through OR No. 0189 which must be viewed as
conclusive proof of the payment of input VAT. To the CA, OR No. 0189 represented an undisputable
acknowledgment and receipt by Mitsubishi of the input VAT payment of MPC.
The CA brushed aside the CTAs ruling and disquisition casting doubt on the veracity and
genuineness of the Mitsubishi-issued OR No. 0189. It reasoned that the issuance date of the said
receipt, April 14, 1998, must be taken conclusively to represent the input VAT payments made by MPC
to Mitsubishi as MPC had no real control on the issuance of the OR. The CA held that the use of a
different exchange rate reflected in the OR is of no consequence as what the OR undeniably attests
and acknowledges was Mitsubishis receipt of MPCs input VAT payment.
The Issue
Hence, the instant petition on the sole issue of whether or not respondent [MPC] is entitled to
the refund of its input VAT payments made from 1993 to 1996 amounting to [PhP] 146,760,509.48.[11]
The Courts Ruling
As a preliminary matter, it should be stressed that the BIR Commissioner, while making
reference to the figure PhP 146,760,509.48, joins the CA and the CTA on their disposition on the
propriety of the refund of or the issuance of a TCC for the amount of PhP 10,766,939.48. In fine, the
BIR Commissioner trains his sight and focuses his arguments on the core issue of whether or not MPC
is entitled to a refund for PhP 135,993,570 (PhP 146,760,509.48 - PhP 10,766,939.48 = PhP
135,993,570) it allegedly paid as creditable input VAT for services and goods purchased
from Mitsubishi during the 1993 to 1996 stretch.
The divergent factual findings and rulings of the CTA and CA impel us to evaluate the
evidence adduced below, particularly the April 14, 1998 OR 0189 in the amount of PhP 135,996,570
[for US$ 5,190,000 at US$1: PhP 26.203 rate of exchange]. Verily, a claim for tax refund may be based
on a statute granting tax exemption, or, as Commissioner of Internal Revenue v. Fortune Tobacco
Corporation[12]would have it, the result of legislative grace. In such case, the claim is to be
construed strictissimi juris against the taxpayer,[13] meaning that the claim cannot be made to rest on
vague inference. Where the rule of strict interpretation against the taxpayer is applicable as the claim
for refund partakes of the nature of an exemption, the claimant must show that he clearly falls under the
exempting statute. On the other hand, a tax refund may be, as usually it is, predicated on tax refund
provisions allowing a refund of erroneous or excess payment of tax. The return of what was erroneously
paid is founded on the principle of solutio indebiti, a basic postulate that no one should unjustly enrich
himself at the expense of another. The caveat against unjust enrichment covers the government.[14] And
as decisional law teaches, a claim for tax refund proper, as here, necessitates only the preponderance-
of-evidence threshold like in any ordinary civil case.[15]
We apply the foregoing elementary principles in our evaluation on whether OR 0189, in the
backdrop of the factual antecedents surrounding its issuance, sufficiently proves the alleged unutilized
input VAT claimed by MPC.

The Court can review issues of fact where there are
divergent findings by the trial and appellate courts
As a matter of sound practice, the Court refrains from reviewing the factual determinations of
the CA or reevaluate the evidence upon which its decision is founded. One exception to this rule is
when the CA and the trial court diametrically differ in their findings,[16] as here. In such a case, it is
incumbent upon the Court to review and determine if the CA might have overlooked, misunderstood, or
misinterpreted certain facts or circumstances of weight, which, if properly considered, would justify a
different conclusion.[17] In the instant case, the CTA, unlike the CA, doubted the veracity of OR No. 0189
and did not appreciate the same to support MPCs claim for tax refund or credit.
Petitioner BIR Commissioner, echoing the CTAs stand, argues against the sufficiency of OR
No. 0189 to prove unutilized input VAT payment by MPC. He states in this regard that the BIR can
require additional evidence to prove and ascertain payment of creditable input VAT, or that the claim for
refund or tax credit was filed within the prescriptive period, or had not previously been refunded to the
taxpayer.
