DONOR’S TAX

GENERAL PRINCIPLES AND DETERMINATION

G.R. No. L-19865 July 31, 1965

MARIA CARLA PIROVANO, etc., et al., petitioners-appellants,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.

REYES, J.B.L., J.:

This case is a sequel to the case of Pirovano vs. De la Rama Steamship Co., 96 Phil. 335.

Briefly, the facts of the aforestated case may be stated as follows:

Enrico Pirovano was the father of the herein petitioners-appellants. Sometime in the early part of 1941, De la Rama
Steamship Co. insured the life of said Enrico Pirovano, who was then its President and General Manager until the time of
his death, with various Philippine and American insurance companies for a total sum of one million pesos, designating
itself as the beneficiary of the policies, obtained by it. Due to the Japanese occupation of the Philippines during the second
World War, the Company was unable to pay the premiums on the policies issued by its Philippine insurers and these
policies lapsed, while the policies issued by its American insurers were kept effective and subsisting, the New York office
of the Company having continued paying its premiums from year to year.

During the Japanese occupation , or more particularly in the latter part of 1944, said Enrico Pirovano died.

After the liberation of the Philippines from the Japanese forces, the Board of Directors of De la Rama Steamship Co.
adopted a resolution dated July 10, 1946 granting and setting aside, out of the proceeds expected to be collected on the
insurance policies taken on the life of said Enrico Pirovano, the sum of P400,000.00 for equal division among the four (4)
minor children of the deceased, said sum of money to be convertible into 4,000 shares of stock of the Company, at par, or
1,000 shares for each child. Shortly thereafter, the Company received the total sum of P643,000.00 as proceeds of the said
life insurance policies obtained from American insurers.

Upon receipt of the last stated sum of money, the Board of Directors of the Company modified, on January 6, 1947, the
above-mentioned resolution by renouncing all its rights title, and interest to the said amount of P643,000.00 in favor of the
minor children of the deceased, subject to the express condition that said amount should be retained by the Company in
the nature of a loan to it, drawing interest at the rate of five per centum (5%) per annum, and payable to the Pirovano
children after the Company shall have first settled in full the balance of its present remaining bonded indebtedness in the
sum of approximately P5,000,000.00. This latter resolution was carried out in a Memorandum Agreement on January 10,
1947 and June 17, 1947., respectively, executed by the Company and Mrs. Estefania R. Pirovano, the latter acting in her
capacity as guardian of her children (petitioners-appellants herein) find pursuant to an express authority granted her by the
court.

On June 24, 1947, the Board of Directors of the Company further modified the last mentioned resolution providing therein
that the Company shall pay the proceeds of said life insurance policies to the heirs of the said Enrico Pirovano after the
Company shall have settled in full the balance of its present remaining bonded indebtedness, but the annual interests
accruing on the principal shall be paid to the heirs of the said Enrico Pirovano, or their duly appointed representative,
whenever the Company is in a position to meet said obligation.
On February 26, 1948, Mrs. Estefania R. Pirovano, in behalf of her children, executed a public document formally
accepting the donation; and, on the same date, the Company through its Board of Directors, took official notice of this
formal acceptance.

On September 13, 1949, the stockholders of the Company formally ratified the various resolutions hereinabove mentioned
with certain clarifying modifications that the payment of the donation shall not be effected until such time as the Company
shall have first duly liquidated its present bonded indebtedness in the amount of P3,260,855.77 with the National
Development Company, or fully redeemed the preferred shares of stock in the amount which shall be issued to the
National Development Company in lieu thereof; and that any and all taxes, legal fees, and expenses in any way connected
with the above transaction shall be chargeable and deducted from the proceeds of the life insurance policies mentioned in
the resolutions of the Board of Directors.

On March 8, 1951, however, the majority stockholders of the Company voted to revoke the resolution approving the
donation in favor of the Pirovano children.

As a consequence of this revocation and refusal of the Company to pay the balance of the donation amounting to
P564,980.90 despite demands therefor, the herein petitioners-appellants represented by their natural guardian, Mrs.
Estefania R. Pirovano, brought an action for the recovery of said amount, plus interest and damages against De la Rama
Steamship Co., in the Court of First Instance of Rizal, which case ultimately culminated to an appeal to this Court. On
December 29, 1954, this court rendered its decision in the appealed case (96 Phil. 335) holding that the donation was valid
and remunerative in nature, the dispositive part of which reads:

Wherefore, the decision appealed from should be modified as follows: (a) that the donation in favor of the
children of the late Enrico Pirovano of the proceeds of the insurance policies taken on his life is valid and binding
on the defendant corporation; (b) that said donation, which amounts to a total of P583,813.59, including interest,
as it appears in the books of the corporation as of August 31, 1951, plus interest thereon at the rate of 5 per cent
per annum from the filing of the complaint, should be paid to the plaintiffs after the defendant corporation shall
have fully redeemed the preferred shares issued to the National Development Company under the terms and
conditions stared in the resolutions of the Board of Directors of January 6, 1947 and June 24, 1947, as amended
by the resolution of the stockholders adopted on September 13, 1949; and (c) defendant shall pay to plaintiffs an
additional amount equivalent to 10 per cent of said amount of P583,813.59 as damages by way of attorney's fees,
and to pay the costs of action. (Pirovano et al. vs. De la Rama Steamship Co., 96 Phil. 367-368)

The above decision became final and executory. In compliance therewith, De la Rama Steamship Co. made, on April 6,
1955, a partial payment on the amount of the judgment and paid the balance thereof on May 12, 1955.

On March 6, 1955, respondent Commissioner of Internal Revenue assessed the amount of P60,869.67 as donees' gift tax,
inclusive of surcharges, interests and other penalties, against each of the petitioners-appellants, or for the total sum of
P243,478.68; and, on April 23, 1955, a donor's gift tax in the total amount of P34,371.76 was also assessed against De la
Rama Steamship Co., which the latter paid.

Petitioners-appellants herein contested respondent Commissioner's assessment and imposition of the donees' gift taxes and
donor's gift tax and also made a claim for refund of the donor's gift tax so collected. Respondent Commissioner overruled
petitioners' claims; hence, the latter presented two (2) petitions for review against respondent's rulings before the Court of
Tax Appeals, said petitions having been docketed as CTA Cases Nos. 347 and 375. CTA Case No. 347 relates to the
petition disputing the legality of the assessment of donees' gift taxes and donor's gift tax while CTA Case No. 375 refers
to the claim for refund of the donor's gift tax already paid.

After the filing of respondent's usual answers to the petitions, the two cases, being interrelated to each other, were tried
jointly and terminated.
On January 31, 1962, the Court of Tax Appeals rendered its decision in the two cases, the dispositive part of which reads:

In resume, we are of the opinion, that (1) the donor's gift tax in the sum of P34,371.76 was erroneously assessed
and collected, hence, petitioners are entitled to the refund thereof; (2) the donees' gift taxes were correctly
assessed; (3) the imposition of the surcharge of 25% is not proper; (4) the surcharge of 5% is legally due; and (5)
the interest of 1% per month on the deficiency donees' gift taxes is due from petitioners from March 8, 1955 until
the taxes are paid.

IN LINE WITH THE FOREGOING OPINION, petitioners are hereby ordered to pay the donees' gift taxes as
assessed by respondent, plus 5% surcharge and interest at the rate of 1% per month from March 8, 1955 to the
date of payment of said donees' gift taxes. Respondent is ordered to apply the sum of P34,371.76 which is
refundable to petitioners, against the amount due from petitioners. With costs against petitioners in Case No. 347.

Petitioners-appellants herein filed a motion to reconsider the above decision, which the lower court denied. Hence, this
appeal before us.

In the instant appeal, petitioners-appellants herein question only that portion of the decision of the lower court ordering
the payment of donees' gift taxes as assessed by respondent as well as the imposition of surcharge and interest on the
amount of donees' gift taxes.

In their brief and memorandum, they dispute the factual finding of the lower court that De la Rama Steamship Company's
renunciation of its rights, title, and interest over the proceeds of said life insurance policies in favor of the Pirovano
children "was motivated solely and exclusively by its sense of gratitude, an act of pure liberality, and not to pay additional
compensation for services inadequately paid for." Petitioners now contend that the lower court's finding was erroneous in
seemingly considering the disputed grant as a simple donation, since our previous decision (96 Phil. 335) had already
declared that the transfer to the Pirovano children was a remuneratory donation. Petitioners further contend that the same
was made not for an insufficient or inadequate consideration but rather it a was made for a full and adequate
compensation for the valuable services rendered by the late Enrico Pirovano to the De la Rama Steamship Co.; hence, the
donation does not constitute a taxable gift under the provisions of Section 108 of the National Internal Revenue Code.