To bolster his position on the dubious character of OR No. 0189, or its insufficiency to prove
input VAT payment by MPC, petitioner proffers the following arguments:
(1) The input tax covered by OR No. 0189 pertains to purchases by MPC from Mitsubishi
covering the period from 1993 to 1996;however, MPCs claim for tax refund or credit was filed on
December 20, 1999, clearly way beyond the two-year prescriptive period set in Sec. 112 of the NIRC;
(2) MPC failed to explain why OR No. 0189 was issued by Mitsubishi (Manila) when the
invoices which the VAT were originally billed came from the Mitsubishis head office in Japan;
(3) The exchange rate used in OR No. 0189 was pegged at PhP 26.203: USD 1 or the
exchange rate prevailing in 1993 to 1996, when, on April 14, 1998, the date OR No. 0189 was issued,
the exchange rate was already PhP 38.01 to a US dollar;
(4) OR No. 0189 does not show or include payment of accrued interest which Mitsubishi was
charging and demanded from MPC for having advanced a considerable amount of VAT. The demand,
per records, is embodied in the May 12, 1995 letter of Mitsubishi to MPC;
(5) MPC failed to present to the CTA its VAT returns for the second and third quarters of
1995, when the bulk of the VAT payment covered by OR No. 0189specifically PhP 109,329,135.17 of
the total amount of PhP 135,993,570was billed by Mitsubishi, when such return is necessary to
ascertain that the total amount covered by the receipt or a large portion thereof was not previously
refunded or credited; and
(6) No other documents proving said input VAT payment were presented except OR No.
0189 which, considering the fact that OR No. 0188 was likewise issued by Mitsubishi and presented
before the CTA but admittedly for payments made by MPC on progress billings covering service
purchases from 1993 to 1996, does not clearly show if such input VAT payment was also paid for the
period 1993 to 1996 and would be beyond the two-year prescriptive period.
The petition is partly meritorious.
Belated payment by MPC of its obligation for creditable input VAT
As no less found by the CTA, citing the SGVs report, the payments covered by OR No. 0189
were for goods and service purchases made by MPC through the progress billings from Mitsubishi for
the period covering April 1993 to September 1996for the E & M Equipment Erection Portion of MPCs
contract with Mitsubishi.[18] It is likewise undisputed that said payments did not include payments for the
creditable input VAT of MPC. This fact is shown by the May 12, 1995 letter[19] from Mitsubishi where, as
earlier indicated, it apprised MPC of the advances Mitsubishi made for the VAT payments, i.e., MPCs
creditable input VAT, and for which it was holding MPC accountable for interest therefor.
In net effect, MPC did not, for the VATable MPC-Mitsubishi 1993 to 1996 transactions
adverted to, immediately pay the corresponding input VAT. OR No. 0189 issued on April 14, 1998
clearly reflects the belated payment of input VAT corresponding to the payment of the progress billings
from Mitsubishi for the period covering April 7, 1993 to September 6, 1996. SGV found that OR No.
0189 in the amount of PhP 135,993,570 (USD 5,190,000) was duly supported by bank statement
evidencing payment to Mitsubishi (Japan).[20] Undoubtedly, OR No. 0189 proves payment by MPC of its
creditable input VAT relative to its purchases from Mitsubishi.
OR No. 0189 by itself sufficiently proves payment of VAT
The CA, citing Sec. 110(A)(1)(B) of the NIRC, held that OR No. 0189 constituted sufficient
proof of payment of creditable input VAT for the progress billings from Mitsubishi for the period covering
April 7, 1993 to September 6, 1996. Sec. 110(A)(1)(B) of the NIRC pertinently provides:
Section 110. Tax Credits.
A. Creditable Input Tax.
(1) Any input tax evidenced by a VAT invoice or official receipt issued in
accordance with Section 113 hereof on the following transactions shall be
creditable against the output tax:
(a) Purchase or importation of goods:
xxxx
(b) Purchase of services on which a value-added tax has been actually
paid. (Emphasis ours.)
Without necessarily saying that the BIR is precluded from requiring additional evidence to
prove that input tax had indeed paid or, in fine, that the taxpayer is indeed entitled to a tax refund or
credit for input VAT, we agree with the CAs above disposition. As the Court distinctly notes, the law
considers a duly-executed VAT invoice or OR referred to in the above provision as sufficient evidence
to support a claim for input tax credit. And any doubt as to what OR No. 0189 was for or tended to
prove should reasonably be put to rest by the SGV report on which the CTA notably placed much
reliance. The SGV report stated that [OR] No. 0189 dated April 14, 1998 is for the payment of the VAT
on the progress billings from Mitsubishi Japan for the period April 7, 1993 to September 6, 1996 for the
E & M Equipment Erection Portion of the Companys contract with Mitsubishi Corporation (Japan). [21]
VAT presumably paid on April 14, 1998
While available records do not clearly indicate when MPC actually paid the creditable input
VAT amounting to PhP 135,993,570 (USD 5,190,000) for the aforesaid 1993 to 1996 service
purchases, the presumption is that payment was made on the date appearing on OR No. 0189, i.e.,
April 14, 1998. In fact, said creditable input VAT was reflected in MPCs VAT return for the second
quarter of 1998.