The argument for petitioners-appellants fails to take into account the fact that neither in Spanish nor in Anglo-American
law was it considered that past services, rendered without relying on a coetaneous promise, express or implied, that such
services would be paid for in the future, constituted cause or consideration that would make a conveyance of property
anything else but a gift or donation. This conclusion flows from the text of Article 619 of the Code of 1889 (identical with
Article 726 of the present Civil Code of the Philippines):

When a person gives to another a thing ... on account of the latter's merits or of the services rendered by him to
the donor, provided they do not constitute a demandable debt, ..., there is also a donation. ... .

There is nothing on record to show that when the late Enrico Pirovano rendered services as President and General
Manager of the De la Rama Steamship Co. he was not fully compensated for such services, or that, because they were
"largely responsible for the rapid and very successful development of the activities of the company" (Res. of July 10,
1946). Pirovano expected or was promised further compensation over and in addition to his regular emoluments as
President and General Manager. The fact that his services contributed in a large measure to the success of the company
did not give rise to a recoverable debt, and the conveyances made by the company to his heirs remain a gift or donation.
This is emphasized by the directors' Resolution of January 6, 1947, that "out of gratitude" the company decided to
renounce in favor of Pirovano's heirs the proceeds of the life insurance policies in question. The true consideration for the
donation was, therefore, the company's gratitude for his services, and not the services themselves.
That the tax court regarded the conveyance as a simple donation, instead of a remuneratory one as it was declared to be in
our previous decision, is but an innocuous error; whether remuneratory or simple, the conveyance remained a gift, taxable
under Chapter 2, Title III of the Internal Revenue Code.

But then appellants contend, the entire property or right donated should not be considered as a gift for taxation purposes;
only that portion of the value of the property or right transferred, if any, which is in excess of the value of the services
rendered should be considered as a taxable gift. They cite in support Section 111 of the Tax Code which provides that —

Where property is transferred for less, than an adequate and full consideration in money or money's worth, then
the amount by which the value of the property exceeded the value of the consideration shall, for the purpose of the
tax imposed by this Chapter, be deemed a gift, ... .

The flaw in this argument lies in the fact that, as copied from American law, the term consideration used in this section
refers to the technical "consideration" defined by the American Law Institute (Restatement of Contracts) as "anything that
is bargained for by the promisor and given by the promisee in exchange for the promise" (Also, Corbin on Contracts, Vol.
I, p. 359). But, as we have seen, Pirovano's successful activities as officer of the De la Rama Steamship Co. cannot be
deemed such consideration for the gift to his heirs, since the services were rendered long before the Company ceded the
value of the life policies to said heirs; cession and services were not the result of one bargain or of a mutual exchange of
promises.

And the Anglo-American law treats a subsequent promise to pay for past services (like one to pay for improvements
already made without prior request from the promisor) to be a nudum pactum (Roscorla vs. Thomas, 3 Q.B. 234; Peters
vs. Poro, 25 ALR 615; Carson vs. Clark, 25 Am. Dec. 79; Boston vs. Dodge, 12 Am. Dec. 206), i.e., one that is
unenforceable in view of the common law rule that consideration must consist in a legal benefit to the promisee or some
legal detriment to the promisor.

What is more, the actual consideration for the cession of the policies, as previously shown, was the Company's gratitude
to Pirovano; so that under section 111 of the Code there is no consideration the value of which can be deducted from that
of the property transferred as a gift. Like "love and affection," gratitude has no economic value and is not "consideration"
in the sense that the word is used in this section of the Tax Code.

As stated by Chief Justice Griffith of the Supreme Court of Mississippi in his well-known book, "Outlines of the Law" (p.
204) —

Love and affection are not considerations of value — they are not estimable in terms of value. Nor are sentiments of
gratitude for gratuitous part favors or kindnesses; nor are obligations which are merely moral. It has been well said that if
a moral obligation were alone sufficient it would remove the necessity for any consideration at all, since the fact of
making a promise impose, the moral obligation to perform it."

It is of course perfectly possible that a donation or gift should at the same time impose a burden or condition on the donee
involving some economic liability for him. A, for example, may donate a parcel of land to B on condition that the latter
assume a mortgage existing on the donated land. In this case the donee may rightfully insist that the gift tax be computed
only on the value of the land less the value of the mortgage. This, in fact, is contemplated by Article 619 of the Civil Code
of 1889 (Art. 726 of the Tax Code) when it provides that there is also a donation "when the gift imposes upon the donee a
burden which is less than the value of the thing given." Section 111 of the Tax Code has in view situations of this kind,
since it also prescribes that "the amount by which the value of the property exceeded the value of the consideration" shall
be deemed a gift for the purpose of the tax. .

Petitioners finally contend that, even assuming that the donation in question is subject to donees' gift taxes, the imposition
of the surcharge of 5% and interest of 1% per month from March 8, 1955 was not justified because the proceeds of the life
insurance policies were actually received on April 6, 1955 and May 12, 1955 only and in accordance with Section 115(c)
of the Tax Code; the filing of the returns of such tax became due on March 1, 1956 and the tax became payable on May
15, 1956, as provided for in Section 116(a) of the same Code. In other words, petitioners maintain that the assessment and
demand for donees' gift taxes was prematurely made and of no legal effect; hence, they should not be held liable for such
surcharge and interest.

It is well to note, and it is not disputed, that petitioners-donees have failed to file any gift tax return and that they also
failed to pay the amount of the assessment made against them by respondent in 1955. This situation is covered by Section
119(b) (1) and (c) and Section 120 of the Tax Code:

(b) Deficiency.

(1) Payment not extended. — Where a deficiency, or any interest assessed in connection therewith, or any
addition to the taxes provided for in section one hundred twenty is not paid in full within thirty days from the date
of the notice and demand from the Commissioner, there shall be collected as a part of the taxes, interest upon the
unpaid amount at the rate of one per centum a month from the date of such notice and demand until it is paid.
(section 119)

(c) Surcharge. — If any amount of the taxes included in the notice and demand from the Commissioner of
Internal Revenue is not paid in full within thirty days after such notice and demand, there shall be collected in
addition to the interest prescribed above as a part of the taxes a surcharge of five per centum of the unpaid
amount. (sec. 119)

The failure to file a return was found by the lower court to be due to reasonable cause and not to willful neglect. On this
score, the elimination by the lower court of the 25% surcharge is ad valorem penalty which respondent Commissioner had
imposed pursuant to Section 120 of the Tax Code was proper, since said Section 120 vests in the Commissioner of
Internal Revenue or in the tax court power and authority to impose or not to impose such penalty depending upon whether
or not reasonable cause has been shown in the non-filing of such return.

On the other hand, unlike said Section 120, Section 119, paragraphs (b) (1) and (c) of the Tax Code, does not confer on
the Commissioner of Internal Revenue or on the courts any power and discretion not to impose such interest and
surcharge. It is likewise provided for by law that an appeal to the Court of Tax Appeals from a decision of the
Commissioner of Internal Revenue shall not suspend the payment or collection of the tax liability of the taxpayer unless a
motion to that effect shall have been presented to the court and granted by it on the ground that such collection will
jeopardize the interest of the taxpayer (Sec. 11, Republic Act No. 1125; Rule 12, Rules of the Court of Tax Appeals). It
should further be noted that —

It has been the uniform holding of this Court that no suit for enjoining the collection of a tax, disputed or
undisputed, can be brought, the remedy being to pay the tax first, formerly under protest and now without need of
protect, file the claim with the Collector, and if he denies it, bring an action for recovery against him. (David v.
Ramos, et al., 90 Phil. 351)

Section 306 of the National Internal Revenue Code ... lays down the procedure to be followed in those cases
wherein a taxpayer entertains some doubt about the correctness of a tax sought to be collected. Said section
provides that the tax, should first be paid and the taxpayer should sue for its recovery afterwards. The purpose of
the law obviously is to prevent delay in the collection of taxes, upon which the Government depends for its
existence. To allow a taxpayer to first secure a ruling as regards the validity of the tax before paying it would be
to defeat this purpose. (National Dental Supply Co. vs. Meer, 90 Phil. 265)

Petitioners did not file in the lower court any motion for the suspension of payment or collection of the amount of
assessment made against them.
On the basis of the above-stated provisions of law and applicable authorities, it is evident that the imposition of 1%
interest monthly and 5% surcharge is justified and legal. As succinctly stated by the court below, said imposition is
"mandatory and may not be waived by the Commissioner of Internal Revenue or by the courts" (Resolution on petitioners'
motion for reconsideration, Annex XIV, petition). Hence, said imposition of interest and surcharge by the lower court
should be upheld.

WHEREFORE, the decision of the Court of Tax Appeals is affirmed. Costs against petitioners Pirovano.

DIGEST:

FACTS:

De la Rama Steamship Co. insured the life of Enrico Pirovano, who was then its President and General Manager until the time of his
death. The Company then received the total sum of P643,000.00 as proceeds of the said life insurance policies. The
Company renounced all its rights on the money in favor of the decendent's children.

After a case that marred Estefania Pirovano, the guardian and the Company (see Pirovano vs. De la Rama Steamship Co., 96 Phil.
335.), the Company paid in favor of the children.

The CIR then assessed donees' gift tax against Pirovano and donor's tax against the Company. Pirovano contested with the CIR which
she lost and thus appealed with the CTA.

The CTA held that donees' gift tax were correctly assessed.

ISSUE: Whether Pirovano should pay the donees' gift tax.

RULING:

YES. Pirovano contends that the Court itself declared that the donation was renumenatory and not simple and it was made for a full
and adequate compensation for the valuable services by decedent to the Company; hence, the donation does not constitute a taxable
gift under the provisions of Section 108 of the National Internal Revenue Code (old law).

The Court states that it is a donation; that the consideration for the donation was, therefore, the company's gratitude for his services,
and not the services themselves and whether the donation was simple or renumenatory, it was still a gift taxable under the law.

II. VALUE-ADDED TAX

1. BASIC ELEMENTS

1. G.R. No. 125355 March 30, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES
CORPORATION, respondents.

PARDO, J.:

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

Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation duly
organized and existing under the laws of the Philippines. It is an affiliate of Philippine American Life Insurance
Co. (Philamlife), organized by the letter to perform collection, consultative and other technical services,
including functioning as an internal auditor, of Philamlife and its other affiliates.1âwphi1.nêt

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:

P1,679,155.00
Taxable sale/receipt ===========
=
10% tax due thereon 167,915.50
25% surcharge 41,978.88
20% interest per annum 125,936.63
Compromise penalty for late payment 16,000.00

TOTAL AMOUNT DUE AND COLLECTIBLE P351,831.01 3

============

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

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

On September 29, 1992, COMASERCO filed with the Court of Tax Appeals4 a petition for review contesting
the Commissioner's assessment. COMASERCO asserted that the services it rendered to Philamlife and its
affiliates, relating to collections, consultative and other technical assistance, including functioning as an internal
auditor, were on a "no-profit, reimbursement-of-cost-only" basis. It averred that it was not engaged in the
business of providing services to Philamlife and its affiliates. COMASERCO was established to ensure
operational orderliness and administrative efficiency of Philamlife and its affiliates, and not in the sale of
services. COMASERCO stressed that it was not profit-motivated, thus not engaged in business. In fact, it did
not generate profit but suffered a net loss in taxable year 1988. COMASERCO averred that since it was not
engaged in business, it was not liable to pay VAT.

On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of Internal
Revenue, the dispositive portion of which reads:
 WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner deficiency
value-added tax for the taxable year 1988 is AFFIRMED with slight modifications. Accordingly,
petitioner is ordered to pay respondent Commissioner of Internal Revenue the amount of P335,831.01
inclusive of the 25% surcharge and interest plus 20% interest from January 24, 1992 until fully paid
pursuant to Section 248 and 249 of the Tax Code.

The compromise penalty of P16,000.00 imposed by the respondent in her assessment letter shall not be
included in the payment as there was no compromise agreement entered into between petitioner and
respondent with respect to the value-added tax deficiency.5

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

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

WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING and SETTING
ASIDE the questioned Decision promulgated on 22 June 1995. The assessment for deficiency value-
added tax for the taxable year 1988 inclusive of surcharge, interest and penalty charges are ordered
CANCELLED for lack of legal and factual basis. 6

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

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

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

We give due course to the petition.

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

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

We agree with the Commissioner.

Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E. O.) No. 273 in
1988, provides that:
 Sec. 99. Persons liable. — Any person who, in the course of trade or business, sells, barters or
exchanges goods, renders services, or engages in similar transactions and any person who, imports
goods shall be subject to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code. 9

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

We disagree.

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

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

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

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

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the
Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade
or business.

Contrary to COMASERCO's contention the above provision clarifies that even a 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" present law applies to all transactions even to
those made prior to its enactment. Executive Order No. 273 stated that any person who, in the course of trade or
business, sells, barters or exchanges goods and services, was already liable to pay VAT. The present law merely
stresses that even a nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of
goods and services.
Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase "sale of services" as the
"performance of all kinds of services for others for a fee, remuneration or consideration." It includes "the supply
of technical advice, assistance or services rendered in connection with technical management or administration
of any scientific, industrial or commercial undertaking or project." 11

On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 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 realizing profit, any income or profit generated by the entity in the conduct of its activities was subject
to income tax.

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for
services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes
of determining liability for VAT on services rendered. As long as the entity provides service for a fee,
remuneration or consideration, then the service rendered is subject to VAT.1awp++i1

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

Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled that the services
rendered by COMASERCO to Philamlife and its affiliates are subject to VAT. As pointed out by the
Commissioner, the performance of all kinds of services for others for a fee, remuneration or consideration is
considered as sale of services subject to VAT. As the government agency charged with the enforcement of the
law, the opinion of the Commissioner of Internal Revenue, in the absence of any showing that it is plainly
wrong, is entitled to great weight. 14 Also, it has been the long standing policy and practice of this Court to
respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its
functions, is dedicated exclusively to the study and consideration of tax cases and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident exercise of its authority. 15

There is no merit to respondent's contention that the Court of Appeals' decision in CA-G.R. No. 34042,
declaring the COMASERCO as not engaged in business and not liable for the payment of fixed and percentage
taxes, binds petitioner. The issue in CA-G.R. No. 34042 is different from the present case, which involves
COMASERCO's liability for VAT. As heretofore stated, every person who sells, barters, or exchanges goods
and services, in the course of trade or business, as defined by law, is subject to VAT.

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

No costs. SO ORDERED.1âwphi1.nêt

DIGEST:

Facts:
 - Commonwealth Management and Services Corporation (COMASERCO), is a corporation 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, (BIR) issued an assessment to private respondent COMASERCO for deficiency value-
added tax (VAT) amounting to P351,851.01, for taxable year 1988.
- COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss in its
operations in the amount of P6,077.00.
- On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of
deficiency VAT.
- On August 20, 1992, the Commissioner of Internal Revenue sent a collection letter to COMASERCO
demanding payment of the deficiency VAT.
- COMASERCO asserted that the services it rendered to Philamlife and its affiliates, relating to collections,
consultative and other technical assistance, including functioning as an internal auditor, were on a "no-
profit, reimbursement-of-cost-only" basis. It averred that it was not engaged in the business of providing
services to Philamlife and its affiliates.
- COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT.
- CTA affirmed CIR, ordering COMASERCO to pay CIR the amount of P335,831.01.
- CA reversed CTA.

Issue:

Whether or not COMASERCO was engaged in the sale of services, and thus liable to pay VAT.

Ruling:

Yes, COMASERCO is liable to pay VAT.

The provision of NIRC of 1997 Section 105 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.

Section 108 of the National Internal Revenue Code of 1997 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. BIR Ruling No. 010-98 emphasized that it is immaterial whether
the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a
reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services
rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is
subject to VAT. Section 109, Republic Act 8424 clearly enumerates the transactions exempted from VAT. The
services rendered by COMASERCO do not fall within the exemptions. 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 heretofore stated, every person who sells, barters, or exchanges goods and services, in the course of trade or
business, as defined by law, is subject to VAT.

Petition is granted.
 2. G.R. No. 146984 July 28, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,

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

DECISION

TINGA, J.:

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

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

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

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

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

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

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

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

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

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

However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated 5
February 2001.13 This time, the appellate court ruled that the "change of ownership of business" as
contemplated in R.R. No. 5-87 must be a consequence of the "retirement from or cessation of business" by the
owner of the goods, as provided for in Section 100 of the Tax Code. The Court of Appeals also agreed with the
CTA that the classification of transactions "deemed sale" was a classification statute, and not an exemption
statute, thus warranting the resolution of any doubt in favor of the taxpayer.14
To the mind of the Court, the arguments raised in the present petition have already been adequately discussed
and refuted in the rulings assailed before us. Evidently, the petition should be denied. Yet the Court finds that
Section 99 of the Tax Code is sufficient reason for upholding the refund of VAT payments, and the subsequent
disquisitions by the lower courts on the applicability of Section 100 of the Tax Code and Section 4 of R.R. No.
5-87 are ultimately irrelevant.