The aforementioned May 12, 1995 letter from Mitsubishi to MPC provides collaborating proof
of the belated payment of the creditable input VAT angle. To reiterate, Mitsubishi, via said letter,
apprised MPC of the VAT component of the service purchases MPC made and reminded MPC that
Mitsubishi had advanced VAT payments to which Mitsubishi was entitled and from which it was
demanding interest payment. Given the scenario depicted in said letter, it is understandable why
Mitsubishi, in its effort to recover the amount it advanced, used the PhP 26.203: USD 1 exchange
formula in OR No. 0189 for USD 5,190,000.
No showing of interest payment not fatal to claim for refund
Contrary to petitioners posture, the matter of nonpayment by MPC of the interests demanded
by Mitsubishi is not an argument against the fact of payment by MPC of its creditable input VAT or of
the authenticity or genuineness of OR No. 0189; for at the end of the day, the matter of interest
payment was between Mitsubishi and MPC and may very well be covered by another receipt. But the
more important consideration is the fact that MPC, as confirmed by the SGV, paid its obligation to
Mitsubishi, and the latter issued to MPC OR No. 0189, for the VAT component of its 1993 to 1996
service purchases.
The next question is, whether or not MPC is entitled to a refund or a TCC for the alleged
unutilized input VAT of PhP 135,993,570 covered by OR No. 0189 which sufficiently proves payment of
the input VAT.
We answer the query in the negative.
Claim for refund or tax credit filed out of time
The claim for refund or tax credit for the creditable input VAT payment made by MPC
embodied in OR No. 0189 was filed beyond the period provided by law for such claim. Sec. 112(A) of
the NIRC pertinently reads:
(A) Zero-rated or Effectively Zero-rated Sales. Any VAT-registered
person, whose sales are zero-rated or effectively zero-rated may, within two (2)
years after the close of the taxable quarter when the sales were made, apply
for the issuance of a tax credit certificate or refund of creditable input tax due
or paid attributable to such sales, except transitional input tax, to the extent that
such input tax has not been applied against output tax: x x x. (Emphasis ours.)
The above proviso clearly provides in no uncertain terms that unutilized input VAT payments not
otherwise used for any internal revenue tax due the taxpayer must be claimed within two
years reckoned from the close of the taxable quarter when the relevant sales were made
pertaining to the input VAT regardless of whether said tax was paid or not. As the CA aptly puts it,
albeit it erroneously applied the aforequoted Sec. 112(A), [P]rescriptive period commences from the
close of the taxable quarter when the sales were made and not from the time the input VAT was paid
nor from the time the official receipt was issued.[22] Thus, when a zero-rated VAT taxpayer pays its input
VAT a year after the pertinent transaction, said taxpayer only has a year to file a claim for refund or tax
credit of the unutilized creditable input VAT.The reckoning frame would always be the end of the
quarter when the pertinent sales or transaction was made, regardless when the input VAT was paid. Be
that as it may, and given that the last creditable input VAT due for the period covering the progress
billing of September 6, 1996 is the third quarter of 1996 ending on September 30, 1996, any claim for
unutilized creditable input VAT refund or tax credit for said quarter prescribed two years after
September 30, 1996 or, to be precise, on September 30, 1998. Consequently, MPCs claim for refund or
tax credit filed on December 10, 1999 had already prescribed.
Reckoning for prescriptive period under
Secs. 204(C) and 229 of the NIRC inapplicable
To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the NIRC
which, for the purpose of refund, prescribes a different starting point for the two-year prescriptive limit
for the filing of a claim therefor. Secs. 204(C) and 229 respectively provide:
Sec. 204. Authority of the Commissioner to Compromise, Abate and
Refund or Credit Taxes. The Commissioner may
xxxx
(c) Credit or refund taxes erroneously or illegally received or penalties
imposed without authority, refund the value of internal revenue stamps when they
are returned in good condition by the purchaser, and, in his discretion, redeem or
change unused stamps that have been rendered unfit for use and refund their
value upon proof of destruction. No credit or refund of taxes or penalties shall
be allowed unless the taxpayer files in writing with the Commissioner a claim
for credit or refund within two (2) years after the payment of the tax or
penalty: Provided, however, That a return filed showing an overpayment shall be
considered as a written claim for credit or refund.
xxxx
Sec. 229. Recovery of Tax Erroneously or Illegally Collected. No suit or
proceeding shall be maintained in any court for the recovery of any national internal
revenue tax hereafter alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority, of any
sum alleged to have been excessively or in any manner wrongfully collected
without authority, or of any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not
such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after
the expiration of two (2) years from the date of payment of the tax or
 penaltyregardless of any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without a written claim
therefor, refund or credit any tax, where on the face of the return upon which
payment was made, such payment appears clearly to have been erroneously
paid. (Emphasis ours.)