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

Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the
taxpayer’s role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its
subsequent incarnations,19 the tax is levied only on the sale, barter or exchange of goods or services by persons
who engage in such activities, in the course of trade or business. These transactions outside the course of
trade or business may invariably contribute to the production chain, but they do so only as a matter of accident
or incident. As the sales of goods or services do not occur within the course of trade or business, the providers
of such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability
as against their own accumulated VAT collections since the accumulation of output VAT arises in the first
place only through the ordinary course of trade or business.

That the sale of the vessels was not in the ordinary course of trade or business of NDC was appreciated by both
the CTA and the Court of Appeals, the latter doing so even in its first decision which it eventually
reconsidered.20 We cite with approval the CTA’s explanation on this point:

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

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

This finding is confirmed by the Revised Charter22 of the NDC which bears no indication that the NDC was
created for the primary purpose of selling real property.23
The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before
this Court,24 should have definitively settled the matter. Any sale, barter or exchange of goods or services not in
the course of trade or business is not subject to VAT.

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

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

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

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

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

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.
DIGEST:

Facts:

Because of a government program of privatization, National Development Company(NDC) decided to sell its N
ational Marine Corporation(NMC) shares and five of its ships. In a VAT Ruling, it was held that the sale was su
bject to VAT since NDC was a VAT-registered enterprise and the transaction is incident to its normal VAT-
registered activity of leasing out personal property.

Issue:

Whether or not the sale by NDC whose VAT-

registered activity is leasing out personal property is subject to VAT considering that such sale was made pursu
ant to a government program of privatization.

Ruling:

No, the sale of the vessels is not subject to VAT since it was not in the ordinary course of trade or business of NDC. “Cour
se of business” is what is usually done in the management of trade or business. It connotes regularity. In the case at bar,
the sale was an isolated transaction. The sale which was involuntary and made pursuant to the declared policy of govern
ment for privatization could no longer be repeated or carried on with regularity. It should be emphasized that the norma
l VATregistered activity of NDC is leasing personal property. Any sale, barter, or exchange of goods or services not in the
course of trade or business is not subject to tax.

3. G.R. No. 178697 November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SONY PHILIPPINES, INC., Respondent.

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5, 2007
Resolution of the Court of Tax Appeals – En Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming the October 26,
2004 Decision of the CTA-First Division2 which, in turn, partially granted the petition for review of respondent
Sony Philippines, Inc. (Sony). The CTA-First Division decision cancelled the deficiency assessment issued by
petitioner Commissioner of Internal Revenue (CIR) against Sony for Value Added Tax (VAT) but upheld the
deficiency assessment for expanded withholding tax (EWT) in the amount of ₱1,035,879.70 and the penalties
for late remittance of internal revenue taxes in the amount of ₱1,269, 593.90.3
THE FACTS:

On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734) authorizing certain
revenue officers to examine Sony’s books of accounts and other accounting records regarding revenue taxes for
"the period 1997 and unverified prior years." On December 6, 1999, a preliminary assessment for 1997
deficiency taxes and penalties was issued by the CIR which Sony protested. Thereafter, acting on the protest,
the CIR issued final assessment notices, the formal letter of demand and the details of discrepancies.4 Said
details of the deficiency taxes and penalties for late remittance of internal revenue taxes are as follows:

DEFICIENCY VALUE -ADDED TAX (VAT)

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

DEFICIENCY EXPANDED WITHHOLDING

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

DEFICIENCY OF VAT ON ROYALTY

PAYMENTS
(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 359,177.80
Interest up to 3-31-2000 87,580.34
Compromise 16,000.00 462,758.14
Penalties Due P 462,758.14
 LATE REMITTANCE OF FINAL
WITHHOLDING TAX
(Assessment No. ST-LR2-97-0127-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 1,729,690.71
Interest up to 3-31-2000 508,783.07
Compromise 50,000.00 2,288,473.78
Penalties Due P 2,288,473.78

LATE REMITTANCE OF INCOME PAYMENTS

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

GRAND TOTAL P 15,895,632.655

Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2, 2000. Sony
submitted relevant documents in support of its protest on the 16th of that same month.6

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

After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized
advertising expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT credit.
As regards the EWT, the CTA-First Division maintained the deficiency EWT assessment on Sony’s motor
vehicles and on professional fees paid to general professional partnerships. It also assessed the amounts paid to
sales agents as commissions with five percent (5%) EWT pursuant to Section 1(g) of Revenue Regulations No.
6-85. The CTA-First Division, however, disallowed the EWT assessment on rental expense since it found that
the total rental deposit of ₱10,523,821.99 was incurred from January to March 1998 which was again beyond
the coverage of LOA 19734. Except for the compromise penalties, the CTA-First Division also upheld the
penalties for the late payment of VAT on royalties, for late remittance of final withholding tax on royalty as of
December 1997 and for the late remittance of EWT by some of Sony’s branches.8 In sum, the CTA-First
Division partly granted Sony’s petition by cancelling the deficiency VAT assessment but upheld a modified
deficiency EWT assessment as well as the penalties. Thus, the dispositive portion reads:

WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED to
CANCEL and WITHDRAW the deficiency assessment for value-added tax for 1997 for lack of merit.
However, the deficiency assessments for expanded withholding tax and penalties for late remittance of internal
revenue taxes are UPHELD.

Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding tax in the
amount of ₱1,035,879.70 and the following penalties for late remittance of internal revenue taxes in the sum of
₱1,269,593.90:

1. VAT on Royalty P 429,242.07

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

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

SO ORDERED.9

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

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

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

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

D. The Honorable Court committed reversible error in holding that the remittance of final withholding
tax on royalties covering the period January to March 1998 was filed on time.10

On April 28, 2005, the CTA-First Division denied the motion for reconsideration.1avvphi1 Unfazed, the CIR
filed a petition for review with the CTA-EB raising identical issues:

1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of P11,141,014.41;
 2. Whether or not the commission expense in the amount of ₱2,894,797.00 should be subjected to 10%
withholding tax instead of the 5% tax rate;

3. Whether or not the withholding assessment with respect to the 5% withholding tax on rental deposit in
the amount of ₱10,523,821.99 is proper; and

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

Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed CIR’s
petition on May 17, 2007. CIR’s motion for reconsideration was denied by the CTA-EB on July 5, 2007.

The CIR is now before this Court via this petition for review relying on the very same grounds it raised before
the CTA-First Division and the CTA-EB. The said grounds are reproduced below:

GROUNDS FOR THE ALLOWANCE OF THE PETITION

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

II

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

PHP1,992,462.72:

A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN

THE AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A WITHHOLDING
TAX OF 5% INSTEAD OF THE 10% TAX RATE.

B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH

RESPECT TO THE 5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE
AMOUNT OF PHP10,523,821.99 IS NOT PROPER.

III

THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON
ROYALTIES COVERING THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON TIME.12

Upon filing of Sony’s comment, the Court ordered the CIR to file its reply thereto. The CIR subsequently filed
a manifestation informing the Court that it would no longer file a reply. Thus, on December 3, 2008, the Court
resolved to give due course to the petition and to decide the case on the basis of the pleadings filed.13

The Court finds no merit in the petition.

The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years," should be
understood to mean the fiscal year ending in March 31, 1998.14 The Court cannot agree.

Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the appropriate
revenue officer assigned to perform assessment functions. It empowers or enables said revenue officer to
examine the books of account and other accounting records of a taxpayer for the purpose of collecting the
correct amount of tax.15 The very provision of the Tax Code that the CIR relies on is unequivocal with regard to
its power to grant authority to examine and assess a taxpayer.

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax
Administration and Enforcement. –

(A)Examination of Returns and Determination of tax Due. – After a return has been filed as required under the
provisions of this Code, the Commissioner or his duly authorized representative may authorize the examination
of any taxpayer and the assessment of the correct amount of tax: Provided, however, That failure to file a return
shall not prevent the Commissioner from authorizing the examination of any taxpayer. x x x [Emphases
supplied]

Clearly, there must be a grant of authority before any revenue officer can conduct an examination or
assessment. Equally important is that the revenue officer so authorized must not go beyond the authority given.
In the absence of such an authority, the assessment or examination is a nullity.

As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said reason, the CIR
acting through its revenue officers went beyond the scope of their authority because the deficiency VAT
assessment they arrived at was based on records from January to March 1998 or using the fiscal year which
ended in March 31, 1998. As pointed out by the CTA-First Division in its April 28, 2005 Resolution, the CIR
knew which period should be covered by the investigation. Thus, if CIR wanted or intended the investigation to
include the year 1998, it should have done so by including it in the LOA or issuing another LOA.

Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase "and unverified
prior years," violated Section C of Revenue Memorandum Order No. 43-90 dated September 20, 1990, the
pertinent portion of which reads:

3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of
issuing L/As covering audit of "unverified prior years is hereby prohibited. If the audit of a taxpayer shall
include more than one taxable period, the other periods or years shall be specifically indicated in the L/A.16
[Emphasis supplied]

On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may, the CIR’s
argument, that Sony’s advertising expense could not be considered as an input VAT credit because the same
was eventually reimbursed by Sony International Singapore (SIS), is also erroneous.

The CIR contends that since Sony’s advertising expense was reimbursed by SIS, the former never incurred any
advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR continues, the said
advertising expense should be for the account of SIS, and not Sony.17
The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-EB,
Sony’s deficiency VAT assessment stemmed from the CIR’s disallowance of the input VAT credits that should
have been realized from the advertising expense of the latter.18 It is evident under Section 11019 of the 1997 Tax
Code that an advertising expense duly covered by a VAT invoice is a legitimate business expense. This is
confirmed by no less than CIR’s own witness, Revenue Officer Antonio Aluquin.20 There is also no denying
that Sony incurred advertising expense. Aluquin testified that advertising companies issued invoices in the
name of Sony and the latter paid for the same.21 Indubitably, Sony incurred and paid for advertising expense/
services. Where the money came from is another matter all together but will definitely not change said fact.

The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and, thus,
taxable. In support of this, the CIR cited a portion of Sony’s protest filed before it:

The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a subsidy equivalent
to the latter’s advertising expenses will not affect the validity of the input taxes from such expenses. Thus, at the
most, this is an additional income of our client subject to income tax. We submit further that our client is not
subject to VAT on the subsidy income as this was not derived from the sale of goods or services.22

Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to income tax, the
Court agrees. However, the Court does not agree that the same subsidy should be subject to the 10% VAT. To
begin with, the said subsidy termed by the CIR as reimbursement was not even exclusively earmarked for
Sony’s advertising expense for it was but an assistance or aid in view of Sony’s dire or adverse economic
conditions, and was only "equivalent to the latter’s (Sony’s) advertising expenses."

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

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

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

Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied. Certainly,
there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It was but a dole out by SIS and
not in payment for goods or properties sold, bartered or exchanged by Sony.

In the case of CIR v. Court of Appeals (CA),23 the Court had the occasion to rule that services rendered for a fee
even on reimbursement-on-cost basis only and without realizing profit are also subject to VAT. The case,
however, is not applicable to the present case. In that case, COMASERCO rendered service to its affiliates and,
in turn, the affiliates paid the former reimbursement-on-cost which means that it was paid the cost or expense
that it incurred although without profit. This is not true in the present case. Sony did not render any service to
SIS at all. The services rendered by the advertising companies, paid for by Sony using SIS dole-out, were for
Sony and not SIS. SIS just gave assistance to Sony in the amount equivalent to the latter’s advertising expense
but never received any goods, properties or service from Sony.

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

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

(g) Amounts paid to certain Brokers and Agents. – On gross payments to customs, insurance, real estate and
commercial brokers and agents of professional entertainers – five per centum (5%).25

In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First Division, held:

x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker is subject to
5% withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the commission expense
in the schedule of Selling, General and Administrative expenses submitted by petitioner (SPI) to the BIR is
captioned as "commission/dealer salesman incentive" the same does not justify the automatic imposition of flat
10% rate. As itemized by petitioner, such expense is composed of "Commission Expense" in the amount of
P10,200.00 and ‘Broker Dealer’ of P2,894,797.00.26

The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the applicable
rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, which was the
applicable rule during the subject period of examination and assessment as specified in the LOA. Revenue
Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and, therefore, cannot be applied in the
present case. Besides, the withholding tax on brokers and agents was only increased to 10% much later or by
the end of July 2001 under Revenue Regulations No. 6-2001.27 Until then, the rate was only 5%.

The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency EWT
assessment on the rental deposit. According to their findings, Sony incurred the subject rental deposit in the
amount of ₱10,523,821.99 only from January to March 1998. As stated earlier, in the absence of the appropriate
LOA specifying the coverage, the CIR’s deficiency EWT assessment from January to March 1998, is not valid
and must be disallowed.

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

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

The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and Sections 2.57.4 and 2.58(A)(2)(a)29
of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on royalties from January to
March of 1998. At the same time, it downplays the relevance of the Manufacturing License Agreement (MLA)
between Sony and Sony-Japan, particularly in the payment of royalties.

The above revenue regulations provide the manner of withholding remittance as well as the payment of final tax
on royalty. Based on the same, Sony is required to deduct and withhold final taxes on royalty payments when
the royalty is paid or is payable. After which, the corresponding return and remittance must be made within 10
days after the end of each month. The question now is when does the royalty become payable?

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

(5)Within two (2) months following each semi-annual period ending June 30 and December 31, the LICENSEE
shall furnish to the LICENSOR a statement, certified by an officer of the LICENSEE, showing quantities of the
MODELS sold, leased or otherwise disposed of by the LICENSEE during such respective semi-annual period
and amount of royalty due pursuant this ARTICLE X therefore, and the LICENSEE shall pay the royalty
hereunder to the LICENSOR concurrently with the furnishing of the above statement.30

Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period which ends
in June 30 and December 31. However, the CTA-First Division found that there was accrual of royalty by the
end of December 1997 as well as by the end of June 1998. Given this, the FWTs should have been paid or
remitted by Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it was correct for the CTA-First
Division and the CTA-EB in ruling that the FWT for the royalty from January to March 1998 was seasonably
filed. Although the royalty from January to March 1998 was well within the semi-annual period ending June 30,
which meant that the royalty may be payable until August 1998 pursuant to the MLA, the FWT for said royalty
had to be paid on or before July 10, 1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony
remitted the same on July 8, 1998, it was not yet late.

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

WHEREFORE, the petition is DENIED. SO ORDERED.

DIGEST:

FACTS:

Sony Philippines was ordered examined for “the period 1997 and unverified prior years” as indicated in the
Letter of Authority. The audit yielded assessments against Sony Philippines for deficiency VAT and FWT, viz:
(1) late remittance of Final Withholding Tax on royalties for the period January to March 1998 and (2)
deficiency VAT on reimbursable received by Sony Philippines from its offshore affiliate, Sony International
Singapore (SIS).

ISSUES:

(1) Is Petitioner liable for deficiency Value Added Tax?

(2) Was the investigation of its 1998 Final Withholding Tax return valid?

HELD:

(1) NO. Sony Philippines did in fact incur expenses supported by valid VAT invoices when it paid for certain
advertising costs. This is sufficient to accord it the benefit of input VAT credits and where the money came
from to satisfy said advertising billings is another matter but does not alter the VAT effect. In the same way,
Sony Philippines can not be deemed to have received the reimbursable as a fee for a VAT-taxable activity. The
reimbursable was couched as an aid for Sony Philippines by SIS in view of the company’s “dire or adverse
economic conditions”. More importantly, the absence of a sale, barter or exchange of goods or properties
supports the non-VAT nature of the reimbursement. This was distinguished from the COMASERCO case
where even if there was similarly a reimbursement-on-cost arrangement between affiliates, there was in fact an
underlying service. Here, the advertising services were rendered in favor of Sony Philippines not SIS.

(2) NO. A Letter of Authority should cover a taxable period not exceeding one year and to indicate that it
covers ‘unverified prior years’ should be enough to invalidate it. In addition, even if the Final Withholding Tax
was covered by Sony Philippines’ fiscal year ending March 1998, the same fell outside of ‘the period 1997’ and
was thus not validly covered by the Letter of Authority.

DIGEST:

In November 1998, the Commissioner of Internal Revenue issued a Letter of Authority numbered 19734 (LOA
19734) which authorized certain revenue examiners to examine Sony Philippines’ books of accounts regarding
revenue taxes for “the period 1997 and unverified prior years.”

After the examination of said books, the CIR found out, among others, that Sony Philippines is liable for
deficiency taxes and penalties for value added tax amounting to P11,141,014.41.

Sony Philippines contested such finding as it argued that the basis used by the CIR to assess said deficiency
were the records covering the period of January 1998 through March 1998 which was a period not covered by
the letter of authority so issued. The CIR countered that the LOA phrase “the period 1997 and unverified prior
years” should be understood to mean the fiscal year ending on March 31, 1998.

Eventually the case reached the Court of Tax Appeals and the CTA decided agreed with Sony Philippines on
this one. So did the CTA en banc.

ISSUE: Whether or not the CIR is correct.

HELD: No. The LOA issued is clear on which period is covered by the examination to be conducted. It’s only
meant to cover the year “1997 and unverified prior years” not the year 1998. The revenue officers who
examined the records covering the period of January to March 1998 had exceeded the jurisdiction granted to
them by the LOA.