Notably, the above provisions also set a two-year prescriptive period, reckoned from date of
payment of the tax or penalty, for the filing of a claim of refund or tax credit. Notably too, both provisions
apply only to instances of erroneous payment or illegal collection of internal revenue taxes.
MPCs creditable input VAT not erroneously paid
For perspective, under Sec. 105 of the NIRC, creditable input VAT is an indirect tax which
can be shifted or passed on to the buyer, transferee, or lessee of the goods, properties, or services of
the taxpayer. The fact that the subsequent sale or transaction involves a wholly-tax exempt client,
resulting in a zero-rated or effectively zero-rated transaction, does not, standing alone, deprive the
taxpayer of its right to a refund for any unutilized creditable input VAT, albeit the erroneous, illegal, or
wrongful payment angle does not enter the equation.
In Commissioner of Internal Revenue v. Seagate Technology (Philippines), the Court
explained the nature of the VAT and the entitlement to tax refund or credit of a zero-rated taxpayer:
Viewed broadly, the VAT is a uniform tax x x x levied on every
importation of goods, whether or not in the course of trade or business, or imposed
on each sale, barter, exchange or lease of goods or properties or on each rendition
of services in the course of trade or business as they pass along the production
and distribution chain, the tax being limited only to the value added to such goods,
properties or services by the seller, transferor or lessor. It is an indirect tax that
may be shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services. As such, it should be understood not in the context of the
person or entity that is primarily, directly and legally liable for its payment, but in
terms of its nature as a tax on consumption. In either case, though, the same
conclusion is arrived at.
The law that originally imposed the VAT in the country, as well as the
subsequent amendments of that law, has been drawn from the tax credit
method. Such method adopted the mechanics and self-enforcement features of the
VAT as first implemented and practiced in Europe x x x. Under the present method
that relies on invoices, an entity can credit against or subtract from the VAT
charged on its sales or outputs the VAT paid on its purchases, inputs and imports.
If at the end of a taxable quarter the output taxes charged by a seller are
equal to the input taxes passed on by the suppliers, no payment is required. It is
when the output taxes exceed the input taxes that the excess has to be paid. If,
however, the input taxes exceed the output taxes, the excess shall be carried over
to the succeeding quarter or quarters. Should the input taxes result from zero-rated
or effectively zero-rated transactions or from the acquisition of capital goods, any
excess over the output taxes shall instead be refunded to the taxpayer or credited
against other internal revenue taxes.
xxxx
Zero-rated transactions generally refer to the export sale of goods and
supply of services. The tax rate is set at zero. When applied to the tax base, such
rate obviously results in no tax chargeable against the purchaser. The seller of
such transactions charges no output tax, but can claim a refund of or a tax
credit certificate for the VAT previously charged by suppliers.[23] (Emphasis
added.)
Considering the foregoing discussion, it is clear that Sec. 112(A) of the NIRC, providing a
two-year prescriptive period reckoned from the close of the taxable quarter when the relevant sales or
transactions were made pertaining to the creditable input VAT, applies to the instant case, and not to
the other actions which refer to erroneous payment of taxes.
As a final consideration, the Court wishes to remind the BIR and other tax agencies of their
duty to treat claims for refunds and tax credits with proper attention and urgency. Had RDO No. 60 and,
later, the BIR proper acted, instead of sitting, on MPCs underlying application for effective zero rating,
the matter of addressing MPCs right, or lack of it, to tax credit or refund could have plausibly been
addressed at their level and perchance freed the taxpayer and the government from the rigors of a
tedious litigation.
The all too familiar complaint is that the government acts with dispatch when it comes to tax
collection, but pays little, if any, attention to tax claims for refund or exemption. It is high time our tax
collectors prove the cynics wrong.
WHEREFORE, the petition is PARTLY GRANTED. The Decision dated December 22, 2005
and the Resolution dated March 31, 2006 of the CA in CA-G.R. SP No. 78280 are AFFIRMED with
the MODIFICATION that the claim of respondent MPC for tax refund or credit to the extent of PhP
135,993,570, representing its input VAT payments for service purchases from Mitsubishi Corporation of
Japan for the construction of a portion of its Pagbilao, Quezon power station, is DENIED on the ground
that the claim had prescribed. Accordingly, petitioner Commissioner of Internal Revenue is ordered to
refund or, in the alternative, issue a tax credit certificate in favor of MPC, its unutilized input VAT
payments directly attributable to its effectively zero-rated sales for the second quarter in the total
amount of PhP 10,766,939.48.
No pronouncement as to costs.
SO ORDERED.
18. NORTHERN MINI HYDRO V. CIR
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