Further, the LOA which covered “1997 and unverified prior years” is in violation of the principle that a Letter
of Authority should cover a taxable period not exceeding one taxable year. If the audit of a taxpayer shall
include more than one taxable period, the other periods or years shall be specifically indicated in the LOA (as
embodied in Section C of Revenue Memorandum Order No. 43-90 dated September 20, 1990).
 4. G.R. No. 193301 March 11, 2013

MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 194637

MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CARPIO, J.:

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

Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II unutilized input value-added tax
(VAT) for the third and fourth quarters of taxable year 2003 (CTA Case No. 7317).

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

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

G.R. No. 193301

Mindanao II v. CIR
 The Facts

G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227, 7287, and 7317, which were
consolidated as CTA EB No. 513. CTA Case Nos. 7227, 7287, and 7317 claim a tax refund or credit of
Mindanao II’s alleged excess or unutilized input taxes due to VAT zero-rated sales. In CTA Case No. 7227,
Mindanao II claims a tax refund or credit of ₱3,160,984.69 for the first quarter of 2003. In CTA Case No. 7287,
Mindanao II claims a tax refund or credit of ₱1,562,085.33 for the second quarter of 2003. In CTA Case No.
7317, Mindanao II claims a tax refund or credit of ₱3,521,129.50 for the third and fourth quarters of 2003.

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

xxxx

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

xxxx

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

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

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

CTA Case No. Period Covered Date of Filing

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

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

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

The Court of Tax Appeals’ Ruling: Division

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

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

2. That input taxes were incurred or paid;

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

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

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

With respect to the fifth requirement, the CTA First Division tabulated the dates of filing of Mindanao II’s
return as well as its administrative and judicial claims, and concluded that Mindanao II’s administrative and
judicial claims were timely filed in compliance with this Court’s ruling in Atlas Consolidated Mining and
Development Corporation v. Commissioner of Internal Revenue (Atlas).14 The CTA First Division declared that
the two-year prescriptive period for filing a VAT refund claim should not be counted from the close of the
quarter but from the date of the filing of the VAT return. As ruled in Atlas, VAT liability or entitlement to a
refund can only be determined upon the filing of the quarterly VAT return.

CTA Period Date Filing

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

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

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

The dispositive portion of the CTA First Division’s 22 September 2008 Decision reads:

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

SO ORDERED.17

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

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

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

The CTA First Division found that the records of Mindanao II’s case are bereft of evidence that the sale of the
Nissan Patrol is not incidental to Mindanao II’s VAT zero-rated operations. Moreover, Mindanao II’s submitted
documents failed to substantiate the requisites for the refund or credit claims.
The CTA First Division modified its 22 September 2008 Decision to read as follows:

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

SO ORDERED.21

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

The Court of Tax Appeals’ Ruling: En Banc

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

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

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

SO ORDERED.24

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

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

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

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

G.R. No. 194637

Mindanao I v. CIR
 The Facts

G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case Nos. 476 and 483. Both CTA
EB cases consolidate three cases from the CTA Second Division: CTA Case Nos. 7228, 7286, and 7318. CTA
Case Nos. 7228, 7286, and 7318 claim a tax refund or credit of Mindanao I’s accumulated unutilized and/or
excess input taxes due to VAT zero-rated sales. In CTA Case No. 7228, Mindanao I claims a tax refund or
credit of ₱3,893,566.14 for the first quarter of 2003. In CTA Case No. 7286, Mindanao I claims a tax refund or
credit of ₱2,351,000.83 for the second quarter of 2003. In CTA Case No. 7318, Mindanao I claims a tax refund
or credit of ₱7,940,727.83 for the third and fourth quarters of 2003.

Mindanao I is similarly situated as Mindanao II. The CTA Second Division’s narration of the pertinent facts is
as follows:

xxxx

In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer (BOT) with the Philippine
National Oil Corporation – Energy Development Corporation (PNOC-EDC) for the finance, design,
construction, testing, commissioning, operation, maintenance and repair of a 47-megawatt geothermal power
plant. Under the said BOT contract, PNOC-EDC shall supply and deliver steam to Mindanao I at no cost. In
turn, Mindanao I will convert the steam into electric capacity and energy for PNOC-EDC and shall
subsequently supply and deliver the same to the National Power Corporation (NPC), for and in behalf of
PNOC-EDC.

Mindanao I’s 47-megawatt geothermal power plant project has been accredited by the Department of Energy
(DOE) as a Private Sector Generation Facility, pursuant to the provision of Executive Order No. 215, wherein
Certificate of Accreditation No. 95-037 was issued.

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

xxxx

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

Mindanao I reported its unutilized or excess creditable input taxes in its Quarterly VAT Returns for the first,
second, third, and fourth quarters of taxable year 2003, which were subsequently amended and filed with the
BIR.
On April 4, 2005, Mindanao I filed with the BIR separate administrative claims for the issuance of tax credit
certificate on its alleged unutilized or excess input taxes for taxable year 2003, in the accumulated amount of
₱14,185, 294.80.

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

The Court of Tax Appeals’ Ruling: Division

On 24 October 2008, the CTA Second Division rendered its Decision29 in CTA Case Nos. 7228, 7286, and
7318. The CTA Second Division found that (1) pursuant to Section 112(A), Mindanao I can only claim 90.27%
of the amount of substantiated excess input VAT because a portion was not reported in its quarterly VAT
returns; (2) out of the ₱14,185,294.80 excess input VAT applied for refund, only ₱11,657,447.14 can be
considered substantiated excess input VAT due to disallowances by the Independent Certified Public
Accountant, adjustment on the disallowances per the CTA Second Division’s further verification, and additional
disallowances per the CTA Second Division’s further verification;

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

The dispositive portion of the CTA Second Division’s 24 October 2008 Decision reads:

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

SO ORDERED.30

Mindanao I filed a motion for partial reconsideration with motion for Clarification31 on 11 November 2008. It
claimed that the CTA Second Division should not have allocated proportionately Mindanao I’s unutilized
creditable input taxes for the taxable year 2003, because the proportionate allocation of the amount of creditable
taxes in Section 112(A) applies only when the creditable input taxes due cannot be directly and entirely
attributed to any of the zero-rated or effectively zero-rated sales. Mindanao I claims that its unreported
collection is directly attributable to its VAT zero-rated sales. The CTA Second Division denied Mindanao I’s
motion and maintained the proportionate allocation because there was a portion of the gross receipts that was
undeclared in Mindanao I’s gross receipts.

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

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

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

SO ORDERED.34

The Ruling of the Court of Tax Appeals: En Banc

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

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

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

SO ORDERED.36

Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En Banc’s 31 May 2010 Decision.
In an Amended Decision promulgated on 24 November 2010, the CTA En Banc agreed with the CIR’s claim
that Section 229 of the NIRC of 1997 is inapplicable in light of this Court’s ruling in Mirant. The CTA En Banc
also ruled that the procedure prescribed under Section 112(D) now 112(C)37 of the 1997 Tax Code should be
followed first before the CTA En Banc can act on Mindanao I’s claim. The CTA En Banc reconsidered its 31
May 2010 Decision in light of this Court’s ruling in Commissioner of Internal Revenue v. Aichi Forging
Company of Asia, Inc. (Aichi).38

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

C.T.A. Case No. 7228:

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

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

C.T.A. Case No. 7286:

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

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

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

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

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

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

xxxx

C.T.A. Case No. 7318:

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

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

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

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

(5) However, Mindanao I filed its Petition for Review with the CTA in Division only on September 9,
2005, which is 8 days beyond the 30-day period to appeal to the CTA.
Evidently, the Petition for Review was filed way beyond the 30-day prescribed period. Thus, the Petition for
Review should have been dismissed for being filed late.

In recapitulation:

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

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

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

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

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

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

xxxx

IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenue’s Motion for Reconsideration is
hereby GRANTED; Mindanao I’s Motion for Partial Reconsideration is hereby DENIED for lack of merit.

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

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

SO ORDERED.39

The Issues

G.R. No. 193301

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

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

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

B. The Atlas case was not and cannot be superseded by the Mirant case in light of Section 4(3),
Article VIII of the 1987 Constitution.
 C. The ruling of the Mirant case, which uses the close of the taxable quarter when the sales were
made as the reckoning date in counting the two-year prescriptive period cannot be applied
retroactively in the case of Mindanao II.

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

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

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

B. The amount of ₱2,752.00 arose from the out-of-pocket expenses reimbursed to SGV &
Company which is substantially suppoerted [sic] by an official receipt.

C. The amount of ₱487,355.93 was unapplied and/or was not included in Mindanao II’s claim
for refund or tax credit for the year 2004 subject matter of CTA Case No. 7507.

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

G.R. No. 194637

Mindanao I v. CIR

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

I. The administrative claim and judicial claim in CTA Case No. 7228 were timely filed pursuant to the
case of Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal
Revenue, which was then the controlling ruling at the time of filing.

A. The recent ruling in the Commissioner of Internal Revenue vs. Mirant Pagbilao Corporation,
which uses the end of the taxable quarter when the sales were made as the reckoning date in
counting the two-year prescriptive period, cannot be applied retroactively in the case of
Mindanao I.

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

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

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

Determination of Prescriptive Period

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

Mindanao II’s unutilized input VAT tax credit for the first and second quarters of 2003, in the amounts of
₱3,160,984.69 and ₱1,562,085.33, respectively, are covered by G.R. No. 193301, while Mindanao I’s unutilized
input VAT tax credit for the first, second, third, and fourth quarters of 2003, in the amounts of ₱3,893,566.14,
₱2,351,000.83, and ₱7,940,727.83, respectively, are covered by G.R. No. 194637.

Section 112 of the 1997 Tax Code

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

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

xxxx

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

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

x x x x 43 (Underscoring supplied)

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

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

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

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

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

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

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

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

San Roque’s failure to comply with the 120-day mandatory period renders its petition for review with the CTA
void. Article 5 of the Civil Code provides, "Acts executed against provisions of mandatory or prohibitory laws
shall be void, except when the law itself authorizes their validity." San Roque’s void petition for review cannot
be legitimized by the CTA or this Court because Article 5 of the Civil Code states that such void petition cannot
be legitimized "except when the law itself authorizes its validity." There is no law authorizing the petition’s
validity.
It is hornbook doctrine that a person committing a void act contrary to a mandatory provision of law cannot
claim or acquire any right from his void act. A right cannot spring in favor of a person from his own void or
illegal act. This doctrine is repeated in Article 2254 of the Civil Code, which states, "No vested or acquired
right can arise from acts or omissions which are against the law or which infringe upon the rights of others." For
violating a mandatory provision of law in filing its petition with the CTA, San Roque cannot claim any right
arising from such void petition. Thus, San Roque’s petition with the CTA is a mere scrap of paper.

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

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

This Court cannot disregard mandatory and jurisdictional conditions mandated by law simply because the
Commissioner chose not to contest the numerical correctness of the claim for tax refund or credit of the
taxpayer. Non-compliance with mandatory periods, non-observance of prescriptive periods, and non-adherence
to exhaustion of administrative remedies bar a taxpayer’s claim for tax refund or credit, whether or not the
Commissioner questions the numerical correctness of the claim of the taxpayer. This Court should not establish
the precedent that non-compliance with mandatory and jurisdictional conditions can be excused if the claim is
otherwise meritorious, particularly in claims for tax refunds or credit. Such precedent will render meaningless
compliance with mandatory and jurisdictional requirements, for then every tax refund case will have to be
decided on the numerical correctness of the amounts claimed, regardless of non-compliance with mandatory
and jurisdictional conditions.

San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine because San Roque
filed its petition for review with the CTA more than four years before Atlas was promulgated. The Atlas
doctrine did not exist at the time San Roque failed to comply with the 120-day period. Thus, San Roque cannot
invoke the Atlas doctrine as an excuse for its failure to wait for the 120-day period to lapse. In any event, the
Atlas doctrine merely stated that the two-year prescriptive period should be counted from the date of payment
of the output VAT, not from the close of the taxable quarter when the sales involving the input VAT were
made. The Atlas doctrine does not interpret, expressly or impliedly, the 120+30 day periods.49 (Emphases in the
original; citations omitted)

Prescriptive Period for

the Filing of Administrative Claims

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

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

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

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

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

Prescriptive Period for

the Filing of Judicial Claims

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

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

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

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

This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law should be
applied exactly as worded since it is clear, plain, and unequivocal. As this law states, the taxpayer may, if he
wishes, appeal the decision of the Commissioner to the CTA within 30 days from receipt of the Commissioner’s
decision, or if the Commissioner does not act on the taxpayer’s claim within the 120-day period, the taxpayer
may appeal to the CTA within 30 days from the expiration of the 120-day period.

xxxx

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

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

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

Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive period
(equivalent to 730 days), then the taxpayer must file his administrative claim for refund or credit within the first
610 days of the two-year prescriptive period. Otherwise, the filing of the administrative claim beyond the first
610 days will result in the appeal to the CTA being filed beyond the two-year prescriptive period. Thus, if the
taxpayer files his administrative claim on the 611th day, the Commissioner, with his 120-day period, will have
until the 731st day to decide the claim. If the Commissioner decides only on the 731st day, or does not decide at
all, the taxpayer can no longer file his judicial claim with the CTA because the two-year prescriptive period
(equivalent to 730 days) has lapsed. The 30-day period granted by law to the taxpayer to file an appeal before
the CTA becomes utterly useless, even if the taxpayer complied with the law by filing his administrative claim
within the two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive period adds a condition that is not
found in the law. It results in truncating 120 days from the 730 days that the law grants the taxpayer for filing
his administrative claim with the Commissioner. This Court cannot interpret a law to defeat, wholly or even
partly, a remedy that the law expressly grants in clear, plain, and unequivocal language.

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

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

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

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

G.R. No. 193301

Mindanao II v. CIR

Mindanao II filed its administrative claims for the second, third, and fourth quarters of 2003 on 13 April 2005.
Counting 120 days after filing of the administrative claim with the CIR (11 August 2005) and 30 days after the
CIR’s denial by inaction, the last day for filing a judicial claim with the CTA for the second, third, and fourth
quarters of 2003 was on 12 September 2005. However, the judicial claim cannot be filed earlier than 11 August
2005, which is the expiration of the 120-day period for the Commissioner to act on the claim.

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

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

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

(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before the CTA on 9 September
2005. Mindanao II’s judicial claim for the fourth quarter of 2003 was thus filed on time, pursuant to
Section 112(C) of the 1997 Tax Code.
G.R. No. 194637
Mindanao I v. CIR

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

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

(2) Mindanao I filed its judicial claim for the third quarter of 2003 before the CTA on 9 September
2005. Mindanao I’s judicial claim for the third quarter of 2003 was thus filed after the prescriptive
period, pursuant to Section 112(C) of the 1997 Tax Code.

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

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

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

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

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

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

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

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

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

xxxx

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

Summary of Administrative and Judicial Claims

G.R. No. 193301

Mindanao II v. CIR

Administrative Judicial Claim Action on Claim

Claim
1st Quarter, 2003 Filed late -- Deny, pursuant to
Section 112(A) of the
1997 Tax Code
2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to
BIR Ruling No. DA-489-03
3rd Quarter, 2003 Filed on time Filed on time Grant, pursuant to
Section 112(C) of the
1997 Tax Code
4th Quarter, 2003 Filed on time Filed on time Grant, pursuant to
Section 112(C) of the
1997 Tax Code
G.R. No. 194637
Mindanao I v. CIR

Administrative Judicial Claim Action on Claim

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

Summary of Rules on Prescriptive Periods Involving VAT

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

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

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

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

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

"Incidental" Transaction

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

Section 105 of the 1997 Tax Code does not support Mindanao II’s position:
SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges, leases
goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax
(VAT) imposed in Sections 106 to 108 of this Code.

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

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

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the
Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or
business. (Emphasis supplied)

Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay)55 and Imperial
v. Collector of Internal Revenue (Imperial)56 to justify its position. Magsaysay, decided under the NIRC of
1986, involved the sale of vessels of the National Development Company (NDC) to Magsaysay Lines, Inc. We
ruled that the sale of vessels was not in the course of NDC’s trade or business as it was involuntary and made
pursuant to the Government’s policy for privatization. Magsaysay, in quoting from the CTA’s decision, imputed
upon Imperial the definition of "carrying on business." Imperial, however, is an unreported case that merely
stated that "‘to engage’ is to embark in a business or to employ oneself therein."57

Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction.1âwphi1 However, it does not follow
that an isolated transaction cannot be an incidental transaction for purposes of VAT liability. Indeed, a reading
of Section 105 of the 1997 Tax Code would show that a transaction "in the course of trade or business" includes
"transactions incidental thereto."

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

Substantiation Requirements

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

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

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

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

DIGEST :

DOCTRINE: SUMMARY OF RULES ON PRESCRIPTIVE PERIODS INVOLVING VAT

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

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

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

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

FACTS: Mindanao I and II (Mindanao) are value-added taxpayers, and Block Power Production
Facilities accredited by the Department of Energy. They had a Build-Operate-Transfer contract with
the Philippine National Oil Corporation–Energy Development Company (PNOC-EDC), whereby
Mindanao converts steam supplied to it by PNOC-EDC into electricity, and then delivers the electricity
to the National Power Corporation (NPC) in behalf of PNOC-EDC.

The Electric Power Industry Reform Act of 2000 (EPIRA, RA 9136), amended the Tax Reform
Act of 1997 (RA 8424), when it decreed that sales of power by generation companies shall be
subjected to a zero rate of VAT. Pursuant to EPIRA, Mindanao I and II filed their claims for the
issuance of tax credit certificates on unutilized or excess input taxes from their sales of generated
power and delivery of electric capacity and energy to NPC.

The CTA En Banc denied Mindanao II’s claims for refund tax credit for the first and second
quarters of 2003, and Mindanao I’s claims for refund/tax credit for the first, second, third, and fourth
quarters of 2003, for being filed out of time.

The following are relevant dates:

CTA Period Close of Last day for Actual date Last day for Actual Date
Case Covered by quarter filing of filing filing case of filing
No. VAT Sales when sales application application with CTA case with
in 2003 were of tax refund / for tax CTA
made tax credit refund / (judicial
certificate with credit claim)
the CIR (admin
claim)
MINDANAO II
7227 1st Quarter 31 March 31 March 2005 13 April 2005 12 Sept 22 April
2003 2005 2005
7287 2nd Quarter 30 June 2003 30 June 2005 13 April 2005 12 Sept 7 July 2005
2005
7317 3rd and 4th 30 Sept 2003 30 Sept 2005 13 April 2005 12 Sept 9 Sept 2005
Quarters 2005
31 Dec. 2003 2 Jan. 2006 (31
Dec. 2005 being
a Saturday)
MINDANAO I
7228 1st Quarter 31 March 31 March 2005 4 April 2005 1 Sept 2005 22 April
2003 2005
7286 2nd Quarter 30 June 2003 30 June 2005 4 April 2005 1 Sept 2005 7 July 2005
7318 3rd and 4th 30 Sept 2003 30 Sept 2005 4 April 2005 1 Sept 2005 9 Sept 2005
Quarters
31 Dec. 2003 2 January 2006
(31 Dec. 2005
being a Saturday)

CTA (En Banc):

Mindanao II’s judicial claims were filed beyond the period allowed in Sec. 112(A), by which the
reckoning of the two-year prescriptive period for filing the application for refund or credit of input VAT
attributable to zero-rated sales or effectively zero-rated sales shall be counted from the close of the
taxable quarter when the sales were made (regardless of whether the tax was actually paid),
according to CIR v. Mirant Pagbilao Corporation (Mirant). Also, the sale of the fully-depreciated
Nissan Patrol is incidental to Mindanao II’s VAT zero-rated transactions and is VATable pursuant to
Sec. 105.

Mindanao I’s claims for the first, second, third and fourth quarters of 2003 were filed out of
time. Section 229 is inapplicable in light of Mirant. Moreover, the procedure prescribed under Section
112(C) should be followed first before the CTA En Banc can act on Mindanao I’s claim.

Mindanao I and II went up to the Supreme Court arguing that their claims were timely filed
pursuant to the case of Atlas, which was then the controlling ruling at the time of the filing. The Mirant
case, which uses the close of the taxable quarter when the sales were made as the reckoning date in
counting the two-year prescriptive period, cannot be applied retroactively to their prejudice.

[1] ISSUE: Whether the reckoning date for counting the two-year prescriptive period in Section 112
should be counted from the end of the taxable quarter when the sales were made (Mirant) or the date
of filing the return (Atlas)?

HELD: Neither Atlas nor Mirant applies, because when Mindanao II and Mindanao I filed their
respective administrative and judicial claims in 2005, neither case had been promulgated. Atlas was
promulgated on 8 June 2007, Mirant on 12 September 2008. Besides, Atlas merely stated that the
two-year prescriptive period should be counted from the date of payment of the output VAT, not from
the close of the taxable quarter when the sales involving the input VAT were made. The Atlas
doctrine did not interpret, expressly or impliedly, the 120+30 day periods.

Prescriptive Period for the Filing of Administrative Claims

Section 112(A) of the 1997 Tax Code was the applicable law at the time of filing of the claims
in issue, therefore the claims needed to have been filed within two (2) years after the close of the
taxable quarter when the sales were made. Mindanao I and II’s administrative claims for the first
quarter of 2003 had prescribed, but their claims for the second, third and fourth quarters of 2003 were
filed on time.

Prescriptive Period for the Filing of Judicial Claims

 In determining whether the claims for the second, third and fourth quarters of 2003 had been
properly appealed, there is still see no need to refer to either Atlas or Mirant, or even to Sec. 229. The
second paragraph of Sect. 112(C) is clear that the taxpayer can appeal to the CTA “within thirty (30)
days from the receipt of the decision denying the claim or after the expiration of the one hundred
twenty day-period.”

The 120+30 day periods are mandatory and jurisdictional. The taxpayer cannot simply file a
petition with the CTA without waiting for the Commissioner’s decision within the 120-day period,
because otherwise there would be no “decision” or “deemed a denial” decision for the CTA to review.
Moreover, Sec. 112(C) expressly grants a 30-day period to appeal to the CTA, and this period need
not necessarily fall within the two-year prescriptive period, as long as the administrative claim is filed
within such time. The said prescriptive period does not refer to the filing of the judicial claim with the
CTA, but to the administrative claim with the Commissioner.

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

BIR Ruling No. DA-489-03 provided that the “taxpayer-claimant need not wait for the lapse of
the 120-day period before it could seek judicial relief with the CTA.” In the consolidated cases of CIR
v. San Roque, however, the Supreme Court En Banc held that the taxpayer cannot simply file a
petition with the CTA without waiting for the Commissioner’s decision within the 120-day jurisdictional
period. Notwithstanding, the Court also held in San Roque that BIR Ruling No. DA-489-03 constitutes
equitable estoppel in favor of taxpayers. Being a general interpretative rule, it can be relied on by all
taxpayers from the time of its issuance on 10 December 2003 up to its reversal by the Court in
Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi) on 6 October
2010, where this Court held that the 120+30 day periods are mandatory and jurisdictional.”

Mindanao II filed its administrative claims for the second, third, and fourth quarters of 2003
on 13 April 2005. Counting 120 days after filing of the administrative claim (11 August 2005) and
30 days after the CIR’s denial by inaction, the last day for filing a judicial claim with the CTA for
the second, third, and fourth quarters of 2003 was on 12 September 2005. However, the judicial
claim could not be filed earlier than 11 August 2005, which was the expiration of the 120-day
period for the Commissioner to act.

Mindanao II filed its judicial claim for the second quarter before the expiration of the 120-
day period; it was thus prematurely filed. However, pursuant to San Roque, the claim qualifies
under the exception to the strict application of the 120+30 day periods. Its judicial claims for the
third quarter and fourth quarter of 2003 were filed on time.
 Mindanao I filed its administrative claims for the second, third, and fourth quarters of 2003
on 4 April 2005. Counting 120 days after filing of the administrative claim with the CIR (2 August
2005) and 30 days after the CIR’s denial by inaction, the last day for filing a judicial claim was on 1
September 2005. However, the judicial claim cannot be filed earlier than 2 August 2005, which is
the expiration of the 120-day period for the Commissioner to act on the claim. Mindanao I
prematurely filed its judicial claim for the second quarter of 2003 but claim qualifies under the
exception in San Roque. Its judicial claims for the third and fourth quarters of 2003, however, were
filed after the prescriptive period.

[2] ISSUE: Whether the sale of the fully-depreciated Nissan Patrol is a one-time transaction not
incidental to the VAT zero-rated operation of Mindanao II, thus not VATable?

Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental
transaction in the course of its business but an isolated transaction that should not have been subject
to 10% VAT. It does not follow that an isolated transaction cannot be an incidental transaction for
purposes of VAT liability. Indeed, a reading of Section 105 would show that a transaction “in the
course of trade or business” includes “transactions incidental thereto.” In the course of its business,
Mindanao II bought and eventually sold a Nissan Patrol. Prior to the sale, the Nissan Patrol was part
of Mindanao II’s property, plant, and equipment. Therefore, the sale of the Nissan Patrol is an
incidental transaction made in the course of Mindanao II’s business which should be liable for VAT.

DISPOSITION: Petitions partially granted. The claim of Mindanao II for the first quarter of 2003 is
DENIED, while its claims for the second, third, and fourth quarters of 2003 are GRANTED. The
claims of Mindanao I for the first, third, and fourth quarters of 2003 are DENIED while its claim for the
second quarter of 2003 is GRANTED.

5. Lapanday (pdf CTA CASE 11pages—no digest)

6. Maxicare Healthcare Corporation vs CIR (pdf CTA case 17 pages---no digest)